Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Safeco Insurance Co. of America v. M.E.S., Inc.

United States District Court, E.D. New York

March 30, 2017

SAFECO INSURANCE COMPANY OF AMERICA, Plaintiff,
v.
M.E.S., INC., M.C.E.S., INC., HIRANI ENGINEERING & LAND SURVEYING, P.C., HIRANI/MES, JV, GEORGE MAKHOUL, JITENDRA S. HIRANI, SARITA HIRANI, Defendants. M.E.S., INC., M.C.E.S., INC., GEORGE MAKHOUL, Plaintiffs,
v.
SAFECO INSURANCE COMPANY OF AMERICA, HIRANI/MES, JV, S.A. COMUNALE CO. INC., LIBERTY MUTUAL INSURANCE COMPANY, RONALD GOETSCH, DAVID PIKULIN, CARYN MOHAN-MAXFIELD, Defendants.

          MEMORANDUM & ORDER

          Pamela K. Chen United States District Judge

         Before the Court are: (1) Plaintiff Safeco Insurance Company of America's (“Safeco's”) motion for summary judgment against Defendants M.E.S., Inc. (“MES”), M.C.E.S., Inc. (“MCES”), and George Makhoul (“Makhoul”) (collectively, “the MES Defendants”), and Defendants Jitendra S. Hirani (“J. Hirani”), Sarita Hirani (“S. Hirani”), Hirani Engineering & Land Surveying, P.C. (“Engineering”), and Hirani/MES, JV (“the JV”) (collectively, “the Hirani Defendants”) in Case No. 09-CV-3312 (“the Safeco Action”); (2) the MES Defendants' cross-motion for dismissal of the Safeco action, and motion for partial summary judgment in Case No. 10-CV-2798 (“the MES Action”); and (3) motions for summary judgment filed by Defendants Safeco, Liberty Mutual Insurance Company (“LMIC”), and S.A. Comunale Co. Inc. (“Comunale”) in the MES Action. In addition, the Court addresses the pending motions regarding the appropriate sanctions to levy against the MES Defendants and the Hirani Defendants.

         For the reasons stated below: (1) Safeco's motion for summary judgment, filed in both the Safeco and MES Actions, is GRANTED; (2) the MES Defendants' motions in both actions are DENIED; (3) LMIC's motion for summary judgment in the MES Action is GRANTED; and (4) Comunale's motion for summary judgment in the MES Action is GRANTED. The MES Defendants are jointly and severally liable to Safeco for all losses incurred by Safeco in connection with the PRTF and ERDLF projects, and all Defendants are jointly and severally liable to Safeco for all losses incurred by Safeco in connection with the HEPFF project. An evidentiary hearing will be held to determine the quantum of damages. In addition, although the Court does not impose any sanctions on the M.E.S and Hirani Defendants beyond the full amount of indemnification that they are liable for under the judgment in the Safeco Action, Safeco may move for a restraint of the MES and Hirani Defendants' assets pursuant to N.Y. C.P.L.R. § 5229 pending the evidentiary hearing and the issuance of a final judgement in this matter.

         BACKGROUND

         I. FACTUAL BACKGROUND[1]

         Under two indemnity agreements, Safeco provided performance and payment surety bonds for three construction projects undertaken by the MES and Hirani Defendants. MES sub- contracted with Comunale to perform fire protection work on two of the three projects, and LMIC[2] provided performance and payment bonds to MES on behalf of Comunale for that work.

         A. The Parties' Indemnity Agreements

         The first indemnity agreement was Dated: February 3, 2003 by Makhoul individually and as the “President, Sole & Only Officer” on behalf of MES and MCES. (Safeco Action Dkt. 64-5 (“the MES Agreement”); see also Dkt. 80 at 2; Dkt. 410-1 ¶ 8.) The second indemnity agreement was signed on June 23, 2003 by Makhoul individually and on behalf of MES as both an entity and as part of the JV, by S. Hirani individually, and by J. Hirani individually and on behalf of Engineering as both an entity and as part of the JV. (Safeco Action Dkt. 64-6 (“the Hirani Agreement”); see also Dkt. 80 at 2-3; Dkt. 410-1 ¶ 11.)

         MES and MCES were listed as the “Principals” for which Safeco acted as surety in the MES Agreement, and the JV was listed as the Principal for which Safeco acted as surety in the Hirani Agreement. (Dkts. 64-5 at 1, 64-6 at 1.) The Principals were defined in both Agreements as “Contractors.” (Id. (defining “Contractor” as “[a]ny one, combination of, or all of the . . . firms . . . set forth above, ” which were MES and MCES in the MES Agreement and the JV in the Hirani Agreement).) The Agreements contemplated that MES, MCES, and the JV, as Contractors, would enter into contracts with third parties, “the performance of which is guaranteed by any Bond for which [Safeco] is surety.” (Id.)

         For ease of reference, the Court shall refer herein to these agreements collectively as “the Indemnity Agreements” or “the Agreements, ” and shall refer to the signatories thereof as the MES and/or Hirani Defendants.[3]

         1. Purpose

         Other than the date of execution, the identities of the indemnitors, and the signatories thereto, the Indemnity Agreements are identical. (Dkt. 410-1 ¶ 14.) At the outset, the Agreements state that they are made “in favor of [Safeco] for the purpose of indemnifying them from all loss and expense in connection with any Bonds for which any [Safeco] Company now is or hereafter becomes Surety” for either MES, MCES, or the JV as Principal. (Safeco Action Dkts. 64-5 at 1, 64-6 at 1.) The Agreements also state that the MES and Hirani Defendants, as signatories to the Agreements, “jointly and severally[] agree” to the terms set forth therein, “[i]n consideration of the execution of any such Bonds . . . and as an inducement to such execution by Surety.” (Id. (emphasis added).)

