Description
Book SynopsisThis is a comprehensive examination of the Surety's Indemnity Agreement, the first publication of its kind; providing a description of the Surety's Indemnity Agreement's provisions along with a discussion of the cases that have interpreted those provisions. In addition, the book provides practice pointers assisting practitioners in the enforcement of the surety's rights under the Indemnity Agreement. Both the footnotes in the book and the bibliographies attached cite numerous cases and published and unpublished papers that concern the development and analysis of the surety's rights under the Indemnity Agreement.
In addition to updating the law and adding as many case citations and articles about the surety's Indemnity Agreement as possible, this new edition has been updated with the new cases related to surety indemnity agreements handed down since the FSLC published the Second Edition in 2013.
Table of ContentsTABLE OF CONTENTS
Preface .....................................................................................................iii
Editors and Authors .................................................................................. v
Chapter I
INTRODUCTION TO THE SURETY’S RIGHTS AS THE
FOUNDATION FOR THE INDEMNITYAGREEMENT....................... 1
A. Background and Summary........................................................... 1
1. The Nature of Suretyship ...................................................... 2
2. Comparison with Insurance: The Extension of Credit Concept and Other Distinctions ............................................ 4
a. Underwriting Issues and Considerations ........................ 7
b. It is the Surety’s Hope and Expectation that It Will
Suffer No Loss ................................................................ 8
B. The Surety’s Common Law and Statutory Rights ....................... 9
1. The Surety’s Common Law Right to Protection from Loss:
Exoneration ........................................................................... 9
2. The Surety’s Common Law and Statutory Rights to
Reimbursement.................................................................... 10
3. The Surety’s Subrogation Rights and the Indemnity
Agreement ........................................................................... 15
a. The Surety’s Subrogation Rights—Basis at Law and in Equity............................................................................ 15
b. The Surety’s Subrogation Rights—Practice and Effect 19
(i) The Surety’s Subrogation to the Obligee’s Rights . 19
(ii) The Surety’s Subrogation to the Principal’s Rights21
(iii) The Surety’s Subrogation to the Rights of
Subcontractors and Suppliers ................................. 22
(iv) The Property Subject to the Surety’s Subrogation
Rights ..................................................................... 22
c. Comparing and Contrasting the Surety’s Subrogation Rights to the Surety’s Reimbursement Rights Under the Indemnity Agreement ................................................... 23
(i) Advantages of Subrogation in Comparison with
......................................................... 24
d. The Effect of the Surety’s Rights Under Its Indemnity Agreement on Subrogation–Selection and Election of Rights ............................................................................ 25
C. Conclusion ................................................................................. 26
Chapter II
CREATION OF THE RELATIONSHIP AMONG THE SURETY, THE PRINCIPAL, AND THE INDEMNITORS—WHO AND HOW .......... 29
A. The Parties to the Indemnity Agreement and its Execution....... 29
1. Principal and Indemnitors ................................................... 29
a. Individuals .................................................................... 30
b. Corporation ................................................................... 31
(i) Subchapter C Corporations .................................... 31
(ii) Subchapter S Corporations..................................... 35
(iii) Holding Company .................................................. 36
c. Limited Liability Company .......................................... 36
d. Partnership .................................................................... 38
(i) General Partnerships .............................................. 39
(ii) Limited Partnerships .............................................. 40
(iii) Limited Liability Partnership ................................. 41
e. Joint Venture................................................................. 42
(i) Multiple Purpose/Multiple Projects........................ 42
(ii) Single Purpose/Single Project Joint Venture.......... 44
f. ESOP (Employee Stock Ownership Plans)................... 44
g. Foreign Entity ............................................................... 45
(i) Foreign Corporations.............................................. 45
(ii) Foreign Sovereigns................................................. 46
(iii) Sovereign Tribal Nations ....................................... 47
(iv) Tribal Affiliates/Entities......................................... 50
(v) Alaska Native Corporations ................................... 51
h. Trust/Trust Beneficiaries .............................................. 51
(i) Testamentary Trust................................................. 52
(ii) Business Trusts....................................................... 53
(iii) Asset Protection/Spendthrift Trusts ....................... 54
(iv) Family or Special Interest Trust ............................. 55
xii
2. Surety .................................................................................. 55
a. Corporate Surety ........................................................... 56
b. Personal Surety ............................................................. 56
c. Compensated Surety ..................................................... 56
d. Uncompensated Surety ................................................. 57
e. Co-Surety ...................................................................... 57
(i) Contractual Co-Surety............................................ 57
