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01/25/89 the Aetna Casualty & v. the Aetna Casualty &

January 25, 1989

APPELLATE COURT OF ILLINOIS, SECOND DISTRICT VILLAGE OF FOX LAKE, PLAINTIFF-APPELLANT

v.

THE AETNA CASUALTY & SURETY COMPANY ET AL., DEFENDANTS-APPELLEES



534 N.E.2d 133, 178 Ill. App. 3d 887, 128 Ill. Dec. 113 1989.IL.70

Appeal from the Circuit Court of Lake County; the Hon. Bernard E. Drew, Jr., Judge, presiding.

APPELLATE Judges:

PRESIDING JUSTICE UNVERZAGT delivered the opinion of the court. NASH and REINHARD, JJ., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE UNVERZAGT

On September 28, 1981, plaintiff Village of Fox Lake (the Village) filed an action in the circuit court of Lake County against defendants Aetna Casualty & Surety Co. (Aetna) and Santucci Construction Co. (Santucci) to recover damages allegedly caused by Santucci's breach of contract for installation of sewer and water lines in the Village and by Aetna's breach of its performance bond obligations. The Village subsequently filed several amended complaints eventually making Angelo D. Ventrella (Ventrella) a party to the case in June 1983. In its complaint, the Village advanced several theories of recovery, all of which grew out of its claim that Santucci did not timely pay its suppliers and subcontractors.

In count I of its complaint the Village sought recovery against Aetna, as surety for Santucci, for breach of its bond obligation. Count II sought recovery of alleged out-of-pocket costs incurred by the Village from Aetna and Santucci. Count IIA asserted that certain sworn contractor's affidavits submitted by Santucci were fraudulent and that this constituted not only an actionable tort, but also an additional breach of the contract. In count III the Village sought recovery on a third-party beneficiary theory claiming that it was a third-party beneficiary of the contract between Santucci and its surety, Aetna. Count IV sought exemplary damages occasioned by the tort of fraud allegedly committed by Ventrella as the individual who signed the contractor's affidavits on behalf of Santucci.

Aetna filed a counterclaim against the Village and a third-party complaint against Santucci. Santucci filed a counterclaim against the Village seeking recovery for unlawful termination by the Village of the contract between the Village and Santucci. Santucci also filed a third-party complaint against the Village's engineers, Baxter & Woodman, Inc.

Motions for summary judgment were filed by the Village, Santucci, and Aetna. The trial court, on December 16, 1986, denied the Village's motion, granted certain portions of the summary judgment motions filed by Santucci and Aetna, and denied other portions. Among its findings, the court held that Aetna's performance bond was limited to the penal sum of its performance bond; that the Village waived the liquidated damages provision of the contract between the Village and Santucci; and that Aetna effectively reserved its rights against the Village when it began performing on its surety bond contract. The court denied summary judgment with respect to the following issues: whether Santucci's breach of the contract was material; whether section 25(d) of the contract provided the sole remedy for the Village against Santucci; and whether the Village had a cause of action for fraud against Santucci and its agent, Angelo D. Ventrella.

Upon motions to reconsider, the court reaffirmed its denial of the Village's motion for summary judgment while granting Aetna's cross-motion for summary judgment and Santucci's cross-motion for partial summary judgment.

The record reveals that on December 15, 1975, the Village entered into a contract with Santucci for the installation of sewer and water mains within the Village of Fox Lake. Santucci, as principal, and Aetna, as surety, executed a performance bond in accordance with section 1 of "An Act in relation to contractors entering into contracts for public construction" (Ill. Rev. Stat. 1975, ch. 29, par. 15) (the Bond for Public Works Act) and in accordance with terms of the contract between the Village and Santucci. Both the contract amount and the bond amount were $2,491,906.75. At the time the contract was executed, the Village did not have the money to pay Santucci because it had not sold general obligation bonds to finance the project. The Village refrained from issuing a notice to proceed on the project until July 1976 when it obtained sufficient money to pay Santucci.

