Winter2011 Vol45,No.2 Fidelit y Surety DIGEST · Fidelit y&Surety DIGEST Winter2011 Vol45,No.2. ......

In This Issue

This issue was edited by Dennis Bartlettwith the assistance of his associateCatherine McDaugale and covers

cases reported between July 1, 2010 andSeptember 30, 2010. As usual, the reportedcases present a mixed bag for surety andfidelity claims professionals and lawyers.In the Performance Bond category, a New

Jersey court found that the surety could beliable for consequential damages caused byits principal’s default. See Titan Stone, Tile& Masonry, Inc. v. Hunt Const. Group, Inc.,FSD — 16072. However, in contrast inHartford Fire Ins. Co. v. City Mont Belvieu,FSD — 16074, the court strictly enforced theapplicable statute of limitation in favor of thesurety. Also, in Five Star Lodging, Inc. v.George Constr., LLC, FSD — 16081, thecourt found the surety was not bound by adefault judgment entered against its principaland the limitation period was strictlyenforced in the surety’s favor.In the Payment Bond category, the court,

in Ricky Tittle Constr. Co. v. Safeco Ins. Co.of Am., FSD — 16087, held the inventoryingof materials, the turning over of keys, andend of the project cleanup were not “contractwork” to determine the applicable one yearlimitation period for suing the surety. InArtistic Stone Crafters, Inc. v. Safeco Ins. Co.of Am., FSD — 16097, the court enforced acontract clause requiring all change orders bein writing and denied that claimant’s claimfor extra work not covered by a writtenchange order. However, in Attard Indus.,Inc. v. United States Fire Ins. Co., FSD —16098, the court found that a subcontrac-tor’s waiver of a right to a jury trial did notextend to the subcontractor’s claims againstthe surety since the surety was not specifical-ly referenced in the waiver. Also, in UnitedStates ex rel. Indus. TurnAround Corp. v.Travelers Cas. & Sur. Co. of Am., FSD —16099, the court found that an arbitrationaward against the principal was binding onthe surety and confirmed the award as to the

surety because the surety had notice of thearbitration proceeding, the ability to partici-pate in that proceeding and that the lawyersrepresenting the surety had been activelyinvolved in presenting the principal’s case.In Tri-State Contractors, Inc. v. Fagnant,

FSD — 16105, the owner’s negotiation ofvalue engineered cost savings which led thebidder to submit a revised proposal barredthe owner’s claim against the bid bond afterthe principal withdrew from the project.Similarly, in Jay Dee/Mole Joint Venture v.Mayor of Baltimore, FSD — 16106, the prin-cipal’s failure to meet MBE and WBE provi-sions of the contract did not allow the oblig-ee to forfeit the bid bond.In Great Am. Ins. Co. v. AFS/IBEX Fin.

Servs., Inc., FSD — 16109, the court tackledthe interesting question of when is a forgerya forgery. The wrongdoer, CharlesMcMahon, Jr., the office manager, endorsedconverted checks “Charles McMahonInsurance Agency” and deposited them intohis personal account. The carrier defendedin part on an argument that the checks wereforged which argument the court rejected. InTooling, Mfg. & Techs. Ass’n v. HartfordFire Ins. Co., FSD — 16112, the courtexplored what is a direct loss and foundproperty stolen from a noninsured subsidiarywas not a direct loss and not covered.In the Miscellaneous Bond area on a sub-

division bond case, the surety was found notobligated to pay for improvements that hadnot been built for a development in which nolots had been sold or were likely to be sold inthe foreseeable future. See Westchester FireIns. Co. v. City of Brooksville, FSD —16135. Also, in City of Yorkville ex rel.Pirtano Constr. Co. v. Ocean Atl. Servs.Corp., FSD— 16137, the court held the sub-division bond protected only the namedobligee, not claimants who furnished workto construct the improvements.We hope you enjoy this issue.Dennis J. BartlettEditor-in-Chief

Fidelity & SuretyLaw Committee

Tort Trial & InsurancePractice Section

American Bar AssociationPublished in cooperation withThe Surety & FidelityAssociation of America

INSIDEContract Bonds-Performance Bonds 1-Payment Bonds 5Bid Bonda 10Fidelity Bonds 11Court Bonds 15Miscellaneous Bonds 17Surety Rights 20

Fidelity&Surety DIGESTWinter 2011 Vol 45, No. 2

Contract Bonds

Performance Bonds

FSD • 16072 Performance Bond – Surety Liablefor Obligee’s damages, Not Just CompletionCosts, But Not For Obligee’s Attorneys FeesThe prime contractor terminated a subcontractor,

and the subcontractor sued for damages. The primecontractor counterclaimed and also sued the subcon-tractor’s surety. The district court found that the ter-mination was justified and awarded damages againstthe subcontractor and its surety.

On appeal, the Court rejected the surety’s argumentthat it was liable for only the cost to complete the sub-contract work. The bond incorporated the subcontractby reference, and they should be read together. TheCourt held that the surety could be liable for damagescaused by the subcontractor’s default including delaycosts and backcharges supported in the record. TheCourt also held, however, that although the prime con-tractor was the prevailing party and entitled to attor-neys fees from the subcontractor, the surety was notliable for the fees. The Court noted that under NewJersey law the surety is chargeable only in accordancewith the strict terms of its undertaking and stated,“Since the surety bond did not explicitly cover attor-neys’ fees – and considering New Jersey’s strong policydisfavoring the shifting of attorneys’ fees – the DistrictCourt correctly held that IFIC was not liable to Huntfor attorneys’ fees and costs. . . .” Titan Stone, Tile &Masonry, Inc. v. Hunt Const. Group, Inc., 2010 WL3622944 (3d Cir. Sept. 20, 2010).

FSD • 16073 Performance Bond – ArbitrationAward against Principal and Surety Affirmed onAppealIn a long-running dispute between a public owner,

the contractor and the contractor’s surety, the partiesagreed to resolve their disputes by arbitration. Afterthe arbitrators rendered an award to the public ownerand the district court affirmed the award, the contrac-tor and surety appealed.The Court held that the district court did not abuse

its discretion in certifying the judgment as final pur-suant to Rule 54(b) without waiting for resolution ofthe contractor’s claims against the City’s engineers.The Court also held that the contractor and surety’sobjections to the way the City presented its case didnot amount to “undue means” to justify setting asidethe award. It was up to the arbitrators to interpret thecontract, and their interpretation was not such that theaward exceeded their powers or did not draw itsessence from the contract. Finally, pursuant to theAAA Rules the arbitrators were not obligated to pro-vide a “reasoned decision” explaining the damageaward because one had not been requested prior toselection of the panel. The Court affirmed the districtcourt judgment confirming the arbitration award butdenied the City’s request for sanctions against the prin-cipal and surety for challenging the award. MCIConstructors, LLC v. City of Greensboro, 610 F.3d849, (4th Cir. July 1, 2010).

FSD • 16074 Performance Bond – Obligee’sClaim Barred by One Year Limitation Periodand Surety Not Estopped to Assert LimitationsDefenseA certificate of occupancy for a public project was

issued in mid-2001 and the City took possession. In

2

Fidelity&Surety DIGEST Winter 2011

Editor-in-Chief Dennis J. BartlettAssistantEditor-In-Chief David A PinesReporter Edward G. Gallagher

The Surety & Fidelity Associationof America

Fidelity & Surety Law Committee

Lawrence R. Moelmann, Chair, Chicago, Illinois

Sam H. Poteet, Jr., Chair-Elect, Nashville, Tennessee

Fidelity & Surety Digest SubcommitteeDennis J. Bartlett, Denver, ColoradoAndy J. Chambers, Phoenix, ArizonaLisa W. Coulter, Columbus, OhioDuane A. Daiker, Tampa, FloridaJames D. Ferrucci, West Orange, New JerseyAmy L. Fischer, West Palm Beach, FloridaRalph J. Kooy, Chicago, IllinoisJohn M. Kraft, Chicago, IllinoisTimothy E. Markey, Cranbury, New JerseyJustin P. Melkus, Dallas, TexasDavid A. Pines, Woodland Hills, CaliforniaAllan C. Reeve, Rochester, New YorkJohn W. Rourke, St. Louis, MissouriGary Strong, New York, New YorkMiller Williams, Orlando, FloridaPatricia Wager, Jericho, New YorkAaron Weishaar, St. Louis, Missouri

Fidelity & Surety Digest (ISSN 1548-1611) is publishedquarterly in the United States by the American BarAssociation for the Fidelity & Surety Law Committee ofthe Tort Trial & Insurance Practice Section, 321 NorthClark Street, Chicago, Illinois 60654. Copyright © 2011by the American Bar Association. All rights reserved. Nopart of the contents of this publication may be repro-duced or distributed without the express written consentof the Manager of Publication Policies and Contracting.Opinions expressed herein are not those of the AmericanBar Association, or its entities. Fidelity & Surety Digestcontains fidelity and surety case summaries. This issuecontains cases reported from July 1, 2010 to September30, 2010.

3

July, 2002, the project was open to the public and inoperation, but the City and the contractor had variousdisputes including alleged punch list and warrantywork. They agreed to a Change Order that establishedthe “actual completion date” as July 19, 2001, whichwas identified as the date of Substantial Completion onthe cover page of the Change Order. The ChangeOrder also provided that the contractor and suretyagreed all warranties remained in force and the con-tractor would pursue completion of the punch list andwarranty items. Pursuant to the Change Order, theCity made a substantial payment jointly to the contrac-tor and surety. For several years the City and suretycorresponded over the contractor’s alleged failure toperform the punch list and warranty work. Finally, in2007 the surety sued the City for a declaratory judg-ment that the statute of limitations barred the City’sclaims, and the City counterclaimed. After a jury trial,the district court entered judgment for the City, and thesurety appealed.The Court reversed the district court and held

that the one year statute of limitations of TexasGov’t Code § 2253.078(a) barred the claim. Thelimitations period was one year from “the date offinal completion, abandonment, or termination ofthe public work project.” The City argued that theone year had not started because there was no finalcompletion. The Court held that under Texas lawsubstantial completion was final completion andpursuant to the certifications in the Change Orderthat was on July 19, 2001. In the alternative, theCity argued that the discussions and letters betweenthe City and the surety estopped the surety fromasserting the limitations defense. The Court rejectedboth promissory estoppel and quasi estoppel argu-ments in part because the surety never made a com-mitment to pay the claim or said the surety wouldnot assert the limitations defense and in part becausethe correspondence on which the City relied wasalmost all after the limitations period had alreadyrun, i.e. more than one year from July 19, 2001.Hartford Fire Ins. Co. v. City of Mont Belvieu, 611F.3d 289 (5th Cir. 2010).

FSD • 16075 Performance Bond – Allegations ofAmended Complaint Sufficient to SupportObligee’s Waiver or Estoppel Arguments as toPerformance Bond Limitations Period But Notas to Payment BondThe obligee sued the surety after expiration of the

statute of limitations. In prior opinions the court dis-missed the claims as time barred but recognized thatfailure to respond to the claims in a timely mannercould be a ground for waiver or estoppel barring thesurety from asserting the limitations defense. Theobligee filed an amended complaint alleging details ofits interaction with the surety, and also asserted a claim

under the payment bond. The surety moved to dismissthe amended complaint.The court held that allegations in the amended

complaint as to the performance bond were sufficientto withstand a motion to dismiss. As to the paymentbond, the court found that the facts alleged did notshow a factual basis for estoppel or waiver by the sure-ty within the one year limitations period applicable tothe payment bond. The court denied the surety’smotion as to the performance bond claim but grantedit as to the payment bond claim. Edgewater BeachApartments Corp. v. Frontier Ins. Co., 2010 WL2926236 (N.D. Ill. July 20, 2010).

FSD • 16076 Performance Bond – CaseRemoved After Year of Litigation Remanded toState CourtThe Michigan Department of Transportation

(DOT) filed a state court suit against the owner of abridge and its surety for specific performance of a con-tract to build direct connections between the bridgeand Michigan’s interstate highway system. The ownerand surety defended the case in state court. After ayear of unsuccessful litigation, the defendants removedthe case to federal court, and the DOT filed a motionto remand.The court rejected the defendants’ contentions that

the notice of removal was timely because a show causeorder added a federal question of impairment of con-tract. The court remanded the case to state court andawarded the DOT attorneys fees. Mich. Dep’t ofTransp. v. Detroit Int’l Bridge Co., 2010 WL 3245773(E.D. Mich. Aug. 17, 2010).

FSD • 16077 Performance Bond – Sureties DidNot File an Affirmative Claim in BankruptcyCourt Sufficient to Waive Right to Jury TrialThe successor to the debtor and another bankrupt

entity sued the sureties. The sureties counterclaimedand filed various affirmative defenses seeking a deter-mination that they did not have liability for the claims.The sureties timely demanded a jury trial, and theplaintiffs moved to strike the demand on the groundthat the sureties lost any right to a jury trial by seekingaffirmative relief in the bankruptcy court.The court found that the sureties’ defenses did not

amount to assertion of an affirmative claim whoseallowance or disallowance would invoke the equitablejurisdiction of the bankruptcy court. The court deniedthe motion to strike the sureties’ jury demand. ActradeLiquidation Trust v. Greenwich Ins. Co. (In re ActradeFin. Techs., Ltd.), 2010 WL 3386945 (Bankr. S.D.N.Y.Aug. 23, 2010).

FSD • 16078 Performance Bond – Dual ObligeeRider Did Not Require that Obligee PayPrincipal More Than Was Due Under Contract

Fidelity&Surety Law Committee Tort Trial& Insurance Practice Section Winter 2011

4

A subcontractor sued the prime contractor on a pri-vate project, and the prime contractor counterclaimedand added the subcontractor’s surety as a counterclaimdefendant. The surety moved for summary judgmenton the ground that a dual obligee rider conditioned thesurety’s obligation on full payment to the principal andthe prime had not paid the full subcontract amount tothe subcontractor.The court pointed out that the rider required only

that the prime contractor pay the subcontractor inaccordance with the terms of the subcontract, and thesubcontract authorized the prime contractor to with-hold payment to offset its damages. Since the primecontractor’s alleged damages exceeded the unpaid bal-ance of the subcontract price, the court denied thesurety’s motion. Quinn Constr., Inc. v. Skanska USABldg., Inc., 2010 WL 3064347 (E.D. Pa. Aug. 3,2010).

FSD • 16079 Performance Bond – Obligee’s Suitin State Where Subcontract Negotiated andSigned Was Proper, and Court Denied Motion toTransfer or DismissThe prime contractor on a private project located

in South Carolina sued a subcontractor and its suretyin federal court in Tennessee. The subcontractor wasfrom Georgia and had filed a mechanics lien action instate court in South Carolina. The subcontractor, sup-ported by its surety, filed a motion to abstain, totransfer or to dismiss for improper venue or forumnon conveniens. The essence of the subcontractor’sargument was that the case should be decided inSouth Carolina and that South Carolina was moreconvenient for witnesses and would avoid piecemeallitigation.The court disagreed and denied the motion. The

forum where the subcontract was negotiated andsigned was proper, and none of the subcontractor’sarguments overcame the deference given to the plain-tiff’s choice of forum or the federal court’s obligationto decide cases brought before it. DBS Corp. v. ReidConstr. Co., Inc., 2010 WL 3806415 (E.D. Tenn. Sept.23, 2010).

FSD • 16080 Performance Bond – UnlicensedSubcontractor and Its Surety Could Not UsePrincipal’s Unlicensed Status as a Defense Evenif Obligee Was Aware Principal Did Not HaveLicenseAn unlicensed subcontractor performed defective

work and the prime contractor recovered a judgment.The subcontractor and its surety appealed arguing thetrial court erred by granting partial summary judg-ment precluding a defense that the prime contractorknew the subcontractor was unlicensed, and thereforethe subcontract was unenforceable by the primecontractor.

Fla. Stat. § 489.128 was amended prior to the con-tract involved to provide that a contract with an unli-censed contractor is unenforceable only by the unli-censed contractor. The Court held that the trial courtcorrectly followed the amended statute and affirmedthe judgment. Earth Trades, Inc. v. T & G Corp., 42So. 3d 929 (Fla. Dist. Ct. App. 2010).

