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HRH CONSTRUCTION, LLC. v. FIDELITY AND GUARANTY INS. CO.

United States District Court, S.D. New York


July 8, 2005.

HRH CONSTRUCTION, LLC, Plaintiff,
v.
FIDELITY AND GUARANTY INSURANCE COMPANY, Defendant. FIDELITY AND GUARANTY INSURANCE COMPANY, Third-Party Plaintiff, v. TRES, INC., et al., Third-Party Defendants. TRES, INC., Counter-claimant, v. FEDERAL INSURANCE COMPANY, Additional Defendant on Counterclaim.

The opinion of the court was delivered by: P. KEVIN CASTEL, District Judge

MEMORANDUM AND ORDER

Plaintiff HRH Construction, Inc. ("HRH") was the general contractor on a construction project at 1400 Fifth Avenue, New York, New York (the "Project") and third-party defendant Tres, Inc. ("Tres") was the subcontractor for carpentry and drywall work on the Project. This action was commenced as a suit by HRH against Federal Guaranty Insurance Company ("FGIC"), the surety to Tres, who HRH had alleged was in default in the performance of its work on the Project. FGIC's obligations to HRH as surety for Tres were set forth in a performance bond and a payment bond, each in the face amount of $3,391,000. In a General Agreement of Indemnity, dated September 18, 2002 (the "Indemnity Agreement"), Tres and third-party defendants, Anthony Iarrobino, Anthonina I. Iarrobino, Nancy J. McKane and Warren L. McKane (the "Individual Indemnitors") agreed to hold FGIC harmless for sums paid under the bonds.

During the pendency of this action, FGIC settled with HRH, paying it a sum of money in full satisfaction of its obligations under the performance bond. As part of the settlement, FGIC, in its capacity as Tres's surety, gave HRH a release of any claims by Tres and the Individual Indemnitors.

  In its third-party action, FGIC seeks to recover against Tres and the Individual Indemnitors amounts paid in satisfying its obligations under the payment and performance bond, pursuant to the Indemnity Agreement and common law principles of indemnity and suretyship. Tres and the Individual Indemnitors have asserted claims against HRH and its surety, Federal Insurance Company ("FIC"), for, inter alia, breach of contract and wrongful termination, and seeks to file an amended answer and a counterclaim against FGIC to assert a claim of a bad faith settlement of the claims by FGIC.

  Plaintiff HRH has moved under Rule 56(b), Fed.R.Civ.P., for summary judgment dismissing the claims of Tres and the Individual Indemnitors. HRH asserts that any claims asserted by Tres and the Individual Indemnitors against HRH and FIC have been released by operation of the May 23, 2005 settlement agreement between HRH and FGIC. FGIC also moves to dismiss the claims of Tres and the Individual Indemnitors against HRH and FIC, asserting that because, under the terms of the Indemnity Agreement, any such claims were assigned to FGIC, Tres and the Individual Indemnitors are no longer the real parties in interest, and FGIC therefore was empowered to enter into the settlement agreement and release the claims. FGIC also has moved for summary judgment on its claim for indemnification, seeking to recover from Tres and the Individual Indemnitors all amounts paid by FGIC pursuant to the bonds, and for related expenses arising out its obligations thereunder. The amounts sought by FGIC include those paid in settlement of the HRH lawsuit.

  The Court heard oral argument on the pending motions on June 22, 2005. For the reasons set forth herein, HRH's motion for summary judgment dismissing the claims of Tres and the Individual Indemnitors is granted. FGIC's motion for summary judgment on its claim for indemnification is granted. Tres's motion to file a second amended answer and a counterclaim against FGIC is denied as futile.

  Background

  During the course of the Project, a dispute arose between HRH and Tres over the level of staffing of carpenters and HRH's payments to Tres for the work being performed. In this dispute, HRH and Tres each assigned varying degrees of fault and responsibility to the other. Tres does not dispute that on October 30, 2003, HRH gave notice to Tres that it was in default under the HRH-Tres contract, and that Tres had 48 hours to cure the default. Because the performance bond was implicated, HRH also placed FGIC on notice of the default. Tres asserts that HRH's declaration of default and subsequent termination was improper. But it does not dispute that the circumstance identified in the notice of default was not cured and that by letter dated November 19, 2003, HRH gave notice that it was terminating the HRH-Tres contract and demanding that FGIC meet its obligations under the performance bond. Tres does not dispute that it did not supply workers to the Project after October 30, 2003, although it does assert that some of the workers who Tres had employed on the Project continued on the job on HRH's payroll.