(ii) Successor/Predecessor Surety ................................ 58
f. Reinsurer....................................................................... 59
g. Surety in Receivership .................................................. 60
h. Surety in Liquidation .................................................... 61
3. Signatures and Requirements for Signature ........................ 61
a. Execution by All Parties ............................................... 61
b. Notarial Acknowledgment ............................................ 62
(i) Purpose (Forged Signatures) .................................. 62
(ii) Protections (Notary Liability) ................................ 63
c. Corporate Resolution .................................................... 64
d. Need for Original Signature.......................................... 65
4. Surety’s Acceptance—By Writing Bonds........................... 65
B. The Principal’s and the Indemnitors’ Representations and
Warranties .................................................................................. 65
1. The Right, Power, and Authority to Execute and Perform the Indemnity Agreement.......................................................... 65
2. The Financial Information Provided to the Surety .............. 67
a. Right to Have Access to Principal’s and Indemnitors’
Books and Records ....................................................... 68
b. Right to Financial Information from Third Parties ....... 68
3. Acknowledgment that There are No Oral or Other Agreements as a Condition Precedent or to Induce the Execution of the Indemnity Agreement. ............................. 72
C. Consideration ............................................................................. 75
D. Severability and Partial Execution............................................. 79
1. Severability of Invalid, Illegal, Void, or Unenforceable Provisions of the Indemnity Agreement.............................. 80
2. Partial Execution of the Indemnity Agreement ................... 82
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a. One or More Parties Fails to Execute the Indemnity Agreement..................................................................... 82
E. The Execution of the Indemnity Agreement by One or More Parties is Defective or Invalid for Any Reason ......................... 82
F. Multiple Indemnity Agreements ................................................ 84
1. With the Same Surety.......................................................... 85
2. With Two or More Sureties................................................. 86
G. The Bonds Included Under the Indemnity Agreement .............. 87
1. Bonds Executed On or After the Date of the Indemnity Agreement ........................................................................... 87
2. Bonds Executed Prior to the Date of the Indemnity Agreement ........................................................................... 88
H. The Surety’s Right to Decline to Execute Bonds ...................... 91
1. The Principal is Not Obligated to Obtain Bonds from the Surety .................................................................................. 91
2. The Surety’s Right to Decline to Execute Any New Bonds 92
3. The Surety’s Right to Decline to Execute Any Final Bonds
............................................................................................. 92
4. Bid Bond Losses Where Final Bonds Not Issued ............... 95
5. Surety Liability for Defective or Rejected Bonds ............... 95
I. The Rights of Other Sureties, Co-Sureties, and Reinsurers ....... 96
J. Termination of the Indemnity Agreement Relationship ............ 98
1. The Indemnity Agreement as a Continuing Obligation ...... 98
2. Method of Termination ..................................................... 100
a. Written Notice Required ............................................. 100
b. Delivery of Written Notice to the Surety–Manner ..... 101
c. Time Conditions—Termination Effective Date.......... 102
3. Effectiveness of Termination with Respect to the Bonds . 102
a. Bonds Executed Prior to the Termination Effective Date
.................................................................................... 102
b. Bonds Executed After the Termination Effective Date
.................................................................................... 103
c. Future Liability for Additional Bonds Executed After the Termination Effective Date ........................................ 104
4. Continuing Liability of Non-Terminating Indemnitors..... 104
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5. Termination By Operation of Law (Voiding of a Bond or Bonded Contract and its Effect on the Indemnity Agreement)
........................................................................................... 104
6. Disputes Between the Principal and the Indemnitors and/or Among the Indemnitors..................................................... 105
Chapter III
DOCUMENTS AND AGREEMENTS RELATED TO THE INDEMNITY AGREEMENT .............................................................. 107
A. The Surety’s Agreements with the Principal and Indemnitors 108
1. Subsequent Indemnity Agreements................................... 108
2. Subordination Agreements ................................................ 109
a. Subordination of Debt to and from Affiliate Entities . 110
b. Indemnitor Loans as Subordinated Debt .................... 112
3. Collateral Agreements ....................................................... 112
4. Capital Retention Agreements........................................... 112
5. Tribal Addenda.................................................................. 114
6. Funds Control Agreements................................................ 121
a. Joint Account Agreements.......................................... 122
b. Trust Agreements........................................................ 123
c. Third-Party Funds Control Agreements ..................... 125
d. Cash Collateral Agreements ....................................... 126
7. Lending, Financing, Security Type Agreements ............... 130
