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January 1, 2001

Law of Developers or Subdivision Bonds

Introduction

The land development laws of most, if not all states, counties, cities or other local governmental agencies (hereinafter collectively referred to as Public Agency) are intended to regulate land use and subdivision growth. The Public Agency enacts statutes, codes or ordinances (hereinafter Statutory Scheme) to regulate and control the design and improvements of subdivision developments within its jurisdiction. Obtaining approval from the Public Agency, whether through a subdivision map, permit or otherwise, is often the initial step a developer must take in developing a parcel of real property. This requirement provides the governing body with a mechanism to regulate and control the design and implementation of subdivision improvements.1 Among the conditions and requirements which a Public Agency may impose before issuing a subdivision map, or(hereinafter Subdivision Bonds).2

Although Subdivision Bonds are somewhat similar to traditional Public Works Bonds, there are important differences and distinctions. For example, (1) Subdivision Bonds are generally required as part of the Statutory Scheme requiring a developer to enter into a Subdivision Agreement with the Public Agency, (2) the roles, positions and obligations of the principal and obligee on Subdivision Bonds differ from those imposed under Public Works Bonds, (3) where Subdivision Bonds are issued, it is the principal, rather than the obligee, who bears the financial responsibility for the placement and construction of the required improvements, and (4) there are distinctions both in coverages and limitation periods. In addition to discussing the unique characteristics of Subdivision Bonds, this article will address and suggest special claims handling procedures, methodologies and defenses to be considered in responding to, and dealing with, claims made on Subdivision Bonds.

I. The Statutory Scheme of Subdivision Bonds.

A. Statutory Purpose.

The law relating to subdivision of land is entirely a creature of legislation.3 While the Statutory Scheme mandated by a Public Agency is not uniform, the general purpose and intent is to regulate and control the design and improvement of a subdivision with proper consideration to its relation to adjoining areas. The Statutory Scheme therefore facilitates the coordination of subdivision planning (lot size, configuration, street patterns and utility easements), as well as overall community planning.4

Through the Statutory Scheme, the Public Agency can assure consistency of subdivision design and improvements with local standards considering public health and other environmental concerns. Most importantly, the Statutory Scheme ensures that the developer properly installs streets, sewers, lighting, sidewalks and drains prior to their dedication to the Public Agency and its taking over their maintenance.5 These goals and purposes will prevent the subdivision from becoming an undue burden on the community and local taxpayers"6

B. Subdivision Agreements and Bond Requirements.

(1) The Subdivision Agreement.

Prior to the development of unimproved land, the Public Agency, as part of the Statutory Scheme, often requires a developer to enter into a Subdivision Agreement.7 The Subdivision Agreement will generally require the developer to construct improvements required by the Public Agency as part of the Statutory Scheme and will set forth the time within which the improvements must be completed.

The types of improvements often mandated by a Public Agency in a Subdivision Agreement include any or all of the following: streets, grading, pavement, gutters, curbs, sidewalks, street lighting, shade trees, surveyor's monuments, water mains, culverts, storm sewers, sanitary sewers or other means of sewerage disposal, drainage structures, erosion control, sediment control, landscaping and public improvements of open space. Further, the Public Agency may require that the developer warrant the work required under the Subdivision Agreement for one year following completion and acceptance of the improvements, including liability for defective work, labor and materials.8

(2) The Subdivision Bond

To ensure the faithful performance of the required subdivision improvements, including liability for changes or alterations in the work, the Public Agency may require the developer to post security usually in the form of Subdivision Bonds acceptable to the Public Agency.9 Subdivision Bonds are required by the Public Agency to provide a financial assurance that a developer of either residential or commercial land will complete the requisite improvements.

While Subdivision Bonds uniformly provide assurances to the Public Agency if a developer defaults on its obligations under a Subdivision Agreement, there are differences in bond forms. Typically, Subdivision Bonds are indemnity bonds requiring performance or payment up to the bond penalty from a surety if a developer defaults on its obligations under the Subdivision Agreement. In some jurisdictions, Subdivision Bonds are treated as either pure forfeiture bonds or financial guarantee bonds. In other instances, the applicable statute may require or treat Subdivision Bonds as an indemnity bond. Some jurisdictions also require a Subdivision Payment Bond, guaranteeing payment to laborers, subcontractors and material suppliers.10 Statutes requiring Subdivision Bonds may also specify the form and content of the bond to be submitted.11

(3) The Bond Amount

The amount of security required to secure performance of the obligation under a Subdivision Agreement is determined by the Public Agency, generally within a prescribed monetary range. For example, the portion of the security which guarantees faithful performance of the completion of the improvements under the Subdivision Agreement (i.e. the Subdivision Performance Bond) is generally calculated as a percentage of the total estimated cost of the improvements to be installed.12 The Subdivision Payment Bond which secures payment to the contractor, subcontractors, laborers, materialmen and persons furnishing equipment is generally required in an amount not less than fifty percent and no more than one hundred percent of the total estimated cost of the improvements.13 In addition to the base cost of the improvements, the security often covers costs and reasonable expenses, including attorneys' fees, that the Public Agency may incur in successfully enforcing the secured obligation.14

(4) Reducing the Bond Amount.

Once a Subdivision Bond has been issued and delivered to the Public Agency, the surety may be held liable up to the full penal sum of the Subdivision Bond.15 However, several jurisdictions provide a statutory mechanism to obtain a reduction of the penal sum of the Subdivision Bond as construction of the required improvements is completed.16 Such reductions in the penal sum act as a partial release of the surety and therefore limit the surety's potential liability should the developer be declared in default or otherwise fail to complete the remaining improvements. A reduction of the bond penalty is not automatic. The developer must comply with statutory requirements for obtaining the Public Agency's approval of completed work and a reduction of the bond.17 Therefore, a prudent developer and surety must be cognizant and vigilant in making sure that bond reductions are requested as work progresses.

II. The Differing Roles, Positions and Obligations of the Principal and Obligee on Subdivision Bonds as Compared with Public Works Bonds.

A. The Differing Roles of the Principal.

A public works project (e.g., the construction of bridges, highways and schools) is initiated and controlled by the governing Public Agency. The Public Agency will put the project out for bid before entering into a construction contract. As part of the contract, the Public Agency will require the contractor to post a Performance Bond securing the contractor's performance of the underlying contract, as well as a Labor and Material Payment Bond securing payment to subcontractors, suppliers and laborers (hereinafter Public Works Bonds). The contractor entering into the contract with the Public Agency is the principal on the Public Works Bonds.

Although Subdivision Bonds are somewhat similar to Public Works Bonds, the developer's role, position and obligations are quite different from those of a contractor entering into a public works contract. In subdivision development, it is the developer, not the Public Agency, who initiates the development of unimproved land. The developer must comply with the Statutory Scheme and enter into a Subdivision Agreement before obtaining the approval and authorization of the Public Agency to commence construction. As previously noted, this authorization may be conditioned upon the construction of various subdivision improvements as required by the Statutory Scheme and as set forth in a Subdivision Agreement between the developer and the Public Agency. The developer, as opposed to the contractor, is the principal on the Subdivision Bonds.

Where the developer is not the actual builder of the subdivision improvements and has separately contracted with a builder, there is no privity of contract between the surety and the builder. In the event the improvements are not completed, whether as a result of the default of the developer or builder, the Public Agency's claim is against the developer under the Subdivision Agreement and the surety under the Subdivision Bonds. Although the surety must deal directly with the developer, as its principal, if the developer is nonresponsive, the surety may also communicate with the builder in an attempt to resolve the Public Agency's claim and mitigate its damages.

