Summary
granting summary judgment to plaintiffs where defense counsel conceded at oral argument that defendant had not submitted sufficient evidence to survive summary judgment
Summary of this case from Russo v. DiMiliaOpinion
Case No. 01-CV-7394 (FB)
October 1, 2003
BENJAMIN D. LENTZ, ESQ., NY, for Plaintiff
VINCENT J. TORNA, ESQ., New York, NY, for Defendant
MEMORANDUM ORDER
This action arises out of an indemnification agreement between plaintiff surety General Insurance Company ("General") and defendant contractor, Mezzacappa Brothers, Inc. ("MBI"). General served as MBI's surety on a series of public construction contracts with New York City (the "City"). Because MBI was experiencing financial difficulties, General made payments on MBI's behalf to numerous subcontractors and suppliers on various projects which had been covered by General's surety bonds. Claiming a total loss of $1,008,712.43, after certain offsets, General has brought this action against MBI for recovery of this sum, together with interest and attorneys' fees, pursuant to the indemnification agreement. It now moves for summary judgment.
At oral argument on the motion, the parties mistakenly agreed that the amount due was in the sum of $1,626,763.30. See Transcript of Oral Argument, September 8, 2003 ("Tr.") at p. 4. In subsequent submissions, the parties acknowledged that this sum included the interest calculation by General of $618,052.87. See Letters of Vincent J. Torna dated September 12, 2003 and Benjamin D. Lentz dated September 23, 2003; see also Affidavit of Peter Brown in support of General's Motion for Summary Judgment ("Brown Aff.") Ex. 1 (General's interest calculations).
The offsets represented settlements by General of certain affirmative claims which MBI had brought against the City, Thompson Pipe Steel Company ("Thompson"), one of MBI's suppliers, and another surety, the Insurance Company of North America ("INA"). By operation of the indemnification agreement, these claims were automatically assigned to General as a consequence of its payments to MBI's subcontractors and suppliers. In opposing summary judgment, MBI contends that General undersold the value of these claims because, although General concededly did not act in bad faith, it failed to act with commercial reasonableness. This contention is also the basis of a number of counterclaims by MBI.
At issue is whether the propriety of the settlements should be measured by the standard of good faith under general principles of surety law, as General contends, or by the standard of commercial reasonableness under Article 9 of the Uniform Commercial Code ("UCC"), as MBI asserts.
BACKGROUND
The following facts, taken from the parties' submissions, are not in dispute.I. Indemnity Agreement
On August 15, 1990, in consideration for General's surety bonds, MBI executed an indemnity agreement (the "1990 Agreement"). The agreement contained (i) an indemnity clause, whereby MBI agreed to pay General all costs and expenses incurred by reason of having executed any bond; (ii) a settlements clause, whereby General "shall have the exclusive right for itself and [MBI] to determine in good faith whether any claim or suit upon any bond shall, on the basis of belief of liability, expediency or otherwise, be paid, compromised, defended or appealed," Brown Aff., Ex. 3; (iii) an assignments clause, whereby "as collateral security to [General] for the agreement of [MBI] to repay all loss and expense to [General], [MBI]: assign[ed] to [General] . . . all rights of [MBI] in, or in any manner growing out of . . . any subcontract or purchase order and against any legal entity and its surety who has contracted with [MBI] to furnish labor, materials, equipment and supplies in connection with any Contract", id.; and (iv) an attorney-in-fact clause. The agreement also provided for recovery of attorneys' fees which MBI caused General to incur. The agreement further stated that General could file the agreement so that it would qualify as a financing statement under the UCC.
II. 1998 Agreement
In June 1998, MBI and General executed an agreement (the "1998 Agreement") wherein, inter alia, MBI acknowledged that General had made payments in excess of $1.7 million to MBI's unpaid suppliers and contractors, and MBI granted General a junior security interest in MBI's action against the City on a contract known as MED-552, Brown Aff., Ex. 4 (1998 Agreement). This MED-552 action was distinct from the other suits and settlements at issue in this case. The contract was neither bonded by General nor covered by the 1990 Agreement. In the 1998 Agreement, MBI acknowledged its assignments of claims to General in the 1990 Agreement. see Brown Aff., Ex. 8. The 1998 Agreement further stated that the monies due on the collateral, which included the proceeds of MBI's claims, even if paid in full, would "not be sufficient to reimburse General for its payments to unpaid suppliers and contractors of [MBI]." Brown Aff., Ex. 4, pp. 5-6.