FSD • 16081 Performance Bond – ObligeeBound by Limitation Provision in Bond andDefault Judgment against Principal Did NotBind SuretyThe contract performance bond required suit with-

in two years of the earlier of completion or occupancy.The contract was completed and occupied in 2000.The obligee, however, was dissatisfied with some of thework and commenced correspondence with the con-tractor and the surety through its agent. The obligeeeventually sued the contractor, but not the surety, in2002, but the suit was placed in abeyance pendingarbitration. Eventually, in 2007 the obligee recovereda default judgment against the contractor and soughtto amend its complaint to add the surety as a defen-dant. The surety asserted that the action was barred bythe two year suit limitation of the bond and moved forsummary judgment. The obligee argued that it was nota party to the bond, and so not bound by the limitationprovision, and that its default judgment against theprincipal was res judicata binding the surety.The Court held that even a third party beneficiary

is bound by the terms of the contract upon which itseeks to sue and pointed out that if the obligee was dis-satisfied with the limitation provision it could haverejected the bond and required the contractor to pro-vide one without such a provision. The Court alsoheld that the default judgment was not res judicata asto the surety. The surety was not a party to the suitand the default judgment was not a judgment on themerits. There was no basis for estoppel against thesurety, which had not misled the obligee in any way.The Court affirmed summary judgment for the surety.Five Star Lodging, Inc. v. George Constr., LLC, 2010WL 2976524 (Ky. Ct. App. July 30, 2010).

FSD • 16082 Performance Bond – County inwhich Obligee Filed Third Party Claim againstSurety Was a Venue Issue That Did Not Affectthe Court’s Jurisdiction over the Third PartyClaimThe principal sued the obligee in Saratoga County,

and the court transferred the case to Albany County.The obligee wanted to file a third party complaintagainst the surety. The case file was still in SaratogaCounty, and the obligee filed its third party complaintthere rather than wait until after the file was trans-ferred. After the file was transferred, the suretymoved to dismiss the third party complaint for lack of


5

jurisdiction because when it was filed the court whereit was filed no longer had jurisdiction. The trial courtdenied the motion, and the surety appealed.The Appellate Division affirmed because the coun-

ty court in which to file was a venue question that didnot affect the court’s jurisdiction. Pike Co. v. Countyof Albany, 905 N.Y.S.2d 371 (N.Y. App. Div. 2010).

FSD • 16083 Performance Bond – Two YearLimitation Provision in Bond Barred Obligee’sClaimThe owner and contractor on a private project had

numerous disputes. The owner eventually terminatedthe contract, and it was undisputed that the contractorperformed no work after April 5, 2004. The ownerpromptly contacted the surety, and in June, 2004 thesurety wrote the owner explaining the numerous dis-putes, the contractor’s willingness to finish its versionof the remaining work, the arbitration clause in thecontract, the owner’s breaches, and the surety’s beliefthat the project lender was the obligee of the bond.The surety reserved all of its or its principal’s rights andstated the its obligations “have not arisen.” The ownerand contractor engaged in arbitration, in which thesurety declined to participate. The contractor eventu-ally defaulted, and an award was entered for theowner. The owner then sued the surety more than twoyears after the admitted last date the principal workedon the job. The bond included a limitations provisionrequiring suit within two years of the date the princi-pal ceased work. The trial court granted a directedverdict to the surety at the close of the owner’s casebecause the two year limitation provision barred theclaim, and the owner appealed.The Court of Appeals refused to consider the

owner’s argument that the arbitration award was bind-ing on the surety because it was not properly designat-ed in the notice of appeal. On the limitations issues,the Court held that the two year provision was reason-able and enforceable and that the surety’s June letterwas not a waiver of the limitations defense. The dis-senting judge thought that the waiver issue was a ques-tion of fact that should have been decided by the jury,not by the trial court in a directed verdict. MonrealFuneral Home, Inc. v. Ohio Farmers Ins. Co., 937N.E.2d 159 (Ohio Ct. App. 2010).

Payment Bonds

FSD • 16084 Payment Bond – Case StayedPending Arbitration Between Claimant andPrincipalA subcontractor sued under the Miller Act and the

principal counterclaimed. The principal and suretymoved to stay pending arbitration between the princi-pal and subcontractor pursuant to a provision in the

subcontract. The claimant sought to dismiss the prin-cipal and proceed against only the surety.The court denied the claimant’s motion and stayed

the entire case pending arbitration. United States exrel. Western Indus., Inc. v. Western Surety Co., 2010WL 3338532 (D. Alaska Aug. 25, 2010).

FSD • 16085 Payment Bond – Suit for PrevailingWages Met Requirements for DiversityJurisdiction, and Court Denied Claimants’Motion to RemandTwo employees sued the principal and surety alleg-

ing failure to pay prevailing wages, overtime wages,and wages for missed meal and rest breaks as well asfailure to pay wages timely and unfair business prac-tices. The plaintiffs were California citizens, the prin-cipal a citizen of Minnesota, and the surety ofMassachusetts. The principal and surety removed thecase to U.S. district court, and the plaintiffs filed amotion to remand.The court found that there was complete diversity

and that the amount in controversy as to at least oneof the individual plaintiffs exceeded $75,000. Even ifone or more of the other plaintiffs’ claims involved lessthan the jurisdictional amount, the court could exercisesupplemental jurisdiction over them. The court deniedthe motion to remand. Carey v. S.J. Louis Constr. Inc.,2010 WL 3853348 (E.D. Cal. Sept. 30, 2010).

FSD • 16086 Payment Bond – Claimant CouldClaim for Equipment it Leased From Owner andfor Attorneys Fees Pursuant to Rental AgreementWith SubcontractorThe claimant rented equipment to a first tier sub-

contractor on a Miller Act project. The prime contrac-tor and its surety moved for partial summary judgmentto dismiss three components of the claim. First, theyargued that some of the equipment furnished did notbelong to the claimant (the claimant rented the equip-ment and then re-rented it to the subcontractor) and sothe claimant could not furnish it under the Miller Act.Second, the defendants argued that the claimant couldnot recover attorneys fees pursuant to an attorneys feeprovision in its rental agreement with the subcontrac-tor. Third, they argued that the claimant was not enti-tled to prejudgment interest.The court rejected the first argument. The

claimant was in lawful possession of the equipmentand furnished it for use on the job. As to attorneysfees, the court recognized that federal law controlledattorneys fees in Miller Act cases but held that underMiller Act precedents the courts enforced attorneysfee clauses in agreements between first tier subcon-tractors and their suppliers on the theory that theattorneys fees were part of the sum justly due for therented equipment. As to prejudgment interest, thecourt distinguished between the 1.5% service charge


6

in the rental agreement and prejudgment interest.Since the claimant sought only the contractual 1.5%,and did not seek prejudgment interest on top of it, thecourt granted the motion as to prejudgment interestand denied it as to the other two issues. United Statesex rel. Ramona Equip. Rentals, Inc. v. Carolina Cas.Ins. Co., 2010 WL 3489348 (S.D. Cal. Sept. 3, 2010).

FSD • 16087 Payment Bond – Inventory ofMaterial, Turn Over of Keys and Clean UpWere Not Contract Work for Purposes of OneYear Limitation in Miller ActThe claimant subcontractor on a Miller Act project

sued more than one year after it was terminated fromthe job but within one year after it went to the job toinventory material, turn over keys and clean up. Thesurety moved for judgment on the pleadings.The court held that these activities were analogous

to repair work, removal of equipment or final inspec-tions, all of which have been held not to qualify as con-tract work for purposes of the one year limitations pro-vision. The court granted the surety’s motion. RickyTittle Constr. Co. v. Safeco Ins. Co. of Am., 2010 WL2690572 (M.D. Ga. July 6, 2010).

FSD • 16088 Payment Bond – Judgment forPrincipal Barred Claim against SuretyThe claimant subcontractor litigated its delay dam-

ages claim against the bond principal in state court andlost. Its federal court suit against the surety had beenstayed. After the state court judgment was affirmed onappeal, the claimant argued that it could re-litigate itsclaims in the suit against the surety.The court held that the surety’s liability was meas-

ured by that of the principal and since the principalwas not liable, neither was the surety. The court grant-ed the surety’s motion for summary judgment.Lexicon, Inc. v. Safeco Ins. Co. of Am., 2010 WL3294448 (E.D. Ky. Aug. 20, 2010).

FSD • 16089 Payment Bond – Motion toDismiss Denied Because Factual Basis forSurety’s Arguments Was Not Set Out in theComplaintA second tier subcontractor on a municipal proj-

ect sued the prime contractor and its surety. Thecomplaint alleged that the claimant had fulfilled allconditions precedent and had not been paid in fullfor its work on the project. The surety moved to dis-miss the complaint. The surety argued that the com-plaint should have been brought in the name of theUnited States for the use of the claimant even thoughthe project was not for the federal government. Thesurety argued that the claimant did not give notice ofits claim and was paid in full, but these alleged factsdid not appear on the face of the complaint. Thesurety argued that the claimant was not entitled to

lost profits, but no lost profits were alleged in thecomplaint.The court refused to consider the surety’s allega-

tions that contradicted the complaint and denied thesurety’s motion to dismiss. F.F. Heating & Cooling,Inc. v. Lewis Mech. Servs., LLC, 2010 WL 3323854(E.D. Mo. Aug. 20, 2010).

FSD • 16090 Payment Bond – Affidavit thatClaimant Was a Co-Subcontractor WasSufficient to Establish Issue of Fact as to HisStatus and Prevent Summary Judgment forSuretyThe claimant performed electrical work on a Miller

Act project. He did not give the 90 day notice requiredof a sub-subcontractor or an employee of a subcon-tractor. The prime contractor and its surety moved todismiss the complaint, which the court treated as amotion for summary judgment.The claimant, however, filed an affidavit that he

was a “co-subcontractor” working directly for thebond principal. The documents suggested that theclaimant was either a sub-subcontractor or an employ-ee of the subcontractor, but the court thought that theaffidavit was sufficient to establish an issue as to amaterial fact and denied the motion. United States exrel. Burke v. S&M Assocs., Inc., 2010 WL 3122798(S.D. Miss. Aug. 4, 2010).

FSD • 16091 Payment Bond – Issues of FactPrecluded Summary Judgment for Claimant onMost of Surety’s defenses and Setoffs, But CourtGranted Claimant Summary Judgment as toRight to Sue on Bond and a Setoff for aRedesign SavingA subcontractor on a project in New York City

sued the surety for the prime contractor. The suretyasserted numerous defenses and setoffs, and theclaimant moved for summary judgment on most ofthem.The court granted the motion in part. The court

rejected the surety’s argument that the claimant couldnot sue on the bond and disallowed a setoff for a costsaving redesign credit. Otherwise, the court denied themotion because there were issues of fact as to the off-sets and defenses asserted by the surety. Underpinning& Found. Skanska, Inc. v. Travelers Cas. & Sur. Co. ofAm., 2010 WL 3735786 (E.D.N.Y. Sept. 20, 2010).

FSD • 16092 Payment Bond – Record on PartialSummary Judgment Motion Did Not SupportCertain of Surety’s Backcharges againstClaimantThe claimant sub-subcontractor alleged that it was

owed a balance of $1,117,050 and the surety for thesubcontractor asserted its principal’s backcharges of


7

$1,151,761. The claimant moved for partial summaryjudgment asking the court to disallow certain of thealleged backcharges. There was no dispute that thesurety could, as a matter of law, assert its principal’sbackcharges. The issues raised by the motion werewhether some categories of backcharges were support-ed in the record.The court disallowed some of the backcharges and

held that the claimant was due a net of $184,488.78even if the surety prevailed on the remaining issues.Underpinning & Found. Skanska, Inc. v. TravelersCas. & Sur. Co. of Am., 2010 WL 2899786 (S.D.N.Y.July 23, 2010).

FSD • 16093 Payment Bond – Court Refused toConsider Notice Defense In Connection WithSurety’s Motion to Dismiss Because Defense WasFirst Raised in Reply BriefA fourth tier subcontractor on a federal project

sued the second tier subcontractor and its surety. Thesurety moved to dismiss the Complaint.The court dismissed the claimant’s quasi-contract

and indemnity claims but denied the motion to dismissthe claimant’s bond claim. The court recognized thatthe Miller Act did not apply to the bond claim. Theprincipal and surety argued that the claimant did notallege compliance with the bond’s notice requirements,but they first made the argument in their reply, and thecourt refused to consider it. CLP Res., Inc. v. Ky.Bluegrass Contracting, LLC, 2010 WL 2690404 (W.D.Okla. July 2, 2010).

FSD • 16094 Payment Bond – Court SeveredCases by Subcontractor Because DifferentSureties on Two Jobs Disagreed on Strategy andSettlementThe prime contractor on three federal jobs, and its

sureties, were sued by a subcontractor. One of the jobswas in Texas, and two were in Oklahoma. The Texasjobs had one surety and the Oklahoma jobs had anoth-er. The subcontractor’s Texas suit was transferred toOklahoma and consolidated with the Oklahoma suit.The surety on the two Oklahoma jobs did not agreewith the surety on the Texas job as to strategy or set-tlement and moved to sever the cases.The court granted the motion. United States ex rel.

Southern Rock, Inc. v. Precision Impact Recovery,LLC, 2010 WL 3749391 (W.D. Okla. Sept. 21, 2010).

FSD • 16095 Payment Bond – Case SeveredFrom Case Brought Against Principal andAnother Surety Re-transferred to District WhereIt Was Originally FiledThe surety on a job in Texas moved to re-transfer

the case against it back to the Northern District ofTexas, where the job was located and where the suithad originally been filed.

The court held that in light of its decision reportedat 2010 WL 3749391 (W.D. Okla. Sept. 21, 2010) sev-ering the case from a case involving the same claimantand prime contractor on two Oklahoma jobs, the caseshould be sent back to Texas. The court reasoned thatTexas law would control and some witnesses werelocated in Texas and might not be available if the caseremained in Oklahoma. United States ex rel. SouthernRock, Inc. v. Precision Impact Recovery, LLC, 2010WL 3808689 (W.D. Okla. Sept. 23, 2010).

FSD • 16096 Payment Bond – Miller Act SuitStayed Pending Arbitration Between Claimantand Principal Pursuant to Arbitration ClauseIncorporated by Reference Into Sub-subcontractA second tier subcontractor sued the prime contrac-

tor and its Miller Act payment bond surety on a proj-ect at the U.S .Consulate in Ciudad Juarez, Mexico.The prime contractor and surety moved to stay thecase pending arbitration pursuant to a clause in thefirst tier subcontract. They argued that the second tiersubcontract incorporated the first tier subcontract andits arbitration clause by reference.The court agreed and granted the stay. Proyecto

Electromecanico S.A. De C.V. v. Caddell Constr. Co.,2010 WL 2838040 (W.D. Tex. July 14, 2010).

FSD • 16097 Payment Bond – Claimant’sRelease and Requirement for Written ChangeOrder Barred Claims Based on Alleged OralPromises of Payment for Extra WorkA subcontractor on a Miller Act project was paid

the adjusted subcontract amount but claimed to haveperformed additional work in reliance on oral promis-es from the prime contractor. The subcontractrequired that any extra work be authorized by writtenchange order, and after completing its work the sub-contractor executed a release and lien waiver in returnfor payment of the remaining subcontract balance.The prime contractor and surety moved for summaryjudgment.The court held that the release barred the claim and

that the subcontract requirement of a written changeorder had not been waived by the conduct of the par-ties. The court entered summary judgment for theprincipal and surety. Artistic Stone Crafters, Inc. v.Safeco Ins. Co. of Am., 2010 WL 2977894 (E.D. Va.July 27, 2010).

