Present: All the Justices
AMERICAN SAFETY CASUALTY
INSURANCE COMPANY
v. Record No. 032709 OPINION BY JUSTICE CYNTHIA D. KINSER
September 17, 2004
C.G. MITCHELL CONSTRUCTION,
INC., ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Melvin R. Hughes, Jr., Judge
In this action for breach of contract and recovery on
a payment bond, the primary issue is whether the circuit
court erred by entering judgment against a surety in favor
of a claimant under the payment bond after determining that
a judgment by default previously entered by the court
against the principal as a sanction for failing to obey an
order regarding discovery was binding on the surety.
Because the surety had notice of the claim against its
principal, and the right and opportunity to defend the
principal against the claim, we conclude that the judgment
by default against the principal was binding on and
conclusive as to the surety. Thus, we will affirm the
circuit court’s judgment.
RELEVANT FACTS AND PROCEEDINGS
C.G. Mitchell Construction, Inc. (“Mitchell”) entered
into an agreement with Nations Environmental Services, Inc.
(“Nations”) to provide labor, equipment and debris removal
services in connection with the demolition of the Richmond
Convention Center Exhibition Hall (the “Project”) in the
City of Richmond. Nations was a subcontractor on the
Project and was required, pursuant to its contract with the
prime contractor, to procure a “Labor and Material Payment
Bond” (the “Bond”).1 Nations obtained the Bond from
American Safety Casualty Insurance Company (“American
Safety”). The Bond named the prime contractor as the
“Obligee,” and Mitchell was a “Claimant” as that term was
defined in the Bond.2
Nations along with Janet C. Williams and Chijioke Ude,
president and vice-president, respectively, of Nations,
also entered into a “General Agreement of Indemnity” (the
1
Requiring a payment bond by Nations, as a
subcontractor, is authorized in Code § 2.2-4337(F). The
purpose of Code § 2.2-4337 is to protect those who furnish
supplies, materials, and labor for the construction of
public improvements, irrespective of whether those items
were furnished to the prime contractor or a subcontractor.
See Solite Masonry Units Corp. v. Piland Constr. Co., 217
Va. 727, 730, 232 S.E.2d 759, 761 (1977) (decided under a
predecessor to Code § 2.2-4337); Thomas Somerville Co. v.
Broyhill, 200 Va. 358, 363, 105 S.E.2d 824, 828 (1958)
(same).
2
In pertinent part, the Bond defined the term
“Claimant . . . as one having a direct contract with the
Principal or with a subcontractor of the Principal for
labor, material, or both, used or reasonably required for
use in the performance” of the subcontract between Nations
and the prime contractor.
2
“Indemnity Agreement”) with American Safety.3 As pertinent
to the issues on appeal, the Indemnity Agreement included
the following provisions with regard to the rights granted
to American Safety:
ASSIGNMENT. A. The CONTRACTOR [Nations], and the
INDEMNITORS [Williams and Ude] as their interests may
appear in the following subsections of this paragraph,
hereby assign, transfer, pledge and set over to SURETY
[American Safety] . . . (i) All the rights of the
CONTRACTOR or INDEMNITORS in, and arising in any
manner out of any CONTRACT; . . . (iv) All the right,
title and interest of the CONTRACTOR or INDEMNITORS in
and to any actions, causes of action, claims or
demands . . . arising out of or in connection with any
CONTRACT . . . . B. SURETY shall have the full and
exclusive right (but not the obligation), in its name
or in the name of the CONTRACTOR or INDEMNITORS, to
prosecute, compromise, release or otherwise resolve
any of the claims, causes of action or other rights
assigned to SURETY, upon such terms as SURETY, in its
sole discretion shall deem appropriate. C. The
CONTRACTOR and INDEMNITORS hereby irrevocably
nominate, constitute, appoint and designate the SURETY
. . . as their attorney-in-fact with the right, but
not the obligation, to exercise all of the rights of
the CONTRACTOR and INDEMNITORS assigned, transferred
and set over to SURETY in this Agreement, and in the
name of the CONTRACTOR and INDEMNITORS to make,
execute, and deliver any and all additional or other
assignments, documents, papers, . . . or other
instruments . . . deemed necessary and proper by the
SURETY in order to give . . . the full protection
intended to be herein given to the SURETY under all
other provisions of this Agreement. The CONTRACTOR
and INDEMNITORS hereby ratify and confirm all acts and
actions taken and done by SURETY . . . as such
attorney-in-fact.