a. Direct Lending ............................................................ 130
b. Indirect Lending.......................................................... 131
8. Underwriting Agreements ................................................. 132
9. Standstill Agreements ....................................................... 136
10. Opinions of Counsel.......................................................... 137
11. Confidentiality Agreements .............................................. 138
B. Collateral for the Surety........................................................... 138
1. What Kinds of Collateral................................................... 138
a. Irrevocable Letter of Credit ........................................ 138
(i) Issuing Entity Requirements–Capacity and Format
.............................................................................. 139
(ii) Evergreen (Automatically Renewable) Clause. ... 140
b. Certificates of Deposit/Demand Deposit Accounts .... 141
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c. Real Property .............................................................. 141
d. Personal Property ........................................................ 142
(i) Equipment ............................................................ 143
(ii) Inventory and Materials ....................................... 143
(iii) Stocks and Bonds ................................................. 144
(iv) General Intangibles .............................................. 144
(v) Intellectual Property (e.g., Patents) ...................... 144
(vi) Life Insurance (e.g., Key Personnel) .................... 145
2. Priority Rights in the Collateral......................................... 146
a. Prior Liens .................................................................. 146
b. Subordination Agreements ......................................... 146
3. Acquiring the Collateral—Means and Methods................ 147
a. Real Property–Mortgages and Deeds of Trust ............ 147
b. Personal Property ........................................................ 148
(i) Assignment or Security Agreement ..................... 148
(ii) Attachment ........................................................... 150
(iii) Types of Security Agreements ............................. 150
4. Perfection .......................................................................... 152
a. Filing a UCC-1 Financing Statement.......................... 152
b. Possession of the Collateral ........................................ 152
c. Control ........................................................................ 153
d. Automatic Perfection upon Attachment ..................... 153
e. Other Required Filings (Examples Only) ................... 153
5. Losing the Collateral ......................................................... 154
a. Failing to Obtain Perfected Lien Rights in the Collateral 154
b. Failing to Maintain the Collateral ............................... 154
c. Third Party Actions Taken Against the Collateral...... 155
(i) Senior Lien Creditors ........................................... 155
(ii) Debtors/Trustees in Bankruptcy ........................... 155
(iii) Others (e.g., Taxing Authorities and Judgment Creditors).............................................................. 157
d. Failing to Insure the Collateral ................................... 158
6. Realizing on the Collateral and Application of the Collateral
Proceeds to the Surety’s Loss............................................ 158
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a. By Contract (Indemnity Agreement, Separate Collateral Agreement, Settlement Agreement, or Other) ............ 158
b. Allocation of Collateral and Its Proceeds By Operation of Law ......................................................................... 161
7. Releasing the Collateral .................................................... 162
a. Satisfactory Evidence of the Surety’s Release and
Discharge From All of its Liabilities under the Bonds162
b. Payment of All of the Surety’s Losses........................ 163
C. The Surety’s Agreements with Entities with Whom the Principal
and/or Indemnitors Have Relationships................................... 163
1. Inter-Creditor Agreements ................................................ 163
2. Subordination Agreements ................................................ 168
3. Guarantees in Favor of Existing Lenders; Guarantees Supporting New Credit...................................................... 169
4. Equipment, Facility, and Intellectual Property Utilization Agreements........................................................................ 169
5. Joint Venture Applications and Related Agreements........ 171
D. The Surety’s Agreements with Entities with Whom the Surety
has Relationships ..................................................................... 171
1. Reinsurance ....................................................................... 171
2. Co-Surety .......................................................................... 173
a. Single Indemnity Agreement for the Co-Sureties....... 174
b. Multiple Indemnity Agreements for the Co-Sureties.. 175
c. Co-Surety Side Agreement Among the Sureties Only 175
(i) Percentages........................................................... 178
(ii) Lead Surety .......................................................... 179
(iii) Solvency Issues .................................................... 180
d. Accommodation Surety .............................................. 180
e. Fronting Agreements .................................................. 181
3. The Guiding Claim Procedures ......................................... 181
Chapter IV
LIABILITY OF THE PRINCIPAL AND INDEMNITORS TO INDEMNIFY AND REIMBURSE THE SURETY ............................. 187
A. The Liability of the Principal and Indemnitors ........................ 189
1. What is a “Principal”? ....................................................... 189
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2. Who can be a “Principal”? ................................................ 190