FSD • 16098 Payment Bond – Claimant’sWaiver of Right to Jury Trial against PrincipalDid Not Extend to Suit against SuretyA sub-subcontractor sued the payment bond surety

for the subcontractor. The sub-subcontract containeda waiver of any right to trial by jury of all disputes aris-ing out of the sub-subcontract. There was no referencedirectly to a payment bond claim, and there was no


8

jury trial waiver in the bond itself or in the subcontractthat was incorporated into the bond. The suretymoved to strike the claimant’s jury trial demand basedon the waiver in the sub-subcontract. The suretyargued that sureties could enforce arbitration clauses inthe claimant’s agreement with the principal, and thatarbitration necessarily involved waiver of a right to ajury trial.The court recognized a split of authorities from

other jurisdictions and that the surety stood in theshoes of the principal to assert the principal’s defensesto the claim. The court reasoned that a major factorin the arbitration cases was the strong federal policy infavor of arbitration while here there was a strongfederal policy requiring that any waiver of theConstitutional right to a jury trial be clear and explic-it. The court thought that the waiver in the sub-subcontract, which did not refer to a surety bond andwas not repeated in the bond itself, did not qualifyunder that test and held that the surety could notenforce the waiver. The court denied the surety’smotion to strike the claimants jury trial demand.Attard Indus., Inc. v. United States Fire Ins. Co., 2010WL 3069799 (E.D. Va. Aug. 5, 2010).

FSD • 16099 Payment Bond – Court AffirmedArbitration Award as to Surety in Miller Act SuitEven Though Principal Was Not a Party to Suit,Surety Did Not Participate in Arbitration andPrincipal Had Filed a Separate Action to VacateAwardA subcontractor on a federal project sued the sure-

ty for the prime contractor. The surety successfullymoved to stay the suit pending arbitration between theclaimant and the principal. On the eve of the arbitra-tion hearing, the surety unsuccessfully moved to staythe arbitration because the United States was not aparty and could not be made a party. The arbitratormade an award to the claimant, and in doing so heldthat the contractor waived strict compliance with var-ious subcontract provisions including a no damage fordelay clause. The principal filed a separate suit in Statecourt to vacate the award, and the claimant moved inthe Miller Act case to confirm it as to the surety. Thesurety moved to vacate the award.The arbitration clause proved for judicial review

of issues of law and findings not supported by sub-stantial evidence. The court interpreted this to trackthe review standards of the Federal Arbitration Actand a comparable Virginia statute. The court foundthat the arbitrator did not exceed his powers either inreviewing the acceptability of work or finding a waiv-er of the no damage for delay provision. The courtalso held that even though the surety was not a partyto the arbitration and the principal had filed anaction to vacate the award, the court could confirm

the award in the Miller Act suit. The court noted thatthe surety had notice of the arbitration proceedingand the ability to participate and that, in fact, thelawyers representing the surety had been activelyinvolved in presenting the prime contractor’s defense.The court also relied on the fact that the surety in theMiller Act suit had invoked the arbitration clause andlater sought a stay of the arbitration. The arbitrationclause provided for confirmation of an award by anycourt with jurisdiction, and the Miller Act gave thecourt jurisdiction. The claim arose out of the subcon-tract and was within the scope of the arbitrationclause. The court granted the claimant’s motion,affirmed the award as to the surety, and denied thesurety’s motion to vacate the award. United States exrel. Indus. TurnAround Corp. v. Travelers Cas. & Sur.Co. of Am., 2010 WL 3190749 (E.D. Va. Aug. 11,2010).

FSD • 16100 Payment Bond – Claim Barred bySecond Tier Claimant’s Failure to Give NoticeRequired by the Prime Contractor’s Bond and byDefense of Payment Available Under VirginiaMechanics Lien StatuteA supplier to a first tier supplier on a “privitaza-

tion” military housing project sued the prime contrac-tor and its surety. The prime contractor had paid thefirst tier supplier in full, but the first tier supplier filedfor bankruptcy owing the claimant. The claimant suedunder the Miller Act, but the bond was on an AIAA312 form rather than the federal standard form. Thecourt did not resolve whether the Miller Act appliedand treated the claimant as if it were a second tier sub-contractor instead of a supplier to a supplier.The court granted summary judgment to the prime

contractor and its surety on the ground that the 90 daynotice required from a second tier claimant by both theMiller Act and the AIA bond form was not timely pro-vided. The court also incorrectly thought that theprime’s payment of the first tier supplier barred theclaim of the second tier claimant. The court appliedthe defense of payment available for a Virginiamechanics lien and stated, “Because Clark paidSmitty’s [the bankrupt first tier supplier] for all materi-al supplied, Smitty’s could not have obtained amechanics lien . . . Accordingly, Capitol likewise wouldhave no right to a mechanics lien and correspondinglyno right to claim under the Payment Bond for thematerials at issue.” United States ex rel. Capitol Bldg.Supply, Inc. v. Clark Realty, LLC, 2010 WL 3767853(E.D. Va. Sept. 15, 2010).

FSD • 16101 Payment Bond – WhetherSettlement Agreement Between Claimant andSubcontractor Was a Novation DischargingBond Claim Depended on Intent of Parties, and


9

Court Affirmed Trial Court’s Rejection ofNovation ArgumentA supplier to a subcontractor on an Alabama pub-

lic project sued the prime contractor and its surety.The claimant settled with the subcontractor and thesubcontractor’s president on his personal guaranty.The settlement was reduced to writing and called forperiodic payments and a consent judgment to beentered if the payments were not made. It also allocat-ed most of the first payment to another job and the restto the bonded job and set an amount agreed to be dueon the bonded job. The prime contractor and suretymoved for summary judgment on the ground that thesettlement agreement was a novation that substituted anew agreement for the one to supply material on thebonded job and extinguished the original obligationand, therefore, the payment bond claim.The Court held that the intent of the parties to the

settlement agreement controlled whether a novationhad occurred that would extinguish the old obligationand substitute a new one. In light of the language ofthe settlement agreement, and particularly a provisionthat disclaimed any intent to benefit third parties, andthe intent of the Alabama Little Miller Act to protectsuppliers, the Court affirmed the trial court’s findingthat there was no intent to discharge the bond claim.The Court also affirmed rejection of arguments basedon the claimant’s continuing to supply material afternot receiving payments and alleged lack of proof thatsome of the material was delivered to the job site. TheCourt affirmed award of attorneys fees to the claimant.Safeco Ins. Co. of Am. v. Graybar Elec. Co., 2010 WL3835723 (Ala. Sept. 30, 2010).

FSD • 16102 Payment Bond – Surety on PrimeContractor’s Payment Bond Liable to SecondTier Subcontractor Even If First TierSubcontractor Had Not Been Paid But BondPrincipal Not Liable Because It Was Not inPrivity With ClaimantA sub-subcontractor on a public project sued the

prime contractor and its sureties. The claimant did notsue the first tier subcontractor. In addition to a claimon the payment bond, the sub-subcontractor allegedviolation of Chapter 93A, intentional interference withcontract, defamation and concerted action claimsagainst the prime contractor. The defendants filed amotion to dismiss. The defendants argued that thesub-subcontract had a pay if paid clause and the inter-vening subcontractor had not been paid therefore therewas no debt due to the sub-subcontractor.The court rejected this argument and held that the

promise in the payment bond to pay claimants, whichincluded sub-subcontractors, was not limited toclaimants who could prove a debt from the interveningsubcontractor. The court then went even further and

held that the bond principal, since it was not in privitywith the claimant, had no obligation to the claimantand dismissed the payment bond count as to the prin-cipal. The court stated, “The bond is a promise madeto Riley by the sureties not by the principal. Rileytherefore has no claim against URS under the bond,and Count I must be dismissed with respect to URS.”The court rejected the prime contractor’s argumentthat the economic loss rule barred the various bad faithor business tort claims. Thus, the court denied themotion to dismiss in its entirety except for the erro-neous holding that the principal was not liable on thebond. P.J. Riley & Co. v. URS Corp. – New York, 2010WL 3934643 (Mass. Super. Ct. Aug. 24, 2010).

FSD • 16103 Payment Bond – Third TierSubcontractor Proper Claimant Under First TierSubcontractor’s Bond, Rejection of Joint CheckOffer Did Not Estop Third Tier SubcontractorFrom Asserting Claim, And Interest Provision inClaimant’s Subcontract AppliedA third tier subcontractor sued the first tier subcon-

tractor and its payment bond surety. The defendantsargued that lack of privity barred the claim, that theclaimant failed to mitigate its damages by rejecting ajoint check offer, and that the trial court should nothave awarded prejudgment interest at the 18% ratecalled for in the claimant’s agreement with the secondtier subcontractor.The Court found that the payment bond defined

“claimant” to include those in privity with the princi-pal’s subcontractors; therefore, the plaintiff was aproper claimant. The Court also found no basis toestop the claimant from pursuing the bond even if itdid reject joint checks and that the interest rate set outin the agreement under which the material was fur-nished was binding on the defendants. The Courtaffirmed the trial court’s judgment. BoatwrightDistrib. & Supply, Inc. v. North State Mech. Inc., 2010WL 3464837 (N.C. Ct. App. Sept. 7, 2010).

FSD • 16104 Payment Bond – On Record, Pay-if-Paid Clause Barred ClaimA subcontractor sued the prime contractor and its

payment bond surety. The trial court granted summa-ry judgment to the subcontractor, and the principaland surety appealed. The appellants argued severalpoints including that a pay-if-paid clause in the sub-contract barred the claim.The Court held that the payment provision of the

subcontract was a clear pay-if-paid clause that succeed-ed in making the owner’s payment to the contractor anenforceable, express condition precedent to the con-tractor’s obligation to pay the subcontractor. Therewas no evidence that the owner had paid the contrac-tor for the subcontractor’s work, therefore the Courtreversed summary judgment for the subcontractor and


10

remanded the case. FaulknerUSA, LP v. Alaron SupplyCo., 322 S.W.3d 357 (Tex. App. – 2010).

Bid Bonds

FSD • 16105 Bid Bond – Rejection of BidFollowed by Negotiation of Cost Reductions andNew Agreement Barred Forfeiture of Bid BondThe low bidder on a public project submitted a bid

bond in the form of a certified check. The bid, howev-er, exceeded the owner’s budget, and the owner did notaccept the bid. Instead, it negotiated various valueengineering cost savings, and the bidder submitted arevised proposal that the owner accepted. The bidderdiscovered various conditions on the site that wouldincrease costs and withdrew from the contract. Theowner sought to retain the bid bond.The Court held that under the Wyoming bid bond

statute the bid bond could be forfeited only if the bidwas accepted and the bidder failed to enter into thecontract within 30 days or failed to proceed with per-formance. Here, the value engineering negotiationswere a counterproposal that effectively rejected thebid. The bidder had a property interest in the bidbond, and the owner’s refusal to return the bonddeprived the bidder of its property without due processof law. The case was on an interlocutory appeal byindividual members of the owner’s governing bodycontesting the trial court’s denial of their motions todismiss based on qualified immunity. The TenthCircuit affirmed the trial court, noted that the bid bondhad already been returned, and remanded for consider-ation of the bidder’s claims for attorneys fees and puni-tive damages. Tri-State Contractors, Inc. v. Fagnant,2010 WL 3422587 (10th Cir. Sept. 1, 2010).

FSD • 16106 Bid Bond – Bid Bond Penalty NotForfeited by Post Award Failure to MeetMBE/WBE RequirementsThe bid bond provided for forfeiture of the penal

amount, $817,125.18, as liquidated damages in theevent of a default. The principal’s low bid identifiedtwo proposed subcontractors that the bidder woulduse to comply with the MBE and WBE provisions ofthe contract. After award, the principal signed thecontract, furnished the performance bond, and didsome preconstruction work but was not issued a noticeto proceed. The principal could not reach agreementwith its two proposed MBE/WBE subcontractors andrequested permission to substitute others. The Cityinvestigated and doubted the good faith of the princi-pal’s original MBE/WBE submission. The Cityannulled the contract for non-compliance with theMBE/WBE requirements. The principal sued the Cityand the City counterclaimed. After discovery, the par-ties filed cross motions for summary judgment.

The court held that the principal breached the con-tract and awarded the City nominal damages of $1.The court rejected the City’s liquidated damages claimfor the bid bond amount. The court found that theconditions of the bid bond were performed. The prin-cipal executed the contract, furnished the performancebond, and performed its post-award, pre-formal con-tract duties created by acceptance of the bid. Once theprincipal performed these obligations, the bid bondconditions were satisfied, and the City’s protection wasthe performance bond. Jay Dee/Mole Joint Venture v.Mayor of Baltimore, 725 F. Supp. 2d 513 (D. Md.2010).

FSD • 16107 Bid Bond – Bond That Did NotMeet Statutory Requirements Made BidNonresponsive, and it Should Have BeenRejected, Therefore Obligee Could Not SeekDamages from BondA bidder submitted a bid bond that did not comply

with Louisiana law because the surety was not author-ized to write bonds in Louisiana and did not meet therequirements of the Louisiana Public Works Act.Nevertheless, the public entity awarded the contract tothe bidder, but when the bidder failed to provide anacceptable performance bond the public owner soughtdamages from the bidder and surety on the bid bondincluding the cost to re-bid the project, the differencebetween the bid and the price ultimately accepted, anddelay costs.The Court held that the bid was non-responsive

because the bid bond surety did not meet the statutoryrequirements. As such, the bid had to be rejected andwas “null and void” pursuant to the statute and notsusceptible of acceptance. Therefore, the principal andsurety were not liable on the bid bond, and the com-plaint failed to state a cause of action. State v. InfinitySur. Agency, L.L.C., 47 So.3d 647 (La. Ct. App.(2010).

FSD • 16108 Bid Bond – Surety’s Consent FormHeld to Be Unconditional Because It CommittedSurety to Final Bonds Either Alone or With Co-SuretiesThe low bidder’s certificate of surety stated that the

surety agreed, “to execute the final bond as required byspecifications or to become co-sureties with others inthe full amount of the contract price for the faithfulperformance of the contract.” Another bidder protest-ed and argued that this was not the required uncondi-tional consent. The trial court disagreed and permittedthe City to award the contract.The Appellate Division affirmed. The Court

reviewed precedent on what is necessary in the consentof surety, including the recent Nova Crete v. City ofElizabeth decision, and concluded that the surety’spromise was unconditional. Blue Diamond Disposal,


11

Inc. v. City of Vineland, 2010 WL 3419192 (N. J.Super. Ct. App. Div. Aug. 24, 2010).

Fidelity Bonds

FSD • 16109 Fidelity Bond – Checks Obtainedby Fraudulent Scheme and Endorsed by OfficeManager of Payee Were Forged Even ThoughOffice Manager Was Authorized to EndorseLegitimate Checks and Name of Payee AgencyWas Partly His Own NameThe insured made premium finance loans for insur-

ance policies. It was fraudulently induced to issue 127checks payable to Charles McMahon InsuranceAgency to finance premiums on non-existent insur-ance policies. There was a Charles McMahonInsurance Agency owned by Charles McMahon, Sr.His son, Charles McMahon, Jr., was the office manag-er and the perpetrator of the fraud. The son endorsedthe checks “Charles McMahon Insurance Agency”and deposited them in his personal account. The pre-mium finance company claimed a loss resulting fromforged endorsements on the checks. The insurerdenied that the checks were forged. The trial courtgranted the insured summary judgment and, aftertrial, added statutory prejudgment interest until thedate of judgment, attorneys fees, and consequentialdamages for the insured’s expenses in suing thewrongdoer. The district court denied the insured’sclaim for bad faith. The insurer appealed and theinsured cross appealed.The Court of Appeals rejected the insurer’s argu-

ments that there was no forgery because the son wasthe insurance agency’s office manager authorized toendorse checks. The Court thought that under thedefinition of forgery in the policy the question waswhether he was authorized to endorse these specificchecks and concluded that he was not. The Courtalso rejected the argument that there was no forgerybecause the agency’s name and the son’s name bothincluded “Charles McMahon.” The point was thatthe son was signing the agency’s name not his ownname. The Court borrowed from the district court inreasoning that if Bob Jones signed Bob Smith’s nameit was still a forgery even though they were bothnamed Bob. The Court reversed the award of conse-quential damages in the form of attorneys fees to suethe wrongdoer since they were not the consequence ofthe insurer’s denial of liability and, in fact, wereincurred prior to the denial. On the insured’s crossappeal, the Court affirmed the stopping of 18%statutory penalty interest on the date of judgment inthe district court. On the bad faith issue, the districtcourt had correctly held that the insured alleged nodamages from the supposed bad faith denial of liabil-ity separate from its damages for breach of contract.

