The Surety’s Right to Require Suit Against the Principal

In most jurisdictions, a payment bond claimant has no obligation to sue both the principal and the surety in pursuing a payment bond claim.  State and federal courts have long recognized this rule and have permitted payment bond claimants to sue the surety alone.  This principle is considered to be consistent with the purpose of the Miller Act and various Little Miller Acts, which is to provide a means of protecting subcontractors and suppliers that provide labor and materials to public projects, given that these entities are unable to secure mechanic’s liens on such projects.
However, Virginia law provides an exception to this rule.  The Virginia Code permits a payment bond surety to demand that a claimant name all solvent, resident principals in any civil action against the surety.  Subject to certain exceptions discussed below, where a bond claimant fails to satisfy the surety’s demand to also bring its action against the principal, the claimant forfeits his rights against the surety.  Va. Code Ann. §§ 49-25, 26.

FACTS
The exceptions to the surety’s right to demand that a claimant bring suit against both the surety and its principal were discussed in the Virginia Supreme Court decision Courson v. Simpson, 251 Va. 315, 320, 468 S.E.2d 17, 20 (1996).  In that case, Springfield Associates borrowed funds from a trust established by an estate.  Property owners Herman and Eleanor Courson secured Springfield’s loan with a deed of trust on the Coursons’ personal residence.  Springfield defaulted on the loan and the Coursons demanded that the trustees seeking repayment of the loan bring an action against Springfield pursuant to Virginia Code §§ 49-25, 26.

The trustees failed to bring an action against Springfield, and the Coursons sought a declaratory judgment asking the court to release their deed of trust and discharge the Coursons of their obligation as sureties to Springfield.   Evidence before the lower court established that Springfield was insolvent at the time of the Coursons’ demand to the trustees.  Consequently, the Circuit Court denied the Coursons’ request for declaratory relief.

ANALYSIS
The Coursons argued on appeal that Code §§ 49-25, 26 required the trustee to sue every party to the transaction, including the surety, upon receipt of a demand from the surety under Code §§ 49-25, 26.  Given that the trustee did not bring an action against the Coursons or Springfield upon receipt of the Coursons’ demand, the Coursons argued that their liability was discharged under the statute.

The Supreme Court of Virginia rejected this contention.   The court held that Virginia Code requires a creditor to bring suit only against any principal debtor who is not insolvent.  Therefore, Springfield’s insolvency eliminated the requirement that they be sued along with the surety, and extinguished the Coursons’ right to be discharged from liability under the statute.  The court noted further that the code section does not “obligate a creditor to bring suit against a surety in order to prevent the surety from being discharged under the statute.”

PRACTICAL POINTS
The Virginia Code offers a unique right to sureties that is not generally available in other jurisdictions, namely a right to demand that the principal also be sued on a bond claim.  The Courson decision provides important guidance as to the limitations on this protection.

Understand the principal’s financial position. A principal is insolvent when it has insufficient assets to pay all of its debts.  A surety is unable to require that a claimant bring suit against an insolvent principal under Virginia law.

The surety’s rights are purely defensive. The rights afforded under Virginia Code § 49-25, 26 are purely defensive in nature and only accrue in the event an action is filed against it.  Likewise, the claimant’s failure to bring suit against the surety as well as the principal following demand does not discharge the surety of its obligation.