On May 25, 2016, Justice Singh of the New York County Commercial Division issued a decision and order in Cava Construction & Development, Inc., v. Tower Insurance Co., 2016 NY Slip Op. 31005(U), granting summary judgment to a surety against the bonded party.
In brief, Tower Insurance issued a $2.7 million surety bond on behalf of third party/subcontractor IKE, which in turn agreed to indemnify Tower. Cava, the contractor, dismissed IKE and demanded payment on the bond. Cava and Tower settled for $1.1 million, and Tower demanded indemnification from IKE and moved for summary judgment.
As an initial matter, the court held that Tower stated a prima facie case for summary judgment merely by submitting “a statement of losses and expenses as required by the indemnity agreement in question.” IKE argued that Tower must also establish that its settlement was reasonable and made in good faith, citing the Fourth Department, but the court disagreed, stating that in the First Department, the good faith and reasonableness burden was on the defendant.
The Court then held that IKE had not demonstrated a triable issue of fact on the question of good faith and reasonableness.
First, the fact that IKE had failed to comply with Tower’s collateral demand gave Tower the right to settle with Cava. Tower had the sole discretion to set the amount of collateral required, and IKE had deposited a much smaller amount.
Second, the fact that Tower’s lawyer had told IKE “that Cava’s claims were unfounded . . . and that there existed numerous legal defenses to Cava’s claims,” did not give rise to a triable issue of fact because the decision not to pursue possible defenses did not equate to “an improper or dishonest purpose [or] unreasonable conduct” on Tower’s part.
Third, IKE claimed that, if it was not liable to Cava’s underlying claim—if Cava had breached their contract and not IKE—Tower’s decision to pay Cava was unwarranted and that, under S.D.N.Y. case law, “a party that pays a claim that it is not obligated to pay is a volunteer and may not recover those expenses.” IKE further argued that, because factual disputes still existed as to which party was in breach, summary judgment could not be awarded on indemnification either. But the court noted that the Appellate Division had “expressly rejected the federal [rule], holding that the federal court had misapplied New York law,” and that under Appellate Division precedent, the issue of Cava’s possible breach is irrelevant, and that the Indemnification Agreement, not the terms of the surety bond, controlled IKE’s obligation to indemnify Tower. Accordingly, Tower was awarded summary judgment.
This opinion demonstrates sureties’ broad discretion to settle claims and then demand indemnification—any bonded party presented with a demand for collateral should be aware that failure to comply will make it very difficult to contest any future settlement by the surety.