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North American Specialty Insurance Co. v. Masonry Builder's of Ky, Inc.

United States District Court, E.D. Kentucky, Southern Division, Pikeville

November 19, 2018

NORTH AMERICAN SPECIALTY INSURANCE COMPANY, Plaintiff,
v.
MASONRY BUILDER'S OF KY, INC., [1]et al., Defendants.

          OPINION AND ORDER

          Robert E. Wier United States District Judge.

         Plaintiff North American Specialty Insurance Company (“NAS”), moving for summary judgment, seeks indemnification from Defendants Masonry Builder's of KY, Inc. (“Masonry”) and Masonry's owners/guarantors, Tim and Rontona Mitchell (collectively, “Defendants”). DE #16. Having thoroughly analyzed the record and DE #16's full briefing, for the reasons that follow, the Court GRANTS the motion on the terms of this Order.

         Masonry needed bonding capacity to qualify for a particular contract. NAS signed on as surety, facilitating the project, but Masonry (and its individual owners) induced NAS by entry of a broad General Indemnity Agreement in NAS's favor. That Agreement gave NAS much authority with respect to and protection regarding any underlying bond claim. Masonry and the Mitchells cavil over NAS's handling, but the Indemnity Agreement puts them squarely on the hook for NAS's bond payments and resulting legal expenses.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         In May 2013, NAS, a licensed surety, issued payment and performance bond #2171269 (the “Bond”) to cover Masonry's contract with Morgan County Real Properties I for construction of the Morgan County Wellness and Youth Center (the “Youth Center”). DE #1 ¶¶ 2, 8; see DE #1-1 (Bond). Payment bonds serve to ensure that subcontractors and vendors have recourse if the bonded contractor fails to pay them for project goods or services; performance bonds guarantee payment for the balance necessary to complete the project, should the contractor fail to do so. Sureties often logically condition bonding upon execution of an agreement indemnifying the surety in the event of the contractor's default under the bond. Accordingly, as required to obtain the Bond, Masonry and personal indemnitors Tim and Rontona Mitchell executed a General Indemnity Agreement (“GIA”) agreeing to indemnify and hold NAS harmless from any “Loss” relative to the Bond. DE #1 ¶ 9; see DE #1-2 (GIA) ¶ 2.[2]

         Masonry won the contract for brick work on the Youth Center. The defense tendered various unauthenticated contract documents suggesting that an unauthorized change by the Owner inserted an alternative brick product into the mix. That alternative, supplied by Hinkle Block and Masonry, LLC (“Hinkle”), is at the root of this dispute. Masonry contended the Owner should have paid for the difference in materials and costs, but Hinkle looked to Masonry. When Masonry refused payment, Hinkle submitted to NAS a claim for $66, 596.23 against Masonry's Bond. DE #1 ¶ 11. NAS initially refused payment on the claim, so Hinkle brought suit against Masonry, NAS, and NAS's affiliate Washington International Insurance Company (“Washington”) (which the GIA includes in its denomination of “Surety[, ]” see DE #1-2 at 1). DE #1 ¶ 12. See Hinkle Block & Masonry, LLC v. Masonry Builder's of KY, Inc., et al., Morgan County Civil Action No. 15-CI-00141; DE #18-3 (Hinkle Complaint).

         The Hinkle litigation involved various claims, including a breach of contract claim against Masonry, a claim for breach of the Bond against NAS and Washington, and bad faith claims against NAS and Washington. DE #18-3 ¶¶ 15-38. NAS alleges that it “continually urged” Masonry to settle the Hinkle claims, which Masonry denies, and the litigation persisted for over two years. DE #1 ¶ 14; DE #7 ¶ 11. In July 2017, NAS, allegedly “with the full cooperation and consent of Masonry, ” reached a settlement in the Hinkle action and paid Hinkle $64, 958.25 to resolve all claims against NAS, Masonry (without prejudice), and Washington. DE #1 ¶ 15. Masonry adds that this settlement resulted in bad faith claim dismissal with prejudice. The order dismissed the contract claim against Masonry without prejudice, and NAS, as surety, took an assignment of that claim. See DE #18-5 (Agreed Order of Dismissal).