B. The Differing Roles of the Obligee.

The Public Agency is the obligee on Public Works Bonds and Subdivision Bonds. The primary distinction in the role of the Public Agency as an obligee on Subdivision Bonds, as opposed to Public Works Bonds, is that the Public Agency has no obligation to pay the developer for the cost of the subdivision improvements. The consideration given by the Public Agency for the protections afforded under the Subdivision Bonds is the right to develop the subdivision. By accepting and acting upon this right, the developer assumes the obligation to pay for the subdivision improvements required under the Subdivision Agreement.

A secondary distinction is that the obligee on Public Works Bonds, as opposed to an obligee on Subdivision Bonds, takes a far more active role in determining and dictating the scope, method and operation of the work to be performed. In a typical public works contract there are often detailed plans, specifications and subcontractor requirements. By comparison, a typical Subdivision Agreement incorporates simple plans, a limited engineer's estimate and no subcontracting requirements, allowing the developer to utilize its own broad discretion in arranging for completion.

Another key distinction between a public works contract and a Subdivision Agreement is the contrast in the time requirements and the potential damage and liability to which the parties may be exposed. Public works contracts generally include a detailed schedule of performance with fixed dates for completion, including exposure for delay, liquidated and consequential damages. A Subdivision Agreement generally provides for completion within one to two years and allows for relatively easy extensions. Within these broad time parameters, the developer generally can independently schedule its work without exposure to delay, liquidated or consequential damages.

III. Construction Costs and Funding Obligations.


The developer assumes responsibility to fund the costs of constructing or placing the subdivision improvements required by the Public Agency. From the surety's perspective, this shift in funding responsibility should be a critical part of its underwriting evaluation. Following are the key areas of inquiry for the surety underwriters.

A. Estimated Costs of Completion.

Has the developer properly estimated the costs necessary to complete the improvements? The Public Agency generally provides engineer's estimates for these expenses. The surety underwriter should attempt to ascertain the accuracy of the engineer's estimates and whether there are any major deviations between the engineer's estimates and the amount the developer has budgeted for completion.

B. Funding of Subdivision Improvements.

Has the developer set aside sufficient funds to complete the subdivision improvements? If a project is to be self-funded by the developer, the surety must be assured that the developer has committed sufficient funds to complete the required improvements. If a project is to be financed through a bank (hereafter Set Aside Bank), the surety should request and obtain a Set Aside Agreement from the Set Aside Bank which provides that as part of its commitment to fund the entire project, the Set Aside Bank has segregated sufficient funds to be used solely for the completion of the subdivision improvements.18 Ascertaining the precise source of payment and procedure to be followed in funding the subdivision improvements is an essential underwriting consideration.

C. Proper Use of Set Aside Funds.

Have the developer and the Set Aside Bank complied with their obligations? The developer and the Set Aside Bank must use the funds set aside to pay for the completion of the improvements including payments to the builder, subcontractors and suppliers completing the improvements.

IV. Differences in the Scope of Coverage on Subdivision Bonds as compared with Public Works Bonds.


There are important distinctions in the scope of coverage between Public Works Bonds and Subdivision Bonds. While both types of bonds typically incorporate the underlying contracts by reference,19 i.e., a public works contract and Subdivision Agreement, respectively, Public Works Bonds provide security for the performance of all of the principal's contract work. By contrast, Subdivision Bonds guarantee only the required public improvements (often referred to as offsite improvements) which are a small portion of the overall development.20

For example, a developer with a project to build a tract of single family residences may be required to enter into a Subdivision Agreement which includes completion of specified subdivision improvements. The Subdivision Bonds guarantee only the developer's completion of the subdivision improvements to be dedicated to the public (including streets, curbs, gutters, storm drains, sewers and any grading necessary to accomplish these public improvements) and do not include the building of the private houses (often referred to as on-site improvements). Therefore, if a developer fails to complete any portion of the actual homes, the Public Agency has no claim against the Subdivision Bonds for the completion of the homes.21

Another distinction in coverage is that a public works contract secured by Public Works Bonds generally includes significant contract obligations. Those obligations may involve performance guarantees, warranties and specific damage exposures, including delay, consequential and liquidated damages. Although Subdivision Agreements often require the posting of a separate Warranty Bond or the subsequent reduction of the Subdivision Bonds to cover warranty obligations once the improvements are completed, Subdivision Bonds generally do not include coverage for delay, consequential or liquidated damages.22

V. Limitations and Expansion of Coverage.


There are situations where the Public Agency makes performance demands on the surety for items which are not sanctioned by the Statutory Scheme or are outside the scope of the Subdivision Agreement. In New Jersey, a Public Agency attempted to impose on the developer the electricity costs for lighting improvements incurred prior to the acceptance of the streets.23 Under the local Statutory Scheme, while the developer was responsible to pay for the costs to install underground electric facilities, the public utility owned the facilities. In fact, under the controlling statute,24 the municipality was expressly prohibited from requiring a performance guarantee of the underground electrical facilities built and owned by a public utility (albeit at the developer's expense). With respect to the electricity needed for the street lighting, the Appellate Division found that the legislative purpose of the Municipal Land Use Law authorized the enactment of subdivision ordinances to protect public interest by requiring installation of necessary improvements but neither the statute itself, nor case law, defined whether electricity costs are included in "street lighting" or are considered an improvement. The court therefore concluded that the cost of electricity was not an improvement and therefore not a proper claim against the Subdivision Bond.25

Another example of limits on claims against Subdivision Bonds arose where the Public Agency refused to release the developer's Subdivision Bonds solely because the developer "failed to form a homeowner's association as required by the planning board resolution.26 Noting that the Public Agency derived its power through statutory delegation, the court held that the Public Agency was without authority to retain the bonds.

Other states have similarly followed the general proposition that a Public Agency may not impose upon a developer a bonding requirement of broader scope than that set forth within the Statutory Scheme. This principle has been applied to defeat claims of contractors that allege that they are third party beneficiaries of the Subdivision Bonds .27 A different result occurred where a developer and its surety were found to have volunteered a payment bond not required by the Public Agency. While the Statutory Scheme did not require a Subdivision Payment Bond, a surety was held bound to an express Material and Labor Bond which was printed and executed on the reverse side of a (Subdivision) Performance Bond.28 Under the circumstances, the court held, "We conclude that since there is nothing in the record indicating that the material and labor bond was written under the compulsion of the county, there is no reason why it is not a valid common-law bond."29 A surety may also be liable where it voluntarily executes a bond of broader scope than contemplated by the Statutory Scheme.30

VI. Differences Between the Limitations Periods.


As noted above, while performance and payment bonds generally include broader coverage, the limitations period for making a claim on such bonds is often limited to within one or two years from the date of acceptance or completion of the project or of the last performance by the contractor or claimant.

In sharp contrast, the limitations period on most Subdivision Bonds runs from the completion date in the Subdivision Agreement.31 This beginning date for the limitations period may be modified by any extensions granted by the Public Agency. The nature of a subdivision development and the changes in the housing marketplace often require the developer to seek one or several extensions of time for the completion of the improvements. Unless the public is threatened by a dangerous condition or some other health hazard, the Public Agency generally grants a requested extension.