III. Settled Claims
A. Thompson Settlement
In May 1998, Thompson sued MBI and General in connection with projects BED-747, RED-328 and QED-941, seeking $822,871. In respect to the QED-941 project, MBI had been retained by INA, the surety for the original contractor, to complete that contract. MBI asserted counterclaims against Thompson on BED-747 and RED-328, totaling approximately $500,000, because of Thompson's alleged failure to timely deliver pipe on these projects.
In November 1998, General settled Thompson's claims against MBI on BED-747 and RED-328 by agreeing to pay Thompson $200,000 and by releasing MBI's counterclaims. General claims that in doing so it achieved a discount of $170,000 off the $370,000 owed by MBI to Thompson on the projects. General argues that settlement was appropriate because incurring further litigation expenses was not warranted when (1) "Thompson asserted in mediation sessions that any claimed 'late' delivery was due to either late payment or non-payment from [MBI], citing as support the admitted fact that [MBI] owed over $300,000 principal on these two projects"; and (2) "General knew, based up on General's own payment of over $1.7 million of other [MBI] indebtedness, that [MBI] was experiencing extreme financial difficulties and was either slow in paying its obligations or was not paying its obligations at all." Brown Aff. at ¶ 20.
MBI objected to General's settlement of these claims on the grounds that "Thompson had been responsible for delays to the projects due to its inability to deliver pipe and due to misfabrication of pipe on BED 747." Affidavit of Sam Mezzacappa ("Mezzacappa Aff.") at ¶ 21.
Some years later, in May 2002, MBI settled Thompson's claim on project QED-941. In that settlement, MBI agreed to pay Thompson $165,000 and to establish an escrow of $100,000 to cover potential future obligations.
B. The City and INA Global Settlement
In the Thompson litigation, MBI impleaded the City. In a related, consolidated case, MBI cross-claimed against INA on the QED-941 project. MBI's claims against the City and INA, covering several projects, totaled $6,205,878. The City asserted cross-claims against MBI on BED-747 for $100,000 and on another project, HWQ-274, for $306,000.
On May 16, 2000, General entered into a global settlement with the City and INA. See Brown Aff., Exs. 15, 16 (settlement stipulations). The City agreed to pay General $1,114,367.28, which represented the contract balances and retainage owed MBI, minus an assessment. Although MBI had several claims against the City, General argues that it evaluated the City's defenses and MBI's claims and concluded that, in light of the favorable aspects of the settlement, litigation would not be worthwhile. The global settlement also allowed General to obtain payment for contract balances owed by INA on QED-941. The City paid $1,114,367.28, INA paid $398,075.46, and liquidated damages against General as a consequence of MBI's default were reduced from $406,000 to $275,000.
The Court notes that MBI, in both Mezzacappa's affidavit and in its Local Rule 56.1 statement, incorrectly represents that General's settlement with the City and INA was reached on May 16, 2002. See Mezzacappa Aff. at ¶ 25; MBI 56.1 Statement at ¶ 17.
MBI argues that the amount General received in settlement represented the "bare minimum that MBI was due from the City on contracts 742, 328, 274 and 747." Mezzacappa Aff. at ¶ 33. MBI acknowledges that General obtained a reduction in the City's claimed liquidated damages, but argues that the City had "failed to justify any liquidated damages[.]" Id. MBI also argues that General's assessments of MBI's claims against the City were superficial and vague, and that General should have consulted with MBI before waiving MBI's claims.
C. MED-552 Settlement
In 1992, MBI filed a lawsuit for delay damages against the City on Contract MED-552, seeking over $11 million in damages. On June 30, 2000, the City and MBI agreed to a settlement of $8 million. MBI claims that General believed there was no need to vigorously pursue a better outcome on the Thompson, City and INA settlements because it had "the assurance that it would recover the balance of monies due from MBI's settlement on MED-552." Mezzacappa Aff. at ¶ 30
General responds that it had no way of projecting what the settlement amount for MED-552 would turn out to be at the time it settled with Thompson and the City.