         Then, NAS sought reimbursement from Masonry for all expenses incurred in defending and settling the Hinkle litigation. NAS filed a UCC financing statement securing NAS's interest in Masonry's assets and demanded payment from Masonry via letter. DE #1 ¶¶ 18-20; DE ##1-3, 1-4. Masonry steadfastly refused payment, and NAS initiated this action to recover the requested sums. NAS asserts three counts against Masonry: (1) breach of the GIA; (2) breach of the implied contractual duty of good faith and fair dealing; and (3) common law indemnity for the sum paid to Hinkle, $64, 958.25, as well as any expenses and attorney fees incurred in litigating the Hinkle case. DE #1 ¶¶ 22-38. NAS additionally requests reimbursement for the costs of bringing this action to enforce the GIA, including reasonable attorney fees. Id. at 8.

         NAS moves for summary judgment, seeking $105, 444.92 in damages, plus ongoing legal fees. DE #16 at 1, 10. As required by the GIA, NAS has attached what it deems “[a]n itemized statement of payments made by the Surety, sworn to by an officer of the Surety[, ]” which the GIA designates as “prima facie evidence of the liability of the Indemnitors to reimburse the Surety.” DE #1-2 ¶ 9; see DE #16-1 (Affidavit of Bryan Seifert). Defendants responded to the summary judgment motion (DE #18), and NAS replied (DE #22).

         The Court makes certain observations about the record. First, NAS does not discuss the merits of Counts II and III, so the Court does not address those claims. Second, Masonry tendered various documents in response but authenticated none. Further, Masonry offered no affidavit to rejoin the factual claims of the Seifert Affidavit. The Court can process only what the record properly contains and so goes forth to resolve the motion.

         II. ANALYSIS

         A. Summary Judgment Standard

         Summary judgment is proper if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A reviewing court must construe the evidence and draw all reasonable inferences from the underlying facts in favor of the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 106 S.Ct. 1348, 1356 (1986); Lindsay v. Yates, 578 F.3d 407, 414 (6th Cir. 2009). “The moving party bears the burden of showing the absence of any genuine issues of material fact.” Sigler v. Am. Honda Motor Co., 532 F.3d 469, 483 (6th Cir. 2008). The movant may satisfy this burden by demonstrating that “after reviewing the record as a whole a rational factfinder could not find for the nonmoving party.” Ercegovich v. Goodyear Tire & Rubber Co., 154 F.3d 344, 349 (6th Cir. 1998). In evaluating a summary judgment motion, a district court must avoid “credibility judgments and weighing of the evidence, ” Bennett v. City of Eastpointe, 410 F.3d 810, 817 (6th Cir. 2005), and view “the facts and any inferences that can be drawn from them . . . in the light most favorable to the non-moving party, ” id. (citing Matsushita, 106 S.Ct. at 1356).

         If the moving party meets its burden, the burden then shifts to the nonmoving party to produce “specific facts” showing a “genuine issue” for trial Celotex Corp. v. Catrett, 106 S.Ct. 2548, 2253 (1986); Bass v. Robinson, 167 F.3d 1041, 1044 (6th Cir. 1999). The nonmovant must “do more than simply show that there is some metaphysical doubt as to the material facts.” Matsushita, 106 S.Ct. at 1356. The nonmovant “has an affirmative duty to direct the court's attention to those specific portions of the record upon which it seeks to rely to create a genuine issue of material fact.” In re Morris, 260 F.3d 654, 655 (6th Cir. 2001). Summary judgment is particularly appropriate in a contract action, if the questions are primarily legal rather than factual, and “the documents and/or evidence underlying the contract are undisputed and there is no question as to intent.” Terry Barr Sales Agency, Inc. v. All-Lock Co., Inc., 96 F.3d 174, 179 (6th Cir. 1996). Where the contract language is ambiguous, however, disputed fact issues as to intent preclude summary judgment. Id.; see also Parrett v. American Ship Building Co., 990 F.2d 854, 858 (6th Cir. 1993).