  Following an initial investigation of the termination of the contract and the costs to complete the Project, FGIC tendered the sum of $752,972 to HRH, which FGIC contended satisfied its obligations under the performance bond. HRH accepted the payment, but advised FGIC that it viewed the payment as only partial satisfaction of FGIC's liability under the bond. After further discussions with FGIC, HRH filed this action seeking a total of $3,185,077, the face amount of the performance bond, less the amount already paid to HRH by FGIC, plus interest. Pursuant to the terms of the Indemnity Agreement, FGIC commenced a third-party action against Tres and the Individual Indemnitors to recover all sums paid in satisfaction of the performance and payment bonds, as well as all other costs incurred by FGIC as a result of its suretyship, including the costs related to its investigation of HRH's claims, the costs incurred in the main action brought by HRH and the costs of enforcing the terms of the Indemnity Agreement.*fn1

  Pursuant to a May 23, 2005 settlement and compromise agreement (the "Settlement Agreement"), FGIC agreed to pay HRH a total of $1,915,000 in full and final settlement of HRH's claims in this action. FGIC and HRH each agreed to release the other from any claims arising from the Project, the related contract and the performance bond, including all claims asserted in this action. The Settlement Agreement also recites that FGIC, pursuant to rights accorded to it in the Indemnity Agreement, releases HRH from all claims asserted by Tres or any other third-party defendant that arise from the Project, the related contract and the performance bond, including all claims and counterclaims asserted by Tres in this action. Also covered by the terms of the release was defendant FIC, the surety for HRH. Under the Settlement Agreement, HRH and FGIC also agreed that they would enter into a stipulation and proposed order dismissing the main action between them with prejudice and seek to sever FGIC's third-party action. (No such order has been submitted to the Court.)

  Discussion

  Summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show 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." Rule 56(c). A fact is material if it "might affect the outcome of the suit under the governing law. . . ." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). An issue of fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Id. The Court must "view the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in its favor, and may grant summary judgment only when no reasonable trier of fact could find in favor of the nonmoving party." Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir. 1995) (citation and quotation marks omitted); accord Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986). However, when the moving party has asserted facts to demonstrate that the non-moving party's claim cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on "mere allegations or denials" of the facts asserted by the movant. Rule 56(e).

  Tres & the Individual Indemnitors' Claim Against HRH & FIC

  The Indemnity Agreement gives FGIC sweeping rights in the event a claim is made against it on the performance bond. It provides for the assignment of any claims that Tres and the Individual Indemnitors may have against the claiming party and designates FGIC as their attorney-in-fact with broad powers. Thus, paragraph 7 of the Indemnity Agreement provides that FGIC "may settle or compromise any claim, liability, demand, suit or judgment upon any BOND or BONDs executed or procured by it, and any such settlement or compromise shall be binding upon [the indemnitors]. Vouchers or other evidence of payments made by [FGIC] shall be prima facie evidence of the fact and amount of the liability" of the indemnitors to FGIC. Tres and the Individual Indemnitors also assigned and transferred to FGIC, inter alia, all "collateral," which is defined to include all "causes of action (whether in contract, tort or otherwise)" belonging to them as well as "all subcontracts . . . and all Surety Bonds securing the performance of, of the discharge of obligations incurred in connection with such subcontracts." Indemnity Agreement ¶ 10(a)(i), (vii) & ¶ 12. The Indemnity Agreement provides that "[t]he assignment is for the purpose of enabling [FGIC] . . . to use any COLLATERAL upon the happening of an EVENT OF DEFAULT to complete the performance of [the indemnitors'] obligations" under the bonded contract. Indemnity Agreement ¶ 12. The Indemnity Agreement further provides that "[t]he assignment is an absolute assignment of COLLATERAL . . . and no further notice or other action by [FGIC] is required." Id. (emphasis added).

  In paragraph 18 of the Indemnity Agreement, Tres and the Individual Indemnitors designated FGIC as their attorney-in-fact: "The [indemnitors] hereby irrevocably constitute and appoint [FGIC] as their true and lawful attorney with the right . . . to exercise all of the rights of the [Indemnitors] assigned, transferred and conveyed to [FGIC] in this Agreement, hereby giving and granting to [FGIC] full power and authority to make, execute, endorse and deliver any agreements for the full protection intended to be given to [FGIC] hereunder as the [Indemnitors] might or could do." Indemnity Agreement ¶ 18 (the "Attorney-in-fact Clause").