DISCUSSION
Summary judgment may be granted if there is "no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).
I. The Standard to Apply in Evaluating General's Settling of MBI's Affirmative Claims
As MBI acknowledges, it is a well-established general rule that the good faith standard applies to the settlement by a surety of claims made against its insured. See, e.g., General Accident Insur, Co, v, Merritt-Meridian Construction Corp., 975 F. Supp. 511, 516 (S.D.N.Y. 1997) (applying New York law); Banque Nationale deParis v. Insur. Co. of N. Amer., 896 F. Supp. 163, 164 (S.D.N.Y. 1995) (applying New York law); Ebasco Constr., Inc. v. A.M.S. Const. Co., Inc. 599 N.Y.S.2d 866, 867 (2d Dep't 1993); International Fidelity Ins., Co. v. Spadafina, 596 N.Y.S.2d 453, 454 (2d Dep't 1993); see also Gundle Lining Constr. Co. v. Adams County Asphalt, 85 F.3d 201, 210-11 (5th Cir. 1996); Frank Briscoe Co. v. The Travelers Indemnity Co., 65 F. Supp.2d 285, 298 (D. N.J. 1999). MBI argues, however, that the UCC standard of commercial reasonableness, and not the good faith standard, should govern the settlement by a surety of its insured's affirmative claims. Alternatively, it contends that the UCC commercial reasonableness standard should at least apply in this particular case because of the provision in the 1990 Agreement stating that the surety can file the agreement as a valid UCC financing statement. MBI argues that this provision demonstrates the intent of the parties to have the agreement governed by the UCC. Under the commercial reasonableness standard, the burden is on the secured party to demonstrate either that it actually optimized the compensation it obtained or employed appropriate procedures for doing so. Bankers Trust Co. v. J.V. Dowler Co., 47 N.Y.2d 128, 134-135 (1979).
The parties agree that because this is a diversity case, New York substantive law applies. See Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938).
Neither MBI nor the Court has uncovered any case law supporting MBI's contentions. Although the applicability of the UCC standard of commercial reasonableness in respect to affirmative claims was raised before the Second Circuit in Hutton Const. Co. v. County of Rockland, 52 F.3d 1191 (2d Cir. 1995), the court, in determining that the indemnification agreement in that case authorized the sureties to settle "not only claims against the Sureties 'upon the bonds,' but also [its insured's] affirmative claims," id. — a matter not in dispute in the present case — refused to consider the issue since it was not raised in the court below.
Courts have consistently assumed that the good faith standard applies to the surety's settling of the contractor's affirmative claims. See, e.g. Compania de Remorque Y Salvamento, S.A. v, Esperance, Inc., 187 F.2d 114 (2d Cir. 1951) (evaluating settlement of contractor's counterclaims by the good faith standard); North American Speciality Insur. Co. v. Montco Const. Co., Inc., 2003 U.S. Dist. LEXIS 9995 at *22 (W.D.N.Y. 2003) (absent showing of bad faith, surety had the right to settle contractor's pending litigation against the owner); General Accident Insur. Co. v. Merritt-Meridian Construction Corp., 975 F. Supp. 511, 519 (S.D.N.Y. 1997) (in the absence of bad faith, surety "had the right to settle not only claims against [the contractor], but [the contractor's] affirmative claims against the owner as well.").
There is no pragmatic distinction between the evaluation of a surety's settlement of claims against its insured and the settlement by the surety of its insured's affirmative claims. In each case, the surety's self-interest is served by striking the best economic bargain. In respect to claims against its insured, it is self-evident that the surety's economic interest is to settle for as little as it can. In the case of its insured's affirmative claims, it is in the surety's best interest to maximize the settlement since it is hardly assured of recouping its losses against an economically labile insured.
