MEMORANDUM OPINION

PAMELA S. HOLLIS, Bankruptcy Judge.

This matter comes before the court on the Cross-Motions for Summary Judgment filed by Plaintiff LDR Industries, LLC ("LDR") and Defendant The Hanover Insurance Company ("Hanover"). In the underlying complaint, LDR seeks a declaratory judgment that any obligation it has to Hanover under a certain Customs bond is not secured by a letter of credit. Having reviewed the Joint Statement of Material Facts, the exhibits on the Joint Exhibit List, and the memoranda of law filed by the parties, the court denies LDR's motion for summary judgment and grants Hanover's motion for summary judgment.

JURISDICTION

As stated below in the Findings of Fact, the parties agree that the court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334, and that it is a core proceeding under 28 U.S.C. § 157(b)(2).

FINDINGS OF FACT

LDR and Hanover stipulated to 61 facts, all of which are included below. The parties also submitted 26 disputed facts. The court reviewed each of these disputed facts and, where appropriate, found certain of these facts to be both relevant and undisputed. Only those relevant and undisputed facts are included below. The court also made its own findings of fact.

The First Customs Bond

The Second Customs Bond

THE LETTERS OF CREDIT

The Original Letter of Credit

The Replacement Letter of Credit

The Wintrust Letter of Credit

LEGAL DISCUSSION

Summary judgment standard

The standard for a summary judgment motion is set forth in Fed. R. Civ. P. 56, made applicable in bankruptcy proceedings via Fed. R. Bankr. P. 7056. Summary judgment is appropriate under Rule 56 if the moving party shows that no genuine issue of material fact exists and that it is entitled to prevail in the case as a matter of law.

In ruling on the motion, the court must draw all reasonable inferences from the underlying facts in the responding party's favor. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Parkins v. Civil Constructors of Illinois, Inc., 163 F. 3rd 1027, 1032 (7th Cir.1998). On cross-motions for summary judgment, the court must "construe all inferences in favor of the party against whom the motion under consideration is made." Hess v. Reg-Ellen Machine Tool Corp., 423 F. 3rd 653, 658 (7th Cir. 2005) (quotation omitted).

"Cross-motions must be evaluated together, and the court may not grant summary judgment for either side unless the admissible evidence as a whole — from both motions — establishes that no material facts are in dispute." Bloodworth v. Village of Greendale, 475 Fed. Appx. 92, 95 (7th Cir. 2012) (citations omitted). A factual dispute is a genuine issue for trial only if it is determinative of the outcome under governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

Contract interpretation

The primary objective of contract interpretation is to give effect to the intent of the contracting parties. Gallagher v. Lenart, 226 Ill. 2nd 208, 232 (Ill. 2007). As this court wrote in Szilagyi v. Chicago Am. Mfg., LLC (In re Lakewood Eng. & Mfg. Co., Inc.), 459 B.R. 306, 328-29 (Bankr. N.D. Ill. 2011), aff'd sub. nom. Sunbeam Prod., Inc. v. Chicago Am. Mfg., LLC, 686 F. 3rd 372 (7th Cir.), cert. denied, 568 U.S. 1076 (2012), the first issue is whether the documents in question are clear and unambiguous.

Air Safety, Inc. v. Teachers Realty Corp., 185 Ill. 2nd 457, 462 (Ill. 1999) (quotation omitted). This is known as the "four corners" method of contract interpretation, and is the controlling approach under Illinois law. See Lease Mgmt. Equip. Corp. v. DFO P'ship, 392 Ill.App. 3rd 678, 685-86 (Ill. App. Ct. 2009).

"In applying this rule, a court initially looks to the language of a contract alone. If the language of the contract is facially unambiguous, then the contract is interpreted by the trial court as a matter of law without the use of parol evidence." Air Safety, 185 Ill. 2nd at 462 (citations omitted). See Minn. Life Ins. Co. v. Kagan, 724 F. 3rd 843, 849 (7th Cir. 2013) ("A court must initially look to the language of a contract alone, as the language, given its plain and ordinary meaning, is the best indication of the parties' intent.") (quotation and emphasis omitted).

If language in a contract is "reasonably or fairly susceptible to more than one construction," it is ambiguous. Tishman Midwest Mgmt. Corp. v. Wayne Jarvis, Ltd., 146 Ill.App.3d 684, 689 (Ill. App. Ct.1986) (citation omitted). But a contract is not ambiguous merely because the parties disagree on its meaning. Continental Mobile Tel. Co. v. Chicago SMSA Ltd. P'ship, 225 Ill.App. 3rd 317, 323 (Ill. App. Ct. 1992).

