McWane, Inc. v. Fidelity & Deposit Compa Ny of Maryland

1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2004 FED App. 0191P (6th Cir.)
File Name: 04a0191p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
MCWANE, INC.,
Plaintiff-Appellant/
Cross-Appellee,
v.
FIDELITY & DEPOSIT
COMPA NY OF MARYLAND,
Defendant-Appellee/
Cross-Appellant,
GROOMS CONSTRUCTION
COMPANY, INC.; HIGHLAND
COUNTY WATER COMPANY,
INC.,
Defendants.
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Nos. 02-4152/4225
Appeal from the United States District Court
for the Southern District of Ohio at Cincinnati.
No. 00-00986—Herman J. Weber, District Judge.
Argued: March 16, 2004
Decided and Filed: June 22, 2004
2 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
Nos. 02-4152/4225
*The Honorable Thomas B. Russell, United States District Judge for
the Western District of Kentucky, sitting by designation.
Before: KRUPANSKY and GILMAN, Circuit Judges;
RUSSELL, District Judge.*
_________________
COUNSEL
ARGUED: Daniel F. Gourash, PORTER, WRIGHT,
MORRIS & ARTHUR, Cleveland, Ohio, for Appellant.
William H. Woods, McNAMARA & McNAMARA,
Columbus, Ohio, for Appellee. ON BRIEF: Daniel F.
Gourash, David Andrew Bell, PORTER, WRIGHT, MORRIS
& ARTHUR, Cleveland, Ohio, for Appellant. William H.
Woods, Dennis D. Liston, McNAMARA & McNAMARA,
Columbus, Ohio, for Appellee.
_________________
OPINION
_________________
KRUPANSKY, Circuit Judge. This appeal involves a
contract dispute between appellant/cross-appellee McWane,
Inc., through its Clow Water Systems Company Division
(“McWane”), and appellee/cross-appellant Fidelity & Deposit
Company of Maryland (“F&D”), regarding F&D’s denial of
McWane’s claim on a payment bond (“Bond”), issued by
F&D as surety to the general contractor Grooms Construction
Co., Inc. (“Grooms”), on a water-main project owned by
Highland County Water Company (“Highland”). McWane
operated as a material supplier on the project prior to

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Nos. 02-4152/4225 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
3
1McW ane is engaged in the business of selling and sup plying ductile
iron water pipe and associated pipe fittings to contractors. Grooms was
a general contractor engaged in the business of installing water and sewer
lines but ceased do ing business in January 2001. Grooms continues to be
an active Ohio corporation. On April 29, 1998, Grooms entered into a
credit agreement with McW ane that permitted Grooms to purchase
materials from McW ane on an account and applied to all future sales.
The agreement required payment within thirty days of the invoice date,
provided for interest to accrue at the rate of 18% per annum on all past
due accounts, and permitted McW ane to recover all costs and expenses of
collection.
2At the time, Grooms’ financial condition was dire and F&D was
unaware of the situation because it had failed to follow its standard
underwriting procedures prior to underwriting the Bond . When the
Payment Bo nd was issued by F&D through its authorized bonding agent
on M arch 7, 2000, F& D performed no separate underwriting on the
Project and the mo st recent information o n file was Groom s’ 1998 year-
end financial statement which showed a strong cash position, though F&D
Grooms’ bankruptcy.1 McWane appeals from the district
court’s denial of its motion for summary judgment and the
grant of summary judgment to F&D predicated on the court’s
conclusion that McWane impaired F&D’s suretyship status
when it endorsed a series of multiparty checks from the public
municipality. Additionally, F&D has cross-appealed from the
district court’s decision that neither the joint check rule nor
the Uniform Commercial Code (“UCC”) were dispositive in
support of F&D’s argument for summary judgment. For the
reasons discussed below, this court reverses the district
court’s grant of summary judgment to F&D while affirming
the district court’s conclusion that neither the joint check rule
nor the UCC proved dispositive in the instant case.
In March of 2000, F&D agreed to stand surety on a
payment bond for Grooms, the low bidder and general
contractor on a water main project owned by Highland.
