Mount Vernon City School District v. Nova Casualty Co.
Mount Vernon City School District (School District) initiated a breach of contract action against Nova Casualty Company (Nova), a compensated surety, and DJH Mechanical Associates, Inc. (DJH), the contractor, for failure to complete HVAC work. DJH defaulted, and Nova disclaimed liability, asserting that the School District improperly diverted $214,000 of contract funds to the Department of Labor for an unrelated debt of DJH, violating the Lien Law and increasing Nova's risk under the performance bond. The lower courts and the Court of Appeals affirmed that Nova was not discharged from its surety obligation because it had not completed performance and thus lacked subrogation rights as a Lien Law trust beneficiary. Furthermore, the payment to DOL, representing earned funds for DJH's past performance, did not materially alter the contract or impair Nova's risk. The School District's request for litigation attorneys' fees was denied, as the contract and bond language did not "unmistakably clearly" obligate Nova for such costs, only for those related to project completion.