By Kurt Faux & Willi Siepmann

Sureties, who issue contractor license bonds in Nevada and Utah, are frequently confronted with attempts by bond claimants to recover attorney’s fees from the penal sum of the bond, which were incurred in pursuing the claim against the bond principal and/or its surety. In many cases, these claimants have obtained default judgments against the principal, and those judgments often include
attorney’s fees. Should the surety honor or dispute those claims for attorney’s fees?

As usual, the answer isn’t that simple, and the following discussion will delineate the factors to be considered in deciding the issue.

NEVADA
In Nevada, contractor license bonds are statutory bonds and their issuance and coverage is determined by the applicable statutes, NRS 624.270 AND 624.273. Neither statute references attorney’s fees, and the only language pertaining to recoverable damages are the phrases “is damaged by” and “is injured by”. While a claimant might argue that paid attorney’s fees in pursuing the claim are damages, that claim should be rejected because any payment of such fees from the penal sum of the bond would diminish that amount, and could be entirely unrelated to the actual damages recovered by that claimant. For example, a claimant might have incurred actual losses of $5,000 but $10,000 in attorney’s fees, and if the penal sum of the bond is only $15,000, the entire claim would exhaust that bond, leaving nothing for subsequent claimants. Similarly, if multiple claimants were forced to split a $50,000 bond on a pro rata cases, the claimant with the largest amount of attorney’s fees would get substantially more than the claimant who has the same substantive claim but no claim for attorney’s fees.

While there is no Nevada case law as yet on this particular issue, i.e. recovery of attorney’s fees from the penal sum of the bond, a claimant may well cite the case of Trustees of Plumbers and Pipefitters Union Local 525 Health and Welfare Trust Plan v. Developers Surety and Indemnity Company, 84 P.3d 59 (2004), in support of an attorney’s fees claim. There, a union benefit trustee filed an action against a surety to recover on the bond after the bond principal failed to pay union benefits. The trial court awarded the bond penal sum to the Trust Funds, but failed to award attorney’s fees beyond the penal sum in reliance upon Basic Refractories v. Bright, 72 Nev. 183, 298 P.2d 810 (1956) (a “completion” bond). In Basic Refractories, the Nevada Supreme Court determined that a surety could not be ordered to pay attorney fees that, in addition to the judgment, exceeded the bond amount when those fees were incurred in a separate action between the secured entity and a third party. Basic Refractories mentions that an attorney’s fee is part of the loss sustained by an obligee when compelled to sue on a bond. Id. at 200.

In Trustees, the Nevada Supreme Court expressly limited the Basic Refractories' holding to the procedural posture of that case. If a secured entity becomes obligated to pay attorney fees in third-party litigation, the surety is not liable for these fees if they exceed the bond amount.

However, the court clarified the attorney’s fees issue, holding that a surety engaging in direct litigation with a secured entity may be responsible to the secured entity above the bond penal sum for attorney’s fees under the offer of judgment statute, NRS 17.115 (now rescinded), the offer of judgment rule under Nevada Rules of Civil Procedure Rule 68, and NRS 18.010 (recovery under $20,000 or litigating without a reasonable basis or to harass).

In discussing the Trustees case, it must first be pointed out that the bond in question was not a license bond but a union benefits bond, a bond which guarantees benefit payments if the principal fails to do so. It is therefore a specific bond with one potential claimant and beneficiary, whereas a license bond has potentially multiple claimants and beneficiaries. The Trustees case also limits recovery from the bond to situations where the surety engages in direct litigation with the claimant and loses. A subsequent recovery of attorney’s fees from the penal sum of the bond and in excess of the penal sum must still be authorized by statute or rule, and in the Trustees case the applicable provisions were NRS 17.115 (offer of judgment, now rescinded), Nevada Rule of Civil Procedure 68 (offer of judgment) and NRS 18.010.]

In general terms, the offer of judgment rule, NRCP 68, allows a defendant or plaintiff to offer a judgment in a specific amount to the opposing party. If the offer is rejected and the rejecting party does not obtain a better result at trial, then the rejecting party may be obligated to pay the attorney’s fees and costs of the offering party.

In addition to the offer of judgment rule, a successful litigant can recover its attorney’s fees pursuant to the following statutes:

NRS 18.010.2(a): When the prevailing party HAS NOT RECOVERED MORE THAN $20,000.00;

NRS 18.010.2(b): When the court finds that the litigation was maintained without reasonable grounds or to harass. The legislature included language in NRS 18.010.2(b) that this section should be liberally construed in favor of fees being awarded to avoid frivolous litigation.