Most forms of Subdivision Bonds do not require that the Public Agency or the developer notify the Surety of an extension.32 Whereas in most cases, the surety can determine its exposure on a Public Works Bond within a couple of years of completion, the surety's exposure on Subdivision Bonds may be extended for six to ten years or more. To properly monitor its exposure, the surety should monitor the financial status of the developer and the progress of the required improvements.

A particularly difficult issue arises when the surety has obtained a Set Aside Agreement from a Set Aside Bank. If the project is extended, it is incumbent upon the developer and the surety to make sure that the Set Aside Agreement is also extended. The surety must not only monitor the completion of the project, it should assure itself that the developer has funds or financing in place during the extension. If the project is selffunded by the developer, the surety must be vigilant in assessing the developer's continuing ability to install the improvements. Where the surety has legitimate concerns relative to the ability of the developer to pay for the costs of completion, the surety should request collateral.

Assuming that the surety is able to properly monitor the situation and limit its exposure, time extensions often assist in avoiding exposure on the Subdivision Bonds. Subdivision development is often delayed when the economy or housing market is slow. When the market turns, in many cases it is possible for the developer to obtain new sources of revenue to complete the improvements so that it can sell the units. From the surety's perspective, it is important to understand and appreciate these issues and to work with the developer and Public Agency to mitigate exposure to loss.

VII. Pre-Claims Handling Procedures.


Special pre-claim and post-claim handling procedures and methodologies may be established to limit or eliminate exposure on Subdivision Bonds. The best pre-claim action the surety can take is to properly underwrite the bond. Avoiding exposure to loss on Subdivision Bonds requires vigilant and consistent monitoring and communication with the developer principal. Once Subdivision Bonds are issued, the surety should also consider the following procedures to reduce its exposure:

l. The surety should obtain a projected schedule of completion of the subdivision improvements from the developer. The surety should monitor the progress of the subdivision improvement work. It should obtain periodic status reports from the developer to compare the actual completion of the work with the developer's projected schedule. The surety should determine the reasons for any delay and obtain assurances that the project will be completed on a timely schedule.

2. If the developer is self-funding, it is essential for the surety to closely monitor the developer's financial ability to complete the required improvements. If the developer has bank financing, it is incumbent upon the surety to communicate often with the Set Aside Bank to assure that the Set Aside Bank is properly disbursing funds as subdivision improvements are completed and that set aside funds are used solely for their intended purpose.

3. The surety must communicate with the developer to determine if there are any major changes in its development plans or financial condition which could impact its ability to timely complete the subdivision improvements. If a developer's financial condition changes or economic or marketplace conditions change, the developer must work with the Public Agency to assure that appropriate extensions are applied for and obtained, and that the Set Aside Bank understands and agrees to maintain its financing and/or Set Aside Agreement during the extended time frame.

4. The surety must communicate with the developer and the Set Aside Bank to ensure that if the Set Aside Bank forecloses on the property, it will require any third party purchaser to assume or take title to the property subject to the developer's subdivision improvement obligations. These negotiations should also deal with the Set Aside Bank's obligations under the Set Aside Agreement. Although a Set Aside Bank may not have a legal obligation to work with the surety, if properly presented as an option, a Set Aside Bank will often work with the parties to deal fairly with the property.

VIII. Defenses to Subdivision Bond Claims.

If the principal is declared in default on a Public Works Bond, the surety must evaluate the default in the context of the terms and conditions of the construction contract. As a matter of practice, the Public Works Bond surety should generally contact the principal to determine if there are any legitimate defenses to the default. Based upon its investigation, and assuming that the default is determined to be proper, the surety may exercise a variety of options, including, inter alia, financing the principal, tendering a completion contractor, providing a completion contractor or paying the bond penalty. The surety will evaluate a variety of factors including the availability and amount of remaining contract funds, the status of the completed work, the percentage of the completed work, whether the remaining work is to be performed by subcontractors and whether the subcontractors' contracts can be ratified and completed by the subcontractors.

If a principal is declared in default on Subdivision Bonds, the initial investigation relative to the default is rather straightforward. If the time frame for completing the subdivision improvements has expired and it is within the limitations period for making a claim, generally the principal will have no defense to a demand on the Subdivision Bonds. As compared with the options available when a claim is made on Public Works Bonds, the options available to the surety on a default against Subdivision Bonds are limited. In most cases, if no other defenses are available, the surety will either complete the work with a completion contractor or pay the obligee an amount necessary for the construction and installation of the required improvements.33

Claims against Subdivision Bonds often expose the surety to substantial loss without subrogation rights. As a result of time extensions sought by the developer and granted by the Public Agency, partially completed improvements which were not accepted by or dedicated to the Public Agency may deteriorate over time requiring repair or replacement. There is no balance of unpaid funds to which the surety may become subrogated. Thus, losses on Subdivision Bonds tend to be substantial. To mitigate against exposure to loss on Subdivision Bonds, the surety should consider the following factors and potential defenses in evaluating, investigating and defending a claim.

1. Who is making the claim? Most Subdivision Performance Bonds identify the Public Agency as the sole obligee. Therefore any claim brought by any other party maybe subject to denial.34

2. Has the claim been timely presented? The Subdivision Agreement must be reviewed for the completion date and the appropriate statute of limitations must be applied.35 If upon review of the Subdivision Agreement it appears that a claim is time barred, that should not be the end of the surety's investigation. Some Statutory Schemes and Subdivision Bonds allow extensions of the completion dates without the surety's consent.36 The surety must determine if any extensions have been granted. It should also ascertain the extension procedures available to the developer and Public Agency and whether they complied with the rules in extending the time for completion.

In addition to a statute of limitation defense, if the appropriate facts exists, the surety may also be entitled to assert equitable estoppel or laches defenses. To the extent the Public Agency, either expressly or through its conduct, accepted the improvements or waived any further obligation of the developer, the Public Agency may similarly have waived its claim against the Subdivision Bonds. For example, a Public Agency may have an inspector monitoring and approving the completion of improvements. The inspector's daily reports often include the inspector's observations at the site with respect to work completed. These reports may be helpful in establishing the improvements completed. The inspection reports may also evidence that the Public Agency permitted the developer to deviate from procedures identified in either the Subdivision Agreement or the Statutory Scheme.

A potential estoppel defense may arise where the Public Agency prematurely issues certificates of occupancy or building permits in violation of its own laws. Some Statutory Schemes require that all public improvements (with limited exceptions) be installed before certificates of occupancy are issued. If the certificate of occupancy or building permits are issued before all improvements are completed, the Public Agency may be estopped from making claim on the Subdivision Bonds or from later taking a position that the improvements are not completed satisfactorily.

Depending upon the Statutory Scheme or the provisions of the Subdivision Agreement, a laches defense may be available to a surety. It is not unusual for a subdivision claim to be made many years after the developer has left the site. Statutory Schemes and Subdivision Agreements generally require that subdivision improvements be completed within a certain time frame. Nonetheless, it is not uncommon for the Public Agency to neglect bringing a claim or filing suit against the surety for months or even years. By then, the surety's interests often have been compromised as the financial condition of the principal may be considerably worse than it would have been had the claim been timely made at or near the time the developer sold the improved lots or built and sold homes thereon.

