Daniel Lund III | Phelps Dunbar
… and the kitchen sink!
In a case that is a roadmap to recovery for a surety against individual indemnitors, the individual indemnitors resisted their indemnity obligations asserting – unsuccessfully – every possible defense imaginable.
The indemnitors had all signed an indemnity agreement with the surety, which wrote a series of bonds for a project in Missouri, naming the co-indemnitor construction company as principal on the bonds. The project ended up in a dispute between the contractor and a subcontractor, which concluded with an arbitration award of $7.8 million in favor of the subcontractor on just some of the disputed claims. At that point, the construction company sought bankruptcy protection, leaving the surety to cover the loss. The surety eventually paid in excess of $23,000,000.
Opposing the surety’s motion for summary judgment, the individual indemnitors urged:
- Lack of consideration: the ideas that (i) the surety did not rely upon the financial wherewithal of the indemnitors when issuing the bonds, but only the strength of the contractor, and (ii) the indemnitors received no benefit from the bonds. The court disposed of the second item easily, and, although the court had little information on the first item (“speculation [by the indemnitors regarding consideration] does not create a factual dispute”), the court quickly dispatched with that argument. The court did so noting that “parol” evidence would not be allowed to counter a “recitation of consideration” in the indemnity agreement.
- Holding the individual indemnitors liable would violate principles of equity: according to the court, “[E]quitable relief cannot be granted where the rights of the parties are governed by a valid contract.”
- The amount of damages sought was excessive: the individual indemnitors urged the court to reserve judgment until the contractor’s bankruptcy resolved in any monies therefrom were distributed. The court responded: “Any other recovery by [surety] is speculation at this point. Nothing currently precludes entry of summary judgment in favor of [surety].”
- Ambiguity concerning the individual liability of indemnitors who signed on behalf of the construction company: the court was not swayed, as the indemnity agreement clearly had the natural persons signing “Individually” (it was not clear from the court’s discussion whether the indemnitors actually signed twice – once for the company and once individually – although the court pointed out that signing twice is “the preferred method” of establishing individual indemnity obligations).
- Holding the individual indemnitors liable would be unconscionable: this was the individual indemnitors’ shot at the breadth of the indemnity agreement, which allows the surety recovery rights simply for making disbursements “‘in good faith’ under a ‘belief’ that it was liable…,” as well as complaining about the indemnitors’ lack of bargaining power when the contract was confected. Here, the court found no evidence of disparate bargaining power, and relied on prior jurisprudence holding that indemnity obligations as such – “while strict” – are “common” in the surety context.
Summary judgment in excess of $25,000,000 was granted in favor of the surety against the indemnitors.
Fid. & Deposit Co. v. Blanton, 2023 U.S. Dist. LEXIS 72650 (E.D. Mo. Apr. 26, 2023)
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.