Therefore, on the situation before it, the district courtwas correct, but now the Court had held the conse-quential damages (attorneys fees to sue the wrongdo-er) were not recoverable as breach of contract dam-ages, so the insured had extra-contractual damages toclaim. The district court had not reached the meritsof the insured’s extra-contractual claim and so madeno finding on the insurer’s good faith or on compli-ance with the Texas Insurance Code. Since theinsured could now allege damages separate frombreach of contract, the Court remanded the bad faithclaim to the district court. Great Am. Ins. Co. v.AFS/IBEX Fin. Servs., Inc., 612 F.3d 800 (5th Cir.2010).

FSD • 16110 Financial Institution Bond –Closing Attorney Was Retained by Insured andWithin Definition of Employee But Issues of FactExisted as to His Alleged Dishonesty and Receiptof Financial BenefitLots were sold in a residential development to

purchasers who were told that the developer wouldlease the lots back from them and they would nothave to make payments. The insured made loans to90 of the purchasers and sued for losses on thoseloans. The insured alleged that it did not know ofthe ponzi-like scheme and that the closing documentsfalsely indicated substantial down payments fromeach borrower. The claim was based on dishonestyby the closing attorney who stated in the HUD-1form that the purchasers made the down payments.The bond defined Employee to include “an attorneyretained by the ASSURED and an employee of suchattorney while either of them is performing legalservices for the ASSURED.” There was no disputethat the attorney performed legal services for theinsured, but the parties disputed whether he wasretained by the insured, whether he was dishonest,and whether he received an improper financial bene-fit. The parties filed cross motions for summaryjudgment.The court held that given its plain meaning

“retained” meant “to engage the services of an attor-ney or counselor to manage a specific matter oraction” and that the attorney, as the bank’s sole repre-sentative at the closing, met this definition as a matterof law. The court also held that there were genuineissues of fact as to whether the attorney was dishonestand whether he received any improper financial bene-fit from the transactions. The court granted theinsured’s motion for partial summary judgment as tothe attorney’s status and the insurer’s motion for sum-mary judgment dismissing the insured’s bad faithclaim. The court denied summary judgment on the dis-honest acts and improper financial gain issues. Fed.Ins. Co. v. United Cmty. Banks, Inc., 2010 WL3842359 (N.D. Ga. Sept. 27, 2010).


12

FSD • 16111 Fidelity Bond – Insured’s NamingIn-state Agent in Suit Was Not FraudulentJoinder, so Case Remanded to State CourtThe insured hired an employee with knowledge

that the employee had been convicted of fraud. Theinsured had a series of policies in force during theperiod the employee embezzled funds by issuingchecks to a phony vendor. The insurer denied theclaim based on the automatic termination provisionsof the policies, and the insured sued the insurer andthe agent who placed the last policy. The insured andthe agent were citizens of the same state, but theinsurer removed the case on the basis of diversityjurisdiction. The insured moved to remand, and theissue was whether the agent was fraudulently joined.The insurer argued that the claims against the agentwere barred by the statute of limitations and that theinsured could not establish a cause of action againstthe agent for either breach of fiduciary duty or negli-gent misrepresentation. The court disagreed andfound that there was a reasonable possibility theclaims were not time barred and that the insured hadstated a claim for breach of fiduciary duty.Therefore, there was no improper joinder and thecourt did not need to reach the negligent misrepresen-tation claim. The court granted the motion toremand. Allied Bldg. Stores, Inc. v. Cont’l Cas. Co.,2010 WL 3896502 (W.D. La. Sept. 29, 2010).

FSD • 16112 Fidelity Bond – Property Stolenfrom Noninsured Subsidiary Was Not a DirectLossThe insured trade association had several entities

added as insureds under its policy, but did not addTMTA Insurance Agency LLC. The Agency was alicensed insurance producer formed to collect broker-age fees on insurance sold to members of the tradeassociation. An employee diverted such commissions.The policy covered direct loss from employee theft andexcluded indirect loss which was defined to include theinability to realize income that the insured would haverealized had there been no loss.The court held that the diverted brokerage commis-

sions were an indirect loss. If the Agency had been aninsured, there would have been coverage, but it wasnot an insured and the diverted commissions wereowed to it not to the insured. The insured argued thatit would have received the money as the owner of theAgency, but the court thought that the inability to real-ize that income was an indirect loss excluded by thepolicy. The court granted the insurer summary judg-ment. Tooling, Mfg. & Techs. Ass’n v. Hartford FireIns. Co., 2010 WL 3464329 (E.D. Mich. Aug. 30,2010).

FSD • 16113 Fidelity Bond – Transfers BetweenInsured’s Accounts Was Not a Loss, and Loss

from Transfers to President’s Personal AccountWas Barred by Officer-Shareholder ExclusionThe insured’s president and part owner transferred

funds from trust accounts into the insured’s operatingaccount and then further transferred part of the fundsto his personal account. The Policy excluded losscaused by the dishonest acts of any Officer-Shareholder. The insured claimed the entire amounttransferred from the trust accounts as a loss. Theinsured also asserted a vexatious refusal to pay claim.The insurer moved for summary judgment.The court held that transfers between accounts

were a theoretical or booking loss and not within themeaning of loss in the policy. The amounts trans-ferred to the president’s personal account were a lossbut were not covered because of the Officer-Shareholder exclusion for loss resulting from dishon-est acts of any Officer-Shareholder “whether actingalone or in collusion with others.” The insured admit-ted that the former president was within the definitionof Officer-Shareholder but argued the transfers werecovered because another employee aided or helpedconceal his misdeeds. The court found that the exclu-sion still applied because the Officer-Shareholder wasa participant in the entire theft and the exclusionexplicitly contemplated that an Officer-Shareholdercould act in collusion with others including otheremployees. Finally, the court held that the insured’svexatious refusal to pay claim failed because the insur-er’s denial of liability was correct. The court grantedthe insurer’s motion for summary judgment and dis-missed the suit. Tactical Stop-Loss LLC v. TravelersCas. & Sur. Co. of Am., 2010 WL 2802203 (W.D.Mo. July 14, 2010).

FSD • 16114 Financial Institution Bond — Suitby Insured Was Not Parallel to Insurer’s Suitagainst Insured and Other Institutions withSimilar Claims Because Insured Was ContestingJurisdiction, Therefore Prerequisite of AbstentionDid Not Exist and Motion Was Denied WithoutPrejudiceAn insured credit union sued its insurer for losses

allegedly caused by a mortgage servicer that fraudu-lently sold mortgages and stole the proceeds. Theinsurer filed suit in Wisconsin against all 26 creditunions that suffered such losses. The insurer moved todismiss or stay the credit union’s New Jersey suit.The court rejected several procedural objections

advanced by the credit union but held that because thecredit union had filed an objection to personal jurisdic-tion in the Wisconsin court there was no parallel pro-ceeding. The prerequisite of federal law on abstentionis the existence of a parallel proceeding. Until theWisconsin court decided that it had jurisdiction overthe insured, there was no parallel proceeding and


13

therefore no basis for a motion to stay. The courtdenied the insurer’s motion without prejudice it itsrenewal if the Wisconsin court exercised jurisdictionover the credit union and the insurer chose to renew itsmotion. Sperry Assocs. Fed. Credit Union v. CumisIns. Soc’y, Inc., 2010 WL 2925924 (D.N.J. July 21,2010).

FSD • 16115 Financial Institution Bond – Suitby Insured Was Parallel to Insurer’s Suit againstInsured and Other Institutions with SimilarClaims, But Abstention Was Not Justified underFacts of the CaseAn alleged servicing contractor, CU National

Mortgage, LLC, sold mortgages, converted the pro-ceeds, and made the monthly payments on the mort-gages to conceal the transactions. After the schemewas discovered, the president and majority sharehold-er of the alleged servicing contractor pled guilty tocriminal charges. The insurer had filed an action inWisconsin state court naming as defendants theinsured and a number of other credit unions that didbusiness with the alleged servicing contractor. Afterthe Wisconsin suit was filed, the insured filed suit inNew York federal court seeking to recover its losses.The insurer asked the court to stay or dismiss the NewYork case so that the dispute could be resolved in theWisconsin case.The court found that the two actions were parallel

for purposes of applying the Colorado River absten-tion factors, but after analyzing the application of thefactors the court concluded that abstention was notjustified. The court denied the insurer’s motion to stayor dismiss the case. Suffolk Fed. Credit Union v.Cumis Ins. Soc’y, Inc., 2010 WL 2925492 (E.D.N.Y.July 22, 2010).

FSD • 16116 Fraud Safeguard Provision ofHomeowners Policy – Plaintiffs Received MoreThan They Invested in Madoff Scheme and SoHad No LossIndividual victims of Bernard Madoff Investment

Securities (BMIS) sued their homeowners insurer pur-suant to a Fraud Safeguard provision of the policy.The plaintiffs sued on their own behalf and on behalfof all others similarly situated. The plaintiffs, howev-er, had received $225,000 more back from BMIS thanthey invested. The Fraud Safeguard coverage insuredagainst direct loss and excluded indirect losses includ-ing the inability to realize potential income.The court found that the plaintiffs did not suffer a

loss. The court rejected arguments that the insuredspossessed the amount shown in their final statementfrom BMIS because they could have withdrawn it atany time up to the date the fraud was revealed andtherefore “lost” that amount. The court also rejectedarguments based on (1) the plaintiffs’ expectation of

earnings computed on an implied interest rate or rea-sonable growth assumptions, (2) inflation adjustments,(3) non-recoverable tax payments, and (4) alleged legit-imate investment growth before the Ponzi scheme com-menced. Since there was no loss, the plaintiffs failed tostate claims for breach of contract, bad faith, unjustenrichment or declaratory relief. The court granted theinsurer’s motion to dismiss. Horowitz v. Am. Int’lGrp., Inc., 2010 WL 3825737 (S.D.N.Y. Sept. 30,2010).

FSD • 16117 Financial Institution Bond –Insurer’s Counterclaim to Rescind PartialPayment Stated a Claim Upon Which ReliefCould Be Granted Based on Mutual Mistake ofFact But Not Based on FraudulentMisrepresentationThe SIPA trustee liquidating the insured sued on the

insured’s financial institution bond and the insurercounterclaimed to recover a partial payment madeunder a reservation of rights agreement. The insurerargued that additional facts showed the person whosedishonesty caused the loss was not an Employee underthe terms of the bond. The trustee moved to dismissthe counterclaim for failure to state a claim arguingthat the counterclaim was barred by res judicata, orwas untimely, or was barred by SIPA. The insurerargued for rescission because the partial payment wasbased on mutual mistake of fact or fraudulent misrep-resentation as to the dishonest person’s status as anEmployee.The court found that pursuant to the facts alleged

by the insurer and which the court could otherwiseconsider in deciding the Rule 12(b)(6) motion, theinsurer stated a claim for rescission based on mutualmistake but not based on fraudulent misrepresenta-tion. The court denied the motion to dismiss the insur-er’s counterclaim except as to the fraudulent misrepre-sentation claim. Zaremba v. Fed. Ins. Co. (In re Cont’lCapital Inv. Servs., Inc.), 2010 WL 3860715 (Bankr.N.D. Ohio Sept. 30, 2010).

FSD • 16118 Financial Institution Bond – Issuesof Fact as to Discovery, Notice and FaithfulPerformance Precluded Summary Judgment forEither Party, But Court Held that Loss OccurredWhen Loans Were Made, Payments ReceivedReduced the Loss, and Accrued But UnpaidInterest on Loans was Not Part of LossTwo employees made loans for construction of

houses that the borrowers did not intend to occupy.Loans for such “spec” houses allegedly were againstthe insured’s lending policies. The insured also claimedthat other policies were not followed for some of theloans. The insured gave late notice of the claim. Theparties each moved for summary judgment.


14

The court held that there were issues of fact as towhen the loss was discovered, whether the insurer wasprejudiced by the late notice, what loan policies werein place and enforced at the time the loans were made,and whether the acts of the employees were within thepolicy’s definition of “failure to faithfully performhis/her trust.” The court held that coverage was onlyfor a direct loss and that any loss occurred when theloans were made not when the real estate market col-lapsed. The amount of the loss would be the amountloaned less any receipts or recoveries. The insured wasnot entitled to claim accrued but unpaid interest on theloans but could claim prejudgment interest against theinsurer if it prevailed on the merits of the claim. Thecourt granted in part and denied in part the parties’respective motions for summary judgment. TranswestCredit Union v. Cumis Ins. Soc’y, Inc., 2010 WL3791310 (D. Utah Sept. 21, 2010).

FSD • 16119 Fidelity Bond – Insurer’s Motionto Dismiss Granted Because Re-Purchase ofLoans by Insured Was Not a Direct Loss andWas Excluded from CoverageThe insured was a mortgage lender that packaged its

mortgages and sold them to investors. The insuredwarranted to the investors that the underlying mort-gages met Fannie Mae’s requirements, including thatthe borrowers had themselves made certain minimumdown payments. One of the insured’s office managersin Florida conspired with a mortgage broker to makeloans that did not meet the down payment requirement.After defaults exposed this defect, the insured was obli-gated to re-purchase the mortgages from the investors.The insured sought to recover its resulting loss from theinsurer on its fidelity bond, which insured against directloss from employee dishonesty but excluded loss fromrepurchasing a real estate loan from an investor. Theinsurer moved to dismiss the suit for failure to state aclaim upon which relief could be granted.The court held that under Wisconsin law direct

means direct and the loss from repurchasing the mort-gages was not direct. The existence of the loss depend-ed on the borrowers defaulting and the investorsdemanding that the insured repurchase the loans. Thecourt found that there was no direct loss and no lossresulting directly from the employee’s dishonesty. Thecourt also held that the exclusion barred the claim andrejected the insured’s argument that its loss resultedfrom advancing loan funds to unqualified borrowers.The insured sold the loans and suffered no loss untilcalled upon to repurchase them from the investors.The court also dismissed the insured’s claims for statu-tory failure to pay and bad faith since the insurer hadfacts to establish that its liability was, at the very least,“fairly debatable.” Universal Mortg. Corp. v.Wurttembergische Versigherung, AG, 2010 WL3060655 (E.D. Wis. July 30, 2010).

FSD • 16120 Fidelity Bond – Computer CrimeCoverage Not Limited to Hacking and Issues ofFact Precluded Summary Judgment for Insureron Whether Computer Use Was ProximateCause of Loss And Claim for Alleged Bad FaithDenial of ClaimThe insured law firm was retained to collect an

alleged debt owed to an alleged Chinese company. Thealleged debtor sent the firm an “official check” pur-portedly from Wachovia Bank, and the law firm wiredthe amount of the check less a small fee to an accountin South Korea designated by the purported client.The “official check” was a fraud, and the law firm wasout the money it wired. The law firm claimed underthe Computer Crime coverage of its policy on the the-ory that its communications with the scammer were viaE-mail and the fraudulent check was most likely creat-ed by use of a computer. The insurer denied the claim,and the law firm sued and added a claim for breach ofthe duty of good faith and fair dealing. The insurermoved for summary judgment.The court rejected the insurer’s argument that there

was no coverage because there had been no computerhacking or manipulation of computer data. The courtthought there were genuine issues of fact as to whetherthe loss resulted directly from use of the computer. Thecourt interpreted direct loss to require only proximatecause and rejected the insurer’s argument that the causeof the loss was the insured’s wiring money out of itsaccount. The court also rejected the insurer’s argu-ments based on exclusions for loss from acceptance ofmoney orders or counterfeit checks and from surren-dering money in a purchase or exchange. The courtfound that issues of fact precluded summary judgmenton the good faith and fair dealing claim and denied theinsurer’s motion as to both counts of the complaint.Owens, Schine & Nicola, P.C. v. Travelers Cas. & Sur.Co. of Am., 2010 WL 4226958 (Conn. Super. Ct. Sept.20, 2010).

FSD • 16121 Financial Institution Bond – Suitfor Breach of Bond Was an Action at Law andTransferred to Superior Court from ChanceryCourtThe insured life insurance company sued its pri-

mary and excess fidelity bond insurers and D&O car-riers in Delaware Chancery Court. The defendants didnot object to the Court’s jurisdiction, but the Courtraised the issue itself.The Chancery Court decided that the suit was real-

ly an action at law for breach of contract, not an equi-table action for apportionment of defense costs, andtransferred it to the Delaware Superior Court. Mass.Mut. Life Ins. Co. v. Certain Underwriters at Lloyd’sof London, 2010 WL 3724745 (Del. Ch. Sept. 24,2010).