  In addition, upon an "Event of Default," the Indemnity Agreement provides that FGIC, "at its option and in its sole discretion," may "assert and prosecute any right or claim hereby assigned, transferred or otherwise conveyed in the name of [Tres] and to compromise and settle any such right or claim on such terms as it considers reasonable under the circumstances in its sole and absolute discretion, subject only to the requirement that it act in good faith, which shall be defined as the absence of deliberate or willful malfeasance." Indemnity Agreement ¶ 14(c) (the "Settlement Clause").

  Under the terms of the Indemnity Agreement, an "Event of Default" is defined as including, inter alia, any declaration that Tres is "in default in the performance of a contract (whether bonded or unbonded)" or "a payment by [FGIC] on any bond." Indemnity Agreement ¶ 13(a) & (f). HRH's notice of default and subsequent termination of Tres's contract therefore constituted an "event of default" without regard to whether such default and termination were proper. Indemnity Agreement ¶ 13; see Peerless Ins. Co. v. Talia Construction Co., 272 A.D.2d 919 (4th Dep't 2000) (in indemnity suit by surety, it is "irrelevant" whether surety was "actually liable" to party making claim under the bond) (citing International Fidelity Ins. Co. v. Spadafina, 192 A.D.2d 637, 639 (2d Dep't 1993)); BIB Construction Co. v. Fireman's Ins. Co., 214 A.D. 2d 521, 523-24 (1st Dep't 1995) ("Once the City declared plaintiff in default and demanded that defendant, as surety, fulfill plaintiff's obligations, defendant was required to comply, regardless of its own belief in the correctness of the City's action. . . .") (citations omitted); see also U.S. Fidelity & Guaranty Co. v. Sequip Participacoes, S.A., 2003 WL 22743430, at *6 (S.D.N.Y. Nov. 19, 2003) ("[W]hile a contractor might ultimately be found to not have defaulted on the guaranteed contract, such a finding would not affect that contractor's obligations under an agreement to indemnify the surety against liability."). As a result, FGIC was empowered to, among other things, release Tres's claims against HRH, subject only to the requirement that it do so without deliberate or willful malfeasance. See, e.g., James McKinney & Son, Inc. v. Lake Placid 1980 Olympic Games, 61 N.Y.2d 836, 838 (1984) ("By the terms of the continuing indemnification agreement, all rights that plaintiff had `in or growing in any manner out of' its contract with [the property owner] were fully assigned to [the surety] . . . Consequently, plaintiff is no longer the real party in interest with respect to claims against [the property owner] by virtue of this assignment . . . Plaintiff, therefore, had no right to maintain any of its claims. . . ."), affirming in relevant part, 92 A.D.2d 991 (3d Dep't 1983); Hutton Construction Co. v. County of Rockland, 52 F.3d 1191 (2d Cir. 1995) (assignment and attorney-in-fact clauses gave surety authority to settle all claims on behalf of its principal); Compania de Remorque y Salvamento, S.A. v. Esperance, Inc., 187 F.2d 114, 117 (2d Cir. 1951); Mezzacappa Brothers, Inc. v. City of New York, 2003 WL 22801429, at *7 (S.D.N.Y. Nov. 24, 2003) ("Under the indemnity agreement, [the surety] had plain and manifest authority to execute the release.").

  In Hutton, the Second Circuit made clear that an indemnity agreement containing assignment and attorney-in-fact clauses similar to those in the Indemnity Agreement "give the Suret[y] the authority to settle all claims on behalf of [its principal], including not only claims against the Suret[y] `upon the bonds,' but also [the principal's] affirmative claims growing out of its insured contracts." 52 F.3d at 1192. As a result, where a surety has exercised its powers under an indemnity agreement by executing a settlement agreement releasing its principal's affirmative claims against another party, that settlement agreement is binding on the principal. Hutton Construction Co. v. County of Rockland, 1993 WL 535012, at *7 (S.D.N.Y. Dec. 22, 1993), aff'd, 52 F.3d 1191 (2d Cir. 1995). Here, in addition to the assignment and attorney-in-fact clauses, the Indemnity Agreement also contains a settlement clause (¶ 14(c)) similar to that at issue in James McKinney & Son, providing further authority for FGIC to enter into a settlement binding on Tres. As a result, FGIC was empowered to release Tres's claims, and summary judgment dismissing the claims of Tres and the Individual Indemnitors against HRH and FIC is granted.

