Dun-Par Engineered Form Co. v. Vanum Construction Co.

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No. 108,841

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

DUN-PAR ENGINEERED FORM COMPANY,
Appellee,

v.

VANUM CONSTRUCTION CO., INC.,
Defendant,

and

THE HANOVER INSURANCE CO.,
Appellant,

and

FORTIS CONSTRUCTION CO., LLC,
Defendant.

SYLLABUS BY THE COURT

1.
A surety bond is to be construed in the light of the circumstances in which it is
given, so as to effectuate its purpose.

2.
The obligation of a bond is to be measured by the bond itself and may not be
extended by implication or enlarged by construction beyond the terms of the executed
contract.

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3.
The primary rule for interpreting written contracts is to ascertain the parties' intent.
If the terms of the contract are clear, the intent of the parties is to be determined from the
language of the contract without applying rules of construction.

4.
Under the facts of the present case, a claimant under the language of the bond had
to be an entity having a direct contract with the principal, or an entity having valid lien
rights which may be asserted in the jurisdiction where the project was located. As the
project was located within the Fort Riley Military Reservation, and because federal law
prohibits mechanic's lien rights for contractors and subcontractors who work on federal
land or buildings, the sub-sub-subcontactor did not have valid lien rights and therefore
could not meet the definition of a claimant under the clear language of the bond.

Appeal from Wyandotte District Court; JAN A. WAY, judge. Opinion filed August 23, 2013.
Reversed and remanded with directions.

Keith Witten, of Gilliland & Hayes LLC, of Overland Park, for appellant.

Matthew R. Hale, of Polsinelli Shughart PC, of Kansas City, Missouri, for appellee.

Before HILL, P.J., POWELL, J., and HEBERT, S.J.

POWELL, J.: The Hanover Insurance Co. (Hanover) appeals the denial of its own
motion for summary judgment and the granting of Dun-Par Engineered Form Company's
(Dun-Par) cross-motion for summary judgment. The district court granted Dun-Par's
claim to recover the unpaid balance due Dun-Par, a sub-sub-subcontractor, from the
Subcontract Payment Bond bought from Hanover by the subcontractor, Vanum
Construction Co., Inc. (Vanum). Hanover challenges the district court's interpretation of
the definition of "Claimant" as set out in the bond.
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Because we find that Dun-Par does not meet the definition of "Claimant" as set out
in the Subcontract Payment Bond, we reverse the district court and remand with
instructions to enter judgment for Hanover.

FACTUAL AND PROCEDURAL HISTORY

The parties agree on the following uncontroverted facts.

Fortis Construction Co., LLC (Fortis) hired Dun-Par as a subcontractor for a
construction project in Fort Riley, Kansas. Dun-Par was the sub-sub-subcontractor on the
project. The general contractor for the project was BE&K Federal Services, LLC
(BE&K). BE&K hired Vanum to be a subcontractor. BE&K and Vanum entered into a
Subcontract Payment Bond through Hanover naming Vanum as the principal and BE&K
as the obligee. Under this bond, Vanum and Hanover agreed to "jointly and severally,
bind themselves . . . to [BE&K] to pay for labor, materials and equipment furnished for
use in the performance of the Subcontract . . . ." Vanum then hired Fortis to be its sub-
subcontractor, which in turn hired Dun-Par, making Dun-Par a subcontractor to Fortis
and a sub-sub-subcontractor to BE&K. Dun-Par admitted that it did not have a direct
contract with Vanum.

Dun-Par performed and, on December 9, 2011, filed suit against Fortis, Vanum,
and Hanover for the unpaid balance due Dun-Par under its contract with Fortis. Dun-Par
obtained default judgments against both Fortis and Vanum. Dun-Par and Hanover both
filed cross-motions for summary judgment on the issue of whether Hanover's Subcontract
Payment Bond covered Dun-Par's claim for payment.

The Subcontract Payment Bond required that Vanum "promptly make payment
directly or indirectly to all Claimants as defined in this bond, for all labor, material and
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equipment used in performance of the Subcontract." The terms of the bond defined
"Claimant" as:

"an individual or entity having a direct contract with the Principal to furnish labor,
materials or equipment for use in the performance of the Subcontract or any individual or
entity having valid lien rights which may be asserted in the jurisdiction where the Project
is located." (Emphasis added.)

The district court granted Dun-Par summary judgment while denying Hanover's
motion.