If the language is ambiguous, then and only then may parol evidence — evidence from outside the contract's four corners — be considered to resolve the ambiguity. See State Bank of Toulon v. Covey (In re Duckworth), 776 F. 3rd 453, 456 (7th Cir. 2014) ("Illinois adopts the familiar principle that an unambiguous contract is interpreted by the court as a matter of law without use of parol evidence.") (citation omitted).

If a contract is silent as to a particular term, it

Consolidated Bearings Co. v. Ehret-Krohn Corp., 913 F. 2nd 1224, 1233 (7th Cir. 1990) (quotation omitted).

The documents are unambiguous

On June 9, 2011, LDR's Vice President of Finance David Pollans signed Hanover's one page Customs bond application form. LDR was seeking a $200,000 Customs bond from Hanover. The First Bond Application contained the First Indemnity Agreement, in which LDR agreed "to completely INDEMNIFY [Hanover] from and against any liability, loss, costs, attorney's fees, and expenses whatsoever which [Hanover] shall at any time sustain as surety on any of said bonds, or for the enforcement of this agreement."

The parties agree that this paragraph requires LDR to indemnify Hanover in the event it sustains a loss in its role as surety. See Plaintiff's Amended Reply Memorandum in Support of Its Motion for Summary Judgment (EOD 55), p. 5 ("Amended Reply"). But this provision alone did not collateralize that indemnification obligation. During the term of the First Customs Bond, Hanover did not require security, and LDR did not deposit funds, procure a letter of credit, post real estate, or take any other action that collateralized its indemnification obligation.

The First Indemnity Agreement did provide, however, that upon demand by Hanover, LDR would "deposit current funds with [Hanover] in amount sufficient to satisfy any claim against [Hanover] by reason of such suretyship."

There is a similar clause in the Second Indemnity Agreement. Upon demand by Hanover, LDR would be required to "deposit funds as soon as [Hanover] has determined that liability exists under any bond written for [LDR], regardless of whether a payment has been issued or reserve booked. Payment shall be made by [LDR] within 15 days."

These provisions are known as "collateral security" clauses, and the court finds both of them to be unambiguous. "Illinois courts and other jurisdictions have routinely granted motions for summary judgment in favor of a surety for specific performance of the collateral security obligation of an indemnity agreement. Courts have traditionally analyzed the plain language of the indemnity agreement to determine a surety's right to obtain specific performance of collateral security." Hanover Ins. Co. v. Clark, 2006 WL 2375428, *5 (N.D. Ill. Aug. 15, 2006) (citations omitted).

The collateral security clause in the First Indemnity Agreement provided that Hanover could demand that LDR deposit funds in an amount sufficient to satisfy any claim Hanover had to pay in its role as a surety. When it was time for a second bond, the language changed slightly, which is entirely appropriate as there was now a history of Hanover providing bonds. Rather than referring to funds that would be sufficient to satisfy "any claim," the amended language required LDR to deposit funds "as soon as [Hanover] has determined that liability exists under any bond written for [LDR]." (Emphasis added by the court.)

LDR conflates the First Indemnity Agreement with the Second Indemnity Agreement.

Therefore, the parties agreed that Hanover could demand a deposit of funds from LDR, and that deposit would collateralize LDR's indemnification obligation. Relying on the First Indemnity Agreement, LDR argues that "if Hanover determined it had liability under its bond, it was permitted to demand that LDR deposit `cuurent [sic] funds' in an amount sufficient to satisfy any claim against Hanover under the bond. Hanover had no basis to make a determination of such liability before Customs had asserted a claim on the bond." Joint Statement of Material Facts, ¶ 77. Since Customs did not assert a claim until after the bond had terminated, Hanover could not have made a determination of liability, so LDR concludes that the Original ILOC did not fall under the collateral security provision.

But LDR is conflating the language of the First Indemnity Agreement with the language of the Second Indemnity Agreement. The First Indemnity Agreement required a deposit of funds to satisfy any claim; it was the Second Indemnity Agreement that required a deposit as soon as Hanover determined that liability existed under any bond.

The court is not being asked to enforce the collateral security provision, only to interpret it.