15

FSD • 16122 Financial Institution Bond – CourtDenied Motion to Dismiss Claims of InsuredThat Lost Its or Its Customers’ Money inMadoff ScamThe insured plaintiffs were a life insurance compa-

ny and its affiliates, or entities it or its affiliates man-aged, which invested over $3 billion with BernardMadoff. The defendants were a primary fidelity bondcarrier and several excess fidelity carriers and a pri-mary Directors and Officers insurer and several excessD & O insurers. The plaintiffs alleged both direct loss-es and suits against plaintiff entities by investors whosemoney was lost. The fidelity insurers moved to dismissthe complaint for failure to state a claim upon whichrelief could be granted. Numerous provisions of theprimary fidelity policy varied from the comparableprovisions of the 1986 S.F. No. 24 including the defini-tion of employee, an Independent Broker ExclusionRider, the definition of “Assured,” the definition ofProperty, the Ownership provision, a Court Costs andAttorneys Fees provision, and the On PremisesInsuring Agreement.One set of claimants were hedge funds which

invested with Madoff. The court thought that Madoffstole the hedge funds’ money directly and rejected theargument that the Trading Loss exclusion applied andthat the stolen funds were not the property of anAssured. The other set of claimants managed thehedge funds and were sued by investors (“feeder fund”suits, for example) and sought coverage for the cost todefend and any liability in those underlying suits. Theinsurers argued that any such costs or losses could notresult directly from a covered cause. The court reject-ed the insurers’ categorical position that a third partyclaim can never be a direct loss and stated, “Becausethe Bond Underwriters’ categorical no-coverage posi-tion is incorrect, I deny the motion to dismiss. This isnot to suggest that all or even many of the claims in theUnderlying Actions are covered.” The court extensive-ly discussed the applicable provisions of the primarybond and denied the fidelity insurers’ motion to dis-miss because it thought that on the record before it thecomplaint was adequate to state claims on the primarybond. Mass. Mut. Life Ins. Co. v. CertainUnderwriters at Lloyd’s of London, 2010 WL2929552 (Del. Ch. July 23, 2010).

Court Bonds

FSD • 16123 Probate Bond – Disgruntled Heir’sSuit Barred Because All Claims Had BeenAsserted and Rejected in Prior SuitsA disgruntled heir sued the surety on an executor’s

bond repeating claims she had made in several previ-ous suits.

The Court held that New Jersey’s EntireControversy Doctrine barred the claims because theywere asserted and decided in prior litigation. TheCourt also noted that the plaintiff’s claims might alsobe barred by the statute of limitations. Wisniewski v.Travelers Cas. & Sur. Co., 2010 WL 2893610 (3d Cir.July 26, 2010).

FSD • 16124 Supersedeas Bond – CourtApproved Bond Based on Obvious Ability ofPrincipal and Surety to Pay JudgmentThe judgment creditor objected to the supersedeas

bond filed by the debtor.The court approved the bond based on the

obvious financial ability of the principal (DuPont)and the surety (F&D) to pay the judgment eventhough the bond did not contain language from aLocal Rule that in the event of a default the suretyconsented to summary jurisdiction of the court.Adams v. United States, 2010 WL 3038089 (D.Idaho Aug. 2, 2010).

FSD • 16125 Probate Bond – Surety Failed toState a Claim against Estate’s Former AttorneysA probate bond surety paid the Estate and sued the

Estate’s former attorney and her law firm to recoverthe loss and expenses. The surety’s complaint assertedclaims for non-contractual indemnity, contribution,and professional negligence. The defendants moved todismiss the complaint.The court found that for non-contractual indem-

nity the obligation discharged by the plaintiff must bethe same as the obligation owed by the defendants.Here the obligations were different, and the court dis-missed the surety’s non-contractual indemnity claim.For contribution, the parties must share a commonliability, and here they did not. The court dismissedthe contribution claim. The surety was not the defen-dants’ client, therefore under Missouri law it couldsue for professional negligence only by showing thatthe defendants were retained by the Estate with thespecific intent to benefit the surety. The court foundno allegation or evidence of such a specific intent anddismissed the professional negligence claim.According to the court, the surety first asserted equi-table subrogation in its opposition to the motion todismiss, but the court nevertheless considered it. Thecourt thought that under Missouri law subrogationwas a drastic remedy to be allowed only in extremecases bordering on fraud. The surety did not allegefraud or anything bordering on fraud, and the courtconcluded, “Because Merchants has not stated aplausible claim for equitable subrogation,Defendants’ motion must be granted.” MerchantsBonding Co. v. Noland, 2010 WL 3584017 (W.D.Mo. Sept. 7, 2010).


16

FSD • 16126 Supersedeas Bond – Bond Releasedif Result Reversed on Appeal But RemainsLiable if Liability Affirmed and Case RemandedOnly for Determination of Amount of DamagesA law firm sued to recover $244,371 in allegedly

unpaid attorneys fees. The court awarded $27,849 butthen added $210,364 for attorneys fees and costs in thelitigation pursuant to a prevailing party provision inthe retainer agreement. The defendant appealed andposted a supersedeas bond for $306,000 conditionedon his prosecution of the appeal with effect. While theappeal was pending, the trial court awarded the plain-tiff another $38,403 of attorneys fees and costsincurred after the first award. The Court of Appealsaffirmed the underlying $27,849 judgment but vacatedand remanded the $210,364 for attorneys fees andcosts. On remand the trial court reinstated its awardof the $210,364, and the defendant appealed. Theplaintiff sought payment of out of the bond and a dec-laration that the unpaid amount of the bond bereserved for payment of the appealed attorneys feeaward. The trial court awarded what the plaintiffasked, and the surety appealed.The Court of Appeals held that the bond was liable

for the underlying $27,849 (which was not in dispute),was not liable for the $38,403 of additional attorneysfees awarded after the defendant had taken the appealfor which the bond was given, and ordered that thebond would be liable for the $210,364 of attorneysfees included in the original judgment if that amountwas ultimately affirmed. The Court reasoned that ifthe appeal results in a reversal of the defendant’s liabil-ity, the bond is discharged, but if it results only in theamount of damages being set aside and a remand todetermine amount, the bond remains in place andliable for the amount ultimately determined. TheCourt emphasized that a bond must be enforcedaccording to its terms and the surety’s liability cannotbe extended beyond its undertaking. Holt Goup,L.L.C. v. Kellum, 2010 WL 3035728 (Colo. App. Aug.5, 2010).

FSD • 16127 Probate Bond – StatutoryProcedure for Notice by Publication WasConstitutional, and Heir’s Claim againstPrincipal and Surety Were BarredThe ward died and the conservator filed a final

accounting and request that she and her surety be dis-charged. Because the conservator was also the execu-tor of the ward’s estate, the court appointed a guardianad litem. The guardian ad litem reviewed the account-ing and consented to its approval. Notice was pub-lished in a proper newspaper. The court approved thefinal accounting and discharged the conservator andher surety. A year and a half later, an heir of thedeceased ward challenged the proceeding on the

grounds that she did not receive notice and the statuteon notice was unconstitutional.The Court rejected her contentions. She did not

have a sufficient direct interest in the conservatorshipproceeding to require more than notice by publication.Ray v. Stewart, 700 S.E.2d 367 (Ga. Sept. 2010).

FSD • 16128 Injunction Bond – PartyWrongfully Enjoined Entitled to Opportunity toProve Damages Suffered as a Result ofInjunctionThe trial court discharged an injunction bond, and

the party enjoined appealed.The Court held that it was error to discharge the

bond without giving the party enjoined an opportuni-ty to present evidence of damages suffered during theperiod the injunction was in place. Kinzler v. Pope,2010 WL 3503453 (Iowa Ct. App. Sept. 9, 2010).

FSD • 16129 Supersedeas Bond – Trial CourtRetained Jurisdiction over Bond and PetitionerDid Not Meet Stringent Requirements forMandamusA litigant appealed denial of his petition for writ of

mandamus to require, among other things, release ofhis supersedeas bond.The Court held that the trial court retained jurisdic-

tion over the bond and the petitioner’s allegations didnot meet the stringent requirements for mandamus.The Court affirmed the order of the Court of Appealsdenying the requested relief. Seaman v. Isaacs, 2010WL 3377726 (Ky. Aug. 26, 2010).

FSD • 16130 Probate Bond – Approval ofPrincipal’s Final Accounting, From Which NoAppeal Was Taken, Barred Suit against SuretyThe probate court approved the final accounting of

an estate administrator. A dissatisfied heir, who hadopposed every pleading filed by the administrator, didnot appeal the approval and discharge but filed a sep-arate suit against the administrator and his suretyobjecting to his handling of the estate.The Court held that the order approving the final

accounting and discharging the administrator was resjudicata and barred the claims and that the surety’s lia-bility had to be premised on a breach by the principal.The Court stated, “Because the probate court conclud-ed that Eckstein was not negligent in performing hisduties, a surcharge action against Fidelity could nothave accrued.” Rothschild v. Eckstein, 2010 WL3528996 (Ohio Ct. App. Sept. 13, 2010).

FSD • 16131 Supersedeas Bond – Courts HadAuthority to Modify Judgment and Assess Bondfor Unpaid Rent Accrued During Appeal PeriodA tenant appealed a judgment for his landlord and

remained in possession of the apartment by posting a


17

supersedeas bond with his parents as sureties. Afterthe judgment was affirmed and review by the TexasSupreme Court denied, the Court of Appeals modifiedits judgment and mandate to add the unpaid rentaccrued during the appeal and attorneys fees. TheCourt directed the trial court to determine the amountsand to enter judgment against the sureties up to thepenal sum of the bond. The trial court followedinstructions, and the tenant appealed.The Court held that it and the trial court had the

authority to modify the judgments and mandate and toinclude the sureties in the revised judgments. Thisdecision replaces the Court’s earlier opinion reachingthe same result and reported at 2010 WL 547536 (Tex.App. Feb. 18, 2010). Whitmire v. Greenridge PlaceApartments, 2010 WL 3294280 (Tex. App. Aug. 19,2010).

FSD • 16132 Injunction Bond – Trial CourtAbused Discretion by Not Releasing Bond WhenCase Was Non-Suited and No Claim forDamages FiledA utility obtained Temporary Restraining Orders to

permit it to go on the property of three owners andconduct a survey. The trial court granted the TROsbut conditioned them on bonds of $25,000 for eachproperty owner. The petitioner used the TROs to sur-vey the defendants’ properties, had no need for furtherrelief, and filed non-suits. The property owners didnot move to dissolve the TROs or file any damageclaims prior to the non-suits, although they did filecounterclaims a month and a half later. The trial court,however, refused to order return of the bonds and theutility company appealed.The Court of Appeals held that it was an abuse of

discretion not to have returned the bonds. EnergyTransfer Fuel, L.P. v. Bryan, 322 S.W.3d 409 (Tex.App. Aug. 31, 2010), Energy Transfer Fuel, L.P. v.Black, 2010 WL 3419216 (Tex. App. Aug. 31, 2010),and Energy Transfer Fuel, L.P. v. Trammell, 2010 WL3419221 (Tex. App. Aug. 31, 2010).

Miscellaneous Bonds

FSD • 16133 Customs Bond – Customs ClaimWas Barred by Its Failure to Request Return ofMerchandise Within 30 Days of Receipt ofSamples, and Surety’s Collateral Claim againstPrincipal Was Moot, but Surety Awarded OnlyAttorneys Fees that Were Not Tainted byAttorney’s Conflict of InterestCustoms requested samples of material from two

entries. The importer submitted the samples, and aCustoms staffer at the port involved wrote acknowl-edging their receipt and purporting to extend the peri-

od of time within which Customs could request rede-livery of the merchandise. After testing the samples,Customs requested redelivery and sued the importerand surety for liquidated damages when the importerwas not able to return the merchandise. The importerand surety argued that the conditional release periodstarted when Customs requested the samples andended when the samples were delivered, and thatCustoms had only 30 days from delivery of the samplesto request redelivery of the merchandise. Since therequest for redelivery was made substantially morethan 30 days after the samples were delivered, theimporter and surety moved to dismiss the action. Thesurety also filed a cross claim against the importer. Thesurety sought deposit of collateral in the amount of theGovernment’s claim and attorneys fees pursuant to anindemnity agreement.The court held that the regulations and consistent

guidance from Customs Headquarters were that rede-livery had to be requested within the 30 day period andthe Customs staffer could not extend that period. Thecourt held, “The government has no colorable claimhere. This is an action that should never have beenbrought; and the motions to dismiss it now must begranted.” The court found that the surety’s collateralrequest was moot because the underlying claim wasdismissed. The attorneys initially retained by the sure-ty had also represented the importer in connectionwith Custom’s claim. The court held that they weredisqualified by conflicts of interest from also represent-ing the surety in the matter and disallowed their feesand the fees of the surety’s successor lawyers to consultwith them. The court also disallowed an expedited fil-ing fee and fees for work on other matters and award-ed the surety only the successor lawyer’s remaining feesfor work on the case before it. United States v.Pressman-Gutman Co.,721 F. Supp. 2d 1333 (Ct. Int’lTrade 2010).

FSD • 16134 Notary Bond – California JointTortfeasor Statute Would Not Protect SettlingNotary or Surety, Therefore SettlementConditioned on Full Release Not ApprovedTwo defendants in an action by a disappointed

mortgage re-financer filed cross claims against thenotary involved and her surety. The notary and suretyreached a settlement with one of the cross claimantsconditioned on its also barring claims by anyone else.The notary and surety then moved for a determinationby the court that the settlement was in good faithunder Cal. Civ. Proc. Code § 877.6 (a joint tortfeasorstatute).The court denied the motion. The statute protects

a tortfeasor entering into a good faith settlement fromcontribution or indemnity claims if the settlingclaimant recovers from a joint tortfeasor, it wouldnot protect against independent claims of another


18

defendant found liable to the plaintiff. Since the set-tlement was conditioned on full protection from otherclaims, it could not be approved. Jette v. OrangeCountry Fin., Inc., 2010 WL 3341561 (E.D. Cal. Aug.11, 2010).

FSD • 16135 Subdivision Bond – Surety NotObligated to Pay for Improvements that HadNot Been Built for Development in Which NoLots Had Been Sold or Were Likely to Be Sold inthe Foreseeable FutureTwo subdivision bonds were issued for infrastruc-

ture improvements in Phase II of a development.Before starting Phase II, the developer filed for bank-ruptcy. The property was sold, and as part of the salethe Obligee agreed to construct the infrastructureimprovements if, but only if, it collected the cost fromthe surety. No lots or homes had been sold in Phase II,and there was no dispute that the improvements wouldcost more than the lots were worth on the open mar-ket or that any home construction was years away.The court read the bond and the Obligee’s ordi-

nance together to require that the improvements actu-ally be constructed and thought that to forfeit the bondwould be a windfall to the Obligee and not achieve thepurpose of the bond to assure the ability of homeown-ers to connect to City utilities. The court found thatthe bond was an indemnity obligation and that theObligee had no damages for which it needed indemni-ty since it had no obligation to construct the improve-ments. The court refused to force the surety to pay theObligee for the possible future benefit of the purchaserof the property. Westchester Fire Ins. Co. v. City ofBrooksville, 2010 WL 3043917 (M.D. Fla. July 30,2010).

FSD • 16136 Subdivision Bond – NamingDeveloper as Defendant Was Not FraudulentJoinder, Even Though Individuals AffiliatedWith Developer Controlled PlaintiffHomeowners Association, Developer Would NotBe Realigned as Plaintiff, and Case Remanded toState CourtA homeowner’s association and club sued the devel-

oper and its surety. The surety filed a notice ofremoval, but the developer did not join in the notice.The surety argued that the developer controlled thetwo plaintiffs and that its joinder was fraudulent orthat it should be re-aligned as a plaintiff. The suretyrelied on the fact that the developer still owned a sig-nificant percentage of the lots, although less than amajority, and that the majority of the officers anddirectors of the plaintiffs were individuals associatedwith the developer. The plaintiffs pointed out that thedeveloper was the principal on the bonds and the sure-ty’s liability could not exceed the principal’s.