3. Has the municipality complied with the applicable enabling statute and/or its own ordinances?

As stated in Section V, supra, a municipality may include as part of its subdivision bond claim the installation or provision of items beyond those for which the applicable enabling statute authorized the municipality to require a performance guaranty. In such cases, the municipality's demands upon the developer and surety are ulta vires and should create no liability.37 Nonetheless, it has also been held that where a developer agreed, without protest, to install certain improvements which the governmental unit lacked authority to require, the developer and its surety were estopped from asserting that the requirement of the improvements was ultra vires.38

Similarly, where a municipality imposes conditions upon a developer without statutory authority, the developer and surety may also have a defense of ultra vires. Depending upon the facts of the case, however, the developer or surety may be held to lack standing to, or to be estopped from, raising such a defense.

The case of Bama, Inc. v. Anne Arundel County,39 for example, concerned a subdivision bond guaranteeing a developer's agreement to improve a road adjoining its development and to donate 15 feet of land to widen it. At the time of the agreement, the county had not yet passed an ordinance which authorized it to make such a requirement a condition of subdivision approval, and the appellate tribunal therefore held the requirement ultra vires and not binding as a matter of law. Nevertheless, the appeals court remanded the case to the trial judge for a determination of whether the developer was estopped from raising a plea of ultra vires, with instructions that the inquiry focus on to what extent the developer questioned the county's authority prior to agreeing to the county's conditions for subdivision approval.

4. Has the developer commenced any subdivision improvements?

a. Liability after commencement of improvements. Once subdivision improvement work commences, in some jurisdictions the developer and the surety will be liable until all subdivision improvements are completed and accepted."40 The developer and its surety may also be obligated to maintain and repair any completed improvements until all subdivision improvements are completed and accepted.41

In other jurisdictions the surety's liability has been limited to the cost of those specified improvements actually required to service the homes on which construction has actually commenced. In Town of Shawangunk v. Goldwil Properties Corp., the developer posted a bond to guarantee completion of specified public improvements. Although development commenced, the developer failed after the construction and sale of a single home and a foreclosure ensued. During the pendency of the foreclosure, other homes had been completed and additional foundations had been constructed. The town sued, seeking recovery under the bond. The Appellate Division held that the liability of the surety would be commensurate with the extent of building development that had taken place in the subdivision.42 The court therefore ordered the payment of the penal sum of the bond to the town so that it could complete improvements reasonably justified by that part of the subdivision which had been developed, followed by a refund of any amount not needed to complete that portion of the work.43

The Office of the State Comptroller of New York,44 has held that a town planning board may not require a developer or its surety to construct streets and other improvements which would lie entirely within an area abandoned by the developer and which would service only the abandoned lots. Stated otherwise, in New York, a developer who elects to phase a subdivision development can build and sell homes in only one phase and complete the public improvements for that phase alone. The developer will not be required to complete public improvements in the remaining phases if the developer decides not to start work on the additional phases.45

In contrast, a Virginia court granted the Public Agency recovery against the surety on Subdivision Bonds where only a small amount of work occurred prior to abandonment. Further, although there was no direct evidence that the county actually intended to complete the bonded improvements, the court found a presumption that the county would properly use the bond proceeds."

b. No liability until commencement of development. One California Court has held that the surety's obligation on a Subdivision Bond commences only after the principal has begun construction of the improvements.46 The Court in County of Yuba stated, "The language of the instrument of credit executed by [the bank] indicates that the parties intended to provide security for full completion of improvements whose construction had already begun."47 Due to a shift in the local population base, the developer found it impossible to sell homes. As a result, no development was ever commenced on the tract for which the instrument of credit was issued. The court denied recovery noting that "construction of streets would serve no useful purpose in the absence of such a subdivision and that none of the parties intended streets to be constructed except as part of construction of such a subdivision."48 The court based its ruling on the doctrine of "frustration of purpose" and stated that to require the bank to pay the county "would be to uphold an illegal forfeiture."49

Similarly, a New Jersey court rejected a Public Agency's attempt to enforce a variance, site plan conditions and a developer's agreement for a project which had been abandoned prior to the commencement of any construction.50 The developer argued that his obligation to perform the developer's agreement was contingent on going ahead with the project itself. Both the trial court and the Appellate Division agreed finding that once the site plan application had been abandoned, there was no need to proceed with the improvements.51

5. Who owns the property on which the subdivision improvements are to be completed?

Generally, the bonded developer will have been required to sign an indemnity agreement in favor of the surety. Thus, any demand made by the Public Agency initially should be tendered to the developer to determine its position. If the developer owns the property, it is likely that it will work with the Public Agency to obtain an extension. If the developer has lost the property in foreclosure, the foreclosing bank or a subsequent third-party purchaser may own the property. As neither the foreclosing bank nor the third-party purchaser are obligees and have no direct right to make claim on the Subdivision Bonds, they often attempt to persuade the Public Agency to require the placement of the improvements.52 While the Public Agency arguably has no legal obligation to act on behalf of the bank or the third party purchasers, the Public Agency often finds it in its best interest to require the improvements. Communicating with the Public Agency early and explaining that these parties are receiving a windfall or an unjust benefit by the placement of the improvements may be helpful in persuading the Public Agency not to require the surety to place the improvements.

In order to preempt this situation, it is advisable to contact the Public Agency as soon as the surety learns of any potential property transfer. To avoid an unjust result, the surety should request that the Public Agency require any subsequent purchaser who is actually developing the property to execute a new Subdivision Agreement secured by appropriate substitute bonds as a condition of the issuance of any permits to commence work on the project. The surety should persuade the Public Agency that it is permitted and should require the actual developer of the property to pay the cost of the improvements. The surety can support its position by referencing general rules of suretyship and the covenant of good faith and fair dealing implied in all contracts which may be summarized as follows:

The contract of suretyship imports entire good faith and confidence between the parties as to the whole transaction. The creditor is bound to observe good faith with the surety.

He must withhold nothing, conceal nothing, release nothing which will possibly benefit the surety. He must not do any act injurious to the surety or inconsistent with its rights. He must not omit any act required by the surety which duty enjoins him to do, if such omission injures the surety.53

The Public Agency, as creditor, is therefore duty bound not to do any act injurious to the interests of the surety. Additionally, in every contract, including bonds which a surety executes for the benefit of the Public Agency, there is an implied covenant of good faith and fair dealing that neither party shall do anything which will have the effect of destroying or injuring the rights of the other to receive the fruits of the contract.54

6. What is the surety's measure of damages as a result of the developer's failure to complete the improvements? Once a determination has been made as to the surety's liability, the surety must also consider whether the Subdivision Bond is a "penalty bond" or an "indemnity bond." A "penalty bond" may be treated by the courts as a liquidated damage should the developer fail to complete the improvements. Upon the default of the principal and timely notice of claim, the surety will be required to pay the full penal sum of the bond, regardless of whether or not the Public Agency has incurred any damage, or intends to complete the improvements.55

Under an "indemnity bond," however, a surety will be liable only for the actual cost of completing the required improvements.56 The purpose of such a bond is to provide funds necessary to cover the costs of completing the improvements. Recovery is limited to the reasonable completion costs, and may not exceed the face amount of the bond.57 Some courts, however, have held that the Public Agency may recover from the bond even if no loss has been incurred or where the Public Agency failed to establish any intent or need to complete the bonded improvements.58 Such result appears to be aberrational, however, and inconsistent with the general principle that contractual provisions which operate as a penalty unrelated to actual damages are void and unenforceable as against public policy.59