         2. Indemnity to Surety

         The Agreements provide that the MES and Hirani Defendants “agree to pay to Surety upon demand . . . [a]ll loss, costs and expenses of whatsoever kind and nature, including court costs, reasonable attorney fees . . ., consultant fees, investigative costs and any other losses, costs or expenses incurred by Surety by reason of having executed any Bond, or incurred by it on account of any Default under this agreement by any of the [MES or Hirani Defendants], ” as well as, inter alia, “interest on all disbursements made by Surety in connection with such loss, costs and expenses . . . at the maximum rate permitted by law calculated from the date of each disbursement” and “[a]n amount sufficient to discharge any claim made against Surety on any Bond, ” either to “pay such claim or [to] be held by Surety as collateral security against loss on any bond.” (Id.)

         With respect to claims against Safeco, the Agreements provide that Safeco “shall have the exclusive right for itself and [the MES and Hirani Defendants] to determine in good faith whether any claim or suit upon any Bond shall, on the basis of belief of liability, expediency or otherwise, be paid, compromised, defended or appealed, ” and “Safeco's determination in good faith . . . shall be final and conclusive” upon the MES and Hirani Defendants. (Safeco Action Dkts. 64-5 at 1, 64-6 at 1.) Safeco is also empowered to “incur such expenses, including reasonable attorneys' fees, as deemed necessary or advisable in the investigation, defense and payment of such claims.” (Id.) “An itemized statement of loss and expense incurred by [Safeco], sworn to by an officer of [Safeco], shall be prima facie evidence of the fact and extent of the liability of [the MES and Hirani Defendants] to [Safeco] in any claim or suit by [Safeco] against [the MES and Hirani Defendants].” (Id.)

         3. Definition of Default

         The Agreements provide that MES, MCES, and the JV would be “deemed to be in default under [the Indemnity Agreements]” if they were “declared to be in default by the Obligee of any Bond; [a]ctually breache[d] or abandon[ed] any Contract [between them and any third party for which Safeco acted as surety]; [f]ail[ed] to pay, to the extent due in whole or in part, claims, bills or other indebtedness incurred in connection with the performance of any [such]

         Contract;” or, inter alia, “[b]reache[d], fail[ed] to perform, or comply with, any provision of [the Indemnity Agreements].” (Safeco Action Dkts. 64-5 at 1, 64-6 at 1.)

         4. Surety's Remedies in Event of Default

         In the event that MES, MCES, or the JV defaulted, the Agreements permitted Safeco, “at its sole discretion, ” to “[t]ake possession of the work under any and all Contracts and to arrange for its completion by others or by the Obligee of any Bond, ” “[t]ake possession of [the MES and Hirani Defendants'] equipment, materials and supplies at the site of the work, or elsewhere, if needed for prosecution of the work, as well as [their] office equipment, books and records, and utilize the same in completion of the work under the Contract without payment of any rental for such use, ” and, inter alia, “[t]ake such other action as [Safeco] shall deem necessary to fulfill its obligations under any Bond.” (Dkts. 64-5 at 1, 64-6 at 1.) The MES and Hirani Defendants, as signatories to the Agreements, “waive[d] all notice of such default [and] of the payment of any claim.” (Id. at 1-2.)

         5. Security to Surety

         As “collateral security” to Safeco, the MES and Hirani Defendants assigned to Safeco, “as of the date of execution of any Bond, all rights . . . in, or in any manner growing out of, ” inter alia, “[a]ny Contract or modification thereof; [a]ny subcontract or purchase order and against any legal entity and its surety who has contracted with [MES, MCES, or the JV] to furnish labor, materials, equipment and supplies in connection with any Contract; [m]onies due or to become due [to MES, MCES, or the JV] on any Contract, including all monies earned or unearned which are unpaid at the time of notification by [Safeco] to the Obligee [of the bond on that contract] of [Safeco's] rights . . .; [a]ny actions, causes of action, claims or demands whatsoever which [MES, MCES, or the JV] may have or acquire against any party to the Contract, or arising out of or in connection with any Contract[;] . . . and [Safeco] shall have the full and exclusive right, in its name or in the name of [MES, MCES, or the JV], but not the obligation, to prosecute, compromise, release or otherwise resolve such actions, causes of action, claims or demands.” (Dkts. 64-5 at 2, 64-6 at 2.) Safeco agreed to forbear exercising these rights “until there is a Default under this agreement, ” as previously defined. (Id.)

         The parties also agreed, as additional collateral security for Safeco, that “all monies earned by [MES, MCES, or the JV] under any Contract are trust funds, whether in the possession of [MES, MCES, or the JV] or otherwise, for the benefit of, and for payment of [their] obligations for, labor, material, and supplies furnished to [them] in performance of such Contract for which [Safeco] would be liable under any Bond on such Contract.” (Id.)

         6. General Provisions

         In addition to these specific terms, the Indemnity Agreements contain a number of general provisions that affect the rights of the parties. Specifically, among other things, the parties agreed that Safeco agreeing, or failing to agree, to changes in any contract or bond “shall not release or affect the obligations of [the MES and Hirani Defendants] to Safeco even though any such assent by [Safeco] does or might increase the liability of the [MES and Hirani Defendants].” (Id.) The Agreements provided that “[t]he rights and remedies afforded to [Safeco] by the terms of [the Agreements] and the terms themselves may not be waived or modified orally and no written change or modification shall be effective until signed by an employee of [Safeco].” (Id.) Finally, the Agreements provide that they are to be “liberally construed so as to protect, exonerate and indemnify [Safeco].” (Id.)

         B. Three Construction Projects

         The MES and Hirani Defendants entered into three construction contracts with the U.S. Army Corps of Engineers (“Corps”) for projects in New Jersey-the Pyrotechnics Research Technology Facility (“PRTF”) and the Explosives Research and Development Loading Facility (“ERDLF”), undertaken by the MES Defendants, and the High Energy Propellant Formulation Facility (“HEPFF”), undertaken by the MES and Hirani Defendants through the JV.[4] Safeco issued performance and payment bonds for all three contracts, in an amount of $10, 628, 832.00 for PRTF, $8, 253, 975.00 for ERDLF, and $16, 549, 000.00 for HEPFF. (Dkt. 410-1 ¶¶ 30, 33; see also Makhoul Aff.[5] ¶ 72.)