a. Individuals .................................................................. 190
b. Corporations or Limited Liability Companies ............ 191
c. Partnerships, Limited Liability Partnerships, Joint Ventures, or Their Partners ......................................... 192
3. What is an “Indemnitor”?.................................................. 192
4. Who can be an “Indemnitor”? ........................................... 192
a. Individuals .................................................................. 192
b. Corporation or Limited Liability Company ................ 194
c. Partnership, Limited Liability Partnership, Joint Venture, or Their Partners ......................................................... 195
d. Trust/Trust Beneficiaries ............................................ 195
5. The Joint and Several Liability of the Principal and the Indemnitors to the Surety .................................................. 196
B. The Reimbursement and Indemnification of the Surety .......... 197
1. Indemnification Against Liability ..................................... 199
2. Indemnification Against Loss ........................................... 201
C. The Basis for the Surety’s Claim for Reimbursement ............. 202
1. The Surety Incurs Loss in Connection With Any Bonds .. 208
2. The Surety’s Execution, Procurement, Renewal, or
Continuation of Any Bonds............................................... 209
3. The Failure of the Principal and the Indemnitors to Comply With Obligations under the Indemnity Agreement ........... 212
4. The Surety’s Enforcement of Its Rights under the Indemnity
Agreement ......................................................................... 213
D. The Surety’s Loss—Types of Damages for Which the Surety Seeks Reimbursement (Indemnification)................................. 214
1. Unpaid Premiums .............................................................. 214
2. The Surety’s Payment of Claims....................................... 215
3. The Surety’s Advances and Loans .................................... 218
4. Interest ............................................................................... 219
5. Recovery of Attorneys’ Fees ............................................. 220
a. Requirement that “All” Fees are Recoverable ............ 222
b. Requirement that Fees Must be Necessary and Incurred in Good Faith .............................................................. 223
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c. Requirement that Fees Must be Reasonable ............... 224
d. The Principal’s Offer to Defend ................................. 228
6. Expenses............................................................................ 231
7. Bad Faith Claims ............................................................... 234
Chapter V
THE SURETY’S ENFORCEMENT OF ITS RIGHTS OF
REIMBURSEMENT (INDEMNITY) .................................................. 237
A. Initial Steps Sureties Take to Enforce Their Reimbursement (Indemnity) Rights ................................................................... 237
1. Reviewing the Underwriting File ...................................... 237
2. Obtaining Asset, Lien, and Internet Searches ................... 240
3. Sending Notice and/or Demand to Principal and Indemnitors
........................................................................................... 240
B. Initial Steps Sureties Take Under the Indemnity Agreement .. 242
1. Perfecting Security Interests.............................................. 242
2. Making a Collateral Demand ............................................ 244
3. Using the Authorizations in the Indemnity Agreement..... 247
C. Filing Suit Against the Principal and/or the Indemnitors ........ 249
1. Surety’s Right to Bring Separate Suits.............................. 249
a. Suits Against Separate Individuals or Entities............ 249
(i) Suits Against the Surety’s Principal ..................... 249
(ii) Suits Against the Surety’s Indemnitors ................ 251
b. Suits for Separate Surety Losses................................. 253
(i) Direct Suits Against the Principal and/or Indemnitors .......................................................... 253
(ii) Cross-Claims and Third-Party Claims. ................ 256
2. Third-Party Beneficiary Provisions................................... 257
3. Personal Jurisdiction and Joinder Provisions .................... 258
4. Venue for Suit Provisions ................................................. 262
5. Service of Process Provisions ........................................... 264
6. Confession of Judgment Provision.................................... 264
7. Choice of Governing Law Provision................................. 268
8. Waiver of Trial by Jury ..................................................... 269
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D. Filing a Claim Against an Indemnitor’s Probate Estate Upon
Death of the Indemnitor ........................................................... 271
E. Standards of Proof ................................................................... 273
1. Generally ........................................................................... 273
2. Subjective Good Faith of Surety Generally Sufficient ...... 275
3. Principal Non-Liability Generally Not a Defense ............. 278
4. Good Faith; Protection of Surety’s Interests ..................... 280
5. Good Faith and Objective Reasonableness ....................... 281
F. The Burden of Proof ................................................................ 284
G. The Surety’s Settlement with One or More Indemnitors ......... 294
Chapter VI
THE SURETY’S ENFORCEMENT OF ITS RIGHTS TO
COLLATERAL FROM THE PRINCIPAL AND THE INDEMNITORS
.............................................................................................................. 295
A. Common Law and Equitable Rights of Enforcement .............. 295
1. Quia timet .......................................................................... 297
2. Exoneration ....................................................................... 302
