By Brian Kantar and Jase A. Brown of Chiesa Shahinian & Giantomasi PC
Originally published in the October 2023 Surety Claims Institute Newsletter
Pickard & Butters Constr., Inc. v. Buttonwillow Recreation & Parks Dist., 2023 WL 4842047 (Cal. Ct. App. July 28, 2023).
The surety issued payment and performance bonds on behalf of Pickard & Butters Construction, Inc. (PBC) in connection with numerous projects, including a public works project for the update of a 12-acre park in Buttonwillow, an unincorporated area in Kern County (the Buttonwillow Project), for the Buttonwillow Recreation and Park District (District).
As is customary, PBC and its principals, Mark Butters and Dana Butters, executed an indemnity agreement in favor of the surety. The indemnity agreement included an assignment clause whereby in the event of a default, the indemnitors agreed to assign their rights to the surety. A “default” was deemed to occur when the surety received notice of a claim, the principal breached or defaulted under a bonded contract, or when the indemnitors failed to deposit collateral security with the surety upon demand. The indemnity agreement also included a power of attorney clause that permitted the surety to execute any compromise of claims or releases in settlement on behalf of the PBC indemnitors.
In April 2015, the surety began to receive claims on several of the principal’s projects, including claims on the Buttonwillow Project. Over the principal’s objection to many of the claims, the surety paid out more than $1.3 million across all of the bonded projects, including $14,237.08 for a claim on the Buttonwillow Project.
In May 2015, PBC filed suit against the District in connection with the Buttonwillow Project seeking contract and delay damages and statutory prompt payment penalties (the Buttonwillow Case). On March 11, 2016, the surety made a collateral demand to the indemnitors for $1.4 million. After PBC failed to comply with the demand, the surety filed suit against the indemnitors in December 2018 (the Indemnity Case).
The Buttonwillow Case proceeded to bench trial and resulted in a judgment in PBC’s favor in the amount of $27,556.53. PBC appealed, and the judgment was reversed and remanded for a retrial. Retrial was set for April 25, 2022, and in its pre-trial brief, PBC sought more than $1.6 million in damages from the District. Without PBC’s knowledge, and in accordance with its assignment and attorney-in-fact rights under the indemnity agreement, the surety entered into settlement negotiations with the District and settled the Buttonwillow Case in January 2022 for $77,556.53, in exchange for a dismissal of the case. PBC, however, objected to the settlement and refused to dismiss the case.
The surety then filed a motion to enforce the settlement. In support of the motion, the surety submitted an affidavit stating that it did not possess sufficient assurance that any trial award would be greater than the settlement offers made by the District; PBC had failed to honor the terms of the indemnity agreement; PBC questioned the surety’s entitlement to the full amount of any judgment received by PBC; and if PBC lost at trial, the surety feared the PBC indemnitors would be unable to satisfy their indemnity obligations and might file for bankruptcy.
In opposition, the indemnitors argued that the court had no authority to enforce the settlement agreement because the indemnitors were vigorously litigating the enforceability of the indemnity agreement in the Indemnity Case. According to the indemnitors, the surety was acting in bad faith under the indemnity agreement by, among other things, paying illegitimate bond claims to which PBC had objected and by settling PBC’s litigation against the District on the eve of trial for 4% of the value sought by PBC.
A hearing was held on the surety’s motion on March 9, 2022, and the trial court ruled in the surety’s favor, finding that the surety had valid assignment and attorney-in-fact rights under the indemnity agreement and therefore the surety was authorized to settle the Buttonwillow Case. The trial court stated that nothing in its ruling precluded any subsequent finding by the court in the Indemnity Case relating to the propriety of the surety’s exercise of its indemnity rights.
On appeal, the Fifth District Court of Appeals affirmed the trial court. The court found that, based upon the factual record, the surety’s assignment rights under the indemnity agreement had been triggered because the surety had received numerous notices of claim and the indemnitors failed to deposit collateral security with the surety upon demand. Therefore, there was a “default.”
Additionally, because the assignment rights had been triggered, the court found that the surety properly exercised its attorney-in-fact rights under the indemnity agreement:
The Indemnitors irrevocably constitute, appoint and designate [the surety] or its designees as their Attorney in Fact, with the right, but not the obligation, to exercise all of the rights of the Indemnitors assigned or granted to [the surety] under this Agreement. The Indemnitors ratify and affirm all acts and actions taken by [the surety] or its designee as their Attorney in Fact.
The court noted that any argument that the surety acted in bad faith in exercising its rights under the indemnity agreement could be resolved in the Indemnity Case and that the enforcement of the settlement agreement did not foreclose the court in the Indemnity Case from ruling on that issue.
However, notwithstanding its statement that it was not ruling on the issue, the court went on to state in dicta that:
[E]ven if the issue of good faith had been developed and presented to the trial court in this case, evidence supporting PBC’s claim in this regard would not negate the substantial evidence of PBC’s default under the indemnity agreement and assignment of PBC’s claims.
The court further noted that “[the surety’s] concerns, particularly about any trial recovery and the possibility of bankruptcy of the PBC Indemnitors, were reasonable.”
Brian Kantar is a Member of Chiesa Shahinian & Giantomasi PC. His practice is concentrated in commercial litigation, with a focus on fidelity and surety, construction, and bankruptcy matters. Kantar regularly represents surety companies, contractors, and developers in a wide variety of contract disputes, performance and payment bond claims, affirmative claims, loss recovery, bankruptcy issues, and contractor workouts. He can be reached at bkantar@csglaw.com or 973.530.2112.
Jase A. Brown is an Associate in the CSG Law Fidelity & Surety and Litigation Groups. He practices in the areas of surety law, fidelity law, construction law, and general commercial law. Brown has extensive experience representing sureties in connection with distressed contractor workouts and transactions, performance and payment bond claims and associated litigation, intercreditor transactions, bankruptcies, and all aspects of surety law. He can be reached at jbrown@csglaw.com or 973.530.2182.