In order for the work to proceed on the sewer and water mains, the Village was required to obtain easements from property owners so the contractor could perform its work on the private property of Village residents. Some of these easements had been obtained when the notice to proceed was issued by the Village engineers in July 1976. The original completion date for the project was July 1978. The completion date as fixed by the Village after it had granted extensions of time to Santucci was December 1978. As of either date, the Village had not procured all easements required for the completion of the work. As a result of the Village's failure to procure these easements when the project commenced, Santucci was, from time to time, forced to stop its work on one sewer or water line and relocate its forces to another area of the project. While the failure to obtain necessary easements did not cause a complete shutdown of the work, it did result in increased costs to Santucci and delays in the completion of the work.

Santucci submitted to the Village monthly pay requests for work done during the previous month. The contractor used the funds it received from the Village for each pay request to pay its subcontractors and suppliers for work they performed for Santucci during the period covered by the request. Santucci prepared the pay estimates for approval by Baxter & Woodman, the Village's engineers. These estimates, after approval by Baxter & Woodman, became the monthly pay requests which were then approved by the Village.

Santucci's contract stated:

"In preparing estimates, the material delivered on the site and preparatory work done may be taken into consideration."

On numerous occasions during preparation of its pay estimates, Santucci sought oral confirmation of its right to payment of materials delivered to and stored on the jobsite but not yet incorporated into the work. On all but one occasion, approval of these requests was refused by Baxter & Woodman. According to Santucci, these oral requests were not inserted in the written pay estimates because their rejection would have resulted in payment delays of up to 30 days on amounts due on the balance of the estimate. Santucci claimed that at the time of the receipt of the Village's August 8, 1978, notice of termination, Santucci had approximately $62,000 in materials stored on the jobsite for which it had not been able to obtain payment.

Santucci's contract provided, in paragraph 25(a) of the general conditions, that the contractor's monthly program payment would be made by the 15th day of the month following submission of its approved estimate, provided that estimate was submitted before the first of the month. In Santucci's and Aetna's response to the Village's motion for summary judgment, the defendants stated that the Village was 6 to 13 days late in payment to Santucci on 5 of the first 18 pay requests. The defendants claimed that the late payments, coupled with a nonpayment for on-site materials, caused Santucci continuing cash flow problems which, in turn, affected the contractor's ability to pay suppliers as promptly as required by paragraph 27 of the general conditions of the contract. Paragraph 27 of the contract required Santucci to pay its suppliers up to the extent of 90% of the cost of materials delivered to the site no later than the 20th day of the month following that in which the materials were delivered and further required the contractor to pay its subcontractors no later than the fifth day of the month following that in which work was performed.

According to the defendants, the Village, as early as September 1976, was aware that Santucci was late in paying subcontractors and suppliers, but the Village also was late in September and October in paying Santucci because it did not desire to withdraw construction funds from a certificate of deposit without incurring a penalty for early withdrawal of those funds.

In November 1977, Baxter & Woodman, the Village engineers, talked with certain Santucci subcontractors and suppliers regarding their contention that Santucci was delinquent in its payments to them. These Discussions prompted a letter from Baxter & Woodman to Santucci, requesting a supplemental contractor's affidavit from Santucci which would delineate the amounts paid and owed to each subcontractor. In addition, waivers of lien from subcontractors and suppliers were requested as additional evidence of payment. The letter further advised Santucci that if the Village did not receive assurances that Santucci had paid its subcontractors and suppliers, the Village would invoke section 25(d) of the general conditions to the contract between the Village and Santucci and withhold additional retained funds as security against nonpayment by Santucci to its subcontractors and suppliers. Section 25(d) provided that the Village may pay suppliers and subcontractors directly or withhold sums due them from Santucci if Santucci failed to furnish evidence of timely payment to the suppliers and subcontractors.

