Indemnitor’s Economic Duress Defense Smoted
October 1, 2024
In this Surety Today: The Blog post we continue our theme of indemnity cases and discuss a case dealing with an Indemnitor’s defense of “economic duress.” In the title I used the word “smoted,” but I am not sure if it should just be “smote” or “smoted.” In any event, smote is the past tense form of the verb smite, which means “to strike sharply or heavily especially with the hand or with something held in the hand,” or “to kill or severely injure by striking in such a way.” Merriam-Webster. Basically, the defense was denied. The case is:
Insight Investments, LLC v. North American Specialty Insurance Company, No. CIV-20-788-G, 2024 WL 4256734, at *1–7 (W.D. Okla. Sept. 20, 2024)
This case involved a U.S. Army Corps of Engineers project to renovate a medical facility at the Vance Air Force Base in Oklahoma. The general contractor entered into a subcontract with Icon Construction, Inc. (“Icon”) to design, manufacture, and install modular buildings as a temporary medical and office facility which was to be used by staff/patients during the renovation of the existing facility. NASIC issued performance and payment bonds on behalf of Icon. As I noted, this case is about a dispute between a surety and its indemnitors, but the facts touch on another potential issue that was not addressed in the opinion. Apparently, after the execution of the subcontract, the issuance of the bonds, and the construction and delivery of the modular buildings, Icon entered into a transaction with Plaintiff, Insight Investments, LLC (“Insight”), whereby Insight agreed to pay Icon $410,000 for the modular building in exchange for monthly payments over the course of the Project and a share of the proceeds from selling the modular units after the Project was completed. Icon failed to make the required monthly payments to Insight. Insight commenced this litigation, seeking to collect from NASIC under the bonds. I do not see how Insight would have a valid claim against the payment bond. Insights’ role sounds more like financing or even an investment/partnership, none of which should be covered by a payment bond.
Back to the issue arising from this opinion, in addition to Icon’s failure to pay Insight, Icon also failed to pay sub-subcontractors and suppliers. Icon subsequently filed bankruptcy. NASIC asserted a third-party claim against an Indemnitor under an Indemnity Agreement for breach of contract, exoneration, specific performance/injunctive relief, and quia timet. The Indemnity Agreement had the typical broad indemnification provision, and sole discretionary right to settle claims. NASIC asserted that it had losses, costs, and expenses totaling $387,204.45. NASIC filed summary judgment on its claim against the Indemnitor. In considering the motion, under the facts of the case, the court ruled that the law of Texas applied to the surety’s claims for indemnity, even though the project was in Oklahoma.
In considering NASIC’s motion, the court held that NASIC had met its prima facie case through its submissions. The Indemnity Agreement provided that “[a]n itemized statement of payments made by the Surety sworn to by an officer of the Surety shall be prima facie evidence of the liability of the Indemnitors to reimburse the Surety” and such provisions have been upheld under Texas law. See, e.g., Liberty Mut. Ins. Co. v. CL Carson, Inc., No. A-11-CA-543, 2013 WL 12392522, at *5 (W.D. Tex. June 19, 2013); Safeco Ins. Co. of Am. v. Gaubert, 829 S.W.2d 274, 282-83 (Tex. App. 1992).
In opposition, the Indemnitor argued that the Indemnity Agreement was invalid because it was signed under economic duress. According to the Indemnitor, NASIC’s agent threatened that NASIC would cancel all of Icon’s surety bonds if the Indemnitor did not sign the Indemnity Agreement, which would have ruined Icon and destroyed the Indemnitor financially. NASIC responded that the “agent” was Icon’s insurance and bonding agent and not NASIC’s agent, representative, or employee and that the Indemnitor failed to satisfy the elements of economic duress. To establish the affirmative defense of economic duress, under Texas law one must show: (1) a threat to do something that there was no legal right to do; (2) illegal exaction or some fraud or deception; and (3) imminent restraint such as to destroy free agency without present means of protection. Krueger Eng’g & Mfg. Co. v. Admiral Truck Servs., Ltd., No. 14-01-00035-CV, 2002 WL 576083, at *6 (Tex. App. Apr. 18, 2002). Importantly, a lawful threat of loss of future business is not economic duress. The court observed that “[t]hough the prospect of losing NASIC’s bonding may have presented [the Indemnitor] with a difficult business decision, she has not shown that NASIC used fraud, physical restraint, or other improper means to achieve her acquiescence.” See also ABB Kraftwerke Aktiengesellschaft v. Brownsville Barge & Crane, Inc., 115 S.W.3d 287, 294 (Tex. App. 2003)(citing First Tex. Sav. Ass’n of Dallas v. Dicker Ctr., Inc., 631 S.W.2d 179, 186 (Tex.App.-Tyler 1982)(“The mere fact that a person enters into a contract with reluctance, or as a result of the pressures of business circumstances, does not, of itself, constitute economic duress invalidating the contract.”). Accordingly, the court held that the Indemnitor failed to establish economic duress.
The Indemnitor also argued that NASIC failed to produce sufficient proof that it actually incurred the losses for which it sought indemnification and that NASIC made payments on claims without having adequately investigated them. The court noted that under the terms of the Indemnity Agreement, NASIC had provided a sworn itemized statement of losses and established its prima facie case. Accordingly, the Indemnitor had no grounds to demand that NASIC produce “documents … such as bills and invoices” to support its demand. Instead, the court held that NASIC having produced the prima facie evidence agreed to by the parties, it was the Indemnitor’s burden to point to evidence showing that the payments were not actually incurred.
As to Bell’s argument that NASIC inadequately investigated the claims on the bonds, the court noted that the Indemnity Agreement grants NASIC “the right to decide and determine in its sole discretion” whether to settle claims and provides that NASIC’s decision “shall be binding and conclusive upon the Indemnitors.” Under Texas law the surety was limited only by bad faith, which exceeds negligence or even gross negligence. Further, the court stated, “even if NASIC was subject to an additional good-faith requirement, Texas law characterizes the good-faith obligation of indemnitees with the express authority to settle claims as ‘discretion limited only by the bounds of fraud,’ with no requirement to conduct a reasonable investigation.” Associated Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 285 (Tex. 1998)(citing Ford v. Aetna Ins. Co., 394 S.W.2d 693 (Tex. App. 1965)). Accordingly, because the Indemnitor pointed to no evidence suggesting that NASIC’s conduct in investigating and settling the claims was fraudulent, improperly motivated, or otherwise contrary to the terms of the Indemnity Agreement, she failed to show a genuine question as to whether the handling of those claims precluded NASIC’s recovery for breach of the Indemnity Agreement. The court ruled that NASIC was entitled to summary judgment on its breach of contract claim against the Indemnitor.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.