Opinion
Civil Action No. 02-CV-8421.
October 12, 2004
MEMORANDUM
I. INTRODUCTION
On October 2, 2002, plaintiff Mountbatten Surety Company, Inc., a Pennsylvania Corporation, obtained a confessed judgment ex parte in the Court of Common Pleas for Montgomery County, Pennsylvania on the basis of a General Indemnity Agreement (GIA) between Mountbatten and the individual defendants. Defendants then removed this action to federal court based upon diversity jurisdiction and subsequently filed a petition to strike or open the confessed judgment on December 17, 2002. On March 17, 2003, I denied defendants' motion to strike the confessed judgment and opened the judgment to determine whether Mountbatten breached the GIA by incurring losses under the bonds without a good faith belief that it, as the surety, was or might be liable. Defendants William H. Jenkins, Karen W. Jenkins, William T. Jenkins, Tricia A. Jenkins, Patrick C. Jenkins and Stephanie P. Jenkins now move for summary judgment. For the reasons stated below, I will deny the motion for summary judgment.
II. BACKGROUND
Defendants operate KH Mechanical, Inc., a family-owned electrical, mechanical and plumbing contractor in St. Marys Georgia. On November 12, 1998, KH entered into a $464,800 subcontract with C.C. Borden Construction Inc. to provide electrical, mechanical, plumbing and security systems work for the Federal Law Enforcement Training Center (FLETC) project in Glynco, Georgia. In order to secure their obligations under the subcontract, KH was required to procure performance and payout bonds naming Borden as the obligee. Accordingly, on March 29, 1999, KH as principal and Mountbatten as surety co-executed a Subcontractor Performance Bond and a Subcontractor Labor and Material Payment Bond, each in the amount of $464,800 naming Borden as obligee.As a condition of co-executing the FLETC bonds, Mountbatten required KH and defendants to sign the GIA. Paragraph 5 of the agreement provides in part:
The Indemnitors hereby jointly and severally covenant, promise, and agree to exonerate, indemnify and save harmless Surety . . . from and against any and all liability, loss, cost, damage and expense of whatsoever kind or nature . . . which surety may in good faith sustain, incur, be put to or to which it may be exposed (1) by reason of having executed any Bond . . . (2) by reason of the failure of the Principal or any of the other Indemnitors to perform or comply with the promises, covenants or conditions of this Agreement or (3) in enforcing any of the promises, covenants or conditions of this Agreement.
(GIA at ¶ 5.). Paragraph 7 of the GIA states
The liability of the Indemnitors shall extend to and include the amount of all payments, together with interest thereon from the date of such payments, made by Surety in good faith under Surety's belief that (1) Surety was or might be liable therefor or (2) the payments were necessary or advisable to protect any of Surety's rights or to avoid or lessen Surety's liability or alleged liability. The vouchers or other evidence of such payments sworn to by a duly authorized representative of Surety shall be prima facie evidence of the fact and extent of the liability of the Indemnitors to Surety.
(GIA at ¶ 7.).
As the FLETC project progressed, the relationship between KH and Borden fell apart. Defendants assert that Borden failed to fulfill its obligations to KH under the subcontract, impeding KH's progress on the job by failing to staff the FLETC project with a full time project manager. They allege that Borden's inability to coordinate the schedules and work of the subcontractors on the FLETC project prevented KH from completing its own work, including work on the security systems and heating, ventilation and air conditioning system in a timely manner.
In contrast, plaintiff asserts that KH was unable to fulfill its obligations to Borden because of its failure to commit sufficient manpower to the FLETC project and because it failed to order materials and supplies in a timely fashion. Plaintiff cites to several occasions when KH allegedly failed to provide enough workers to complete their scheduled tasks. It asserts that once it became aware of the difficulties between KH and Borden on the FLETC project it and its affiliate HMS Dreadnought, Inc. retained Contract Completions, Inc. and its president Robert Kahan to determine a course of action for the parties. It was determined that KH should remain on site and attempt to complete its work on the FLETC project. Anne Marie Staskel, the project manager for HMS Dreadnought, acted as a liaison between Borden and KH, working to ensure KH fulfilled its obligations. Plaintiff asserts that contrary to defendants' allegations, Dreadnought did not control KH's schedule, but instead, KH determined when it could complete tasks and that Borden thereafter accepted their schedule.
