Fireman's Ins. of Newark v. Todesca Equipment

• Decision Date: 06 November 2002
• Docket Number: No. 02-1006.,02-1006.
• Citation: 310 F.3d 32
• Parties: FIREMAN'S INSURANCE CO. OF NEWARK, NEW JERSEY, Plaintiff, Appellee, v. TODESCA EQUIPMENT CO., INC., Todesca Equipment Company, Power Line, Inc., Rhode Island Sand & Gravel Co., Inc., East Providence Asphalt & Concrete Co., Albert M. Todesca, Thomas Russo, Charles Todesca and Paul Todesca, Defendants, Appellants.
• Court: U.S. Court of Appeals — First Circuit

310 F.3d 32

FIREMAN'S INSURANCE CO. OF NEWARK, NEW JERSEY, Plaintiff, Appellee, v. TODESCA EQUIPMENT CO., INC., Todesca Equipment Company, Power Line, Inc., Rhode Island Sand & Gravel Co., Inc., East Providence Asphalt & Concrete Co., Albert M. Todesca, Thomas Russo, Charles Todesca and Paul Todesca, Defendants, Appellants.

No. 02-1006.

United States Court of Appeals, First Circuit.

Heard September 13, 2002.

Decided November 6, 2002.

D. Ethan Jeffery with whom Charles R. Bennett, Jr., and Hanify & King were on brief for appellants.

Brian J. Lamoureux with whom William M. Dolan III and Brown Rudnick Berlack Israels LLP were on brief for appellee.

Before SELYA, Circuit Judge, COFFIN and B. FLETCHER,^* Senior Circuit Judges.

COFFIN, Senior Circuit Judge.

Appellants, a group of affiliated construction companies and related individuals, appeal from an order of the district court granting summary judgment to appellee, surety, on its complaint seeking indemnification from appellants for certain payments the surety made on behalf of appellants. Finding no errors of law, we affirm.

I. Background

Appellants, as principals and indemnitors, entered into a continuing indemnity agreement with surety Fireman's Insurance Company of Newark, New Jersey ("Fireman's"), in March 1991. Pursuant to the indemnity agreement, Fireman's issued various bonds, intended to guarantee performance and payment to subcontractors and suppliers, on behalf of appellants for construction projects involving companies with which appellants were allied or in which they were beneficially interested. In exchange, appellants agreed to indemnify and hold Fireman's harmless for all losses and expenses it incurred under the bonds and provided Fireman's with broad discretion to determine whether a claim should be paid, settled, or challenged. Although appellants also entered into indemnity agreements with Reliance Insurance Co., previously a plaintiff and an appellee in this case, the Reliance portion of the district court judgment is no longer at issue.¹

In October 1993, Coken Company ("Coken") filed a lawsuit against Fireman's in Providence County Superior Court seeking $44,371.53 for subcontracting work it had performed for companies named in appellants' indemnity agreement for which it had not been paid. Fireman's did not file an answer to Coken's complaint, and no action occurred in the lawsuit until March 1997, when Coken filed for summary judgment. Fireman's did not respond to Coken's summary judgment motion and judgment was entered against Fireman's for $139,326.34, plus interest and costs, in June 1997.² An execution, incorporating costs and interest, was subsequently obtained by Coken in the amount of $153,696.98 against Fireman's. Although the record is unclear as to when payment was made, the parties appear to agree that Fireman's eventually paid Coken $207,855.55 and incurred attorney's fees of $17,285.79 in the matter.

In August 2000, Fireman's filed suit against appellants in the federal district court of Rhode Island seeking recovery of more than $315,000 that it had paid out to various claimants under the bonds. The Coken payment constituted the largest payout for which Fireman's sought repayment. In July 2001, Fireman's moved for summary judgment, and appellants objected, based solely upon the payment to Coken.³ The motion was granted by the district court in October 2001 based on the recommended ruling of the magistrate judge.⁴

Appellants allege on appeal that the district court made errors of law in granting summary judgment to Fireman's. We review the district court's order de novo, "construing the record in the light most favorable to [the non-movant] and resolving all reasonable inferences in its favor." Davric Maine Corp. v. Rancourt, 216 F.3d 143, 146 (1st Cir.2000). Summary judgment is appropriate if the evidence presented by appellants is "`merely colorable, or is not significantly probative' to conjure a genuine issue of material fact." Id. (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).

