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August 24, 2005.

GREGORY V. SERIO, not individually, but in his capacity as Rehabilitator of Frontier Insurance Company, Plaintiff,
CLER, INC., a dissolved Illinois corporation; EDWARD FORTE; and CORDIA FORTE, Defendants.

The opinion of the court was delivered by: JOHN W. DARRAH, District Judge


This matter comes on for ruling following a bench trial between the parties. Plaintiff, Gregory V. Serio, in his capacity as Rehabilitator of Frontier Insurance Company, filed suit against Defendants, Cler Inc., Edward Forte, and Cordia Forte. Plaintiff, who acted as surety on construction projects undertaken by Defendants, seeks payment for losses incurred as surety for Cler on two construction projects. Defendants do not dispute that they were parties to an indemnity agreement or that Plaintiff incurred and paid out the claimed losses. Instead, Defendants argue that: (1) Plaintiff unnecessarily stopped one of the construction projects, which caused all the damages Plaintiff claims; and (2) Plaintiff incurred unreasonably excessive expenses in completing the construction projects.

The Court has considered the evidence, including the exhibits and testimony of witnesses, and has further considered the written arguments and proposed findings of fact and conclusions of law and the authority cited therein submitted by counsel for the parties. The Court has also considered the witnesses' intelligence, memory, ability and opportunity to observe, manner while testifying, any interest, bias, or prejudice of the witnesses, and the reasonableness of the witnesses' testimony when considered in light of all the evidence in the case.


  Cler was a corporation that acted as a general contractor for construction projects. Cler; Edward Forte (President of Cler) both personally and in his corporate capacity; and Cordia Forte, personally, executed a General Agreement of Indemnity in exchange for surety bonds provided by Plaintiff. That agreement provided, in pertinent part, that:
2. [Defendants] will indemnify and save [Plaintiff] harmless from and against every claim, demand, liability, cost, charge, suit, judgment and expense which [Plaintiff] may pay or incur in consequence of having executed, or procured the execution of, such bonds, or any renewals or continuations thereof or substitutes therefor, including fees of attorneys, whether on salary, retainer or otherwise, and the expense of procuring, or attempting to procure, release from liability, or in bringing suit to enforce the obligation of any of [Defendants] under this Agreement. In the event of payment by [Plaintiff], [Defendants] agree to accept the voucher or other evidence of such payment as prima facie evidence of the propriety thereof, and of the [Defendants'] liability therefor to [Plaintiff]. . . .
5. [Plaintiff] shall have the exclusive right to determine for itself and [Defendants] whether any claim or suit brought against [Plaintiff] or the Principal upon any such bond shall be settled or defended and its decision shall be binding and conclusive upon [Defendants].
6. If such bond be given in connection with a contract, [Plaintiff] is hereby authorized, but not required, to consent to any change in the contract or in the plans or specifications relating thereto; to make or guarantee advances or loans for the purposes of the contract without the necessity of seeing to the application thereof, it being understood that the amount of all such advances or loans, unless repaid with legal interest by the Contractor to [Plaintiff] when due, shall conclusively presumed to be a loss hereunder; in the event of the abandonment, forfeiture or breach of the contract, or the breach of any bond given in connection therewith, or the failure, neglect, or refusal to pay for labor or materials used in the prosecution of the contract, to take possession of the work under the contract and, at the expense of [Defendants], to complete the contract, or cause, or consent to the completion thereof. [Defendants] hereby assign, transfer, and set over to [Plaintiff] (to be effective as of the date of any such bond, but only in the event of a default as aforesaid), all of their rights under the contract, including their right, title and interest in and to all subcontracts let in connection therewith; all machinery, plant, equipment, tools and materials which shall be upon the site of the work or elsewhere for the purposes of the contract, including all materials ordered for the contract, and any and all sums due under the contract at the time of such abandonment, forfeiture, breach, failure, neglect or refusal, or which may thereafter become due, and [Defendants] hereby authorize [Plaintiff] to endorse in the name of the payee, and to collect any check, draft, warrant or other instrument made or issued in payment of any such sum, and to disburse the proceeds thereof. . . .
17. At any time, and until such time as the liability of [Plaintiff] under any and all said Bonds is terminated, [Plaintiff] shall have the right to reasonable access to the books, records, and accounts of the [Defendants]; and any bank depository, material man, supply house, or other person, firm or corporation when requested by [Plaintiff] is hereby authorized to furnish [Plaintiff] any information requested including, but not limited to, the status of the work under contracts being performed by [Defendants], the condition of the performance of such contracts and payments of accounts.
18. In the event of any breach, delay or default asserted by the [City of Chicago] in any said Bonds, or the Contractor has suspended or ceased work on any contract or contracts covered by any said Bonds, or failed to pay obligations incurred in connection therewith, or in the event of the death, disappearance, Contractor's conviction for a felony, imprisonment, incompetency, insolvency, or bankruptcy of the Contractor, or the appointment of a receiver or trustee for the Contractor, or the property of the Contractor, or in the event of an assignment for the benefit of creditors of the Contractor, or if any action is taken by or against the Contractor under or by virtue of the National Bankruptcy Act, or should reorganization or arrangement proceedings be filed by or against the Contractor under said Act, or if any action is taken by or against the Contractor under the insolvency laws of any state, possession, or territory of the United States, [Plaintiff] shall have the right, at its option and in its sole discretion, and is hereby authorized, with or without exercising any other right or option conferred upon it by law or in the terms of this Agreement, to take possession of any part or all of the work under any contract or contracts covered by any said Bonds, and at the expense of the Contractor and [Defendants] to complete or arrange for the completion of the same, and the Contractor and [Defendants] shall promptly upon demand pay to [Plaintiff] all losses, and expenses so incurred. 19. . . . WE HAVE READ THIS GENERAL AGREEMENT OF INDEMNITY CAREFULLY, THERE ARE NO SEPARATE AGREEMENTS OR UNDERSTANDINGS WHICH IN ANY WAY LESSEN OUR OBLIGATIONS AS ABOVE SET FORTH.
Plaintiff issued surety bonds for two construction projects for the City of Chicago ("the City") undertaken by Cler: (1) the Woodson Library Project and (2) the Central South Side Project. These surety bonds provided that if Cler was unable to perform its obligations with the City of Chicago, subcontractors, or other persons furnishing material or labor, Plaintiff was obligated to pay those claims.