On October 19, 1999, as a result of alleged continuing difficulties between Borden and KH and in order to ensure that KH's vendors and suppliers were paid, HMS Dreadnought and KH executed an Assignment of Rights whereby Borden was to forward the contract funds due KH and vendors to HMS Dreadnought, which would then disburse monies to pay vendors and suppliers and to meet KH's payroll. Plaintiff asserts that under the assignment Borden was to forward payment funds to HMS Dreadnought provided that the job was progressing in a satisfactory manner. Defendants assert that although KH continued to work on the FLETC project it received no further payments from Borden or from Dreadnought after the execution of the assignment of rights.
Plaintiff explains the absence of payments to KH by noting that although KH had agreed to complete its work on the FLETC project by October 31, 1999, it failed to do so. It asserts that by early November, 1999, KH was approximately 60 days behind schedule to complete Phase 1 of the project and that KH was solely responsible for a large percentage of the project delays. Plaintiff alleges that because of KH's delays, by November 1999, liquidated damages were accruing in favor of Borden in an amount approaching the total sum due to KH for the work it had performed. Borden declared KH in default. Plaintiff asserts that under its contractual rights Borden was entitled to withhold funds from KH to cover its losses due to KH's sub par performance. Under the circumstances plaintiff argues HMS Dreadnought could not force Borden to make payments to KH.
Defendants blame the project delays on Borden's failure to coordinate other subcontractors and on their failure to pay KH fully for all the work it had performed. Defendants allege that by September 1999, Borden had paid KH $125,798.35 for their work, leaving a balance due KH of $116,332.10 which Borden allegedly refused to pay. Defendants assert that because Borden withheld these funds, KH was unable to pay one of its suppliers, City Electric Supply Company (CESCO).
KH stopped work on the FLETC Project on or around November 11, 1999. Defendants assert KH ceased work on the project because of Borden's continued failure to pay KH. Plaintiff alleges KH abandoned the project without direction from Mountbatten, HMS Dreadnought or Contract Completion. They argue that KH's abandonment violated the provisions in its subcontract that would have permitted it to terminate its work. Further, plaintiff alleges KH's departure required Borden to incur additional costs in order to complete the FLETC project.
CESCO filed a Miller Act complaint against Borden and KH in the United States District Court for the District of Georgia on January 12, 2000 seeking to collect $16,536.37 for electrical supplies provided to KH for the FLETC project. Borden filed a cross-claim against KH alleging that because of alleged failures on the FLETC project KH was liable to Borden for approximately $150,000. KH filed an answer to the complaint on February 8, 2000, admitting CESCO had supplied electrical components on the FLETC job, but denying any amounts were due to CESCO because Borden had not paid KH for their materials. KH also filed a cross-claim against Borden seeking payment for all remaining amounts due KH under the subcontract.
CESCO's claims against all of the original defendants were dismissed with prejudice on or about February 25, 2000.
Borden filed a cross claim against Mountbatten on or about February 29, 2000. On or about March 3, 2000, Borden attempted to serve the cross-claim on Montbatten via the Dekalb County Georgia sheriff's office. The summons form was delivered to Stephanie York, an employee of Thompson, O'Brien, Kemp Nasuti. The summons form was addressed to J. Patrick O'Brien of Thompson, O'Brien, Kemp Nasuti as the cross-claim defendant and not to Mountbatten, although Mountbatten Surety Company was listed as the cross-claim defendant in the caption on the form. York mistakenly believed the summons and cross-complaint were related to another entity for whom O'Brien was the agent for service of process and which was also a defendant in the lawsuit. Accordingly, she forwarded them to that entity and Mountbatten remained unaware of the summons.
Plaintiff asserts Borden's addition of Mountbatten as a third-party violated Rule 14 of the Federal Rules of Civil Procedure because of the dismissal of the existing Georgia action. Plaintiff alleges Borden failed to obtain the court order required to make it a proper party to the Georgia Action.
