United States Court of Appeals for the Federal Circuit
2008-5188
AMERICAN CONTRACTORS INDEMNITY COMPANY,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
Jefferson B. Slagle, Thompson, Slagle & Hannan, LLC, of Duluth, Georgia,
argued for plaintiff-appellant.
Sean M. Dunn, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for defendant-
appellee. With him on the brief were Michael F. Hertz, Acting Assistant Attorney
General, Jeanne E. Davidson, Director, and Donald E. Kinner, Assistant Director.
Appealed from: United States Court of Federal Claims
Judge Margaret M. Sweeney
United States Court of Appeals for the Federal Circuit
2008-5188
AMERICAN CONTRACTORS INDEMNITY COMPANY,
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
Appeal from the United States Court of Federal Claims in 07-CV-374,
Judge Margaret M. Sweeney.
___________________________
DECIDED: June 29, 2009
___________________________
Before NEWMAN, SCHALL, and DYK, Circuit Judges.
DYK, Circuit Judge.
American Contractors Indemnity Company (“ACIC”) filed a complaint under the
Tucker Act, 28 U.S.C. § 1491(a)(1), against the United States seeking damages for an
alleged breach of contract by the Small Business Administration (“SBA”). On the
government’s motion, the Court of Federal Claims dismissed ACIC’s complaint for
failure to state a claim upon which relief could be granted. Am. Contractors Indem. Co.
v. United States, 81 Fed. Cl. 682, 693 (2008). We reverse and remand.
The question here is whether the SBA is liable under a security bond guarantee
agreement. In particular, the question is whether the SBA’s obligation is voided
because the plaintiff surety, ACIC, agreed to an amendment of the underlying bond, and
the amendment has an effective date before the date of the SBA’s approval of the
amendment.
BACKGROUND
ACIC is a California company that acts as surety for the performance of
construction contracts by issuing performance and payment bonds. In 2002,
DiGiovanni Insulation and Refractory, Inc. (“DiGiovanni”), a construction company,
applied to ACIC for performance and payment bonds to guarantee its completion of a
construction project in New Orleans, Louisiana, for Steve Ho, owner of the Hoshun
Chinese Cuisine restaurant.
Because DiGiovanni could not otherwise qualify for commercial surety bonds, it
applied to participate in the SBA’s bond guarantee program. As a general matter, the
SBA will enter into bond guarantee agreements with sureties if the principal for whom
the bond is sought is a “small business concern” that cannot otherwise obtain
commercial bonds and the bond is for less than $5,000,000. See generally 15 U.S.C.
§ 694b. DiGiovanni qualified for the SBA program as a small business concern, and on
September 27, 2002, ACIC and the SBA entered into a written Surety Bond Guarantee
Agreement (“Guarantee Agreement”). Under the Guarantee Agreement, the SBA
agreed to reimburse 80% of any loss by ACIC on SBA-approved bonds issued for the
project, “subject to the regulations in 13 CFR [§] 115.” One of the incorporated
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provisions was 13 C.F.R. § 115.19(e), entitled “Denial of Liability[:] Alteration.” That
section provided that the SBA is not liable under a bond guarantee agreement if
[w]ithout obtaining prior written approval from SBA . . . , the Surety agrees
to or acquiesces in any material alteration in the terms, conditions, or
provisions of the bond, including . . . acquiescing in any alteration to the
bond which would increase the bond amount by at least 25% or $50,000.
13 C.F.R. § 115.19(e) (emphasis added).
On October 4, 2002, ACIC issued performance and payment bonds for
DiGiovanni, each with a penal sum equal to the construction contract price of
$1,781,850. DiGiovanni then commenced work. On March 24, 2003, DiGiovanni and
the owner of the project agreed in a written “Change Order” to modify the work to be
done, resulting in a contract price increase of $240,000. On May 19, 2004, ACIC
submitted to the SBA a revised Guarantee Agreement in the amount of $2,021,850.
The SBA approved the increased bond on June 2, 2004.
At some point, DiGiovanni and ACIC also agreed to a rider modifying the bonds
with an effective date of March 24, 2003. While the effective date stated on the rider
was before the SBA’s approval, the date that DiGiovanni and ACIC reached agreement
on the bond modification is disputed. The parties differ as to whether the agreement
was reached before or after the SBA approved the increase.
