Fidelity and Deposit Company of Maryland v. Edward E Gillen Co et al

Filing 158

ORDER signed by Judge Lynn Adelman on 04/23/18 granting 136 Defendant's Motion for Summary Judgment and denying 146 Plaintiff's Motion for Summary Judgment. (cc: all counsel) (jad)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
FIDELITY AND DEPOSIT COMPANY
OF MARYLAND,
Plaintiff,
v.

Case No. 13-C-1291

EDWARD E. GILLEN COMPANY, et al.,
Defendants.
______________________________________________________________________
DECISION AND ORDER
In 2010, defendant Edward E. Gillen Company (“Gillen”), a marine construction
firm, became part of a joint venture with other companies.

The Public Building

Commission of Chicago selected the joint venture as the general contractor for a harbor
construction project, which the parties refer to as the “31st Street Harbor Project.” The
plaintiff here, Fidelity & Deposit Company of Maryland (“F&D”), issued a surety bond to
ensure the joint venture’s performance. The amount of the bond is more than $30
million.
To complete the project, the joint venture subcontracted some of the construction
work to Gillen. Gillen, in turn, entered into agreements with other subcontractors, who
supplied labor and materials.

F&D alleges that, in 2012, Gillen defaulted on its

obligations by failing to pay the subcontractors.

Following the default, the unpaid

subcontractors filed at least seventeen separate lawsuits against Gillen in the Circuit
Court of Cook County. F&D, as the surety, was named as a defendant in each of the
suits. Many of those suits have since been resolved. However, several suits remain

pending, and F&D alleges that the remaining plaintiffs in those suits claim that Gillen
owes them a total of $2,563,207.96.
F&D commenced this action against Gillen and other defendants in 2013,
alleging that the defendants had breached various obligations to protect F&D as the
surety for the 31st Street Harbor Project. Since then, the parties have settled a large
portion of the case, including all claims against the defendants other than Gillen. The
sole remaining claim is F&D’s claim against Gillen based on the equitable doctrine of
quia timet. The parties have filed cross-motions for summary judgment on this claim,
which I address in this order.
Quia timet is a somewhat obscure equitable doctrine that applies in the
suretyship context, along with the doctrines of exoneration and reimbursement. All of
these doctrines relate to a surety’s right to require the principal obligor (which in this
case is Gillen, as one of the parties to the joint venture) to perform the underlying
obligation. See Peter A. Alces, The Law of Suretyship and Guarantee § 6:6 (Westlaw
2018).

The doctrine that applies depends on the timing of the surety’s action.

Reimbursement, as the name implies, is asserted after a surety has already made
payments under the bond. See id. § 6:13. But the law does not require a surety to wait
until it has made payment to seek relief against the principal, and this is where the
doctrines of exoneration and quia timet step in. See Admiral Oriental Line v. United
States, 86 F.2d 201, 204 (2d Cir. 1936) (a surety “is not obliged to make inroads into his
own resources when the loss must in the end fall upon the principal”). The doctrine of
exoneration applies at the time when the performance of the underlying obligation is
due, but has not been paid. See Alces, supra, § 6:13. In an action for exoneration, a
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surety seeks to compel the principal to satisfy the obligation before the creditor calls
upon the surety to do so. See Dobie v. Fid. & Cas. Co. of New York, 95 Wis. 540, 483
(1897) (“It seems to be well settled that a surety against whom a judgment has been
rendered may, without making payment himself, proceed in equity against his principal
to subject the estate of the latter to the payment of the debt, in exoneration of the
surety.”).

Quia timet, in contrast, is available to the surety before payment of the

underlying obligation is even due. See Alces, supra, § 6:13. In general, an action for
quia timet, which is Latin for “because he fears,” can be brought when the surety fears
that the principal will not perform the obligation when it comes due. The object of a
claim for quia timet is to require the principal to provide cash collateral to the surety to
secure the principal’s future performance. See Borey v. Nat’l Union Fire Ins. Co., 934
F.2d 30, 32 (2d Cir. 1991) (“Quia timet is the right of a surety to demand that the
principal place the surety ‘in funds’ when there are reasonable grounds to believe that
the surety will suffer a loss in the future because the principal is likely to default on its
primary obligation to the creditor.”).
In the present case, F&D pleaded claims for both exoneration and quia timet.
See Third Am. Compl., Count IV, ECF No. 98.

However, in one of its summary-

judgment briefs, F&D states that it is no longer seeking exoneration. Br. in Supp. of
Cross-Mot. for Summ. J. at 9, ECF No. 150. Thus, the only question remaining is
whether F&D is entitled to the equitable remedy of quia timet.
In seeking quia timet, F&D contends that it reasonably fears having to pay, at
some point in the future, more than $2 million to Gillen’s subcontractors. F&D believes
that when Gillen’s liability to the subcontractors is finally determined, Gillen will be
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unable to pay the amounts owed because it is insolvent and, as of February 2012, “had
no assets.” See Reply Br. at 9, ECF No. 155; see also Br. in Supp. at 6–8 (identifying
facts suggesting that Gillen is insolvent and cannot pay the underlying obligations). But
if F&D is correct, then it would be impossible for Gillen to now provide F&D with the
collateral it seeks, namely, “$2,349,582.97 in cash or cash equivalents.” Cross-Mot. for
Summ. J. at 1, ECF No. 146. Simply put, if Gillen has no asserts and cannot now pay
the amounts that it will eventually owe to the subcontractors, then it is too late for F&D
to obtain quia timet, as the whole point of the doctrine is to prevent a principal from
absconding with cash that it currently has. See, e.g., Escrow Agents’ Fid. Corp. v.
Superior Court, 4 Cal.App.4th 491, 496 (1992) (stating that purpose of quia timet is to
prevent the principal from “abscond[ing] with the very funds which could have been
used to satisfy the bond”).
F&D has not explained how it expects a company with no assets to pay more
than $2 million in cash. Perhaps F&D suspects that Gillen has the ability to post the
collateral. But if that is so, then how could F&D reasonably fear that Gillen will not pay
the obligations when they are due? F&D does not point to any facts suggesting that
Gillen is in the process of depleting its assets, or that, once the smoke clears in the
Illinois litigation, Gillen will refuse to pay the subcontractors what they are owed. F&D’s
only stated concern is that Gillen is broke and therefore can’t pay the subcontractors.
But if Gillen is broke, then quia timet is not an available remedy. Accordingly, F&D is
not entitled to relief.
For the reasons stated, IT IS ORDERED that Gillen’s motion for summary
judgment (ECF No. 136) is GRANTED.
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IT IS FURTHER ORDERED that F&D’s motion for summary judgment (ECF No.
146) is DENIED.
FINALLY, IT IS ORDERED that the Clerk of Court shall enter final judgment.
Dated at Milwaukee, Wisconsin, this 23rd day of April, 2018.

s/Lynn Adelman________
LYNN ADELMAN
United States District Judge

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