. . . .
3
Williams and Ude executed the Indemnity Agreement as
individual indemnitors.
3
REMEDIES UPON DEFAULT. A. In the event of any
EVENT OF DEFAULT as described in this Agreement,
SURETY shall have the right, at its option, and in its
sole and absolute discretion . . . to take any one or
more of the following actions: . . . (vii) in its name
or in the name of the CONTRACTOR or Indemnitors to
adjust, settle or compromise any . . . suit or
judgment involving any BOND or to take whatever other
action it may deem necessary . . . with respect to
such matter. SURETY’S determination as to whether any
such . . . suit . . . should be settled or defended
shall be binding and conclusive upon the CONTRACTOR
and INDEMNITORS.
Pursuant to its contract, Mitchell was to supply
Nations with daily tickets outlining the work performed and
Nations was to compensate Mitchell for its work on a “time
and materials” basis. Mitchell would periodically invoice
Nations based upon the totals from the daily tickets.
According to Mitchell, Nations breached the contract by
refusing to pay Mitchell the sums due on the invoices.
Consequently, Mitchell filed a motion for judgment
against both Nations and American Safety. Mitchell alleged
that Nations had breached the contract between them and was
indebted to it for the sum of $312,500.09, plus interest.4
Mitchell also alleged that American Safety was obligated to
make payment to Mitchell under the Bond for all labor,
material, and equipment it had supplied to Nations on the
4
Along with the motion for judgment, Mitchell filed a
statement of account and affidavit verifying the amount
owed to it by Nations in accordance with Code § 8.01-28.
4
Project. Nations and American Safety each filed grounds of
defense, denying any indebtedness to Mitchell.5
More than a year after Mitchell filed its action,
Nations’ attorney moved to withdraw as counsel of record
for Nations. The circuit court granted the motion. No
attorney has since entered an appearance on behalf of
Nations. Nations’ registered agent also resigned, and the
State Corporation Commission terminated Nations’ corporate
status in December 2002.
Pursuant to Rule 4:5(b)(6), Mitchell subsequently gave
notice that it would take the deposition of a corporate
designee of Nations. However, no corporate designee from
Nations appeared at the scheduled deposition even though
Mitchell effected proper service. Consequently, Mitchell
filed a motion for sanctions and/or to compel a corporate
designee of Nations to appear for a deposition. At a
hearing on the motion, the circuit court learned that
Williams and Ude had resigned as officers and directors of
Nations. American Safety suggested to the court that,
since Williams and Ude were the only persons with knowledge
of the matters set out in the deposition notice, Mitchell
could obtain the needed information by issuing subpoenas to
5
American Safety also filed a cross-claim against
Nations and a third-party motion for judgment against
Williams and Ude.
5
Williams and Ude in their individual capacities and
deposing them about their personal knowledge. The circuit
court granted Mitchell’s motion and directed a corporate
designee of Nations to appear for a Rule 4:5(b)(6)
deposition.
Mitchell subsequently gave notice that it would take
the deposition of Nations’ corporate designee and effected
proper service of the notice. Again, no corporate designee
appeared for the scheduled deposition. Consequently,
Mitchell moved for sanctions, including judgment by
default, against Nations for its failure to comply with the
circuit court’s prior order directing a corporate designee
from Nations to appear for a deposition.
At a hearing on the motion, American Safety again
represented to the circuit court that a deposition of a
corporate designee was not necessary because Williams and
Ude could be deposed about their personal knowledge.
American Safety also argued that judgment by default
against Nations was not appropriate because, other than the
affidavit attached to the motion for judgment, Mitchell had
not presented evidence to prove its claimed damages against
Nations and because genuine issues of material fact existed
as to the amount that Nations owed Mitchell.
6
The circuit court found that Nations violated the
prior order when a corporate designee failed to appear at
the Rule 4:5(b)(6) deposition after receiving proper
notice. Thus, the circuit court granted Mitchell’s motion
for sanctions. It entered judgment by default in favor of
Mitchell against Nations in the amount of $312,500.09, plus
interest and costs.