The Magistrate Judge refused to re-align the devel-oper or to disregard it as fraudulently joined andaccordingly recommended remanding the case to statecourt. The Judge also found, however, that the surety’sposition was not objectively unreasonable and recom-mended denial of the plaintiff’s request for attorneysfees. Club at Hokuli’a, Inc. v. Am. Motorists Ins. Co.,2010 WL 3465278 (D. Haw. Sept. 3, 2010).

FSD • 16137 Subdivision Bond – BondsProtected Only Obligee Not Claimants WhoAllegedly Worked to Construct theImprovementsThree claimants on subdivision bonds sued the

principal and surety. The obligee was not a party tothe action. The defendants moved to dismiss on thegrounds that the bonds did not protect the claimants.The claimants had each filed mechanics liens, and oneof the events of default under the bonds was the devel-oper permitting liens against the improvements. Thedeveloper wrote the City stating that it would beunable to complete the work and recommending thatthe City call the bonds. The City clerk wrote the sure-ty requesting payment. To date the surety had notpaid.The court rejected the claimants’ argument that

they were third party beneficiaries of promises in thebonds and held that they did not have standing tobring a direct suit against the surety. The court con-strued the bonds as purely performance bondsdesigned to protect the City. City of Yorkville ex rel.Pirtano Constr. Co. v. Ocean Atl. Servs. Corp., 2010WL 3385461 (N.D. Ill. Aug. 24, 2010).

FSD • 16138 Public Official Bond – Surety’sFailure to Pay Admitted Amount, ConditioningPartial Payment on Release of Claim, andRequest for Information after Admitting DebtWere Unfair Trade PracticesAn employee covered by a public official bond

embezzled funds over a period of several years. TheSchool District claimed the bond penalty for each year.The court’s interpretation of the correspondencebetween the parties was that the insurance companyfirst acknowledged liability for a single bond penaltybut conditioned payment on submission of a proof ofloss that would have waived the School District’sclaim for additional amounts. Several years later, theinsurance company asked for additional informationand took the position that it had defenses to the claim.The obligee School District asserted a statutory unfairtrade practices claim pursuant to Mass. Gen. Laws ch.93A. After the court entered summary judgment onthe bond claim, 2008 WL 5650854 (D. Mass. Sept.16, 2008), the insurance company paid the entireamount claimed plus interest leaving only the Chapter93A claim.


19

The court found that merely taking the positionthat only one bond penalty was owed was not a vio-lation but that the insurance company did violateChapter 93A by conditioning payment on waiver ofany claim for additional amounts, requesting infor-mation several years after admitting liability, and notpaying the admitted amount. The court found thatthe first set of violations were barred by the applica-ble four year statute of limitations and that the vio-lations were not willful or knowing (which wouldhave allowed multiple damages) and awarded theSchool District attorneys fees and costs. S.Worcester Cnty. Reg’l Vocational Sch. Dist. v. UticaMut. Ins. Co., 2010 WL 3222015 (D. Mass. Aug. 13,2010).

FSD • 16139 Certificate of Title Bond –Counterclaim by Judgment Creditor of PrincipalStated a Claim on BondThe surety issued bonds to secure certificates of title

for trucks sold by the principal. The surety filed suitagainst the principal and others. One of the otherdefendants (Manasseh) had recovered a judgmentagainst the principal for selling trucks that belonged toManasseh and filed a counterclaim against the suretyfor the amount of the bonds related to those trucks.The surety moved to dismiss the counterclaim or for amore definite statement.The court thought that the allegations of the coun-

terclaim were sufficient to state a claim on the bondsand denied the surety’s motion. Guarantee Co. of N.Am., USA v. Middleton Bros., Inc., 2010 WL 2801879(E.D. Mo. July 15, 2010).

FSD • 16140 Lease Bond – Court Refused toExclude Expert Witnesses Proposed by Banksand Broker But Did Limit the Scope of TheirProposed TestimonyIn a consolidated multidistrict litigation involving

fraudulent leases and related surety bonds, severalsureties moved to exclude testimony of expert witness-es proposed by some of the claimant banks or, in thealternative, to limit the witnesses’ testimony.The court refused to exclude the witnesses but did

substantially limit their testimony. The court held thatthe expert witnesses would not be allowed to testifycontrary to findings the court had already made (forexample, that in certain of the cases CMC rather thanthe bank was the intended obligee), or to ultimatefacts, the intent of the parties or legal conclusionsincluding the meaning of contracts. One expert prof-fered by a broker would be permitted to testify as tocustom and practice in the surety industry related tobroker compensation and brokers’ standard of care.In re Commercial Money Ctr., Inc., 2010 WL 2991526(N.D. Ohio July 27, 2010).

FSD • 16141 Mortgage Broker Bond – SuretyBound by Amount of Judgment againstPrincipal, Including Attorneys Fees, Up to PenalSum of BondA homeowner recovered a judgment against a

mortgage broker, and the judgment was affirmed onappeal. The judgment included $65,070.65 under theOhio Mortgage Brokers Act consisting of $2,125 incompensatory damages, $52,532.50 in attorneys fees,$4,038.15 of court costs and $6,375 of punitive dam-ages. The homeowner submitted a claim on the mort-gage broker’s $60,000 bond required by the Act. Thesurety paid $15,000 consisting of the compensatorydamages and $12,825 of attorneys fees. The home-owner sued the surety for the balance of the bondamount plus prejudgment interest and costs.The court found that the surety was bound by the

state court judgment because it was in privity with thebond principal and had notice of the suit prior to judg-ment (but well after the suit was filed). The courtawarded the homeowner the $45,000 unpaid balanceof the bond. The court also awarded prejudgmentinterest at 10% from the date the judgment against theprincipal became final and attorneys fees in the federalcourt action against the surety on the theory that thesurety’s refusal to pay once the court of appealsaffirmed the judgment against the principal was“obdurate conduct.” Swayne v. Capitol Indem. Corp.,2010 WL 2663209 (S.D. Ohio July 1, 2010).

FSD • 16142 Property Broker Bond – SuretyDischarged in Interpleader Action UponPayment of Amount Owed to Two ClaimantsWho Filed AnswersThe surety on a Property Broker Bond received

claims that exceeded the bond penalty. The surety filedan interpleader action, and only two of the claimantsfiled responsive pleadings. The bond amount was suf-ficient to pay those two claimants in full.The Magistrate Judge recommended, and the dis-

trict court ordered, that upon payment into court ofthe amount of the two claims the surety was releasedand discharged from further liability under the bond.Ohio Cas. Ins. Co. v. C&C Trucking of Duncan SC,Inc., 2010 WL 3075270 (S.D. Ohio June 24, 2010)and 3092908 (S.D. Ohio Aug. 6, 2010).

FSD • 16143 Mechanics Lien Bond – StatutoryLien Bond Protected Owner and Property fromLien Claim and Owner Dismissed from Actionto Enforce LienA subcontractor filed its notice of contract to assert

a mechanics lien against a private project well after thecontractor and its surety filed a statutory lien bond.The subcontractor sued the prime and surety on thebond but also sued the owner of the property. The


20

owner moved to dismiss the claims against it on theground that by statute once the lien bond was filed itand its property were not subject to the lien.The court agreed and dismissed the claims against

the owner. Gen. Mech. Contractors, Inc. v. C.E. FloydCo., 2010 WL 3191799 (Mass. Super. Ct. June 29,2010).

FSD • 16144 Mechanics Lien Release Bond –Claimant Entitled to Reform Lien Release toCorrect Date, and Other Defenses Foreclosed byPrior JudgmentA supplier to a subcontractor filed a lien. The

prime contractor contacted the supplier, and theyagreed on a settlement. The prime contractor delivereda check and a lien release, which the supplier signed.In a prior appeal, the Court held that the supplier wasentitled to a trial on its claim that the date throughwhich it released its lien rights was a mistake and itwas entitled to reform the release. There was no priorappeal of the judgment for the claimant for the periodafter the date stated in the lien release. After remand,the trial court entered judgment for the claimant, andthe prime contractor and surety appealed.The Court found that substantial evidence support-

ed reforming the lien release on both mutual mistakeand unilateral mistake grounds and that the prior judg-ment barred the prime contractor from raising otherdefenses to the lien. The Court also awarded attorneysfees to the claimant not limited by the bond amount.N. Coast Elec. Co. v. Ariz. Elec. Serv., Inc., 2010 WL3298857 (Wash. Ct. App. Aug. 23, 2010).

Surety’s Rights

FSD • 16145 Surety’s Rights – Surety Did NotHave Standing to Intervene in Contract AppealsBoard Proceeding on Principal’s ClaimsAn ongoing proceeding before the Armed Services

Contract Appeals Board (ASBCA) involved appeals bythe contractor of the government’s denial of affirma-tive claims. The surety paid payment bond losses onthe two contracts involved, recovered a judgmentagainst the principal and indemnitors, and sought tointervene in the ASBCA proceeding as both the subro-gee and assignee of the contractor.The ASBCA denied permission to intervene and

reiterated its position that in the absence of a takeoveragreement the surety is not subject to the ContractDisputes Act or the Disputes clause in the contract andhas no standing before the Board. Appeals ofThorington Elec. & Constr. Co., ASBCA No. 56895,2010 WL 2899030 (July 16, 2010).

FSD • 16146 Surety’s Rights – Surety Entitled toSummary Judgment against Indemnitor

The surety sued the principal and indemnitors.One indemnitor filed for bankruptcy, and after trial thesurety recovered a judgment against the other defen-dants. The surety then obtained relief from the auto-matic stay and moved for summary judgment againstthe bankrupt indemnitor.The court granted the motion based on a statement

of uncontested facts. Am. Contractor’s Indem. Co. v.A.C.I. Contracting, Inc., 2010 WL 3522438 (W.D.Ark. Sept. 1, 2010).

FSD • 16147 Surety’s Rights – Subdivision BondSurety Granted Judgment by Default againstPrincipal and IndemnitorThe surety on a subdivision bond sued the principal

and an indemnitor. The defendants defaulted, and thesurety moved for entry of judgment by default.The court granted the surety’s motion and entered

judgment by default against the principal and indemn-itor. Developers Surety & Indem. Co. v. Old TowneStation, LLC, 2010 WL 2951214 (M.D. Ala. July 22,2010).

FSD • 16148 Surety’s Rights – Surety Entitled toAdd Attorneys Fees, Costs and PrejudgmentInterest to Earlier Judgment for LossesIn an earlier decision reported at 2010 WL

2367491 (M.D. Ala. June 11, 2010), the court grantedthe surety summary judgment for its losses. The sure-ty sought to add attorneys fees, costs and prejudgmentinterest.The court agreed and granted the surety its attor-

neys fees, costs and prejudgment interest. DevelopersSur. & Indem. Co. v. Old Towne Station, LLC, 2010WL 3258617 (M.D. Ala. Aug. 16, 2010).

FSD • 16149 Surety’s Rights – Surety’sComplaint Stated Claims for Breach of Contractand Conversion against Bank that Signed SetAside AgreementThe surety issued a subdivision bond in reliance on

a set aside agreement from the defendant bank. Afterthe principal defaulted, the bank refused to pay overthe balance of the set aside fund for use in completingthe bonded work. The surety settled with the obligeeand sued the bank for breach of contract and conver-sion. The bank moved to dismiss the complaint forfailure to state a claim. The bank argued that the setaside agreement was not a binding contract becauseneither the surety not the principal signed it.The court noted that the bank signed the agree-

ment and the surety and principal could signifyacceptance by their actions, including issuance of thebond. Similarly, for the conversion count the com-plaint alleged an adequate property right in the fundbased on the contract. The court denied the bank’smotion to dismiss. Lincoln Gen. Ins. Co. v. Tri


21

Counties Bank, 2010 WL 3069874 (E.D. Cal. Aug. 5,2010).

FSD • 16150 Surety’s Rights – Surety Entitled toAttorneys Fees Pursuant to a Prevailing PartyAttorneys Fee Provision in Bonded Subcontract,Which Was Incorporated Into the Bond byReferenceThe bond incorporated the subcontract, and the

subcontract contained a prevailing party attorneys feeclause. After the Court of Appeals affirmed a judg-ment for the subcontractor’s sureties based on theobligee’s failure to perform conditions precedent in thebond, the sureties moved in the district court for anaward of attorneys fees and costs as provided in thesubcontract. The obligee argued that it should nothave to pay fees incurred to defend the principal sincethe principal was not a prevailing party. The suretiesresponded that defending the principal was a part ofdefending the sureties, but they took the issue intoaccount by requesting only 50% of the fees actuallypaid from the time the sureties were added to the caseuntil the time the case was stayed pending appeal of thejudgment for the sureties.The court agreed that the 50% allocation was a

reasonable estimate and granted the motion but madeseveral other minor reductions in the requested fees.Hunt Constr. Grp., Inc. v. Nat’l Wrecking Corp., CaseNo. 1:05-cv-165 (D.D.C. July 19, 2010).

FSD • 16151 Surety’s Rights – IndemnitorsOrdered to Deposit Collateral DespiteBankruptcy Filing of Principal and OtherIndemnitorsThe principal and several indemnitors filed for

bankruptcy. The surety sought to compel the non-bankrupt indemnitors to comply with the collateraldeposit and access to books and records sections of theindemnity agreement.The court granted the surety’s motion to the extent

of an order directing the defendants to deposit $3.5million with the clerk to be held as collateral for thesurety. Kearney Constr. Co. v. Travelers Cas. & Sur.Co. of Am., 2010 WL 2803971 (M.D. Fla. July 15,2010).

FSD • 16152 Surety’s Rights – CompletingSurety Stated Claim against Obligee for Paymentof Contract Funds Earned by Surety’sCompletion WorkThe obligee on a Florida public project delayed for

many months before finally terminating the principaland demanding that the surety complete the work.The obligee refused to enter into a takeover agree-ment and demanded that the surety simply performthe work. After the surety completed the disputed

phase of the work, the obligee refused to pay the sure-ty and claimed that liquidated damages exceeded theremaining contract funds. The surety sued, and theobligee filed a motion to dismiss. The obligee assert-ed that sovereign immunity barred the surety’s suitbecause there was no written contract between it andthe surety. The obligee also argued that the surety’sclaims were barred by the provision of the bond thatno right of action accrued to anyone other than theobligee or its successors or assigns and that it wasonly a beneficiary of the bond, did not sign it, andhad no obligations under it. The obligee argued thatthe surety was a mere volunteer and so not entitled toassert any claims and relied on alleged inconsistenciesbetween the surety’s allegations and enforcement ofthe surety’s rights under the bond or rights impliedinto the bond and contract. Finally, the obligeeargued that its set off for liquidated damages exceed-ed the contract balance. The surety, however, allegedin its Complaint that the delays in project completionwere caused by the obligee’s own mismanagement ofthe contract.The Magistrate Judge recommended denial of the

owner’s motion. The court held that the bond incor-porated the contract and created contractual obliga-tions between the owner and the surety sufficient tomeet Florida’s requirements for waiver of sovereignimmunity. The court also agreed with the surety thatsovereign immunity did not bar the surety’s equitablesubrogation claim to the rights of the contractor andowner. By virtue of completing the work, the suretywas subrogated to the rights of the contractor andowner and could sue for the contract funds earned byits performance. The court noted that the bond pro-vision limiting who could sue on the bond to theobligee and its successors would not have preventedthe contractor from suing to enforce the contract andheld that by completing the work the surety stood inthe shoes of the contractor and also could sue formoney owed under the contract. The court rejectedthe owner’s argument as contrary to mutuality ofcontract under Florida law and contrary to the sure-ty’s rights upon completion of the work. The courtrejected the owner’s volunteer argument and pointedout that the School Board itself demanded perform-ance and the surety obviously acted to protect itsinterests not as a volunteer. The court also rejectedthe set off argument. For purposes of the motion todismiss, the surety’s allegations had to be taken astrue, and the School Board’s set off claims would bedetermined on their merits later in the proceedings.Great Am. Ins. Co. v. Sch. Bd. of Broward Cnty.,2010 WL 4366865 (S.D. Fla. July 30, 2010) [Noobjections were filed to the Magistrate’s recommen-dation, and it was adopted by the District Court onSeptember 27, 2010.]


