[Cite as Selective Ins. Co. of Am. v. Ohio Dept. of Rehab. & Corr., 2012-Ohio-6357.]




                                                         Court of Claims of Ohio
                                                                                        The Ohio Judicial Center
                                                                                65 South Front Street, Third Floor
                                                                                           Columbus, OH 43215
                                                                                 614.387.9800 or 1.800.824.8263
                                                                                            www.cco.state.oh.us



SELECTIVE INSURANCE COMPANY OF AMERICA

        Plaintiff/Counter Defendant

        v.

OHIO DEPARTMENT OF REHABILITATION AND CORRECTION

        Defendant/Counter
        Plaintiff/Third-Party Plaintiff

        v.

DDC+, INC., et al.

        Third-Party Defendants

Case No. 2009-07407

Judge Clark B. Weaver Sr.

DECISION

        {¶ 1} On August 30, 2012, each of the parties, with the exception of third-party
defendants, filed motions for summary judgment as to their respective claims and
defenses.       Plaintiff/counter defendant, Selective Insurance Company of America
(Selective), moved for summary judgment both as to its complaint and the counterclaim
filed by defendant/counter plaintiff/third-party plaintiff, Ohio Department of Rehabilitation
and Correction (ODRC).              ODRC moved for summary judgment in its favor as to
Selective’s complaint, its own counterclaim, and its third-party complaint against third-
party defendants, DDC+, Inc. (DDC) and Pete Tudela.
        {¶ 2} On September 12, 2012, the court held an oral hearing on the cross-
motions for summary judgment. Civ.R. 56(C) states, in part, as follows:
Case No. 2009-07407                       -2-                      JUDGMENT ENTRY

      {¶ 3} “Summary judgment shall be rendered forthwith if the pleadings,
depositions, answers to interrogatories, written admissions, affidavits, transcripts of
evidence, and written stipulations of fact, if any, timely filed in the action, show that
there is no genuine issue as to any material fact and that the moving party is entitled to
judgment as a matter of law. No evidence or stipulation may be considered except as
stated in this rule. A summary judgment shall not be rendered unless it appears from
the evidence or stipulation, and only from the evidence or stipulation, that reasonable
minds can come to but one conclusion and that conclusion is adverse to the party
against whom the motion for summary judgment is made, that party being entitled to
have the evidence or stipulation construed most strongly in the party’s favor.” See also
Williams v. First United Church of Christ, 37 Ohio St.2d 150 (1974); Temple v. Wean
United, Inc., 50 Ohio St.2d 317 (1977).
      {¶ 4} The procedural history of this litigation and many of the relevant facts are
set forth in the opinion of the Tenth District Court of Appeals in Selective Insurance
Company of America, 10th Dist. No. 11AP-597, 2012-Ohio-1314.
      {¶ 5} “In February 2007, DDC+, Inc. (‘DDC’) submitted a bid to the state of Ohio
to upgrade the generator at the Northeast Pre-Release Center.           Prior to the bid
submittal, DDC secured a bid guaranty and contract bond from Selective. The state
accepted DDC’s
      {¶ 6} bid, and DDC entered into a contract with ODRC to serve as the principal
contractor on
      {¶ 7} the project.
      {¶ 8} “DDC subcontracted with Buckeye Power Sales Company, Inc. (‘Buckeye’)
for the purchase and installation of a new generator.          DDC, however, failed to
completely pay Buckeye. To attain the monies due it, Buckeye commenced the process
to establish a mechanic’s lien on payments due to DDC under the contract between
Case No. 2009-07407                       -2-                     JUDGMENT ENTRY

