DENISE COTE, District Judge.
The plaintiffs, International Fidelity Insurance Company ("IFIC") and United States Fire Insurance Company ("US Fire"), are surety companies. The defendants are a specialty construction company located in New York, the President of that construction company, and other companies in which the President holds an ownership interest. The plaintiffs have moved for summary judgment on their claims for breach of promissory notes and of a Forbearance Agreement. For the following reasons, the motion is granted.
The following facts are undisputed or as shown by the defendants unless otherwise noted. In 2002, the Aulson Company was awarded contracts for projects involving the repair and refurbishment of a number of bridges, including the Manhattan Bridge in New York City. In connection with these projects, the defendants negotiated with IFIC and US Fire to obtain surety bonds guaranteeing the performance and payment obligations of the Aulson Company, Aulson Roofing and Aulson Industrial under the construction contracts. Before issuing the surety bonds, both of the plaintiffs independently required the defendants to execute indemnity agreements. An indemnity agreement was executed between defendants Aulson Company, Aulson Roofing, Aulson Industrial, Great Rock Realty, Shell Rock Realty, Small Rock, River Rock Realty, Alan Aulson and Maureen Aulson ("US Fire Indemnitors"), and US Fire on January 2, 2002. In this agreement, the US Fire Indemnitors agreed to
In consideration of the agreement, US Fire executed two surety bonds; together the bonds carried a maximum obligation or penal sum of $32,338,022.
All of the defendants executed a second indemnity agreement with IFIC on December 22, 2005. This agreement similarly provided that the defendants
In consideration of this agreement, IFIC executed three surety bonds, carrying in total a penal sum of $12,700,000.
In March of 2007, the Aulson Company advised the defendants that it was financially unable to perform its obligations under the construction contracts, including paying its laborers and material suppliers. As a result, Koch Skanska Inc. ("Skanska") the general contractor and obligee on three of the bonded projects, sought to have the plaintiffs fulfill the Aulson Company's obligations. In connection with satisfying their obligations under the surety bonds, IFIC and US Fire calculated their losses, costs and expenses at $6,400,000 and $5,500,000, respectively. IFIC demanded payment from defendants of $6,400,000 and US Fire demanded $4,200,000 to hold as security against the losses and expenses it expected to incur. The defendants refused to make such payments due to financial inability and instead requested a restructuring of the indemnity agreements.
On August 1, 2007, IFIC and US Fire entered into a Forbearance, Restructuring, Intercreditor and Security Agreement (the "Forbearance Agreement") with the defendants. IFIC and US Fire agreed to liquidate and reduce the principal amounts of indebtedness owed to both to $4,500,000 and $1,500,000, respectively. The sureties also agreed to forebear on collection of the indebtedness for two years, that is, until July 31, 2009. In the Forbearance Agreement, the defendants largely waived their right to assert defenses against the plaintiffs. The Forbearance Agreement provided:
(Emphasis Supplied.) In consideration of this agreement, the defendants concurrently executed separate promissory notes to IFIC and US Fire that reflected the defendants' promise to repay in full the IFIC and US Fire debts by August 1, 2009. The Forbearance Agreement granted the plaintiffs liens on certain real property (the "Real Estate Collateral") and security interests in a variety of other collateral. The promissory notes and Forbearance Agreement further provided that in the event of default by the defendants the debt would become immediately due and payable and that "interest thereafter shall accrue at the lesser of nine (9%) percent per annum or the maximum rate of interest permitted under the applicable legal requirements."
With respect to the Manhattan Bridge project, US Fire entered into a takeover agreement with Skanska, obligating US Fire to complete work on the bridge that the Aulson Company had been hired to do. US Fire then hired the Aulson Company to perform this work. The Aulson Company's work on the Manhattan Bridge was repeatedly impeded by circumstances outside of its control. The Aulson Company has estimated that its delay claim against Skanska has a value of between $4,000,000 and $5,188,349.57.
In August of 2007, at the same time that the parties entered into the Forbearance Agreement, US Fire entered into a collateral security agreement with the US Fire Indemnitors to memorialize the parties' rights and obligations in regard to the bonded contracts. This agreement assigned the defendants' rights to bring its delay claims to US Fire. It provided:
(Emphasis supplied.)
