September 22, 2014
STATE OF GEORGIA DEPARTMENT OF CORRECTIONS
DEVELOPERS SURETY AND INDEMNITY COMPANY
Certiorari to the Court of Appeals of Georgia -- 324 Ga.App. 371.
Samuel S. Olens, Attorney General, W. Wright Banks, Jr., Denise E. Whiting-Pack, Senior Assistant Attorneys General, Mary Jo Volkert, Helen P. Taylor, Assistant Attorneys General, Johnson & Freeman, Ronald J. Freeman, for appellant.
Thompson & Slagle, DeWitte Thompson, Jefferson B. Slagle, Joseph H. Wolenski III, for appellee.
Hines, Presiding Justice.
This Court granted certiorari to the Court of Appeals in State Dept. of Corrections v. Developers Surety and Indem. Co., 324 Ga.App. 371 (750 S.E.2d 697) (2013), to consider whether the State's sovereign immunity is waived for a claim asserted by a surety on a contract with [295 Ga. 742] the State. See Ga. Const. of 1983, Art. I, Sec. II, Par. IX. For the reasons
that follow, we find that it is, and accordingly, we affirm the judgment of the Court of Appeals.
The facts as found by the Court of Appeals are the following. The Georgia Department of Corrections (" GDOC" ) entered into a construction contract (" Contract" ) with Lewis Walker Roofing (" Walker Roofing" ) to re-roof several buildings at Valdosta State Prison. The Contract contained two " no assignment" clauses, and as a prerequisite to contracting with GDOC, Walker Roofing was required to obtain payment and performance bonds. It obtained such payment and performance bonds from Developers Surety and Indemnity Company (" Developers Surety" ). Walker Roofing and Developers Surety [295 Ga. 743] had previously signed a general agreement of indemnity in favor of Developers Surety that included a provision in which Walker Roofing assigned to Developers Surety the company's right to payment under bonded contracts as security against any losses that Developers Surety might suffer under a bond. GDOC was not a party to the indemnity agreement. The bonds required Developers Surety, upon default of Walker Roofing, to " promptly remedy the default or defaults or to promptly perform the [c]ontract in accordance with its terms and conditions." It also specified that Developers Surety was to give GDOC notice " within twenty-five (25) days after receipt of a declaration of default of the surety's election either to remedy the default or defaults promptly or to perform the contract promptly."
Walker Roofing did not complete its work within the time frame required by the Contract, and GDOC declared Walker Roofing in default. On September 23, 2010, GDOC issued a formal notice of default with respect to the performance of Walker Roofing, thus triggering Developers Surety's obligations under the performance bond. Developers Surety did not notify GDOC within 25 days of receipt of GDOC's notice of default regarding whether it would remedy the default or perform the contract. However, approximately three months after the declaration of default, Developers Surety gave GDOC the option of entering into a contract with another company for the completion of the work. GDOC then contracted with that company to finish the project. Under the payment and performance bonds and prior to Walker Roofing's default, Developers Surety had provided financial assistance to Walker Roofing in the amount of $577,118.60; it incurred an additional $160,161.39 in costs and attorney fees arising from its investigation of its liability, if any, under the default.
On July 12, 2011, Developers Surety filed suit against GDOC for breach of contract and for a declaratory judgment that it had no
obligation under the payment and performance bond it issued to Walker Roofing on behalf of GDOC. GDOC filed a counterclaim for breach of contract. The parties filed cross-motions for summary judgment, and the trial court determined that Developers Surety's claims were not barred by sovereign immunity and that GDOC had breached the construction contract as a matter of law. It concluded that GDOC waived its sovereign immunity by entering into the contract with Walker Roofing, and that the doctrine of equitable subrogation gave Developers Surety the ability to file suit against GDOC once it incurred liability and paid the obligations of its principal under the bond. Consequently, the trial court granted summary judgment to Developers Surety and denied it to GDOC; in [295 Ga. 744] the same order, the trial court entered judgment in favor of Developers Surety in the amount of $577,118.60.
GDOC appealed to the Court of Appeals, contending, inter alia, that it was entitled to summary judgment because Developers Surety was not a party to the Contract, and thus, the State's waiver of sovereign immunity for breach of contract did not apply to Developers Surety. The Court of Appeals affirmed the trial court's findings that GDOC waived sovereign immunity by entering into the Contract, and that the doctrine of equitable subrogation gave Developers Surety the ability to " step into the shoes" of Walker Roofing and file suit against GDOC.
In Georgia, the doctrine of sovereign immunity has constitutional status, and such immunity may be waived only by an act of the General Assembly or by the Constitution itself. Georgia Dept. of Corrections v. Couch, 295 Ga. 469 (759 S.E.2d 804) (2014); Georgia Dept. of Natural Resources v. Center for a Sustainable Coast, Inc., 294 Ga. 593, 597-598 (755 S.E.2d 184) (2014). And, the Georgia Constitution provides for the waiver of the State's defense of sovereign immunity, " as to any action ex contractu for the breach of any written contract now existing or hereafter entered into by the [S]tate or its departments and agencies." Ga. Const. of 1983, Art. I, Sec. II, Par. IX (c). OCGA § 50-21-1 (a) echoes this constitutional provision:
The defense of sovereign immunity is waived as to any action ex contractu for the breach of any written contract existing on April 12, 1982, or thereafter entered into by the state, departments and agencies of the state, and state authorities.
