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International Fidelity Insurance Company and United States Fire v. the Aulson Company

December 4, 2012


The opinion of the court was delivered by: Denise Cote, District Judge:


The plaintiffs, International Fidelity Insurance Company

("IFIC") and United States Fire Insurance Company ("US Fire"), are surety companies. The defendants are a specialty construction company located in New York, the President of that construction company, and other companies in which the President holds an ownership interest. The plaintiffs have moved for summary judgment on their claims for breach of promissory notes and of a Forbearance Agreement. For the following reasons, the motion is granted.


The following facts are undisputed or as shown by the defendants unless otherwise noted. In 2002, the Aulson Company was awarded contracts for projects involving the repair and refurbishment of a number of bridges, including the Manhattan Bridge in New York City. In connection with these projects, the defendants negotiated with IFIC and US Fire to obtain surety bonds guaranteeing the performance and payment obligations of the Aulson Company, Aulson Roofing and Aulson Industrial under the construction contracts. Before issuing the surety bonds, both of the plaintiffs independently required the defendants to execute indemnity agreements. An indemnity agreement was executed between defendants Aulson Company, Aulson Roofing, Aulson Industrial, Great Rock Realty, Shell Rock Realty, Small Rock, River Rock Realty, Alan Aulson and Maureen Aulson ("US Fire Indemnitors"), and US Fire on January 2, 2002. In this agreement, the US Fire Indemnitors agreed to indemnify . . . and hold [US Fire] harmless from and against all demands, claims, loss, costs, damages, expenses and attorneys' fees of whatever kind or nature, sounding in contract, tort or otherwise, and any and all liability therefore, sustained or incurred by [US Fire] by reason of executing or procuring the execution of any said Bond or Bonds . . . .

In consideration of the agreement, US Fire executed two surety bonds; together the bonds carried a maximum obligation or penal sum of $32,338,022.

All of the defendants executed a second indemnity agreement with IFIC on December 22, 2005. This agreement similarly provided that the defendants shall exonerate, indemnify and keep indemnified [IFIC] 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 or incur: (1) By reason of having executed or procured the execution of the Bonds, (2) By reason of the failure of the Contractor [the Aulson Company] or Indemnitors to perform or comply with covenants and conditions of this Agreement or (3) In enforcing any of the covenants and conditions of this Agreement.

In consideration of this agreement, IFIC executed three surety bonds, carrying in total a penal sum of $12,700,000.

In March of 2007, the Aulson Company advised the defendants that it was financially unable to perform its obligations under the construction contracts, including paying its laborers and material suppliers. As a result, Koch Skanska Inc. ("Skanska") the general contractor and obligee on three of the bonded projects, sought to have the plaintiffs fulfill the Aulson Company's obligations. In connection with satisfying their obligations under the surety bonds, IFIC and US Fire calculated their losses, costs and expenses at $6,400,000 and $5,500,000, respectively. IFIC demanded payment from defendants of $6,400,000 and US Fire demanded $4,200,000 to hold as security against the losses and expenses it expected to incur. The defendants refused to make such payments due to financial inability and instead requested a restructuring of the indemnity agreements.

On August 1, 2007, IFIC and US Fire entered into a Forbearance, Restructuring, Intercreditor and Security Agreement (the "Forbearance Agreement") with the defendants. IFIC and US Fire agreed to liquidate and reduce the principal amounts of indebtedness owed to both to $4,500,000 and $1,500,000, respectively. The sureties also agreed to forebear on collection of the indebtedness for two years, that is, until July 31, 2009. In the Forbearance Agreement, the defendants largely waived their right to assert defenses against the plaintiffs. The Forbearance Agreement provided: that none of the Indemnitors has any claim or counterclaim against the Surety with respect to the Indemnity Agreements, or any other matter, any such claims or counterclaims being hereby knowingly and intentionally forever waived and released by the Indemnitors; and . . . that none of the Indemnitors has any defense to the enforcement of any of the Indemnitors' obligations pursuant to the Indemnity Agreements, any such defense being hereby knowingly and intentionally forever waived and released by the Indemnitors. (Emphasis Supplied.) In consideration of this agreement, the defendants concurrently executed separate promissory notes to IFIC and US Fire that reflected the defendants' promise to repay in full the IFIC and US Fire debts by August 1, 2009. The Forbearance Agreement granted the plaintiffs liens on certain real property (the "Real Estate Collateral") and security interests in a variety of other collateral. The promissory notes and Forbearance Agreement further provided that in the event of default by the defendants the debt would become immediately due and payable and that "interest thereafter shall accrue at the lesser of nine (9%) percent per annum or the maximum rate of interest permitted under the applicable legal requirements."

With respect to the Manhattan Bridge project, US Fire entered into a takeover agreement with Skanska, obligating US Fire to complete work on the bridge that the Aulson Company had been hired to do. US Fire then hired the Aulson Company to perform this work. The Aulson Company's work on the Manhattan Bridge was repeatedly impeded by circumstances outside of its control. The Aulson Company has estimated that its delay claim against Skanska has a value of between $4,000,000 and $5,188,349.57.

In August of 2007, at the same time that the parties entered into the Forbearance Agreement, US Fire entered into a collateral security agreement with the US Fire Indemnitors to memorialize the parties' rights and obligations in regard to the bonded contracts. This agreement assigned the defendants' rights to bring its delay claims to US Fire. It provided:

In consideration for the Surety agreeing to fund the completion of the Bonded Contracts, and as more fully set forth in the certain agreement between the Indemnitors, the Surety and International Fidelity and Insurance Company (the "interparty Collateral Agreement"), the Indemnitors assign to the Surety all right, title and interest in and to all funds due or to become due on the Bonded Contracts and any and all affirmative claims . . . the Indemnitors now have, or may have, on the Bonded Contracts. The Indemnitors recognize, acknowledge and agree that the Surety already possesses the interest set forth herein pursuant to the Indemnity Agreement. (Emphasis supplied.)

Following the execution of the Forbearance Agreement and the promissory notes, the defendants made payments of $85,000 and $227,902.83 to the plaintiffs on September 28, 2007 and January 30, 2008, respectively. These payments were distributed pro rata between the plaintiffs; IFIC received $235,346.62 and US Fire received $77,556.71. The defendants made no further payments to either IFIC or US Fire on or before August ...

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