Keene Corp. v. International Fidelity Ins. Co., 83-1492

• Citation: 736 F.2d 388
• Decision Date: 29 May 1984
• Docket Number: No. 83-1492,83-1492
• Parties: KEENE CORPORATION, Plaintiff-Appellee, v. INTERNATIONAL FIDELITY INSURANCE COMPANY, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 388

736 F.2d 388

KEENE CORPORATION, Plaintiff-Appellee, v. INTERNATIONAL FIDELITY INSURANCE COMPANY, Defendant-Appellant.

No. 83-1492.

United States Court of Appeals Seventh Circuit.

Argued Feb. 17, 1984.

Decided May 29, 1984. ^*

Opinion June 13, 1984.

Thomas S. Novak, Sills, Beck, Cummis, Zuckerman, Radin & Tischman, Newark, N.J., for defendant-appellant.

Richard L. Horwitz, David J. Chroust, Drendel, Schanlaber, Horwitz & Oakes, Aurora, Ill., for plaintiff-appellee.

Before CUMMINGS, Chief Judge, COFFEY, Circuit Judge, and BEATTY, District Judge. ^**

CUMMINGS, Chief Judge.

The appeal in this diversity suit involves a dispute between defendant-appellant International Fidelity Insurance Company ("Fidelity"), a surety, and plaintiff-appellee Keene Corporation ("Keene"), its obligee, in regard to two surety agreements guaranteeing contract performance by Chicago Automatic Machine, Inc. ("Chicago Automatic"). The district court granted Keene's motion for summary judgment, holding that Fidelity is obligated to reimburse Keene pursuant to both surety agreements, and we affirm.

I

In October 1978 Keene's Kaydon Bearing Division, an automotive equipment producer, agreed to purchase from Chicago Automatic a 20-spindle rotary assembly machine, tooled to assemble Keene's roller bearings. The purchase order called for delivery to one of Kaydon's Muskegon, Michigan, plants by the week of March 26, 1979. The purchase order specified a purchase price of $149,000 and a payment schedule. ¹ At Chicago Automatic's behest, ² Keene purchased a performance bond from Fidelity, paying a premium of 2% of the purchase price. Under the performance bond, Fidelity unconditionally guaranteed Chicago Automatic's performance under the contract, with a maximum liability of $149,000.

Keene made the following payments to Chicago Automatic: $7,500 on October 19, 1978 (5% of the purchase price) and $29,800 on November 14, 1978 (20% of the purchase price). Shortly after Chicago Automatic received Keene's purchase order, the issue arose as to where the induction heating system, a component of the roller-bearing machine, would be acquired. Chicago Automatic's initial proposal had specified a Lepel system or equivalent; Chicago Automatic later inquired whether Keene knew of any manufacturers other than Lepel that produced induction heating systems. As a result of that inquiry Chicago Automatic learned of Pillar Corporation ("Pillar"), to whom Chicago Automatic then subcontracted that portion of the work.

In the meantime Keene informed Chicago Automatic of its need for a machine tooled to assemble its unitized thrust bearings. After negotiations, Keene accepted Chicago Automatic's proposal to manufacture a thrust-bearing machine by issuance of a purchase order dated February 5 1979. Delivery was scheduled for the week of August 6, 1979, and the purchase order specified a payment schedule. ³ Again Fidelity issued a performance bond in the amount of the contract price ($135,000) contemporaneously with the contract, unconditionally guaranteeing Chicago Automatic's performance. This time, however, Keene's recovery in the event of Chicago Automatic's default was limited to recapture of the monies advanced by Keene. Keene paid Chicago Automatic $33,750 (25% of the purchase price) upon Chicago Automatic's receipt of the order.

Early in 1979 Chicago Automatic began experiencing difficulty in manufacturing the roller-bearing machine due to, in part, the inadequacy of Pillar's induction heating system. Chicago Automatic requested time extensions and Keene acceded to the requests. Apparently Fidelity was not apprised of the delays and extensions in regard to the roller-bearing machine until March 1980. In June 1979 Chicago Automatic also requested a ten-week extension for completing the thrust-bearing machine. Keene acceded to the request, notifying Fidelity of the extension by forms supplied by Fidelity dated August 1, 1979 and September 18, 1979. ⁴ The revised completion date for the thrust-bearing machine was set at October 31, 1979. Chicago Automatic failed to meet this deadline.

Despite Chicago Automatic's delays in completing the hardware, in September 1979 Keene made a third progress payment to Chicago Automatic in the amount of $33,750 in connection with the roller-bearing contract, and in October 1979 made a second progress payment in the same amount in connection with the thrust-bearing contract.