McWane contracted with Grooms to supply pipe materials for
the Project.2 Prior to the start of construction, Highland
4 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
Nos. 02-4152/4225
also had in formation that Grooms was a slow-pay to its suppliers. Not
until June 2000 d id F&D receive Grooms’ overdue 19 99 year-end
financial statement which indicated that the contracto r had sustained $2
million in lo sses in 1999 .
3Because Highland had concerns about Grooms’ reputation for slow-
pay to its suppliers, Highland instituted a multiple-party check payment
arrangement that would include, as co-payees, G rooms and all suppliers
whose invoices were submitted with a pa rtial paym ent req uest. Neither
Highland nor Grooms advised McWane which invoices were submitted
with any p articular partial p ayment request.
4On April 11, 2000 , Gro oms subm itted a letter to Highland
representing that Grooms had ob tained agreement from its sup pliers to
Highland’s multiple-party check payment procedure. Grooms did not
contact McW ane prior to that letter and Highland did not confirm
McW ane’s acquiescence to the pro cedure.
5Highland issued the following four checks:
Multiple-party check #1 on Ap ril 19, 2000, to Grooms, M cW ane and
Water Works as co-payees in the amount of $396,095.24.
Multiple-party check #2 on May 17, 2000 to Grooms, McW ane, Water
W orks and another supplier, Pittsburgh Pipe, as co-payees in the
amo unt of $471 ,997 .23.
Multiple-party check #3 on June 21, 2 000 to Grooms and McW ane as co-
payees in the amou nt of $7 7,11 1.25 .
Multiple-party check #4 on July 19, 2000 to Groom s, McW ane, and
arranged with Grooms to issue joint checks during phases of
the Project, with each check made payable to Grooms and its
many suppliers, including McWane.3 Highland and Grooms
arrived at this arrangement without prior notice to McWane
or the other suppliers.4
This arrangement required McWane, along with other
named suppliers on the project, to endorse a joint check and
return it to Grooms prior to the issuance of separate payment
from the General Contractor. Highland issued a total of four
joint checks between April and July of 2000, totaling
approximately $1.1 million.5 After McWane and other co-

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Nos. 02-4152/4225 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
5
W ater W orks as co-payees in the amount o f $17 2,60 0.76 .
6Approximately $111,00 0 of check #2 represented payment for the
current Project, while $69,000 was applied to invoices due on a prior
separate project, per Grooms’ instruction. W hile McW ane’s name
app eared on check # 1 for p artial end orsem ent, as of the date of issuance
of that check, McW ane was owed no mo ney from Grooms and, thus,
received no proceeds from check #1.
7This claim was submitted on August 3, 2000. M cW ane
subsequently reduced this amo unt to $427,705.69 to reflect a sales tax
credit that was given to G rooms.
payees had endorsed the checks, Grooms then issued separate
checks. After the multiple parties endorsed check #2, Grooms
presented a separate check to McWane for $180,912.24.6
That check cleared and was applied to outstanding invoices.
After the multiple parties endorsed check #3, Grooms
presented a separate check to McWane for $78,156.73, which
cleared. After Highland issued check #4 and prior to full
endorsement from all co-payees, Grooms presented McWane
with a separate check in the amount of $111,522.38, at the
same time that McWane endorsed check #4. However, before
McWane deposited check #4, Grooms stopped payment.
McWane received no other money directly from Grooms, but
did receive four checks directly from Highland (being
previously endorsed by Grooms) totaling $29,817.63.
Once Grooms stopped payment on the check, McWane
submitted a claim to F&D on the Bond for $440,208.56, the
estimated amount of Grooms’ arrears to McWane.7 On
September 7, 2000, F&D denied McWane’s claim. In its
denial letter, F&D maintained that McWane had forfeited its
right to recover under the joint check rule.
On November 24, 2000, McWane filed a complaint against
Highland, Grooms, and F&D. The claims against Grooms
included an action on an account and breach of contract,
6 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
Nos. 02-4152/4225
while the claims against F&D were for breach of payment
bond and declaratory judgment. F&D and Highland also filed
cross-claims. Thereafter, the parties conducted discovery,
including depositions of various party representatives.