In the investigation of the claim and the alleged "damage," it is advantageous to obtain an initial evaluation of the state of completion of the improvements by an experienced engineer or builder. Such evaluation should be compiled after a walkthrough of the site either with or without a representative of the obligee. Aerial photographs of the site may be helpful in assessing the improvements remaining to be installed. Aerial or inspection photographs may also be used as an exhibit in the event defenses to the claim are asserted and the matter proceeds to a trial. Care must always be taken to ensure that the list of uncompleted work provided by the Public Agency does not include improvements beyond the scope of the Subdivision Bonds and/or Subdivision Agreement. For instance, while claims may properly be asserted for the cost of installing the prescribed improvements, the surety generally is not obligated to pay for the cost of operating or maintaining such improvements.60 Other examples of claimed damages which may not be covered by the bond are cracked sidewalks, chipped curbing, and dead or dying landscaping which occurred after the improvements were completed by the developer and dedicated to the Public Agency. Often, the Public Agency seeks to recover for problems resulting from its failure to properly maintain properly dedicated improvements. Noting the foregoing potential limits of damage claims, care should be taken in reviewing the Subdivision Bonds and Subdivision Agreement to determine whether or not specific claims asserted by the Public Agency fall within the bond's coverage.

7. Has the Public Agency impaired the surety's rights? The obligee owes a general duty to the surety not to unjustly or unnecessarily increase the surety's risk of loss. The discharge of the surety may occur where the surety is released from its obligation by some act of the obligee. "Impairment of collateral" is but one of several defalcations of the obligee which may give rise to the complete or partial discharge of the surety.61

A certificate of occupancy has been described as "a tangible manifestation that property has been improved and is being used in conformity to applicable municipal ordinances."62Occupancy of a structure may be conditioned on the issuance of such a certificate.63 In the absence of a certificate of occupancy, a developer may find it extremely difficult, if not impossible, to complete the sale or lease of any new building. Mortgage lenders, for example, generally demand a certificate of occupancy as a prerequisite to closing a mortgage loan on a newly constructed home.64 Developers, of course, cannot make any money without sales or rental, and buildings which cannot be legally occupied have no value.

In a sense, the Public Agency's control over the issuance of a certificate of occupancy is the "carrot" motivating the developer to perform its subdivision improvement obligations. Once the certificate of occupancy is issued and the property is sold, the Public Agency is left only with its after-the-fact ability to enforce the Subdivision Bonds.

A Public Agency's improper issuance of a certificate of occupancy, in effect, permits the developer to reap the benefits of the Public Agency's "conditional" site plan approval (or conditional issuance of a zoning permit) without the developer first complying with the same conditions upon which that approval was granted. In this situation, the Public Agency violates the intent of the Subdivision Agreement in essentially the same manner as an obligee on a Public Works Performance Bond violates its own contract when it overpays its principal for work not yet performed. With respect to a Public Works Performance Bond, the obligee's actions in releasing the security it holds to induce performance by the bonded principal may create a pro tanto discharge for the surety to the extent of the overpayment. With respect to Subdivision Bonds, the surety may argue that the Public Agency, by improperly issuing a certificate of occupancy, voluntarily and/or negligently similarly released collateral security it was holding to induce performance by the bonded principal upon which the surety was entitled to rely. A claim or cross-action for negligent release by the obligee of collateral security may result in the complete or pro tanto discharge of the surety.65

The improper release of a certificate of occupancy is tantamount to releasing tangible liens on the subject property since the principal could not have sold the property without a certificate of occupancy. It is the release of the property from restrictions on its use and occupancy, not the certificate of occupancy per se, which directly prejudices the surety's rights. Thus, the Public Agency's early or improper issuance of a certificate of occupancy is arguably an "impairment" giving rise to at least a pro tanto discharge of the surety. The injury to the surety is the obligee's removal of the principal's primary positive motivation to perform its obligations while the principal is still capable of performing. Moreover, by enabling the premature sale of new buildings in the absence of completed subdivision improvements, the obligee permits the principal to liquidate and disburse its assets, thereby increasing the risk that the surety will be unable to recover from its principal.66

The above discussion, of course, presupposes that the Public Agency's issuance of a certificate of occupancy was somehow improper. This, however, may not be assumed simply by virtue of the Public Agency's having issued a certificate of occupancy despite incomplete subdivision improvements. Whether and to what extent a Public Agency can withhold a certificate of occupancy from the principal as a method of enforcing the principal's obligation to complete subdivision improvements is a potentially complex issue. In many cases, the release of a certificate of occupancy may be statutorily required whether or not certain improvements remain to be completed.

A certificate of occupancy may be required as "a method of assuring that there has been compliance with the building permit after the building has been erected."67 In particular, courts have recognized that a Public Agency has the implied authority to withhold a certificate of occupancy both to enforce building permits and as a tool of subdivision control.68 This use of a certificate of occupancy must be exercised pursuant to ordinances with standards such that "the withholding of a certificate of occupancy as a subdivision control must be related to the health, welfare and safety of the occupants of the residence for which the certificate is sought.69 This standard should be easy to meet, however, because the basis for requiring installation of the subdivision improvements themselves is to protect the health, welfare and safety of the occupants of the residences to be built in the subdivision.

Where a statute exists governing the issuance of certificates of occupancy, the surety is arguably entitled to rely on the Public Agency not to grant a certificate of occupancy in violation of the obligee's own ordinances where the incomplete subdivision improvements at issue relate to the health, welfare and safety of the occupants of the residence for which the certificate is sought.70 Such improvements need not be directly on or bordering the lots in question. For example, the failure to complete gutters, paving or sidewalks at the start of a dead end street arguably isolates and endangers the welfare of the whole street. A soil erosion problem in one area could create a hazard in other areas. At the same time, the surety will have no legitimate complaint if a certificate of occupancy is issued for one end of a large development far from any incomplete site work. In the end, any defense of the surety based on the Public Agency's improper issuance of a certificate of occupancy will depend on (1) the provisions of the Statutory Scheme, and (2) the location and import of the incomplete site improvements vis-a-vis those buildings for which certificate of occupancy is issued.

IX. Conclusion.

Understanding and appreciating the unique aspects of Subdivision Bonds should assist the surety in establishing a monitoring program and developing special preventative procedures to avoid claims. Where claims are made on Subdivision Bonds, recognition of the roles, responsibilities and unique interplay between the principal, Public Agency, builder, indemnitors, and Set Aside Bank will assist the surety in establishing alternative approaches or defenses to satisfy, reduce or eliminate its exposure. Consistent monitoring, open communication and creativity, both before and after a claim is made, are the keys to superior handling of Subdivision Bond claims.


1. See, Associated Home Builders, Inc. v. City of Walnut Creek, 4 CaUd 633, 94 Cal.Rptr. 630 (Cal. 1971); The Pines v. City of Santa Monica, 29 Ca1.3d 656, 175 Cal.Rptr. 336 (Cal. 1981); Benny v. City of Alameda, 105 Cal.App.3d 1006, 164 Ca1.Rptr. 776 (Cal.App. 1980); Bank of Southeastern Connecticut v. Nazarko Realty Group, 49 Conn.App. 452, 714 A.2d 722 (Conn.App. 1998); and City of Bellafontaine Neighbors v. JJ Kelley Realty and Building Co., 460 S.W.2d 298, (Mo.App. 1970).