         B. Validity and Enforceability of the GIA[3]

         Questions governing “the construction and interpretation of a contract”-including whether the contract's terms are ambiguous-“are questions of law to be decided by the court[.]” Frear v. P.T.A. Indus., Inc., 103 S.W.3d 99, 105 (Ky. 2003) (quoting First Commonwealth Bank of Prestonsburg v. West, 55 S.W.3d 829, 835 (Ky. Ct. App. 2000)); accord Zetter v. Griffith Aviation, Inc., 435 F.Supp.2d 622, 628-29 (E.D. Ky. 2006). The Court's “review must begin with an examination of the plain language of the instrument.” Ky. Shakespeare Festival, Inc. v. Dunaway, 490 S.W.3d 691, 694 (Ky. 2016). “In the absence of ambiguity, a written instrument must be enforced strictly according to its terms[.]” Wehr Constructors, Inc. v. Assurance Co. of Am., 384 S.W.3d 680, 687 (Ky. 2012) (quoting Frear, 103 S.W.3d at 106).

         “A contract of indemnity is an obligation or duty requiring a promisor . . . to make good any loss or damage which another has incurred while acting at the request or for the benefit of the promisor.” Intercargo Ins. Co. v. B.W. Farrell, Inc., 89 S.W.3d 422, 426 (Ky. Ct. App. 2002). An indemnification agreement accompanying a performance or payment bond in the construction industry is a “prime example” of such a contract. Id. In Kentucky, “[t]he right of an indemnitee to recover of the indemnitor under a contract of indemnity according to the terms of such a contract is well recognized.” U.S. Fid. & Guar. Co. v. Napier Elec. & Constr. Co., 571 S.W.2d 644, 646 (Ky. Ct. App. 1978). Further, “[s]uch a contract is not against public policy and will be enforced if the indemnitee has suffered loss thereunder and has complied with its terms.” Id.; accord Thompson v. The Budd Co., 199 F.3d 799, 807 (6th Cir. 1999) (finding that an indemnitor's liability is “determined by the provisions of the indemnity agreement itself”).

         Defendants do not contend that the GIA is ambiguous, or that its terms are subject to different interpretations. Indeed, the Court finds that the relevant, operative language is not ambiguous. See Ky. Shakespeare Festival, 490 S.W.3d at 694-95. To the extent Defendants contest the validity of the GIA itself, they argue that: (1) as a general matter of public policy, “Kentucky law disfavors contracts [] calling for indemnification for the actions of the indemnitee”; and (2) specifically, this GIA provides for indemnification for costs “related, at least in part, to [NAS's] own claimed wrongful conduct, ” rendering it an “[e]xculpatory contract[] . . . highly disfavored under Kentucky law[.]” DE #18 at 5. The argument hinges on the fact that Hinkle sued both Masonry and the sureties. The claims against NAS included an extra-contractual theory. Thus, per Masonry, NAS spent money and incurred loss for its own alleged improper conduct relative to claim adjustment.

         a. The GIA Does Not Violate Public Policy

         Defendants offer no real support for their first proposition, which is contrary to Kentucky precedent. Kentucky law does not disfavor, nor does it discriminate against, indemnity agreements. See U.S. Fid. & Guar. Co., 571 S.W.2d at 646; see also Enerfab, Inc. v. Ky. Power Co., 433 S.W.3d 363, 366 (Ky. Ct. App. 2014) (noting that “general principles of contract construction apply equally to indemnification agreements” and agreeing with the U.S. Fid. & Gaur. Co. court that “[s]uch a contract is not against public policy[.]”); accord Nat. Sur. Corp. v. People's Mill. Co., 57 F.Supp. 281, 282 (W.D. Ky. 1944) (“The right of an indemnitee to recover of the indemnitor under a contract of indemnity according to the terms of such a contract is well recognized. Such a contract is not against public policy and will be enforced if the indemnitee ...


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