On October 31, 2001, the parties filed simultaneous
motions for summary judgment. McWane filed a motion for
summary judgment against F&D, Highland, and Grooms,
while both F&D and Highland filed separate motions for
summary judgment against McWane.
On September 13, 2002, the district court granted
McWane’s unopposed motion for summary judgment against
Grooms in the amount of $470,214.82, plus interest. The
court also granted Highland’s and F&D’s motions for
summary judgment against McWane and denied McWane’s
motions for summary judgment against Highland and F&D.
The court concluded that McWane was not entitled to recover
against F&D because McWane had impaired F&D’s
suretyship status. However, the court refused to find
dispositive F&D’s additional claims involving the application
of the joint check rule and the UCC.
On October 11, 2002, McWane made timely appeal from
the district court’s order denying its motion for summary
judgment against F&D. McWane did not appeal the grant of
Highland’s motion for summary judgment, and Grooms did
not appeal the uncontested grant of summary judgment in
favor of McWane. On October 18, 2002, F&D timely filed its
notice of cross-appeal.
This court has jurisdiction over this action pursuant to
28 U.S.C. §§ 1291. This court reviews de novo a district
court’s grant of summary judgment. Peters v. Lincoln Elec.
Co., 285 F.3d 456, 465 (6th Cir. 2002). A district court’s
interpretation of state law is also governed by the de novo
standard. Ferro v. Garrison Ind., Inc., 142 F.3d 926, 931 (6th
Cir. 1998).

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Nos. 02-4152/4225 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
7
“Suretyship is the contractual relation whereby one person,
the surety, agrees to answer for the debt, default or
miscarriage of another, the principal, with the surety generally
being primarily and jointly liable with the principal.” Solon
Family Physicians, Inc. v. Buckles, 645 N.E.2d 150, 152
(Ohio Ct. App.1994) (citing Hopkins v. INA Underwriters Ins.
Co., 542 N.E.2d 679, 682 (Ohio Ct. App.1988)); see also
Manor Care Nursing & Rehab. Ctr. v. Thomas,704 N.E.2d
593 (Ohio Ct. App.1997); St. Paul Fire & Marine Ins. Co. v.
Industrial Comm. of Ohio, 506 N.E.2d 202, 210 (Ohio Ct.
App.1987) (stating that the surety’s obligation is created
concurrently with that of the principal debtor).
The doctrine of surety has several defenses by which the
surety may avoid liability on the contracted payment bond.
F&D has relied upon one of these defenses in arguing that by
signing the multiple-party checks presented by Grooms,
McWane extended the time of payment by Grooms without
F&D’s consent, thus discharging the surety obligation.
The district court agreed with F&D’s argument that
McWane impaired Fidelity’s “suretyship status” by
unilaterally negotiating the highland checks back to Grooms,
without Fidelity’s consent, and thereby intentionally
forfeiting its right to be paid for its materials from the
proceeds of the four multiple-party checks. The district court
concluded, “Ohio courts would hold that plaintiff impaired its
suretyship status by endorsing the checks presented by
Grooms without taking steps to secure payment from Grooms
for the materials plaintiff had supplied so as to relieve Fidelity
of liability to plaintiff under the Payment Bond.”
The determination of the district court, in the instant case,
hinged on the Ohio court’s decision in a markedly similar
case, Water Works Supplies, Inc v. Grooms Const. Co., Inc.,
No. 10CV 010 (Ohio Ct. Com. Pl. Sept 27, 2001)
(unpublished decision). In Water Works, the trial court
concluded that F&D’s surety obligations were discharged
8 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
Nos. 02-4152/4225
when another supplier, Water Works, endorsed the joint
checks issued by Highlands. However, upon review, the Ohio
Court of Appeals found little merit in that conclusion, relying
instead on the clear language of the Bond to reverse the lower
court’s grant of summary judgment to F&D. Water Works
Supplies, Inc., v. Grooms Construction Co., Inc., 2003 WL
1563809 (No. 01CA18) (Ohio Ct. App., 2003) (unpublished
table opinion), appeal not accepted for review Water Works
Supplies, Inc. v. Grooms Constr. Co., Inc., 791 N.E.2d 984
(Ohio, 2003). In the instant case, this court considers
persuasive the reasoning and conclusions of the Ohio Court
of Appeals, as the Water Works suit involved the same
defendant, the same project, the same joint checks and the
identical payment bond waiver clause as presented in the case
sub judice.