The district court found that Dun-Par was entitled to payment under the bond as a
contract beneficiary and as a "claimant" with valid "lien rights." It initially concluded
that, on its face, the bond language appeared to preclude Dun-Par from payment for two
reasons: first, Dun-Par did not fall into the first category of claimants because Dun-Par
did not have a direct contract with Vanum; and second, Dun-Par did not fall into the
second category of claimants because federal law prohibited Dun-Par from obtaining a
lien on federal property.

However, Vanum supplied a generic form for the bond with Hanover which,
unlike Hanover's usual bond agreement form, did not provide coverage for subcontracts
two levels down from Vanum. The district court interpreted the word "jurisdiction" as
used in the bond's definition of a claimant as referring to the jurisdiction of Kansas, not
the jurisdiction of the federal government. With that interpretation, the district court
reasoned that Dun-Par would have had the right to assert a mechanic's lien on the project
under Kansas law, but federal law prohibited the remedy. Despite the lack of remedy,
Dun-Par still retained the right of a mechanic's lien under Kansas law. The district court
explained that the lien laws of Kansas were designed to protect contractors who are
denied justly earned compensation, which promotes fairness in the construction industry.
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Though Dun-Par could not issue a mechanic's lien on the Fort Riley project, Dun-Par still
had the right to a mechanic's lien under state law; therefore, Dun-Par qualified as a
claimant under the terms of the bond.

The second theory relied upon by the district court provided Dun-Par with the
right to collect from Hanover because Dun-Par was a third-party beneficiary of the
contract. The district court interpreted Wichita Sheet Metal Supply, Inc. v. Dahlstrom &
Ferrell Constr. Co., 246 Kan. 557, 561, 792 P.2d 1043 (1990), as holding that "[c]laims
under Kansas little Miller Act statutes must look down two levels." Following this
conclusion, the district court reasoned that if this bond had been a public works bond
under K.S.A. 60-1111, then Dun-Par would be within two levels of Vanum and
Hanover's bond would cover payment to Dun-Par. The legislature's enactment of K.S.A.
60-1111 demonstrated the State's public policy in favor of protecting subcontractors from
nonpayment through the use of bonds.

The district court found that Hanover's risk was so limited under the terms of the
bond that it appeared as an "inadvertent windfall to Hanover from the fortuitous caprices
of using someone else's supplied form." The district court also discussed the background
of the bond by concluding that there was no evidence of a meeting of the minds on the
terms of the bond. "The facts of this case are an anomaly that lead, under defendant's
position to a result inconsistent with the usual bond coverage of Kansas workers and
contractors." The court concluded that the "weight of the law in this court's opinion is that
the contractor two levels down from Vanum and five levels down on the whole project is
and should be covered by Hanover's bond."

Hanover timely appeals.

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DID THE DISTRICT COURT ERR IN FINDING THAT DUN-PAR HAD THE
RIGHT TO PAYMENT BY HANOVER UNDER THE SUBCONTRACT PAYMENT BOND?

Hanover relies upon the plain language of the bond to argue that Dun-Par clearly
does not fit into either of the two categories of claimants given in the bond because Dun-
Par had neither a direct contract with Vanum nor the right to impose a lien upon the
property owned by the federal government. Hanover argues that the Subcontract Payment
Bond is a contract and is therefore subject to the rules governing contract interpretation.
See Tradesmen Int'l, Inc. v. Wal-Mart Real Estate Business Trust, 35 Kan. App. 2d 146,
163, 129 P.3d 102 (giving the ordinary meaning to clear and unambiguous language in a
payment bond), rev. denied 281 Kan. 1382 (2006).

Dun-Par cites to two cases, Local No. 1179 v. Merchants Mutual Bonding Co., 228
Kan. 226, 229, 613 P.2d 944 (1980), and Haynes Hardware Co. v. Western Casualty &
Surety Co., 156 Kan. 356, 360, 133 P.2d 574 (1943), to show that courts should construe
surety bonds to give effect to the bond's purpose. Dun-Par argues that in giving effect to
the purpose of Hanover's Subcontract Payment Bond, the district court correctly decided
that the bond covered Dun-Par's claims.

Standard of Review and Analysis

"Summary judgment is appropriate when the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, show that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as
a matter of law." Law v. Law Company Building Assocs., 295 Kan. 551, 561, 289 P.3d
1066 (2012). "'"'"When opposing a motion for summary judgment, an adverse party must
come forward with evidence to establish a dispute as to a material fact. In order to
preclude summary judgment, the facts subject to the dispute must be material to the
conclusive issues in the case."'"'" Osterhaus v. Toth, 291 Kan. 759, 768, 249 P.3d 888
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(2011) (quoting Warner v. Stover, 283 Kan. 453, 455, 153 P.3d 1245 [2007]). On appeal,
the same rules apply. Summary judgment must be denied if "'"'"reasonable minds could
differ as to the conclusions drawn from the evidence."'"'" Osterhaus, 291 Kan. at 768
(quoting Warner, 283 Kan. at 455-56).

