Maryland Federal Court Grants Summary Judgment in Favor of Surety in Indemnity Action and Permits Cause of Action Under Trust Fund Statute

Since the 2004 decision of Atlantic Contracting & Material Co., Inc. v. Ulico Cas. Co., 380 Md. 285 (2004), sureties in Maryland state and federal courts have faced great difficulty obtaining summary judgment in contractual indemnification actions. In reliance upon Atlantic Contracting, Maryland courts consistently require sureties to proceed to trial to prove that losses suffered by the surety were reasonably incurred. However, a recent decision by the U.S. District Court for the District of Maryland indicates that sureties may again have the opportunity to save cost and time through summary judgment and have a right of action under the Maryland Trust Fund Statute (MTFS).

In Argonaut Ins. Co. v. Wolverine Constr. Co., Inc., No. WDQ-11-2741, 2013 WL 5574647 (D. Md. Sep. 13, 2013), a surety filed an action against its principal for contractual indemnification and against its principal’s officer under the MTFS. The surety suffered losses when it paid claims under the performance and payment bonds issued for the principal on a project to construct a chapel. After the surety moved for summary judgment on both claims, the officer cross-moved for summary judgment on the alleged MTFS violation, asserting that the surety was not a “person” damaged by its allegedly improper utilization of contract trust funds.

The court first analyzed the contractual indemnification claim against the principal. Although the surety recovered a portion of its losses by settling the principal’s claim against the owner, the surety was still owed over $500,000 for claims made against its performance and payment bonds. The principal argued that the claimed losses were excessive because the surety failed to aggressively pursue the principal’s claims, settling with the owner for far less than what was owed, and failed to pursue reductions in claims against the payment bond. However, as the principal’s only supporting evidence was a self-serving estimate of the value of its claims, which the court concluded was speculative, the court found the principal had no legitimate defense to summary judgment. The principal also argued that the attorney’s fees incurred by the surety were excessive and unnecessary because the principal had consistently cooperated with the surety in resolving the owner and subcontractor claims. The court rejected this challenge, noting that the principal’s continued objection to the surety’s indemnification rights was sufficient to award counsel fees. Further, although the court determined that the surety had the burden to prove the reasonableness of the attorney’s fees, the court found that the surety met this burden by submitting itemized billing statements for fees at reasonable hourly rates under the local rules. The principal’s general objection that the fees were excessive and unnecessary was not sufficient to defeat summary judgment or require any reduction.

The court then turned to the surety’s MTFS claim against the principal’s officer. The MTSF provides that an officer of a contractor who knowingly retains or uses trust funds for other purposes “shall be personally liable to any person damaged by the action.” Although the court denied summary judgment to both parties, it found that the surety had a viable cause of action against the officer under the statute because the surety suffered losses paying subcontractors under its payment bond. The court found there was a genuine dispute as to whether the officer had the requisite actual knowledge of the misappropriations to justify imposing liability under the statute.

For these reasons, the court granted summary judgment in favor of the surety on its claim for contractual indemnification, and permitted the surety to proceed to trial on the MTFS claim. Although the MTFS claim has yet to proceed to trial, the Argonaut decision is perhaps evidence that the Maryland federal courts have become less reluctant to deny sureties the time and cost savings of summary judgment in contractual indemnity actions. Furthermore, the ruling confirms a surety has a potential additional remedy under the MTSF when a principal fails to pay subcontractors.

Categories: Legal Updates