United States Surety Company v. Stevens Family Limited Partnership et al

Filing 88

ENTER MEMORANDUM Signed by the Honorable Milton I. Shadur on 1/29/2014. 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, et al.,
Defendants.

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Case No. 11 C 7480

MEMORANDUM
At the conclusion of the January 28 hearing on the motion of defendants to amend their
answer to add an affirmative defense captioned "First Affirmative Defense -- Bad Faith of
Plaintiff," this Court continued the motion to enable the parties to adduce any relevant caselaw
authority in support of or in opposition to that motion. Although this memorandum may perhaps
be superfluous because both litigants' counsel are presumably aware of what is addressed here, its
subject was not touched upon specifically during the January 28 hearing and -- perhaps out of an
overabundance of caution -- will be dealt with here briefly.
As the parties are well aware, the surety agreement at issue in this action contains a
specific choice-of-law provision that looks to California law. And that being the case, this
Court's understanding is that the principles established by that state's Supreme Court in Cates
Constr., Inc. v. Talbot Partners, 980 P. 2d 407 (1999) provide the rules of decision that should
govern counsel's current search. Briefly put, Cates teaches that although a covenant of good faith
and fair dealing is implicit in every contract (id. at 415), surety agreements (unlike insurance
policies) do not give rise to a tort action for breach of that covenant (id. at 418-427). At the end

of its extended analysis, the Cates' majority summarized its conclusion in this fashion (id. at
427):
We acknowledge that our unwillingness to recognize a new tort action may mean
that isolated instances of surety misconduct may yet occur. Nonetheless, in the
absence of compelling policy reasons supporting tort recovery, we leave it up to
the Legislature, which is better equipped to gather data and study the effects of a
significant shift in the balance of power between owner/obligees,
contractor/principals and sureties, to determine whether statutorily authorized tort
remedies would benefit the real estate development industry.
Accordingly, we hold that recovery for a surety's breach of the implied covenant
of good faith and fair dealing is properly limited to those damages within the
contemplation of the parties at the time the performance bond is given or at least
reasonably foreseeable by them at that time.
Needless to say, if any later pronouncement from the California Supreme Court has
modified or limited the just-quoted ruling from a divided court, this Court will consider such
later caselaw. In the absence of such supervening authority, however, counsel's submissions will
be expected to adhere to the Cates decision.

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Milton I. Shadur
Senior United States District Judge
Date: January 29, 2014

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