22

FSD • 16153 Surety’s Rights – Surety Could NotUse Collateral Pending Resolution of Its andBank’s Conflicting ClaimsThe surety sued an indemnitor and sought deposit

of collateral. The same indemnitor had guaranteed abank loan to the principal, and the bank intervened inthe surety’s suit. In a prior decision, the court orderedthe indemnitor to deposit collateral with the surety butordered the surety not to use the collateral pendingauthority from the court. The surety sought thatauthority and the bank objected arguing that therecord did not show the amount and source of any col-lateral deposited with the surety, that the surety hadnot shown a security interest in the indemnitor’s assets,and that it was entitled to discovery as to the claimsmade on the surety’s bonds.The court recognized that under Illinois law the

indemnity agreement’s collateral deposit provision wasenforceable, but nevertheless denied the surety’smotion to use the collateral. The court agreed that thebank was entitled to know the source of any collateralto see if it claimed a prior interest in it and ordered thesurety to provide that information to the bank. Thecourt declined to rule on the surety’s and bank’s con-flicting claims to priority in whatever was depositedand denied the bank’s request for discovery as to thebond claims against the surety. Travelers Cas. and Sur.,Co. of Am. v. Paderta, 2010 WL 2732243 (N.D. Ill.July 8, 2010).

FSD • 16154 Surety’s Rights – Court DeniedPrincipal and Indemnitors’ Motion to DismissThe surety sued the principal and indemnitors to

recover its losses and expenses. The defendants filed amotion to dismiss. The defendants’ arguments werebased on a change in the surety’s name, the alleged fail-ure to plead the specific cause of the losses, and thesurety’s failure to seek indemnity by means of a crossclaim in the obligee’s suit against the principal andsurety.The court rejected each argument. An amended

complaint explained the name change, the losses andexpenses were incurred by reason of the execution ofthe bonds as provided in the indemnity agreement, andthere was no identity of action between the obligee’ssuit and the surety’s suit for indemnity, so res judicatadid not apply. Pa. Gen. Ins. Co. v. Hunter AllianceCorp., 2010 WL 3516008 (N.D. Ill. Aug. 31, 2010).

FSD • 16155 Surety’s Rights – Surety NotResponsible for Alleged Fraud by Agent andEntitled to Summary Judgment againstIndemnitors, as Limited in Amount by Rider toAgreement, and Upon Disposition of All ClaimsInvolving Surety Case Dismissed as to OtherParties for Lack of Diversity Jurisdiction

Contract bonds were obtained in part by a falsefinancial statement and in part by indemnity from per-sons who were not owners of the principal. These per-sons also lent money to the principal to provide work-ing capital for the bonded job. They alleged that theagent placing the business knew the financial statementwas false. The surety paid losses and sued on theindemnity agreement. The principal and individualindemnitors related to the principal defaulted, but theindividual indemnitors who were not owners defendedand argued that the agent was the surety’s agent andinduced their participation by means of the false finan-cial statement. There were also various cross claimsand third party claims against the agent and theaccountant who prepared the financial statement aswell as between indemnitors.The court granted summary judgment to the surety

on its indemnity claims. The agent did not have actu-al or apparent authority to act for the surety in repre-senting the financial condition of the principal, andeven if he had, any reliance by the indemnitors wouldnot have been reasonable. The surety was not respon-sible for any fraud by the agent. The court also grant-ed summary judgment limiting the amount of theindemnity obligations pursuant to a rider to the indem-nity agreement. This disposed of all claims in the caseto which the surety was a party. There was no diversi-ty among the remaining parties, and the court declinedto exercise supplemental jurisdiction over their remain-ing disputes. The court dismissed the remaining claimsfor lack of jurisdiction. Travelers Cas. & Sur. Co. ofAm. v. Young Constr. & Paving, LLC, 2010 WL3341569 (N.D. Ill. Aug. 18, 2010).

FSD • 16156 Surety’s Rights – Surety StatedClaim against Principal and IndemnitorsThe surety sued the principal and indemnitors to

recover its losses and expenses. The defendants filed amotion to dismiss. The defendants asserted argumentsbased on a change in the surety’s name, the alleged fail-ure to plead the specific cause of the losses, and thesurety’s failure to seek indemnity by means of a crossclaim in the obligee’s suit against the principal andsurety.The court denied the motion. An amended com-

plaint explained the name change, the losses andexpenses were incurred by reason of the execution ofthe bonds as provided in the indemnity agreement, andthere was no identity of action between the obligee’ssuit and the surety’s suit for indemnity, so res judicatadid not apply. Pa. Gen. Ins. Co. v. Hunter AllianceCorp., 2010 WL 3516008 (N.D. Ill. Aug. 31, 2010).

FSD • 16157 Surety’s Rights – Probate BondSurety Recovered Default Judgment againstExecutor and Others Based on Discovery Abusein Fraudulent Conveyance Suit


23

The surety for the executor of a California probateestate sued the executor, another individual and anLLC to recover funds diverted from the estate andfraudulently conveyed to the LLC to purchase realproperty in Kansas. The defendants defaulted andfailed to comply with discovery requests in spite ofnumerous warnings, second chances and promises.The magistrate judge recommended, and the dis-

trict court entered, a default judgment against two ofthe defendants as sanctions for their discovery abuse.Am. Contractors Indem. Co. v. Atamian, 2010 WL3862034 (D. Kan. Aug. 6, 2010) and 2010 WL3843642 (D. Kan. Sept. 27, 2010).

FSD • 16158 Surety’s Rights – Judgment forSurety Would be Premature Unless SettlementAgreement BreachedThe surety sought entry of a final money judgment

even though there was a settlement agreement that wasin the process of performance. The payments andother obligations had been performed to date, butother obligations remained to be performed in thefuture. The surety argued that it could use the moneyjudgment if the settlement agreement were breachedand that all of the defendants were not parties to theagreement even though all would be released if orwhen it was fully performed.The court thought that the surety’s motion was pre-

mature unless there was an actual breach of the settle-ment agreement and denied the motion. Frontier Ins.Co. v. MC Mgmt., Inc., 2010 WL 3276430 (W.D. Ky.Aug. 17, 2010).

FSD • 16159 Surety’s Rights – Surety’s Claimsagainst Obligee Must be Decided by ArbitrationUnder the Broad Arbitration Clause in theBonded SubcontractThe surety for a subcontractor paid losses and sued

the obligee alleging that the obligee concealed the factthat its estimate of the cost of the subcontract worksubstantially exceeded the subcontract amount and ini-tially divided the work into two subcontracts to avoidthe surety performing an independent estimate of thecost. The surety further alleged that the obligee con-cealed problems with the work to induce the surety toconsent to an increase in the amount of the bonds andthen terminated the second subcontract and added itsscope to the first subcontract. The surety pled causesof action to void the bonds and to recover damages forfraud in the inducement, fraud/intentional misrepre-sentation, negligent misrepresentation, fraudulent con-cealment, unjust enrichment, equitable estoppel, andunfair and deceptive trade practices. The subcontractcontained an arbitration clause and stated that the sub-contractor’s insurers and sureties would be obligated toparticipate in and be bound by the arbitration. Theobligee moved to dismiss the suit and the surety moved

to stay the arbitration.The court found that the arbitration clause was

“broad” and, combined with the presumption of arbi-trability, empowered the arbitrators to decide the sure-ty’s claims including its fraud claims. The court deniedthe surety’s motion to stay the arbitration and reservedjudgment on the obligee’s motion to dismiss. Itappears that the court thought the litigation should bestayed pending completion of the arbitration, but noone had yet requested that relief. First Sealord Sur., Inc.v. TLT Constr. Corp., 2010 WL 3810856 (D. Mass.Sept. 27, 2010).

FSD • 16160 Surety’s Rights – DepositAgreement Between Insured and Bank BarredSubrogation Claim by InsurerThe insured (Schultz Foods) issued a check for

$153,856.46. The check was stolen and the payeechanged by “washing” to an individual who endorsedand deposited it. The money was promptly wiredoverseas. When Schultz Foods discovered what hadhappened, it asked its bank (Wachovia) to re-credit itsaccount. When Wachovia refused, Schultz Food recov-ered from its insurer and the insurer sued Wachovia assubrogee. The parties recognized that the check wasnot properly payable and that under the U.C.C. theloss fell on Wachovia. The U.C.C., however, allowsthis result to be varied by agreement as long as theagreement does not absolve the bank from lack ofgood faith or the failure to exercise ordinary care. Thedeposit agreement between Schultz Foods andWachovia recited several precautions that a customercould take and several fraud prevention services thatWachovia offered to its customers and provided thatthe customer would be precluded from recoveringagainst Wachovia if it failed to implement any of theservices or failed to follow any of the precautions.Among the services offered was Positive Pay in whichthe customer informs the bank of certain informationabout each check as it is issued and the bank contactsthe customer before paying any check that varies fromthe information provided. The court accepted thatPositive Pay would have included the identity of thepayee of the check and would have prevented the loss.The court rejected the insurer’s arguments that: (1)

the deposit agreement released Wachovia only if thedepositor took none of the precautions and used noneof the services; (2) a bank and its customer cannotcontract out of the strict liability imposed by theU.C.C.; (3) the very broad provision was unenforce-able because it purported to absolve Wachovia of lia-bility for its own lack of good faith or failure to exer-cise ordinary care even though there was no allegationof either in this case; (4) Positive Pay was an unreason-able requirement because Schultz Foods incorrectlybelieved that it would be very costly to implement;and (5) Wachovia’s payment of three prior check


24

frauds suffered by Schultz Foods without invoking thedeposit agreement was a waiver of its right to invokethe deposit agreement in this instance. The courtinterpreted the agreement to apply if the customereither did not take precautions or did not purchaseservices. The U.C.C. clearly allowed variation of thebank’s responsibility within limits. The agreementwould be judged based on the facts of the case, andjust because it might not be enforceable under othercircumstances was irrelevant. The reasonableness ofPositive Pay was an objective question to be decidedon the facts not on Schultz Foods’ mistaken belief asto its cost. And, the deposit agreement contained anexplicit anti-waiver provision that Wachovia couldenforce the agreement even if it had chosen not to inpast cases. The court granted summary judgment toWachovia and dismissed the case. Cincinnati Ins. Co.v. Wachovia Bank, N.A., 2010 WL 2777478 (D.Minn. July 14, 2010).

FSD • 16161 Surety’s Rights – Issues of FactPrecluded Summary Judgment on SubrogatedInsurer’s Claims against Interstate ShippingGroupThe dishonest shipping manager of the insured per-

petrated a kickback scheme in which the insured over-paid for shipping. The insurer paid the loss and suedthe other parties to the scheme as well as the employ-ee. The insurer recovered judgments against the ship-ping manager, the local trucking company involved,and the local company’s dishonest employee, but theremaining defendant, a shipping group used by thelocal company for interstate shipments, was originallydismissed based on a limitations clause in the bills oflading. The Eighth Circuit reversed, see 562 F.3d 943(8th Cir. 2009), and following remand the insurer andthe remaining defendant filed cross motions for sum-mary judgment on many of the insurer’s claims.The court largely denied the motions because there

were issues of fact as to the agency relationshipbetween the remaining defendant and the local truck-ing company and its dishonest employee. The courtwas sympathetic to the insurer’s argument that theremaining defendant was unjustly enriched by its per-centage of the overcharges and stated that it would notbe surprised if the jury forced their return. The courtrejected the insurer’s argument that the remainingdefendant was bound by the unopposed summaryjudgment entered against the dishonest employee of thelocal shipping company because he was the remainingdefendant’s subagent. Hartford Fire Ins. Co. v. Clark,2010 WL 2925050 (D. Minn. July 21, 2010).

FSD • 16162 Surety’s Rights – DishonestEmployee’s Debt Not Discharged to the Extentof Her Net Theft But Proof Was Insufficient toDeny Dischargeability of Her Husband’s Debt

An employee stole $314,327.49 from the insured.The policy had a limit of liability of $150,000, and theinsurer paid that amount to the insured. The employ-ee and her husband filed for bankruptcy, and the insur-er and insured filed a complaint objecting to the dis-chargeability of the debt arising out of the theft. Theissues were the amount to be excepted from dischargeand whether the discharge exception should also applyto the husband.The court subtracted from the amount the

employee stole various items of recovery and restitu-tion and the amount of $84,123.45 for which theemployer had issued a Form 1099 to the employee.That left $135,392.64, and the court entered judg-ment declaring that amount nondischargeable as tothe employee. The court credited the husband’s tes-timony that he did not know of his wife’s activitiesand did not pay attention to the family finances. Thecourt stated, “While Darren’s ambivalence to thefamily finances was likely reckless, there are insuffi-cient facts to conclude that Darren’s actions rise tothe level of willful and maliciousness or that he con-spired with Lisa.” The court, therefore, exceptedfrom discharge only the debt of the employee herself.Acuity v. Rodenbaugh (In re Rodenbaugh), 431 B.R.473 (Bankr. E.D. Mo. 2010).

FSD • 16163 Surety’s Rights – BankruptcyCourt Held that Mortgage Broker Bond Surety’sIndemnity or Contribution Claim againstAppraiser Was Barred by Joint TortfeasorStatuteThe surety on a mortgage broker bond filed a third

party complaint seeking indemnity or contributionfrom other persons involved in the mortgage transac-tion that gave rise to the plaintiff’s damages. One ofthe third party defendants, an appraiser, settled withthe claimant and moved to dismiss the surety’s thirdparty complaint on the ground that a Missouri statutebarred contribution or indemnity from a settling tort-feasor. The surety tried to explain suretyship and sub-rogation to the Bankruptcy Judge, but he was deter-mined that the principal was the “insured” and thesurety was subrogated to the principal’s rights not tothe rights of the claimant.The court held that the joint tortfeasor statute

applied and the surety’s third party complaint wasbarred. The court granted the appraiser’s motion.McClelland v. N. Am. Specialty Ins. Co. (In reMcClelland), 2010 WL 3245315 (Bankr. W.D. Mo.Aug. 16, 2010).

FSD • 16164 Surety’s Rights – Surety Entitled toSummary Judgment against Indemnitor and toSeek Additional Expenses in the FutureThe surety moved for summary judgment against

an indemnitor for the surety’s losses paid to date and


25

for future expenses incurred in defending a suit by theobligee.The court granted the surety’s motion including

leave to seek an award of additional expenses in thefuture. Travelers Cas. & Sur. Co. of Am. v. PowerTech Servs., Inc., 2010 WL 2802387 (D.N.J. July 15,2010).

FSD • 16165 Surety’s Rights – Surety Entitled toJudgment Pursuant to Settlement AgreementBreached by IndemnitorsThe surety and indemnitors agreed to a settlement

by which the indemnitors were to make periodic pay-ments and the surety accepted less than the full amountowed if the payments were made. If the payments werenot made, the indemnitors consented to a judgment inthe full amount owed plus interest less any paymentsmade. The indemnitors made payments for severalmonths before defaulting. The surety moved to enforcethe settlement agreement and enter judgment in the fullamount still owed. One indemnitor opposed themotion and filed a cross motion to set aside the agree-ment. He argued that he should not be bound by theagreement because his attorney did not inform him ofthe settlement terms. The facts, including his makingpayments under the agreement, showed otherwise.

The court granted the surety’s motion, denied theindemnitor’s cross motion, and entered judgment forthe surety. RLI Ins. Co. v. Vintage Contracting Co.,2010 WL 4062862 (D.N.J. Aug. 25, 2010).

FSD • 16166 Surety’s Rights – Public OfficialBond Surety Failed to State Claim againstEntities That Paid Bribes to County ExecutiveThe surety on public official bonds for a former

county executive settled with the county for lossesstemming from the principal’s giving contracts inexchange for bribes. The surety then sued three relat-ed entities that paid some of the bribes and profitedfrom the contracts. The three entities filed for bank-ruptcy, and the surety filed adversary proceedings todetermine the debt and declare that it was nondischar-gable. The surety’s complaints relied on subrogation,common law indemnity and disgorgement. The defen-dants moved to dismiss the complaints.The Bankruptcy Court held that the surety did not

show that any of its payments to the county were fordebts for which the county could have recovered fromthe defendants and so subrogation did not apply. Thecourt also held that the defendants and the surety werenot joint tortfeasors, so there could be no common lawindemnity, and that while the county could have suedfor disgorgement of the profits from the fraudulentlyobtained contracts the surety could not assert thatcause of action. The court dismissed the surety’s actionfor failure to state a claim. W. Sur. Co. v. Sandoval,2010 WL 3745895 (Bankr. D.N.J. Sept. 17, 2010).