In or around July 2004, ACIC received notice that DiGiovanni had defaulted on
the project; claims were then made on the bonds by the project owner and DiGiovanni’s
suppliers and subcontractors. ACIC investigated and settled the claims, incurring a net
loss of over half a million dollars. ACIC timely notified the SBA of the claims and
submitted requests for payment pursuant to the Guarantee Agreement. After
investigating ACIC’s requests, however, the SBA refused to reimburse ACIC for its loss
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on the bonds. In a final decision dated May 4, 2007, the SBA concluded that “ACIC
acquiesced in the bond amount [increase] of $240,000.00 prior to obtaining the approval
of SBA as required by 13 CFR § 115.19(e)” and that, as a result, the SBA would not
“honor this claim or any other claim arising out of the DiGiovanni default.”
On July 12, 2007, ACIC filed a complaint in the Court of Federal Claims seeking
recovery under the Guarantee Agreement. In response, the government filed a “Motion
to Dismiss” for failure to state a claim. Attached to the motion were two exhibits not
attached to ACIC’s complaint. The first exhibit was a document on ACIC letterhead
entitled “Surety Rider” with a stated effective date of March 24, 2003. The Surety Rider
stated that the DiGiovanni bond would be increased pursuant to the “changed order of
$240,000.00” to $2,021,850. The document was signed by Macharl S. Zwart of the
Martin Insurance Agency, as agent for ACIC. The second exhibit was a copy of the
revised Guarantee Agreement, indicating that it was received by the SBA on May 19,
2004, and approved on June 2, 2004. Relying on the two documents, the government
argued:
ACIC offers no evidence that . . . prior written approval was received for
the $240,000 change in the bond amount as of its effective date, March
24, 2003. . . . Thus, because . . . ACIC materially altered the bond through
increasing it by $240,000 without SBA’s prior approval, the SBA properly
determined that it was not liable, and ACIC has not articulated a basis for
its breach of contract claim.
Def. Mot. Dismiss 5, Am. Contractors Indem. Co., 81 Fed. Cl. at 682 (No. 07-CV-003).
In response, ACIC argued that dismissal was inappropriate because the documents
submitted by the government did not prove that ACIC had agreed to the increase before
June 2, 2004, since “it is common in the surety industry” to retroactively date bond
increases to match a contract change order. The Court of Federal Claims rejected
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ACIC’s argument and granted the motion to dismiss, holding that ACIC “failed to allege
any facts suggesting that it submitted to the SBA a request for written approval before
the bond was increased” or “any facts suggesting that the SBA provided written
approval prior to the . . . increase.” Am. Contractors Indem. Co., 81 Fed. Cl. at 693.
ACIC filed a motion for reconsideration, including as an exhibit a different copy of
the Surety Rider it had located in its files. The copy submitted by ACIC included an
attached power of attorney appointing Macharl S. Zwart as ACIC’s agent for purposes
of the DiGiovanni bond, bearing (among other dates) a date of May 25, 2004. ACIC
contended, inter alia, that the power of attorney, dated long after March 24, 2003,
indicated that it had not agreed to increase the bond amount before SBA approval. The
Court of Federal Claims denied the motion. Am. Contractors Indem. Co. v. United
States, 82 Fed. Cl. 774, 780 (2008).
ACIC timely appealed the judgment dismissing its complaint, and we have
jurisdiction under 28 U.S.C. § 1295(a)(3).
DISCUSSION
Whether a complaint fails to state a claim upon which relief can be granted is a
question of law that we review de novo. Cambridge v. United States, 558 F.3d 1331,
1335 (Fed. Cir. 2009). To avoid dismissal for failure to state a claim, the claimant must
plead sufficient facts that, if taken as true, are enough “to raise a right to relief above the
speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). On a motion
to dismiss, the court generally may not consider materials outside the pleadings. See
Court of Federal Claims Rule 12(d) (“If, on a motion under RCFC 12(b)(6) or 12(c),
matters outside the pleadings are presented to and not excluded by the court, the
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motion must be treated as one for summary judgment . . . .”); see also 5C Charles Alan
Wright & Arthur R. Miller, Federal Practice and Procedure § 1366 (3d ed. 2004).
