United States Surety Company v. Stevens Family Limited Partnership et al
Filing
80
MEMORANDUM Opinion and Order Signed by the Honorable Milton I. Shadur on 1/8/2014. Mailed notice by judge's staff. (srb,)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES SURETY COMPANY,
Plaintiff,
v.
STEVENS FAMILY LIMITED
PARTNERSHIP, THOMAS J. STEVENS,
LILLIA STEVENS, MATTHEW S.
STEVENS AND EDNA M. HOWARD,
Defendants.
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No. 11 C 7480
MEMORANDUM OPINION AND ORDER
Defendants Stevens Family Limited Partnership, Thomas
Stevens, Lillia Stevens, Matthew S. Stevens and Edna M. Howard
(collectively “Indemnitors”1) have filed their Second Amended
Answer & Affirmative Defenses (“ADs”) to Surety’s First Amended
Complaint (“FAC”) that seeks their performance of
collateralization and indemnification.2
Most recently Surety has
moved to strike the ADs, and that motion has been fully briefed
1
That is the capacity in which they executed the June
18, 2008 General Indemnity Agreement (“Agreement”) with United
States Surety Company (“Surety”) and with others that Surety
might procure to act as a surety or co-surety or to execute a
bond at Surety’s request. To be more precise, the individual
defendants signed the Agreement as “Indemnitors” while the
limited partnership defendant signed the Agreement as another of
the defined “Principals.” But because every Principal’s
undertaking under the Agreement was one of indemnification, this
opinion’s collective use of “Indemnitors” to describe all of the
defendants is entirely appropriate.
2
As those pleading captions reflect, both sides have
been compelled to go back to the drawing board for repleading
because of this Court’s identification of curable errors in their
earlier pleadings.
by the parties and is ripe for decision.
For that purpose this
opinion will draw upon, without any need to repeat, this Court’s
statement of the background facts and its analysis of the
Agreement and of the parties’ rights and obligations in its
November 26, 2012 memorandum opinion and order (“Opinion,” 905
F.Supp.2d 8543).
Before this second opinion turns to substantive issues,
something needs to be said about a purported fundamental premise
that Indemnators’ counsel impermissibly advance on their clients’
behalf.
It is inexplicable (and frankly inexcusable) for any
lawyers who devote any part of their practice to federal court
litigation to continue to cite the now discredited formulation in
Conley v. Gibson, 355 U.S. 41, 45-46 (1957) -- see defendants’
Response at 5 -- as the standard for federal pleadings.
Nearly
seven years have elapsed since the Supreme Court held in Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 562-63 (2007) that the
Conley v. Gibson formulation was overly generous and had outlived
its usefulness -- and as every federal practioner must know, two
years later Ascroft v. Iqbal, 556 U.S. 662, 678 (2009) repeated
and reinforced Twombly’s addition of the requirement of
“plausibility” to federal pleadings.
Counsel ought to realize
that such citation of overruled authority can cast a cloud on
3
Further citations to the Opinion will simply take the
form “Opinion at --,” setting out the cited page number but
omitting the prefatory “905 F.Supp.2d.”
2
their general credibility.
That aside, however, when indemnitors’ ADs are scrutinized
through the proper lens of plausibility, they clearly fail to
survive.
Opinion at 858 explains that California law provides
the substantive rules of decision here.
And California law
recognizes the reality that a surety that puts up its own major
money commitment through a bond is entitled to define and enforce
the remedies specified in its agreement with the indemnitors on
whose liabilities it has had to make good -- a relationship
inherently different from that created by the issuance of an
insurance contract (see the extended -- and extensive -- analysis
in Cates Constr., Inc. v. Talbot Partners, 980 P. 2d. 407, 418-25
(Cal. 1999)).
Indeed, the intermediate appellate California
decision on which Indemnitors seek to place their principal
reliance -- Arntz Contracting Co. v. St. Paul Fire & Marine Ins.
Co., 54 Cal. Rptr. 2d 888, 899 (Cal.App. 1996), decided three
years before Cates -- also held that quite unlike the obligation
of an insurer to its insured, a surety is not required to give a
heightened degree of consideration to the interests of its
indemnitor -- there is no fiduciary-like special relationship
between those parties.4
4
It would be a topsy-turvy legal world in which an
earlier intermediate appellate decision would somehow trump a
later and thoroughly studied Supreme Court decision. Yet that is
how Indemnitors would have their reading of the entire Arntz
opinion operate.
3
In this instance Agreement ¶ 3.1 is unambiguous in vesting
sole and unequivocal discretion in Surety as to such enforcement:
Surety shall have the right in its sole and absolute
discretion to determine whether any claims under any
Bond or Bonds shall be paid, compromised, adjusted,
defended, prosecuted or appealed.
So both Cates and Arntz (as well as a group of other California
cases cited in Surety’s memoranda that state and apply the same
principle) uniformly reject the position that Indemnitors try to
promote here.
Indemnitors are not alone in having placed their bet on
Arntz
as the asserted authority supporting their ADs 1 and 2,
each of which asserts that Surety should have undertaken a
different course of action other than making good on a bond claim
by paying $440,000 in settlement -- and consequently asserts that
Surety’s handling of the matter amounted to a failure to mitigate
its damages.5
Just as Indemnitors seek to call Arntz to their
aid by thrusting a fiduciary-like obligation on Surety, that same
approach was advanced by defendant Highland Partnership, Inc.
