CITY OF YORKVILLE v. AMERICAN SOUTHERN INSURANCE COMPANY (August 12, 2011)

Ocean Atlantic Services was the real estate developer for the Westbury East Village subdivision in Yorkville, Illinois. Yorkville required Ocean to include certain public improvement projects in its plan, which would eventually be turned over to Yorkville. It also required Ocean to post a bond to ensure completion of the improvements. Ocean obtained a number of bonds from American Southern Insurance Company. Ocean ran into financial difficulties and was unable to complete the project. Several subcontractors, including Aurora Blacktop Incorporated, went unpaid. The City of Yorkville made a demand on American Southern. American Southern refused the demand but Yorkville did not pursue the matter further. Aurora filed suit against American Southern in the name of the City of Yorkville but for its own benefit. Judge Darrah (N.D. Ill.) concluded that Aurora had no standing to assert a claim on the bonds and dismissed the complaint. Aurora appeals.

In their opinion, Seventh Circuit Judges Rovner, Williams, and Hamilton affirmed. Aurora concedes it is not a party to the bonds but nevertheless asserts that is a third party beneficiary with standing to bring a claim. Relying on Illinois law and the Restatement (Third) of Suretyship and Guaranty, the Court distinguished between payment bonds and performance bonds. Illinois courts generally recognize third-party beneficiaries in the context of a payment bond, in which the surety is liable for the contractor’s promise to pay for all labor and materials. Illinois courts are less likely to find third-party beneficiary status in the context of a performance bond, where there is no promise to pay for labor and materials. The bonds at issue here contain no language suggesting that American Southern was liable to anyone other than the City of Yorkville. The district court did not err.