Minnesota Supreme Court Tolls Payment Bond Deadlines for Fraudulent Concealment

by Dorsey & Whitney LLP
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Introduction

On April 2, 2014, the Minnesota Supreme Court confirmed that fraudulent concealment of a cause of action by a principal on a surety bond will toll a contractual limitations period for claims against the surety. The Court’s decision in Minnesota Laborers Health & Welfare Fund et al. v. Granite Re, Inc. et al., No. A12-1017, provides a measure of protection to bond claimants from fraudulent concealment by principals of potential claims. However, the decision leaves open to sureties the ability to use carefully drafted contract language as a means to circumvent the fraudulent concealment doctrine in future bonds. Contractors and Owners should be mindful of this possibility, and protect themselves by closely examining the payment and performance bonds on which they may have to rely.

Background

The Granite Re case arose out of the demolition of the High Bridge Generating Plant in Saint Paul. EnviroTech Remediation Services, Inc., performed asbestos and lead abatement work on the demolition project. Pursuant to the terms of its contract, EnviroTech obtained a payment bond from Granite Re, as Surety.

As a party to a collective bargaining agreement, EnviroTech was required to make employee benefit contributions to certain employee benefit plans (the “Funds”). EnviroTech also was required to provide reports showing the hours on which these contributions were calculated. In 2009, the Funds obtained information allegedly showing significant omissions in the reports provided to the Funds. The Funds concluded that EnviroTech had been underpaying the required contributions and made a claim on the bond for unpaid contributions. Granite Re denied the claim as barred under the one-year limitation period agreed to in the bond.

The Funds brought an action against Granite Re in April 2011. They argued that the fraudulent concealment doctrine, under which time limits to bring a claim are not enforced where the existence of the claim is concealed by fraud, applied to their claim under the bond in light of EnviroTech’s misleading reports. Accordingly, the Funds argued the one-year time limit did not apply. The district court dismissed the Funds’ claim as time-barred, while the Minnesota Court of Appeals disagreed. Granite Re appealed to the Minnesota Supreme Court.

The Minnesota Supreme Court’s Holding

The Court considered three related arguments brought by Granite Re: that (1) because Granite Re was not involved in EnviroTech’s fraudulent concealment, the contractual limitations period in the bond should not be tolled against Granite Re; (2) the general rule that a surety stands in the shoes of the principal does not apply to payment bonds; and (3) the language setting the one-year limitations period in the bond precluded application of the fraudulent concealment doctrine. The Court disagreed on each point. It held that the fraudulent concealment doctrine applies to the surety whether or not it was involved in the principal’s fraud, and that equitable tolling applies to payment bonds. The court also held that the one-year limitation language in the bond was not sufficiently specific to preclude application of the fraudulent concealment doctrine.

The Court nonetheless offered sureties a suggested way to avoid application of the fraudulent concealment doctrine in the future. The Court stated that Granite Re could have included a specific contractual provision in the bond precluding tolling based on fraudulent concealment. The Court noted that “[t]he effect of such a provision would have been to invalidate Granite Re’s guarantee to the bond claimants in the case of EnviroTech’s fraudulent concealment, thus prohibiting equitable tolling.”

Granite Re reinforces the longstanding rule that a surety is subject to the rights and defenses of a principal. Granite Re also confirms that a surety may not generally hide behind the fraudulent concealment of a bond principal. Importantly, however, the decision leaves open to sureties the means to circumvent the fraudulent concealment doctrine in future bonds.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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