B. Specific Performance of the Surety’s Rights to Demand
Collateral under the Indemnity Agreement.............................. 303
1. The Surety’s Rights ........................................................... 303
2. The Surety’s Remedy ........................................................ 308
C. Specific Performance of the Surety’s Trust Fund Rights under
the Indemnity Agreement ........................................................ 311
1. The Trust Fund Provision.................................................. 311
2. Legal Recognition of the Trust.......................................... 314
a. Manifestation of Intent to Create a Trust .................... 315
b. Ascertainable Trust Res .............................................. 317
c. Identification of Beneficiaries .................................... 320
d. Identification of a Trustee........................................... 320
e. Making Sense of the Myriad of Rulings ..................... 321
3. Specific Performance As a Remedy .................................. 323
4. Effective Use of the Trust Fund Provision ........................ 325
D. The Surety’s Assignment Rights ............................................. 327
1. The Surety’s Rights ........................................................... 327
xx
a. Origin and Nature of the Assignment Rights.............. 327
b. The Property Rights Assigned .................................... 329
c. Right to Contract Funds .............................................. 331
d. Right to Equipment and Materials .............................. 331
e. Right to Principal’s Subcontracts and Claims ............ 332
(i) Right to Settle Claims Involving the Principal..... 333
(ii) Right to Recover Costs and Expenses .................. 334
(iii) Right to Offset ...................................................... 334
f. Right to Licenses, Patents, Copyrights, or Trade Secrets
.................................................................................... 334
g. Right to Other Property (i.e., General and Limited Partnership Interests, Tax Refunds, General Intangibles, Claims Under Insurance Policies)............................... 335
h. Right to Real Property ................................................ 335
2. The Surety’s Remedy ........................................................ 335
a. The Indemnity Agreement as Security Agreement..... 335
b. The Indemnity Agreement as a UCC-1 Financing Statement .................................................................... 336
c. The Effective Date of the Assigned Rights................. 339
d. Enforcement of the Surety’s Assignment Rights........ 340
e. The Non-Waiver of the Surety’s Other Contractual,
Legal, and Equitable Rights........................................ 341
Chapter VII
THE INDEMNITY AGREEMENT AND THE HANDLING OF SURETY CLAIMS ............................................................................... 343
A. The Surety’s Investigation Into the Books and Records of the
Principal and the Indemnitors .................................................. 343
1. Access to Principal and Indemnitors’ Books and Records 343
a. In general .................................................................... 343
b. Purposes ...................................................................... 344
c. Enforcement................................................................ 346
2. The Surety’s Right to Information from the Principal or
Indemnitors........................................................................ 348
3. Access to Information from Third Parties ......................... 350
xxi
4. The Principal’s and the Indemnitors’ Obligation to Maintain or Furnish Surety with Accurate Books and Records or Information........................................................................ 352
5. The Surety’s Right to Furnish Information to Third Parties
........................................................................................... 353
6. The Surety’s Investigation at the Bonded Project Site ...... 354
7. The Principal’s Turnover of Books and Records to the Surety Upon the Occurrence of a Default under the Indemnity Agreement........................................................ 354
B. The Surety’s Rights to Settle Claims Against Bonds .............. 355
1. Principal and Indemnitors’ Obligation to Notify Surety of
Claims ............................................................................... 355
2. The Surety’s Investigation ................................................ 356
3. The Surety’s Right to Settle Claims Against Its Bonds .... 356
4. Effect of a Prima Facie Provision on the Surety’s Right to
Settle.................................................................................. 363
5. Indemnitors’ Option to Post Collateral ............................. 366
a. Effect of Failure to Deposit Collateral........................ 367
b. Nature and Amount of Collateral................................ 369
c. The Duty of Good Faith.............................................. 370
d. The Surety’s Duty to Notify Principal and Indemnitors
.................................................................................... 373
e. The Surety’s Investigation of Claims and Assertion of
Defenses...................................................................... 375
6. The Duty to Cooperate ...................................................... 379
7. The Surety’s Right to Settle the Principal’s Affirmative
Claims ............................................................................... 380
a. The Surety’s Duty of Good Faith ............................... 385
b. The Uniform Commercial Code Commercially Reasonable Standard................................................... 385
C. Specific Provisions in the Indemnity Agreement Applicable to Performance Bond Claims ....................................................... 389
1. The Surety’s Advances or Loans to the Principal ............. 389
a. The Surety’s Right to Advance Money to the Principal
.................................................................................... 390
