U.S. Sur. Co. v. Stevens Family Ltd. P'ship

905 F.Supp.2d 854

UNITED STATES SURETY COMPANY, Plaintiff,

v.STEVENS FAMILY LIMITED PARTNERSHIP, et al., Defendants.

Case No. 11 C 7480.

United States District Court,

N.D. Illinois,

Eastern Division.

Nov. 26, 2012.

Stephanie M. Keddy, Thomas Scott Leo, Leo & Weber, P.C., Chicago, IL, for Plaintiff.

Karl W. Roth, William P. Foley, Roth Law Group LLC, Chicago, IL, for Defendants.

MEMORANDUM OPINION AND ORDER

MILTON I. SHADUR, Senior District Judge.

United States Surety Company (“Surety”) brought this contractual action against Stevens Family Limited Partnership and four individual defendants (collectively the “Partnership” ¹) to seek enforcement of a general indemnity agreement (“Agreement”) entered into by the parties. More precisely Surety requests both indemnification against certain claims and specific performance of a related collateral security provision, both in connection with payment and performance bonds issued by Surety on Partnership's behalf.

Surety now asks for judgment on the pleadings under Fed.R.Civ.P. (“Rule”) 12(c). As explained here, Surety's pleading-based motion is denied as to the first of those contentions but granted as to the second.

Standards of Construction

As with Rule 12(b)(6) motions, Rule 12(c) motions call for the factual allegations in a complaint to be viewed in the light most favorable to the nonmovant plaintiff, drawing all reasonable inferences in its favor (Emergency Servs. Billing Corp. v. Allstate Ins. Co., 668 F.3d 459, 464 (7th Cir.2012)). Hence for purposes of the current motion assertions in Surety's First Amended Complaint (“Complaint”) will be considered untrue if Partnership has denied those assertions in its Answer. Moreover, Partnership's Rule 8(b)(5) disclaimer that it lacks sufficient knowledge or information to form a belief about any of Surety's assertions has the effect of a denial.² What follows is a summary of the facts as perceived through the lens of the Rule 12(c) standards.

Background Facts³

Partnership owns a construction company—Architectural Specialties Trading Company, Inc. (“Architectural Specialties”)—that specializes in architectural millwork (Ans. ¶ 9). Two construction projects are relevant to this action, each of them including Architectural Specialties as a subcontractor ( id. ¶¶ 14, 16). First, in May 2008 Architectural Specialties contracted to help build an armed forces retirement home—a project run by general contractor W.G. Yates & Sons Construction Co. (“Yates”) ( id. ¶ 14). Second of the projects was one to build the Dental Sciences Building for the University of North Carolina at Chapel Hill—an undertaking that began in June 2009 and was led by BE & K Building Group, LLC (“BE & K”) ( id. ¶ 16). Both projects required Architectural Specialties to provide its general contractors with payment and performance bonds ( id. ¶¶ 15, 17). Partnership purchased those bonds (together the “Bonds”) from Surety—Bond No. 10000825985 was issued to Yates in the penal sum of $1,368,000, and Bond No. 1000825982 was issued to BE & K in the penal sum of $1,251,234 ( id.).

In conjunction with Partnership's purchase of the Bonds, the parties executed the Agreement, which includes this indemnification provision (Agreement ¶ 2):

In consideration of the execution and delivery by the Surety of a Bond or any Bonds on behalf of the Principal [Architectural Specialties], the Undersigned [Partnership as defined at the outset of this opinion] agree to indemnify and hold the Surety harmless from and against any and all demands, liabilities, losses, costs, damages, attorneys' fees and expenses of whatever kind or nature together with interest thereon at the maximum rate allowed by law, which arise by reason of, or in consequences of, the execution by the Surety of any Bond on behalf of the Principal and whether or not the Surety shall have paid any sums in partial or complete payment thereof....

That provision is coupled with this collateral security provision (Agreement ¶ 6):

If a claim is made against Surety, whether disputed or not, or if Surety deems it necessary to establish a reserve for potential claims, and upon demand from Surety, the Undersigned shall deposit with Surety cash or other property acceptable to Surety, as collateral security, in a sufficient amount to protect Surety with respect to such claim or potential claims and any expense or attorneys' fees.... If said collateral, or collateral previously deposited with Surety, is deemed insufficient by Surety, the Undersigned agrees to deposit additional or substitute collateral in an amount and type acceptable to Surety. This may include the Surety's demand for cash collateral in substitution for Trust Deed collateral. The Undersigned further agrees to reimburse the Surety for all attorney's fees, costs, expenses, etc., including any in-house attorney's fees, in the Surety's defense of any action brought by the Undersigned or anyone to effect the return or turnover of the collateral.