Mitchell then filed a motion for summary judgment
against American Safety. At a hearing on that motion,
American Safety argued that the judgment by default should
not be conclusive against it or even introduced into
evidence because American Safety did not have the ability
to make a corporate designee from Nations appear at a Rule
4:5(b)(6) deposition. American Safety further argued that
it had a right to present a defense to Mitchell’s claim.
In a final order, the circuit court found that
American Safety had notice of Mitchell’s claim against
Nations and had the right and opportunity to defend
Nations. Accordingly, the circuit court concluded that the
judgment by default entered against Nations was binding and
conclusive upon the surety, American Safety. Thus, the
court granted Mitchell’s motion for summary judgment and
entered judgment in favor of Mitchell against American
Safety in the amount of $312,500.09, plus interest and
7
costs, subject to offsets in the amount of $57,110.86 for
claims against the Bond by subcontractors and vendors to
Mitchell that American Safety had already resolved. This
appeal followed.
ANALYSIS
On appeal, American Safety challenges the circuit
court’s actions granting Mitchell’s motion to compel the
deposition of a corporate designee of Nations, granting
Mitchell’s motion for sanctions and judgment by default
against Nations, and entering summary judgment against
American Safety. On brief, American Safety describes the
primary issue as whether the circuit court could use “a
default judgment imposed as a discovery sanction against a
defunct corporation, without more, to impose” liability
upon a surety. American Safety’s framing of the issue,
however, omits two unchallenged findings by the circuit
court: (1) American Safety had notice of Mitchell’s claim
against Nations; and (2) American Safety had both the right
and opportunity to defend Nations. Thus, the issue,
properly stated, is whether the judgment by default entered
against Nations is binding on American Safety when American
Safety, as the surety, had notice of the claim against its
principal, Nations, and the right and opportunity to defend
Nations.
8
Under the terms of the Indemnity Agreement, Nations
assigned to American Safety its right and interest in any
cause of action or claim arising out of or in connection
with any contract.6 Nations also appointed American Safety
as its “attorney-in-fact with the right, but not the
obligation, to exercise all of the rights” of Nations
assigned to American Safety and “in the name of [Nations]
to make, execute, and deliver any and all additional or
other assignments, documents, papers, . . . deemed
necessary and proper by [American Safety] in order to give
. . . the full protection intended to be herein given to
[American Safety].” Finally, under the Indemnity
Agreement, American Safety had the right, upon any default,
to take action in its name or in Nations’ name “to adjust,
settle or compromise any . . . suit or judgment involving
any BOND or to take whatever other action it may deem
necessary . . . with respect to such matter.” As the
circuit court found, these provisions in the Indemnity
Agreement provided American Safety with the right to take
any measures it deemed necessary and proper in order to
defend Nations in the action brought by Mitchell.
6
The Indemnity Agreement defines the term “CONTRACT”
as “an agreement between CONTRACTOR and a third party . . .
for which SURETY executes . . . a BOND.” Nations’
subcontract with Mitchell is a “CONTRACT” under the
Indemnity Agreement.
9
Despite this authority and the fact that American
Safety, as a defendant in the action brought by Mitchell,
had notice of Mitchell’s claim against Nations, American
Safety never designated or even attempted to designate a
corporate representative on behalf of Nations. In other
words, it did nothing on Nations’ behalf to comply with the
circuit court order directing a corporate designee to
appear at a Rule 4:5(b)(6) deposition. Nor did American
Safety argue that it did not have the authority under the
Indemnity Agreement to do so. In fact, American Safety did
not make that argument until the hearing on Mitchell’s
motion for summary judgment, which was after the circuit
court had entered judgment by default against Nations.
However, American Safety appeared at the hearing on
Mitchell’s motion to compel the appearance of Nations’
corporate designee at a deposition as well as the hearing
on Mitchell’s motion for sanctions.
