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Hanover Insurance Co. v. Clark

August 15, 2006


The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer


Clark Construction and Development, Inc. ("Clark Construction") entered into a contract with property owner McKinley IV, Inc. ("McKinley") to construct two group homes in Chicago. As a condition of federal housing law, the Clark Construction's principals, Defendants David Clark and Robin Clark, were required to furnish a surety bond guaranteeing Clark Construction's performance under the construction contract with McKinley. Defendants obtained this bond from Plaintiff Hanover Insurance Company ("Hanover"), who reserved the right to recover the bond amounts against Defendants in the event of default on their contractual obligations with McKinley.

When the project fell too far behind schedule to be finished by the agreed date of completion, McKinley declared Defendants in default of their obligations under their contract. Plaintiff subsequently filed this action under the court's diversity jurisdiction,*fn1 charging Defendants with breach of contract for failure to indemnify and hold Hanover harmless from bond claims totaling $276,429.01. Additionally, Plaintiff demands specific performance of the indemnity agreement with Defendants, requiring a posting of collateral in the amount of $855,870.99 against a total liability not to exceed the penal sum of $1,162,300.00. Defendant David Clark has since filed for bankruptcy, leaving only Robin Clark as Defendant in this proceeding.

Plaintiff Hanover now moves for summary judgment, arguing that the plain language of the contract and established case law confirm Hanover's right to recover for breach of contract and obtain specific performance of the indemnity agreement. For the reasons set forth below, the motion is granted.


The facts relevant to this motion are largely undisputed. In October 2003, Clark Construction, a construction firm co-owned by Defendant Robin Clark and David Clark, entered into a lump sum contract under § 202 of the Housing Act of 1959 with the U.S. Department of Housing and Urban Development ("HUD") for the construction of two federally-financed group homes to be owned by McKinley. (Plaintiff's Local Rule 56.1 Statement of Undisputed Material Facts (hereinafter, "Pl. 56.1 Stmt."), at ¶ 5 (citing Lump Sum Construction Contract, Ex. A to Plaintiff's Complaint).) Pursuant to federal law, McKinley required that Clark obtain a surety bonds to guarantee Clark Construction's performance obligations under the contracts. (Id. at ¶ 6.) Plaintiff, as surety, issued payment and performance bonds in the penal sum*fn2 of $1,162,300.00 to McKinley and HUD on behalf of Clark Construction. (Id. at ¶ 6 (citing Dual Obligee Bond, Ex. B to Plaintiff's Complaint).)

As a condition for issuing these bonds, Plaintiff required that the "Indemnitors" (Clark Construction, and David Clark and Robin Clark, individually) enter into a General Agreement of Indemnity ("Indemnity Agreement") with Plaintiff. (Id. at ¶ 7 (citing General Agreement of Indemnity, Ex. C to Plaintiff's Complaint).) Defendant acknowledged in the Indemnity Agreement that she would indemnify and hold Hanover harmless from all liability under the bonds it issued on behalf of Clark Construction: The Indemnity Agreement provides that the Indemnitors shall "exonerate, indemnify, and save harmless the surety from and against every claim . . . which the surety may pay or incur, including, but not limited to, loss, interest, court costs and consultant and attorney fees" accrued by executing the bonds, investigating claims, defending suits, or enforcing the terms and conditions of the agreement. (Id. at ¶ 8 (citing Indemnity Agreement ¶ 2, Ex. C to Plaintiff's Complaint).) Additionally, the agreement requires the Indemnitors to pay Hanover "as soon as liability exists or is asserted against the Surety," and authorizes Hanover to demand that such funds be held in collateral until the Indemnitors provide evidence of Hanover's discharge from all bonds and liability. (Indemnity Agreement ¶ 3, Ex. C to Plaintiff's Complaint.) The agreement also grants Hanover the exclusive right to settle claims arising out of any bond against it and/or the Indemnitors and permits Hanover, in doing so, to "take whatever action it deems appropriate in response thereto, and its determination of whether to defend or settle the same shall be binding and conclusive upon the Indemnitors." (Id.) Moreover, "[v]ouchers or other evidence of payment by the Surety shall be conclusive evidence of the fact and amount of such liability, necessity, or expediency and of the Indemnitors' liability to the Surety therefore." (Id.) Defendant does not contest the validity or enforceability of the Indemnity Agreement. (Defendant's Response to Pl. 56.1 Stmt ¶ 7.)