Here ACIC’s complaint alleged that “[a]ll conditions precedent to [the
government’s liability] have been met” and that “the SBA agreed in writing to an
amendment of the Guarant[ee Agreement] to increase its guarantee . . . to
$2,021,850.00.” However, the government argued that two documents referenced in
the complaint should be considered to be part of the complaint, and that those
documents on their face defeat the claim. As a preliminary matter, ACIC argues the
Court of Federal Claims erred in considering the documents on a motion to dismiss.
Noting that there was no dispute as to the authenticity of the two exhibits, the trial court
determined that consideration of the documents was permissible on a motion to dismiss
because they were relied upon and referred to in the complaint and were integral to
ACIC’s claim. Am. Contractors Indem. Co., 81 Fed. Cl. at 687–88. We need not
resolve whether the trial court properly considered these documents on the motion to
dismiss because we conclude that even assuming that the two exhibits were properly
considered, the court erred in granting the motion to dismiss.
On appeal, as before the Court of Federal Claims, the government’s sole
argument that ACIC failed to state a claim is that 13 C.F.R. § 115.19(e) bars liability
because the Surety Rider’s effective date—March 24, 2003—predates the date when
the SBA approved the revised Guarantee Agreement—June 2, 2004.
The government’s argument is premised on the incorrect notion that § 115.19(e)
must be interpreted as providing that the effective date of a bond is necessarily the date
when the parties to the bond “agree[d] to or acquiesce[d] in” a change. 13 C.F.R.
2008-5188 6
§ 115.19(e). Under the plain language of the regulation, the relevant date is the date
the surety “agrees to or acquiesces in” a material change to a bond, not the effective
date of that change. While the effective date of a rider altering a bond may be the same
as the agreement or acquiescence date, it is not necessarily the same as the
agreement or acquiescence date in every case. ACIC contends that the industry
follows “the common practice of dating surety bonds to conform to the date of the
bonded obligation,” such that an agreement reached on a given date may result in
retroactive issuance of a bond with a much earlier “effective” date. Pl.-Appellant’s Br.
23. At oral argument, counsel for the government did not dispute this characterization
of industry practice.
In addition, during the notice and comment process accompanying issuance of
13 C.F.R. § 115.19, the SBA acknowledged the industry practice of backdating bonds in
the context of a different provision of § 115.19, namely § 115.19(f). See Surety Bond
Guarantee, 61 Fed. Reg. 3266, 3269 (Jan. 31, 1996). Subsection (f), entitled
“Timeliness,” provides that the SBA is not liable under a bond guarantee agreement if
“[t]he bond was Executed prior to the date of SBA’s guarantee” or if the bond is
executed or approved after “work under the Contract had begun.” In the comments on
this provision the SBA stated that “the current industry practice of back-dating the bond
at the request of the obligee” would not invalidate the SBA guarantee under § 115.19(f)
“as long as there is proper documentation of the actual date of execution of the bond
and such execution date is no earlier than the date of SBA’s guarantee.” 61 Fed. Reg.
at 3269. This comment appears to assume that such backdating would also not violate
§ 115.19(e). While the SBA conceivably could prohibit bond amendments with
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retroactive effective dates by promulgating regulations to that effect, the current
regulation contained in 13 C.F.R. § 115.19(e) on its face does not bar sureties from
agreeing to an effective date before SBA approval. The mere existence of an earlier
effective date thus does not establish a violation of 13 C.F.R. § 115.19(e).
It may be that, on a motion for summary judgment, filed after appropriate
discovery, the government will be able to establish that ACIC agreed to alter the
DiGiovanni bond before receiving SBA approval. However, no motion for summary
judgment was before the Court of Federal Claims, and we express no opinion on
whether such a motion would be successful. We hold only that the Court of Federal
Claims erred in dismissing ACIC’s complaint for failure to state a claim because the
“effective” date of the bond is not necessarily the date of agreement or acquiescence
within the meaning of 13 C.F.R. § 115.19(e). We note that ACIC argues that the
governing date for purposes of § 115.19(e) (that is, the date of agreement or
acquiescence) is the date that the bond first becomes enforceable and that the bond
does not become enforceable until delivery and acceptance. We express no opinion on
this issue which, we think, is best addressed by the Court of Federal Claims in the first
instance.
The judgment is reversed, and the case is remanded for further proceedings.
REVERSED and REMANDED
COSTS
No costs.
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