Nevertheless, American Safety argues that the circuit
court erred by treating the judgment by default conclusive
as to American Safety’s liability on the Bond and thereby
preventing American Safety from contesting the amount of
damages claimed by Mitchell. Relying on this Court’s
decisions in Munford v. Overseers of the Poor of Nottoway,
23 Va. (2 Rand.) 313 (1824); Hobson v. Yancey, 43 Va. (2
10
Gratt.) 73 (1845); and United States Fid. & Guar. Co. v.
Jordan, 107 Va. 347, 58 S.E. 567 (1907), American Safety
asserts that “a final judgment, entered after a trial on
the merits against a principal, has served under Virginia
law as no more than ‘prima facie evidence’ against a
surety.” We are not persuaded by American Safety’s
argument.
In Munford, a jury found that Munford had been
appointed and qualified as sheriff but had not been
appointed by the Overseers of the Poor to collect the poor-
rates, unless a judgment previously entered against him as
collector was conclusive evidence of that fact. 23 Va. at
315. The issue was whether that prior judgment against
Munford “precluded and estopped the sureties from giving
any evidence going to contradict” Munford’s appointment.
Id. In holding that the judgment against Munford was not
conclusive evidence against the sureties as to the fact of
his appointment to collect the poor-rates, the Court stated
that it would be improper to hold “the sureties
conclusively bound by a judgment against the principal,
which they had no opportunity to resist or impeach.” Id.
at 320.
In Hobson, the children and legatees of a decedent
obtained a decree against the executor of the estate. 43
11
Va. at 75. Execution was issued on the decree and returned
“nulla bona.” Id. The parties in whose favor the decree
had been rendered then instituted a suit against the
sureties of the executor to recover the amount due under
the decree. Id. The sureties argued that they were not
responsible for certain rents from real estate that had
been charged to the executor in the prior decree. Id. at
77. This Court concluded that the trial court had not
properly inquired into the credits that the executor was
entitled to receive and therefore remanded the suit for
further proceedings. Id. at 80. There, as in Munford,
there was no indication that the sureties had any notice of
or the opportunity to defend the executor in the first
proceeding brought only against the executor.
Finally, in Jordan, the trial court decided that a
settlement by a treasurer for moneys due the county was
conclusive proof against the treasurer’s surety. 107 Va.
at 352, 58 S.E. at 567. On appeal, this Court reversed,
holding that the treasurer’s settlement with the county was
“not conclusive, but only prima facie evidence of the
balance in his hands.” Id. at 356-57, 58 S.E. at 569.
Treating the settlement as having no higher dignity than a
judgment, we explained that judgments generally bind only
parties and privies and are “not conclusive upon other
12
persons, because it would be unjust to bind one by a
proceeding in which he had no opportunity to make defense,
and in which he could not appeal if dissatisfied with the
judgment rendered therein.” Id. at 355, 58 S.E. at 568.
The general rule, however, is subject to exceptions such as
in “cases of contracts of indemnity, or in the nature of
contracts of indemnity, or in those cases in which a
person, although not in form a party to the suit, is bound
to assist in the prosecution or defense, and either does so
in fact, or, when called upon to prosecute or defend, as
the case may be, fails to do so.” Id. at 356, 58 S.E. at
569. The bond at issue in Jordan was not a bond of
indemnity, and as in Munford and Hobson, the surety had no
opportunity to participate in or defend the treasurer in
the settlement of funds due the county.
Unlike American Safety, none of the sureties in those
cases had notice of the claim against its principal and
both the right and opportunity to defend the principal
against the claim. Thus, Munford, Hobson, and Jordan are
inapposite. They are not controlling or persuasive
authority on the issue before us.
However, we do find the decision in Drill South, Inc.
v. International Fid. Ins. Co., 234 F.3d 1232 (11th Cir.
2000), both persuasive and apposite. That case involved an
13
action on a payment bond in a federal construction project.
Id. at 1234. In response to a motion for default judgment
against the principal, the surety “stated that it took no
position on a default judgment against its principal . . .
provided that the default judgment was not deemed binding
on [the surety].” Id. After the trial court entered
default judgment against the principal, the court concluded
that the surety was bound by that judgment. Id. at 1235.
