Surety Case Law Note: Indemnitor Defenses Review
May 30, 2023
In this Surety Today Blog post we consider a Case Law Note addressing the issue of Indemnitor defenses. “Desperate times call for desperate measures,” (Hippocrates) and the Indemnitors in this case, who were facing a $25,708,623.39 judgment, were clearly desperate. Which lead to the assertion of virtually every imaginable defense in the book. Fortunately, the surety in the case was represented by our good friend Carol Smith, Esq., and she was able to smite each of the indemnitors’ desperate defenses. Still, the case is a good one to review to brush up on some of the lesser encountered defenses, such as lack of consideration, unconscionability, liability of individuals in individual capacity, equity/fairness, reasonableness of damages, etc. The case is:
FIDELITY AND DEPOSIT COMPANY OF MARYLAND v. BLANTON, No. 4:21-CV-1074 JAR, 2023 WL 3092494 (E.D. Mo. April 26, 2023)
In this case various individuals and corporate entities (collectively, “Indemnitors”) entered into a standard Agreement of Indemnity in favor of Fidelity and Deposit Company of Maryland (“F&D”), with respect to construction surety bonds issued for the benefit of the principal, Ben F. Blanton Construction, Inc. (“Principal” or “Blanton Construction”).
During the course of a bonded project, an obligee asserted a performance bond claim for the full penal sum of the Performance Bond, and unpaid subcontractors and suppliers made claims on the payment Bond. F&D informed the Indemnitors that it was investigating the claims and would pay those claims if and when appropriate. F&D further reminded the Indemnitors that under the Indemnity Agreement, if they requested F&D to litigate any claims, the Indemnitors would need to deposit cash or collateral with F&D. The Indemnitors did not request that F&D litigate any claims and did not deposit any collateral. F&D paid claims and incurred costs and expenses in excess of $25 million and filed suit against the Indemnitors. After suit was filed, F&D sought summary judgment.
The Corporate Indemnitors (the Individual Indemnitors’ defenses are addressed later) opposed the motion for summary judgment asserting a plethora of defenses including: that there was no consideration for the Indemnity Agreement, that equity precludes enforcement against the Corporate Indemnitors, and that the amount of damages was in dispute because of a possible future set off.
Consideration: The Corporate Indemnitors contended that their execution of the Indemnity Agreement in no way induced F&D to issue the bonds and that instead F&D relied only on the strength of the principal’s financial condition. Likewise, the Corporate Indemnitors noted that F&D did not inquire into the financial condition or conduct any type of due diligence regarding the Corporate Indemnitors in the decade after the Indemnity Agreement was executed.
The court noted that the language of the Indemnity Agreement contained a recitation of consideration, and that such statement constituted prima facie evidence of consideration. The Indemnity Agreement provided that the Indemnitors admitted they had a “substantial, material and beneficial interest in obtaining of the Bonds…” and that they executed the Indemnity Agreement “in consideration of the premises of the Indemnity Agreement, including the issuance of bonds.” Where a contract states the consideration, a party is precluded from challenging the consideration in the contract by extrinsic evidence under the parol evidence rule. “[I]f the statement in a written contract in relation to the consideration shows upon its face that the expressed consideration is a part of the terms of the contract itself, then that part of the writing stands as any other part, and it cannot be contradicted, added to, nor subtracted from, by parol.” Stone Motor Co. v. Gen. Motors Corp., 293 F.3d 456, 461 (8th Cir. 2002). The court observed “[t]o permit a party when sued on a written contract to admit that he signed it but to deny that it expresses the agreement he made, or to allow him to admit that he signed it but did not read it or know its stipulations, would absolutely destroy the value of all contracts and negotiable instruments.” J.W. Jenkins Sons Music Co. v. Johnson, 175 Mo. App. 355, 162 S.W. 308, 309 (1914); Woods of Somerset, LLC v. Devs. Sur. & Indem. Co., 422 S.W.3d 330, 336 (Mo. Ct. App. 2013). The reason underlying the rule is to give stability to written agreements and to remove the temptation and possibility of perjury, which would be afforded if parol evidence was admissible.
In addressing the Corporate Indemnitors’ position that F&D did not rely on their financial backing and promises, the court noted that such speculation does not create a factual dispute. Rather, the court relied upon the parties’ agreement and obligations in the Indemnity Agreement, which have been “uniformly sustained and upheld.” Fid. & Deposit Co. of Maryland v. Fleischer, 772 S.W.2d 809, 815 (Mo. Ct. App. 1989). Otherwise, the parties’ agreements in Indemnity Agreement would be unreliable and become a nullity. Id.; see also Am. Contractors Indem. Co. v. Leadco, LLC, No. 4:11-CV-2126 CAS, 2014 WL 1272771, at *7 (E.D. Mo. Mar. 27, 2014). The court further observed that the contention that the Corporate Indemnitors did not receive a benefit from the issuance of the bonds was not persuasive. The court stated that every time that bonds were issued, the Corporate Indemnitors were benefitted, and a “party to a contract can provide consideration by suffering a detriment (such as issuing a bond); there is no requirement that the other party obtain a benefit.” Devs. Sur. & Indem. Co. v. Barlow, 628 F. App’x 980, 983 (10th Cir. 2015). Finally, the court stated that if the Corporate Indemnitors had believed that they should have no liability under the Indemnity Agreement then they could have utilized the termination provision in the Agreement at any time, but they did not do so. Accordingly, the court held that “the Indemnity Agreement demonstrates consideration for its execution and it is enforceable.” See Am. Ins. Co. v. Gilbert, 319 F. Supp. 1315, 1317–18 (E.D. Mo. 1970) (citing James W. Scudder & Co. v. Morris, 107 Mo. App. 634, 82 S.W. 217 (S.L.C.A.1904)).
