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Fall 2004-10 Completion bond held not to be assignable
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Fall 2004-10 Completion bond held not to be assignable

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Number 57
Fall 2004

Completion bond held not to be assignable

The plain text of a rider to a completion bond limiting the benefit to the named party is binding and prevails over the main body of the bond. The issuer of the bond is not liable to a subsequent assignee. Citibank v. Grupo Cupey, Inc., 382 F. 3d 29 (1st Cir. 2004).

American International Insurance Company of Puerto Rico issued a performance bond for the benefit of Grupo Cupey, to cover a default by the contractor in a residential real estate project in Trujillo Alto known as “Vista de Cupey.” Citibank, N.A. financed construction and received, in addition to mortgage collateral security, a “dual obligee rider” to the bond, which in fact made it an additional beneficiary.

After several delays in construction, Grupo Cupey declared the contractor to be in default. The project stalled, Grupo Cupey failed to pay Citibank, and Citibank sued its borrower and American International. Some partial settlements later, Citibank sold its credit, collateral and cause of action to Grupo Catalan, who replaced the bank as plaintiff.

 

Rider vs. main body

 

American International moved for the dismissal of the law suit, arguing that the terms of the rider expressly limited its liability to Citibank and Grupo Cupey, and did not extend to Grupo Catalan, who could not state a claim for performance.

The rider in question read as follows:

“No right of action shall be accrue [sic] on this bond to or for the use of benefit [sic] of any person or corporation other than the Owner [Grupo Cupey] and Lender [Citibank] herein named . . .”

However, the main body of the bond contained language that provided for actions against “heirs, executors, administrators or successors.” Grupo Catalan averred that it was such a “successor.”

The more restrictive language of the rider governed, the court ruled. “The rider, by its own terms, amended the bond in several respects, including the addition of new, more restrictive language that limited causes of action against AIICO to ‘the Owner and Lender herein named,’ and did not extend rights to ‘successors.'”

Moreover, the fact that the District Court had allowed Grupo Catalan to replace Citibank as plaintiff was merely a procedural incident not designed to create novel contractual relationships among the parties to the suit.

Liberal construction

In response to Grupo Catalan’s claim that the rider be liberally construed in its favor, the Court of Appeals stated that although the prevailing doctrine is that a surety bond should be liberally interpreted in favor of its beneficiary, that principle is not a blank check and applies only where the text of the agreement is ambiguous.

 

© 2004 Goldman Antonetti