In RE: Factory Sales and Engineering, Inc.
Filing
17
OPINION: The judgment of the Bankruptcy Court is AFFIRMED, dismissing instant appeal at appellant's costs, as set forth in document. Signed by Judge Ivan L.R. Lemelle on 03/14/2019.(am)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
FACTORY SALES AND ENGINEERING, INC.
CIVIL ACTION
VERSUS
NO. 18-6300
CHUBB EUROPEAN GROUP, LTD, ET AL.
SECTION: “B”
OPINION
Before the Court is Appellant Factory Sales and Engineering,
Inc.’s appeal from a decision of the United States Bankruptcy Court
for the Eastern District of Louisiana (Rec. Doc. 1, 4). Appellees
ACE European Group, Ltd., Westchester Fire Insurance Co., and Chubb
European
Group,
Ltd.
filed
a
response
brief
(Rec.
Doc.
6).
(“FSE”),
has
Appellant filed a reply brief (Rec. Doc. 10).
Appellant,
Factory
Sales
and
Engineering
submitted the following Statement of Issues on Appeal from the
Judgment of the Bankruptcy Court entered on June 14, 2018 (Rec.
Doc. 4):
1. Whether,
under
the
principles
of
New
York
contract
interpretation law, the Agreement of Indemnity (“Executed
Indemnity”)
Appellees
governing
(the
the
"Sureties")
relationship
and
Factory
between
the
Sales
and
Engineering, Inc. ("FSE") is ambiguous regarding whether
collateral provided to the Sureties for a specific bond
must be released to FSE when that bond is released.
1
2. If the Executed Indemnity is ambiguous, whether, under New
York law, it should be construed against the Sureties as
its drafters.
3. If the Executed Indemnity is ambiguous, whether, in light
of other related instruments and the New York law doctrine
of expressio unius est exclusio alterius ("the expression
of one thing means the exclusion of other things"), the
omission
of
explicit
collateralization
in
language
the
providing
Executed
Indemnity
for
cross-
should
be
deemed intentional.
4. If the Executed Indemnity is ambiguous, whether the weight
of the other extrinsic evidence supports interpreting it
to require the Sureties to release collateral provided by
FSE for a specific bond to FSE when that bond is released.
5. Whether the Sureties are obligated under New York law to
return the disputed deposits to FSE.
For the reasons discussed below,
IT IS ORDERED that the opinion of the Bankruptcy Court
is AFFIRMED, dismissing the instant appeal at appellant's costs.
Factory Sales and Engineering, Inc. (FSE) was in the business
of
designing,
manufacturing
and
installing
large
pieces
of
industrial equipment for various clients around the world. See
Rec. Doc. 2-5. Sometime in 2012, FSE was in contact with an
insurance broker, Marsh, Inc. (Marsh). See Rec. Doc. 2-5 at 70.
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Because some of FSE’s customers required FSE to provide surety
bonds, FSE was put in contact with ACE European Group, Ltd.,
Westchester Fire Insurance Co., and Chubb European Group, Ltd.
(“the Sureties”. See id. In September 2012, the Sureties began
issuing bonds for FSE. See id. To protect themselves against the
risk of loss on the bonds, the Sureties required that FSE sign the
Indemnity Agreement. Id. Under the Indemnity Agreement, FSE was
required to deposit cash collateral with the Sureties. Id. at 71.
On May 9, 2017, FSE filed a petition in state court seeking
the return of $2.35 million in collateral held by the Sureties.
See Rec. Doc. 2-5. On June 6, 2017, an involuntary Chapter 7
petition was filed against FSE by several of its creditors. Id.
The Sureties removed the case to federal court. Id. at 62. On July
17, 2017, the case was converted to a Chapter 11 reorganization.
See Rec. Doc. 2-5. After hearing testimony and reviewing the
evidence,
the
Bankruptcy
Court
found
that
the
Sureties
were
entitled to keep the $2.35 million in collateral and apply it to
any outstanding claims on projects that were not completed by FSE.
Id. at 184-85. Specifically, the Bankruptcy Court held that the
language
was
not
collateralization
found
that
ambiguous,
even
ambiguous
and
that
of
Id.