Surety alleges that it has received claims on both Bonds (Compl. ¶ 18–19). It asserts that it has incurred $7,931.42 of claim investigation costs in connection with the Retirement Home Project ( id. 18). But Partnership responds that it does not have sufficient information to determine whether that is accurate (Ans. ¶ 18). As to the Dental Building Project, Partnership admits that BE & K sent Surety several letters discussing Architectural Specialties's alleged default as well as a claim on the Bond issued in connection with the Project ( id. ¶ 19). Included in those letters was a June 2011 “Notice of Default” letter, a July 2011 “Failure to Cure Default” letter and an August 2011 letter demanding payment of $439,030 for costs incurred due to Architectural Specialties's alleged default ( id.). Partnership admits that BE & K sent it those letters but maintains that it never defaulted ( id.).

Surety avers that in response to BE & K's claim it first demanded collateral security in the amount of $100,000 (Compl. ¶ 25), and it later supplemented that demand with a request for an additional $400,000 ( id. at ¶ 26). Although Partnership's Ans. ¶¶ 25–26 deny its having received those demands for collateral, its response to Surety's motion puts the lie to that denial, for its P. Mem. ¶¶ 4–7 state that it did offer up collateral in response to Surety's demands.⁴ Partnership says there that it offered Surety collateral in the form of two real estate parcels with a total equity exceeding the $500,000 demanded by Surety ( id. ¶ 6), but that Surety rejected that collateral due to the existenceof a contested lien on the offered properties ( id.). For its part Surety has simply alleged that Partnership failed to post collateral in a manner consistent with the Agreement (Compl. ¶ 23).

This action was brought based on Surety's belief that it was not properly indemnified and collateralized under the terms of the Agreement. On consideration of Surety's motion for judgment on the pleadings, this Court holds that Partnership's admission referred to in the preceding paragraph entitles Surety to a judgment as a matter of law on its demand for collateralization but that its motion for current enforcement of the Agreement's indemnification provisions must be and is denied.

Controlling Law

Surety's contract action was brought pursuant to this Court's diversity jurisdiction, so that Illinois law—including its choice-of-law principles—applies ( Assaf v. Trinity Med. Ctr., 696 F.3d 681, 685 (7th Cir.2012)). Application of California substantive law is called for by a clear choice-of-law provision in Agreement ¶ 12.24. Partnership pointed to that fact in response to Surety's citation to Illinois caselaw in its original memorandum (P. Mem.¶ 9), and Surety replied by including California caselaw in its reply memorandum. Because Illinois' choice-of-law doctrine would honor the Agreement's provision, California law controls.

California regularly recognizes indemnity contracts in favor of sureties ( First Nat'l Ins. Co. v. Hunt, No. Civ. 10–1449, 2011 WL 2173765, at *3 (E.D.Cal. June 2, 2011), citing Fid. & Deposit Co. of Md. v. Whitson, 187 Cal.App.2d 751, 756, 10 Cal.Rptr. 6 (1960)). And as with all contracts, California law seeks to give effect to the contracting parties' intentions ( Myers Bldg. Indus., Ltd. v. Interface Tech., Inc., 13 Cal.App.4th 949, 968, 17 Cal.Rptr.2d 242 (1993)).

Generally speaking, California requires that four elements be shown for a plaintiff to succeed in an action for breach of an indemnity agreement: “the existence of an indemnity agreement, the plaintiff's performance under the agreement, breach of the agreement, and damages.” ( First Nat'l Ins., 2011 WL 2173765, at *3). Here it is beyond peradventure that the first two of those elements have been fulfilled. What this Court must therefore determine is whether it is clear that (1) Partnership had an obligation to collateralize Surety, indemnify Surety or both under the circumstances, (2) that Partnership failed to fulfill its obligation or obligations and (3) what damages, if any, resulted.

Indemnification Provision

Surety's Complaint asserts a right to indemnification for two different types of costs: (1) indemnification for expenses and fees incurred while “defending, investigating and evaluating claims against the bonds” and (2) indemnification for losses it may incur “through the payment or settlement of claims [under the bonds]” (Compl. ¶ 30). As to the first request for indemnification, Partnership's Rule 8(b)(5) disclaimers (see Ans. ¶¶ 18, 30, 31) have effectively denied that such expenses and fees exist, so that indemnification for costs already incurred cannot be awarded at this stage of the litigation.⁵ More discussion is required for the second request for indemnification—that based on any payment or settlement of the claims made by Yates and BE & K.

Surety's Complaint does not assert—or even suggest—that it has either paid or settled the claims made...