Plaintiff and defendants dispute whether O'Brien was the registered agent for service of process for Mountbatten.
Borden wrote to Mountbatten on or about April 28, 2000 informing it that it had been served with process on March 3, 2000 in regard to Borden's cross-claim in the Southern District of Georgia. The letter included the docket number for the case and noted that Mountbatten's response had been due on March 23, 2000. Mountbatten argues that the letter from Borden did not constitute actual notice of the suit and that as a result of the failed attempt to serve the summons in the Spring of 2000 it remained unaware that it was a party to the lawsuit. It alleges that it became aware of the lawsuit when Borden filed a Motion for Entry of Default against Mountbatten on or about July 12, 2000. Plaintiff asserts it promptly retained an attorney to represent its interests and that its attorney subsequently filed an answer to the cross-claim, a motion to set aside the default judgment, and a motion to dismiss the claim for insufficient service of process. In contrast, defendants assert that Mountbatten deliberately chose to take no action with respect to the cross-claim. Defendants note that Mountbatten did not file its motion to set aside the default until September 29, 2000 and that as a result Borden was able to obtain the default against Mountbatten.
Plaintiff asserts no default judgment was ever entered against Mountbatten and that Borden filed only a notice of entry of default. Defendants allege that a default judgment was entered against Mountbatten.
On or about October 5, 2000, the District Court scheduled a pre-trial conference in an attempt to resolve the case. The parties were ordered to bring authorized representatives to the hearing for settlement purposes. KH's attorney failed to appear at the conference although KH was a party to the matter. Mountbatten was represented at the conference by Frank Hucks, a surety analyst with experience in the surety field and as a contractor.
As an explanation for their absence from the settlement negotiations, defendants assert that there is no record evidence that KH was given notice of the pre-trial conference.
Mountbatten asserts that prior to the settlement negotiations, Hucks' colleagues reviewed information related to the claim supplied by Borden and Hucks himself reviewed the KH file and the project completion cost items one by one. In reviewing Mountbatten's file about KH Hucks concluded that "it was obvious that KH had been financially unable to complete the project and, that, for all practical purposes, there were no defenses" Mountbatten could assert on KH's behalf for its failure to complete the FLETC project. (Hucks Dep. at 36:14-20). Hucks did not directly contact KH in his investigation, but alleges he spoke to Bob Kahan at Contract Completion "to determine whether there may have been any reason that KH could have walked off the job . . ." (Id. at 32:4-7). Plaintiff alleges it unsuccessfully made numerous attempts to contact KH, its attorney and William Jenkins to gain further information related to the claim and to investigate viable defenses.
The file in question has not been located during the pendency of this litigation. Mountbatten was acquired by Fidelity Deposit Company of Maryland in 2002 and plaintiff asserts that during the transfer of files some materials, including Hucks' file, were misplaced.
At deposition, Robert Kahan could not remember having any conversations with Frank Hucks in reference to the FLETC project. (Kahan Dep. at 102:4-24). Kahan also testified that it was possible that he discussed the KH matter with Hucks although he could not recall the exact conversation. (Id. at 113:13-114:24).
Defendants assert that plaintiff has produced no evidence that it attempted to contact KH regarding settlement and that, in fact, Mountbatten never tried to contact KH about the settlement. Defendants further assert that plaintiff had received extensive documentation and oral communications from the Jenkins regarding their possible defenses, such as delays attributable to Borden and other subcontractors. They allege that Hucks failed to account for their possible defenses in negotiating a settlement amount.
In support of their assertions, defendants cite to the affidavit of William T. Jenkins, which states, in part, that "[n]either KH nor any of the Jenkins defendants have seen a copy of a settlement agreement between Mountbatten and Borden, nor were they parties to any settlement negotiations." (D's Mot. for S.J. Exh. 1 ¶ 30). Defendants do not state whether they were contacted for information about their progress on the FLETC project prior to the negotiations.