The Ohio courts have recognized that an agreement
between the creditor and principal that extends the time for
performance will not discharge the surety “absent a concrete
showing of prejudice.” Water Works, 2003 WL 1563809 at
*4. As the Ohio Court of Appeals noted in reversing the
lower court’s decision in Water Works, an adequate showing
of prejudice may arise where “the principal could have paid
the debt by forwarding to the claimant its share of a payment
received from the owner, had the claimant not given the
principal an opportunity to misapply or dissipate those funds
by agreeing to an extension.” Id.
In the instant case, F&D has claimed that by endorsing the
joint checks, McWane improperly granted Grooms an
extension of time for payment. In response, McWane has
argued persuasively that F&D expressly waived any defense
based upon an extension of time in the waiver clause of the
Bond.
Evaluating the merit of F&D’s defense requires an
examination of the language of the Bond. See G.F. Business
Equip., Inc. v. Liston, 454 N.E.2d 1358, 1359 (Ohio Ct. App.

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Nos. 02-4152/4225 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
9
1982) (noting that the precise words of the contract serve to
bind the surety). In interpreting a surety contract, other words
cannot be added by construction or implication, but the
meaning of the words actually used is to be ascertained in the
same manner as the meaning of similar words used in other
contracts. They are to be understood in their plain and
ordinary sense, to be read in the light of the surrounding
circumstances and of the object intended to be accomplished.
See Troyer v. Horvath, 468 N.E.2d 351, 353 (Ohio Ct.
App.1983) (“A bond is to be construed as a contract between
the parties and interpreted in accordance with its terms.”);
RESTATEMENT (THIRD), SURETYSHIP AND GUARANTY § 6
(1996) (“Each rule in [the] Restatement stating the effect of
suretyship status may be varied by contract between the
parties subject to it.”). “Furthermore, any doubtful language
in the contract of surety must be construed strongly against
the surety, and in favor of indemnity, which the creditor has
reasonable ground to expect.” Solon Family Physicians, 645
N.E.2d at 152.
F&D issued the Bond on March 7, 2000, identifying itself
as surety for Grooms as general contractor on the water
project. The Bond provided, in pertinent part, that F&D was
held and firmly bound unto Highland County Water
Company . . . and unto all persons, firms, and
corporations who are or which may furnish labor, or who
furnishes materials to perform as described under the
contract. . . . PROVIDED that beneficiaries or claimants
hereunder shall be limited to the SUBCONTRACTORS,
and persons, firms, and corporations having a direct
c o n t r a c t w i t h t h e P R I N C I P A L o r i t s
SUBCONTRACTORS.
The Bond also contained a broad waiver clause whereby F&D
contractually waived certain potential surety defenses. In
pertinent part, that clause provided:
10 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
Nos. 02-4152/4225
The said SURETY for value received hereby stipulates
and agrees that no change, extension of time, alteration
or addition to the terms of the contract or to the WORK
to be performed thereunder of the SPECIFICATIONS
accompanying the same shall in any way affect its
obligation on this BOND, and it does hereby waive
notice of any such change, extension of time, alteration
or addition to the terms of this contract to the WORK or
to the SPECIFICATIONS.
F&D has claimed that by not requiring Grooms to
immediately pay McWane its share of the joint check,
McWane extended the time by which Grooms was allowed to
pay, thereby extending the time for performance of the
underlying contract. However, F&D’s payment bond contract
expressly waived notice of any extension of time. See Water
Works 2003 WL 1563809 at *4 (“A surety bond is, however,
a contract and a surety may contractually waive defenses”).