Furthermore, it is established law that the UCC does not displace the surety's equitable subrogation rights — that is, the surety's right to stand in the shoes of its insured once the surety has performed its obligations under a bond. See, e.g., National Shawmut Bank of Boston v. New Amsterdam Casualty Co., 411 F.2d 843 (1st Cir. 1969) (holding that UCC Article 9 does not affect a surety's right to equitable subrogation); Amwest Surety Insur. Co. v. United States, 870 F. Supp. 432, 434 (D. Conn. 1994) (rejecting attempt to apply the UCC to the surety's equitable subrogation claim, after noting that" [t]here is no reference in the UCC to sureties," and that a "surety claim is [not] derived from . . . the ordinary financing contemplated by UCC Article 9."). Such cases provide further support for General's contention that the UCC has no role to play in evaluating General's settling of MBI's affirmative claims.
MBI's alternative argument, that the provision in the indemnification agreement allowing General to file the agreement as a financing statement under the UCC should be taken to mean that the parties intended the UCC to govern their entire agreement, is specious. The purpose of a financing statement under the UCC is merely to alert prospective third party lenders that a conflicting security agreement may exist. See United States v. Smith, 832 F.2d 774, 778 (2d Cir. 1987).
II. Under the Good Faith Standard, General Is Entitled to Summary Judgment
When asked at oral argument whether MBI had submitted sufficient evidence to survive summary judgment under the good faith standard, its counsel conceded: "Under that standard, no." Tr. at 10. It is well-established that "statements made by an attorney concerning a matter within his employment may be admissible against the party retaining the attorney." United States v. Margiotta, 662 F.2d 131, 142 (2d Cir. 1981). Statements made by an attorney during oral argument thus constitute binding judicial admissions. See Geller v. Prudential Insur. Co. of America, 237 F. Supp.2d 210, 220 (E.D.N.Y.) (awarding partial summary judgment based on counsel's concessions at oral argument); Kohler v. Inter-Tel, Inc., 244 F.3d 1167, 1170 n. 3 (9th Cir. 2001) (citing United States v. Wilmer, 799 F.2d 495, 502 (9th 1986) (attorney's statement during oral argument constitutes judicial admission)); McCaskill v. SCI Management Corp., 298 F.3d 677, 680 (7th Cir. 2001) ("The verbal admission by [defendant's] counsel at oral argument is a binding judicial admission, the same as any other formal concession made during the course of proceedings."). It is thus undisputed that General's settling of MBI's affirmative claims met the good faith standard.
In light of MBI's dispositive concession, the Court need not decide whether summary judgment would be warranted under the commercial reasonableness standard.
III. MBI's Counterclaims
Although General has not moved for summary judgment on MBI's counterclaims, they are admittedly based on the same arguments made by MBI in opposition to the motion before the Court; consequently, as MBI agreed at oral argument, if the Court were to reject its arguments, its counterclaims should sua sponte be dismissed. See Tr. at 2. See Ann Howard Designs v. Southern Frills, Inc., 992 F. Supp. 688, 692 (S.D.N.Y. 1998) (dismissing claims that had not been challenged on summary judgment where "the relevant facts [had] been fully briefed and the record [showed] that [the] claims should [fail]").
IV. Damages
In addition to its right to recover the $1,008,712.43 owed pursuant to its payment bonds, General is also entitled under the indemnification agreement, as conceded by MBI, to recover interest and attorneys' fees. See Tr. at 3. However, in respect to interest, MBI argues that the Court is not bound by the 9% rate governing contracts under CPLR 5003 (a); rather, it should view the matter as equitable in nature and fix a lesser rate in the exercise of its discretion. See Letter of Vincent J. Torna dated September 12, 2003. Regardless of whether the matter be viewed as contractual or equitable, interest will be computed at 9%. It is anticipated that the parties will now be able to calculate the interest without further court intervention, as well as attorneys' fees, and jointly submit a proposed judgment within 20 days from the date herein. If not, the court will set these matters down for a hearing. See Fed.R.Civ.P. 56(d) (allowing the Court, in a case not fully adjudicated on a summary judgment motion, to direct such further proceedings as are just).
CONCLUSION
General's motion is granted to the extent set forth in this Memorandum. MBI's counterclaims are dismissed. If a joint proposed judgment is not submitted to the Court within 20 days from the date herein because the parties cannot agree on interest and/or attorneys' fees, a hearing will be held to resolve the issue (s).
SO ORDERED.