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December 3, 1982


The opinion of the court was delivered by: Shadur, District Judge.


Keene Corporation ("Keene") has sued International Fidelity Insurance Company ("Fidelity") to enforce two surety agreements, each of which guaranteed contract performance by Chicago Automatic Machine, Inc. ("Chicago Automatic"). Fidelity has in turn filed a third party complaint against Chicago Automatic for indemnification.*fn1 Keene now moves under Fed.R.Civ.P. ("Rule") 54(b) and 56 for partial summary judgment against Fidelity. For the reasons stated in this memorandum opinion and order, Keene's Rule 56 motion is granted (any ruling under Rule 54(b) is deferred).


In an October 7, 1978 written proposal, Chicago Automatic offered to manufacture and deliver, within "22-26 weeks" after acceptance, a 20-spindle rotary assembly machine tooled to assemble Keene's roller bearings ("roller bearing machine"). Including an "induction heating system Lepel [a manufacturer of such systems] or equivalent," the proposal quoted a price of $149,000. Kirk Aff.Ex. 1 at 4-5.*fn3

Keene accepted the proposal by issuing its October 19, 1978 purchase order (Kirk Aff.Ex. 2) calling for delivery to its plant by the week of March 26, 1979. At Chicago Automatic's behest,*fn4 Keene purchased a performance bond from Fidelity (Kirk Aff.Ex. 4), paying 2% of the sale price as a premium. Under the performance bond, Fidelity unconditionally guaranteed Chicago Automatic's performance under the contract, with a maximum liability of $149,000.

Shortly thereafter Keene informed Chicago Automatic of its need for a machine tooled to assemble its unitized thrust bearings (the "thrust machine"). Chicago Automatic submitted a January 13, 1979 written proposal (Kirk Aff.Ex. 6). After negotiations (including Chicago Automatic's agreement it would complete the machine by the week of August 6, 1979, Kirk Aff. ¶ 13), Keene accepted the proposal, but at the reduced price of $135,000, by issuing its February 5, 1979 purchase order (Kirk Aff.Ex. 7).

Again Fidelity issued a performance bond in the amount of the contract price contemporaneously with the contract, unconditionally guaranteeing Chicago Automatic's performance (Kirk Aff.Ex. 9). This time however Keene's recovery in case of Chicago Automatic's default was limited to recapture of the monies advanced by Keene.

In the meantime Chicago Automatic asked Keene if it knew of any manufacturers besides Lepel that produced induction heating systems (Harestad Aff. ¶ 6). As a result of that inquiry Chicago Automatic learned of Pillar Corporation ("Pillar"), to whom Chicago Automatic then subcontracted that portion of the contract work.*fn5

Pillar completed the heating apparatus sometime in late 1978 or early 1979. But Pillar's system turned out to be inadequate for the needs of the roller bearing machine. For that and other reasons Chicago Automatic did not meet the delivery schedule under the roller bearing machine contract.

In June 1979 Chicago Automatic also requested a ten-week extension to October 30, 1979 for completing the thrust machine contract (Kirk Aff. ¶ 19). Then over the next several months Chicago Automatic sought additional time extensions on both contracts. Keene acceded to the various requests (Kirk Aff. ¶ 20).

On August 1, 1979 and again on September 18, 1979, Keene notified Fidelity of the extended October 30 completion date for the thrust machine in written responses to Fidelity's status requests (made and responded to on Fidelity's regular report forms). Harestad Aff.Ex.A. Apparently Fidelity was not apprised of any schedule changes for the roller bearing machine until sometime in March 1980.*fn6

Exasperated by the continuing production delays, Keene wrote Chicago Automatic February 8, 1980 that it would "probably have no choice but to call the performance bonds" if the thrust machine were not completed by April 7 and the roller bearing machine by May 5 (Kirk Aff.Ex. 11). About ten days later, Tarzian of Chicago Automatic responded both machines would be completed in seven weeks (Kirk Aff. ¶ 22 and Ex. 12). Convinced that even this new timetable could not be met, Keene's representatives met with Chicago Automatic's principals and reached agreement (confirmed by Keene's March 5 letter) under which Chicago Automatic would focus its efforts first on the thrust machine, with the week of May 2 as the revised completion date (Kirk Aff.Ex. 13). Attempting to extract an additional two week extension, Chicago Automatic wrote Keene March 17 with a proposed "final timetable on the completion of the thrust machine," designating May 16 as the completion date (Kirk Aff.Ex. 15).