F&D has further maintained that McWane impaired its
suretyship status by mishandling certain collateral, namely,
the four checks that Highland wrote to Grooms, McWane, and
other suppliers. Grooms received these checks from
Highland, presented them for signature by McWane and the
other co-payees, and deposited them into its bank account.
Pursuant to this arrangement, Grooms then paid McWane by
separate check. McWane has argued that because they did
not have possession or control over the joint checks from
Highland they could not have impaired F&D’s suretyship.
McWane’s position represents the proper elaboration of
suretyship principles and guiding law.
In limited circumstances, an obligee [i.e. McWane] may be
held liable for impairment of suretyship status if it acts “to
increase the secondary obligor’s [i.e. F&D] risk of loss by
increasing its potential cost of performance or decreasing its
potential ability to cause the principal obligor [i.e. Grooms]
to bear the cost of performance.” RESTATEMENT (THIRD),

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Nos. 02-4152/4225 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
11
SURETYSHIP AND GUARANTY § 37(1). The burden is on
F&D, as a compensated surety, to prove that McWane is
liable for any alleged loss or prejudice resulting from its
impairment of F&D’s suretyship status. RESTATEMENT
(THIRD), SURETYSHIP AND GUARANTY § 49(2)(a)(i).
To discharge a surety based on impairment of collateral, the
surety must prove that the obligee (i) failed to obtain or
maintain perfection in collateral, (ii) released collateral
without obtaining substituted collateral of equal value,
(iii) failed to perform a duty to preserve the value of
collateral, or (iv) failed to comply with applicable law in
disposing of collateral. RESTATEMENT (THIRD), SURETYSHIP
AND GUARANTY § 42 (2) (a) - (d). The record before this
court indicates that McWane did not possess any collateral
belonging to Grooms that secured a debt. As McWane had
neither power over, nor possession of, any collateral
belonging to Grooms, it cannot be held liable for any alleged
impairment of F&D’s suretyship status. See Woolworth v.
Brinker, 11 Ohio St. 593 (Ohio 1860) (stating that to give
effect to a relinquishment “there must have been a parting
with something actually in the power and possession” of the
creditor, for without the relinquishment the surety could still
exercise its subrogation rights against the debtor).
The Ohio Supreme Court affirmed this position, regarding
the duty of a creditor not in possession of collateral, in
Buckeye Fed. Savings & Loan Ass’n v. Guirlinger, 581
N.E.2d 1352, 1354 (Ohio 1991):
We find that the most equitable and commonsense
approach is to require the party in possession of the
collateral to carry the responsibility to conserve it.
Public policy will not be served by requiring a creditor
out of possession to supervise and, probably, second,
guess the debtor as the guarantor in its handling of the
collateral in its rightful possession. We hold, therefore,
12 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
Nos. 02-4152/4225
that a creditor not in possession of collateral cannot be
liable for its unjustified impairment.
See also, Mid-Continent Refrigerator v. Whitterson, 289
N.E.2d 379, 382 (Ohio Ct. App.1972); Boyd v. Royal
Indemnity,185 N.E. 422, 423 (Ohio 1933).
In the instant case, the record reveals that McWane had
neither possession nor control of the joint checks. Nor did
McWane have possession of anything of actual value from
Highland. Instead, Grooms presented the multi-party checks
to McWane for endorsement solely to facilitate the release of
funds from Highland to Grooms, rather than to satisfy an
outstanding debt from Grooms. In each instance, Grooms
tendered separate payment to McWane. Moreover, at the
time Grooms presented the joint checks to McWane for
signature, the appellant had no indication from Grooms which
funds represented by each check stood as payment for
materials supplied by McWane.
Consequently, the district court erred in determining that
McWane impaired F&D’s suretyship status when it endorsed
the multi-party checks presented to it by Grooms.