Following the execution of the Forbearance Agreement and the promissory notes, the defendants made payments of $85,000 and $227,902.83 to the plaintiffs on September 28, 2007 and January 30, 2008, respectively. These payments were distributed pro rata between the plaintiffs; IFIC received $235,346.62 and US Fire received $77,556.71. The defendants made no further payments to either IFIC or US Fire on or before August 1, 2009, the maturity date for repayment of the debt set by the Forbearance Agreement and promissory notes.
On March 24, 2011, IFIC, as lead surety, notified the defendants that an event of default had occurred, and demanded payment of $6,891,000 — the aggregate unpaid principal and accrued interest on the debt as of the date, exclusive of costs. On August 4, IFIC requested repayment under the promissory notes of $7,101,377.58, the figure representing unpaid principal and the accrued interest on the debt as of that date plus costs and expenses. The parties agree that the unpaid principal due to IFIC under the Forbearance Agreement and IFIC note is 4,264,653.38 and that the unpaid principal due to US Fire under the Forbearance Agreement and US Fire note is $1,422,443.79.
On December 16, 2011, the plaintiffs filed suit against the defendants. IFIC asserts claims for breach of the Forbearance Agreement and the IFIC promissory note against all of the defendants. US Fire asserts claims for breach of the Forbearance Agreement and the US Fire promissory note against its indemnitors.
On August 24, 2012, following discovery, the plaintiffs' filed a motion for summary judgment. This motion was fully submitted on October 9. For the following reasons, the plaintiffs' motion for summary judgment is granted.
Summary judgment may not be granted unless all of the submissions taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); see
Fed.R.Civ.P. 56(e); see also
The first dispute that must be resolved concerns the law that will be applied here. The parties dispute whether Massachusetts or New York law governs.
A federal court sitting in diversity applies the choice of law rules of the state in which it sits.
The parties have agreed that Massachusetts law will govern the claims brought by the plaintiffs.
The promissory notes were executed concurrently with the Forbearance Agreement. A dispute arising from the Forbearance Agreement and promissory notes involves the "rights and obligations" of the parties to those documents. The plain meaning of the Forbearance Agreement indicates therefore that Massachusetts law is to govern the plaintiffs' claims that the defendants breached the Forbearance Agreement and the promissory notes.
The defendants argue that the relevant governing law is the law of New York. They point to the collateral security agreement — executed by US Fire and the US Fire Indemnitors concurrently with the Forbearance Agreement — which provides that the collateral agreement "and all its terms and conditions shall be governed by and interpreted in accordance with the laws of the State of New York." The defendants have not explained, however, why claims for breach of the Forbearance Agreement and enforcement of promissory notes executed under that agreement should be governed by the choice of law provision contained in a separate agreement. The defendants' argument that New York law applies to the plaintiffs' claims appears to stem from their contention, which is rejected below, that the collateral security agreement obligated the plaintiffs to pursue the Aulson Company's affirmative delay claim against Skanska.
The plaintiffs have shown that they are entitled to enforce the Forbearance Agreement and promissory notes. To establish a claim for breach of contract under Massachusetts law the plaintiffs must demonstrate that (1) the parties reached a valid and binding agreement; (2) the defendants' breached the terms of the agreement; and (3) the plaintiffs suffered damages from the breach.
The plaintiffs have shown that there is no material issue of fact concerning any element of their claims. The plaintiffs have submitted the IFIC and US Fire promissory notes with their motion as well as notarized acknowledgment forms for each of the signatories. The defendants do not dispute the authenticity of the notes or the signatures. The parties also agree that the Forbearance Agreement is a valid and binding agreement. The defendants concede that after January 30, 2008 they made no further payments to IFIC or US Fire before or on the maturity date set for repayment in the Forbearance Agreement. Under the terms of the Forbearance Agreement, this constituted an event of default. The plaintiffs have shown damages in the form of the liquidated damages as expressly provided for in the Forbearance Agreement and the notes.
The defendants present two related arguments against granting summary judgment to the plaintiffs. First, the defendants argue that the plaintiffs breached their duty of good faith and fair dealing when they failed to investigate and pursue the Aulson Company's affirmative delay claim against Skanska. Second, the defendants contend that the plaintiffs breached their obligation to mitigate damages by failing to take reasonable steps to generate income from the assets that the Aulson Company had assigned to them, i.e., the Aulson Company's affirmative delay claim against Skanska. Neither of these contentions raises a question of material fact that prevents an award of summary judgment to the plaintiffs.