         1. PRTF

         On January 16, 2008, the Corps issued a Cure Notice in which it threatened to terminate the MES Defendants for default unless the specific deficiencies cited in the notice were promptly cured. (Dkt. 410-1 ¶ 35.) In the PRTF Cure Notice, the Corps also demanded a meeting with the MES Defendants and Safeco to discuss the issues addressed in the notice. (Id.) MES informed Safeco that it did not want Safeco to attend the meeting because it believed that Safeco's presence and participation would weaken MES's position with the Corps. (Makhoul Aff. ¶ 14.)

         The Notice to Cure meeting took place on January 31, 2008. (Makhoul Aff. ¶ 15.) Safeco attended the meeting over MES's objections. (Makhoul Aff. ¶¶ 15, 17.) Safeco's representative stated in the presence of representatives of MES and the Corps that Safeco would “honor its commitment, the bond commitment to the Corps” and affirmed that Safeco would complete the project if it was terminated and Safeco was asked to complete it. (Dkt, 410-5 at 139:2-5, 14-16; Makhoul Aff. ¶ 17.) The MES Defendants allege that at the meeting, the Corps asked MES's employees to leave the room so the Corps representatives could have a private conversation with Safeco's representative. (Dkt. 441-3, at ECF 3.)

         On March 5, 2008, the Corps terminated the MES Defendants for default from the PRTF project, and 12 days later, on March 17, 2008, the Corps made a bond demand on Safeco to complete the remaining work on the PRTF contract. (Dkt. 410-1 ¶¶ 36-37.)

         Safeco entered into a Takeover Agreement (“the PRTF Takeover Agreement”) with the Corps, dated June 3, 2008, under which Safeco agreed to undertake the completion of the MES Defendants' work under the PRTF contract. (Dkt. 410-1 ¶ 42.) This agreement contained Safeco's full reservation of rights, including but not limited to the right to contest the propriety of the default termination. (Id.) Pursuant to the PRTF Takeover Agreement, Safeco hired Perini Management Services, Inc. (“Perini”) as a completion contractor, tasked with, inter alia, completing the work, providing construction management services, and providing technical expertise to Safeco and its attorneys regarding the PRTF contract. (Dkt. 410-1 ¶ 43.) Safeco also hired Cashin, Spinelli & Ferretti, LLC (“Cashin Spinelli”)[6] as a consultant on the PRTF project, to assist in responding to the performance bond demand, to oversee completion of the PRTF contract, and to provide additional technical expertise to Safeco and its attorneys regarding the project. (Dkt. 410-1 ¶ 44.) Finally, Safeco retained outside counsel, Watt, Tieder, Hoffar & Fitzgerald, L.L.P. (“Watt Tieder”), to provide legal advice and assistance to Safeco in responding to the PRTF bond demand and to provide other legal services in connection with the MES Defendants' default and Safeco's completion of the PRTF contract. (Dkt. 410-1 ¶ 45.)

         On August 14 and 17, 2015, respectively, Safeco and the Corps executed a settlement agreement under which Safeco and the Corps agreed upon a mutual release and discharge of all claims and responsibilities under the PRTF bond, including Safeco's withdrawal of any remaining appeals with respect to the PRTF bond and the Corps's release and return of the PRTF bond to Safeco. (See Dkt. 410-9; see also Dkt. 410-1 ¶ 46.) As part of this settlement, the Corps also agreed to pay $2, 000, 000 to Safeco, “inclusive of interest, legal fees, consultant fees, and any other similar or related expenses whatsoever, in full and complete settlement of all of the reinstated [PRTF] appeals, and the [PRTF] Surety Claim.” (See Dkt. 410-9 at ¶ 4.)

         2. ERDLF

         On November 10, 2008, the Corps issued a Cure Notice in which it threatened to terminate the MES and Hirani Defendants for default unless the specific deficiencies cited in the notice were promptly cured. (Dkt. 410-1 ¶ 40.) On December 22, 2008, the Corps terminated the MES Defendants for default from the ERDLF project, and that same day, made a performance bond demand on Safeco to complete the ERDLF contract. (Dkt. 410-1 ¶ 41.)

         Safeco did not enter into a Takeover Agreement with respect to the ERDLF project, though Safeco still hired Perini, Cashin Spinelli, and Watt Tieder to assist with, inter alia, the investigation and analysis of completion issues with the ERDLF project, and to assist in the development of Safeco's legal strategy with respect to that project. (Dkt. 410-1 ¶¶ 56-58.) Ultimately, Safeco denied liability on the bond and on January 8 and 13, 2015, respectively, Safeco and the Corps executed a settlement agreement under which Safeco and the Corps agreed upon a mutual release and discharge of all claims and responsibilities under the ERDLF bond, including Safeco's withdrawal of any remaining appeals with respect to the ERDLF bond and the Corps's release and return of that bond to Safeco. (See Dkt. 410-12; see also Dkt. 410-1 ¶ 59.) 3. HEPFF On September 3, 2008, the Corps issued a Cure Notice in which it threatened to terminate the MES and Hirani Defendants for default unless the specific deficiencies cited in the notice were promptly cured. (Dkt. 410-1 ¶ 38.) In the HEPFF Cure Notice, the Corps also demanded a meeting with the MES and Hirani Defendants and Safeco to discuss the issues addressed in the notice. (Id.)