In its cross-appeal, F&D has maintained that the joint check
rule and the UCC each provide an alternative defense to
McWane’s claim for payment on F&D’s Bond to Grooms,
which the district court should have entertained. F&D urges
this court to find error in the district court’s conclusion that
neither the UCC provisions nor the joint check rule were
material in its decision to grant F&D’s motion for summary
judgement.
F&D has maintained that Ohio courts should recognize the
joint check rule as applicable to the instant matter, thereby
discharging F&D’s liability as surety. McWane has
responded that the joint check rule does not apply to
extinguish Fidelity’s obligations as a surety because the rule

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Nos. 02-4152/4225 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
13
does not apply to the surety of a co-payee, but merely
provides that the maker of a joint check is deemed to have
paid the materialman named as payee. McWane’s position is
consonant with the terms and application of the rule.
The joint check rule does not innoculate F&D from liability
in this instance. The rule provides that when a subcontractor
and the materialman are joint payees, and no agreement exists
with the owner or general contractor as to the allocation of the
proceeds, a materialman, by endorsing the check, is deemed
to have received the monies owed. This rule emerged from
the California Supreme Court decision in Post Brothers
Construction Company v. Yoder, 569 P.2d 133 (Cal. 1977).
In that resolution, the court concluded that the joint check rule
barred the supplier’s claim against the surety, because the
owner/contractor was the maker of the multi-party check. It
reasoned that when the supplier endorsed the multiple-party
check, it waived its right to recovery from the maker of the
check. The court further reasoned that the surety for the
maker of the checks could use the joint check rule as a
defense to the supplier’s claim. Id. at 134.
As stated and applied, however, the rule does not extend
beyond the relationship between the maker of the checks and
his or her sureties. As a co-payee, Grooms and its surety
F&D stand beyond the reach of the joint check rule. Id. at
P.2d 137; see also Iowa Supply co. v. Grooms & Co.
Construction, Inc., 428 N.W.2d 662, 666 (Iowa 1998)
(concluding that the rule only bars claims against the maker
of the check for the money due from a subcontractor).
In addition, federal courts that have considered the rule,
have noted that a joint check arrangement, standing alone,
does not waive a supplier’s right to recover from a
contractor’s surety. See, e.g., United States ex rel. Clark-
Fontana Paint Co. v. Glassman Construction Co., 397 F.2d
8, 11 (4th Cir. 1968); United States ex rel. Youngstown
Welding and Eng'g Co. v. Travelers Indem. Co., 802 F.2d
14 McWane, Inc. v. Fidelity
& Deposit Co. of Md.
Nos. 02-4152/4225
1164, 1167 (9th Cir. 1986). Moreover, Ohio courts have not
yet recognized the joint check rule. See Water Works 2003
WL 1563809 at *5. Consequently, the district court did not
err in refusing to find the joint check rule dispositive in the
case sub judice.
F&D has further maintained, in its cross-appeal, that under
the UCC, McWane’s endorsement on the multiple-party
checks represented an unsecured loan to Grooms. McWane
has responded that it could not negotiate the joint checks at
the time of endorsement because McWane never possessed or
controlled the checks.
The record evidence indicates that each of the joint checks
was made payable to two or more entities and McWane was
the first party to endorse each joint check. Additionally, the
joint checks were made payable to all co-payees and not
alternatively, and could not be negotiated until all of the co-
payees had endorsed a given check. Finally, McWane was
not a holder of the checks because a single co-payee cannot
be a “holder” under U.C.C. § 3-110: “If an instrument is
payable to two or more persons not alternatively, it is payable
to all of them and may be negotiated, discharged, or enforced
only by all of them.” See also Pamar Enterprises, Inc. v.
Huntington Banks of Mich., 580 N.W.2d 11, 15 (Mich. Ct.
App. 1998). Accordingly, McWane lacked the legal capacity
to negotiate, discharge, or enforce these checks under the
strictures of the U.C.C, and the district court did not err in not
considering the UCC dispositive in rendering F&D claims.
The district court’s grant of summary judgment to F&D is
reversed, the district court’s resolution of the joint check rule
and the UCC is affirmed, and the case is remanded for further
proceedings consistent with this opinion.

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