xxii
b. The Surety’s Absolute Right to Cancel any Bank Guarantee or Cease Advancing or Lending Money to the Principal ...................................................................... 391
c. The Surety’s Advances as a Loss ............................... 391
2. The Surety’s Takeover Rights ........................................... 392
a. When the Surety’s Takeover Rights May be Exercised
.................................................................................... 393
b. The Substance of the Surety’s Takeover Rights ......... 394
3. The Surety’s Assignment Rights to the Contract Balances and to the Use of the Principal’s Subcontractors and Suppliers............................................................................ 395
a. Receipt of the Contract Monies from the Obligee for the Performance of the Work............................................ 395
b. Use of the Principal’s Subcontractors and Suppliers .. 398
Chapter VIII
COMPLEMENTARY PROVISIONS OF THE INDEMNITY AGREEMENT ...................................................................................... 401
A. The Obligee Refuses to Accept a Bond ................................... 401
B. Additional Obligations of the Principal and the Indemnitors to the Surety ................................................................................. 402
1. Obligation and/or Right to Obtain the Release and Discharge of the Bonds ...................................................................... 402
a. By the Principal and the Indemnitors ......................... 402
b. Rights of the Surety .................................................... 403
2. The Principal and Indemnitors’ Agreement to Subordinate
Certain Claims to the Surety’s Rights ............................... 404
a. Claims of Indemnity and/or Contribution by the Principal and Indemnitors Against Each Other .......... 405
b. Loans Between Principal and Indemnitors ................. 405
3. Notice Obligations of the Principal and Indemnitors ........ 405
4. The Indemnitors’ Obligation to Know the Status of the Principal’s Financial Condition and the Bonded Contracts
........................................................................................... 406
C. Changes or Modifications ........................................................ 407
1. Changes in the Bonds and Underlying Bonded Contracts 407
2. Changes in the Indemnity Agreement ............................... 410
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D. Notices ..................................................................................... 411
1. Manner and Method .......................................................... 411
2. The Principal and the Indemnitors’ Notice to the Surety of
Claims or Demands ........................................................... 413
E. Waivers and Non-Waivers ....................................................... 413
1. The Principal’s and the Indemnitors’ Waivers and Non- Waivers.............................................................................. 413
a. Claims Against the Surety .......................................... 413
b. Notices and Defenses.................................................. 415
2. The Surety’s Waivers and Non-Waivers........................... 418
a. The Surety Accepts, Fails to Obtain, or Releases Other Indemnity Agreements................................................ 419
b. The Surety Releases One or More of the Indemnitors 420
c. The Surety Accepts, Fails to Obtain, or Releases Collateral..................................................................... 421
d. The Surety Delays in Exercising its Rights ................ 422
3. The Indemnitors’ Waiver of Their Homestead Rights and
Other Exemptions.............................................................. 424
4. The Indemnitors’ Waiver of Their Rights to Jury Trial .... 426
5. Election of Venue and Choice of Law .............................. 428
F. Other Surety Rights ................................................................. 430
1. Power of Attorney for the Principal and the Indemnitors . 430
2. Confession of Judgment .................................................... 433
3. Miscellaneous Other Rights and Remedies ....................... 437
a. Surety’s Rights in Addition to Other Rights............... 437
b. Surety’s Exhaustion of Its Rights and Remedies ........ 438
c. No Election of the Surety’s Rights and Remedies...... 439
d. The Surety Shall Have Every Right, Remedy, or Defense that a Personal Surety Without Compensation Would Have ............................................................................ 440
e. The Indemnity Agreement Shall be Liberally Construed to Protect, Exonerate, and Indemnify the Surety ........ 441
Chapter IX DEFENSES........................................................................................... 443
A. Defenses Common to Both the Principal and the Indemnitors 444
xxiv
1. Disputes Over the Execution of the Indemnity Agreement
........................................................................................... 444
2. The Indemnitors’ Failure to Sign or Understand the
Indemnity Agreement........................................................ 445
3. The Principal and the Indemnitors Contend That They Are Not Liable for Payments Made by the Surety ................... 446
a. The Surety’s Failure to Make Payment in Good Faith450
b. The Surety’s Payment Is Not Reasonable................... 457
c. The Surety Acted in Bad Faith ................................... 459
4. Release of the Indemnitors ................................................ 460
5. Lack of Notice to the Indemnitors..................................... 460
6. Waiver by Surety............................................................... 462
7. The Surety’s Failure to Write Additional Bonds for the
Principal ............................................................................ 463
8. The Surety’s Failure to Finance the Principal ................... 464
9. Lack of Venue for Bringing Suit and/or Lack of Service of Process............................................................................... 465
