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October 28, 2008

Late Suit on Payment Bond Permitted Due to Earlier Suit on Lien Discharge Bond

Pansini Stone Setting v. Crow and Sutton, 850 NYS2d 133 (2nd Dep't 2007)

In 1996 Crow and Sutton ("C&S") issued a subcontract to Pansini Stone Setting to construct fieldstone walls on a private project. Pansini and C &S had a disagreement regarding the price of materials, and Pansini abandoned the job. Pansini filed a mechanic's lien for about $167,000, and C&S obtained a discharge of lien bond from Reliance Ins. in the amount of $182,500. Pansini commenced a lien foreclosure action and an arbitration against C&S.

In 2003 the arbitration between Pansini and C&S was decided with a finding in favor of Pansini of about $234,000. In February, 2006, Pansini filed a motion to amend its lien foreclosure suit to add a claim on Reliance's payment bond, presumably in the amount of the award, and to add Travelers as additional defendant, as Travelers had assumed the obligations under Reliance's bonds. The trial court denied Pansini's motion, but on appeal the Appellate Court reversed.

The Appellate Court based its ruling on the fact that the lien discharge and payment bonds had been "issued by the same insurer, with regard to the same project, and insured payment for the same labor and material."

Generally leave to amend is freely granted unless the motion is prejudicial to the opposing party, or the proposed amendment is "palpably insufficient or patently devoid of merit." Here, the court rejected the argument that it would be prejudicial to allow a suit on the payment bond because of the possible additional liability, holding that "exposure to additional liability does not, in itself, constitute prejudice."

The court also permitted Pansini to add Travelers as a defendant even though the suit period on the payment bond had been expired for years, stating:

Where the claim against the new party would otherwise be barred by the applicable statute of limitations, the claim may nonetheless be asserted upon demonstrating that:

  1. both claims arose out of the same conduct, transaction or occurrence,
  2. the new party is united in interest with the original defendant, can be charged with notice and will not be prejudiced in maintaining a defense, and
  3. the new party knew or should have known that the suit would have been brought against it but for a mistake in identity.

Finding that all of these requirements were met, the court permitted Travelers to be brought into the suit despite the long delay.

Note: Ordinarily the risks are the same to the surety under a payment bond and lien discharge bond issued on the same job. This case illustrates, however, that issuing a lien discharge bond can result in additional liability to the payment bond surety because a lien discharge bond can remain in effect for so many years. So perhaps there is a good reason that sureties charge an annual premium for lien discharge bonds, unlike payment bonds which have a fairly finite life and one premium.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.


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