Equity: The Corporate Indemnitors argued that the Indemnity Agreement was unenforceable against them because there was never any benefit to them, there was no consideration, and the bonds were significantly larger than any bonds issued previously, making it inequitable to enforce the Indemnity Agreement against them.
The Court held that equity would not allow the parties to forgo the enforcement of the valid Indemnity Agreement. “[E]quitable relief cannot be granted where the rights of the parties are governed by a valid contract.” Moore v. Medtronic, Inc., No. CIV. 99-2066ADMAJB, 2001 WL 1636248, at *3 (D. Minn. July 30, 2001) (quoting U.S. Fire Ins. Co. v. Minn. St. Zoological Bd., 307 N.W.2d 490, 497 (Minn.1981)). Thus, the Court rejected the Corporate Indemnitors’ “equity” argument.
Amount of Damages: The Corporate Indemnitors argued that any distributions F&D receives under the Principal’s bankruptcy plan should be deducted from any recovery in this action. The court held that a factual dispute as to the amount of possible setoff from F&D’s recovery in the bankruptcy is not a basis for denying summary judgment. No present or existing recovery was alleged. Any other recovery by F&D is speculation. If F&D later recovers pursuant to the bankruptcy, then an amended judgment or partial satisfaction of judgment could be entered. Thus, the court held that future potential recoveries could not delay summary judgment.
Individual Liability: The Individual Indemnitors argued that the language of the Indemnity clause of the Indemnity Agreement was ambiguous as to any personal liability against them. They contended that the “Indemnity” clause makes no mention of any personal liability on behalf of either of the Individual Indemnitors, as differentiated from the various Corporate Indemnitors. They claim the Indemnity clause does not contain any “clear and explicit intent” for the Individuals to assume a personal guaranty contract.
The court rejected this argument and noted that the Individual Indemnitors executed the Indemnity Agreement as individuals and their signatures were notarized under an “INDIVIDUAL ACKNOWLEDGEMENT” notary block. Mr. Blanton further executed the Indemnity Agreement in a corporate capacity on behalf of several business entities as well as his individual capacity. Under Missouri law in order to hold a corporate officer individually liable in signing a contract of guaranty, the officer should sign the contract twice once in his corporate capacity and once in his individual capacity, as happened here. See Wired Music, Inc. of the Great Midwest v. Great River Steamboat Co., 554 S.W.2d 466, 470–71 (Mo. App. 1977); Capitol Grp., Inc. v. Collier, 365 S.W.3d 644, 648 (Mo. Ct. App. 2012). Because, the Indemnity Agreement was clear and unambiguous and the Individual Indemnitors signed individually, the court held that the Individual Indemnitors were bound in their personal capacities.
Unconscionability: The Individual Indemnitors argued that the Indemnity Agreement was grossly unconscionable because F&D could collect against them virtually any amount for any nonspecific costs it claims it incurred under a “self-validating” belief that it was liable and such payments are deemed to be prima facie evidence. The Individual Indemnitors contended that F&D’s “nearly limitless monetary provision” in the Indemnity Agreement is “so unduly harsh and one-sided” that it must be deemed “unconscionable.” In addition, the Individual Indemnitors argued that the Indemnity Agreement was unconscionable because it was executed as a requirement of F&D extending surety credit and it was in a “vastly superior bargaining position.”
The court noted that “Missouri courts have adopted the doctrine of unconscionability ‘to guard against one-sided contracts, oppression, and unfair surprise.’” Cowbell, LLC v. Borc Bldg. & Leasing Corp., 328 S.W.3d 399, 405 (Mo. Ct. App. 2010). “Procedural unconscionability involves the contract formation process; substantive unconscionability refers to undue harshness in the terms of the contract.” Pleasants v. Am. Exp. Co., 541 F.3d 853, 857-58 (8th Cir. 2008). Unconscionability is “an inequality so strong, gross, and manifest that it must be impossible to state it to one with common sense without producing an exclamation at the inequality of it.” Eaton v. CMH Homes, Inc., 461 S.W.3d 426, 432 (Mo. 2015).
The court held that the Individual Indemnitors failed to demonstrate unconscionability. They did not deny that the “contract was negotiated at arms length and in good faith.” Further, the court noted that contract provisions such as those in the Indemnity Agreement “have been uniformly sustained and upheld.” Fid. & Deposit Co. of Maryland v. Fleischer, 772 S.W.2d 809, 815 (Mo. Ct. App. 1989). “Such provisions, while strict, are common in indemnity contracts executed by contractors and others to induce the execution of bonds by compensated sureties.” Id. (citing Fidelity and Deposit Co. of Maryland v. Bristol Steel & Iron Works, Inc., 722 F.2d 1160, 1163 (4th Cir.1983); Maryland Casualty Co. v. Spitcaufsky, 352 Mo. 547, 178 S.W.2d 368, 371 (1944)). In addition, the court held that the Individual Indemnitors’ liability was not “limitless” as they claimed. For expenses to be paid, F&D must incur them in good faith. Moreover, the Individual Indemnitors failed to post collateral and demand that F&D litigate any claim as permitted under the Indemnity Agreement. Thus, the court held that the Indemnity Agreement was not unconscionable. Having rejected the many, many defenses asserted by the Indemnitors, the court granted F&D’s Motion for Summary Judgment.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321 or mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group..[/vc_column_text][/vc_column][/vc_row]
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