         A Notice to Cure meeting was held on September 16, 2008, and as with the PRTF project, Safeco attended over MES's objections. (Makhoul Aff. ¶ 166-68.) MES alleges that at the meeting, the Corps requested that Safeco take over and fund the completion of the project through a memorandum of understanding (“MOU”) pursuant to which the Corps would advance funds directly to Safeco. (Makhoul Aff. ¶ 172.) MES and Hirani objected to the new provision that payments to the JV for completed work would go directly to Safeco. (Makhoul Aff. ¶ 173, 180.) After further negotiations, on September 30, 2008, the Corps sent Safeco and the JV a letter with its “final offer” for the MOU, which included a term that Safeco receive the remaining payments, as well as a term that the Corps would reserve its right to continue to assess liquidated damages against the JV and Safeco. (Makhoul Aff. ¶ 185, 423-12, Ex. 177 at ECF 178-80.)

         In a letter dated October 31, 2008, the JV sent proposed revisions to the MOU to the Corps. (Dkt. 423-12, Ex. 178 at ECF 182-90.) Among other revisions, the JV included a provision waiving the Corps's right to recover liquidated damages if the JV completed the project in accordance with the terms of the agreement. (Dkt. 432-12, Ex. 177 at ECF 179; Ex. 178 at ECF 188.) Ultimately, no MOU was executed.

         The Corps terminated the HEPFF contract on November 4, 2008 for default. (Dkt. 410-1 ¶ 39; Makhoul Aff. ¶ 194; Dkt. 64-13 (Ex. J) (“Termination Letter”).) The Termination Letter stated that “the JV [had] provided no credible evidence that it [could] deliver the required project.” (Termination Letter at ECF 12.) It listed its concerns as “(1) the JV's failure to prosecute the work, (2) the JV's failure to pay sub-contractors, and (3) the JV's failure to remedy significant work deficiencies.” (Id.) J. Hirani's deposition testimony confirmed that the project was terminated because of “delaying the job and not putting enough manpower and doing quality work.” (Dkt. 412-10, at ECF 7.) Bernard Khadra, MES's Project Engineer and Assistant Project Manager for the each of the bonded projects, testified that the Corps terminated the project because the HEPFF project was “behind schedule” and that the Corps claimed there “were construction and design deficiencies.” (Dkt. 412-12, at 59.) On November 4, the Corps also made a performance bond demand on Safeco to complete the contract. (Dkt. 410-1 ¶ 39.)

         On December 3, 2009, Safeco and the Corps entered into a Takeover Agreement (“the HEPFF Takeover Agreement”), under which Safeco agreed to undertake the completion of the JV's work under the HEPFF contract. (Dkt. 410-1 ¶ 49.) This agreement contained Safeco's full reservation of rights, including, but not limited to, the right to contest the propriety of the default termination. (Id.) Pursuant to the HEPFF Takeover Agreement, Safeco hired Perini and Cashin Spinelli as completion contractor and consultant, respectively, and again retained Watt Tieder as outside counsel. (Id. ¶¶ 50-52.)

         On October 29 and 30, 2015, Safeco and the Corps, respectively, executed a settlement agreement under which Safeco and the Corps agreed upon a mutual release and discharge of all claims and responsibilities under the HEPFF bond, including Safeco's withdrawal of any remaining appeals with respect to the HEPFF bond and the Corps's release and return of the HEPFF bond to Safeco. (See Dkt. 410-11; see also Dkt. 410-1 ¶ 53.) As part of this settlement, the Corps also agreed to pay $6, 015, 000 to Safeco, “inclusive of interest, legal fees, consultant fees, and any other similar or related expenses whatsoever, in full and complete settlement of all of the reinstated HEPFF appeals, and the HEPFF Surety Claim.” (See Dkt. 410-11 at 3.)

         C. Safeco's Losses Under The Three Bonds

         According to Safeco, it has incurred substantial losses on all three projects, both from (1) Safeco having to investigate the MES and/or Hirani Defendants' defaults under these projects and, as to the PRTF and HEPFF projects, having to complete them, and (2) Safeco having to investigate and discharge bond payment demands of various subcontractors and suppliers on all three projects, who claimed that the MES and Hirani Defendants had failed to pay them for labor and/or materials. (See Dkt. 410-1 ¶¶ 47-48, 54-55, 60-67.) In addition, Safeco alleges losses from having to investigate and discharge the U.S. Department of Labor's claim of wage violations by the MES and Hirani Defendants on all three projects, which Safeco ultimately settled. (Id. ¶¶ 68-70.)

         At the Court's request, Safeco supplemented its summary judgment papers with a statement of damages on September 2, 2016. (See Dkt. 438.) In these supplemental papers, Safeco asserts that its total unreimbursed loss for the three projects is $8, 841, 027.31. (Dkt. 438 at 9). For the PRTF project, Safeco asserts that it paid $11, 629, 179.91 to contractors and suppliers, [7] $195, 903.26 to consultants, [8] and $29, 927.93 in additional administrative expenses, for total expenses, prior to inclusion of legal fees, of $11, 855, 011.11. (Dkt. 438-1, at ECF 11, 13-14.) Safeco received $10, 537, 739.81 in contract funds from the Corp, and $2, 000, 000.00 in a settlement in litigation against the Corps. (Id. at ECF 16-17.) Therefore, prior to the inclusion of legal expenses, which Safeco appeared to provide to Watt Tieder in a lump sum for all three projects (Dkt. 438-1, at ECF 15), Safeco made a net gain of $682, 728.71 from the PRTF project. For the HEPFF project, Safeco paid $10, 682, 341.34 in contractor and supplier costs, [9]$477, 278.80 to consultants, [10] and $16, 328.70 in additional administrative expenses, for total expenses, prior to the inclusion of legal fees, of $11, 175, 948.84. (Id. at 11, 13-14.) Safeco received $1, 953, 367.95 in contract funds from the Corps and $6, 015, 000.00 from a settlement in the litigation with the Corps. (Id. at 16-17.) Therefore, prior to the inclusion of legal expenses, Safeco has an outstanding loss of $3, 207, 580.85 from the HEPFF project. For the ERDLF project, Safeco paid $706, 528.81 in contractor and supplier costs, $132, 523.15 to consultants, and $12, 482.88 in additional administration expenses, for total expenses, prior to the inclusion of legal fees, of $851, 534.84. (Id. at ECF 12-14.) For the ERDLF project, Safeco has not received contract payments from the Corps or any payments from settlements. Therefore, prior to the inclusion of legal expenses, Safeco has an outstanding loss of $851, 534.84 from the ERLDF project. Safeco's combined total loss before legal fees is $3, 376, 386.98, and its combined total loss after legal fees (totaling $5, 464, 640.29[11]) is $8, 841, 027.27. There is no genuine dispute that Safeco sustained losses on all three projects. The only project on which Safeco came out ahead prior to the inclusion of attorneys' fees was the PRTF project, and there is no question that attorneys' fees for that project are greater than the small “gain” of $682, 728.71, given that the total attorneys' fees for all three projects is $5, 464, 640.29. In fact, as of March 17, 2014, Safeco had already spent $865, 047.52 in attorneys' fees on the PRTF project alone, (Dkt. 423-6 at ECF 27), and that number has unquestionably increased during the years of protracted litigation that have followed. And as discussed infra, the Indemnity Agreements unequivocally provide that the MES and Hirani Defendants will indemnify Safeco for attorneys' fees.

