Fraudulent Concealment Will Toll Statute of Limitations on Payment Bonds Against Innocent Surety
The doctrine of fraudulent concealment generally provides that an otherwise applicable statute of limitations is tolled during the time that facts giving rise to a cause of action are concealed. The Minnesota Supreme Court recently held that this doctrine tolls the limitations period on a payment bond claim against an innocent surety, even if the surety is unaware of the fraud. Minn. Laborers Health & Welfare Fund v. Granite Re, Inc., 844 N.W.2d 509 (Minn. 2014). However, the court left a significant loophole open for sureties by allowing them to contractually exclude the application of the doctrine. Any party entering into a suretyship agreement must be sure to carefully analyze contract language in order to fully understand which party will bear losses resulting from a principal’s fraud.
Defendant Granite Re was the surety on a payment bond issued to EnviroTech Remediation Services, Inc. (“EnviroTech”) that was working on a bridge demolition project in the city of St. Paul. Granite Re agreed to ensure payment of EnviroTech’s labor and material costs on the project. The bond limited the general statute of limitations to “one (1) year following the date on which [EnviroTech] ceased work on [the] subcontract…”
EnviroTech was required to contribute to employee fringe benefit plans that were held by plaintiff Minnesota Laborer’s Health and Welfare Funds (the “Funds”). But EnviroTech concealed payroll records for the bridge project and failed to make accurate fringe benefit payments to the Funds; ultimately shorting Plaintiff over $245,000.
When the Funds discovered EnviroTech’s fraud, it brought suit against EnviroTech and made a claim against the Granite Re bond. However, because the claim was brought more than one year after completion of work Granite Re denied the bond claim. The Funds then brought a declaratory judgment action against Granite Re. The trial court granted summary judgment to Granite Re, determining that the doctrine of fraudulent concealment did not apply to toll the limitations period because Granite Re was not a party to the fraudulent concealment. The Minnesota Court of Appeals reversed and the Minnesota Supreme Court granted further review.
The Supreme Court addressed three arguments presented by Granite Re: “(1) Granite Re did not participate in or know about EnviroTech’s fraudulent concealment; (2) the general rule that a surety stands in the shoes of the principal obligor for the purposes of equitable tolling does not apply to payment bonds; and (3) Granite Re contractually limited its obligation to pay on the bond by including a one-year limitations provision in the bond.” The court rejected all three arguments, and held that generally fraudulent concealment by a principal tolls the limitations period against a surety.
However, the court recognized a broad exception to this general rule. It held that “by contract, the parties are free to place the loss resulting from the principal obligor’s concealment of its default on the obligee.” In this case, the statute of limitations provision in the EnviroTech bond was not sufficient to preclude the application of tolling. Nevertheless, a surety can alter its obligations under the general rule by placing limits on substantive obligations under a bond rather than on the statute of limitations, which is merely a procedural device. Therefore, Granite Re could have limited its liability by including a contractual provision that specifically precluded tolling based on fraudulent concealment.
Before entering into suretyship agreements applying Minnesota law, parties should closely analyze the entirety of the agreement in order to understand what type of liability they may face in the event of the principal’s fraudulent concealment of default.