when the surety had full knowledge of the action against the principal and an opportunity to defend it."). While it appears that NAS had notice that arbitration proceedings between Frontier and Tri-State were going to occur (Pl.'s Mot. for Confirmation of Award Exs. 4, 5) (correspondence between counsel for NAS and counsel for Frontier), there is no indication that NAS had an opportunity to present defenses to Frontier's claims in the arbitration. Cf. Skip Kirchdorfer, 995 F.2d at 661 (sureties had "an unusually close relationship" to principal that included sharing the same attorney who was an officer in principal's corporation); Aurora Painting, 832 F.2d at 1153 (surety tendered its defense to principal and used the same counsel as principal).
Additionally, one circuit court has questioned whether the general rule that a judgment against a principal is binding on a surety with notice and opportunity to defend is even applicable in the Miller Act context. United States Fid. & Guar. Co. v. Hendry Corp., 391 F.2d 13, 17 (5th Cir. 1968) ("This principle is inapposite when the plaintiff's recovery depends upon a Miller Act bond."). In that case, the Fifth Circuit held that "a state judgment in a suit between a subcontractor and a prime contractor does not bind the surety in the subcontractor's Miller Act suit against it." Id. at 20. The court found that one important purpose of the Miller Act's grant of exclusive federal jurisdiction, 40 U.S.C. § 270b(b), was to protect sureties from judgments arising out of multiple litigation in different forums that might exceed the amount of the bond. Id. at 18. As a result, "a state court judgment that would bind a surety on his Miller Act bond offends the congressional mandate." Id. At least one district court has applied Hendry to arbitration awards, holding that an arbitration proceeding between a subcontractor and a prime contractor would not have preclusive effect against the prime contractor's Miller Act surety. Pensacola Const. Co. v. St. Paul Fire & Marine Ins. Co., 705 F. Supp. 306, 311-14 (W.D. La. 1989) ("If the surety were forced to defend his bond in every arbitration proceeding that his indemnitee might be involved in, he would lose the protection that Congress granted the Miller Act surety. The surety would face the possibility of inconsistent results in the different forums and might end up being made liable for more than the amount of the bond.").
Federal law is thus far from clear (and the Seventh Circuit has not weighed in) as to whether and in what circumstances a Miller Act surety may be liable for an arbitration award against its principal. Whichever rule is applied, however, leads to the same result. If the Hendry/Pensacola Construction rule is followed, NAS is not liable for the award against Tri-State because a surety cannot be bound by such an award. Even if the Skip Kirchdorfer/Aurora Painting rule applies, HAS is not liable because an arbitration in which a surety did not have an opportunity to defend itself is not preclusive as to the surety's liability. Further, the arbitration award here was essentially a default judgment against Tri-State, as Tri-State failed to appear for the arbitration. (Pl.'s Mot. for Confirmation of Award Ex. 6.) As the argument that sureties are bound by an arbitration award against a principal is grounded in a theory of preclusion, the fact that a majority of federal courts (including the Seventh Circuit) do not give preclusive effect to default judgments, Stephan v. Rocky Mountain Chocolate Factory, 129 F.3d 414, 418 (7th Cir. 1997), supports a finding that the award against Tri-State does not conclusively establish the liability of NAS.
Even if it is not federal law at all, but rather state law that determines the preclusive effect of an arbitration award, application of Illinois law leads to the same result. Like the rule from the Frederick dicta, Illinois law requires that a surety have notice and an opportunity to defend before a judgment against its principal can preclusively establish liability against it. See Lesczauskis v. Downs, 121 N.E.2d 590, 591 (Ill. 1918) ("[I]n the absence of such notice and opportunity to defend . . . the judgment against the principal is not conclusive against the surety."); State Bank of Blue Island v. Benzing, 48 N.E.2d 333, 340 (Ill. 1943) (citing Lesczauskis). As noted above, while NAS had notice of the arbitration between Tri-State and Frontier, there is no indication that NAS had any opportunity to present defenses in that proceeding. Illinois law stresses the importance of allowing a surety to present defenses to its own liability on a bond. "[T]he requirement of a judgment on the bond against the surety is more than a mere technical formality. It insures the surety of a hearing and an adjudication of the issues relevant to [its] liability on the bond." Westbrooks v. Finley, 138 N.E.2d 77, 79 (Ill.App. Ct. 1956).
Further, at least one court in this district applying Illinois law held in an analogous case that a prior default judgment against a principal was not preclusive in a suit against the principal's guarantors. Dale v. Frank, No. 85 C 5891, 1986 WL 1004 (N.D. Ill. Jan. 6, 1986). The court in that case held that a default judgment against a promissory note principal was not preclusive as to the note's guarantors because no judgment on the merits had been made. "The issue of the [principal's] liability on the underlying note — breach of contract, fraud, etc. has yet to be presented in court. To bar [the guarantors from asserting defenses of the principal] at this point would be to deny them any day in court." Id. at *1 (emphasis omitted). Here, similarly, no defenses of Tri-State (which NAS, as surety, is entitled to assert, Metropolitan Pier & Exhibition Authority v. Mc3d, Inc., 56 F. Supp.2d 984, 989 (N.D. Ill. 1999)) were presented in the arbitration, and to bar NAS from presenting them here would deny it its day in court.
Regardless of whether federal or Illinois determines the preclusive effect of the arbitration award against Tri-State, the award does not conclusively establish liability of NAS to Frontier. Even assuming that arbitration awards against a contractor can be preclusive as to the contrator's Miller Act surety' a liability, NAS has had no opportunity to present defenses either as to its own liability on the bond, or as to Tri-State's liability on the subcontract, which NAS is entitled to assert in its own defense. Frontier is free to proceed with its Miller Act claim against NAS here; my ruling today is simply that the arbitration award itself does not conclusively establish liability. Entry of judgment against NAS at this point would be premature.
Plaintiff's motion for confirmation of the arbitration award and entry of judgment against defendants is GRANTED IN PART AND DENIED IN PART. The arbitration award is confirmed, and defendant Tri-State is hereby ordered to pay Frontier the sums described in the award. With respect to defendant NAS, however, Frontier's motion for entry of judgment is denied.
JUDGMENT IN A CIVIL CASE
Decision by Court. This action came to hearing before
the Court. The issues have been heard and a decision
has been rendered.
IT IS HEREBY ORDERED AND ADJUDGED that Frontier's motion to confirm arbitration award is granted in part and denied in part. The motion is granted as to Tri-State and denied as to NAS. Judgment is, therefore, entered in favor of Frontier and against Tri-State in the amount of $41,450.45 plus interest and $7,521.09 in attorneys' and arbitration fees.