During the months of November and December 1977, the Village through Baxter & Woodman contacted several of Santucci's subcontractors and suppliers other than those who had complained to the Village of nonpayment to determine the status of their payments by Santucci. Baxter & Woodman determined that only 4 of 15 suppliers and subcontractors had accounts with Santucci which were delinquent. On December 30, 1977, Santucci furnished partial waivers of lien to Baxter & Woodman evidencing payment to the four material suppliers whose accounts with Santucci were allegedly delinquent, as well as furnishing partial waivers of lien from other material suppliers.

On January 5, 1978, the Village's attorney wrote to Santucci and requested, pursuant to the provisions of section 25(d) of the general conditions, that Santucci provide evidence to the Village that all obligations set forth in the sworn contractor's affidavits furnished to date had been paid. Santucci responded by furnishing the attorney with copies of the waivers submitted on December 30, 1977.

On January 23, 1978, Baxter & Woodman reported to the Village that Santucci had not responded to the engineers' request or the Village attorney's request for evidence of payment. The engineers advised the Village that Santucci had "not delivered evidence of payment to material suppliers and subcontractors . . . and apparently intends to ignore written requests for such." The engineers also reported to the Village, "Mr. Ventrella has given false sworn statements to the Village for the purpose of obtaining payment for work performed . . .."

As a result of the alleged nonpayment of subcontractors and suppliers, the Village withheld payment on pay requests 18 and 19. On February 9, 1978, George Heck of Baxter & Woodman and Julius Abler, the Village's attorney, met with representatives of Santucci to discuss the matter of payments to subcontractors and suppliers. Don Hane of Aetna was also present. Jack Russell, Santucci's accountant, provided Heck and Abler with information regarding the status of Santucci's accounts with its material suppliers and subcontractors. Heck and Abler learned that the total unpaid balance due to subcontractors and suppliers was about $72,500 of the approximately $1.6 million of work which had been completed. Heck and Abler also learned that Santucci was questioning some of the outstanding balances of its suppliers and subcontractors because Santucci was not sure that all materials billed had been received. At the meeting it was agreed that all future pay requests to the Village would be accompanied by evidence of payment by Santucci, in the form of waivers of lien or cancelled checks, to its subcontractors and suppliers. It was further agreed that the Village would honor pay requests 18 and 19. On February 13, 1978, Santucci's accountant furnished to Baxter & Woodman an additional $273,862.62 worth of lien waivers and/or cancelled checks evidencing payments to subcontractors and suppliers. Also, at the February 9, 1978, meeting, the Village attorney was advised that Baxter & Woodman had consistently refused payment for on-site materials. Attorney Abler ended that meeting with a clear indication that, for this reason, the Village would not thereafter strictly enforce the time and percentage limitation to section 27 of the general conditions of the contract.

On February 16, 1978, Baxter & Woodman formally recommended to the Village that it honor pay requests 18 and 19. At the time of this recommendation Santucci allegedly owed $100,000 to suppliers and subcontractors. Three reasons were given for the recommendation. First, Santucci had provided evidence of payments of approximately $550,000. Second, the Village had sufficient retained funds to secure itself against nonpayment of subcontractors and suppliers, and third, Aetna's payment bonds stood as additional security against nonpayment. The Village paid these requests in full.

Between February 28, 1978, and August 3, 1978, Santucci submitted pay requests 20 through 25 to the Village, which the Village fully honored. At the time the Village and its engineers knew that Santucci had not fully paid its subcontractors and suppliers. In its response to the Village's motion for summary judgment, Santucci asserted that the Village and its engineers did not recommend payment for these requests based on the strength of the sworn contractor's affidavits accompanying each request because they believed those affidavits to be false.

During the entire sewer and water project, Santucci's accountant Russell was responsible for the preparation of each pay request submitted to the Village. Each request was prepared on forms designed by Baxter & Woodman. The form of the request was at variance with the requirements of section 27 of the contract in that it required the contractor to certify to more stringent supplier payment time requirements. The forms contained an affidavit to be signed by a representative of Santucci.

