A BOND CLAIMANT MAY RECOVER ATTORNEY’S FEES
FROM THE BOND (UTAH) AND IN EXCESS OF THE PENAL SUM OF THE BOND
A surety, which litigates contractor license bond cases in Nevada and Utah must be aware of
the potential dangers involved with those litigations, namely that a bond claimant may recover attorney’s fees from the bond penal sum in Utah, or recover attorney’s fees from the bond in Nevada in excess of the penal sum.
The issue in Utah is in essence whether attorney’s fees can be recovered from the bond penal
sum in addition to the principal claim amount. We are presently involved in litigation where the apparently valid claim amount is around $9,000, but where the claimant’s attorney has asked the surety to also pay attorney’s fees in excess of $20,000 and potentially much more than that. (The bond penal sum is $150,000.) Those fees were incurred in litigating the claim against the bond principal and against the surety. The Utah statutes and administrative rules are silent on whether attorney’s fees are recoverable from a contractor’s license bond, but the bond required by the Division of Occupational and Professional Licensing has this remarkable sentence: “Said bounden Principal shall also pay reasonable attorney’s fees in cases successfully prosecuted or settled against the Principal or Surety if the bond has not been depleted.” (Emphasis added) Neither the Utah Supreme Court or the Utah Court of Appeals has interpreted that sentence, but it is our position that it means what it says, namely that only the bond principal shall pay attorney’s fees, not the surety, although the reference to “if the bond has not been depleted” might suggest otherwise, that the surety also must pay such fees. A prior sentence in the same paragraph had stated that “the above bounden Principal and Surety shall indemnify persons”, but the Surety was obviously omitted from the crucial attorney’s fees sentence.
The plaintiff in the case discounts the language of the bond, ignoring that it was obviously
required by the Division and that the Division required this particular form. Instead, they argue that they can enforce the judgment they have obtained against the principal, which includes some attorney’s fees, against the bond, and that, in any case, incurred attorney’s fees are included in “losses”, which are recoverable from the bond. However, if that were the case, then why does the bond reference the recovery of attorney’s fees separately?
An additional argument against awarding attorney’s fees from the penal sum of the bond is the fact that such fees could easily deplete the penal sum, and that a claimant, who litigates first, might recover all of its fees, while subsequent claimants might not even recover their principal amounts. An important factor here and separately is the proportionality between the claimed principal amount and the claimed attorney’s fees. In our case, the claimed amount is just over $9,000, which the surety has paid, while the fees might by now be in excess of $30,000. The bond speaks of “reasonable attorney’s fees”, but attorneys representing the claimants might see the inclusion of attorney’s fees an invitation to litigate longer than necessary, which appears to be the situation in our case.
The central problem in Nevada is different, namely that bond claimants, who litigate with the surety, may be able to recover attorney’s fees in excess of the penal sum from the surety. In most cases, the maximum exposure of the surety is the penal sum of the bond. However, there are some exceptions where the surety litigates a bond claim and ultimately loses against the claimant.
1. Offer of Judgment.
Under Nevada Offer of Judgment rules, a claimant may recover attorney’s fees and cost from the date the offer is made, if the surety does not accept the offer and then does worse when the claim is ultimately decided on the merits. Trs. of the Plumbers & Pipefitters v. Developers Sur. & Indem. Co., 120 Nev. 56; 84 P.3d 59 (2004). (On appeal by union trustees over denial of attorney fees, judgment was reversed; surety could be ordered to pay attorney fees even if fees award plus judgment, would exceed bond amount because surety engaged in direct litigation over bond.) However, such an award is not mandatory but discretionary.
The Nevada Supreme Court has set forth factors which need to be met to award attorney’s fees pursuant to NRCP 68. Those factors include: (1) whether a party’s defense was brought in good faith; (2) whether the Offer of Judgment was reasonable and in good faith in both its timing and amount; and (3) whether the decision to reject the offer was grossly unreasonable or in bad faith. Beattie v. Thomas, 99 Nev. 579, 668 P.2d 268 (1983).
2. Filing for Trial De Novo after an Arbitration Award.
Nevada assigns most cases with a value of less than $50,000.00 to arbitration, including cases involving bond claims. The arbitrator’s decision is not binding on either party, and both the plaintiff and the defendant can reject the award by filing a so-called Request for Trial De Novo. If a surety files such a request and does not fare better at the subsequent trial, it exposes itself to a mandatory award of attorney’s fees even in excess of the penal sum under the following circumstances:
(a) Awards of $20,000 or less. The party, which rejected the award, must beat
the arbitration award by 20% or more. Thus, for example, if the arbitrator
awarded the claimant $15,000.00, the surety would have to pay the
claimant’s attorney’s fees “associated with the proceedings following the
request for trial de novo” if ultimately the claimant obtained a judgment for
$13,001.00. (The surety could recover its fees and cost if the reverse took
place; i.e. if the claimant filed for trial de novo, and then didn’t do 20%
better than what the award had been.)
(b) Awards of $20,000 or more. Here, the party rejecting the award will have to
do at least 10% better at the time of trial than after the arbitration hearing.
3. THE PREVAILING PARTY RECOVERS $20,000 OR LESS
NRS 18.010.2(a) provides that a court may award attorney’s fees to a prevailing party,
“when the prevailing party has not recovered more than $20,000.” Although such an
award is discretionary, courts have applied it in bond claim cases, where the penal sum of the bond is often less than 20,000.00.
4. THE SURETY HAS DEFENDED THE CASE “WITHOUT REASONABLE GROUNDS
NRS 18.010.2(b) provides for an award of attorney’s fees where, among others, a
defendant has maintained the defenses “without reasonable ground or to harass the
prevailing party.” The provision elaborates: “The court shall liberally construe the
provisions of this paragraph in favor of awarding attorney’s fees in all appropriate
situations. It is the intent of the Legislature that the court award attorney’s fees pursuant to this paragraph and impose sanctions pursuant to Rule 11 of the Nevada Rules of Civil Procedure in all appropriate situations to punish for and deter frivolous or vexatious claims and defenses because such claims and defenses overburden limited judicial resources, hinder the timely resolution of meritorious claims and increase the costs of engaging in business and providing professional services to the public.” For the surety, this situation typically arises where it has tendered its defense to the bond principal, and where the principal has defended the claim without proper grounds or even frivolously. Often, violations of discovery rules accompany such conduct.
5. THE COURT IMPOSES DISCOVERY SANCTIONS
The Nevada Rules of Civil Procedure (NRCP) provide for court imposed monetary sanctions if a party violates certain discovery rules, such as the failure to answer interrogatories or produce documents, or the failure to answer deposition questions.
SUMMARY: While evaluating a contractor’s license bond claim in Utah and before litigating
such a claim in Nevada, the surety needs to be aware of the potential recovery from the bond
penal sum in Utah and in excess of the penal sum in Nevada. While the former is still unresolved, the latter is always a potential, though relatively rare risk, one that is much higher where a bond claim has been tendered to the bond principal.