(“Highland”) in a recent California District Court case,
5
Indemnitors and their counsel fail to face up to the
extraordinary level of irony manifested by those ADs. They
blithely ignore the fact that all of the problems that gave rise
to the bond claims stem from the facts that their company -Architectural Specialties Trading Company, Inc., on whose behalf
they had gone on the hook personally by entering into the
Agreement -- went bust and defaulted on its construction
subcontracts, and that Indemnitors themselves did not try to
salvage their Company’s position by essaying any of the efforts
in which they now claim Surety should have engaged.
4
Travelers Cas. & Surety Co. of Am. v. Highland P’ship, Inc., 2012
WL 5928139 (S.D. Cal. Nov. 26, 2012).
In Highland P’ship the District Court flatly rejected that
position, and the analysis there applies with equal force here.6
Moreover, Highland P’ship (like this case) dealt with claims
settled by the surety (there Travelers) on which Highland (there
the indemnitor, like Indemnitors here) sought to second guess its
surety on grounds comparable to those asserted in Indemnitors’
ADs here.
Thus, after torpedoing the contention that a surety’s
obligation equates to that of an insurer for purposes of
evaluating the implied covenant of good faith and fair dealing
(Highland P’ship at *5), the Highland P’ship court went onto
analyze that implied covenant in its application to surety
agreements (id. at *6) and, after quoting the language of the
contract there that -- just like the one here -- vested “sole
discretion” in the surety, that court concluded (id. at *7):
6
This Court of course recognizes that the opinion in
Highland P’ship granted summary judgment on defendants’
Counterclaim, while the issue before this Court is the viability
of part of Indemnitors’ pleading -- their ADs -- as a matter of
law. That however is a distinction without a difference, for
Indemnitors have set out their contentions in detail in those
ADs, and this Court has credited those factual allegations
arguendo, just as a court is required to credit a litigant’s
version of the facts in opposition to a motion for summary
judgment. Hence the evaluation of the defendants’ position in
Highland P’ship parallels the evaluation of Indemnitors’ ADs as a
matter of law that this Court is required to make here.
5
Pursuant to this paragraph, Travelers argues it was
given the authority to settle claims against it in its
sole discretion, and any determination made by
Travelers was to be binding and conclusive upon
Defendants. The only precautionary language in the
paragraph states that Travelers should be indemnified
for all loss it believed as “necessary or expedient.”
However, even this precautionary language allows
Travelers to settle claims it deemed necessary or
expedient, not both. See AIU Ins. Co. v. Super. Ct.
(1990) 51 Cal.3d 807, 821, 274 Cal.Rptr 820, 799 P.2d
1253 (“[T]he mutual intention of the parties at the
time the contract is formed governs interpretation”).
Thus, because all parties to the Indemnity Agreement
are sophisticated business people, and the Court will
not rewrite the parties contract after the fact to
facilitate a different result, the Court finds the
implied covenant conflicts with the parties explicit
agreement. See, e.g., Certain Underwriters at Lloyd’s
of London v. Super.Ct. (2001) 24 Cal.4th 945, 968, 103
Cal.Rptr.2d 672, 16 P.3d 94 (“[W]e do not rewrite any
provision of any contract, for any purpose.”).7
After that discussion, which as already stated applies to
this case with at least equal force, Highland P’ship went on to
discuss the claims that Travelers as surety had paid, and it then
cited Arntz and other California caselaw as holding “[t]o
successfully establish a bad faith defense, an indemnitee, such
as Defendants, must prove that the surety engaged in ‘objectively
unreasonable conduct’ in handling its obligations under the
indemnity agreement”
Highland P’ship at *9).
And just as
Highland P’ship held that the indemnitors there flunked that
7
[Footnote by this Court] Indeed, the just-quoted
Highland P’ship analysis applies to this case a fortiori. As the
earlier-quoted Agreement ¶3.1 states, it vests “sole and absolute
discretion” in Surety without hedging it with the possible
qualification discussed in the Highland P’ship quotation.
6
test, the Indemnitors here have struck out for the same reason.
So much, then, for Indemnitors’ first two ADs.
As for their
third AD, which purports to state an estoppel defense, once again
the irony of that position has escaped the Indemnitors and their
counsel.
They attempt to fault Surety for its good faith
exercise of its sole and absolute discretion, while totally
ignoring the fact that they themselves took no action available
to them to deal with the problems that had resulted from their
own corporation’s contractual defaults (as Matthew 7:3 put it,
“And why beholdest thou the mote that is in thy brother’s eye,
but considerest not the beam that is in thine own eye?”
Conclusion
It is fortuitous that Surety’s counsel brought the decision
in Highland P’ship to this Court’s attention, for it soundly
analyzed and applied California law in a manner that, as already
stated, applies with equal force here.
That has spared this
Court any need to reinvent the wheel by separately researching
the law in a “foreign” jurisdiction -- California -- where a
District Judge who deals with that law day in and day out has
already done so.
In sum, Surety’s motion to strike Indemnitors’
ADs [Dkt. 67] is granted.
___________________________________
Milton I. Shadur
Senior United States District Judge
Dated:
January 8, 2014
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