A North Carolina contractor lost a big lawsuit, ran into financial trouble and then stonewalled surety Liberty Mutual Insurance Co. for a short while before filing for protection from its creditors in U.S. bankruptcy court.
That is the picture that emerges of Intercoastal Contracting Inc., a Castle Hayne, N.C.-based heavy construction general contractor that started as a diving company in 1987, from a lawsuit against it in August by Liberty Mutual. The contractor’s downfall is also recorded in other legal documents and lawsuits.
During a year when contractor failures have spiked, sureties are often forced to step in to finish projects while their contractor clients are in financial free fall. Because the surety almost always has the right under its agreement with the contractor to be compensated in full for its losses, the relationship can become strained. And when all the complexities of a bankruptcy are factored into the equation, the projects may languish.
When a surety’s contractor files for bankruptcy protection, “the surety enters an alternative universe where the simple can become complex and the complex nearly unmanageable,” wrote co-authors Patrick J. O’Connor, Jr., a Minneapolis attorney, and Kim McNaughton, who at the time was a regional vice president for bond claims for Liberty Mutual Surety. They wrote about the subject in a 2009 journal article.
Despite having filed for protection from its creditors in August, Intercoastal had continued work on the Buddy Phillips Bridge in Jacksonville for the North Carolina Dept. of Transportation.
Then, in early October, NCDOT announced that Intercoastal had suspended work on the bridge and that if Intercoastal couldn’t resume work NCDOT would work with Liberty Mutual to find a replacement contractor.
Liberty Mutual had already apparently reached the end of its legal rope with Intercoastal.
Seeking $5 Million in Collateral
In its initial complaint against Intercoastal, Liberty Mutual alleges that the contractor had stopped taking its calls about how Intercoastal’s owners would turn over the $5 million or so in collateral it says Intercoastal owes.
Intercoastal had allowed Liberty Mutual to look at its books earlier in the year, after Intercoastal lost an important lawsuit, but those cooperative times now feel far away.
The original motivation for Liberty Mutual to look at Intercoastal’s books was the verdict in a lawsuit over allegedly defective work. A homeowners association, the Inlet Point Harbor Owners Association, Wilmington, N.C., part of a condominium community, had filed suit against Intercoastal over the failure of a new marine bulkhead. The association had paid Intercoastal a total of $1.9 million when work on the bulkhead was completed in 2007.
According to court records, the bulkhead began to bulge in places during 2008 and despite some repair work in 2009 parts of it failed. The homeowner’s association hit Intercoastal with a lawsuit over the defects in 2010.
Intercoastal and its related company, Intercoastal Diving Inc., which has not filed for bankruptcy protection, demanded that the contractor’s liability insurance carrier, National Union Fire Insurance Co. of Pittsburgh, Pa., indemnify and defend Intercoastal, but the insurer declined. The insurer's attorneys argued in essence that the harbor bulkheads were a matter of defective work not generally covered under a liability policy—a legal issue with national significance.
Ultimately, Intercoastal lost both the lawsuit involving the insurance and the one against it by the Inlet Point Harbor Owners Association.
After the court ruling, Liberty Mutual asked Intercoastal and its liability insurer to pay a big part of the $2.9-million damage award to the harbor owners association. When that didn’t happen, Liberty Mutual was obliged on July 23 to turn over $1.9 million—the penal sum of its surety bond—to Inlet Harbor.
Despite the ongoing trouble on the harbor bulkheads, Liberty Mutual continued to issue bonds for bridge work to Intercoastal during 2010 and 2011.
For example, Liberty Mutual issued a $290,000 payment to NCDOT on Intercoastal’s behalf when Intercoastal couldn’t come up with payment and performance bonds on a NCDOT project—the amount is equal to 5% of Intercoastal’s $7.9 million bid.
Meanwhile, Liberty Mutual wanted Intercoastal to fund some of the losses.
First, Liberty Mutual in June demanded that the owners of Intercoastal, Stanley Rudd and Donn and Melissa Evans, provide $2.5 million in collateral, plus access to Intercoastal’s books and records to see how the company was doing on its bonded projects.
Based on its analysis of the books, Liberty Mutual believed it faced potential losses on Intercoastal’s work of $5.08 million.
So Liberty Mutual demanded Intercoastal turn over the proceeds of its projects “to ensure payments” to “the laborers, subcontractors, and suppliers.”
Despite what Liberty Mutual says is a “clear obligation to do so under the Indemnity Agreement,” Intercoastal failed or refused to give Liberty Mutual the money.
In July Intercoastal cancelled a meeting with Liberty Mutual’s consultants, claims Liberty Mutual, and “closed access to its books and records.” Calls to Intercoastal’s bookkeeper have “gone un-returned,” Liberty Mutual claims.
Demand for Security
On August 10th, Liberty mutual demanded security of $5.08 million.
But a few weeks later, Intercoastal filed for protection in federal bankruptcy court in Wilmington, N.C., listing debts of between $1 million and $10 million and stating that among its biggest creditors were Liberty Mutual, with $2.3 million owed to it for job bonds, and $990,000 to SunTrust Bank. The company’s bankruptcy filing sought protection under Chapter 11.
Calls to Intercoastal Contracting went unreturned. Liberty Mutual officials could not be reached for comment.
According to O’Connor and McNaughton, one of the worst possible outcomes for a surety whose client files for bankruptcy protection is “having to pay twice without any reduction in bond penalty,” especially when the surety has provided financing to the contractor prior to the bankruptcy petition.
They recommend that sureties aggressively manage the situation.
Contracts that aren’t fully completed prior to the bankruptcy filing, “become property of the debtor’s estate,” write O’Connor and McNaughton. After the contractor files for bankruptcy court protection, the obligee, or the client, is “prohibited from terminating the bonded construction contract and calling on the surety to take over.”
O’Connor and McNaughton write that this situation “can cause great heartache for both the surety and bond obligee” as the project is disrupted and work “grinds to a halt with no clear path for moving forward with the work.”
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