Summary
explaining that courts routinely uphold collateral security provisions
Summary of this case from International Fidelity Insurance v. Anchor EnvironmentalOpinion
Civil Action No. 03-6377.
February 24, 2005
MEMORANDUM AND ORDER
Presently before this Court is Plaintiff's Motion for Summary Judgment (Doc. 15). For the reasons set forth below, upon consideration of Plaintiff's Motion for Summary Judgment, Defendants' Response (Doc. 17) and Plaintiff's Reply (Doc. 18), this Court will grant Plaintiff's Motion for Summary Judgment.
BACKGROUND
From the evidence of record taken in a light most favorable to the Defendants, the pertinent facts are as follows. Defendant MedTek, Inc. ("MedTek" or "Indemnitor"), a construction company, is a New Jersey corporation owned by Defendants Carlos and Sharon Truffin. MedTek contracted to perform a series of projects at the Veterans' Administration Hospital ("VA Medical" or "Obligee") and was required to obtain a surety for the contract. Colonial Surety Company ("Colonial" or "Surety") was contracted to issue the required performance and payment bonds for the MedTek/VA Medical contract on May 3, 2002.
According to the surety agreement, upon MedTek's default, Colonial is obligated under the performance bond to execute upon and assume control of the defaulted construction project. Consequently, MedTek is required to issue collateral security to Colonial to compensate for any obligations assumed upon default. MedTek is further obligated, pursuant to the indemnity agreement, to exonerate Colonial against any and all liabilities, losses and expenses imposed upon, sustained, or incurred by Colonial by reason of having executed the bonds.
"Default" is defined in the surety agreement as follows: "Indemnitor shall be in Default with respect to a Contract if any of the following occur: Principal or any Indemnitor breaches, abandons or repudiates any Contract. Any beneficiary of a Bond or obligee of a Contract declares Principal to be in default. . . . Principal or any Indemnitor breaches any provision of this Agreement or Contract with Surety." Pl's Brief at 2-3.
MedTek initiated the construction at VA Medical, however, after substantial performance of the construction obligations, MedTek stopped construction work. In addition, MedTek stopped issuing payments to several subcontractors who performed under individual contracts with MedTek to work on the VA Medical project. VA Medical issued several requests to MedTek for continued performance to no avail. Eventually, VA Medical threatened to declare MedTek in default and requested that Colonial complete the outstanding contract requirements, consisting of mostly "punchlist" items. Several of the contractors have filed complaints against Colonial seeking execution on bonds issued to MedTek. On August 13, 2002, Colonial made a demand for collateral security in the amount of $375,000.00. After receiving no response, Colonial filed suit against MedTek before this Court seeking assumption of the obligations under the surety contract, including indemnification for payment obligations and specific performance of the general indemnity agreement. Since the filing of this lawsuit, Plaintiff avers that subcontractors have filed claims against the payment bonds issued in the amount of $424,584.86. Pl's Brief at 1.
Colonial settled the payment bond claim of L. Clark Company, Inc. and paid it $51,750 on July 26, 2004. Therefore, that amount should be deducted from the $424,584.86.
STANDARD OF REVIEW
Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c). An issue is "genuine" if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 2510, 91 L. Ed.2d 202 (1986). A factual dispute is "material" if it might affect the outcome of the case under governing law. Id.
A party seeking summary judgment always bears the initial responsibility for informing the district court of the basis of its motion and identifying those portions of the record that it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552, 91 L. Ed.2d 265 (1986). Where the non-moving party bears the burden of proof on a particular issue at trial, the movant's initial Celotex burden can be met simply by "pointing out to the district court that there is an absence of evidence to support the non-moving party's case." Celotex, 477 U.S. at 325, 106 S. Ct. at 2553-54. After the moving party has met its initial burden, "the adverse party's response, by affidavits or otherwise as provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). That is, summary judgment is appropriate if the non-moving party fails to rebut by making a factual showing "sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322, 106 S. Ct. at 2552-53. "[I]f the opponent [of summary judgment] has exceeded the `mere scintilla' [of evidence] threshold and has offered a genuine issue of material fact, then the court cannot credit the movant's version of events against the opponent, even if the quantity of the movant's evidence far outweighs that of its opponent." Big Apple BMW, Inc. v. BMW of North America, Inc., 974 F.2d 1358, 1363 (3d Cir. 1992). Under Rule 56, the court must view the evidence presented on the motion in the light most favorable to the opposing party. Anderson, 477 U.S. at 255, 106 S. Ct. at 2513-14.
DISCUSSION
Colonial's motion for summary judgment is predicated upon the fact that the Defendants are in default of the executed surety agreement. Furthermore, due to MedTek's failure to complete performance on its contract with VA Medical, several subcontractors have potential claims against the bonds issued to MedTek, and a number of subcontractors have, in fact, initiated claims to enforce them. Thus, Colonial argues that it is entitled to enforcement of the surety contract provisions, specifically the provision requiring MedTek to provide collateral security. MedTek avers that a question of fact remains as to whether it, under the terms of the contract, has been declared to be in default. Additionally, MedTek claims that Colonial is not entitled to the remedies it seeks as those remedies are actions at law and not in equity, making them unenforceable.