Under Massachusetts law, every contract contains an implied covenant of good faith and fair dealing.
No provision in the promissory notes or the Forbearance Agreement obligates either IFIC or US Fire to investigate or to pursue the affirmative claims of the Aulson Company that were assigned to the sureties in the indemnity agreements. Moreover, the implied covenant of good faith and fair dealing prohibits one party from doing anything that destroys the right of the other party to enjoy the fruits of the contract. The defendants have not shown that the plaintiffs have acted to deprive the defendants of the benefits they acquired under either the Forbearance Agreement or the notes. Indeed, the defendants have already enjoyed the fruits of the Forbearance Agreement. In consideration for the defendants' promise to repay their indebtedness upon maturity of the promissory notes, the plaintiffs agreed to and for two years did forbear on collecting the debt the defendants owed to the plaintiffs. The plaintiffs also reduced the total amount of the defendants' indebtedness. Thus, the defendants have already enjoyed the fruits of their bargain and now seek to be relieved from performing their obligations. The implied covenant of good faith and fair dealing is not meant to serve such ends.
The defendants cite a host of cases to argue that the plaintiffs have breached a duty of good faith by failing to investigate and pursue the Aulson Company's affirmative delay claim against Skanska. These cases are unpersuasive for a number of reasons. Nearly all of the cases involve claims by sureties against the principals for indemnification. The principals in these cases argued that the surety had failed to act in good faith in investigating and paying the claim for which it sought indemnification. This line of cases is inapposite. Here, the defendants are not contesting the plaintiffs' decision to pay out on claims asserted against the Aulson Company by third-parties for the Aulson Company's breach of the bonded contracts.
Three of the cases cited by the defendants relate to affirmative claims of a principal that are assigned to a surety through an indemnity agreement.
The defendants next suggest that certain language found in the collateral security agreement and the Forbearance Agreement obligated both sureties to investigate and pursue the defendants' affirmative claim against Skanska. The collateral security agreement between US Fire and the US Fire Indemnitors provides that "the Indemnitors assign to the Surety all right, title and interest in . . . all affirmative claims," and that "the Surety has the sole discretion to settle any affirmative claims. . . ." The Forbearance Agreement appoints IFIC as lead surety and gives IFIC
Nothing in this contractual language, however, suggests that either IFIC or US Fire was obligated to investigate and pursue Aulson's affirmative claims; the "power and right" to sue on a principal's affirmative claim does not impose an obligation and responsibility to do so.
The defendants' second affirmative defense is largely repetitive of their first. The defendants argue that summary judgment should be denied because, by failing to investigate and pursue the Aulson Company's affirmative claim for delay against Skanska, the plaintiffs failed to mitigate their damages.
Massachusetts law recognizes a duty to mitigate damages. The Massachusetts Supreme Court has explained:
But, the duty to mitigate has little relevance in the context of a liquidated damages provision. Under Massachusetts law a liquidated damages clause is enforceable "so long as it is not so disproportionate to anticipated damages as to constitute a penalty."
The defendants have not shown that the plaintiffs had any obligation to mitigate damages. The Forbearance Agreement contains an acceleration clause that provides that upon the occurrence of an event of default "all amounts outstanding (with accrued interest thereon, if any) and all other Obligations owing to the Surety under the Debt and Debt Documents" shall be declared due. The parties agree that the unpaid principal due to IFIC under the Forbearance Agreement and IFIC note is 4,264,653.38 and that the unpaid principal due to US Fire under the Forbearance Agreement and US Fire note is $1,422,443.79. The parties also agree that pursuant to the Forbearance Agreement and notes, upon an event of default the defendants are obligated to pay accrued interest on the unpaid indebtedness due to the sureties at the default rate of 9% from the date of default to the entry of judgment. The acceleration clause and the other provisions in the Forbearance Agreement setting the amount due to the sureties are enforceable liquidated damages clauses. These provisions reasonably anticipate the plaintiffs' damages caused by the defendants' refusal to pay off their indebtedness.
The plaintiffs' August 24 motion for Summary Judgment is granted. By December 17, 2012 the plaintiffs shall submit any application for attorney's fees, costs and expenses, along with a proposed judgment.
SO ORDERED