2. An example of another form of security is found in Vale Dean Canyon Homeowners Association v. Dean, 100 Or.App. 158, 785 P.2d 772 (Or.App. 1990) wherein the Public Agency required a certificate of deposit as security to assure performance of the Subdivision Agreement.

3. See e.g., Pennington Homes, Inc. v. Stanhope, 41 N.J. 578, 197 A.2d 870 (N.J. 1964).

4. The basic purpose of a Subdivision Performance Bond is to "assure those who purchase homes in a new subdivision that they will receive the public improvements that were a large part of the inducement to purchase lots and/or homes in that development." Town of Southington v. Commercial Union Insurance Company, 54 Conn.App. 328, 334, 735 A.2d 835 (Conn.App. 1999), certification granted in part by Town of Southington v. Commercial Insurance Company, 251 Conn. 906, 738 A.2d 1093 (Conn. 1999).

5. See, e.g. Evola v. Wendt Construction Company, 170 Ca1.App.2d 21, 338 P.2d 498 (Ca1.App. 1959) (the Subdivision Map Act discussed in this case has since been amended).

6. "The reason for requiring the subdivider to install street improvements is directly related to the public health, safety and welfare. Such a requirement assures suitable access routes, advances the objectives of the community plan, and protects the municipality and its taxpayers from the burden of constructing additional streets to accommodate new developments." General Insurance Company of America v. City of Colorado Springs, 638 P.2d 752, 757 (Colo. 1982). See also, Fleck v. National Property Management, Inc. 590 P.2d 1254, 1257 (Utah 1979).

7. See, e.g., South Central Coast Regional Comm. v. Charles A. Pratt Construction Company, 128 Ca1.App.3d 830, 180 Ca1.Rptr.555 (Ca1.App., 1982), called into doubt by Lakeview Development Corp. v. City of South Lake Tahoe, 915 F.2d 1290 (9" Cir. (Cal.) 1990).

8. See, e.g. California Government Code, §66499.9(c).

9. See, e.g., California Government Code §66499; 110. S. 1951 § 1425; Connecticut General Statutes §8-25; RCW §58.17.130; New Jersey Statute §40:55-D-84.

10. Although some jurisdictions may permit or require letters of credit, certificates of deposit, or other financial instruments, this article will focus solely on Subdivision Bonds. [An example of another form of security is found in Vale Dean Canyon Homeowners Association v. Dean, 100 Or.App. 158, 785 P.2d 772 (Or.App., 1990) wherein the Public Agency required a certificate of deposit as security to assure performance of the Subdivision Agreement.]

11. See e.g. California Government Code §66499.1, 66499.2; Town Law of New York §277 (Subd. 1); New Jersey Statute (N.J.S.A.) 40:55D-84.

12. Often, the Public Agency retains an engineer to estimate the costs of the improvements to be installed by the developer from which estimate the bond amount is derived.

13. See, N.J.S.A. 40:5513-53(a) authorizing a performance bond "not to exceed 120% of the cost of installation of improvements."

14. See, e.g., California Government Code, §66499

15. See discussion below on "Limitations and Expansion of Coverage" (Section V).

16. See e.g., California Government Code §§66499(b), 66499.5; N.J.S.A. 40:5513-53 (d) (1).

17. See, Kern County v. Edgemont Development Corp., 222 Cal.App.2d 874, 879,

18. Ca1.Rptr. 629 (Cal.App., 1963) in which the court refused to declare a portion of work complete, or that the developer otherwise had an absolute right to have the work accepted, where the developer failed to file the required application for acceptance.

19. See, e.g„ City of Los Angeles v. Anchor Casualty Company, 204 Ca1.App.2d 175, 22 Ca1.Rptr. 278 (Ca1.App. 1962).

20. See, e.g., City of Sacramento v. Trans Pacific Industries, Inc., 98 Ca1.App.3d 389, 400, 159 Ca1.Rptr. 514 (Ca1.App. 1979) citing Bloom v. Bender, 48 Ca1.2d 793, 313 P.2d 568 (Cal. 1957). See also, City of O'Fallon v. Bank of Belleville, 171 I11.App.3d 584, 586, 525 N.E.2d 1162 (I11.App. 1988) (an underlying agreement may be incorporated in bond where "alluded to," even if not specifically referred to in bond.) Further, an oral contract may in some jurisdictions constitute a valid basis for a contract of suretyship. See, East Baton Rouge Parish v. Travelers Insurance Company, 342 So.2d 226 (La.App.1977).

21. Township of Wyckoff v. Sarna, 136 N.J.Super. 512, 347 A.2d 16 (App.Div. 1975).

22. Courts will construe a Subdivision Performance Bond in a fair and reasonable manner based upon a consideration of its language and provisions. In City of O'Fallon v. Bank of Belleville, 171 I11.App.3d 584, 586, 525 N.E.2d 1162 (I11.App. 1988), the surety argued that the portion of the development not completed by the developer -- the culvert -- was not covered by the Subdivision Bond which by its terms included streets and sidewalks. Interpreting the Subdivision Performance Bond as incorporating the Subdivision Agreement, the court held the surety obligated by the bond to complete the improvements prescribed and required by the Public Agency. Thus, the court held that the definition of "street" in the Public Agency's ordinance encompassed the culvert. See also Town of Brookfteld v. Greenridge, Inc., 177 Conn. 527, 418 A.2d 907 (Conn. 1979) (implicit obligation to include underdrain in construction of road improvements based upon good road-building practice although underdrain was not specifically indicated on filed map nor spelled out in road specifications).

23. See, e.g_, Bd. of Supervisors of Stafford County v. Safeco Insurance Co. of America, 226 Va. 329, 339, 310 S.E.2d 445 (Va.1983) (Supreme Court of Virginia rejected County's claim for consequential damages, other than interest, limiting recovery to the principal amount of the bond).

24. New Jersey Shore Builders Association v. Township of Marlboro, 248 N.J.Super. 508, 510, 591 A.2d 950 (App.Div. 1991).

25. See, N.J.S.A. 55D-53a(2)

26. New Jersey Shore Builders Association, supra, 248 N.J.Super. at 513-14, 591 A.2d 950 (App.Div. 1991)

27. Eastern Planned Comm. v. Middletown, 235 N.J.Super. 467, 469, 563 A.2d 81 (L.Div. 1989).

28. Hewson Construction, Inc. v. Reintree Corporation, 101 Wash.2d 819, 685 P.2d 1062, 1065 (Wash. 1984) ("The Washington statute gives only the municipality power to enforce plat obligation bonds (sic) thus contractors such as Hewson have no right of action to enforce the bonds."), Evola v. Wendt Construction Co., 170 Ca1.App.2d 21, 25, 338 P.2d 498, 501 (Cal.App.1959) ("No authority is given by the section which would authorize the governing body to enact an ordinance on the subject; none that would permit the county to expand the agreement to protect labor or material claimants."). See, also, W.S. Dickey Clay Mfg. Co. v. Ferguson Investment Co., Inc., 1963 O.K.290, 388 P.2d 300, 303 (Okla.1963) ("The construction of the bond should be consonant with the effectuation of the apparent purposes of the Legislature and the City Council.").

29. Rexroth and Rexroth, Inc. v. General Casualty Company of America, 242 Ca1.App.2d 363, 51 Cal.Rptr. 505 (Ca1.App.1966). Although the text of the Performance Bond is not recited in the opinion, one might infer from the context of the opinion, that the bonding agent erroneously selected a bond form intended for construction projects, with performance and payment bond language on alternate sides of the form.

