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NORTH AMERICAN SPECIALTY INSURANCE v. MONTCO CONSTRUCTION

United States District Court, Western District of New York


April 25, 2003

NORTH AMERICAN SPECIALTY INSURANCE COMPANY, PLAINTIFF, VS. MONTCO CONSTRUCTION CO., INC., CORLINE J. CAMPBELL AND MONTY CAMPBELL, DEFENDANTS.

The opinion of the court was delivered by: John T. Elfvin, Senior District Judge.

MEMORANDUM and ORDER*fn1

Plaintiff North American Specialty Insurance Company ("NAS") commenced this action April 3, 2001 alleging, inter alia, that defendants Montco Construction Company ("Montco"), Corline Campbell and Monty Campbell*fn2 had breached an indemnity contract. Presently before the Court is plaintiff's motion for partial summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure ("FRCvP"). For the reasons stated hereinbelow, plaintiff's motion will be granted.

The following facts are undisputed unless otherwise noted. On September 26, 1997 NAS and Montco executed an Agreement of Indemnity ("Indemnity Agreement" or "Agreement") by which Montco agreed, inter alia, to "exonerate, indemnify or keep indemnified" NAS for costs and expenses incurred by NAS as a result of the issuance of any surety bonds on Montco's behalf. The pertinent provision of the Indemnity Agreement reads:

"INDEMNITY

"SECOND: The Indemnitors shall exonerate, indemnify, and keep indemnified the Surety from and against any and all liability for losses and/or expenses of whatsoever kind or nature (including, but not limited to, interest, court costs and counsel fees) and from and against any and all such losses and/or expenses which the Surety may sustain and incur: (1) By reason of having executed or procured the execution of the Bonds, (2) By reason of the failure of the Indemnitors to perform or comply with the covenants and conditions of this Agreement or (3) In enforcing any of the covenants and conditions of this Agreement. Payment by reason of the aforesaid causes shall be made to the Surety by the Indemnitors as soon as liability exists or is asserted against the Surety, whether or not the Surety shall have made any payment therefor. Such payment shall be equal to the amount of the reserve set by the Surety. In the event of any payment by the Surety, the Indemnitors further agree that in any accounting between the Surety and the Indemnitors, the Surety shall be entitled to charge for any and all disbursements made by it in good faith in and about the matters herein contemplated by this Agreement under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed; and that the vouchers or other evidence of any such payments made by the Surety shall be prima facie evidence of the fact and amount of the liability to the Surety." Agreement, Second para., Am. Compl., Ex. A.
In addition, the Indemnity Agreement provided a method for settlement of claims made upon any bonds issued by NAS. The parties' rights and obligations with respect to such settlements is found in the fifteenth paragraph of the Indemnity Agreement, which provides:

"SETTLEMENTS

"FIFTEENTH: The Surety shall have the right to adjust, settle or compromise any claim, demand, suit or judgment upon the Bonds, unless the Indemnitors shall request the Surety to litigate such claim or demand, or to defend such suit, or to appeal from such judgment, and shall deposit with the Surety, at the time of such request, cash or collateral satisfactory to the Surety in kind and amount, to be used in paying any judgment or judgments rendered or that may be rendered, with interest, costs, expenses and attorneys' fees, including those of the Surety." Id., Fifteenth para.
Pursuant to the third and twenty-second paragraphs of the Agreement, Montco agreed to, inter alia, assign its rights to payments arising from any construction contracts to NAS in the event that it breached any of the provisions of the Indemnity Agreement. The pertinent paragraphs read as follows:

"ASSIGNMENT

"THIRD: If such bond be given in connection with a contract, the Contractor, the Indemnitors hereby consenting, will assign, transfer and set over, and does hereby assign, transfer and set over to the Surety, as collateral, to secure the obligations in any and all of the paragraphs of this Agreement and any other indebtedness and liabilities of the Contractor to the Surety, whether heretofore or hereafter incurred, the assignment in the case of each contract to become effective as of the date of the bond covering such contract, but only in the event of (1) any abandonment, forfeiture or breach of any contracts referred to in the Bonds or of any breach of any said Bonds; or (2) of any breach of the provisions of any of the paragraphs of this Agreement; or (3) of a default in discharging such other indebtedness or liabilities when due ***." Id., Third para.
"ATTORNEY IN FACT

"TWENTY-SECOND: The Indemnitors hereby irrevocably nominate, constitute, appoint and designate the Surety as their attorney-in-fact with the right, but not the obligation, to exercise all of the rights of the Indemnitors assigned, transferred and set over to the Surety in this Agreement, and in the name of the Indemnitors to make, execute, and deliver any and all additional or other assignments, documents or papers deemed necessary and proper by the Surety in order to give full effect not only to the intent and meaning of the within assignments, but also to the full protection intended to be herein given to the Surety under all other provisions of this Agreement. The Indemnitors hereby ratify and confirm all acts and actions taken and done by the Surety as such attorney-in-fact." Id., Twenty-Second para.
Montco subsequently entered into a contract with the City of Buffalo whereby Montco agreed to provide labor and materials for the construction and completion of the Fillmore-Ferry Police Precinct Project ("Project"). In order to comply with its obligations under such contract, Montco was required to obtain certain construction bonds. Accordingly, on November 16, 1998, NAS issued Bond No. 158422 ("Bond"), in the penal sum of $2,600,000, naming Buffalo as the obligee and Montco as the principal. Am. Compl., Ex. B.

Prior to completion of the Project, certain subcontractors asserted claims on the Bond. NAS subsequently informed Montco of such and requested that it be advised of any defenses which could be asserted against the claims. Montco's inquiry precipitated a volley of correspondences between the parties regarding NAS's obligations to pay the subcontractors' bond claims. Several of such have been submitted to the Court as evidence.

The first submitted correspondence is a March 16, 2001 letter from Kevin M. Cox, Esq., counsel for Montco, to Daniel E. Sarzynski, Esq., counsel for NAS, by which Montco informed NAS that it had commenced a civil action against the City of Buffalo and which letter contained the following passage:

"I am puzzled as to why you would claim that `NAS is not aware whether Montco has any defenses to this (Community Steel's) claim.' As you know, I advised you during our recent telephone conversation referenced in your letter that the City of Buffalo materially altered the Contract with Montco. *** As you are aware, a material alteration made without the consent of the surety on the contractor's bond will discharge a surety obligations [sic] under the bond. *** As I explained to you, the City of Buffalo materially altered its Contract with Montco, the result of which was its eventual Verified Claims and pending lawsuit.
"Based on the foregoing, I strongly urge your client to act in good faith and recognize Montco's legitimate defenses in this matter, and to stop feigning ignorance in that regard. ***." Cox Aff., Ex. A.
Cox sent a second letter, dated March 23, 2001, to Sarzynski which again informed him that one of Montco's defenses to the Bond claims was that Buffalo had materially altered the construction contract with Montco and that such material alteration had discharged NAS's obligations under the Bond. The letter also admonished NAS for possibly acting in bad faith by not asserting defenses on behalf of Montco. See id., Ex. B. Cox sent a third letter to Sarzynski, on March 26, 2001, wherein he reiterated Montco's position that Buffalo had breached the construction contract and, further advised him that, "if [NAS] chooses to pay said claims, it is doing so in bad faith and in complete disregard of Montco's defenses of material alteration and breach of contract by the City of Buffalo." Id., Ex. C. The fourth correspondence is a May 1, 2001 letter sent by Montco in response to several of NAS's specific inquiries regarding certain subcontractors who had made claims on the Bond. According to the May 1, 2001 letter, Montco had asserted "no defenses" to five of the seven relevant claims. See Affidavit of Gregory G. O'Mahony, Esq., Ex. A. Nevertheless, Montco maintained its position that plaintiff was not obligated to pay such claims. Montco's asserted objection is found in the final paragraph of the May 1, 2001 letter, which reads:

"Notwithstanding the foregoing, Montco continues to assert that your client's obligations under the bond have been discharged due to the material alteration of the Contract by the City of Buffalo. As such, Montco objects to your client paying any of the above claims at the present time, and asserts that if it does so it is acting in bad faith in breach of its surety agreement with Montco." Ibid.
NAS responded with a May 4, 2001 letter whereby it requested that Montco immediately make payment to NAS pursuant to its obligations under the Indemnity Agreement.*fn3 See O'Mahony Aff., Ex. B. NAS subsequently sent Montco two more letters — dated May 10, 2001 and May 15, 2001 — both of which reiterated NAS's position that Montco was obligated to make payments to it and that failure to do so would be deemed a breach of the Agreement. See id.

Despite its demands, NAS never received any such payments from Montco. NAS eventually paid "in excess of $416,189.42 on behalf of Montco and in discharge of its surety obligations." Affidavit of Todd R. Braggins, Esq. ¶ 11. In addition, the City of Buffalo has refused to acknowledge NAS's status as assignee of the construction contract. Id. at ¶ 14.

FRCvP 56(c) provides that summary judgment shall be entered where the movant demonstrates that there is "no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." A genuine issue of fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In deciding whether summary judgment is appropriate this Court must draw all factual inferences in favor of the non-moving party.*fn4 Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970).

In support of its motion for summary judgment, NAS contends that Montco breached the unambiguous terms of the Agreement by failing to "post collateral security, make payment or otherwise exonerate or indemnify NAS pursuant to Paragraph Second of the Agreement." Affidavit of Todd R. Braggins, Esq. ¶ 17. NAS asserts that such breach triggered the Assignment and Attorney-In-Fact clauses whereby it has all rights to payments that are due to Montco, including those funds that are due or claimed to be due from the City of Buffalo. Id. at ¶¶ 18-19. Thus, because it is the assignee of the contract between Montco and the City of Buffalo, NAS asserts that it has the right to prosecute Montco's pending action against the City of Buffalo. Id. at ¶ 20. Thus, plaintiff seeks summary judgment with respect to Count V of its Amended Complaint and requests a declaratory judgment that "(1) [d]efendants are in material breach of the Agreement, (2) Montco has assigned, transferred, and set over to NAS any and all contracts entered into in connection with the Bond, including its contract with the City of Buffalo ***, (3) pursuant to its rights as attorney-in-fact, NAS has the right to exercise all of the defendant's rights that have been assigned, transferred, and set over to NAS, and (4) NAS's rights as attorney-in-fact include, but are not limited to, the right to prosecute Montco's action in the Supreme Court, Erie County, against Joseph N. Giambra and the City of Buffalo, bearing Index Number 2000/3982, which action arises out of the assigned Contract." Pl.'s Mem. Law, p. 2.

Montco does not dispute that it entered into the Indemnity Agreement or that it has not made any payments to NAS with respect to the Bond. However, Montco opposes plaintiff's summary judgment motion contending that there are issues of fact whether NAS acted in bad faith by not asserting proper defenses to the claims made on the bond. Montco argues that, if NAS acted in bad faith, then Montco has no obligation to indemnify plaintiff. In addition, Montco asserts — as it previously asserted to NAS — that NAS's obligations under the Agreement of Indemnity were discharged because the underlying contract between Montco and the City of Buffalo was breached. Thus, Montco contends that NAS made payments as a "volunteer" and, consequently, under New York law, it has no obligation to reimburse NAS for such payments.