"The legal effect of a written instrument is a question of law. It may be construed
and its legal effect determined by the appellate court regardless of the construction made
by the district court." Osterhaus, 291 Kan. at 768. "[W]here there are no disputed facts
and an appellate court is required to interpret and give legal effect to a written contract,
appellate review of a summary judgment order is de novo." Wittig v. Westar Energy, Inc.,
44 Kan. App. 2d 216, 221, 235 P.3d 535 (2010). There are no disputed material facts
here; therefore, summary judgment is appropriate.

It is a correct statement of the law that "[a] surety bond is to be construed in the
light of the circumstances in which it is given, so as to effectuate its purpose." Local No.
1179, 228 Kan. at 229. But it is also well established in Kansas law that "the obligation of
a bond is to be measured by the bond itself and may not be extended by implication or
enlarged by construction beyond the terms of the executed contract." Koch v. Merchants
Mutual Bonding Co., 211 Kan. 397, 400, 507 P.2d 189 (1973); see also In re
Conservatorship of Huerta, 273 Kan. 97, 104, 41 P.3d 814 (2002) (same); Martin v.
Hanschu, 241 Kan. 521, 523, 738 P.2d 96 (1987) (same). Moreover, "[t]he primary rule
for interpreting written contracts is to ascertain the parties' intent. If the terms of the
contract are clear, the intent of the parties is to be determined from the language of the
contract without applying rules of construction." Osterhaus, 291 Kan. at 768.

The terms of the bond defined "Claimant" as:

"an individual or entity having a direct contract with the Principal to furnish labor,
materials or equipment for use in the performance of the Subcontract or any individual or
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entity having valid lien rights which may be asserted in the jurisdiction where the Project
is located."

The district court incorrectly interpreted the word "jurisdiction" to mean the
jurisdiction of Kansas. The district court explained that the "work and materials were
supplied in Kansas and the parties were subject to Kansas law. That Federal law stops the
effect of the remedy under Kansas law does not extinguish the jurisdiction nor [sic] the
fact that [Dun-Par] meets the requirements under State law to have filed a lien."

However, a review of the plain wording in the bond reveals that the word
jurisdiction is clearly modified by "where the Project is located." According to the bond's
description of the project, Project No. 0880019 was located at 2310 Trooper Drive, Fort
Riley, Kansas. The address places the project within the Fort Riley Military Reservation.
Under K.S.A. 27-102 and K.S.A. 27-105, the State of Kansas gave the federal
government exclusive jurisdiction over the Fort Riley Military Reservation, only
reserving for itself the right to serve process within the Fort's boundaries. Therefore,
federal law dictates whether Dun-Par qualifies as an "entity having valid lien rights which
may be asserted" in the federal enclave of Fort Riley.

While mechanic's lien rights provide protection from nonpayment for contractors
and subcontractors who work on private property, federal law does not provide lien rights
for contractors and subcontractors who work on federal land or buildings. Instead, to
protect subcontractors, Congress enacted the Miller Act. This Act mandates that when
awarding a federal contract for the "construction, alteration, or repair of any public
building or public work of the Federal Government," a contractor must furnish a bond to
the federal government in order to ensure payment "of all persons supplying labor and
material in carrying out the work provided for in the contract." 40 U.S.C. § 3131(b)(2)
(2006).

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In this case, the language in the bond is clear and unambiguous. The second
definition of a claimant requires that Dun-Par must have lien rights that may be asserted
under federal law. Since there are no federal lien rights for Dun-Par to assert, Dun-Par
does not qualify as a claimant. Since Dun-Par is not a claimant, the district court erred in
granting Dun-Par summary judgment.

Because the clear and unambiguous contract language in the bond resolves the
issue of whether the district court properly granted Dun-Par summary judgment, there is
no reason for us to consider Dun-Par's arguments regarding the purpose of the bond or
any public policy supporting Dun-Par's claims. Any other allegations of error are also
moot.

Accordingly, the district court's granting of summary judgment for Dun-Par is
reversed, and the case is remanded to the district court with directions to enter summary
judgment in favor of Hanover.