In his affidavit filed in support of Santucci's summary judgment motion, Russell stated that the affidavits attached to all pay estimates were prepared by him in the belief that they were accurate. According to Russell, the affidavits were prepared in the belief that Santucci had met the requirement, therein contained, that payment had been made for all materials purchased and used to the date of the affidavit in the performance of the construction work under the Santucci contract with the Village. Russell's belief was based, in turn, upon the fact that Santucci's running inventories showing the gross values of materials stored at the jobsite, but not used in the work, always exceeded, from time to time, total amounts owed to Santucci's suppliers. Russell submitted the pay request and affidavits to Angelo D. Ventrella, Santucci's vice-president, who indicated to Russell that he was relying upon the accuracy of the figures which Russell had prepared.

Ventrella, in his affidavit filed in support of Santucci's summary judgment motion, stated that he signed each pay request and affidavit on the strength of Russell's representations as to the accuracy of the amount set forth in each request. Ventrella stated that he did not review the status of the accounts with suppliers before signing each affidavit but relied upon Russell's representations that the statements in the affidavit, regarding the status of supplier and subcontractor accounts, were true and accurate. Ventrella swore that at no time did he intend to deceive the Village of Fox Lake.

On August 8, 1978, the Village served upon Santucci and Aetna notice of its intent to terminate the sewer and water contract. Attached to the notice were 19 letters from various subcontractors and suppliers of Santucci purportedly demanding the payment of amounts due. The amounts claimed due totaled $223,528. The notice informed Santucci and Aetna that the failure to honor the demands for payment contained in the letters was in violation of section 27 of the general conditions of the contract and that unless the demands were honored within 10 days, Santucci would be terminated.

In its response to the Village's motion for summary judgment, Santucci claimed that of the 19 demand letters attached to the notice to terminate, six were duplications seeking payments totaling $72,335. Santucci maintained that evidence of payment for some of the amounts claimed in the notice as due had been previously furnished to the Village and its engineers. Approximately $34,000 of the amounts claimed due were disputed by Santucci, including a $21,500 bill from a supplier for materials delivered to and used by Santucci on another job. According to Russell and his affidavit in support of Santucci's motion for summary judgment, he was unable to respond for Santucci to the notice of termination because he could not determine, within the 10 days allotted, which amounts claimed in the notice were correct. Russell stated that subsequently, by comparing the attached bills and Santucci's records and books, he was able to determine that the amount of bills attached to the notice which were actually due and owing on the date of its service on Santucci was $59,000.

On August 22, 1978, Santucci was terminated by the Village for the reasons set forth in the notice to terminate, i.e., Santucci did not honor the demands for payment which were attached to the notice. According to the deposition of Harold Kively of Baxter & Woodman, the Village held approximately $172,500 in retained funds as of the date of termination.

Santucci admitted to a violation of section 27 of the general conditions of the contract in the amount of $59,050.48. According to Santucci, this amount constituted about 6.7% of the $878,000 in Santucci's material and supplier obligations, paid and unpaid as of the date that the notice of termination was served upon the Village, and 1.9% of the total amount paid to complete the project.

After termination, representatives of Aetna met with representatives of Santucci. At this meeting, Santucci informed Aetna that it was wrongfully terminated and that the Village, not Santucci, had breached the contract. The representatives of Santucci requested that Aetna exercise its right to take over performance of its contract with the Village but only if Aetna did so pursuant to a reservation of its rights.

On September 5, 1978, representatives of Aetna, the Village, and Santucci met to discuss Santucci's termination and the performance of its contract with the Village. Aetna informed the Village that Aetna would take over performance of Santucci's contract with the Village but only under a reservation of rights because of Santucci's position that the Village, by terminating the contract, had breached it. Aetna informed the Village it would undertake performance of Santucci's contract subject to the following conditions:

(a) that Aetna, in taking over Santucci's contract, would not be waiving any rights which it may have if it was subsequently determined that Santucci was correct in its contention that the termination was unlawful; and

(b) that all of the rights of both Aetna and Santucci, including whatever right Aetna may have to additional compensation in the event that the Village's termination of Santucci's contract was found to be without legal justification, would be expressly reserved as though Aetna did not exercise its right ...


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