The Indemnity Agreement is not only valid and enforceable under New York law*fn5 — see Int'l Fidelity Ins. Co. v. Spadafina, 596 N.Y.S.2d 453, 454 (2d Dept. 1993) (citing cases); see also Fidelity and Deposit Co. of Md. v. Refine Constr. Co., Inc., 1984 WL 536, at *3 (S.D.N.Y. 1984) (holding that a "surety's right to indemnification for its losses and expenses under a bond has been consistently upheld in New York") — but also governs the relationship between the parties to the extent that Montco, a general contractor, has expressly agreed to indemnify NAS, the surety, for losses arising from claims made on the Bond. Gen. Accident Ins. Co. of America v. Merritt-Meridian Constr. Corp., 975 F. Supp. 511, 516 (S.D.N.Y. 1997) (citing BIB Constr. Co. v. Fireman's Ins. Co., 625 N.Y.S.2d 550, 553 (1st Dept. 1995). The terms of the Indemnity Agreement are unambiguous.*fn6 Therefore, the Court must give effect to the express rights and obligations of the parties contained therein and such interpretation is an issue of law that may be determined on a motion for summary judgment.*fn7 Tantleff v. Truscelli, 493 N.Y.S.2d 979, 982 (2d Dept. 1985); Jakobson Shipyard, Inc. v. Aetna Cas. and Sur. Co., 775 F. Supp. 606, 609 (S.D.N.Y. 1991), aff'd, 96 F.2d 387 (2d Cir. 1992).

Under the express terms of the Agreement, NAS had the right to make payments and settle all claims upon the Bond unless Montco requested that NAS litigate or otherwise defend against such claims and that, in conjunction with such request, Montco deposit sufficient "cash or collateral" with NAS to secure the amount of any possible judgments and litigation expenses. See Agreement, Fifteenth para. It is undisputed that Montco did not deposit any such cash or collateral with NAS despite its expressed objections to the Bond claims. Montco also does not dispute the total amount of costs that NAS claims to have incurred with respect to payments made on the Bond. Therefore, there is no doubt that Montco breached the express terms of the second paragraph of the Agreement of Indemnity by (1) failing to make payments "as soon as liability exist[ed] or [was] asserted against [NAS]" and (2) failing to "exonerate, inndemnify and keep indemnified" NAS for losses it incurred with respect to issuance of the Bond. See Agreement, Second para. However, such a finding does not foreclose further consideration of the matter inasmuch as the Court must nonetheless determine whether there are any issues of material fact whether NAS paid the bond claims in bad faith. See Spadafina, at 454 (citing New York cases for the proposition that bond payments made by a surety pursuant to an indemnity agreement are to be scrutinized by courts only for bad faith and reasonableness as to the amount paid); Lumbermens Mut. Cas. Ins. Co. v. Darel Group U.S.A., Inc., ___ F. Supp.2d ___, 2003 WL 1628830, at *4 (S.D.N.Y. 2003) (holding that a principal is not liable to a surety for payments made by the surety in bad faith).

Montco contends that there are triable issues of fact whether NAS acted in bad faith because NAS paid the subcontractors' bond claims despite Montco's repeated objections and asserted defenses. In support of its argument, Montco has offered the series of correspondences that were exchanged between the parties as evidence of NAS's bad faith. In particular, Montco points to NAS's failure to assert Montco's main defense to the bond claims — viz., that NAS had been relieved from liability under the Bond because the underlying construction contract between Montco and the City of Buffalo had been materially altered — as evidence that NAS "voluntarily and in bad faith paid out bond claims." Defs.' Mem. Law, p. 4.