  Cler was awarded the Woodson Library Project on April 30, 1996; and the City set May 20, 1996 as the construction start date on the one-year project. Cler's schedule of activities was filed with the City seven weeks late; and Cler did not begin the job until August 28, 1996.

  Cler failed to hire an electrical subcontractor until late September 1996; as a result, a problem involving electrical construction and Cler's electrical plan, which did not meet the requirements of the City code, was not timely discovered. Cler sought to modify the Woodson Library contract to purchase electrical equipment needed to remedy the electrical problem, but Cler's proposal was rejected by the City as too expensive. In March 1997, while attempting to obtain a final, authorized contract modification for the electrical equipment, Cler delivered a check to its electrical subcontractor with insufficient funds for payment. The subcontractor refused to purchase the electrical equipment without payment, although Cler had told the City that the electrical equipment was ordered. Nonetheless, the City attempted to resolve the electrical equipment issues with Cler. Although Cler was required and was directed to continue working on the Woodson Library Project while contract modification proposals were awaiting authorization, Cler refused to continue work. The project's completion date was pushed back by the City from May 20, 1997 to November 30, 1997.

  Cler was required to request progress payments from the City on a monthly basis for expenditures incurred and to pay Cler's subcontractors in a timely fashion. Cler's first request for payment was submitted almost four months after the project's proposed start date and subsequent payment requests were not filed on a monthly basis. Cler also failed to submit proper documentation for progress payment requests, thus delaying payment from the City. As a result, subcontractors and vendors began complaining that they had not been paid for work performed on the Woodson Library Project. Cler understaffed the project, as well. A full-time project manager was not used, as required; and a part-time, incompetent project manager was eventually terminated. As a result, the project was not completed until January 1998.