During the settlement negotiations, the parties concentrated on items valued at over $5,000, rather than negotiating over smaller items in the claim. Plaintiff alleges that a large portion of Borden's claim consisted of both liquidated damages and extended overhead (actual) damages. It asserts that these amounts were duplicative although, based on the contractual language and the evidence available to Hucks, plaintiff argues Borden would have been able to recover both liquidated and actual damages. It argues that because Hucks was able to negotiate away the duplicative claim, the settlement amount was substantially reduced. Defendants argue that Hucks settled the case without knowledge as to the validity of Borden's liquidated damages and overhead claims and that there was no basis for the settlement amount agreed upon. Ultimately a settlement of $102,189.13 was reached.
As part of the settlement with Borden, plaintiff also agreed to pay two claims representing property damage allegedly caused by KH at the FLETC site in the event that KH's insurance carrier refused to pay for the damage. Plaintiff asserts that due to KH's failure to provide information to resolve the damage claim Borden ultimately was unable to recover from the insurer and, in accordance with the settlement agreement, Mountbatten paid Borden an additional sum of $8,990.00, for a total settlement amount of $111,189.13. Defendants assert that it was Hucks' failure to investigate their possible defenses to the claim and his blind acceptance of Borden's allegation that KH was responsible for the damage which resulted in the additional payment rather than their own lack of cooperation.
Defendants do not make clear precisely what KH's defense to the property damage claim is.
Following the settlement, KH filed for bankruptcy and the Georgia action was stayed.
III. STANDARD FOR SUMMARY JUDGMENT
Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56. An issue is "material" only if the dispute over facts "might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). If the record taken as a whole in a light most favorable to the nonmoving party, "could not lead a rational trier of fact to find for the nonmoving party, there is no `genuine issue for trial.'"Matsushita Elec. Co. v. Zenith Radio, 475 U.S. 574, 587 (1986) (citation omitted).
The Supreme Court has recognized that the moving party "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions . . . which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). After the moving party has filed a properly supported motion, the burden shifts to the nonmoving party to "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). The nonmoving party may not rest upon the mere allegations or denials of the party's pleading. See Celotex, 477 U.S. at 324.
IV. DISCUSSION A. FLETC Project
Defendants have not established that no genuine issue of material fact remains as to whether plaintiff acted in bad faith when it settled the claims with Borden. "Courts have recognized one exception to the enforcement of the indemnitor's liability for the surety's disbursements and expenses and that is bad faith or fraudulent payment." International Fidelity Ins. Co. v. United Const., Inc., No. 91-2361, 1992 WL 46878, at *2 (E.D. Pa. Mar. 4, 1992). Bad faith, in essence, means that the surety acted with an "improper motive" or "dishonest purpose." See Fidelity Guaranty Ins. Co. v. Keystone Contractors, Inc., No. 02-1328, 2002 U.S. Dist. LEXIS 15403, at *13 (E.D. Pa. Aug. 14, 2002); United States Fidelity Guar. Co. v. Feibus, 15 F. Supp. 2d 579, 587 (M.D. Pa. 1998). "Bad faith is not simply bad judgment or negligence, but rather it implies the conscious doing of a wrong because of dishonest purpose or moral obliquity. . . . Bad faith requires a showing of recklessness or improper motive such as self-interest or ill will." Feibus, 15 F. Supp. 2d. at 585. "The purpose of good faith clauses is to facilitate the handling of settlements by sureties and protect them from unnecessary and costly litigation. . . . It is believed that the expense, delay, trouble, and risk of loss to the surety is a sufficient safeguard against an unwarranted payment." Id. at 585 (internal quotation and citations omitted).