On appeal, the surety argued that “default judgments
against a bond principal are not binding on a co-defendant
surety actively defending in the same action.” Id. The
court disagreed, explaining “the general rule that has
emerged is that a surety is bound by any judgment against
its principal, default or otherwise, when the surety had
full knowledge of the action against the principal and an
opportunity to defend.” Id.; accord Frederick v. United
States, 386 F.2d 481, 485 n.6 (5th Cir. 1967); Lake County
v. Massachusetts Bonding & Ins. Co., 75 F.2d 6, 8 (5th
1935); Massachusetts Bonding & Ins. Co. v. Central Finance
Corp., 237 P.2d 1079, 1081 (Colo. 1951); Von Engineering
Co. v. R.W. Roberts Constr. Co., 457 So.2d 1080, 1082 (Fla.
Dist. Ct. App. 1984); First Mobile Home Corp. v. Little,
298 So.2d 676, 682-83 (Miss. 1974); contra United States ex
rel. Fidelity Nat’l Bank v. Rundle, 107 F. 227, 229 (9th
14
Cir. 1901); United States ex rel. Vigilanti v. Pfeiffer-
Neumeyer Constr. Corp., 25 F. Supp. 403, 405 (E.D.N.Y.
1938); Gearhart v. Pierce Enters., Inc., 779 P.2d 93, 95
(Nev. 1989).
Applying that rule, the court in Drill South found
that the surety had full knowledge of the potential default
judgment against its principal and numerous opportunities
to defend the principal against the merits of the claim and
the extent of liability. 234 F.3d at 1235-36. The court
further found that the surety had the legal right to step
in and defend its principal at every stage of the
proceedings pursuant to an indemnity agreement with its
principal. Id. at 1236. Under that agreement, the
principal had designated the surety as its “attorney-in-
fact,” which gave the surety the “ ‘right to adjust,
settle, or compromise any claim, demand, suit or judgment
upon the [payment bond].’ ” Id. Thus, the court affirmed
the judgment against the surety. Id. at 1240. In doing
so, the court rejected the surety’s argument that it was
not obligated to defend the action against its principal.
Id. at 1236. The issue, according to the court, was not
whether the surety had an obligation to defend under the
terms of the indemnity agreement but whether it had the
right to do so. Id.
15
Turning to the present case, we conclude that American
Safety is bound by the judgment by default entered against
Nations. Like the surety in Drill South, American Safety
had notice of Mitchell’s claim against Nations and the
opportunity to defend Nations. It also clearly had the
right to do so under the terms of the Indemnity Agreement.
In our view, it does not matter that the judgment by
default was entered as a discovery sanction or that the
circuit court accepted Mitchell’s affidavit as evidence of
the amount of Nations’ indebtedness. “The law requires
only that a surety have notice and an opportunity to defend
before it is bound by a judgment against its principal.”
Id. Thus, the circuit court did not err in granting
Mitchell’s motion for summary judgment and entering
judgment against American Safety.
American Safety also challenges the circuit court’s
order directing a corporate designee of Nations to appear
at a deposition and the order entering judgment by default
against Nations as a discovery sanction. In both
instances, the circuit court was dealing with discovery
issues and abuses. A trial court generally exercises
“broad discretion” in resolving such matters. Woodbury v.
Courtney, 239 Va. 651, 654, 391 S.E.2d 293, 295 (1990). On
appeal, we accord deference to a trial court’s decision
16
regarding discovery disputes and will set aside that
decision only if the court abused its discretion. See
Walsh v. Bennett, 260 Va. 171, 175, 530 S.E.2d 904, 907
(2000). Here, we cannot say that the circuit court abused
its discretion in entering either of those orders.
As to the order requiring a corporate designee of
Nations to appear at a deposition, American Safety argues
that the circuit court abused its discretion in compelling
an act by a defunct corporation when Mitchell could have
obtained the information it needed by deposing Williams and
Ude in their individual capacities. However, the
termination of Nations’ corporate status did not impair
Mitchell’s remedy against Nations. Under Code § 13.1-755,
“[t]he termination of corporate existence shall not take
away or impair any remedy available to or against the
corporation, its directors, officers or shareholders, for
any right or claim existing or any liability incurred,
prior to such termination.” This statutory provision,
which partially changed the common law, see Harris v. T.I.,
Inc., 243 Va. 63, 68, 413 S.E.2d 605, 608 (1992), further
provides that “[a]ny such action . . . by or against the
corporation may be prosecuted or defended by the
corporation in its corporate name,” and “[t]he
shareholders, directors and officers shall have power to
17
take such corporate or other action as shall be appropriate
to protect such remedy, right or claim.” Code § 13.1-755.