         II. PROCEDURAL HISTORY: THE SAFECO ACTION

         On July 30, 2009, Safeco filed the Safeco Action, alleging various alternative claims for relief, including, inter alia, breach of contract and indemnification as to both the MES and Hirani Defendants. (Safeco Action Dkt. 1.)

         On March 24, 2010, Safeco filed a motion for partial summary judgment in the Safeco Action, arguing that the MES and Hirani Defendants had breached the parties' indemnity agreements and seeking to enforce Safeco's alleged rights to collateral security, including assignment of Defendants' affirmative claims against third parties, including subcontractors and full access to Defendants' books, records, and accounts. (Safeco Action Dkt. 64.) On May 19, 2010, the Honorable Allyne R. Ross granted that motion in part and denied it in part. (Safeco Action Dkt. 80.)

         Judge Ross held that the Indemnity Agreements were integrated documents, and therefore, under the parol evidence rule, she rejected the MES Defendants' attempts to introduce evidence of any oral agreements or letters sent prior to the execution of those agreements. (Id. at 14-17.) Judge Ross also held that the MES Defendants could not use the alleged oral “modifications” to the Indemnity Agreements to claim that they were fraudulently induced to enter into those agreements. (Id. at 17 n.5.) With respect to Safeco's motion for specific performance as to collateral security provided for in the Indemnity Agreements, Judge Ross held that, under both New York State law and the agreements themselves, the issue of Safeco collecting collateral security was separate from the ultimate issue of liability for indemnification, and that any alleged bad faith on Safeco's part was relevant only to the latter. (Id. at 18-23.) Therefore, Judge Ross found that Safeco's right to collateral security from the MES and Hirani Defendants under the Indemnity Agreements did not foreclose a later assertion of bad faith by those parties against Safeco as to the ultimate issue of liability. (Id. at 25.) Judge Ross reserved judgment on the amount of the collateral security, finding that Safeco had not provided sufficient support for the reasonableness of its demand for $13, 325, 000 from the MES Defendants and $8, 800, 000 from the Hirani Defendants. (Id. at 26-28.)[12] Judge Ross also granted Safeco's motion to exercise its right under the Indemnity Agreements to review the MES and Hirani Defendants' books and records. (Id. at 29.)

         The MES Defendants appealed Judge Ross's May 19, 2010 summary judgment order to the Court of Appeals for the Second Circuit. (Safeco Action Dkt. 84.) The appeal was ultimately dismissed for lack of jurisdiction (Safeco Action Dkt. 101), but while the appeal was pending, the MES Defendants also sought reconsideration of the May 19, 2010 order, allegedly on the basis of evidence that Safeco had produced only after the order was issued. (See Safeco Action Dkt. 91.) On October 4, 2010, Judge Ross issued an order on the reconsideration motion, as well as on Plaintiff's motion renewing its collateral security demand in which Plaintiff sought an order establishing the amount of the collateral, setting a deadline for the MES and Hirani Defendants to pay it, and providing for a formal assignment of Defendants' claims against third parties in the event Defendants failed to post collateral by the set deadline. (See Safeco Action Dkt. 107.)

         Judge Ross held that the Indemnity Agreements clearly distinguished between Safeco's actual losses, which triggered Safeco's indemnification right, and claims yet to be paid or anticipated, which were included in the collateral security provisions. (Id. at 2-3.) In light of that distinction, Judge Ross held that the actually-paid claims were to be subtracted from Safeco's collateral security demand of $13, 325, 000 as to the MES Defendants and $8, 800, 000 as to the Hirani Defendants, and directed Safeco to refile the demand with the Court, with Defendants to respond within 14 days thereafter. (Id. at 3, 10-11. See also Id. at 9 (“[W]here claims have actually been paid, Safeco has an adequate remedy at law in the enforcement of the indemnification clause of the agreement and is not entitled to the equitable remedy of specific performance.”).) Safeco's motion for a formal assignment of Defendants' claims against third parties was again denied. (Id. at 11.)

         Safeco then filed with the Court its renewed demand for collateral, which Judge Ross took up in an order issued on November 22, 2010. Safeco's modified collateral security demand sought $7, 712, 170.91 from the MES Defendants and $6, 932.603.94 from the Hirani Defendants. (Safeco Action Dkt. 121.) Judge Ross ultimately held that Safeco was entitled to collateral security of $6, 614, 634.41 from the MES Defendants for anticipated losses and projected legal and consulting fees related to the HEPFF and PRTF projects, and $4, 960, 067.44 from the Hirani Defendants (though the MES Defendants were jointly and severally liable for this amount), to cover anticipated losses on the HEPFF project, with both sets of losses accruing from August 24, 2010. (Id. at 7, 16.) Judge Ross ordered that the MES and Hirani Defendants provide Safeco with that collateral by December 1, 2010. (Id. at 27.) The MES Defendants sought reconsideration of that order, a request in which the Hirani Defendants joined, but that request was denied. (See Safeco Action Dkt. 125.)