There is no doubt that by entering into the Contract, GDOC waived the defense of sovereign immunity for any breach of the Contract for which it could be held liable. Similarly, there is little question that Walker Roofing could maintain an action against GDOC for the alleged breach of the Contract. Thus, the next step in [295 Ga. 745] the analysis is the determination of the status of Developers Surety as surety for Walker Roofing. OCGA § 10-7-56 provides:
A surety who has paid the debt of his principal shall be subrogated, both at law and in equity, to all the rights of the creditor and, in a controversy with other creditors, shall rank in dignity the same as the creditor whose claim he paid.
And, subrogation has been well-defined as
the substitution of another person in the place of the creditor, so that the person in whose favor it is exercised succeeds to all the rights of the creditor. It is of equitable origin, being founded upon the dictates of refined justice, and its basis is the doing of complete, essential, and perfect justice between the parties, and its object is the prevention of injustice.
Bankers Trust Co. v. Hardy, 281 Ga. 561, 562 (640 S.E.2d 18) (2007). Thus, as subrogee of Walker Roofing, Developers Surety
stands in the place of Walker Roofing and may " succeed" to its rights. Id. In this case, Walker Roofing had a right of action, i.e., an action for breach of contract against GDOC. And, the plain language of the constitutional waiver of the State's sovereign immunity in the case of a suit for breach of a written contract entered into by the State expressly addresses the " action" itself, not the party bringing the action. See Georgia Dept. of Natural Resources v. Center for a Sustainable Coast, 294 Ga. at 598 (2) (ordinary signification is to be given to words in construing a constitutional provision).
The action in this case remains one for breach of contract; it is not transformed into another cause of action, either legal or equitable, against GDOC merely because Developers Surety stands in the place of Walker Roofing as the subrogee. Compare Georgia Dept. of Natural Resources v. Center for a Sustainable Coast, supra (sovereign immunity bars injunctive relief against the State at common law). Subrogation is merely a basis upon which Developers Surety, after having incurred liability and paid its bond obligations for its principal, can assert the claim for breach of contract initially belonging to its principal, Walker Roofing.
In its analysis, the Court of Appeals found persuasive the reasoning of Insurance Co. of the West v. United States, 243 F.3d 1367 (C.A. Fed. 2001). As noted, in that case, the surety of a contractor that had financed the completion of a government contract following the contractor's default sued the government directly to recover the remaining funds, and that federal court held that under the Tucker Act, [295 Ga. 746] 28 USC § 1491 (a) (1), the federal government's waiver of sovereign immunity for any claim founded upon an express or implied contract with the United States applied to the subrogees as well as to the original parties to the contract. A pivotal point in that federal court's analysis was the fact that the Tucker Act waived immunity as to claims, not particular claimants. Insurance Co. of the West v. United States, supra. As discussed, our constitutional provision waiving sovereign immunity for actions sounding in contract also does so expressly in terms of " actions," not parties. Furthermore, as noted by that federal court, there is nothing novel about employing the doctrine of equitable subrogation in regard to claims by sureties against the government. Indeed, there is a tradition in federal law of permitting a surety to succeed to the contractual rights of a contractor against the government in the circumstances in which the surety takes over contract performance or when it finances completion of the defaulted contract. Id. at 1370, citing Prairie State Bank v. United States, 164 U.S. 227, 231 (17 S.Ct. 142, 41 L.Ed. 412, 32 Ct. Cl. 614) (1896). So too, there is long recognition in this State of the precept that a surety who has paid the debt of its principal may sue on the original indebtedness in an action to enforce a legal right, such as an action for breach of contract. See Fender v. Fender, 30 Ga.App. 319 (117 S.E. 676) (1923); Lumpkin v. Mills, 4 Ga. 343 (1848). This is consistent with the fact that the right of subrogation is an inchoate one, which becomes choate when the surety is called upon to perform its obligation under a payment or performance bond. Cotton States Mut. Ins. Co. v. Citizens and Southern Nat. Bank, 168 Ga.App. 83, 86 (1) (308 S.E.2d 199) (1983).
It is noteworthy that the General Assembly has provided that a payment bond is mandated for all State public works construction contracts with an estimated contract amount greater than $100,000, and that the State may require such a bond for public works construction contracts that are estimated to be less than that amount. OCGA § 13-10-60. Thus, at best, it would be inconsistent, and at worst, unjust and impractical, to require a surety's bond to ensure payment or performance in favor of the State in the case of a defaulted construction contract with the State, but then to bar the surety from exercising its right of subrogation in an action for the breach of the contract in the event that the State is the defaulting party. As the Court of Appeals quite aptly noted, to raise the complete defense of sovereign immunity in such a case would be to discourage businesses from issuing payment or performance bonds for the benefit of the State. State Dept. of Corrections v. Developers Surety and Indem. Co., supra at n. 4. Inasmuch as a fundamental
purpose of sovereign immunity is the protection of State funds, this Court will not sanction [295 Ga. 747] a result that is contrary to the constitutional and statutory text and would hamper the issuance of such payment and performance bonds, and thus, potentially cause greater exposure of the State's treasury and resources. Georgia Dept. of Corrections v. Couch, supra.
Simply, there is waiver of the State's sovereign immunity in this case of a claim asserted by a surety on a contract with the State.
All the Justices concur.