After review of the indemnity agreement provisions, remedies are often granted when the contract precedents are established.United Bonding Ins. Co. v. Stein, 273 F. Supp. 929, 930 (E.D. Pa. 1967). According to most indemnity provisions, the surety will be granted relief upon default of the indemnitor and when liabilities are present for the surety. United States Fid. Guar. Co. v. Feibus, 15 F. Supp. 2d 579, 583 (M.D. Pa. 1998) (analyzing a "prima facie evidence clause" of a surety/indemnitor agreement). In interpreting the agreements between the surety and the indemnitor, general contact principles are applied. See Safeco Ins. Co. v. Dematos Enter., Inc., 2003 U.S. Dist. LEXIS 7651 (E.D. Pa. Apr. 9, 2003) (analyzing summary judgment requirements under the contract terms); United States Fidelity, 15 F. Supp. 2d 579 (same); Int'l. Fidelity Ins. Co. v. United Constr., Inc., 1992 U.S. Dist. LEXIS 6777 (E.D. Pa. May 15, 1992) (same). When the contract language is clear, unambiguous and the parties' intent is known, the contract agreements will be enforced when the necessary conditions precedent are met. Here, the parties do not challenge any terms of the contract.
First, according to the General Indemnity Agreement ("GIA") signed by both Colonial and MedTek, "[i]f a claim is made against Surety, or if Surety deems it necessary to establish a reserve for potential claims, and upon demand from Surety, Indemnitor shall immediately deposit with Surety cash or other property acceptable to Surety, as collateral security, to protect Surety with respect to such claims or potential claims and any anticipated expenses or attorneys' fees." GIA ¶ 7. Plaintiff states that Defendants have failed to provide adequate collateral security, despite numerous requests to do so, and are, therefore, in default of the GIA. Defendants argue that they provided Colonial with adequate collateral security by allowing it to take control over the funds paid by the owner of the project.
Under terms similar to the above-mentioned collateral security provision, once the surety receives a demand on its bond, the principal must provide the surety with funds which the surety is to hold in reserve. "If the claim on the bond must be paid, then the surety will pay the loss from the principal's funds; otherwise the surety must return the funds to the principal. . . . Thus, there is no windfall for the surety." United States Fid. Guar. Co. v. Feibus, 15 F. Supp. 2d 579, 588 (M.D. Pa. 1998). Many courts have routinely upheld similar collateral security clauses. See Fallon Electric Co., Inc. v. Cincinnati Ins. Co., 121 F. 3d 125, 127 (3d Cir. 1997) (stating that the intentions of the parties should be ascertained primarily by looking at the language used in the agreement); Safeco Ins. Co. v. Dematos Enter., Inc., 2003 U.S. Dist. LEXIS 7651, *14-16 (E.D. Pa. Apr. 9, 2003); United States Fid. Guar. Co., 15 F. Supp. 2d at 588. Accordingly, "[i]n order to protect the surety's bargain under an indemnity agreement, courts have granted specific performance when indemnitors have failed to comply with such a provision." Safeco, 2003 U.S. Dist. LEXIS at *14.
Under the GIA in this case, the only conditions precedent to Defendants' obligation to provide collateral security are: (1) a claim is made against a bond issued by Colonial, and (2) that Colonial makes a demand for collateral. There is no dispute of material fact as to whether Colonial has satisfied these conditions. Plaintiff has submitted evidence of at least seven (7) claims made against the bonds issued on behalf of MedTek and has produced letters written to MedTek indicating a demand for collateral security under the GIA. See Nunziata Aff. Exhibit A; Miller Aff. Exhibit L. Therefore, this Court must grant summary judgment is favor of Plaintiff and order specific performance of the collateral security provision under the GIA.
Second, as indicated in the GIA, Defendants have agreed to indemnify Colonial "from and against any and all (i) demands, liabilities, losses, costs, damages or expenses of whatever nature or kind, including fees of attorneys and all other expenses. . . ." GIA ¶ 3. As such, this Court will enforce that provision against Defendants and order said indemnification.
Lastly, as stated previously, Defendants are in default of the GIA if they "breach any provision of this Agreement of Contract with Surety." GIA ¶ 5E. In addition, Defendants are in default of the GIA if they, "breach, abandon or repudiate any Contract." GIA ¶ 5A. This Court finds that there is no dispute of material fact regarding Defendants' default under the GIA. Contrary to Defendants' argument, it is immaterial whether VA Medical formally declared MedTek in default of the construction contract. As previously held, Defendants are in default under the GIA for failing to comply with paragraph 7 mandating the provision of adequate collateral security upon request. Further, Defendants have provided no evidence to suggest that the contract with VA Medical was completed to VA Medical's satisfaction. Plaintiff has provided this Court with numerous letters written by VA Medical urging MedTek to complete construction. As of this date, Defendants have submitted no documentation that the work has been done. Therefore, Defendants are also in default of the construction contract.
In accordance with the GIA, Colonial is entitled to the following remedies upon default by Defendants: (1) assumption of the administration of any Contract and arrangement for its completion; (2) to take possession of and operate and use Defendants' equipment, materials and supplies at the site of the work of elsewhere . . .; (3) to take possession of and operate and use the office equipment, books and records of Defendants as are necessary for the completion of any Contract; and (4) to file an immediate suit to enforce any or all of the provisions of this Agreement. GIA ¶ 6. As Defendants have been found in default of the GIA, Plaintiff is entitled, at its discretion, to take any or all of the above-listed actions.
It should be noted that while it is undisputed that Defendants are liable in damages for all losses, costs and expenses of Colonial under the GIA, the total amount of damages cannot be determined at this time. Accordingly, a decision on the amount of damages is inappropriate at this time, and a hearing will be held before this Court to determine Plaintiff's damages.
CONCLUSION
For the foregoing reasons, this Court will grant Plaintiff's Motion for Summary Judgment and will order Defendants to make an immediate collateral security deposit with Colonial of $450,000.00. An appropriate Order follows.
Although this Court is granting summary judgment on Plaintiff's Complaint in its entirety, it is noted that Count II is duplicative of Count I, as collateral security is to be provided for potential or anticipated claims, and Count III becomes moot after this Court's decision on summary judgment ordering Defendants to deposit $450,000.00 in cash with Plaintiff.