Meanwhile Keene wrote Fidelity on March 6, advising it of Chicago Automatic's failure to make timely completion and delivery of the two machines and inquiring as to the "necessary procedure should we be forced to resort to the Bonding to recover our investment" (Kirk Aff.Ex. 14). By a March 26 letter to Keene, Fidelity attorney Caifano referred to an "agreed . . . revised completion schedule for the machines presently being assembled by Chicago Automatic," calling for "substantially full completion on May 16, 1980." Caifano asked for confirmation of Keene's acquiescence in that schedule revision (Kirk Aff.Ex. 16). But only a month later Caifano reversed course, claiming Fidelity "has become awake [in April 1980] of a novation agreement calling for the extension of compliance with specifications of the original purchase orders" (Kirk Aff.Ex. 17). For that reason Caifano's letter asserted Fidelity's obligation as surety had been terminated because of the time extension agreement.

Once again Chicago Automatic failed to perform by the promised dates. In the face of that latest default, Keene demanded payment under the two performance bonds (Kirk Aff.Ex. 18 and 19). Fidelity ignored the demand and Keene brought this action.

Complaint Count 1 seeks the full $149,000 amount of the roller bearing machine performance bond, because Keene's claimed damages of $287,400 far exceed that amount. In principal part the asserted damages consist of (1) $71,500 in advance payments ($33,750 of which was advanced almost six months after expiration of the initial performance date) and (2) $187,920 in lost profits that would have been realized from the sale of roller bearings to Chrysler during the period July 1979 through December 1980.*fn7

Complaint Count 2 asks reimbursement under the thrust machine performance bond for the $67,500 advanced to Chicago Automatic (the last half of which was paid October 12, 1979, approximately two months after Chicago Automatic failed to meet its first production deadline). Count 3 (not in issue on the current motion) asks punitive damages because of Fidelity's allegedly bad faith refusal to discharge its suretyship obligations.

Partial Summary Judgment

Keene has moved for summary judgment on Counts 1 and 2. Though conceding Chicago Automatic has defaulted on both contracts, Fidelity advances two affirmative defenses to resist Keene's motion:

    1. Chicago Automatic's failure to perform both
  contracts stemmed from Pillar's contractual
  defaults, which in turn must be ascribed to Keene
  because Pillar served as its agent in
  constructing the heating induction system.
    2. Keene's failure to obtain Fidelity's consent
  to the time extensions relieved Fidelity of its
  suretyship obligations to the extent of its
  resulting injury.

Fidelity's first argument does not raise any genuine issue of material fact. Its second is both factually and legally defective.

For the reasons stated in the Appendix, the Pillar contention falls of its own weight. Material facts to be considered on this motion establish only that Pillar was Chicago Automatic's subcontractor for the induction heating system — a fact irrelevant to Fidelity's liability.*fn8

Fidelity's second argument is equally barren. It does however call for separate comment on the two performance bonds.

As for the bond on the thrust machine contract, Fidelity was specifically notified of the first ten-week extension a few days before the August 6, 1979 deadline expired. Because Fidelity failed to object, there is clearly no predicate for its making any current complaint about the revised timetable under any theory.

Keene advanced the first $33,750 to Chicago Automatic as a down payment (Kirk Aff.Ex. 8) and the second $33,750 installment October 12, 1979 (Kirk Aff.Ex. 10) — before the additional ten-week period had elapsed. Accordingly Fidelity cannot claim discharge of its liability in any case, and it is obligated to pay the full $67,500.

As for the performance bond on the roller bearing machine contract, Fidelity's affirmative defense fails for an equally fundamental reason.*fn9 Under Illinois law,*fn10 if the obligee of a surety bond gives the principal additional time to perform, the surety who has not consented to the extension is discharged unless the extension agreement was not founded on independent consideration. 34 I.L.P. Sureties § 25, at 255 (1958). Fidelity points to no new consideration whatever for Keene's willingness to defer the completion date. With no dispute as to the damages caused by Chicago Automatic's default, Keene is entitled to the entire $149,000 as a matter of law.


There is no genuine issue of material fact and Keene is entitled to a judgment on each of Counts 1 and 2 as a matter of law. Keene is directed promptly to submit a proposed form of judgment order, together with a statement of the basis for imposing and calculating interest and (because Keene seeks inclusion of a Rule 54(b) determination) a statement of the basis for the order's finality, conforming to the teaching of our ...

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