DDC and ODRC.        On March 12, 2008, Buckeye served ODRC and Pete Tudela,
president of DDC, with an
      {¶ 9} affidavit of claim in the amount of $359,059.
      {¶ 10} “Pursuant to R.C. 1311.28, upon receiving the affidavit, ODRC should
have ‘detain[ed] from the principal contractor or from the balance of the funds remaining
in the contract with the principal contractor, an amount, up to the balance remaining in
the contract, that does not in the aggregate exceed the claim.’       When it received
Buckeye’s affidavit, ODRC had yet to pay DDC $400,242.84 under the contract.
Despite the mandate of R.C. 1311.28, ODRC did not detain $359,059.00 of the
$400,242.84 as amounts became due to DDC. Rather, during July through December
2008, ODRC issued payments to DDC totaling $376,130.99.             After issuing those
payments, ODRC had only $24,111.85 in unpaid contract funds.
      {¶ 11} “In addition to establishing a mechanic’s lien on payments due DDC,
Buckeye also filed a claim against the bond. In July 2008, Selective issued a $100,000
payment to Buckeye. Selective issued a subsequent payment of $27,466 to Buckeye in
January 2009.
      {¶ 12} “On February 27, 2009, Buckeye filed suit against ODRC, DDC, Tudela,
and Selective in the Franklin County Court of Common Pleas.           Against DDC and
Tudela, Buckeye alleged claims for breach of contract, violation of the Ohio Prompt
Payment Act, fraud, and theft. Against Selective, Buckeye alleged a breach of contract
claim for failure to pay its entire claim against the bond. Against ODRC, Buckeye
sought recovery under R.C. 1311.32 of the $24,111.85 remaining in the contract
between ODRC and DDC.
      {¶ 13} “Ultimately, Buckeye settled its claims against ODRC and Selective. In the
resulting settlement agreement, ODRC agreed to pay Buckeye $24,111.85 in exchange
for Buckeye’s dismissal of its claims against ODRC. Selective agreed to pay Buckeye
Case No. 2009-07407                          -2-                      JUDGMENT ENTRY

an additional $30,000. In return, Buckeye agreed to dismiss its claim against Selective
and assign its claims against DDC and ODRC to Selective.
       {¶ 14} “On September 3, 2009, Selective initiated the instant lawsuit against
ODRC in the Court of Claims of Ohio. In its complaint, Selective asserted two claims:
(1) violation of R.C. 1311.28, which required ODRC to retain funds remaining in DDC’s
contract up to the amount of Buckeye’s claim, and (2) failure to protect Selective’s
collateral, i.e., the contract balance remaining when ODRC received Buckeye’s affidavit
of claim.   ODRC responded by filing a counterclaim, alleging that Selective was
obligated to indemnify it from any damage suffered due to DDC’s failure to pay
Buckeye. ODRC also filed a third-party complaint against DDC and Tudela, alleging
claims for fraud, indemnity and contribution, and breach of contract.” Id. at ¶ 2-8.
       {¶ 15} “[T]he trial court sua sponte dismissed the entire case for lack of subject
matter jurisdiction. The trial court concluded that Selective’s and ODRC’s claims arose
from Buckeye’s efforts to enforce its mechanic’s lien. Because subcontractors could
sue the state to enforce mechanic’s liens prior to the enactment of the Court of Claims
Act, the trial court held that it lacked jurisdiction over the action. The trial court entered
judgment dismissing the complaint, counterclaim, and third-party complaint on June 9,
2011.” Id. at ¶ 9.
       {¶ 16} In reversing that judgment and concluding that this court did have subject
matter jurisdiction of Selective’s complaint, the court of appeals stated:
       {¶ 17} “In the case at bar, Selective is not attempting to enforce Buckeye’s
mechanic’s lien. Instead of seeking recovery from a fund held by the state, Selective is
seeking money damages for the state’s failure to retain contract payments following its
receipt of Buckeye’s affidavit of claim.” Id. at ¶ 22.
       {¶ 18} The court of appeals further stated:
       {¶ 19} “Selective has ‘repeatedly tweaked’ the legal basis for its second claim.
Before this court, Selective contends that its claim is premised on an alleged breach of
Case No. 2009-07407                       -2-                        JUDGMENT ENTRY