Plaintiff, citing to several cases in the insurance context, argues that bad faith must be proven by clear and convincing evidence. See, e.g., Cowden v. Aetna Casualty Surety Co., 134 A.2d 223, 229 (Pa. 1957). See also Poliselli v. Nationwide Mut. Fire Ins. Co., 23 F.3d 747, 751 (3d Cir. 1994). Defendants argue that because this case involves a suretyship relationship and not an insurance relationship the burden of proof as to whether plaintiff exercised its duty of good faith should be governed by general contract principles and not the standards set forth in cases pertaining to insurance policies. "The usual view, grounded in commercial practice, [is] that suretyship is not insurance." Pearlman v. Reliance Ins. Co., 371 U.S. 132, 140 n. 19 (1962). See also Superior Precast, Inc. v. Safeco Ins. Co. of America, 71 F. Supp. 2d 438 (E.D. Pa. 1999). Defendants therefore argue that the correct standard of proof is a preponderance of the evidence. See, e.g. Ragnar Benson, Inc. v. Bethel Mart Assocs., 454 A.2d 599, 602 (Pa.Super. 1981) ("As in civil cases generally, the party having the burden of proof in a contract matter must sustain it by a `preponderance of the evidence.'") I agree that the correct standard of proof in this case is by a preponderance of the evidence. Regardless, defendants have not met their burden.
1. Alleged Lack of Investigation
Defendants allegation that plaintiff's investigation into its available defenses was insufficient is not sufficient evidence for me to grant judgment in their favor as a matter of law. Defendants allege that plaintiff acted in bad faith because it failed to conduct a sufficient investigation into their allegations that Borden was responsible for the delays on the FLETC project. They assert that Hucks made no effort to contact KH prior to settlement. Defendants further allege that Hucks failed to contact Kahan at Contract Completion prior to settlement. Even if Hucks had contacted Kahan, defendants allege Kahan had no relevant information about Borden's claims. Defendants also assert that Hucks failed to contact Staskel or other employees at HMS Dreadnought prior to settlement.
Plaintiff counters that Hucks reviewed all the information available to him at the time of the settlement and that he and others at Mountbatten tried to contact KH for further support of its defenses without success. Plaintiff notes no KH representative attended the negotiations (although KH denies having notice of the pre-trial conference). Clearly a dispute remains as to the precise facts of the alleged investigation.
Even accepting defendants allegations as true (and here I must view all facts in the light most favorable to plaintiff), their allegations are insufficient to establish bad faith as a matter of law. "[A] lack of diligence or negligence is not the equivalent of bad faith, indeed even gross negligence cannot support a finding of bad faith." Feibus, 15 F. Supp. 2d 579, 585 (M.D. Pa. 1998). See also PSE Consulting Inc, v. Frank Mercede Sons, Inc., 838 A.2d 135, 153 (Conn. 2004) ("[T]he failure to investigate, standing alone and not accompanied by other evidence of an improper motive, is not enough to constitute bad faith. . . .").
2. Negotiation of Settlement
Hucks' decision to concentrate his efforts in the settlement negotiation on items worth over $5,000 is not sufficient evidence of bad faith for me to grant summary judgment. Defendants allege plaintiff acted in bad faith because Hucks "pulled the settlement figure out of thin air" and took the majority of Borden's itemized claims at face value. "[W]hile excessive payment may have been negligent or even reckless, overpayment by itself does not evince any ill will by [the surety]." Travelers Cas. Sur. Co. of Am., Inc. v. Jadum Constr. Inc., No. 02-10581, 2003 U.S. Dist. LEXIS 11861 (D. Mass. Jul. 11, 2003). See also Frontier Ins. Co. v. Int'l Inc., 124 F. Supp. 2d 1211, 1214 (N.D. Al. 2000) ("the law is clear that alleged overpayment or negligent investigation of claims does not constitute bad faith in the suretyship context").
At deposition, Hucks explained the surety's procedure in negotiating a settlement. He noted,
we have two things we look at. One, we do what's responsible to settle the claim and mitigate the loss to the extent possible. That is totally bifurcated and separate from the indemnification action. Whether the money can be collected or not has no effect. We settle the claim as well as we can. Then we decide what we can gain back in an indemnification action.
(Hucks Dep. at 68:21-69:7). Hucks therefore appears to have had KH's best interest in mind when negotiating the settlement. Plaintiff alleges Hucks believed Borden's claims were legitimate after examining the available evidence and that he believed the language in the subcontract might entitle Borden to collect both liquidated damages and actual damages. Hucks accordingly negotiated a settlement which he believed benefitted KH by eliminating one element of the damages claim. Viewing the facts in the light most favorable to plaintiff, I cannot conclude that Hucks' decision to focus the negotiations on the more substantial elements of Borden's claim establishes that plaintiff acted in bad faith as a matter of law.
