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F.W. SIMS, INC. v. FEDERAL INS. CO.

April 2, 1992

F.W. SIMS, INC., Plaintiff, against FEDERAL INSURANCE COMPANY, Defendant.


The opinion of the court was delivered by: LEONARD D. WEXLER

MEMORANDUM AND ORDER

 F.W. Sims, Inc. ("Sims"), a sub-contractor who worked on the construction of the Wind Watch Hotel in Islip, New York, brings this action against Federal Insurance Company ("Federal"), seeking to collect $ 118,101.93 on a labor and material bond issued by Federal which guarantees payment to those who furnished labor and materials under contract to E.W. Howell Co., Inc. ("Howell"), the general contractor for the aforementioned hotel construction project. This Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332. Now before the Court is plaintiff's motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. For the reasons stated below, the motion is denied.

 I. BACKGROUND

 According to plaintiff's complaint, on or about September 1, 1987, Pacific Ventures, Inc. ("Pacific") entered into a contract with Howell to construct a 362 room hotel at Islip, New York. On December 22, 1987, Pacific assigned the hotel contract to One Colony Hill Associates ("Colony"). On January 19, 1988, Howell, as principal, and Federal, as surety, executed and posted a labor and material bond in the penal sum of $ 26,378,649, guaranteeing payment to subcontractors who furnish labor, material, or both on the hotel construction project. On or about March 7, 1988, Howell and Sims entered into a subcontract whereby Sims was to furnish work and materials on the project for a sum of approximately $ 3,000,000, of which approximately $ 2,900,000 has already been paid.

 Federal notes that Sims reviewed its subcontract with Howell and negotiated certain changes in Article 5 regarding the percentage of Howell's retainage, but did not object to the "pay when paid" clause cited below.

 PROGRESS PAYMENTS

 . . . Contractor's responsibility for payments to subcontractor is expressly contingent upon Owner's payment to Contractor.

 Article 6 of the subcontract between Sims and Howell states in relevant part:

 FIND PAYMENT

 The final payment shall be made within forty days after the completion of the work covered by this contract and acceptance thereof by the Owner or Architect and Contractor, upon the condition that the final payment is actually received by contactor from owner . . . .

 On or about June 30, 1990, Sims submitted its bill in the sum of $ 118,101.93 for amounts due. Federal does not assert that Sims' work is in any way defective. However, due to the fact that Colony ceased making payments to Howell on the main contract, Howell has not paid Sims any of the money still due on the subcontract. Moreover, since February 20, 1991, Colony has been in involuntary bankruptcy.

 Federal sets forth three affirmative defenses: (1) Article 5 of the subcontract provides that the "Contractor's responsibility for payments to the subcontractor is expressly contingent upon Owner's payment to Contractor"; (2) Article 6 of the subcontract between Sims and Howell provides that "the final payment shall be made within forty days after the completion of the work covered by this contract . . . upon the condition that final payment is actually received by Contractor from Owner"; (3) Federal was discharged when the bonded contract was materially altered by reason of an assignment of the contract without the consent of the defendant.

 Finally, Sims alleges that on or about July 2, 1990, Howell entered into a Modification Agreement with Colony in which Howell agreed to wait until September 1, 1990 before seeking further payments from Colony on the underlying contract. Sims alleges that this Modification Agreement was made without notice to Sims and in derogation of ...


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