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Monday, March 4, 2013

Village Liable to Subcontractors in Developer Bankruptcy

The Village of Antioch approved two residential developments proposed by Neumann Homes.  Lake County Grading Company, LLC v. Village of Antioch, 2013 IL App (2d) 120474.  Conditions were imposed that required Neumann to construct certain public improvements to be dedicated to the Village. The approvals also required Neumann to provide the Village with surety bonds to secure the cost of the improvements.  Neumann entered into various contracts for that work, including a contract with Lake County Grading Company to perform grading work. Neumann filed for bankruptcy, and never paid Lake County for the grading work it completed.  Lake County Grading filed claims against the surety bonds provided by Neumann to secure the work.  However, because the language of the surety bonds guaranteed performance by Neumann but were silent regarding payments to subcontractors like Lake County Grading, the surety companies refused to pay the subcontractor.
Lake County Grading then filed suit against the Village, claiming that the Public Construction Bond Act required the Village to obtain both a performance bond to secure the work and a payment bond to protect subcontractors.  According to Lake County Grading, the Village's failure to comply with the payment bond requirement of the Act rendered it liable for third party beneficiary breach of contract.  The circuit court granted summary judgment to Lake County Grading on this theory, and the Village appealed, claiming that the payment bond provision should have been "read into" the surety bonds, and Lake County Grading's recourse was through its surety claims.
On appeal, the court first determined that Lake County Grading qualified as a third-party beneficiary. The court held that the payment bond requirement of the Bond Act is to be read into any public works contract between a public entity and a general contractor.  In this case, the court determined that the Village's approval of the Neumann Homes development was the type of "contract" covered by the Bond Act.  As a result, the Village was required to obtain a performance and payment bond from Neumann Homes for the public improvements work. Because it did not require both types of bonds, the Village violated the Bond Act and breached the contract.  As a third party beneficiary to that contract, Lake County Grading was entitled to recover its costs for the grading work from the Village under a breach of contract theory.  The court refused to follow the First District appellate decision in Shaw Industries, Inc. v. Community College District No. 515, where the court reached the opposite conclusion.  In the Shaw case, the Second District determined that a subcontractor was not a third party beneficiary under the express terms of the contract between a public entity and a general contractor.  Instead, the First District in the Lake County Grading case relied on federal cases in reaching its holding that Antioch was liable to the subcontractor.
Municipalities would be well advised to ensure that developers provide the appropriate security for public improvements to avoid being liable to subcontractors if the developer fails to pay their bills.
Post Authored by Julie Tappendorf, Ancel Glink


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