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A federal district court in Pennsylvania has ruled that a contingent claim made under a surety bond did not present an actual case or controversy where the insurance company had paid all of its obligations under the bond but the insured faced the potential risk that a trustee in bankruptcy might seek a refund of contractual disbursements made to the insured for work done even though the trustee had neither made any such request nor indicated that she would make such a request.

The Case

Welded Construction L.P. entered into a written contract with Transcontinental Gas Pipe Line Co. LLC to furnish labor, supervision, materials, tools and equipment and to perform all work necessary in connection with the construction of a new pipeline. Aaron Enterprises Inc. was a subcontractor for Welded and furnished "labor, material, and equipment for auger boring and related work that was necessary in the construction" of the new pipeline.

Federal Insurance Co. issued a surety bond with Welded as principal and Transcontinental as obligee.

Within 90 days before Welded entered bankruptcy, Welded paid Aaron Enterprises approximately $1,428,897 in nine individual disbursements.

After Welded's bankruptcy filing, Aaron Enterprises made a contingent bond claim on the amounts paid within those 90 days if it was required "to return, refund, or disgorge all or any portion" of the payments it had received from Welded.

Aaron Enterprises subsequently went to court, seeking a declaration that Federal Insurance was obligated to pay it, pursuant to the bond, any amounts that it might be required to return, refund or otherwise disgorge as preferential payments under the U.S. Bankruptcy Code.

Federal Insurance moved to dismiss, arguing that Aaron Enterprises had no bond claim and that Aaron Enterprise's action did not present an actual case or controversy.

The District Court's Decision

The district court granted Federal Insurance's motion, holding that Aaron Enterprises' claim was "not ripe" and that its complaint sought "an advisory opinion."

In its decision, the district court found no "adversity of interests between the parties" that required an "immediate and definite determination of their rights." The district court reasoned that Aaron Enterprises' claim depended on a "future, contingent scenario" that was "far from immediate in nature" and that might never materialize.

Indeed, the district court pointed out, Aaron Enterprises admitted that an adversity of interests remained uncertain because it depended on Welded's bankruptcy proceeding.

At this time, the district court added, Federal Insurance had "fulfilled its obligations" to Aaron Enterprises, and any breach was contingent on the outcome of Welded's bankruptcy proceeding.

In the district court's opinion, Aaron Enterprises was anticipating that Welded's bankruptcy trustee would file an avoidance action, that it would unsuccessfully defend that action, and that the bankruptcy court would order it to refund the payments, in which case Aaron Enterprises then would file a breach of contract action against Federal Insurance in which (Aaron Enterprises anticipated) Federal Insurance would raise a statute of limitations defense.

The district court reasoned that Aaron Enterprises was "attempting to fast forward one sequence of events" so that it could interpret the bond. Doing so, however, would result in a "strictly advisory" judgment and did not present a justiciable case and controversy, the district court concluded.

The case is Aaron Enterprises v. Federal Insurance.

Attorneys involved include: for Aaron Enterprises, James W. Kutz and Nicholas V. Fox of McNees Wallace & Nurick in Harrisburg; for Federal Insurance, Patrick R. Kingsley and Shareda P. Coleman of Stradley Ronon Stevens & Young in Philadelphia.

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Meyerowitz is the director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He can be contacted at [email protected].