GALVESTON � In a recently filed lawsuit, First National Insurance Company of America alleges Bay Electric Services Inc. "wrongfully diverted contract proceeds for its own benefit."

A lawsuit filed April 4 in Galveston County District Court argues that Bay failed to pay Consolidated Electrical Distributors Inc. in the amount of at least $79,926 in accordance to an agreement the parties entered for a renovation and expansion project with the city of Galveston.

Under the agreement, Holliday Builders Inc., a policyholder with First National, subcontracted with the defendant to perform certain electrical work on the project at the Island Transit Maintenance Facility in exchange for Bay Electric purchasing certain electrical components from CED.

First National issued certain surety bonds in connection with the project, including a payment bond in the amount of $1.8 million.

"The payment bond named Holliday as principal and the city of Galveston as oblige, and was for the benefit of all claimants who supplied labor and material to Holliday or its subcontractors, including Bay, in the prosecution of the project and who duly perfected a claim under the Texas Government Code," the original petition says.

The suit explains that CED provided materials for use on and incorporation into the project, but Bay failed and refused to pay the former despite repeated demands. It shows funds Holliday paid to Bay under the contract were trust funds that were required to be held for the benefit of Bay's subcontractors and suppliers, including CED.

"Bay has been paid all but $37,412.23 of the balance of the contract between it and Holliday," the suit says.

"Thus, upon information and belief, Bay received proceeds under the contract for materials supplied by CED that it has not to CED in the amount of at least $42,514.65, the difference between the CED claim and the remaining contract proceeds due to Bay from Holliday."

First National asserts it paid the defendant $63,758.50 in construction trust funds, of which the latter paid only $28,000 to CED, "despite all of Bay's debt to CED."

It paid the CED claim in full, the suit says.

Strasburger & Price LLP is representing the plaintiff, and Galveston County 405th District Court Judge Wayne Mallia is presiding over the case.

Case No. 11-cv-0564

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