In its reply memorandum, LDR changes tack slightly. It argues that two events must have occurred before LDR was obligated to deposit funds under the collateral security provision: (1) the existence of a claim or a determination of liability; and (2) a demand by Hanover for a deposit of current funds. Amended Reply, p. 6. In support of this argument, LDR cites Safeco Ins. Co. v. DeMatos Enterprises, Inc., 2003 WL 21293825 (E.D. Pa. April 10, 2003) and Hanover Ins. Grp. v. Singles Roofing Co., Inc., 2012 WL 2368328 (N.D. Ill. June 21, 2012).

The DeMatos court found that "the only conditions precedent to Indemnitor Defendants' obligation to provide collateral security are (1) that a claim has been made against a bond issued by Safeco and (2) that Safeco has made a demand for collateral." Id. (citation omitted). Similarly, in Singles Roofing, the indemnitor agreed to make payment to the surety "as soon as liability exists or is asserted." 2012 WL 2368328, *3. "[T]he condition precedent to [the indemnitor's] obligation to make payments was that claims be `asserted against' Hanover." Id. at *5.

LDR argues that because no claim had been made against the First Customs Bond prior to Hanover's request for a letter of credit, nor had there been a determination of liability, and there was no demand to deposit "current funds", the conditions precedent had not been satisfied and LDR could not have been obligated to provide collateral to secure its obligation under the First Customs Bond.

But the cases cited by LDR apply to the situation where a surety comes to court seeking to enforce a collateral security provision, and to obtain specific performance of the indemnitor's obligation to perform.

In this case, LDR has already deposited collateral. The question is whether the collateral it posted applies retroactively to the First Customs Bond. The language of the First Indemnity Agreement is unambiguous that upon demand, LDR could be required to deposit current funds in amount sufficient to satisfy any claim. Hanover made a demand, and LDR posted the Original ILOC. The court need not decide whether the conditions precedent to LDR's obligation to deposit funds were satisfied, because it is not being called upon to enforce that obligation. Instead, the court is deciding whether the collateral LDR posted secured its obligation under both the First and Second Customs Bonds, or only the Second Customs Bond.

At least one prior decision found a similar obligation to post collateral in an indemnification agreement to apply retroactively to bonds issued in prior years. In Great Am. Ins. Co. of New York v. International Custom Products, Inc., et al., 2011 WL 7037123 (W.D. Pa. Oct. 31, 2011), plaintiff Great American asked the district court to compel defendants International Custom and Dennis Raybuck to post $550,000 pursuant to a 2005 indemnification agreement. International Custom and Raybuck argued that they could not be liable under the 2005 agreement for claims made against bonds issued in 2003 and 2004.

After summary judgment was entered against him, Raybuck asked the district court to reconsider its decision that the 2005 indemnity agreement, which included a collateral security provision, applied retroactively. Following Pennsylvania contract law, which appears to be identical to Illinois contract law — the goal is to effect the intent of the parties, the meaning of a contract is drawn from its plain language, an ambiguity is found where a term is reasonably susceptible to different constructions, and disagreement among the parties does not constitute ambiguity — the court rejected Raybuck's argument. "[T]he clear language of the contract requires Raybuck to indemnify Great American for any loss suffered which results from Great American's past or future assumption of suretyship on bonds. It also requires Raybuck, upon demand by Great American, to deposit sufficient funds to satisfy any claim against Great American by reason of such suretyship." Id. at 3 (emphasis in original).

Similarly, the language of the First Indemnity Agreement required LDR to indemnify Hanover "from and against any liability, loss, costs, attorneys' fees, and expenses whatsoever which [Hanover] shall at any time sustain as surety on any of said bonds." It also required LDR, upon demand by Hanover, to "deposit current funds with [Hanover] in amount sufficient to satisfy any claim against [Hanover] by reason of such suretyship". As the Great American court found with nearly identical phrasing, this language is clear and unambiguous.

When the Great American court found the language to be unambiguous, it enforced the indemnity agreement and required Raybuck to post collateral for earlier-in-time bonds. In this case, LDR has already posted collateral. Based on the unambiguous language of the indemnity agreement, the collateral LDR posted upon demand applies retroactively to the First Customs Bond.

Collateral may be required for certain bonds.

Moreover, even if LDR's submission of the Original ILOC was not a performance under the collateral security provision, both the First and Second Indemnity Agreements advised LDR that "Collateral may be required for certain bonds." Sometime in July or August 2012, after Customs notified LDR that the bond amount would have to increase, Hanover required LDR to furnish a letter of credit. In other words, it required collateral.