The
if
bonds.
the
the extrinsic
language
evidence
it
called
Bankruptcy
of
the
supported
the
for
Court
a
crossfurther
contract
was
result
that
the Sureties were entitled to hold onto the collateral at issue.
Id. at 184-99.
3
On June 26, 2018, FSE filed a notice of appeal. See Rec. Doc.
1.
Appellant argues that this Court should reverse the ruling of
the Bankruptcy Court because the executed indemnity agreement at
issue does not provide for cross-collateralization among separate
bonds. See Rec. Doc. 4 at 6. Specifically, Appellant argues that
the collateral is bond-specific. Id. According to Appellant, the
language in the executed indemnity agreement is ambiguous as a
matter of New York law. Id. at 7. Therefore, Appellant urges this
court to construe the agreement against the Appellees and render
judgment in favor of Appellant. Id.
Appellees argue that the ruling of the Bankruptcy Court should
be upheld because the collateral is cross-collateralized across
multiple bonds issues in other projects that Appellant has worked
on. See Rec. Doc. 6 at 9-10. Specifically, Appellees argue that
they are entitled to keep the funds and use those funds to pay off
any
outstanding
claims
for
projects
that
Appellant
has
not
completed. Id. at 7, 12.
The Fifth Circuit has consistently held that the standard of
review applicable to bankruptcy appeals in a district court is the
same as the standard applied by a Court of Appeals to a district
court proceeding.
1989).
In re Killebrew, 888 F.2d 1516, 1519 (5th Cir.
Factual findings of the Bankruptcy Court are reviewed for
clear error, FED. R. BANKR. P. 8013, and the appellant has the burden
4
of demonstrating that the bankruptcy court's findings are clearly
erroneous.
In re Drehsen, 190 B.R. 441, 442 (M.D. Fla. 1995).
Conclusions of law, and mixed conclusions of law and fact are
reviewed de novo.
In re Nation Gypsum Co., 208 F.3d 498, 504 (5th
Cir. 2000).
“Interpretation of a contract is a legal question reviewed de
novo.” Hoffman v. L & M Arts, 838 F.3d 568, 581 (5th Cir. 2016);
Field Motor Sports, Inc. v. Traxxas, L.P., 861 F.3d 591, 597 (5th
Cir. 2017); In re Killebrew, 888 F.2d 1516, 1519 (5th Cir. 1989);
accord JA Apparel Corp. v. Abboud, 568 F.3d 390, 397 (2d Cir. 2009)
(finding that the court must review de novo whether a contract is
ambiguous as it is a question of law). However, when the court
uses extrinsic evidence, “the meaning of the ambiguous contract is
a question of fact for the factfinder.” Field Motor Sports, Inc.,
861 F.3d at 598 (quoting JA Apparel Corp., 568 F.3d at 397).
Due to the choice of law provision in the contract, the
contract is governed by New York law. Under New York law, to
determine the terms of a contract, a court must look to the
parties’ intent based on the language they used in the contract.
See Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568, 573
(2d Cir. 1993) (citing Slatt v. Slatt, 477 N.E.2d 1099 (N.Y.
1985)). Thus, “words of a contract must be given a fair and
reasonable meaning in accordance with the parties’ intent.” Sutton
v.
E.
River
Sav.
Bank,
55
N.Y.2d
5
550,
555
(1982)
(internal
quotation marks omitted). In determining the parties’ intentions,
the court may look to the four corners of the agreement and enforce
the contract according to those terms in which the parties agreed
upon. See New York State Workers’ Compensation Bd. v. Murray Bresky
Consultants, Ltd., 155 A.D.3d 1408, 1410 (N.Y. App. Div. 2017);
see also In re World Trade Ctr. Disaster Site Litig., 754 F.3d
114,
122
(2d
Cir.
2014)
(stating
that
agreements
are
to
be
construed in accordance with the parties’ intent); Cont’l Ins. Co.
v. Atl. Cas. Ins. Co., 603 F.3d 169, 180 (2d Cir. 2010) (holding
that the best evidence of parties’ intentions is the contract
itself).