In considering NRS 18.010(2)(b)in the Trustees case, the Nevada Supreme Court held the district court should have considered the allegations of the Trust Funds that the surety acted in bad faith by defending the claim without reasonable grounds and by unlawfully obstructing the Trust Funds’ access to evidence. Allegedly, the surety intentionally precluded the Trust Funds from obtaining any substantive testimony at the deposition of the surety.

Finally, attorney’s fees can also be awarded against a surety if the surety participates in non-binding arbitration, files for “trial de novo” after the arbitration award and then does worse than the arbitration award at the short trial, which typically follows such a “de novo”. That award is mandatory but is limited to $3,000.00. Of course, attorneys’ fees are available as sanctions for discovery and related violations.

In summary, the only real exposure for attorney’s fees from the penal sum and in excess of that sum in Nevada arises when the surety engages in direct litigation with the claimant, the case is tried and the surety loses. The most common scenario in our experience would involve a tender of defense, after which the principal’s attorney also represents the surety, and then both principal and surety lose at trial.
Awards of attorney’s fees pursuant to NRCP 68, NRS 18.010.2(a) and (b) are discretionary with the court.

UTAH
Utah, on the other hand, presents a very different scenario. Again, the statutes and administrative code sections requiring and discussing the bond do not mention attorney’s fees, but the bond itself does, and that in a rather peculiar way.

In discussing the Utah approach, the basic law pertaining to attorney’s fees must be reiterated, namely that a party can only recover its attorney’s fees if such fees are allowed by contract or by statute. See,

R.T. Nielsen Co. v. Cook, 40 P.3d 1119 (Utah, 2002); Dixie State Bank v. Bracken, 764 P.2d 985, 988 (Utah 1988). As stated, the contractor’s license bond statutes do not reference attorney’s fees. The pertinent statutes are part of the Utah Construction Trades Licensing Act, which is Chapter 55 of Title 58 of the Utah Code Annotated. Specifically, UCA 58-55-306(1)(b) states that an applicant for a contractor’s license shall demonstrate his financial responsibility by “submitting a bond in an amount and form determined by the commission with the concurrence of the director”. Coverage of the bond is delineated in Utah Administrative Code rule R156-55A-602(2), which states in relevant parts:

(2) The coverage of the license bond shall include losses that may occur as the result of the contractor's violation of the unprofessional or unlawful provisions contained in Title 58, Chapters 1 and 55 and rules R156-1 and R156-55a including the failure to maintain financial responsibility, the failure of the licensee to pay its obligations, and the failure of the owners or a licensed unincorporated entity to pay income taxes or self employment taxes on the gross distributions from the unincorporated entity to its owners.

In contrast, the Utah statute pertaining to motor vehicle dealer license bonds, UCA 41-3-205 has this language in subsection (4)(a): “A person making a claim on the bond shall be awarded attorney fees in cases successfully prosecuted or settled against the surety or principal if the bond has not been depleted.” The same sentence is part of the state mandated bond form.

Second, the Utah Contractor’s License Bond does not allow for the recovery of attorney’s fees from the surety. The bond form is required by the Utah Division of Occupational and Professional Licensing (“DOPL”) and must be used by the bond-issuing surety verbatim except for the spaces to be completed with the names of the Principal and Surety. The bond form itself has one sentence pertaining to “reasonable attorney’s fees”, and it reads: “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). The Bond does not say that the surety shall pay reasonable attorney’s fees, but instead limits payment for attorneys’ fees to the bond principal, excluding the surety from such payment. If DOPL wanted the surety to pay attorney’s fees, the bond would say so. That said, the sentence is rather peculiar in that it also contains the phrase “if the bond has not been depleted.” It is unclear what the principal’s payment of attorney’s fees has to do with any repletion of the bond, but the first part of the sentence is clear enough in excluding the surety from such payments, that any attempts by claimants to recover their fees from the bond should be rejected.

Finally, it must be noted that no Nevada or Utah court has yet ruled on the issue whether a bond claimant can recover its attorney’s fees from the bond simply because those fees were incurred before or during litigation. It is our general position, however, that such claims should be rejected for the reasons stated above absent specific evidence of inclusion in the bond, a statute or rule.