30. Id., 242 Ca1.App.2d at 368.

31. See, e.g. Mount Florence Group v. City of Peekskill, 235 A.D.2d 787, 652 N.Y.S.2d 814 (N.Y.App.Div. 1997), (holding that where a subdivision bond provided for a longer limitations period than the relevant statute, the surety was bound by the more liberal language of the bond). See, also, Board of County Supervisors of Prince William County v. Sie-Gray Developers, Inc., 230 Va. 24, 334 S.E.2d 542, 546 (1985), holding as follows:

To allow appellees to assert a defense of ultra vires would contravene the general principle that one who makes a contract with a municipality is estopped to assert that it was ultra vires, when it is sought to be enforced against him. A defense unavailable to Sie-Gray would likewise be unavailable to Republic, as surety. (citations omitted)

32. See Commercial Standard Insurance Company v. Tab Construction, Inc., 94 Nev. 536, 583 P.2d 449 (Nev. 1978), wherein Subdivision Payment Bond contained six-month limitations period from the date of completion of improvements. But see Sherwood Forest No. 2 Corp. v. City of Norman, 1980 O.K. 632 P.2d 368 (Okla. 1980), citing City of Norman v. Liddell, 596 P.2d 879 (Okla. 1979), where the Supreme Court of Oklahoma rejected a limitations period set forth in the bond as void by a local statute, and further held a two year limitations period set forth in a sidewalk ordinance to be void as a violation of the State's Constitution. Instead, the Court applied a five (5) year limitations period for breach of contract.

33. See, e.g_, City of Sacramento v. Trans Pacific Industries, 98 Ca1.App.3d 389, 400, 159 Ca1.Rptr. 514 (Ca1.App. 1979).

34. In General Insurance Company ofAmerica v. City of Colorado Springs, 638 P.2d 752, 757 (Colo. 1981), the Supreme Court of Colorado rejected the City's contention that the subdivision bond was a "penalty bond," liable in the full amount for the principal's failure to perform, but rather deemed the bond an "indemnity bond," liable only for the actual cost of completing the required improvements.

35. In Hewson Construction, Inc. v. Reintree Corporation, 101 Wash.2d 819, 685 P.2d 1062 (Wash. 1984), the court denied the subcontractor who installed the sidewalks on a subdivision improvement a right of action to enforce a Subdivision Performance Bond. The court rejected the subcontractor's argument that it was a third-party beneficiary of the Subdivision Performance Bond holding that the bond runs solely to the Public Agency, as obligee. Similarly, in W.S. Dickey Clay Mfg. Co. v. Ferguson Investment Company, 1963 O.K. 298, 388 P.2d 300 (Okla. 1963), the court denied a material supplier a right of action against a Subdivision Bond despite the fact that the bond included language binding the surety to laborers and materialmen. Finding that the subdivision law did not require the developer to guarantee payment for labor and materials, the court held that the material supplier was confined to the measure of liability as contemplated by the law requiring the Subdivision Bond. See also, Evola v. Wendt Construction Company, 170 Cal.App.2d 21, 388 P.2d 498 (Cal.App. 1959) and Norton v. First Federal Savings, 128 Ariz. 176, 624 P.2d 854 (Ariz. 1981), called into doubt by Hartford Accident and Indemnity Company v. Arizona Department of Transportation, 172 Ariz. 564, 838 P.2d 1325 (Ariz.App. 1992). Vale Dean Canyon Homeowners .Association v. Dean, 100 Or.App. 158, 785 P.2d 772 (Or.App. 1990), however, did allow lot owners, as third party beneficiaries of the Subdivision Agreement, to enforce the terms of the Subdivision Agreement. In part, the court found that in entering into the Subdivision Agreement, the Public Agency intended to benefit the lot owners. Interestingly, the court refused to give much credence to testimony by the Public Agency that its intent was to assure that the improvements would be placed at no cost to itself. This case may however be limited to its particular circumstances and the language of the particular Subdivision Agreement.

36. See footnote 31, supra.

37. See, e.g., N.J.S.A. 40:55D-53(b).

38. See, New Jersey Shore Builders Association v. Township of Marlboro, 248 N.J.Super. 508, 591 A.2d 950 (App.Div. 1999) (the cost of electricity for street lighting held not an improvement for which a municipality was authorized to require of developers); Eastern Planned Comm. v. Middletown, 235 N.J.Super. 467, 563 A.2d 81 (L.Div. 1989) (held: municipality is without statutory authority to require a developer to form a homeowners' association as a condition for releasing performance security). See also Hilton Acres v. Klein, 35 N.J. 570, 581 (1961), observing as follows:

The Appellate Division held that, since the extension provision was void for lack of municipal power and in contravention of the enabling statute, plaintiffs were not entitled to the benefit of it.

This conclusion rests on established and eminently sound law. Our cases have consistently held that municipal action in the land use control field taken in direct violation of law or without legal authority is void ab initio and has no legal efficacy. So a building permit issued contrary to a zoning ordinance or building code cannot ground any rights in the applicant.

39. Board of County Supervisors of Prince William County v. Sie-Gray Developers, Inc., 230 Va. 24, 334 S.E.2d 542 (Va. 1985).

40. 53 Md.App. 14,451 A.2d 1261 (Md.Ct.SpApp. 1982).

41. See, e.g„ Kern County v. Edgemont Development Corp., 222 Ca1.App.2d 874, 879, 35 Ca1.Rptr. 629 (Ca1.App. 1963); City of Sacramento v. Trans Pacific Industries, 98 Ca1.App.3d 389, 400, 159 Cal.Rptr. 514 (Ca1.App. 1979); and Mount Florence Group v. City of Peekskill, 652 N.Y.S.2d 814, 235 A.2d 787 (N.Y.App. Div. 1997). Cf. Town of Southington v. Commercial Union Insurance Company, 254 Conn.348, 757 A.2d 549 (2000) (interpreting a Connecticut statute to grant a municipality discretion to call subdivision bond whether or not any lots have been conveyed).

42. Kern County and Mount Florence Group, supra.

43. Town of Shawangunk v. Goldwil Properties Corp., et als. defendants and Republic Insurance Co., appellant, 61 A.D.2d. 693, 403 N.Y.S. 2d. 784 (N.Y.App.Div. 1978), relying in part on Subdivision 1 of Section 277 of the Town Law.

44. See also, Village of Warwick v. Republic Insurance Company, 104 Misc. 2d. 514; 428 N.Y.S. 2d. 589 (Sup. Ct. 1980), and City of Peekskill v. Continental Insurance Company, 999 F.Supp. 584 (S.D.N.Y. 1998), aff d 166 F.3d 1199 (2nd Cir. 1998).

45. Opinion number 81-158, issued May 29, 1981.

46. Board of Supervisors of Stafford County v. Safeco Insurance Company of America, 226 Va. 329, 310 S.E.2d 445 (Va. 1983), citing City of Sacramento, supra, and declining to follow County of Yuba, infra. It should be noted, however, that two justices dissented, stating that where there is no likelihood the development will be constructed, the court's ruling amounts to a forfeiture, penalizing the surety under the guise of enforcing the terms of an indemnity bond. Board of Supervisors of Stafford County, supra, 226 Va. at 340-341, 310 S.E.2d at 451-52.

