Opinion
01-CV-8531 (ILG).
May 23, 2003.
MEMORANDUM ORDER
In this diversity action brought by a surety for reimbursement from the defendants pursuant to an indemnity agreement, plaintiff International Fidelity Insurance Company ("IFIC") has moved for summary judgment. IFIC issued a payment performance bond to defendants North Shore Environmental Solutions. Inc. ("North Shore") and North Shore Energy Saver, Inc. (collectively, the "North Shore Defendants"), and the parties entered into an Agreement of Indemnity (the "Indemnity Agreement") pursuant to which IFIC had the right to settle any and all claims made against the indemnitor. Subsequently, IFIC entered into a settlement of a class action suit against North Shore. It now seeks indemnification. The only defense against this motion is to show that IFIC entered into the settlement in bad faith. Although defendants attempt to muddy the factual waters with various conclusory allegations of bad faith, for the reasons set forth below, IFIC's motion is granted.
FACTUAL AND PROCEDURAL HISTORY
IFIC's business includes issuing surety bonds in connection with public improvement projects in New York State. North Shore is in the construction and asbestos abatement business. On January 26, 1990, the North Shore Defendants, Jo Anne Zitnansky and Jaro Zitnansky (collectively, the "Indemnitors") as Indemnitors for themselves, their heirs, executors and administrators, executed the Indemnity Agreement pursuant to which IFIC issued payment performance bond 877607 (the "Payment Bond"). Defendants Jo Anne and Jaro Zitnansky signed the Indemnity Agreement as officers of the North Shore Defendants and in their individual capacity.
The Indemnity Agreement provides, among other things:
The Contractors and Indemnitors shall exonerate, indemnify, and keep indemnified the Surety from and against any and all liability for losses and/or expenses of whatsoever kind or nature (including, but not limited to, interest, court costs and counsel fees) and from and against any and all such losses and/or expenses which the surety may sustain and incur: (1) By reason of having executed or procured the execution of the Bonds, (2) By reason of the failure of the Contractors to perform or comply with the covenants and conditions of this Agreement or (3) In enforcing any of the covenants and conditions of this Agreement.
* * * * * * * *
SETTLEMENTS
The Surety shall have the right to adjust, settle or compromise any claim, demand, suit or judgment upon the Bonds, unless the Contractor and the Indemnitors shall request the Surety to litigate such claim or demand, or to defend such suit, or to appeal from such judgment, and shall deposit with the Surety, at the time of such request, cash or collateral satisfactory to the Surety in kind and amount, to be used in paying any judgment or judgments rendered or that may be rendered, with interest, costs, expenses and attorneys' fees, including those of the Surety.
(See Affidavit of Bogda M.B. Clarke ("Clarke Aff.") Exh. A).
In 1995, a class action, captioned Andrezej Barszcz v. North Shore Environmental Solutions, Inc., U.S. Capital Insurance Co., and International Fidelity Insurance Co., Index No. 115108/95, was filed in the Supreme Court of New York (the "Prevailing Wage Action"). Plaintiffs in that action were employees of North Shore who had performed work on various North Shore contracts with New York City and alleged that North Shore had failed to pay their wages or paid wages lower than the prevailing rate of wages and supplemental benefits as required by New York State Labor Law. IFIC was named as a defendant in this action as the issuer of the Payment Bond.
On or about May 30, 1996, IFIC entered into a Stipulation of Settlement (the "Settlement Agreement") in that action. (See Clarke Aff. Exh. C). The Settlement Agreement was signed by North Shore's attorney Peter J. Shatzkin of the law firm of Shatzkin Furman. Pursuant to the Settlement Agreement, a settlement fund was created (the "Settlement Fund"), and administered by FRG Information Systems Corp. ("FRG"). IFIC agreed to contribute a Primary Letter of Credit in the amount of $188,860.00 and a Secondary Letter of Credit in the amount of $97,722.00.
On September 11, 1996, after a hearing and finding that "the Settlement was arrived at through arm's length, good faith bargaining among the parties," (Clarke Aff. Exh. D at 2), the Honorable Ira J. Gammerman issued a Final Order and Judgment certifying the class and approving the Settlement Agreement.
On December 16, 1996, Justice Gammerman signed a Stipulation and Order (i) amending the Second Amended Complaint to include a cause of action against New York City and the New York State Comptroller; and (ii) ordering the City and Comptroller — stakeholders in the action — to pay over to FRG $227,876. The City had withheld this money from North Shore as required by New York State Labor Law. This Order had no impact on IFIC's obligations pursuant to the Settlement Agreement.
On February 27, 1997, IFIC contributed $255,432.24 to the Settlement Fund, and it seeks indemnification from the Indemnitors.