3. Hucks' Alleged Ill-Will
Defendants allege plaintiff acted in bad faith because Hucks' impression of the defendants as "scumbags" caused him to ignore their defenses in favor of accepting Borden's claims. There is no dispute that Hucks referred to defendants as "scumbag contractors" at his deposition. Plaintiff asserts that Hucks' opinion of defendants arose as a result of their alleged failure to cooperate in the resolution of Borden's claim. Plaintiff further argues that regardless of any alleged ill-will towards KH Hucks acted in both Mountbatten's and KH's interests in negotiating the settlement, as he was able to lessen KH's indemnification obligations by mitigating Mountbatten's loss. Merely because Hucks had a poor opinion of the Jenkins does not establish that he had an improper motive to negotiate an unfavorable settlement with Borden. There is no evidence that Hucks held this opinion of the defendants at the time of the settlement or that he allowed this opinion to motivate his negotiations. Viewing the record in the light most favorable to plaintiff, the opinion Hucks expressed of the Jenkins at his deposition is insufficient to establish that he acted in bad faith at the time of the settlement negotiations as a matter of law.
4. Mountbatten's Response to the Cross-Claim
Defendants allege plaintiff acted in bad faith by failing to file a timely response to Borden's cross-claim in willful disregard of possible liability. Plaintiff asserts that the crossclaim was improperly served and that it made a timely response to the cross-claim once it was properly made aware of the claim. Viewing the evidence in the light most favorable to plaintiff, I find a genuine issue of material fact remains as to whether Mountbatten's delayed response to the cross-claim is evidence of an "improper motive" or a "dishonest purpose" sufficient to establish it acted in bad faith.
B. St. Marys Riverfront Park Project
KH contracted with the city of St. Marys, Georgia on February 24, 2000, to construct the St. Marys Riverfront Park. As a condition of awarding the contract to KH, the city required KH to procure performance and payment bonds naming the city as obligee. In February, 2000, KH as principal and Mountbatten as surety co-executed a Contractor Performance Bond and a Contractor Labor and Material Payment Bond. $41,132.87 of the confessed judgment amount at issue here represents monies that Mountbatten allegedly paid to creditors under the park project Bonds.
During the confession of judgment process, Mountbatten submitted affidavits that it was entitled to recover money pursuant to the park project. However, plaintiff now asserts that it is unable to demonstrate sufficiently its losses on the project and thus concedes it is unable to recover any losses it may have incurred on the Park Project. Mountbatten argues, however, that this concession is not an admission of any alleged improper action on the FLETC project. Defendants argue that Mountbatten's failure to produce evidence of any losses on the park project is, in effect, an admission that plaintiff bad faith with respect to the park project. They further argue that plaintiff's actions with regard to the park project exemplify its bad faith towards defendants.
Viewing the facts in the light most favorable to plaintiff, I cannot hold that Mountbatten's inability to produce sufficient evidence to prove its loss on the park project is sufficient evidence to establish that it acted in bad faith relative to the FLETC project.
V. CONCLUSION
The terms of the GIA allowed plaintiff to settle claims and incur expenses regardless of KH's actual liability. Accordingly, plaintiff was not under an obligation to secure defendants' approval prior to reaching a settlement under the FLETC bonds. Because of the parties' divergent representations of the facts surrounding plaintiff's investigation into KH's defenses, the tactics used at the settlement negotiations between Borden and plaintiff, the impact of Hucks' alleged ill-will toward defendants on the negotiations and the circumstances surrounding service of the Georgia cross-claim on plaintiff, I cannot conclude that plaintiff acted in bad faith with regard to its settlement of the claim with Borden as a matter of law. Defendants have not proven by a preponderance of the evidence that plaintiff acted with the "improper motive" or "dishonest purpose" required to establish a surety's bad faith. Accordingly I will deny defendants' motion for summary judgment.
ORDER
AND NOW, this ____ day of October 2004, upon consideration of defendants' motion for summary judgment and all responses thereto, it is ORDERED that defendants' motion is DENIED.