47. County of Yuba v. Central Valley National Bank, Inc., 20 Ca1.App.3d 109, 97 Ca1.Rptr. 369 (Ca1.App. 1971); holding limited by City ofSacramento v. Trans Pacific Industries, Inc., 98 Ca1.App.3d 389, 159 Ca1.Rptr. 514 (Ca1.App. 1979), and further limited by City of Los Angeles v. Amwest Surety Insurance Co., 63 Ca1.App.4th 378, 73 Ca1.Rptr.729 (Ca1.App. 1998). The import of these decisions limiting County of Yuba is that where at least some development has occurred and where it appears that the municipality intends to complete the improvements, in California the municipality has a valid claim under a subdivision bond. See also Board of Supervisors of Stafford County v. Safeco Insurance of America, 226 Va.329, 310 S.E.2d 445 (1983), and the dissent thereto.

48. County of Yuba, supra, at 112.

49. Id., at 111

50. Id.

51. River Vale Planning Board v. E&R Office Interiors, Inc., 241 N.J.Super. 391, 575 A.2d 55 (App.Div. 1990).

52. Id. at 400, citing inter alia, New Windsor v. Inbro Development, 448 N.Y.S.2d 99, 112 Misc.2d 983 (Sup.Ct. 1982) (condition of performance bond not actuated where developer fails to commence work). while not brought in the context of a bond claim against a surety, it can be fairly argued that the citation was an endorsement, albeit in dicta, by the Appellate Division of the result of the case cited.

53. See, City of Sacramento v. Trans Pacific Industries, Inc., 98 Ca1.App.3d 389, 159 Ca1.Rptr. 514 (Ca1.App. 1979). See also, Board of County Supervisors of Prince William County v. Sie-Gray Developers, Inc., 230 Va. 24, 334 S.E.2d 542 (Va. 1985), wherein the Court upheld an assignment of the County's rights under the Subdivision Performance Bond to a subsequent developer of the improvements, and Will County v. Woodhill Enterprises, Inc., 4 I11.App.3d 68, 274 N.E.2d 476 (I11.App. 1971), in which the court allowed an assignee of Public Agency to pursue a claim against a Performance Bond. But see, Morro Palisades Co. v. Hartford Acc. & Indem. Co., 52 Ca1.2d 397, 340 P.2d 628 (Cal. 1959), in which the court denied an assignee's recovery against the bond, where the assignee did not seek to compel the subdivision improvements, but rather sought to recover a money judgment on its own behalf.

54. Massachusetts Bonding & Ins. Co. v. Osborne, 233 Ca1.App.2d 648, 662, 43 Ca1.Rptr. 761 (Ca1.App. 1965), quoting County of Glen v. Jones, 146 Cal. 518, 520, 80 P. 695 (Cal. 1905).

55. See, e.g., Kendall v. Ernest Pestana, Inc., 40 Ca1.3d 488, 500, 220 Ca1.Rptr 818 (Cal. 1985), superceded by statute on other grounds as stated in Rancho Santa Paula Mobilehome Park, Ltd. v. Evans, 26 Ca1.AppAth 1139, 32 Ca1.Rptr.2d 464 (Ca1.App.1994)

56. See, e.g., Clark v. Barnard, 108 U.S. 436, 2 S.Ct. 878 (1883).

57. In General Insurance Company of America v. City of Colorado Springs, 638 P.2d 752, 757 (Colo. 1981), relying upon, United States v. Zerbey, 271 U.S. 332, 46 S.Ct. 532 (1926) the Court rejected the City's contention that the subdivision bond was a "penalty bond," but rather deemed the bond an "indemnity bond," liable only for the actual cost of completing the required improvements. See also Morro Palisade Co. v. Hartford Accident & Indemnity Co., 52 Ca1.2d 397, 340 P.2d 628 (Cal. 1959); County of Los Angeles v. Margulis, 6 Ca1.App.2d 57, 44 P.2d 608, (Ca1.App. 1935).

58. Bd. of Supervisors of Stafford v. Safeco Insurance Company of America, 226 Va. 329, 335, 310 S.E.2d 445 (Va.,1983). Bd. of County Supervisors of Prince William County v. Sie-Gray Developers, Inc., 230 Va. 24, 334 S.E.2d 542 (Va. 1985). Town of Poughkeepsie v. Holden Construction Co., Inc., 419 N.Y.S.2d 531, 71 A.D.2d 886, (N.Y.App.Div. 1979), (case remanded to assess Public Agency's damages resulting from developer's breach).

59. Bd. of Supervisors of Stafford v. Safeco Insurance Company of America, 226 Va. 329, 337-38, 310 S.E.2d 445 (Va. 1983) (a surety stands in the shoes of its principal and may not assert defenses not available to the principal). The surety had conceded that the county's lack of intent to complete the improvements was not a viable defense to the principal's failure to complete the improvements. (Citing Cohen v. Mayflower Corp., 196 Va. 1153, 1164, 86 S.E.2d 860 (Va. 1955).)

60. Ogden Dev. Corp. v. Federal Ins. Co., 508 F.2d 583, 584 (2d Cir. 1974) (complete legal defense to surety where bond prescribed a penalty rather than a legally enforceable provision for liquidated damages).

61. New Jersey Shore Builders Association v. Township of Marlton, 248 N.J. Super 508, 591 A.2d 950 (App.Div. 1991). See also, Eastern Planned Community v. Middletown, 235 N.J. Super 467, 563 A.2d 81 (Law Div. 1989), in which the trial court held that an obligation on the part of the developer to form a homeowners association pursuant to the planning board approvals was not a bondable item and release of the surety bond could not be withheld pending this event.

62. Restatement of the Law Third, Suretyship and Guaranty, §37 (characterizing various actions and inactions of obligees as creating an "Impairment of Suretyship Status"). See also, "Release of Underlying Obligation" (§39), "Extension of Time" (§40), "Modification of Underlying Obligation" (§41), "Impairment of Collateral" (§42) and "Delay in Enforcement; Running of Statute of Limitations as to Underlying Obligation" (§43).

63. Dresner v. Carrarra, 69 N.J. 237, 242, 353 A.2d 505 (1976).

64. N.J.S.A.52:27D-133.

65. See, e.g., Rzepiennik v. U.S. Home Corp., 221 N.J.Super. 230, 534 A.2d 89 (App.Div. 1987).

66. Langeveld v. L.R.ZH. Corp., 74 N.J. 45, 376 A.2d 931 (N.J. 1977); Boorstein v. Miller, 124 N.J. Eq. 526, 3 A.2d 87 (Ch.Div.1938).

67. There is no reported decisional authority where a surety was granted a pro tanto discharge based on the municipal obligee's improper issuance of a certificate of occupancy. There is, however, at least one unreported oral decision where a trial-level court accepted such an argument. Township of Middletown v. Rocham Developers, Inc., et al., Docket No. MON-L-68001-79 (N.J. Super.Ct. Law Div.).

68. JD. Land Corp. v. Allen, 114 N.J. Super. 503, 510-511, 277 A.2d 404 (N.J.Super.A.D. 1971).

69. See, Dresner v. Carrara, 69 N.J. 237, 242, 353 A.2d 505 (N.J. 1976).

70. Id., at 512.

71. J.D. Land Corp., supra, 114 N.J. Super. at 512, 277 A.2d 404 (App.Div. 1971).

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