10. Termination of the Indemnity Agreement ......................... 467
11. Novation and Successive Indemnity Agreements ............. 469
12. Mitigation of Damages ...................................................... 469
13. Failure of the Principal to Execute a Bond Issued by the Surety ................................................................................ 471
14. Material Change ................................................................ 472
15. No Proper Default by the Obligee ..................................... 474
16. Tortious Interference with Contract .................................. 474
17. Abuse of Rights/Domination............................................. 476
18. Suretyship vs. Insurance.................................................... 476
19. Contracts of Adhesion ....................................................... 478
20. Restraint of Trade.............................................................. 479
21. Fiduciary Duty................................................................... 479
22. Electronic Signatures......................................................... 480
23. Statute of Limitations ........................................................ 481
24. Death of Indemnitor .......................................................... 482
25. Improper Exemptions ........................................................ 482
B. Defenses Commonly Asserted Only By The Indemnitors ....... 483
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1. Lack of Consideration ....................................................... 483
2. Surety’s Failure to Adequately Pursue the Principal......... 484
3. The Surety’s Knowledge of the Indemnitor’s Divorce ..... 484
4. The Surety’s Knowledge of the Sale of the Principal’s
Business............................................................................. 485
Chapter X
THE INDEMNITY AGREEMENT IN COMMERCIAL SURETY SETTINGS............................................................................................ 487
A. Types of Commercial Surety Bonds ........................................ 488
1. Judicial Bonds ................................................................... 489
2. Fiduciary Bonds/Probate Bonds ........................................ 491
3. License and Permit Bonds ................................................. 492
4. Statutory Bonds ................................................................. 494
5. Release/Discharge Bonds .................................................. 495
6. Commercial Surety Performance Bonds ........................... 496
a. Subdivision Bonds............................................................. 496
b. Reclamation Bonds ........................................................... 497
c. Other Performance Type Commercial Surety Bonds ........ 497
7. Non-Statutory Guaranty and/or Faithful Performance Bonds
........................................................................................... 498
8. Public Official Bonds ........................................................ 498
B. Underwriting the Risk of Commercial Surety Bonds .............. 499
1. The Basic Principles of Underwriting—The Three “Cs” .. 499
2. The Principal’s Character .................................................. 499
3. The Principal’s Capacity ................................................... 500
4. The Principal’s Cash/Capital............................................. 500
5. The Principal’s Collateral.................................................. 501
C. Issues Regarding Surety’s Exposure........................................ 503
1. Penal Sum Issues ............................................................... 503
2. Length of Performance under Bonded Obligation ............ 504
3. Modifications to the Bonded Obligation ........................... 505
a. Renewal Bonds ........................................................... 505
b. Cancellation ................................................................ 505
D. Indemnity Agreement Considerations ..................................... 506
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1. Types of Commercial Surety Bond Indemnity Agreements
........................................................................................... 506
2. The Long Form Indemnity Agreement ............................. 508
a. Broad Definition of Principal / Indemnitor................. 509
b. The Right to Cross-Indemnity Between Indemnitors . 511
c. Release and Discharge Rights..................................... 511
d. Collateral..................................................................... 512
e. Place in Funds Rights ................................................. 513
f. The Right to Decline and/or Renew Existing Bonds .. 514
g. Cancellation Rights..................................................... 515
h. Non-Impairment of Surety’s Rights ........................... 516
i. Access to Financial Information ................................. 517
j. Interest Provision ........................................................ 518
3. Differences Between Commercial Surety and Contract Surety Bond Indemnity Agreements: The Lack of Certain Key Provisions Typically Found in Contract Surety Bond Indemnity Agreements ...................................................... 518
a. Lack of Takeover Provisions ...................................... 518
b. Lack of Trust Fund Provisions.................................... 519
c. Lack of Power of Attorney Provisions ....................... 519
d. Lack of Advance or Financing Provisions.................. 519
e. Lack of Assignment and UCC Provisions .................. 520
E. Collateral Agreement and Other Considerations ..................... 520
1. Collateral Agreement ........................................................ 520
2. Subordination and Intercreditor Agreements .................... 523
F. Enforcement Issues .................................................................. 524
1. Preliminary Injunctions and Temporary Restraining Orders
........................................................................................... 524