It simply makes sense that the parties intended the Letters of Credit would secure both the First and the Second Customs Bonds, and the primary objective of contract interpretation is to give effect to the intent of the contracting parties. While Hanover did not require a deposit of collateral at the time it issued the First Customs Bond, when its relationship with LDR was just beginning, it left open the possibility of securing the indemnification obligation with the collateral security provision and the note that "[c]ollateral may be required for certain bonds". Then, when Hanover's exposure increased dramatically, it required LDR to post collateral to secure its obligations to Hanover. After all, as the parties agreed, there is often a lag of several years after goods are imported before the amounts of antidumping and countervailing duties to be assessed are determined by Customs.

The Letters of Credit are not limited to a particular bond.

LDR argues that because it was not required to post a letter of credit to obtain the First Bond, and because none of the Letters of Credit addressed which LDR obligations they secured, "[t]he only reasonable interpretation of this silence is that the parties never agreed to alter the original terms of the First Bond — that was not secured by a letter of credit." Amended Memorandum (EOD 54), p. 7. For this argument, LDR cites Consolidated Bearings. "A contract is not ambiguous merely because it fails to address some contingency; the general presumption is that the rights of the parties are limited to the terms expressed in the contract." Id. at 1233 (quotation omitted).

LDR also argues that because the Letters of Credit "unambiguously provide[] no agreement that Hanover could draw on the Letters of Credit to satisfy LDR's obligation under the First Bond, the only reasonable interpretation is that the parties did not make such an agreement." Amended Memorandum, p. 8.

But the silence of the Letters of Credit regarding the bonds to which they apply does not limit their application to the Second Customs Bond. Indeed, the Letters of Credit state that they:

LDR and Hanover agree that the Letters of Credit make no reference to any specific bond number, bond amount, or bond period. If the Original ILOC and its replacements referred to the Second Customs Bond, but not the First, then LDR's argument might hold water. Instead, the language of the Original ILOC expressly provides that "FUNDS UNDER THIS IRREVOCABLE LETTER OF CREDIT ARE AVAILABLE TO HANOVER". There is nothing ambiguous about this sentence, and there is no language in the Original ILOC or the other Letters of Credit that limits them to the Second Customs Bond. Indeed, the Letters of Credit instruct us not to refer to any outside documents.

As the Seventh Circuit wrote in Consolidated Bearings, "the general presumption is that the rights of the parties are limited to the terms expressed in the contract." Id. at 1233. The terms expressed in the documents governing the relationship between LDR and Hanover were that upon demand by Hanover, LDR would be required to "deposit current funds . . . in an amount sufficient to satisfy any claim . . ." and that "collateral may be required for certain bonds." Hanover made a demand for a letter of credit. LDR posted the Original ILOC. Funds under the Original ILOC were available to Hanover. In Consolidated Bearings, the parties made "no agreement about the respective rights . . . upon cancellation; we conclude that the parties did not intend one." Id. Similarly, the Original ILOC contained no agreement that it would be limited to a particular bond, and neither did any of the other applicable documents, so it is appropriate to conclude that the parties did not intend one.

Since the contract language is unambiguous, the contract is interpreted as a matter of law without the use of extrinsic evidence.

The parties submitted extrinsic evidence regarding communications about the Replacement ILOC. A representative of Hanover asked LDR for a statement confirming that the Replacement ILOC "covers all potential past, present and future liabilities associated with LDR Industries, LLC's Customs Bond Program," but no statement was ever furnished.

Whatever this unfulfilled request means, it is irrelevant. So too is LDR's motivation for switching to Hanover as its bonding company. Since the language of the documents is unambiguous, it is unnecessary to look outside the four corners of those documents for their meaning. LDR provided a deposit of funds when Hanover demanded it. The Letters of Credit posted as collateral contain no language limiting their application to one bond or another.

Since the language of the Indemnity Agreements unambiguously required LDR to deposit current funds in amount sufficient to satisfy any claim, and noted that collateral might be required for certain bonds, when LDR posted the Original ILOC it secured LDR's indemnity obligation under both the First and Second Customs Bonds.

CONCLUSION

The court finds that the language of the documents is unambiguous. The Original ILOC and its subsequent replacement letters of credit secure LDR's obligation to Hanover under the First Customs Bond. Therefore, LDR's motion for summary judgment will be denied, and Hanover's motion for summary judgment will be granted.