Montco's allegations are insufficient to defeat plaintiff's summary judgment motion. A surety's decision to proceed with claims despite possible defenses is not credible evidence of bad faith because, if anything, it was in NAS's best interests to assert such defenses considering the fact that its own funds were at risk due to Montco's failure to post collateral.*fn8 See Merritt-Meridian, at 518 (finding no merit to defendant-contractor's argument that the surety's failure to assert possible defenses was evidence of bad faith). Nevertheless, there is no indication that NAS acted in bad faith. NAS sent several inquires to Montco about the claims that were being made on the Bond and informed Montco that, unless it posted collateral pursuant to the terms of the Agreement, it would proceed to settle such claims. NAS thusly provided Montco with an opportunity to object to the claims and to post collateral if it wished NAS to litigate the claims. Montco chose not to do so and NAS therefore had a right to settle such claims pursuant to the express terms of the second paragraph of the Indemnity Agreement. See Agreement, Second para. Montco's assertions of bad faith are purely conclusory and therefore insufficient to raise an issue of material fact whether NAS paid the subcontractors' bond claims in bad faith. See Merritt-Meridian, at 518 ("Conclusory allegations of bad faith are insufficient to defeat a motion for summary judgment in favor of a surety seeking to enforce an indemnification agreement.") (citing Spadafina, at 455).

In addition, the Court rejects Montco's argument that NAS acted in bad faith by not asserting that its obligations under the Bond were discharged when the underlying contract between Montco and the City of Buffalo had been materially altered. Whether or not there was a breach of the underlying construction contract is irrelevant as to the issue of NAS's good faith with regard to payments it made to the subcontractors. See Merritt-Meridian, at 516 ("it is irrelevant whether [the principal] was actually liable for the payments claimed by the subcontractors *** so long as [the surety] acted in good faith in making the payments"). NAS's obligations as a surety required it to make payments to the subcontractors regardless of its own belief in the appropriateness of the underlying action. See BIB Constr., at 553 (discussing the fact that another pending lawsuit with respect to a possible breach of the underlying contract between the principal and owner was irrelevant to whether the surety complied with its obligations to the owner).

Montco's final argument in opposition to plaintiff's summary judgment motion — viz., that NAS cannot recover those payments that it made as a "volunteer"*fn9 — is unavailing because it is based on the premise that NAS had been informed that its obligations under the Bond had been released by operation of the City of Buffalo's material alteration of the underlying construction contract. See Def.'s Mem. Law, p. 5. However, as the Court has already explained, the alleged breach by the City of Buffalo — and NAS's knowledge of such alleged breach — is not dispositive as to whether NAS complied in good faith with its obligations as a surety. Furthermore, the Court notes that the cases cited by defendant in support of its "volunteer" argument are inapposite because in no such case did the court have the opportunity to interpret an indemnity agreement with a settlements clause such as the one here at issue. See Defs.' Mem. Law, p. 5-6. In sum, the Court finds that Montco breached the Indemnity and Settlements clauses of the Indemnity Agreement by failing to post collateral or otherwise exonerate and indemnify NAS for its losses incurred as a result of issuing Bond No. 158422.

Such a breach activated the Assignment and Attorney-In-Fact clauses of the Indemnity Agreement. Montco therefore assigned to NAS all of its rights arising from the construction contract with the City of Buffalo. Such rights include NAS's right to settle Montco's pending action against the City of Buffalo. See Hutton Constr. Co., Inc. v. County of Rockland, 52 F.3d 1191, 1192 (2d Cir. 1995) (affirming district court's ruling that an assignments clause similar to the one at issue in this case operated to give the surety the right to settle the principal's affirmative claims against the owner); see also Merritt-Meridian, at 519 (holding that the assignment and attorney-in-fact clause — virtually identical to the same such clauses in the Indemnity Agreement at issue in this case — gave the surety the right to not only settle claims against the principal but also to settle affirmative claims against an owner) (citing Hutton Constr. Co., at 1192).*fn10

Accordingly, it is hereby ORDERED that plaintiff's motion for partial summary judgment with respect to Count V of its Amended Complaint is granted, that defendants are in material breach of the Agreement of Indemnity, that defendants have assigned, transferred and set over to plaintiff any and all contracts entered into in connection with Bond No. 158422, that, pursuant to its rights as the attorney-in-fact, plaintiff has the right to prosecute, or otherwise settle, Montco's action in New York Supreme Court, County of Erie against the City of Buffalo, Index No. 2000/3982.

