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Mountbatten Surety Co., Inc. v. Szabo Contracting

June 17, 2004


[6] Appeal from the Circuit Court of Du Page County. No. 99-CH-513. Honorable Edward R. Duncan, Jr., Judge, Presiding.

[7] The opinion of the court was delivered by: Presiding Justice O'malley

[8]  Defendants, Szabo Contracting, Inc., Szabo Construction, LLC, Frank Szabo, Jr., James C. Szabo, Carla Szabo, and Carl F. Szabo appeal the order of the circuit court of Du Page County granting summary judgment in favor of plaintiff, the Mountbatten Surety Company, Inc., and awarding plaintiff a judgment totaling $763,544.31. Defendants argue that (1) plaintiff did not properly plead and demonstrate that its right to be indemnified by defendants under a general indemnity agreement (Agreement) had been triggered by a default on an underlying bond, (2) that the attorney fees awarded plaintiff by the trial court were not reasonable, and (3) that the trial court abused its discretion in denying defendants leave to plead over and to file affirmative defenses. We affirm.

[9]  The following undisputed facts are taken from the record on appeal. In 1993, Szabo Contracting, Inc. (SCI), began its business as a general contractor and focused on municipal projects. In 1998, defendants executed a general indemnity agreement with plaintiff whereby plaintiff was to provide performance and payment bonds on various projects that SCI undertook for its municipal clients.

[10]   Plaintiff is a Pennsylvania insurance company that is authorized to transact insurance and surety business in Illinois. Plaintiff issued a number of performance and payment bonds on behalf of SCI and in favor of various state and municipal entities for public works projects in which SCI was acting as a contractor. These projects included a contract with the Village of South Barrington, four contracts with the Village of Lombard, a contract with Du Page County, two contracts with the City of Aurora, a contract with the Village of Bloomingdale, a contract with the Illinois Department of Natural Resources, and a contract with the Village of Melrose Park. The combined total of the performance and payment bonds issued by plaintiff was over $16 million. On February 16, 1998, all defendants separately and severally executed the Agreement.

[11]   The Agreement provided:

[12]   "The Indemnitors [defendants] hereby jointly and severally covenant, promise and agree to exonerate, indemnify and save harmless the Surety [plaintiff] (and any surety the Surety procures to execute any Bond and any other surety with which Surety may act as co-surety on any Bond or other instrument) from and against any and all liability, loss, cost, damage and expense of whatsoever kind or nature (including but not limited to, interest, court costs and counsel, consulting, accounting and other professional fees) which the Surety may sustain, incur, be put to or to which it may be exposed (1) by reason of having executed any Bond or other instrument or any renewal, modification, continuation, substitution or extension thereof, (2) by reason of the failure of the Principal or any of the other Indemnitors to perform or comply with the promises, covenants and conditions of this Agreement or, (3) in enforcing any of the promises, covenants or conditions of this agreement."

[13]   In addition, the Agreement provided:

[14]   "The liability of the Indemnitors [defendants] shall extend to and include the amount of all payments, together with interest thereon, from the date of such payments, made by the Surety [plaintiff] in good faith under the Surety's belief that (1) the Surety was or might be liable therefor, or (2) the payments were necessary or advisable to protect any of the Surety's rights or to avoid or lessen the Surety's liability or alleged liability."

[15]   Additionally, defendants agreed to collateralize any reserve established by plaintiff in the anticipation of a loss on any of the bonds it issued. If defendants failed to deposit sufficient collateral after plaintiff made a collateral demand, then defendants' failure constituted a default under the Agreement, triggering plaintiff's rights under the Agreement to obtain injunctive relief to compel defendants to deposit sufficient collateral, or to obtain a judgment against defendants for the amount of the collateral demanded plus costs and attorney fees.