II. Discussion

Appellants allege that the district court erred in two respects when it granted appellee's motion for summary judgment. First, appellants argue that the district court misapplied the holding of the Rhode Island Supreme Court in Massachusetts Bonding & Insurance Co. v. Gautieri, 69 R.I. 70, 30 A.2d 848 (1943), and, in doing so, erroneously ignored the common law rule that every contract contains an implied covenant of good faith and fair dealing. Second, appellants contend that the district court incorrectly concluded that they had failed to raise a genuine issue of material fact.

A. Applicability of Massachusetts Bonding

In granting appellee's summary judgment motion, the district court relied upon the rule enunciated in Massachusetts Bonding, namely that when a surety brings an action pursuant to an indemnity agreement giving the surety broad discretion to pay claims, the only defense an indemnitor can raise is that the surety committed fraud or collusion in paying the claim. In Massachusetts Bonding, a surety sought recovery from the indemnitors for funds the surety paid to the United States government due to a penalty for alleged illegal activity by the principals. Massachusetts Bonding, the surety, settled the government's claim despite the principals' urging that valid defenses to the claim should be raised.

The language of the indemnity agreement required the indemnitors to pay Massachusetts Bonding for all sums that it paid "on account of any damages, costs, charges, and expenses of whatsoever kind or nature." The critical language of the agreement furnished Massachusetts Bonding with broad latitude to determine whether a claim should be paid:

"And the Indemnitors further agree that in any accounting which may be had between the indemnitors and [Massachusetts Bonding], [Massachusetts Bonding] shall be entitled to credit for any and all disbursements, in and about matters herein contemplated, made by it in good faith under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether such liability, necessity or expediency existed or not" (italics ours).

Massachusetts Bonding, 30 A.2d at 850 ("This last clause which we have emphasized by italics is indeed of a most sweeping character.").

The court held that the expansive character of this provision, most notably the final clause, indicated that the parties had "lodged in the indemnitee a discretion limited only by the bounds of fraud." Id. As such, in order to show bad faith by the surety, the indemnitors were required to prove that the surety committed fraud or engaged in collusion with the United States in order to avoid repaying the surety. See id.

The appellants' argument that Massachusetts Bonding was incorrectly applied rests on an alleged critical factual difference between the two cases. The relevant difference, appellants argue, is that in Massachusetts Bonding the principals contended that the claim should not have been paid at all, while appellants here urge that they are not responsible for any amount paid by the surety over that "actually owed" to Coken. In other words, appellants admit potential liability for the amount initially claimed by Coken, but protest liability for any increase in that amount due to the passage of time or the possible incorrect judgment amount.⁵ Appellants characterize Massachusetts Bonding as a case about liability, and the current case as revolving around "damages."

Because the essence of the Massachusetts Bonding holding derived from the nature of the agreement between the parties, we look to the language in the agreement between Fireman's and appellants. Similar to the agreement in Massachusetts Bonding, the Fireman's agreement provided:

In the event of any payment by SURETY, SURETY shall be entitled in any accounting with PRINCIPAL or INDEMNITOR(S) to reimbursement for any and all disbursements made by it in good faith in and about the matters contemplated by this Agreement under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity, or expediency existed.

Further, the agreement placed complete and exclusive authority in Fireman's to determine if claims should be paid:

SURETY shall have the exclusive right in its name or in the name of PRINCIPAL to adjust, settle or compromise any claim, counterclaim, demand, suit or judgment involving any BOND or to take whatever other action it may deem necessary, expedient or appropriate. SURETY'S determination as to whether any such claim, counterclaim, demand, suit or judgment should be settled or defended shall be binding and conclusive upon PRINCIPAL and INDEMNITORS.

Finally, the agreement required that its terms be "liberally construed so as to protect, exonerate, and indemnify SURETY." Thus, the agreement affords Fireman's the same broad discretion to settle claims as given to the surety in the Massachusetts Bonding agreement and in fact contains the very same language that most impressed the court in that case.

The difference between asserting that a surety should pay nothing on a claim, as opposed to arguing that a surety paid too much on a claim, is insignificant to our analysis. As the court held in Massachusetts Bonding:

[U]nless it could be shown that such loss as the indemnitee suffered in the instant case was the result of fraud on its part, or of collusion between it and the agents of the United States, which would be the same thing as fraud, these defendants would be foreclosed by the very terms of the bond from claiming that the plaintiff had not acted in good faith in settling the government's claim despite defendants' prior refusal to consent to such settlement.⁶ Given the broad...