*fn2 Monty Campbell and Corline Campbell are Montco's principal corporate officers. The three named defendants hereinafter will collectively be referred to as "Montco" or "defendant."

*fn3 The May 4, 2001 letter pertinently reads:

"With respect to [the subcontractors], you state that Montco Construction Company, Inc. (`Montco') has no defenses to the amounts these claimants claim they are owed.
Therefore, since there do not appear to be any legitimate defenses to these claims, Montco, Corline Campbell and Monty Campbell, as required by the Agreement of Indemnity, must exonerate, indemnify and keep indemnified North American Specialty Dept. Supt. of Insurance Company ("NAS") from the foregoing liability by making payment to NAS in the amount of $98,983,54 [sic] (the total amount of these claims) on or before May 9, 2001. As you are aware, according to the terms of the Agreement of Indemnity, payment `shall be made to the Surety by the Indemnitors as soon as liability exists or is asserted against the Surety.' Montco's failure to make payment will be deemed a breach of the Agreement of Indemnity and NAS will be forced to pay these claims." O'Mahony Aff., Ex. B.
*fn4 Nevertheless, the non-moving party must rebut the motion for summary judgment with more than conclusory allegations and general denials. FRCvP 56(e); see also Kerzer v. Kingly Mfg., 156 F.3d 396, 400 (2d Cir. 1998) ("Conclusory allegations, conjecture and speculation *** are insufficient to create a genuine issue of fact"). Furthermore, summary judgment is mandated "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322-323 (1986).

*fn5 The parties have failed to address which jurisdictional law governs in this diversity action. However, the Court will apply New York law inasmuch as the parties' briefs have assumed as much. See Krumme v. Westpoint Stevens Inc., 238 F.3d 133, 138 (2d Cir. 2000) ("The parties' briefs assume that New York law controls, and such implied consent is sufficient to establish choice of law.") (quotations and punctuation marks omitted).

*fn6 See Krumme, [see footnote 5] at 139 (holding that "[t]he language of a contract is ambiguous if it is capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement. Conversely, a contract is unambiguous when it has a definite and precise meaning, unattended by a danger of misconception in the purport of the [contract] itself, and concerning which there is no reasonable basis for a difference of opinion.") (quotations and citations omitted). The terms of the Indemnity Agreement are definite, precise and not capable of more than one meaning. Indeed, no party has argued otherwise.

*fn7 See Morlee Sales Corp. v. Manufacturers Trust Co., 9 N.Y.2d 16, 19 (1961) holding that it is "aniomatic that a contract is to interpreted so as to give effect to the intention of the parties as expressed in the unequivocal language employed").

*fn8 See e.g., Banque Nationale de Paris S.A. v. Ins. Co. of North America, 896 F. Supp. 163, 165 (S.D.N.Y. 1995) (rejecting debtor's contention that the surety's failure to assert possible defenses to certain claims evinced bad faith). Significantly, the Banque Nationale Court held that "obviously was in [the surety's] interest to press the alleged defenses for all they were worth, as the third party defendants' failure to post collateral meant that [the surety's] own funds were at risk ***." Ibid.

*fn9 New York's common-law "volunteer doctrine" hold that an insurer who pays a claim that it is not obligated to pay is a "volunteer" as to that claim, and may not seek reimbursement for that claim from another party. See Merritt-Meridian, at 517 n. 4 (discussing New York's "volunteer doctrine"). In any event, Montco's argument based on the volunteer doctrine fails because of the fact that the parties had executed the Indemnity Agreement. See id. ("The [volunteer] doctrine may apply to cases in which a surety seeks indemnification in the absence of an express indemnity agreement, or where the indemnity agreement does not include a settlements clause ***.") (emphasis added).

*fn10 The court declines to address defendants' September 12, 2002 Supplemental Affirmation in Opposition to Plaintiff's Motion for Partial Summary Judgment inasmuch as it is meritless and requires no discussion.


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