Request By:
Mr. Steven R. Bourne
Hopkinsville-Christian County
Planning Commission
P.O. Box 1125, City Hall
Hopkinsville, Kentucky 42240
Opinion
Opinion By: David L. Armstrong, Attorney General; Thomas R. Emerson, Assistant Attorney General
This is in reply to your letter raising questions concerning subdivision performance bonds and KRS 100.281(4) which provides as follows:
"All subdivision regulations shall be based on the comprehensive plan and shall contain:
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Specifications for the physical improvements of streets, utilities, and other facilities, and the extent to which they shall be installed or dedicated as conditions precedent to approval of any plat, including the provision of subdivision performance bonds to insure proper completion of physical improvements."
You recognize that the statute clearly provides for the use of performance bonds as a requirement in subdivision development. Your question involves the interpretation of the statute and whether it allows "other forms of suretyship to be substituted, e.g., irrevocable letters of credit and escrow accounts."
You maintain that under present economic conditions it is difficult for a developer to obtain a performance bond, and, if he does, the cost of the premium is prohibitive. To allow the use of irrevocable letters of credit and escrow accounts would alleviate those problems as they are more easily obtained and the premiums are much lower.
Your specific questions are as follows:
"1. Can alternative forms of suretyship be substituted for performance bonds without violating KRS 100.281(4)?
2. If allowable, do the subdivision regulations have to specifically state the types of alternative suretyship to be established or may it refer to 'performance bonds' as an all inclusive term within which alternatives such as credit letters, escrow accounts, etc. are contemplated?"
In Rathkopf, "The Law of Zoning and Planning," Vol. 4, 71-79, it is stated that most enabling acts contain authority for the planning board to either require actual improvement of the property before final approval of the plat or require that a bond covering the costs of such improvements be furnished by the subdivider. Many enabling acts provide that in lieu of actual installation of the required improvements, the subdivider may furnish the city with a performance bond executed by a satisfactory corporate surety and sufficient in amount to cover the full estimated costs of installation.
The purpose of a performance bond is to assure that the required improvements will be made. The terms and conditions of performance bonds must remain within the bounds established by the legislature. See E.C. Yokley, "Zoning Law and Practice," (4th Ed.), Vol. 3, § 17-11. In 82 Am. Jur.2d Zoning and Planning § 166, it is stated, in connection with the imposition of conditions concerning the approval of subdivision plats, that if the conditions imposed by the city or reviewing authority are within its delegated powers and are reasonable, they will be enforced or upheld. However, a local legislative body or reviewing authority has no power to impose conditions which are not within the purview of its delegated authority or the enabling legislation. Requirements as to the payment of various fees or deposits, where not specifically authorized, are invalid and unenforceable.
In Yokley's Law of Subdivisions (2nd, Ed.) § 59 (p. 315), the following appears:
"Since statutory provisions relating to the giving of performance bonds to cities by subdividers evince a legislative intent that matters relating to the bond (its enforcement and the release of the municipality's interest in it) are to be in the centralized hands of the city or town, the courts have placed limitations on the right of individuals to sue on such bonds. . . ."
See also Anderson, "American Law of Zoning 2d," Vol. 4, § 23.46 and Montgomery County v. Phoenix Insurance Company, 232 Md. 58, 192 A.2d 111 (1963).
Finally, we direct your attention to the case of J.D. Land Corp. v. Allen, 144 N.J. Super 503, 277 A.2d 404, 408 (1971), where the court dealt with performance bonds. The subdivider had posted bond and deposited cash in escrow with the city. The court said there was no statutory authorization allowing a city to require the posting of an additional cash deposit. The legislative scheme provided for only one performance guarantee (a performance bond) .