  FGIC's Claim for Indemnification & Tres & the Individual Indemnitors' Motion to Amend

  FGIC seeks summary judgment against Tres and the Individual Indemnitors on its claim for indemnification to recover the costs, expenses and counsel fees incurred to date as a result of its suretyship. Paragraph 4 of the Indemnity Agreement provides that Tres and the Individual Indemnitors shall indemnify FGIC for, inter alia, "all claims, damages, expenses, losses, costs, professional and consulting fees, disbursements, interests and expenses of every nature," incurred by FGIC by reason of its obligations under the performance and payment bonds. In support of its motion, FGIC has submitted evidence of the amounts paid by it in executing its duties as surety (which under paragraph 7 of the Indemnity Agreement constitute "prima facie evidence of the fact and amount of the liability" of the indemnitors to FGIC), as well as evidence of its investigation of HRH's claims (including having its in-house engineer and consultants review HRH's documentation with respect to its costs to complete Tres's work and conduct visits to the jobsite) and its extensive correspondence with HRH and others in connection with its investigation and payments under the performance bond prior to HRH's commencement of this action. FGIC also has submitted evidence of the considerable pretrial discovery conducted in this case prior to settlement (including the depositions of some of the Individual Indemnitors). FGIC has submitted sworn proof that it factored into the amount of its settlement with HRH the fact that there were potential defenses to HRH's claim. The record submitted by the parties on FGIC's motion also demonstrates that a mediator privately retained by the parties proposed that FGIC settle HRH's claims in this action for $1.7 million, and that this also influenced FGIC's decision to settle. FGIC has met its initial burden on its summary judgment motion of demonstrating that it acted in good faith both in performing its obligations as surety and in settling HRH's claims, and that the amounts incurred by it in doing so were reasonable. If they are to survive summary judgment, Tres and the Individual Indemnitors must raise a genuine dispute over a fact material to FGIC's claims.

  In opposition to FGIC's motion, Tres does not dispute that FGIC incurred and paid $1,406,995.15 under the performance and payment bonds; nor does it dispute the fact or amount of FGIC's settlement with HRH. Instead Tres argues that it is not liable to FGIC because such payments were made in bad faith or, implicitly, were unreasonable in amount. The sole evidence Tres musters in support of this argument is the conclusory assertion that FGIC failed to adequately investigate HRH's notice of default and contract termination. See Tres Opp. Mem. at 21-25; Oral Argument Tr. at 23-24. Tres relies heavily on the reports of two experts retained by FGIC in connection with this litigation, which Tres argues demonstrate that there were serious issues as to whether HRH or Tres should be liable for the problems that arose on the Project, but which do not speak to the adequacy of FGIC's investigation. At oral argument, counsel for Tres also argued, for the first time, that the absence of any default on the part of HRH was a condition precedent to any obligations under the Indemnity Agreement, relying on paragraph 3 of the performance bond, which provides that "[i]f there is no Owner Default, the Surety's obligation under this Bond shall arise. . . ." It is well established under New York law, however, that the indemnitor of a surety does not create an issue of fact on its liability to the surety by demonstrating that there are genuine issues of fact in the dispute which gave rise to the claim on the bond for which the surety made payment to another. See Frontier Ins. Co. v. Renewal Arts Contracting Corp., 12 A.D.3d 891, 892 (3d Dep't 2004) ("New York courts have held that such provisions mean that the surety is entitled to indemnification upon proof of payment, unless payment was made in bad faith or was unreasonable in amount, and this rule applies regardless of whether the principal was actually in default or liable under its contract with the obligee.") (collecting cases); Sequip Participacoes, supra, 2003 WL 22743430 at *6 ("[W]hile a contractor might ultimately be found to not have defaulted on the guaranteed contract, such a finding would not affect that contractor's obligations under an agreement to indemnify the surety against liability.") (collecting cases); First National Ins. Co. of America v. Joseph R. Wunderlich, Inc., 358 F. Supp. 2d 44, 53 (N.D.N.Y. 2004) ("Unquestionably, the Agreement . . . gave the [surety] the exclusive right to settle claims and pursue completion of the work projects so long as it was done in good faith. To solidify this exclusive right, the Agreement unequivocally states that such determinations by the [surety] shall be prima facie evidence of the facts . . . Nothing that the Defendants have asserted rise to the level of bad faith, fraud or extravagance, and, thus, . . . has failed to raise a genuine issue of fact.") (emphasis in original), aff'd mem., 2005 WL 859291 (2d Cir. Apr. 15, 2005); Acstar Indemnity Co. v. Teto Enterprises, Inc., 248 A.D.2d 654 (2d Dep't 1998). As a result, "[d]isputes whether the contractor defaulted on his obligation or conclusory allegations of surety acting in bad faith are insufficient to defeat a motion for summary judgment." Wunderlich, 358 F. Supp. 2d at 52 (citations omitted). New York also holds that evidence that the surety's investigation was inadequate is insufficient to raise a genuine dispute over the surety's good faith. See Peerless Ins. Co., 272 A.D.2d at 919 ("[P]roof that plaintiff failed to investigate the claim fully would not impugn the good faith of plaintiff in making the payment. . . .").