a. The Elements of Injunctive Relief .............................. 526
b. Distinction Between a Preliminary Injunction and Temporary Restraining Order ..................................... 527
c. Examples of Injunctive Relief Awarded to Commercial Bond Sureties.............................................................. 527
2. Liens .................................................................................. 529
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a. Surety’s Enforcement Rights under the Uniform
Commercial Code ....................................................... 529
3. Bankruptcy ........................................................................ 531
a. Bankruptcy and the Effects on the Commercial Bond
Surety’s Collateral ...................................................... 531
b. Fundamental Bankruptcy Principles ........................... 532
c. Pertinent Commercial Surety Bond Indemnity Agreement and Collateral Agreement Provisions Related to Bankruptcy.............................................................. 533
d. Property of the Bankruptcy Estate as it Relates to Differing Types of Collateral...................................... 534
(i) Property of the Bankruptcy Estate........................ 535
(ii) Types of Collateral and Bankruptcy Considerations
.............................................................................. 536
(iii) Debtor’s Property as the Surety’s Collateral and its
Use........................................................................ 538
Chapter XI
THE INDEMNITY AGREEMENT IN BANKRUPTCY .................... 541
A. Bankruptcy and the Surety’s Rights under the Indemnity
Agreement................................................................................ 541
1. The Concepts..................................................................... 541
a. Breathing Space .......................................................... 541
b. Sharing ........................................................................ 542
c. Forgiveness of Indebtedness ....................................... 542
2. The Effect of Fundamental Bankruptcy Principles on the Indemnity Agreement........................................................ 543
a. The Automatic Stay (“Breathing Space”)................... 543
b. Preference Liability (“Sharing”) ................................. 544
c. Discharge (“Fresh Start”)............................................ 546
B. The Effect of Bankruptcy upon the Surety’s Rights under the
Indemnity Agreement—Specific Topics ................................. 547
1. The Assertion of Indemnity Rights in the Bankruptcy Case -
The Surety’s Proof of Claim ............................................. 547
a. Types of Claims a Surety May Hold .......................... 549
b. Contents of Surety’s Proof of Claim........................... 550
c. The Contingent Claim in Bankruptcy ......................... 551
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2. Prima Facie Provision and Effect upon Burden of Proof in Bankruptcy ........................................................................ 553
3. Right to Settle Claims–Bankruptcy Cases......................... 555
4. Right to Recover Attorneys’ Fees in Bankruptcy.............. 556
5. Non-Dischargeability ........................................................ 558
a. Trust Fund................................................................... 558
b. Representations and Warranties Provision in the Indemnity Agreement ................................................. 563
6. Access to Documents ........................................................ 565
C. Use or Restrictions of Bonded Contract Funds........................ 567
1. The Perennial Battle—Are the Bonded Contract Funds Property of the Debtor’s Estate or Are They Subject to the Surety’s Subrogation Rights? ............................................ 567
2. Indemnity Agreement Provisions that Support the Surety’s
Traditional Equitable Right to Contract Funds ................. 571
a. The Trust Fund Provision ........................................... 571
b. Assignment of Contract Consideration ....................... 574
D. Surety’s Use or Control of the Debtor’s Property Other Than
Bonded Contract Funds ........................................................... 576
1. Right of Takeover to Complete a Bonded Project............. 576
a. Requirement of Principal’s Default ............................ 577
b. Ipso Facto Clauses ...................................................... 578
c. Acceptance/Rejection of the Bonded Contract ........... 580
2. Assertion of Control over Debtor’s Equipment and
Subcontracts ...................................................................... 582
a. Tools and Equipment .................................................. 582
b. Subcontractors and Suppliers...................................... 583
3. Taking Control or Compromising Debtor’s Affirmative Claims ............................................................................... 584
4. Surety’s Collateral............................................................. 585
E. Post-Petition Financing and Extension of Surety Credit ......... 588
1. Stay Relief and Rights Afforded under the Indemnity Agreement ......................................................................... 589
2. Post Petition Indemnity Agreement .................................. 590
F. Surety’s Right to Decline, Cancel, or Not Renew Bonds ........ 591
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1. Right to Decline ................................................................ 591
2. Right to Cancel.................................................................. 593
3. Right to Non-Renew.......................................................... 597
G. Bankruptcy Court Treatment of Indemnity Agreements in Chapter 11 Plans ...................................................................... 598
BIBLIOGRAPHY................................................................................. 601
APPENDIX OF CASES BY JURIDICTION ....................................... 623