IFIC claims it has sustained an additional $43,261.43 in losses as a result of attorneys' fees and expenses incurred in connection with the Prevailing Wage Action. These losses were partially offset by the return of a portion of IFIC's contribution to the Settlement Fund in the amount of $30,258.78. IFIC thus claims $268,434.89 in losses, attorneys' fees and expenses in connection with defending and settling the Prevailing Wage Action.
DISCUSSION
I. Summary Judgment StandardSummary judgment "shall be rendered forthwith if the pleadings, depositions . . . together with the affidavits . . . show that there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). If, when "[v]iewing the evidence produced in the light most favorable to the nonmovant . . . a rational trier of fact could not find for the nonmovant, then there is no genuine issue of material fact and entry of summary judgment is appropriate." Binder v. Long Island Lighting Co., 933 F.2d 187, 191 (2d Cir. 1991). While all reasonable ambiguities and inferences should be resolved against the moving party, those inferences must be supported by affirmative facts and must be based on relevant, admissible evidence. Fed.R.Civ.P. 56(e). The party opposing summary judgment "may not rely on conclusory allegations or unsubstantiated speculation." Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998).
II. The Indemnity Agreement
Indemnity agreements are valid and enforceable under New York law. See International Fidelity Insurance Co. v. Spadafina, 192 A.D.2d 637, 596 N.Y.S.2d 453 (2d Dep't 1993). Where the general contractor has expressly agreed to indemnify the surety for losses arising from claims made on surety bonds, the indemnity agreement governs the relationship between the surety and the contractor. See id.; BIB Construction Co. v. Fireman's Insurance Co., 214 A.D.2d 521, 523, 625 N.Y.S.2d 550, 553 (1st Dep: 1995); General Insurance Co. v. K. Capolino Construction Corp., 903 F. Supp. 623, 626 (S.D.N.Y. 1995).
Under the terms of the Indemnity Agreement, IFIC had the right to settle all claims and make payments, unless the Indemnitors requested that IFIC litigate and posted collateral at the time of such request to secure the amount of the possible judgment and expenses. See Clarke Aff. Exh. A. There is nothing in the record to suggest that the Indemnitors either requested IFIC to litigate the Prevailing Wage Action or posted collateral to fund the litigation or a possible judgement.
Pursuant to the Indemnity Agreement "vouchers or other evidence of any such payments made by the Surety shall be prima facie evidence of the fact and amount of the liability to the Surety." Id. IFIC has stated a prima facie case under the contract by submitting documentation of the payment of settlement as well as the fees and costs in making a settlement. See Spadafina, 596 N.Y.S.2d at 454.
In this regard, IFIC annexed to its supporting affidavit its claims abstract summarizing its losses under the Payment Bond, a copy of the check payable to the Settlement Fund, and a claims abstract outlining attorneys fees and expenses. See Clarke Aff. Exhs. E F.
A surety's right to settle claims is limited only by its obligation to do so in good faith. See id.; National Surety Co. v. Fulton, 192 A.D. 645, 183 N.Y.S. 237, 238 (1st Dep't 1920); General Accident Insurance Co. v. Merritt-Meridian Construction Corp., 975 F. Supp. 511, 516 (S.D.N.Y. 1997). It is irrelevant whether North Shore was actually liable for the amounts claimed in the Prevailing Wage Action, as long as IFIC acted in good faith in settling the claims and making payments under such a settlement. See Spadafina, 596 N.Y.S.2d at 454;Merritt-Meridian, 975 F. Supp. at 516.
Sureties enjoy this wide discretion to settle claims because they play an important role in the construction industry, and because their economic incentives are sufficient to protect against the payment of invalid claims. As the Appellate Division, First Department observed:
"The expense, delay, trouble, and risk of loss to the guaranty company is a sufficient safeguard against an unwarranted payment, and without such a stipulation as complained of here [which provided that the surety's payment would be `conclusive evidence' of the fact and amount of indemnitor's liability to the surety] guaranty companies could not safely do business as they do, and to the evident advantage of the parties and of the general public."Fulton, 183 N.Y.S. at 238 (quoting Guarantee Co. v. Pitts, 78 Miss. 837, 30 So. 758 (1901)).
The Indemnitors' Claims of Bad Faith
The Indemnitors have raised what they contend are numerous triable issues of fact as to whether IFIC acted in good faith when it settled the Prevailing Wage Action. However, the Indemnitors' allegations are unsupported and conclusory. Such "conclusory allegations of bad faith are insufficient to defeat a motion for summary judgment in favor of a surety seeking to enforce an indemnification agreement." Lumbermens Mutual Casualty Insurance Co. v. Darel Group U.S.A., Inc., 2003 WL 1628830, at *7 (S.D.N.Y. March 18, 2003) (quotingMerritt-Meridian, 975 F. Supp. at 518); see also Spadafina, 596 N.Y.S.2d at 455.