         Between 2010 and the present, there have been extensive and protracted disputes over the payment of collateral, and Defendants have failed to rebut Safeco's contention that as of March 11, 2016, “no Defendant has provided Safeco with even one dollar's worth of collateral security.” (Dkt. 419, at 2.)[13] There have also been extensive disputes regarding Defendants' failure to turn over all required discovery. On July 23, 2014, the Court adopted the Report and Recommendations of the Honorable Vera M. Scanlon recommending that the Court hold the MES and Hirani Defendants in civil contempt for failing to pay the Court's collateral security order and for failing to meet their obligations to produce relevant books and records regarding their finances.

         On September 3, 2015, the Court granted the parties leave to file cross summary-judgment motions, and the motions were fully briefed on April 17, 2016. The Court held oral argument on July 11, 2016, and requested supplemental filings from the parties as to the extent of Safeco's loss. On September 2, 2016, Safeco submitted supplemental briefing, (Dkt. 438), and on September 30, 2016, Defendants filed a response, (Dkt. 441).

         III. PROCEDURAL HISTORY: THE MES ACTION

         The MES Defendants filed the MES Action on August 24, 2009 in federal court in New Jersey, and filed an amended complaint on December 4, 2009. (MES Action Dkts. 1, 22.) The case was transferred to this Court on June 18, 2010. (MES Action Dkt. 54.) The MES Defendants filed a Second Amended Complaint-the operative complaint in that action-on January 7, 2014. (MES Action Dkt. 111.) On June 16, 2015, the Court granted in part and denied in part a motion to dismiss the MES Defendants' claims in the MES Action, as discussed in note 16, infra. As with the Safeco action, the Court granted the parties leave to file summary-judgment motions on September 3, 2015, the motions were fully briefed on April 17, 2016, and oral argument was held on July 11, 2016.

         SUMMARY JUDGMENT STANDARD

         Summary judgment is appropriate where the submissions of the parties, taken together, “show[] that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. Proc. 56(a); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986) (summary judgment inquiry is “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law”). In ruling upon a summary judgment motion, the court must resolve all ambiguities and draw all reasonable inferences against the moving party, construing any disputed facts in the nonmoving party's favor. See Zalaski v. City of Bridgeport Police Dep't, 613 F.3d 336, 340 (2d Cir. 2010); Major League Baseball Props., Inc. v. Salvino, Inc., 542 F.3d 290, 309 (2d Cir. 2008). The same standard of review applies when the Court is faced with cross-motions for summary judgment, as here. See Lauria v. Heffernan, 607 F.Supp.2d 403, 407 (E.D.N.Y. 2009). When evaluating cross-motions for summary judgment, the Court reviews each party's motion on its own merits, and draws all reasonable inferences against the party whose motion is under consideration. Morales v. Quintel Entm't, Inc., 249 F.3d 115, 121 (2d Cir. 2001).

         The initial burden of “establishing the absence of any genuine issue of material fact” rests with the moving party. Zalaski, 613 F.3d at 340. Once this burden is met, however, the burden shifts to the nonmoving party to put forward some evidence establishing the existence of a question of fact that must be resolved at trial. Spinelli v. City of N.Y., 579 F.3d 160, 166-67 (2d Cir. 2009); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The nonmoving party cannot avoid summary judgment simply by relying on “conclusory allegations or unsubstantiated speculation, ” but must instead “offer some hard evidence showing that its version of the events is not wholly fanciful.” Jeffreys v. City of N.Y., 426 F.3d 549, 554 (2d Cir. 2005) (quotation marks omitted). Nor is a mere “scintilla of evidence” in support of the nonmoving party sufficient; rather, “there must be evidence on which the jury could reasonably find for the [non-movant].” Hayut v. State Univ. of N.Y., 352 F.3d 733, 743 (2d Cir. 2003) (quotation marks omitted) (alteration in original); see also Anderson, 477 U.S. at 248 (a dispute of fact must be “genuine”-that is, “the [record] evidence [must be] such that a reasonable jury could return a verdict for the nonmoving party.”); Miner v. Clinton Cty., 541 F.3d 464, 471 (2d Cir. 2008) (nonmoving party must offer “some hard evidence showing that its version of the events is not wholly fanciful” (quotation marks omitted)). In other words, “the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment . . . .” Anderson, 477 U.S. at 247-48 (emphasis in original).

         DISCUSSION

         I. SAFECO'S AND THE MES DEFENDANTS' CROSS-MOTIONS FOR SUMMARY JUDGMENT

         In the Safeco Action, Safeco asserts claims for declaratory relief, specific performance, breach of contract, and injunctive relief as to both the MES and Hirani Indemnity Agreements, as well as claims for exoneration, quia timet[14], and indemnity against the MES Defendants on the PRTF and ERDLF projects, and against all Defendants as to the HEPFF project. (See Dkt. 1.) As a practical matter, however, Safeco treats all of its claims as essentially coterminous, acknowledging that “[u]pon a judgment of entitlement to full indemnity, the remainder of the relief requested in Safeco's various Counts would likely be rendered moot.” (See Safeco Mot.[15]at 12 n.6.)

