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November 9, 1995


William C. Conner, Senior United States District Judge

The opinion of the court was delivered by: CONNER

CONNER, Senior D.J.:

 Plaintiff General Insurance Company of America ("General") has brought this action against defendants K. Capolino Construction Corporation, K. Capolino Design and Renovation, Ltd., Kenneth L. Capolino and Patricia M. Capolino (collectively, "Capolino") seeking indemnification for costs incurred in completing construction contracts for which General had issued performance bonds on Capolino's behalf. The parties have made cross-motions for summary judgment. For the reasons set forth below, both motions are denied.


 On September 22, 1988, defendants executed an agreement under which Capolino agreed to indemnify General for all losses and expenses, including attorney's fees, incurred by General under any bonds that it might issue on Capolino's behalf. Subsequently, on February 19, 1992, Capolino entered into a contract with the White Plains Housing Authority ("WPHA" or "Owner") to perform construction improvements at the Winbrook Apartments in White Plains. The scheduled contract completion date was March 1, 1993. On the same day the construction contract was signed, General, as surety, and Capolino, as principal, executed and delivered to the WPHA, as obligee, performance and payment bonds for that contract. On May 11, 1992, Capolino contracted with the WPHA to perform construction improvements at the Schuyler-DeKalb Apartments in White Plains. The agreed completion date for that project was May 11, 1993. General subsequently issued performance and payment bonds on that contract as well. Except for the contract prices and completion dates, the pertinent terms of the two construction contracts and two sets of bonds are identical.

 Almost from the outset, the relationship between Capolino and the WPHA was less than harmonious. On November 23, 1992, the WPHA informed Capolino by letter that it was considering declaring Capolino to be in default on both of the contracts. Two days later, Capolino sent a written response contending that it was not in default on either contract and that it had previously declared the WPHA in default on both. On December 15, 1992, the WPHA sent letters to Capolino declaring Capolino in default and terminating each of the contracts on seven days' notice. The WPHA also wrote to General, informing it of the declarations of default and requesting a meeting to discuss General's obligations under the performance bonds. In January and February 1993, Capolino, the WPHA and General attempted to settle the disputes. When settlement proved impossible, the WPHA renewed its demand on General to complete the two contracts. General, based on its own investigation into the situation, concluded that Capolino was in default and elected to perform.

 In March 1993, General and the WPHA entered into an agreement for the completion of the projects. The agreement specifically recognized that both Capolino and the WPHA had declared one another in default and that each disputed the propriety of the other's declaration. The agreement also expressly stated that General, Capolino and the WPHA reserved their respective rights and claims. The agreement further provided that General would receive the balance of the contract prices. The parties do not dispute that the balance remaining on the Winbrook contract was $ 33,857.65, while the balance on the Schuyler-DeKalb contract was $ 66,127.15. According to the complaint, the WPHA has paid General a total of $ 94,232.10. General's contractor, Ackerman Construction Consultants, Inc., completed the projects in the summer of 1993.

 This action is only one component of the litigation among the WPHA, Capolino and General. In February 1994, Capolino filed an action in New York State court asserting claims against General for, inter alia, breach of contract and tortious interference and against the WPHA for, inter alia, breach of contract, fraud and RICO violations. That action was removed to this court and subsequently dismissed. In addition, an action is currently pending in New York State court between the WPHA and Capolino that encompasses their respective claims of breach of contract.

 On November 8, 1994, General filed this diversity action seeking to recover, under the terms of the indemnity agreement and under common law principles, approximately $ 132,000 in expenses that it has incurred in completing the projects and in bringing this action. Capolino has filed counterclaims against General seeking a declaratory judgment that Capolino is not liable for the costs of completion. Capolino also seeks damages in the amount of the contract balances paid to General and indemnity for any judgment that the WPHA may be awarded against Capolino. Finally, Capolino has alleged damages of $ 250,000 from General's purported tortious interference in Capolino's contractual relationship with the WPHA. Both General and Capolino have filed motions for summary judgment. General seeks summary judgment on the issue of Capolino's liability, while Capolino requests summary judgment dismissing the complaint.


 We may grant summary judgment when "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). In evaluating a party's request for summary judgment, "the evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).

 Because General and Capolino entered into an express contract of indemnification, in the absence of bad faith, the "indemnity agreement governs the relationship between . . . contractor and . . . surety." Bib Construction Co. v. Fireman's Insurance Co., 214 A.D.2d 521, 625 N.Y.S.2d 550, 553 (App. Div. 1995); see International Fidelity Ins. Co. v. Spadafina, 192 A.D.2d 637, 596 N.Y.S.2d 453, 454 (App. Div. 1993); Maryland Casualty Co. v. Grace, 292 N.Y. 194, 200, 54 N.E.2d 362, 364 (1944). The indemnity agreement at issue in this case clearly and unambiguously sets forth the rights and obligations of the parties. It provides that, on demand, Capolino will pay to General all losses and expenses, including attorney's fees, incurred by General "by reason of having executed any Bond" on Capolino's behalf. See General Agreement of Indemnity for Contractors, attached as Exhibit 2 to Affidavit of Wendy Ling, dated May 5, 1995. In the event of default by Capolino, the agreement states that General has the right, at its sole discretion, to take possession of the work for which a bond was executed and to arrange for the project's completion. The agreement further provides that Capolino is deemed to be in default if the obligee of a bond declares it to be in default. Moreover, the agreement states that General, as surety, has the exclusive right to determine in good faith whether any claims made on a bond shall be paid, compromised or defended. See id.

 Under New York law, it is well-settled that a party that pays a claim it is not obligated to pay is a volunteer and may not recover those expenses. See National Union Fire Ins. Co. v. Ranger Ins. Co., 190 A.D.2d 395, 599 N.Y.S.2d 347, 348 (App. Div. 1993) (citing Koehler v. Hughes, 148 N.Y. 507, 511, 42 N.E. 1051, 1052-53 (1896)); Fidelity & Casualty Co. v. Finch, 3 A.D.2d 141, 159 N.Y.S.2d 391, 394 (App. Div. 1957). Thus, General may not recover from Capolino unless, under the terms of the performance bonds that General issued on Capolino's ...

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