Frustrated by the continuing delays, Keene wrote Chicago Automatic on February 8, 1980, stating that it would "probably have no choice but to call the performance bonds" if the thrust machine were not completed by April 7 and the roller-bearing machine by May 5. ⁵ Further communication between Keene and Chicago Automatic ensued, including Keene's recommendation that Chicago Automatic focus its efforts on the thrust-bearing machine, with the week of May 2 as the revised completion date. Chicago Automatic responded to this recommendation with a proposed completion date of May 16 for the thrust-bearing machine. Meanwhile Keene wrote Fidelity on March 6, 1980, advising it of Chicago Automatic's failure to make timely completion and delivery of the two machines and inquiring of the "necessary procedure should we be forced to resort to the Bonding to recover our investment." ⁶ Fidelity's attorney Richard Caifano responded by letter March 26, referring to an "agreed * * * revised completion schedule for the machines presently being assembled by Chicago Automatic," calling for "substantially full completion on May 16, 1980." ⁷ Caifano asked for confirmation of Keene's acquiescence in that schedule revision. ⁸ On April 29, 1980, Caifano advised Keene that Fidelity would treat its obligations under the performance bonds as terminated on the grounds that Keene and Chicago Automatic had allegedly entered into a "novation agreement calling for the extension of compliance with specifications of the original purchase orders," and that Fidelity had not "approved or acquiesced in that extension." ⁹

Chicago Automatic failed to complete on May 16, whereupon Keene demanded payment from Fidelity under the two performance bonds. Fidelity ignored the demand and Keene brought this action on September 17, 1980, in the district court for the Southern District of New York. Fidelity subsequently obtained a change of venue to the Northern District of Illinois. ¹⁰

Count 1 of Keene's complaint sought the full $149,000 obligation of the roller-bearing machine performance bond because Keene's asserted damages of $287,400 resulting from the breach of the roller-bearing contract far exceed that amount. In principal part these asserted damages consist of (1) $71,050 in progress payments to Chicago Automatic and (2) $187,920 in lost profits that Keene allegedly would have realized from the sale of roller bearings to Chrysler Corporation during the period July 1979 through December 1980. ¹¹ Count 2 sought reimbursement under the thrust-bearing machine bond for the $67,500 advanced to Chicago Automatic. Count 3 requested punitive damages in connection with Fidelity's alleged bad faith refusal to discharge its suretyship obligations.

Keene moved for partial summary judgment on Counts 1 and 2. In opposing the motion, Fidelity conceded that Chicago Automatic defaulted on both contracts. Fidelity raised two affirmative defenses: (1) "The modifications to the agreements here * * * took place without the approval of the surety" (Defendant's Mem. In Opp. to Plaintiff's Motion For Partial Summary Judgment, Point II, at 10, Plaintiff's App. at 249); and (2) "The relationship between plaintiff and Pillar Corp. bars any right of plaintiff to summary judgment" (Id. Point III, at 23, Plaintiff's App. at 256). ¹²

The district court granted Keene's motion for partial summary judgment, holding that Fidelity's affirmative defenses did not raise a material issue of law or fact. Regarding the first defense, the district court observed that Fidelity in 1979 received at least one notice of extension and failed to object; therefore any current objection to the revised schedules was in effect waived by Fidelity. Further, the court held that under Illinois law, ¹³ if the obligee of a surety bond gives the principal additional time to perform, the surety who has not consented to the extension is discharged unless the extension agreement was not founded on independent consideration. The court held that Fidelity did not establish any new consideration for Keene's willingness to defer the completion date. Regarding Fidelity's second defense, the court found no such relationship between Keene and Pillar that would negate Fidelity's obligation under the performance bonds. Because Fidelity apparently did not dispute the damages caused by Chicago Automatic's default, the court held Keene was entitled to the entire $149,000 obligation on the roller-bearing machine bond, as well as the $67,500 advanced on the thrust-bearing machine contract. Fidelity's motion for reconsideration was denied, and Fidelity appeals. For the reasons stated infra, we affirm the district court's order entering partial summary judgment in favor of Keene.

II

Fidelity first reasserts its first argument in opposition to Keene's partial summary judgment motion, viz., that Fidelity is discharged by virtue of the extensions of time for Chicago Automatic's performance. Although we have discovered no recent reported Illinois decisions addressing the issue, the district court correctly surmised that under Illinois law a compensated surety is not discharged by an extension of time for performing the underlying contract unless the extension is supported by valid and sufficient consideration. English v. Landon, 181 Ill. 614, 619, 54 N.E. 911 (1899); Flynn v. Mudd & Hughs, 27 Ill. 323, 325 (1862); Highland Park State Bank v. Sheahen, 149 Ill.App. 225, 229 (2d Dist.1909); Truesdell v. Hunter, 28 Ill.App. 292, 296 (2d Dist.1888). Fidelity...