A court must be able to determine if a contract is unambiguous
on its face. See Medtech Prods. v. Ranir, LLC, 596 F. Supp. 2d
778, 808 (S.D. N.Y. 2008). An unambiguous contract is one which
has a “definite and precise meaning.” Id. A contract will be
unambiguous when there is no reasonable basis for a difference of
opinion. Id. According to the court in Medtech Prods., even if the
parties
argue
or
present
different
interpretations
in
the
litigation, the contract is not ambiguous. Id. (citing Metro Life
Ins. Co. v. RJR Nabisco Inc., 906 F.2d 884, 889 (2d Cir. 1990)).
On the other hand, a contract is ambiguous if it is subjected
to more than one reasonable interpretation. Medtech Prods., 596 F.
Supp. 2d at 808. “Ambiguity in a contract is the inadequacy of the
wording to classify or characterize something that has potential
6
significance.” Eternity Global Master Fund Ltd. v. Morgan Guar.
Trust Co., 375 F.3d 168, 178 (2d Cir. 2004). New York courts have
repeatedly held that a contract is ambiguous when the terms of the
contract
could
suggest
more
than
one
meaning
when
viewed
objectively. See e.g. Law Debenture Trust Co. of N.Y. v. Maverick
Tube Corp., 595 F.3d 458, 466 (2d Cir. 2010); Chapman v. N.Y. St.
Div. of Youth, 546 F.3d 230, 236 (2d Cir. 2008); World Trade Ctr.
Props., L.L.C. v. Hartford Fire Ins. Co., 345 F.3d 154, 184 (2d
Cir.
2003).
In
analyzing
whether
the
contract
was
viewed
objectively, courts look to whether the contract was looked at by
a “reasonably intelligent person” who would thus have knowledge of
the practices and words used in that particular business. See
Chapman, 546 F.3d at 236.
If a court finds that a contract is ambiguous, then and only
then, must a court consider extrinsic evidence. See id.; see also
Gerritsen v. Glob. Trading, Inc., 2008 U.S. Dist. LEXIS 124482 *24
(E.D. N.Y. Nov. 18, 2008). As noted in Chapman, a court must
consider whether a contract is ambiguous by first looking at the
contract itself without the use of extrinsic evidence. Chapman,
546 F.3d at 236. If the contract is ambiguous, then extrinsic
evidence1 must be used by the court in order to determine the true
Extrinsic evidence is all evidence that relates indirectly to a matter, such
as evidence of the meaning of a writing other than the writing itself. See
STEPHEN MICHAEL SHEPPARD, Extrinsic Evidence, in THE WOLTERS KLUWER BOUVIER LAW
DICTIONARY DESK EDITION (2012), available at LexisNexis.
1
7
meaning of the contract and the parties’ intent. However, extrinsic
evidence may not be used to reform or remake a contract. See
Acranom Masonry, Inc. v. Wenger Constr. Co., 2017 U.S. Dist. LEXIS
161248 *32 (E.D. N.Y. Sept. 29, 2017) (“[E]xtrinsic evidence cannot
be
introduced
to
alter
or
add
a
provision
to
a
written
agreement.”). In Acranom Masonry, Inc., the court explained that
extrinsic evidence should be limited to resolving the specific
ambiguity in the contract. A court should not use such extrinsic
evidence to create an entirely new contract between the parties by
adding or deleting terms of the written contract at issue. Id.
While the court in Acranom Masonry, Inc. found the contract
to be ambiguous, the court, nevertheless, held that the defendant’s
extrinsic evidence was not enough to cure the ambiguities. Id. at
*39. According to the court, the defendant’s extrinsic evidence
did not address any of the ambiguities recognized by the court and
the defendant only sought to use the evidence to “fill a gap” in
the contract. Id. at *33-34. The court further stated that while
the Second Circuit has stated that extrinsic evidence may be used
to resolve an ambiguity when there is an omission of a material
fact, the New York Court of Appeals has rejected this exception
and found that such omission does not, of itself, create an
ambiguity. Id. at *34-35. See, e.g., Nissho Iwai Eur. v. Korea
First Bank, 782 N.E.2d 55, 60 (N.Y. 2002); Reiss v. Fin Performance
8
Corp., 764 N.E.2d 958, 961 (N.Y. 2001); Trustees of Freeholders &
Commonality v. Jessup, 65 N.E. 949, 951 (N.Y. 1903).
A. The contract is not ambiguous and grants the Sureties the
right to hold the collateral security
The Court agrees with the Bankruptcy Court’s finding that the
Indemnity Agreement is not ambiguous. The parties’ disagreement
turns on the meaning of the phrase “any Bond” in the Executed
Indemnity.