In connection with a letter of credit it is stated in 9 C.J.S. Banks and Banking, § 176 that "A letter of credit commonly is issued at the request of a third person who in some way indemnifies the bank against its obligations incurred or to be incurred under the letter of credit, and who gives directions to the bank as to its terms." It must contain a request, general or special, to pay the bearer or person named money, or sell him some commodity on credit, or give him something of value and look to the writer of the letter for repayment. The court in Republic National Bank of Dallas v. Northwest National Bank of Fort Worth, Texas, 566 S.W.2d 359 (1978) said in part:
". . . Though every letter of credit is, in a sense, a form of guaranty, the letter of credit differs from a classical surety undertaking in that it is a primary obligation between the issuer and the beneficiary and the issuer of the credit is not concerned with the arrangements between the beneficiary and the issuer's account party. . . ."
It was stated in Lustrelon, Inc. v. Prutscher, 178 N.J. Super 128, 428 A.2d 518 (1981), that a letter of credit may also serve as a guarantee of the performance of obligations and such an instrument is known as a "standby letter of credit. " See also Wichita Eagle & Beacon Pub. Co. v. Pacific National Bank of San Francisco, U.S. Dist. Ct., N.D. Calif., 343 F.Supp. 332 (1971).
The word "escrow" is a generic term and is said to be primarily a conveyancing device to carry out the terms of a binding contract of sale previously entered into by the parties. In 30A C.J.S. Escrows, §§ 1 and 3 the following statements appear:
". . . As frequently defined, an escrow is a written instrument, which by its terms imports a legal obligation, deposited by the grantor, promisor, or obligor, or his agent, with a stranger or third person, who is not a party to the instrument, to be kept by the depositary until the performance of a condition or the happening of a certain event and then to be delivered over to take effect. . . ."
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"Money deposited to be held until the performance of a condition has been treated as deposited in escrow, and it has been declared to be no longer open to question that money may now be delivered in escrow. . . ."
While we can find no reported Kentucky case in point, at least one state court has dealt with a substitution for a performance bond. The court, in In the Matter of Cataract Disposal, Inc. v. Town Board of the Town of Newfane, Ct. App., 440 N.Y.S.2d 913 (1981), said that a performance bond is merely an undertaking "given to insure the public authority that the contract once awarded [will] be completed as awarded." Furthermore, the court stated:
"We know of no rule of law which confines this concept of insurance against breach to an undertaking posted by a third-party surety or which would exclude from the concept a cash deposit submitted by the bidder against which the contracting public authority has a right of direct recourse. Indeed, a deposit of cash together with an indemnity agreement, when placed in the hands of the contracting municipality, may be viewed as the functional equivalent of a third-party surety, since both simply provide a reliable source of recovery in the event of the contractor's default or insolvency."
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". . . [W]e merely hold that when the bidding specifications call for a 'performance bond, ' it lies within the province of the contracting municipality to consider the requirement to have been met when the bidder offers to post a cash deposit and an indemnity agreement permitting the municipality to appropriate the collateral directly in the event of a breach."
Notwithstanding the holding in the New York case, supra, the fact remains that KRS 100.281 requires subdivision regulations to contain a provision relative to subdivision performance bonds. For whatever the reasons, the General Assembly thought it necessary that performance bonds be required rather than other methods or procedures for purposes of insuring that the required physical improvements be completed in the subdivision.
A court has a duty to accord to words of a statute their literal meaning unless to do so would lead to an absurd or wholly unreasonable conclusion. In addition, a legislature making no exceptions to the positive terms of a statute is presumed to have intended to make none. See Bailey v. Reeves, Ky., 662 S.W.2d 832 (1984).
The requirement of securing a performance bond is generally thought of as involving a specific procedural process. The words "performance bond" are not usually considered as an all inclusive term for various forms of surety undertakings. If greater flexibility is needed in connection with the arrangements undertaken to assure that the required improvements will be made, then such changes should be provided by the General Assembly rather than by this Office. Thus, in the absence of a statutory amendment or a judicial decision to the contrary, subdivision regulations enacted pursuant to KRS 100.281 must contain, among other things, a provision relating to subdivision performance bonds to insure proper completion of required physical improvements, rather than provisions relating to letters of credit and escrow accounts.