Lawrence Tractor Co. v. Carlisle Insurance Co.
202 Cal. App. 3d 949, 1988 Cal. App. LEXIS 634, 249 Cal. Rptr. 150 (1988)
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Rule of Law:
A surety's total liability, including any award for attorney's fees arising from an underlying contract incorporated by reference, is limited to the penal sum of the bond unless the bond itself specifically provides for liability in excess of that amount.
Facts:
- Lawrence Tractor Company, Inc. (Lawrence) sold farm equipment to Verburg Brothers, Inc. (Verburg), retaining a lien on Verburg's crops as security.
- After Verburg defaulted on its payments, it returned the equipment to Lawrence for resale.
- To address a potential deficiency from the resale, Lawrence, Verburg, and a third party entered into a subordination agreement allowing Verburg to obtain new financing.
- The subordination agreement required Verburg to provide Lawrence with a surety bond to guarantee payment for any deficiency from the equipment sale.
- This subordination agreement contained a clause entitling the prevailing party in any enforcement action to recover reasonable attorney's fees.
- Contemporaneously, Carlisle Insurance Company (Carlisle) issued a surety bond for a penal sum of $50,000 to Lawrence, with Verburg as the principal.
- The bond issued by Carlisle incorporated the subordination agreement by reference and indemnified Lawrence against monetary loss resulting from the deficiency.
Procedural Posture:
- Lawrence filed a lawsuit in Kings County Superior Court (a trial court) against Verburg and Carlisle.
- After a bench trial, the court entered judgment in favor of Lawrence, awarding damages against Verburg and awarding $50,000 (the full penal sum of the bond) against Carlisle.
- The trial court's judgment also stated Lawrence was entitled to 'all costs and reasonable attorney’s fees incurred upon noticed hearing.'
- Following a motion by Lawrence, the trial court issued an 'Amended Order re Attorney Fees,' awarding Lawrence an additional $16,854.50 in attorney's fees against both Verburg and Carlisle.
- Carlisle, as appellant, appealed the trial court's order awarding attorney's fees to the current court (an intermediate appellate court), with Lawrence as the appellee.
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Issue:
Does a surety's liability for attorney's fees, awarded pursuant to a provision in an underlying contract incorporated into the bond, extend beyond the penal sum of the bond?
Opinions:
Majority - Best, J.
No. A surety's liability is capped by the penal sum of its bond. The general rule, established in cases like Hartford Acc. Etc. Co. v. Indus. Acc. Com., is that the amount recoverable from a surety cannot exceed the penal sum, even if the underlying contract or the bond itself provides for attorney's fees. These fees are considered part of the damages covered by the bond, not a separate obligation that can be added on top of the bond's face value. Simply incorporating an underlying contract's attorney's fee provision by reference does not create an exception to this rule. Unless the bond specifically and explicitly obligates the surety to pay attorney's fees in excess of the penal sum, its total liability is strictly limited to that sum.
Analysis:
This decision reaffirms the long-standing principle of strict construction for surety bonds, emphasizing that a surety's risk is limited to the explicit penal sum stated in the instrument. It clarifies that contractual attorney's fees are treated as part of the indemnified loss, not as a separate penalty that can exceed the bond's face value. This ruling provides certainty for the surety industry by preventing unforeseen liability beyond the negotiated bond amount. For obligees, it serves as a caution to ensure the bond's penal sum is sufficient to cover potential damages and associated legal costs, or to negotiate for specific language allowing recovery of fees in excess of the bond's limit.
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