The Indemnitors claim that the Settlement Agreement was the product of various "collusions with the law," "extortions by the public servant" (apparently Justice Gammerman), and a "kangaroo court" (apparently New York Supreme Court). The Indemnitors' support for its various claims of IFIC's alleged bad faith are gleaned from the Affidavit of Defendants Jo Ann and Jaro Zitnansky (the "Zitnansky Affidavit"). This affidavit consists almost entirely of legal argument and conclusions with no factual support.
Pursuant to Fed.R.Civ.P. 56(e), supporting and opposing affidavits "shall be made with personal knowledge." "When ultimate facts and legal conclusions appear in an affidavit, such extraneous material should be disregarded by the court."LaRouche v. Webster, 175 F.R.D. 452, 455 (S.D.N.Y. 1996); see also Burlington Coat Factory Warehouse Corp. v. Esprit De Corp., 769 F.2d 850, 852 (2d Cir. 1989) conclusory 10 Moore's Federal Practice § 56.14[1][d] (3d Ed. 1995) ("Affidavits that contain nothing more than conclusory allegations or speculation are not sufficient to overcome a properly supported summary judgment motion. Allegations that proffer legal conclusions . . . but are not buttressed with factual support expressed in the affidavit may not serve as the basis for summary judgment."). Accordingly, the Court does not credit the Zitnansky Affidavit.
Even if the Court were inclined to accept the Indemnitors' conclusory allegations, there is no basis for the conclusion that IFIC settled the Prevailing Wage Action in bad faith. The Idemnitors principle claim of bad faith on the part of IFIC concerns the signing of the Settlement Agreement. The Idemnitors claim that Peter J. Shatzkin, whose signature appears on the Settlement Agreement on behalf of North Shore and its insurer, U.S. Capital Insurance Company (Clarke Aff. Exh. C at 22), did not in fact represent North Shore when he purported to sign the Settlement Agreement on its behalf. The Indemnitors assert that IFIC knew this at the time it entered into the Settlement Agreement and that "IFIC's reliance, therefore, on the Settlement Agreement was unreasonable, intentionally malicious and in violation of their obligation of fair dealing with their principal North Shore." (Indemnitors' Opposition Brief at 3).
Not only is this conclusory assertion of dubious validity, it is also beside the point. Even if the Indemnitors could show that IFIC was aware that Mr. Shatzkin did not represent North Shore when he signed the Settlement Agreement, there is nothing in the indemnity Agreement that required IFIC to obtain the Indemnitors' consent to settle. Indeed, the Indemnity Agreement provided that unless the Indemnitors requested that IFIC litigate and posted collateral, IFIC had the right to settle any claim. Therefore, any factual dispute regarding Shatzkin's status is not material.
The Settlement Agreement was signed on May 30, 1996 and approved by Judge Gammerman on September 11, 1996. IFIC's Reply Declaration of Kenneth Hayes ("Hayes Reply Decl.") attaches a letter dated February 21, 1997 on North Shore letterhead written by defendant Jaro Zitnansky to Mr. Shatzkin requesting that he appeal Judge Gammerman's Final Order and Judgment. (Hayes Reply Decl. Exh. C). This sequence of events belies the Indemnitors' claim that Mr. Shatzkin was not North Shore's lawyer when he signed the Settlement Agreement on its behalf.
The Indemnitors' other claims of bad faith are nothing more than legal conclusions about the merits of the Prevailing Wage Action. These conclusory allegations do not help the Indemnitors, because it is irrelevant whether North Shore was actually liable for the amounts claimed by the Prevailing Wage Action. See Spadafina, 596 N.Y.S.2d at 454;Merritt-Meridian, 975 F. Supp. at 516 ("a decision to proceed with claims despite possible defenses, however, is not evidence of bad faith.") Pursuant to the Indemnity Agreement. IFIC had the right to settle any and all claims so long as it was "under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed." (Clarke Aff. Exh. A). The Indemnitors have offered no facts even to suggest that IFIC acted in bad faith when it settled the Prevailing Wage Action and fulfilled its obligations under the Settlement Agreement. Their claim of bad faith is plainly belied by Justice Gammerman's finding that the Settlement Agreement was arrived at through arm's length and good faith bargaining. This Court must give full faith and credit to the September 11, 1996 Final Order and Judgment based upon that finding. 28 U.S.C. § 1738.
The Indemnitors argue (i) that there was no obligation to the workers for alleged underpayment of wages; (ii) that there were no verified complaints of workers under the 1992 contract; (iii) that the Comptroller failed to find credible evidence of willfulness and (iv) that the class in the Prevailing Wage Action was illegally constituted, since the named plaintiff was a supervisor and thus ineligible to make a claim for underpayment of wages, and other purported class members never worked on the projects. (Indemnitors' Opposition Brief at 4).
The Indemnity Agreement unambiguously requires the Indemnitors to reimburse IFIC for any payments it makes pursuant to the Indemnitors' joint and several liability under the Payment Bond.
CONCLUSION
For the reasons set forth, plaintiff's motion for summary judgment is granted.
SO ORDERED.