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Liberty Mutual Insurance Co. v. Devere Construction Co., Inc.

United States District Court, E.D. Michigan, Northern Division

February 28, 2017

DEVERE CONSTRUCTION CO., INC., et al., Defendants.


          THOMAS L. LUDINGTON United States District Judge

         Plaintiff Liberty Mutual Insurance Company (“Liberty Mutual”) provided a number of payment and completion bonds to Defendants, a variety of construction companies[1] with contracts to complete a number of projects for the State of North Carolina and North Carolina counties and local municipalities. After Defendants experienced cash-flow problems, Liberty Mutual received a number of claims from labor and material providers alleging that Defendants had failed to pay them. On February 5, 2016, Liberty Mutual filed suit against Defendants. ECF No. 1. In the complaint, Liberty Mutual identifies eleven claims: breach of contract, exoneration and quia timet, specific performance of the indemnity agreement, breach of trust fund provisions, breach of statutory trust fund provision, common law conversion, statutory conversion, fraud/misrepresentation, constructive fraud/misrepresentation, fraudulent conveyance, and constructive fraudulent conveyance.

         On March 14, 2016, Liberty Mutual filed a motion for a preliminary injunction to prevent Defendants from transferring assets and require Defendants to post collateral security. ECF No. 21. That motion was provisionally granted on April 14, 2016. ECF No. 41. After limited discovery occurred, the Court issued an order that granted Plaintiff's motion for a preliminary injunction and ordered Defendants to post collateral in the amount of $12, 500, 000. ECF No. 56. After Defendants did not post collateral, the Court issued another order which again directed Defendants to post collateral and imposed daily sanctions of $2, 500 for each day that passed before collateral was posted. ECF No. 70. Defendants filed a motion for reconsideration of that order, arguing that they were unable to afford to post the collateral as directed. They further argued that they did not wish to declare bankruptcy and requested that the Court “supervise the orderly liquidation” of the Defendants' assets. ECF No. 72. That motion was denied. ECF No. 85.

         Now, Liberty Mutual has filed a motion for partial summary judgment and a motion to strike Defendants' amended affirmative defenses. ECF Nos. 100, 102. For the reasons stated below, those motions will be granted.


         Many of the material facts are not disputed by the parties. Plaintiff Liberty Mutual is an insurance company which, among other things, acts as a surety for significant payment and completion bonds for government construction contractors.[2] Defendants are a number of construction companies which entered into various contracts for public construction contracts in North Carolina. This case arises out of a number of payment and completion bonds which Liberty Mutual provided to Defendants for those projects. See Compl. at 4-7, ECF No. 1.


         The parties entered into a General Agreement of Indemnity on July 29, 2010. See GAI, ECF No. 104, Ex. B. The GAI was comprehensive in scope. Several of the most relevant provisions will be reproduced here. Within the document, the Defendants are identified as the “Indemnitors, ” and “Principals, ” while Liberty Mutual is identified as the “Surety.” Id. at 1.

         The GAI obligated Defendants to indemnify Liberty Mutual for any losses sustained as a result of its surety agreement:

The Indemnitors shall exonerate, hold harmless, indemnify, and keep indemnified the Surety from and against any and all liability for losses, fees, costs, and expenses of whatsoever kind or nature, including, but not limited to pre- and post-judgment interest at the maximum rate permitted by law accruing from the date of a breach of this Agreement or a breach of any other written agreements between or for the benefit of the Surety and the Idemnitor(s) and/or Principal(s), court costs, counsel fees, accounting, engineering and other outside consulting fees and from and against any and all such losses, fees, costs and expenses which the Surety may sustain or incur: (1) by reason of being requested to execute or procure the execution of any Bond; or (2) by having executed or procured the execution of any Bond; or (3) by reason of the failure of the Indemnitors or Principals to perform or comply with any of the covenants and conditions of this Agreement or Other Agreements; or (4) in enforcing any of the covenants and conditions of this Agreement or Other Agreements.

Id. at 1, ¶ 2.

         Under the agreement, Defendants are required to pay Liberty Mutual collateral security upon demand:

If Surety determines, in its sole judgment, that potential liability exists for losses and/or fees, costs, and expenses for which the Indemnitors and Principals will be obliged to indemnify the Surety, promptly upon demand, a sum of money equal to an amount determined by the Surety or collateral security of a type and value satisfactory to the Surety, to cover that liability, whether or not the Surety has: (a) established or increased any reserve; (b) made any payments; or (c) received any notice of any claims therefor.


         The Indemnity provision also provides that:

In the event of any payment by the Surety, the Indemnitors and Principals further agree that in any accounting between the Surety and the Principals, or between the Surety and the Indemnitors, or either or both of them, the Surety shall be entitled to charge for any and all disbursements made by it in good faith in and about the matters herein contemplated . . . and that the vouchers or other evidence of any such payments made by the Surety shall be prima facie evidence of the fact and amount of the liability to the Surety.

Id. (emphasis added).

         In the GAI, the Defendants agreed to “assign, transfer, pledge, and convey to the Surety and agree to use their best efforts to cause the Principals to assign, transfer, pledge, and convey to the Surety as collateral security for the full performance of the covenants and agreements herein contained, . . . the following”:

(a) all the right, title and interest of the Indemnitors and/or Principals in, and growing in any manner out of, all contracts referred to in the Bonds, or in, or growing in any manner out of the Bonds . . . (d) all actions, causes of actions, claims and demands whatsoever which the Indemnitors and/or Principals may have or acquire against any subcontractor, laborer or materialmen, or any person furnishing or agreeing to furnish or supply labor, material, supplies, machinery, tools, or other equipment in connection with or on ...

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