  Plaintiff received a "Notice of Claim Against Bond" from Precision Metals, Inc.; and Plaintiff sent Defendants letters demanding resolution of this claim and fulfillment of Defendants' duties of indemnification and exoneration under the General Agreement of Indemnity. Plaintiff also received a Notice of Claim Against Bond from Will-Rent, Inc. Plaintiff, after notifying Defendants of these claims and not receiving a response, asked the City to insure that contract funds were paid to satisfy claims arising on the project.

  Plaintiff then asserted its rights in the remaining contract funds and; consequently, Cler was not paid the money it sought in payment application number nine. Payment application number nine sought a progress payment from the City for work finished by Cler and its subcontractors, and Cler would have used the payment to pay a number of its subcontractors. Plaintiff later allowed the City to release contract funds for payments to subcontractors, provided the City guaranteed that funds would actually go to subcontractors, to whom payment was overdue.

  Thereafter, the City began the construction contract-mandated procedure to terminate the Woodson Library Contract. The City issued letters to Cler notifying it of the City's intent to default and terminate the contract, but Cler made no attempt to cure the default or resolve the City's complaints. Instead, Cler filed for bankruptcy protection. On October 30, 1997, the City terminated the contract and demanded Plaintiff perform under the Woodson Library bond. Defendants, through a letter from their attorney, authorized Plaintiff to investigate the claims made against the bonds, as the City had requested.

  Marc Roth was hired by Plaintiff in September 1997 to complete the investigation, and he reviewed the relevant project and contract documents. Roth also inspected the project site on several occasions; attended project meetings; and conducted personal interviews with Plaintiff, the City, subcontractors, potential general contractors to complete the project, and Cler's employees. According to Roth's report, the City was partly responsible for the earlier electrical equipment issue by requiring the project to comply with certain code requirements but failing to timely provide an electrical plan. The report further noted that, as of November 4, 1997, the electrical equipment was on site but that the electrical subcontractor would not install the equipment until a contract modification was authorized. No further work could be completed until resolution of this issue. Roth's analysis also found that Cler owed more to subcontractors than Cler was owed by the City: Cler owed approximately $450,000.00, yet the City had approved a lesser amount to pay out these claims. Roth also found that Cler: (1) was late in filing important documents, (2) filed incomplete and inaccurate documents, (3) failed to submit timely reports, (4) bounced a check to a subcontractor, and (5) was late in beginning the job. Roth further determined that a number of lien claims had been filed against Cler by subcontractors and other entities working on the Woodson Library Project. Roth noted that the City could seek liquidated damages if the project was not timely completed, and the City intended to enforce other penalties. After examining possible defenses available to permit Plaintiff to deny the City's bond claim, Roth's report concluded that Plaintiff was not entitled to deny the bond claim. Plaintiff's attorney reached the same conclusion and concluded the bond provided a waiver of a "material change" defense which prevented Plaintiff from raising the City's misconduct regarding the electrical equipment issue, which otherwise would have been available.

  During Roth's investigation, the City asked Plaintiff to take action under the bond. The City also threatened to assert a claim for liquidated damages of $1,000.00 per day for every day the Woodson Library Project was delivered past the revised deadline of November 30, 1997. While the City initially refused to discuss liquidated damages, the City eventually granted additional time extensions; and Plaintiff did not pay liquidated damages to the City. The City also assessed a penalty against Cler of over $170,000.00, but Plaintiff negotiated a reduction to $18,509.95. Plaintiff chose a general contractor, Oakley Construction, Inc. ("Oakley") to complete the project after a competitive bid process. Plaintiff and Oakley executed a takeover agreement; and Plaintiff secured additional time extensions and contract modifications from the City, which increased the value of the takeover agreement. The modifications also addressed issues raised by Cler prior to the default, including the electrical equipment problem.

  The original value of the Woodson Library Project was $2,338,426.00. Before Cler was terminated from the project, it had been paid $1,003,850.13. After contract modifications of an additional $729,419.54, the total value of the contract was worth $3,067,845.54. The remaining balance to be paid on the contract, after modication, after Cler's termination, was $2,063,995.41. After deducting the $18,509.95 penalty, $2,045,486.46 was due Plaintiff. However, Plaintiff could not account for $37,991.85 of this amount claimed; and, therefore, Plaintiff received a total of $2,007,493.61 from the City. This amount included $273,458.88 Plaintiff received from the City for ...

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