  Here, as in Frontier Insurance, FGIC has "met its initial burden on the motion by establishing that the underlying claims for [Tres's] admitted failure to complete the work" — justified or not — "were paid pursuant to the surety bonds, thus invoking the presumption of propriety contained in the indemnification agreement." Frontier Insurance, 12 A.D.3d at 892. At oral argument, Tres argued, as did the principal in Frontier Insurance, that "the factual issue of whether [HRH] was in default under the construction contract precludes summary judgment because the absence of [HRH's] default was a condition precedent to plaintiff's obligations under the performance bond." Id. at 892-93. Such an argument was rejected in Frontier Insurance, a case Tres concedes represents New York law. Oral Argument Tr. at 11-12.

  Tres's argument that FGIC failed to conduct an adequate investigation — which Tres does not support with any relevant evidence — is at base simply an argument that there were questions concerning and possible defenses to HRH's claims, and as such does not defeat summary judgment in this case. As the Frontier Insurance court concluded, where the parties' relationship is governed by language such as that in the Indemnification Agreement, any purported default by HRH "is irrelevant to liability under the indemnity agreement. Under that agreement, [FGIC] had the exclusive and binding authority to assess the merits of any claim brought under its bonds. As a result, any factual issue as to liability under the bonds would be immaterial unless defendants also showed that plaintiff decided to accept liability and pay the obligee's claims in bad faith. . . ." Id. at 893 (citation omitted). Conclusory allegations of possible collusion between FGIC and HRH or as to the excessiveness of the amounts paid "are insufficient to meet defendants' burden to raise a question of material fact as to bad faith." Id. Tres offers no evidence of fraud, collusion or other malfeasance that would call into question any of FGIC's actions and rights under the Indemnity Agreement. Indeed, in its motion to file a second amended answer, Tres states that "[t]he course of conduct pursued by the surety-to-date [sic], may not have risen fully to the level of bad faith up until the settlement." Tres Amended Answer Mem. at 3. Nor does Tres submit any evidence other than its bald statements disputing liability and the expert reports submitted by FGIC in this case on the issue of the reasonableness of the amounts paid by FGIC. Despite the fact that Tres acknowledges that "there is nothing new that shall be added to the fact pool which was not known nor under the possession of a party except the recent circumstance which adds to the surety's activities and may compound it to the level of bad faith" [sic] (id.), Tres points to no evidence in opposition to FGIC's motion or in support of its motion that would demonstrate anything approaching bad faith or deliberate malfeasance with respect to FGIC's settlement of the HRH action. A question as to whether HRH or Tres was in default does not suffice to create a genuine issue of material fact with respect to bad faith, deliberate malfeasance or reasonableness under the Indemnity Agreement. Tres cites no authority to the contrary. As a result, FGIC is entitled to summary judgment on its indemnification claim in its entirety.

  Tres and the Individual Indemnitors seek to amend their answer and add a counterclaim to assert that the Settlement Agreement was entered into in bad faith. They seek no additional discovery in support of the amended counterclaim. Because they have been unable to raise a triable issue of fact as to FGIC's bad faith and seek no further discovery, it would be futile to grant the amendment. Conclusion

  The supplemental summary judgment motions seeking dismissal of Tree's amended counterclaims on the basis of the Settlement Agreement are GRANTED. Because Tres's counterclaims are dismissed on the basis of the Settlement Agreement, the motions for summary judgment seeking dismissal of those counterclaims on other grounds are DENIED as moot. FGIC's motion for summary judgment on its claim for indemnification is GRANTED. Tres's motion to amend its answer and assert a counterclaim against FGIC is DENIED. All other pending motions are DENIED as moot. The Clerk is directed to enter judgment in accordance with the foregoing.

  SO ORDERED.


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