FSD • 16167 Surety’s Rights – Court DismissedSurety’s Additional Insured Claims againstSubcontractors’ CGL Carriers Based on PolicyDefenses Asserted by CarriersThe prime contractor’s surety was assigned the

prime contractor’s rights and sued three CGL carriersfor a subcontractor alleging that the prime contractorwas an additional insured under the policies. This wasone aspect of a long running dispute over repair of ter-razzo floors on the project. In a prior decision thecourt found issues of fact as to prejudice from allegedlate notice to the three insurers. The insurers movedfor summary judgment on other grounds.The court noted the split of authority in other juris-

dictions over whether faulty workmanship can be cov-ered under a liability policy and that the New JerseySupreme Court had not decided the issue. The courtdid not need to reach that question because each insur-er was entitled to summary judgment on othergrounds. For one, the additional insured endorsementrequired that a certificate of insurance be issued, and itwas not. For another, the defective work was knownto the additional insured prior to inception of the pol-icy and so was excluded by a Known Injury amend-ment. For the third policy, several business risk exclu-sions combined to bar coverage. The court granted theinsurers’ motions for summary judgment and dis-missed them from the case. Travelers Cas. & Sur. Co.v. Dormitory Auth.-State of New York, 2010 WL3001729 (S.D.N.Y. July 20, 2010).

FSD • 16168 Surety’s Rights – Court GrantedSummary Judgment Rejecting Surety’s ThirdParty Beneficiary, Functional Equivalent ofPrivity and Litigation with Third Party Theoriesto Overcome Lack of Privity with Architect andCMThe surety for a co-prime contractor on a public

project sued, among others, the project architect andconstruction manager (CM) alleging increased costs toperform the work as a result of the architect and CM’smultiple failures. The architect and CM moved forsummary judgment. The surety was the subrogee andassignee of its principal, but the principal was not inprivity of contract with these defendants. The suretysought to overcome this lack of privity by arguing thatthe principal was a third party beneficiary of the con-tracts between the owner and the architect and CM, orthat the principal’s relationships to the architect andCM were the functional equivalent of privity underNew York law, or that the surety incurred attorneysfees and expenses in defending suits by subcontractorsand others as a result of the wrongful acts of the archi-tect and CM.The court rejected each argument and granted sum-

mary judgment to the architect and CM dismissing the


26

surety’s claims. The court found that the facts ofrecord after extensive discovery showed that the prin-cipal was not an intended third party beneficiary of theowner’s contracts with the architect and CM. Since theprincipal was simply one among many potential bid-ders, it was not “known” for purposes of the function-al equivalent of privity test at the time of the allegedmisrepresentations by the architect and CM. Sincethere was no duty owed to the principal there was nobasis to apply the New York rule allowing attorneysfees as a component of damages when a wrongful actinvolved the claimant in litigation with others.Travelers Cas. & Sur. Co. v. Dormitory Auth.-State ofNew York, 2010 WL 3199861 (S.D.N.Y. Aug. 11,2010).

FSD • 16169 Surety’s Rights – Court GrantedSummary Judgment Dismissing Surety’s Claimsagainst Owner, Other Than for Money DueUnder the Contract, and Dismissing the Owner’sCounterclaims, Other Than by Subrogation toPayment Bond Claims of Subcontractors OwnerPaidThe surety financed completion of the project and

sued the owner for money due under the contract, fordelay damages the contractor suffered, for variousimpact pass through claims of subcontractors, and forthe surety’s own costs in defending various paymentbond suits allegedly caused by the owner’s breaches.The owner counterclaimed for the contractor’s breachof contract and the surety’s breach of both the per-formance and payment bonds. The owner sought sum-mary judgment on each of the surety’s claims, exceptmoney owed under the contract, and the surety movedfor summary judgment on each of the owner’s counter-claims.The court held that the no damage for delay clause

barred the delay damage claims. Some of the passthrough claims were not subject to a liquidating agree-ment that complied with New York law, and those thatwere failed because of either the no damage for delayclauses or the claimant’s failure to give required noticeof the conditions alleged to have caused increasedcosts. The surety’s claim for costs to defend paymentbond suits was barred by the provision in the paymentbond that “The owner shall not be liable for the pay-ment of any costs or expenses of any such suit.” Thecourt also granted the surety summary judgment on allbut one of the owner’s counterclaims. The contractorhad completed the work, albeit with financing fromthe surety, and there was no termination for default.The court held that the surety did not assume the con-tractor’s obligations and that the owner’s attemptedalter ego argument was not pled and came far too late.The owner never performed the conditions precedentto make a performance bond claim. The owner had

paid some subcontractors, however, and could make apayment bond claim for those payments by subroga-tion to the rights of the subcontractors it paid.Travelers Cas. & Sur. Co. v. Dormitory Auth.-State ofNew York, 2010 WL 3419196 (S.D.N.Y. Aug. 26,2010).

FSD • 16170 Surety’s Rights – Surety Entitled toDefault Judgment in Amount of Its Losses andExpenses Plus Prejudgment InterestThe surety paid the obligee union benefit fund and

sued the principal and indemnitors. Following thedefendants’ default, the surety moved for entry of judg-ment by default.The Magistrate Judge recommended a default judg-

ment for the surety for the amount the surety paid theobligee plus expenses plus prejudgment interest pur-suant to New York law. Great Am. Ins. Co. v.Gateway Acoustics Corp., 2010 WL 3522813(E.D.N.Y. July 26, 2010).

FSD • 16171 Surety’s Rights – Surety Entitled toDefault Judgment against Principal andIndemnitorsThe surety sued the principal and indemnitors and

moved for by default.The Magistrate Judge recommended a default judg-

ment for the surety against the principal and indemni-tors for the amount the surety paid the obligee (a unionbenefit fund) plus expenses plus prejudgment interestpursuant to New York law. Great Am. Ins. Co. v.Gateway Acoustics Corp., 2010 WL 3522813(E.D.N.Y. July 26, 2010).

FSD • 16172 Surety’s Rights – Subdivision BondSurety That Had Not performed or Paid UnderIts Bonds Did Not Have Standing to SeekContribution from New Owner of Property ThatWould Benefit from the ImprovementsA developer failed after selling some lots, and the

unsold portion of the property was sold in foreclosure.The County demanded that the surety on two bondsguarantying completion of improvements either com-plete the work or pay the costs to complete. TheCounty recovered a judgment against the surety, andthe surety appealed. In this case, the surety sued theentities that owned the land as a result of the foreclo-sure. The surety sought a declaratory judgment thatthe defendants should contribute pro rata to the costsof the improvements or payments demanded by theCounty. The surety argued that the defendants wouldbe unjustly enriched if the surety made or paid for theimprovements.The court dismissed the case as not meeting the case

or controversy and standing requirements of the feder-al courts. The surety had done no work and paid forno improvements. The defendants had not been


27

enriched, unjustly or otherwise, because the improve-ments had not been made. The surety could not showan injury in fact because it had not performed. Thecourt dismissed the complaint because the surety didnot have Article III standing. Lexon Ins. Co. v. BMRFunding, LLC, 2010 WL 2816786 (E.D.N.C. July 14,2010).

FSD • 16173 Surety’s Rights – DilatoryDefendants Denied Extension of DiscoveryDeadlineThe surety paid losses and expenses and sued the

principal and indemnitors in 2008. The original dis-covery deadline of December 1, 2009, was extended toJune 1, 2010. The defendants served written discoveryrequests on the last business day before the deadlineand moved for another extension.The court found that no excuse was offered to jus-

tify not making the discovery requests in a timely man-ner and denied the motion. Cincinnati Ins. Co. v.Savarino Constr. Corp., 2010 WL 3001937 (S.D. OhioJuly 28, 2010).

FSD • 16174 Surety’s Rights – Court DeniedPrincipal and Indemnitors’ Belated Motion toTransfer Action as Not in the Interests of theParties or the PublicThe surety sued the principal and indemnitors in

the federal court in Pennsylvania. After discovery wascompleted and summary judgment motions filed, thedefendants moved to transfer the case to Tennessee,where they were apparently located.The court noted the defendants’ delay and that the

surety’s predecessor was located in Pennsylvania andsubstantial events leading to the suit occurred inPennsylvania. The court thought that the EasternDistrict of Pennsylvania was a permissible venue andthat the balance of the interests of the parties and thepublic favored retaining the case rather than transfer-ring it. The court denied the defendants’ motion. Fid.& Deposit Co. of Md. v. Price & Price Mech., Inc.,2010 WL 3431858 (E.D. Pa. Aug. 31, 2010).

FSD • 16175 Surety’s Rights – Court DeniedIndemnitors’ Motion to Transfer SuitThe surety sued the principal and indemnitors in

the federal court in Pennsylvania. After discovery wascompleted and summary judgment motions filed, thedefendants moved to transfer the case to Tennessee,where they were apparently located.The court noted the defendants’ delay and the fact

that the surety’s predecessor was located inPennsylvania and substantial events leading to the suitoccurred in Pennsylvania. The court thought that theEastern District of Pennsylvania was a permissiblevenue and that the balance of the interests of the par-ties and the public favored retaining the case rather

than transferring it. The court denied the defendants’motion. Fid. & Deposit Co. of Md. v. Price & PriceMech. Inc., 2010 WL 3431858 (E.D. Pa. Aug. 31,2010).

FSD • 16176 Surety’s Rights – Surety GrantedSummary Judgment against Principal andIndemnitorsThe surety settled with the obligee, sued the princi-

pal and indemnitors, and moved for summary judg-ment. The defendants did not oppose the motion.The court reviewed the surety’s support for the

motion, enforced the indemnity and prima facie evi-dence provisions of the indemnity agreement, andentered summary judgment for the surety. UnitedStates Fid. & Guar. Co. v. Hato Tejas Constr., S.E.,2010 WL 2900372 (D.P.R. July 21, 2010).

FSD • 16177 Surety’s Rights – Surety Entitled toSummary Judgment as to Indemnitor’s Liability,But Surety’s Motion to Set Aside Transfer ofAssets Was PrematureThe surety sued the principal and indemnitors and

moved for summary judgment. One indemnitorargued that the indemnity agreement was a contract ofadhesion, unconscionable, against public policy, andinduced by fraud. She also argued that she was notkept informed about claims or settlements.The court found that the indemnitor did not read

the agreement and could not now complain about itsterms, that her then husband was not the surety’sagent, and that the surety did not have an obligation,contractual or fiduciary, to keep her informed aboutclaims and payments. The court granted the suretysummary judgment as to liability and directed it tosubmit updated information on the amount of its loss-es and expenses. The court denied as premature thesurety’s motion for summary judgment to set aside theindemnitor’s transfer of assets to a partnership andtrust. Documents relevant to the transfers had recent-ly been produced, and the court allowed renewedmotions after they were considered. The court reject-ed the surety’s “reverse piercing” argument that thepartnership and trust should be considered alter egosliable for the debts of the indemnitor and granted theindemnitor summary judgment on that issue. HartfordFire Ins. Co. v. CMC Constr. Co., 2010 WL 3338581(E.D. Tenn. Aug. 24, 2010).

FSD • 16178 Surety’s Rights – In a Suit toDetermine Responsibility for Completion Coststo Correct Defects in the Original Contractor’sWork, the Court Delineated the Owner’s Dutyto Disclose Information and Remanded the Casefor Determination of Responsibility for CertainCosts


28

A completion contractor had to perform substantialwork beyond that contemplated in the completion con-tract because of defects in the original contractor’swork that were not revealed in the owner’s punch listsor other documents. The trial court held for the owner,the Court of Appeal reversed, and the Supreme Courtaccepted the case to resolve conflicting decisions by theCourts of Appeal and decide the circumstances underwhich a public owner would be liable for a contractor’sincreased costs if the public owner knew, but failed todisclose, material facts that would affect the contrac-tor’s bid or performance.The Court rejected the owner’s argument that the

contractor had to prove active intent to conceal ormislead. Instead, the Court held that relief for non-disclosure is appropriate when “(1) the contractorsubmitted its bid or undertook to perform withoutmaterial information that affected performance costs;(2) the public entity was in possession of the informa-tion and was aware the contractor had no knowledgeof, nor any reason to obtain, such information; (3) anycontract specifications or other information furnishedby the public entity to the contractor misled the con-tractor or did not put it on notice to inquire; and (4)the public entity failed to provide the relevant infor-mation.” The Court agreed with the result in theCourt of Appeals reversing the trial court judgmentfor the owner. The Court remanded the case to deter-mine responsibility for increased costs to correct latentdefects in the work of the original contractor. LosAngeles Unified Sch. Dist. v. Great Am. Ins. Co., 234P.3d 490 (Cal. 2010).

FSD • 16179 Surety’s Rights – Surety Entitled toSummary Judgment against Principal andIndemnitorsThe trial court granted the surety summary judg-

ment against the principal and indemnitors, and thedefendants appealed.The court relied on the indemnity agreement and

held that the issue was not whether the principal wasin default but whether the obligee had declared it to bein default. The affidavit of the surety’s employee as tolosses and expenses was prima facie evidence of theamount owed, and the indemnitor’s conclusory affi-davit that it should have cost less did not create anissue of fact. The Court rejected the defendants’ argu-ment that the one year limitation period for suits on apayment bond applied. The Court held that theindemnity agreement was a contract under seal subjectto a 20 year limitation period, although the regular sixyear statute of limitations for breach of a written con-tract would not have barred the action, and that thelimitation period for payment bond suits was irrele-vant. Cagle Constr., LLC v. Travelers Indem. Co., 700S.E.2d 658 (Ga. Ct. App. 2010).

FSD • 16180 Surety’s Rights – Surety ThatCompleted Contract and Paid Payment BondObligations Entitled to Contract Funds and,Therefore, Owner’s Breach of SettlementAgreement by Paying Surety Instead of FilingInterpleader Did Not Harm other ClaimantsThe obligee on a public project held a contract bal-

ance. The surety completed the project, paid claimantsunder the payment bond, and claimed the contractfunds. The contractor, lender and guarantor of thelender also claimed the funds. The owner agreed to asettlement in which it would pay the funds into courtin an interpleader, but the owner instead paid the sure-ty. The court held that failure to pay the fund intocourt was a breach of the settlement agreement, butthat the other parties suffered no damages because thesurety was entitled to the fund. Century Ins. Co. v.Guerrero Bros., Inc., 2010 WL 3515810 (N. Mar. I.Sept. 9, 2010).

FSD • 16181 Surety’s Rights – Surety’s Failureto Act Promptly Barred Trial Court FromReconsidering Judgment for IndemnitorAn alleged indemnitor filed a declaratory judgment

action against the surety alleging, among other things,that he did not sign the indemnity agreement. Thesurety counterclaimed for its losses on a bond forunpaid taxes. The indemnitor filed a motion for sum-mary judgment on the surety’s counterclaim. Thecourt thought that the surety had not responded andgranted the motion. The indemnitor then nonsuitedhis other claims, and the court signed the order of non-suit on October 22, 2009. On January 11, 2010, thesurety filed an unsworn motion for reconsideration ofthe summary judgment and pointed out that it hadtimely mailed an opposition to the motion. The courtgranted the surety’s motion, and upon reconsiderationdenied the indemnitor’s summary judgment motion.The court rejected the indemnitor’s argument that theorder of nonsuit made the original summary judgmenta final judgment and the surety’s motion for reconsid-eration came too late. The indemnitor sought man-damus.The Court of Appeals held that the judgment was

final and the trial court did not have jurisdiction toreconsider its original summary judgment. In reJamea, 2010 WL 2968044 (Tex. App. July 29, 2010).


Winter2011 Vol45,No.2 Fidelit y Surety DIGEST · Fidelit y&Surety DIGEST Winter2011 Vol45,No.2. ......

Documents

Transcript of Winter2011 Vol45,No.2 Fidelit y Surety DIGEST · Fidelit y&Surety DIGEST Winter2011 Vol45,No.2. ......