The relevant provision at issue states:
1.
PREMIUMS & COLLATERAL FOR SURETYSHIP- The
INDEMNITORS shall pay or cause to be paid to the SURETY
both the agreed premium and, upon written request by the
SURETY at any time, collateral security for its
suretyship until the INDEMNITOR shall furnish to the
SURETY competent written evidence, satisfactory to the
SURETY, of the termination of any past, present and
future liability under any Bond. The INDEMNITOR . . .
further consents that the collateral security provided
in consideration of suretyship may be held by the SURETY
in any investment or depository that the SURETY in its
sole discretion deems advisable and prudent. The
Surety’s election not to demand collateral at the
inception of the suretyship obligation shall not operate
as a waiver of the right to demand and receive such
collateral at any time before liability has terminated
under any Bond. (Emphasis added).
Rec. Doc. 2-5 at 18.
Appellant argues that the terms “the agreed premium” and “any
Bond” are singular and can be interpreted to be referencing a
specific bond. Rec. Doc. 4 at 10. Appellee rejects this argument,
stating that the Bankruptcy Court correctly found that the Executed
Indemnity plainly states that the collateral security lasts until
there
is
no
future
liability
under
9
any
bond,
and
not
until
termination of liability under “a” Bond or “the” Bond. Rec. Doc.
6 at 10. The Court is not persuaded that the term “any Bond” is
ambiguous
or
can
reasonably
by
interpreted
as
referencing
a
specific bond. The word “any” in the agreement indicates the
parties’ intent for the bonds to be cross-collateralized and not
just bond specific. The agreement clearly states that collateral
security for the suretyship is to
last until the indemnitor
furnishes written evidence of the termination of “past, present,
and future liability under any Bond.” Rec. Doc. 2-5 at 18. Any
reasonable, objective person, especially one in this particular
business, can identify that the word “any” suggests more than one
potential item and is not used to describe a single, specific item.
Appellant’s argument that the term “any Bond” is singular is not
persuasive, because when the term “any” precedes a noun, it is
generally for the specific purpose of making clear that the writer
or speaker is not identifying a single, specific instance of the
noun. As the bankruptcy judge below noted, the agreement did not
state “under the Bond” which would indicate a reference to a
specific, singular Bond.
From the face of the contract, the
contract provides that Appellant is to pay Appellees until there
is not any further liability on any bond, which would include all
bonds – past, present, or future - that Appellees have issued on
behalf of Appellant. This interpretation is not only consistent
with the terms of the agreement and the purpose of the agreement
10
(to protect the Sureties in case of a loss from the issuance of
bonds), but this interpretation is also consistent with industry
practice. According to the testimony of Chris Vahey2, collateral
bonds are held on an account basis or a “total global exposure”
unless there is only one bond for an account.3 See Rec. Doc. 2-3
at 149-50, 166-67. Furthermore, just because Appellants argue a
different interpretation in the litigation does not make this
provision of the contract ambiguous. See Medtech Prods., 596 F.
Supp. 2d at 808.
Therefore, this Court finds that the terms of the Executed
Indemnity
agreement
contract.
Since
are
this
not
Court
ambiguous
finds
that
from
the
the
face
of
the
contract
is
not
ambiguous, it is not necessary to address Appellant’s remaining
arguments concerning the use of extrinsic evidence, as extrinsic
evidence need only be considered in ambiguous contracts.
Chris Vahey has been a surety underwriter for almost 20 years.
Since Vahey is familiar with industry practices, customs, and terms used,
the Court finds that his reasonable and objective interpretation is
consistent with the terms of the contract. See Chapman, 546 F.3d at 236
("[A]n ambiguity exists where a contract term could suggest more than one
meaning when viewed objectively by a reasonably intelligent person who has
examined the context of the entire integrated agreement and who is cognizant
of the customs, practices, usages and terminology as generally understood in
the particular trade or business.")
2
3
11
Accordingly, the judgment of the Bankruptcy Court is
AFFIRMED, dismissing instant appeal at appellant’s costs.
New Orleans, Louisiana, this 14th day of March, 2019.
___________________________________
SENIOR UNITED STATES DISTRICT JUDGE
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