the construction contract, as well as the common-law duty an obligee owes a surety to
protect the collateral. Whether Selective proceeds under either or both of these
theories, it has alleged a legal claim for money damages. As we stated above, the Court
of Claims has exclusive jurisdiction over civil actions against the state for money
damages that sound in law.” (Citations omitted.) Id. at ¶ 31.
       {¶ 20} Upon remand, Selective continues to pursue several legal theories in
support of its claim. However, to the extent that Selective alleges a claim premised
upon ODRC’s admitted violation of R.C. 1311.28, the court notes that the statute does
not create a private right of action for damages against a stakeholder. Similarly, to the
extent that Selective alleges a claim for relief against ODRC based upon an alleged
breach of the construction contract, Selective is not a party in privity with ODRC.
Indeed, Selective concedes that it is nether a signatory to the construction contract nor
a third-party beneficiary thereto.
       {¶ 21} Based upon the undisputed evidence, the court concludes that Selective’s
claim for money damages is premised upon the common law theory of equitable
subrogation.   Under this theory, a surety of a government contractor may recover
progress payments made to a defaulting contractor where such payments were made
after the government entity received notice of the contractor’s default.               See
Lumberman’s       Mutual   Casualty   Company     v.   United   States,   654   F.3d   1305
(Fed.Cir.2011).
       {¶ 22} The theory of equitable subrogation is summarized in Restatement of the
Law 3d, Suretyship and Guarantee, Section 37 (1996) as follows:
       {¶ 23} “Impairment of Suretyship Status”
       {¶ 24} “(1) If the obligee acts to increase the secondary obligor’s risk of loss by
increasing its potential cost of performance or decreasing its potential ability to cause
the principal obligor to bear the cost of performance, the secondary obligor is
discharged as described in subsections (2) and (3), and the secondary obligor has a
Case No. 2009-07407                         -2-                      JUDGMENT ENTRY

claim against the obligee as described in subsection (4). An act that increases the
secondary obligor’s risk of loss by increasing its potential cost of performance or
decreasing its potential ability to cause the principal obligor to bear the cost of
performance is an ‘impairment of suretyship status.’
        {¶ 25} “* * *
        {¶ 26} “(3) If the obligee impairs the secondary obligor’s recourse against the
principal obligor by:
        {¶ 27} “* * *
        {¶ 28} “(d) impairing the value of an interest in collateral securing the underlying
obligation (Section 42); * * * the secondary obligor is discharged from its duties pursuant
to the secondary obligation to the extent set forth in those sections in order to prevent
the impairment of recourse from causing the secondary obligor a loss.” (Emphasis
added.)
        {¶ 29} In the context of this case, Selective is the secondary obligor, ODRC is the
obligee, DDC is the primary obligor and Buckeye is an intended beneficiary of the
secondary obligation.     The construction contract represents the primary obligation.
There is no doubt that ODRC violated Article 15.6 of the underlying construction
contract by making progress payments to DDC after receiving notice of Buckeye’s claim
affidavit.   ODRC’s wrongful conduct impaired Selective’s interest in the collateral
securing its secondary obligation. Under the Restatement, ODRC’s wrongful conduct
had the legal effect of discharging Selective from its duties under the bond. In other
words, ODRC’s impairment of Selective’s collateral provided Selective with a legal
defense to Buckeye’s claim.
        {¶ 30} There is also no dispute that when a demand for payment was made by
Buckeye, Selective had knowledge that its suretyship status had been impaired by
ODRC. The question becomes whether Selective may still recover from ODRC, even
though Selective made payments to Buckeye after having knowledge of facts which
Case No. 2009-07407                                -2-                          JUDGMENT ENTRY

would have discharged it from its obligations under the bond. That question must be
answered in the affirmative.
        {¶ 31} Section 37(4)(ii) of the Restatement provides in relevant part: “If the
obligee impairs the secondary obligor’s suretyship status * * * before the secondary
obligor performs a portion of the secondary obligation, if the secondary obligor then
performs * * * for the benefit of an intended beneficiary who can enforce the secondary
obligation notwithstanding such impairment, the secondary obligor has a claim against
the obligee with respect to such performance to the extent that such impairment would
have discharged the secondary obligor with respect to that performance.” (Emphasis
added.)
        {¶ 32} Pursuant to the above-cited rule, Selective still has a claim against ODRC
to recover the payments Selective made to Buckeye on behalf of DDC inasmuch as
Buckeye, as an intended beneficiary of the bond, had a right to enforce Selective’s
secondary obligation in an action brought pursuant to R.C. 1311.311. As noted above,
such an action was filed by Buckeye in Franklin County and ultimately settled by
agreement.
        {¶ 33} In ODRC’s response to the motion for summary judgment, it contends that,
in light of the settlement of the Franklin County action, the validity of Buckeye’s lien
claim is a factual issue which precludes judgment in Selective’s favor.1 ODRC argues
that if Buckeye’s lien is found by this court to be invalid, Selective’s payments to
Buckeye were voluntary and gratuitous.2 The court disagrees.
        {¶ 34} There is no claim herein that the Franklin County settlement was made in
bad faith or that it is the product of fraud or collusion. Accordingly, there are no genuine
factual issues as to the validity of Buckeye’s lien.