         In the MES Action, the MES Defendants have asserted claims for breach of the duty of good faith and fair dealing, tortious interference with contract, tortious interference with prospective economic advantage, breach of verbal contract for extra work, quantum meruit, violations of the Miller Act, 40 U.S.C. § 3131 et seq., fraud in the inducement, and fraudulent misrepresentation and concealment against Safeco.[16] (MES Action Dkt. 111 (Second Amended Complaint (“SAC”)).) The MES Defendants assert the fraudulent misrepresentation and concealment claim against individual Defendants Mohan-Maxfield and Pikulin[17], and assert a claim for breach of contract/performance bond against LMIC and Comunale. (Id.)[18]

         A. Indemnity and Bad Faith

         Safeco has moved for summary judgment both as to liability on its claim for full indemnity in the Safeco Action and as to all of the MES Defendants' claims in the MES Action. (See Safeco Mot. at 1-3.) Safeco argues that there is no genuine issue of material fact regarding the MES and Hirani Defendants' failure to comply with the Indemnity Agreements, and therefore it is “entitled, as a matter of law, to judgment regarding its entitlement to indemnity, and to recover its resulting damages.” (Safeco Mot. at 12.)

         The MES Defendants oppose this motion, and move both to dismiss the Safeco Action and for partial summary judgment in the MES Action on their claim for the breach of the duty of good faith and fair dealing (“breach of good faith claim”). (MES Safeco Opp.[19] at 35.) The Hirani Defendants also oppose Safeco's summary judgment motion on Safeco's indemnity claim in the Safeco Action, arguing that the issue of Safeco's bad faith must be determined at trial. (Dkt. 399.)

         1. Affirmative Claim in MES Action Versus Defense in Safeco Action

         The MES Defendants assert, as an affirmative claim in the MES Action, that Safeco breached the duty of good faith and fair dealing. This “implied duty of good faith and fair dealing prevents any party to a contract from depriving another party of the benefits of the agreement.” Banque Nationale de Paris S.A., 896 F.Supp. at 164-65 (S.D.N.Y. 1995). But “New York law will not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when it arises from the same allegations as a breach of contract claim.” Mendez v. Bank of Am. Home Loans Servicing, LP, 840 F.Supp.2d 639, 652 (E.D.N.Y. 2012) (collecting cases). As the MES Defendants themselves recognize, their affirmative breach of good faith claim “is mostly based on Safeco's breach of its express agreement to determine in good faith whether the [Corps'] claims were valid.” (MES Safeco Opp. at 25.) Moreover, the MES Defendants treat this affirmative breach of good faith claim as wholly coterminous with their defense of bad faith to Safeco's claim for indemnification.[20] (See id. at 1 (“Safeco . . . acted in bad faith and MES moves for summary judgment on [the breach of good faith claim in the MES Action] and to dismiss entirely [the Safeco Action]. Safeco's lack of good faith is also a defense to Safeco's motion for summary judgment [in the Safeco Action].”) (emphases added).) Therefore, the Court treats the MES Defendants' bad faith/lack of good faith defense in the Safeco Action and the affirmative breach of good faith claim in the MES Action as coterminous, and for ease of reference, will refer to it as Defendants' “bad faith” claim throughout this Order.

         2. Burden of Proving Bad Faith

         As recognized in the case law cited by the MES Defendants, “New York courts have held that pursuant to an indemnity agreement such as that signed by the defendants, ‘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.'” Lee v. T.F. DeMilo Corp., 815 N.Y.S.2d 700, 702 (N.Y.App.Div. 2006) (citations omitted); see also Berkley Reg'l Ins. Co. v. Weird Bros., 13-CV-3227, 2013 WL 6020785, at *7 (S.D.N.Y. Nov. 6, 2013) (quoting Prestige Decorating & Wallcovering, Inc. v. U.S. Fire Ins. Co., 858 N.Y.S.2d 1, 2 (N.Y.App.Div. 2008)) (same); Joseph R. Wunderlich, Inc., 358 F.Supp.2d 44, 52 (N.D.N.Y. 2004) (holding that the indemnity agreement “unequivocally state[d] that . . . determinations [by the surety regarding whether to settle claims or complete the work] shall be prima facie evidence of the facts” and that “[n]othing that the Defendants have asserted rise to the level of bad faith, fraud or extravagance;” thus plaintiff surety was entitled to summary judgment), aff'd, 144 Fed. App'x 125 (2d Cir. 2005).

         Nevertheless, the MES Defendants dispute who bears the burden of proof on bad faith, and in fact, whether the standard is bad faith rather than an affirmative showing of good faith, or as they argue, “honest belief” that it was liable on the bonds. First, to support their proposition that Safeco, rather than the MES Defendants, bears the burden of showing good faith, the MES Defendants cite two New York cases that refer to a plaintiff surety's “initial burden” to establish that payments were made in good faith and were reasonable in amount. (MES Safeco Opp. at 3.) (citing Hartford Fire Ins. Co., Inc. v. Edgewater Constr. Co., Inc., 801 N.Y.S.2d 875, 21 A.D.3d 1312 (N.Y.App.Div. 2005) and North Am. Specialty Ins. Co. v. Schuler, 737 N.Y.S.2d 741, 291 A.D.2d 924 (N.Y.App.Div. 2002)). Further examination of this line of cases, however, reveals that they are fully consistent with a finding that a plaintiff surety satisfies any “initial burden” with proof of payment, and that the burden then shifts to defendant contractors to show bad faith (which, as discussed further below, equates to a showing of fraud or collusion). Hartford Fire Ins. Co. cites Schuler for the “initial burden” language, which in turn cites Peerless Ins. Co. v. Talia Constr. Co., 708 N.Y.S.2d 223, 272 A.D.2d 919 (N.Y.App.Div. 2000). Peerless itself states that, “Plaintiff met its initial burden [without any explanation of what this burden consists of] [and] Defendants submitted no evidence that plaintiff acted in bad faith, i.e., that plaintiff engaged in fraud or collusion;” therefore concluding that the plaintiff surety was entitled to summary judgment. Peerless, 272 A.D.2d at 919. Furthermore, the two cases cited by Peerless clearly state that proof of payment satisfies this initial burden on the surety, where indemnification agreements have such a provision, [21] thus shifting the burden to defendants. See Acstar Ins. Co. v. Teton Enters., 670 N.Y.S.2d 588, 248 A.D.2d 654, 654-55 (N.Y.App.Div. 1998) (explaining that “[t]here is no evidence . . . of bad faith by the plaintiff, and the plaintiff's payment . . . is prima facie evidence of the propriety of such payment.”); Int'l Fid. Ins. Co. v. Spadafina, 596 N.Y.S.2d 453, 454-55, 192 A.D.2d 637, 639 (N.Y.App.Div. 1993) (“Here, [plaintiff surety] has stated a prima facie case under the contract by submitting proper documentation of payment of the settlement . . . as well as the fees and costs incurred. . . and, as [defendant's] conclusory affidavits are insufficient to raise a triable issue as to either the bona fides of the settlement or as to the reasonableness of its amount[, ]. . . summary judgment is granted in favor of [plaintiff surety].” (internal quotations omitted)). See also Frontier Ins. Co. v. Renewal Arts Contracting Corp., 784 N.Y.S.2d 698, 700 (N.Y.App.Div. 2004) (“Plaintiff met its initial burden on the motion by establishing that the underlying claims for defendants' admitted failure to complete the work were paid pursuant to the surety bonds, thus invoking the presumption of propriety contained in the indemnification agreement.”). In light of the clear precedent cited above that “the surety is entitled to indemnification upon proof of payment, unless payment was made in bad faith or was unreasonable in amount, ” Lee, 815 N.Y.S.2d at 702, and the principles articulated in General Accident Insurance Co. of America v. Merritt-Meridian Construction Corp. (“Merritt-Meridian”), discussed at length below, the Court finds that any initial burden upon Plaintiff is simply a burden to submit proof of payments, after which the burden shifts to Defendants to show bad faith.