In addition, upon the involuntary termination of a
corporation’s existence, “the properties and affairs of the
corporation shall pass automatically to its directors as
trustees in liquidation.” Code § 13.1-753; see also Code
§ 13.1-752. Given these statutory provisions, the circuit
court did not abuse its discretion by compelling Nations to
designate a corporate representative to appear at a Rule
4:5(b)(6) deposition.
Contrary to American Safety’s argument, deposing
Williams and Ude in their individual capacities would not
have had the same legal effect as deposing one or both of
them as Nations’ corporate designee. In accord with Rule
4:5(b)(6), Mitchell “designate[d] with reasonable
particularity the matters on which examination [was]
requested” in its notice of deposition. Nations was then
required to designate one or more officers or other persons
to testify on its behalf, and it could have set forth the
matters on which each designated person would testify. Id.
The person designated by a corporation to testify on its
behalf must “testify as to matters known or reasonably
available to the organization.” Id. Thus, the designated
person gives testimony about the knowledge and memory of
18
the corporation, not his or her personal knowledge. See
United States v. Taylor, 166 F.R.D. 356, 361 (M.D.N.C.
1996) (decided under F.R.C.P 30(b)(6), which is in all
pertinent respects identical to Rule 4:5(b)(6)); accord The
Paul Revere Life Ins. Co. v. Jafari, 206 F.R.D. 126, 127
(D. Md. 2002)(same); see also Black Horse Lane Assoc., L.P.
v. Dow Chemical Corp., 228 F.3d 275, 303 (3d Cir.
2000)(same).
Finally, with regard to the circuit court’s order
entering judgment by default against Nations as a discovery
sanction, American Safety contends that, absent a showing
of prejudice by Mitchell, the court’s choice of sanction
was too severe. American Safety also contends that
Mitchell seized upon Nations’ defunct status to give notice
of a Rule 4:5(b)(6) deposition knowing that Nations could
not designate someone to testify on its behalf at a
deposition, thereby setting in motion events that allowed
it to obtain the judgment against Nations without ever
having to present evidence in a trial. However, one of the
sanctions authorized under Rule 4:12(b)(2)(C) when a party
fails to obey an order to provide discovery is “judgment by
default against the disobedient party.” Mitchell sought
through a Rule 4:5(b)(6) deposition to explore, among other
things, the basis of Nations’ denials in its grounds of
19
defense and its answers to interrogatories. Mitchell was
deprived of that opportunity. Thus, we cannot say that the
circuit court abused its discretion in choosing to enter
judgment by default against the disobedient party, Nations.
See Woodbury, 239 Va. at 654, 391 S.E.2d at 295 (trial
court did not abuse its discretion in granting partial
summary judgment for defendant when plaintiff failed to
timely identify expert witnesses). Given the circumstances
of this case, it is doubtful that any lesser sanction would
have remedied the problem posed by Nations’ failure to obey
the circuit court’s order compelling the appearance of its
corporate designee at a deposition.
We also point out that American Safety had notice of
every step in the proceedings that led to the entry of
those two orders. In fact, counsel for Mitchell wrote
American Safety’s counsel in order to obtain available
dates before scheduling both the first and the second
deposition of Nations’ corporate designee. But, as
previously stated, American Safety never attempted to
designate a corporate representative to appear at a
deposition on behalf of Nations. It was not until the
hearing on Mitchell’s motion for summary judgment that
American Safety even argued that it did not have the
20
authority under the Indemnity Agreement to make that
designation.
CONCLUSION
We hold that a surety is bound by a judgment by
default entered against its principal when the surety had
notice of the claim against the principal and the
opportunity and right to defend the principal. Since
American Safety was such a surety, we will affirm the
judgment of the circuit court.7
Affirmed.
7
In light of our decision, we do not consider American
Safety’s argument concerning collateral estoppel because
that principle was not the basis of the circuit court’s
decision to enter summary judgment against American Safety.
21