Opinion
Civil Action No. 3:02-CV-2133-K.
August 15, 2004
MEMORANDUM OPINION AND ORDER
Before the Court is Plaintiff's Motion for Partial Summary Judgment. Having considered the merits of the motion, and for the reasons set forth below, the motion is GRANTED.
I. Factual and Procedural Background
This claims stems from a 2001 Indemnity Agreement ("Agreement") between Plaintiff United States Fire Insurance Company ("U.S. Fire"), a construction surety, and Defendants Scott and Linda Unclebach (collectively, "Unclebachs"), the president and secretary, respectively, of two construction contracting companies, Defendants Rey-Bach, Inc. ("Rey-Bach") and CSF Mechanical Corporation ("CSF"). On behalf of Rey-Bach and CSF and themselves as individuals, the Unclebachs agreed to indemnify U.S. Fire against any loss it sustained on surety bonds issued for two construction projects: one, consisting of four office buildings in Allen, Texas ("Jupiter project"); and, the other, in connection with construction work at the Castle Hills Elementary School ("Castle Hills project").In May 2002, U.S. Fire began receiving claims on these bonds, including one from the developer of the Jupiter project, which had fired Rey-Bach. U.S. Fire demanded the Unclebachs honor the Indemnity Agreement, but to date, U.S. Fire claims they have failed and refused to do so. As a result, U.S. Fire has retained legal counsel to defend itself from claims of subcontractors and suppliers, as well as pursue its claims against the Unclebachs. U.S. Fire, so far, has incurred losses of $405,897.77, including paid claims and attorneys' fees. It expects $26,886.61 of additional losses and expenses.
In October 2002, U.S. Fire sued the Unclebachs for breach of contract and conversion. U.S. Fire also sued Rey-Bach and CSF as well, but both have since been dismissed without prejudice pursuant to an agreed order.
II. Summary Judgment Standards
Summary judgment is appropriate when the pleadings, affidavits and other summary judgment evidence show that no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A genuine issue of material fact exists if "`the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'" Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1429 (5th Cir. 1996) (en banc) ( quoting Anderson v. Liberty Lobby, Inc., 477 US 242, 248 (1986)). The moving party bears the burden of identifying those portions of the record it believes demonstrate the absence of a genuine issue of material fact. Celotex, 477 U.S. at 322-25. Once a movant makes a properly supported motion, the burden shifts to the nonmovant to show that summary judgment should not be granted; the nonmovant may not rest upon allegations in the pleadings, but must support the response to the motion with summary judgment evidence showing the existence of a genuine fact issue for trial. Id. at 321-25; Anderson, 477 U.S. at 255-57. All evidence and reasonable inference must be reviewed in the light most favorable to the nonmovant. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962).
The nonmovant is not required to respond to the motion unless the movant has properly supported his motion with competent evidence. Jaffe v. Bosco, No. 3:96-CV-2064-X, 1996 WL 727981, at *2 (N.D. Tex. 1996) (Kendall, J.). Thus, the court may not grant summary judgment by default simply because the defendant failed to respond to the summary judgment motion. Nat'l Bank v. Administration Central Sociedad Anonima, 776 F.2d 1277, 1279 (5th Cir. 1985). However, when no response is filed, the court may accept the movant's version of the facts as true and grant summary judgment when a prima facie showing for entitlement to judgment is made. Eversley v. Mbank Dallas, 843 F.2d 172, 174 (5th Cir. 1988).
III. The Indemnity Agreement
A. Indemnification
U.S. Fire contends it is entitled to judgment as a matter of law because there are no genuine issues of material fact regarding the Unclebachs' liability under the Indemnity Agreement and the amount of damages. This Court agrees.
In order to prevail on a state law claim of indemnification, U.S. Fire must establish that: (1) a contractual indemnity agreement exists between it and the Unclebachs; (2) such agreement obligates the Unclebachs to indemnify U.S. Fire under the circumstances; (3) the indemnity agreement has accrued or been triggered; 4) all conditions precedent for recovery have occurred, been performed, waived or excused; and (5) U.S. Fire has suffered damages. See Transamerica Ins. Co. v. Avenell, 66 F.3d 715, 719 (5th Cir. 1995). Under Texas law, when the terms of an indemnity agreement are clear and unambiguous, the court will give effect to the agreement as written. Ideal Lease Serv. v. Amoco Prod. Co., 662 S.W.2d 951, 953 (Tex. 1983).
Courts can award a surety its reasonable attorneys' fees for investigating or settling claims, as well as the costs for bringing an action for breach of an indemnity agreement. See Burlington N. Santa Fe R.R. Co. v. Interdom Partners, No. 4:03-CV-033A, 2003 WL 23110385, slip op. at *4 (N.D. Tex. Dec. 23, 2003) (McBryde, J.); C.W. Hammond v. Travelers Indemnity Co., 553 S.W.2d 205, 206 (Tex.App.-Houston [14th Dist.] 1977, no writ).
A surety entitled to indemnification is also entitled to exoneration when it has not yet paid claims that are due. See Wingsco Energy One v. Vanguard Groups Res. 1984, Inc., Civ. A. No. H-86-452, 1989 WL 223756, at *2 (S.D. Tex. 1989).