[16]   Under the Agreement, defendants also agreed to assign, transfer, pledge, and convey to plaintiff as collateral security various rights of defendants in any and all sums due or to become due under any contract; all subcontracts and purchase orders; all interest in any contract, the work, or tools and supplies; and all other personal property. Paragraph 9 of the Agreement provided that the rights defendants assigned to plaintiff could be exercised by plaintiff as follows:

[17]   "(E) The rights provided to the Surety [plaintiff] under the assignments herein granted may be exercised by the Surety immediately on the occurrence of any one or more of the following events or upon the [S]urety's reasonable apprehension that any one or more of the following may occur:

[18]   (1) Any abandonment, forfeiture, or breach of, or failure, refusal or inability to perform, the terms and provisions of any contract with respect to which a Bond or other instrument has been executed by Surety;

[19]   (2) The failure, delay, refusal or inability of the Principal to pay bills or other indebtedness incurred in, or in connection with, the performance of any contract with respect to which a Bond or other instrument has been executed by Surety;

[20]   (3) The failure, refusal or inability of the Principal to satisfy any of the conditions of any such Bond or other instrument executed by Surety;

[21]   (4) The failure to perform, or comply with, any of the promises, covenants, and obligations of this Agreement;

[22]   (5) The failure to pay and discharge, when due, any other indebtedness of the Principal to the Surety;

[23]   (6) Any assignment by the Principal for the benefit of creditors, any appointment or application for the appointment of a receiver or trustee, or any voluntary or involuntary filing of a petition under Title 11 of the United States Code as to any Indemnitor whether insolvent or not;

[24]   (7) Any proceeding which deprives the Principal of the use or interferes with the Principal's use of any supplies, tools, plant, machinery, equipment or materials required for the performance of any contract with respect to which Surety has issued any Bond; or

[25]   (8) The Principal's death, disappearance, incompetence, conviction of a felony, or imprisonment, if the Principal is an individual.

[26]   (F) In the event the assignments become operative as provided above, in addition to any other remedies the Surety may have, the Indemnitors authorize and empower the Surety in its sole discretion and to the extent it deems appropriate, but without any obligation to take action:

[27]   (1) To assert, pursue, prosecute, compromise or settle in whole or in part at the Indemnitors' expense all of the rights, actions, causes of action, claims and demands assigned, and

[28]   (2) To take possession of all or any part of the work (together will all associated supplies, tools, plant, machinery, equipment, materials, job books, records, drawings and plans), at the Indemnitors' expense to complete all or any part of the work, or to relet or consent to the reletting or completion of the contract or contracts secured by any Bond."

[29]   The Agreement further provided that the contract funds were to be treated as trust funds:

[30]   "If any of the Bonds or other instruments are executed by the Surety in connection with the performance of a contract, the entire contract price or other consideration to be received by the Principal, whether received as payments or loans, shall be dedicated to the satisfaction of the conditions of the Bond(s) or other instrument(s). All consideration, including all funds paid, due or to become due and all securities, warrants, checks or other evidence of indebtedness and the proceeds thereof, given upon or under any contract in connection with which the Surety shall have issued a Bond shall be impressed with a trust in favor of laborers, materialmen, suppliers, subcontractors and the Surety for the exclusive purpose of satisfying the conditions of the Bonds. Upon demand of the Surety for the deposit therein of all funds or the proceeds of all consideration received or to be received from any contract referred to in any Bond."

[31]   Early in 1999, plaintiff became aware of claims submitted by SCI's subcontractors for nonpayment and the Village of South Barrington's complaint regarding SCI's performance. On February 23, 1999, HMS Dreadnought, an entity related to plaintiff, wrote to the Village of South Barrington acknowledging receipt of the Village's complaint and other claims made against the payment bond. HMS Dreadnought "demand[ed], on behalf of the Surety [plaintiff] that [the Village of South Barrington] release no further funds under the above-referenced contract without the in-advance written consent and direction of the Surety or HMS Dreadnought, Inc." HMS Dreadnought made the demand "to protect the Surety's rights of subrogation and to enable the Surety to protect its interests under its Bonds furnished for this project." On March 11, 1999, R.W. Dunteman Company, a subcontractor in the Lombard project, filed suit against SCI for failing to pay it sums due under its contract with SCI. On March 23, 1999, plaintiff sent letters to the ...

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