        1
         Although ODRC was also a party to the Franklin County case and a signatory to the settlement
agreement, ODRC’s status was that of a stakeholder with regard to the remaining contract funds.
        2
         Article 15.6.3 of the underlying construction contract states that, absent a timely objection, the
contractor is deemed to have assented to the correctness of the claim affidavit.
Case No. 2009-07407                             -2-                         JUDGMENT ENTRY

       {¶ 35} ODRC argues, in the alternative, that even if Selective were permitted to
recover damages upon any of the asserted legal theories, then ODRC would be able to
recover the same sum from Selective by making a claim against the bond. However, as
stated above, ODRC’s wrongful conduct had the affect of discharging Selective’s
obligations to ODRC under the bond. The payment Selective subsequently made to
Buckeye did not have the effect of reviving Selective’s bond obligation to ODRC.
Moreover, if the court adopts ODRC’s view, Selective will be left with a relatively
worthless right of indemnity against DDC, even though Selective is guilty of no
wrongdoing.
       {¶ 36} ODRC further argues that any recovery by Selective must be reduced by
Buckeye’s collateral recovery pursuant to R.C. 2743.02(D). Again the court disagrees.
R.C. 2743.02(D) provides that “[r]ecoveries against the state shall be reduced by the
aggregate of insurance proceeds, disability award, or other collateral recovery received
by the claimant.”
       {¶ 37} In this case, Selective is the “claimant” as the term is used in R.C.
2743.02(D).     Selective’s claim of equitable subrogation vindicates its own right to
access available contract funds in the event of a default by DDC. As such the claim is a
direct action against ODRC in equity.           The claim is not brought by Selective as a
subrogee or assignee either of Buckeye or DDC.3 Accordingly, R.C. 2743.02(D) shall
not be applied to reduce Selective’s recovery.
       {¶ 38} Based upon the foregoing, the court finds that the only conclusion to be
drawn from the undisputed evidence is that ODRC wrongfully impaired Selective’s
suretyship rights and that Selective is entitled to judgment against ODRC on its claim of
equitable subrogation, as a matter of law. Accordingly, Selective’s motion for summary


       3
         ODOT’s reliance on Heritage Ins. Co. v. ODOT, 103 Ohio St.3d 513, 2004-Ohio-6766, is
misplaced inasmuch as that case discussed the application of R.C. 2743.02(D) in the context of a claim
brought by a subrogated insurer.
Case No. 2009-07407                            -2-                        JUDGMENT ENTRY

judgment shall be granted and judgment shall be entered in favor of Selective for
$207,466,4 the total amount of payments made by Selective to Buckeye, plus
prejudgment interest in an amount to be determined. ODRC’s motion for summary
judgment as to Selective’s complaint shall be denied.
       {¶ 39} With respect to the third-party complaint, ODRC argues that if it is found
liable to Selective on the complaint, then DDC has breached its contract with ODRC
and must indemnify it for such loss. The grounds for indemnification are that DDC
breached Article 15.5 of the underlying construction contract by failing to pay Buckeye.
ODRC’s third-party complaint also alleges fraud against both DDC and Pete Tudela,
President of DDC. The basis of such claim is that Tudela continued to submit pay
applications to ODRC on behalf of DDC, and accepted payment therefor, even after it
had been served with Buckeye’s claim affidavit.5
       {¶ 40} Article 15.5 entitled: “PROMPT PAYMENT” states in part:
       {¶ 41} “15.5.1 If a Subcontractor or Material Supplier requests payment in time to
allow the Contractor to include the request in the Contractor's Contractor Payment
Request, the Contractor shall pay within ten (10) days after receipt of payment from the
State * * *
       {¶ 42} “15.5.3 If the Contractor fails to comply with the provision of Paragraph GC
15.5, the Contractor shall pay to the applicable Subcontractor or Material Supplier
eighteen (18) percent interest, compounded annually, on any unpaid amount.”
       {¶ 43} ODRC has submitted the affidavit of James Weller in support of its motion
for summary judgment. He is employed by ODRC as Operations Manager in the
Construction Bureau. In his affidavit, he avers:



       4
        The total amount paid by Selective to Buckeye.
       5
        Neither DDC nor Tudela have filed a cross-motion for summary judgment as to the third-party
complaint.
Case No. 2009-07407                        -2-                      JUDGMENT ENTRY

      {¶ 44} “At the time the affidavit of claim was submitted by Buckeye Power Sales
on the generator upgrade project at Northeast Prerelease Center in Cleveland Ohio, I
was the Acting Bureau Chief; * * *
      {¶ 45} “Despite Pete Tudela accepting service of the affidavit of claim, he
continued submitting pay applications to the State falsely attesting that he had no
knowledge of liens having been filed on the project.”
      {¶ 46} Based upon the evidence presented, there are both legal and factual
issues which remain to be litigated regarding ODRC’s claims against DDC and Tudela.
First, the remedy for a breach of Article 15.5 is that interest shall accrue and be owed to
the subcontractor on the unpaid balance. Second, the scope of the indemnity provision
upon which ODRC relies is limited by R.C. 2305.31 to circumstances where the harm is
not caused by the sole or concurrent negligence of the owner. See Kovach v. Warren
Roofing & Illuminating Co., 2007 Ohio 2514 (May 24, 2007); Kemmeter v. McDaniel
Backhoe Serv., 89 Ohio St.3d 409, 2000-Ohio-209. Additionally, the court believes that
the development of further facts surrounding both the payments to DDC and the
settlement of the action in Franklin County is required before judgment may be rendered
upon either the fraud or breach of contract claims.
      {¶ 47} Accordingly, ODRC’s motion for summary judgment as to its third-party
complaint is DENIED.
Case No. 2009-07407                         -2-                       JUDGMENT ENTRY




                                               Court of Claims of Ohio
                                                                          The Ohio Judicial Center
                                                                  65 South Front Street, Third Floor
                                                                             Columbus, OH 43215
                                                                   614.387.9800 or 1.800.824.8263
                                                                              www.cco.state.oh.us



SELECTIVE INSURANCE COMPANY OF AMERICA

      Plaintiff/Counter Defendant

      v.

OHIO DEPARTMENT OF REHABILITATION AND CORRECTION

      Defendant/Counter
      Plaintiff/Third-Party Plaintiff

      v.

DDC+, INC., et al.

      Third-Party Defendants

Case No. 2009-07407

Judge Clark B. Weaver Sr.

JUDGMENT ENTRY

       {¶ 48} An oral hearing was conducted in this case upon the cross-motions for
summary judgment.        For the reasons set forth in the decision filed concurrently
herewith, plaintiff/counter defendant’s motion for summary judgment is GRANTED and
judgment is entered in favor of plaintiff/counter defendant in the amount of $207,491,
which includes the filing fee. Defendant/counter plaintiff/third-party plaintiff’s motion for
Case No. 2009-07407                      -2-                     JUDGMENT ENTRY

summary judgment as to plaintiff/counter defendant’s complaint is DENIED, as is its
motion for summary judgment on its third-party complaint.      A status conference is
scheduled for December 19, 2012, at 9:30 a.m., to discuss further proceedings.




                                        _____________________________________
                                        CLARK B. WEAVER SR.
                                        Judge



cc:


Bryan L. Jeffries                          James E. Rook
4653 Trueman Boulevard, Suite 100          Kristin S. Boggs
Hilliard, Ohio 43026                       Assistant Attorneys General
                                           150 East Gay Street, 18th Floor
                                           Columbus, Ohio 43215-3130

Justin D. Owen
Lee M. Brewer
501 West Schrock Road, Suite 104
Westerville, Ohio 43081
006
Filed November 16, 2012
To S.C. Reporter March 22, 2013