The Unclebachs carry a heavy burden to avoid summary judgment. They must defeat the Agreement's provision that an itemized statement of payments, losses and attorneys' fees, sworn to by an officer of the surety, will constitute prima facie evidence of the fact and extent of the liability of the indemnitors. See Merchs. Bonding Co. v. Gandler-Snider Eng'g. Co., No. 3:98-CV-0499-BC, 1999 WL 500226, at *5 (N.D. Tex. 1999) (Boyle, J.). When the plaintiff-surety submits those itemized statements and affidavits with its complaint, the defendant-indemnitors must allege that the agreement is invalid or unenforceable in order to raise a genuine issue of fact and avoid summary judgment. See id at n. 8.
Like the surety in Merchants Bonding, U.S. Fire has provided such an itemized statement of its losses with the affidavit of an authorized corporate representative. The Unclebachs, however, have failed to file a response. Consequently, they have not challenged the validity of the Agreement, their liability under the Agreement's plain language, or U.S. Fire's list of claims paid and pending. Thus, U.S. Fire has established a prima facie case for indemnification and exoneration and is entitled to judgment as a matter of law.
B. Construction Trust Provisions
U.S. Fire is also entitled to summary judgment on the claim that the Unclebachs violated construction trust provisions in the Texas Property Code by accepting payments from developers and failing to disperse those monies to subcontractors and material suppliers. The Court agrees.
Section 162.001 of the Texas Property Code provides that, "Construction payments are trust funds . . . if the payments are made to a contractor or subcontractor . . . under a construction contract for the improvement of specific real property in this state." Tex. Prop. Code Ann. § 162.001 (Vernon 2004); see In re Waterpoint Int'l, LLC, 330 F.3d 339, 345 (5th Cir. 2003) (these payments are trust finds for benefit of laborers). The Code further imposes fiduciary responsibilities on contractors to ensure that subcontractors and suppliers are paid for the work they complete; misapplying these funds can amount to a criminal offense. Id. at § 162.031-.032; see In re Waterfront, 330 F.3d at 345.
When a third party pays a subcontractor and thereby extinguishes the contractor's obligation, courts recognize the continued existence of the obligation for the benefit of the third party; in other words, "the equitable rights of one person are worked out through the legal rights of another." Interfirst Bank Dallas, N.A. v. U.S. Fidelity and Guar. Co., 774 S.W.2d 391, 397 (Tex.App.-Dallas 1989, writ denied) ( quoting Texas Co. v. Miller, 165 F.2d 111, 115 (5th Cir. 1947)); see Trinity Universal Ins. Co. v. Bellmead State Bank, 396 S.W.2d 163, 168 (Tex.Civ.App.-Dallas, 1965, writ ref'd n.r.e.) ("Simply stated, the right of subrogation of the surety is founded solely upon the equitable principle of having paid, pursuant to a bound obligation so to do, what in equity should have been paid by the contractor. . . ."). Labeled "the purest of equities," this legal subrogation is widely embraced by the Texas courts. Interfirst Bank, 774 S.W.2d at 397 (citing Yonack v. Interstate Sec. Co., 217 F.2d 649, 651 (5th Cir. 1954)). It is often applied to controversies in which the obligation of a contractor under a construction contract is backed by payment bonds issued by a commercial surety. Interfirst, 774 S.W.2d at 397 ( citing Pearlman v. Reliance Ins. Co., 371 U.S. 132, 141 (1962)).
U.S. Fire's affidavit lists 17 claims it has paid to subcontractors and suppliers on behalf of the Unclebachs for the Jupiter and Castle Hills projects. Because they failed to respond, there is no dispute over their failure to pay. Under a subrogation theory, U.S. Fire assumes the rights of those subcontractors and suppliers, including their rights to the trust funds. See Interfirst Bank, 774 S.W.2d at 397; Trinity Universal, 396 S.W.2d at 168. U.S. Fire is entitled to summary judgment on this claim as well.
C. Conversion
U.S. Fire contends the Unclebachs are liable for conversion for failure to pay the subcontractors and suppliers with the trust funds. The Court agrees.
For a successful claim of conversion, a plaintiff must prove that: (1) it owned, had legal possession of, or was entitled to possession of the property; (2) the defendant unlawfully assumed and exercised dominion and control over the property in a manner inconsistent with plaintiff's rights; and (3) the defendant refused plaintiff's demand for return of the property. Russell v. Am. Real Estate Corp., 89 S.W.3d 204, 210 (Tex.App.-Corpus Christi 2002, no pet.).
U.S. Fire contends that when the Unclebachs accepted payments from developers and failed to make required payments to their subcontractors, they became liable to the subcontractors for conversion. See Tex. Prop. Code Ann. § 162.001; In re Waterpoint, 330 F.3d at 345. Under a subrogation theory, as previously discussed, U.S. Fire now steps into the shoes of those subcontractors to make the claim of conversion. See Interfirst Bank, 774 S.W.2d at 397. The Court finds the Unclebachs liable for conversion for failing to use the monies paid to them, which were trust funds to be held for the benefit of the subcontractors and suppliers, to pay those same subcontractors and suppliers. See Russell, 89 S.W.3d at 210.
This Court concludes summary judgment is appropriate on all grounds urged.
IV. Conclusion
For the reasons state above, U.S. Fire's Motion for Partial Summary Judgment is GRANTED. This case is DISMISSED in part with prejudice. The sole remaining issue to be determined is attorneys' fees.
SO ORDERED.