         Secondly, the MES Defendants assert that not only does a surety have the burden of proving good faith, but that good faith equates to an honest belief that it was liable on the Bonds. (MES Safeco Opp. at 3-6.) In support of this proposition, the MES Defendants rely entirely on a 1944 New York State case, Maryland Casualty Corp. v. Grace, 54 N.E.2d 362 (N.Y. 1944). (MES Safeco Opp. at 3-6.) But that case is inapposite in terms of establishing a standard for purported good faith and is wholly inapplicable here, as the New York Court of Appeals there dealt with an indemnification agreement whose terms required proof that a surety had an honest belief in their liability on the performance bond at issue-which the Indemnity Agreements here plainly do not.

         Rather, the case before the Court is on all fours with a 1997 case adjudicated in the Southern District, Merritt-Meridian. In that case, as here, the defendant construction company served as general contractor for several projects on which the plaintiff acted as surety and issued payment bonds, protecting subcontractors in the event of the defendant's default, and performance bonds, protecting owners in the event of the defendant's default. Merritt-Meridian, 975 F.Supp. 511, 513 (S.D.N.Y. 1997). The plaintiff brought suit under the parties' indemnity agreement for payments made under bonds issued to subcontractors and suppliers, and for costs incurred in completing three construction projects where the defendant was terminated for default by the owners. Id. at 513-14. The indemnity agreement provided, in relevant part, that “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 . . . .” Id. at 514. The agreement provided further that “the Surety shall have the right to adjust, settle or compromise any claim, demand, suit or judgment upon the Bonds, unless the Principals and the Indemnitors shall request the Surety to litigate such claim . . . and shall deposit with the Surety, at the time of such request, cash or collateral satisfactory to the Surety in kind and amount . . . .” Id. After being informed of the defendant's failure to pay subcontractors, the plaintiff forwarded copies of the claims to the defendant and requested that the defendant either pay or inform the plaintiff of the basis for disputing the claim. Id. at 515. In addition, the plaintiff also requested that the owners not make payments to the defendant without the plaintiff's consent. Id. While the defendant claimed that there were a number of defects in the claims, at no time did defendant request that the plaintiff defend or litigate any claims, nor did the defendant deposit any collateral with the plaintiff, despite the plaintiff requesting collateral. Id.

         The Merritt-Meridian court noted that “[i]ndemnity agreements such as those at issue in this case are valid and enforceable under New York law, ” and “[w]here, as here, the general contractor has expressly agreed to indemnify the surety for losses arising from claims made on surety bonds, the indemnity agreement governs the relationship between the surety and the contractor.” Id. at 515-16. The court held that, under the terms of the indemnity agreement, the plaintiff surety had the right to make payments and settle all claims unless the defendant requested that the plaintiff litigate them and posted collateral, a right “limited only by [the plaintiff's] obligation to settle claims in good faith.” Id. at 516. The court found that it was “irrelevant whether [the defendant] was actually liable for the payments claimed by the subcontractors or actually defaulted on their contracts with the owners, so long as [the plaintiff] acted in good faith in making the payments and completing the performance under the construction contracts.” Id. The court concluded that, “[i]n the absence of an indication of fraud or collusion between [the plaintiff] and the claimants, the subcontractor's and owners' claims of default invoked the Indemnification Agreement and its settlements clause.” Id. (emphasis added). Notably, the court reasoned that “[s]ureties enjoy such discretion to settle claims because of the important function they serve in the construction industry, and because the economic incentives motivating them are a sufficient safeguard against payment of invalid claims.” Id. Thus, the court held that the plaintiff surety was entitled to summary judgment unless the defendant could demonstrate bad faith and that “[c]onclusory allegations of bad faith are insufficient to defeat a motion for summary judgment in favor of a surety seeking to enforce an indemnification agreement.” Id. at 518.

         The MES Defendants attempt to shift the burden to Safeco as the surety to show, in the first instance, that it acted in good faith, defined as [or based on] an “honest belief in the surety's liability.” They argue that Merritt-Meridian's conclusion that the defendant must first show bad faith, defined as [or based on] “fraud or collusion”, on the part of the surety is incorrect, because it rests on a case that misapplied an earlier New York State court case which, according to the MES Defendants, held that a suretor must first demonstrate good faith, i.e., an “honest belief that [the surety] was liable for such claims.” (See ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.