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April 25, 2003


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


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:


"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:


"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:


"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.
"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, ...

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