On December 19, 2004, Clark Construction filed for bankruptcy under Chapter 7 in the United States Bankruptcy Court of the Northern District of Illinois. (Pl. 56.1 Stmt. ¶ 11.) On December 21, 2004, Albert Cueller, III, Division Director of McKinley, declared Clark Construction in default of its obligations under the construction contract. He cited the fact that the project was less than half completed with nine months remaining until the original estimated date of completion, as well as the lack of communication by Clark Construction to the building owners regarding the status of the project. (Id. at ¶ 9 (citing Letter from Cueller to Clark of December 21, 2004, Ex. D to Plaintiff's Complaint).) In her response to Plaintiff's 56.1 Statement, Defendant alleges that the cause of the defaults described in the letter of December 21, 2004 was McKinley's refusal to allow Clark Construction to begin work for a period of at least five months. (Defendant's Response to Pl. 56.1 Stmt. ¶ 9 (citing Clark Aff. ¶ 6, Ex. A to Defendant's Response to Plaintiff's Motion for Summary Judgment (hereinafter "Def. Response").) According to Defendants, these delays cost Clark Construction significant amounts of money, culminating in the company's bankruptcy filing on December 19, 2004. (Id. at ¶ 9.) Plaintiff does not dispute Defendant's testimony regarding McKinley's role in the construction project's delay.

On December 22, 2004, David Clark telephoned the property owner to inform him that Clark would be turning the matter over to Hanover because he would not be able to perform under the terms of the contract and because Clark Construction was filing for bankruptcy. (Pl. 56.1 Stmt. ¶ 10 (citing letter from Cueller to Clark of February 3, 2005, Ex. E to Plaintiff's Complaint).) On February 3, 2005, Cueller advised Clark Construction that its obligations under the contract were terminated upon receipt of Clark's December 22, 2004 telephone call. (Id.) Defendant contests the date of termination; she notes language in the December 21 letter from McKinley suggesting that Clark Construction would have an opportunity to cure: "If you fail to remedy [the violations] in the time and manner permitted by the Contract, we will seek all redress and remedies available to us under the Contract and as permitted by law, including possible termination of the Contract." (Defendant's Response to Pl. 56.1 Stmt. ¶ 10 (citing letter from Cueller to Clark of December 21, 2004, Ex. D to Plaintiff's Complaint).)

The language of the contract does not explicitly specify the manner by which the contract may be deemed terminated. (Lump Sum Contract, Ex. A to Plaintiff's Complaint.) In March 2005, however, the United States Bankruptcy Court of the Northern District of Illinois entered an order deeming the executory contract between Clark Construction and McKinley rejected and granting Hanover relief from the automatic stay to the extent necessary to re-let the contract and otherwise conclude the work. (Pl. 56.1 Stmt. ¶ 12 (citing Order of March 22, 2005, Ex. F to Plaintiff's Complaint).) On March 8, 2006, Plaintiff entered into a Settlement Agreement and Release ("Settlement Agreement") with McKinley and HUD. (Id. at ¶ 14 (citing Settlement Agreement and Release, Ex. A to Grennan Aff.).) Pursuant to the Settlement Agreement and according to Robert Grennan, Assistant Vice President of Bond Claims at Hanover Insurance, Hanover paid the sum of $210,832.00 to McKinley and HUD to complete construction of the projects. (Id.; Payment Voucher, Ex. 1 to Grennan Supplemental Aff.)

In this action, Hanover seeks to recover the amounts it has already paid. In addition, Hanover asserts that Clark is liable for expenses Hanover incurred in connection with the investigation and defense of the bond claims. Specifically, to assist with its investigation and defense, Plaintiff hired the law firm of Leo & Weber, P.C., and the consulting firm Construction Consulting & Disbursement Services, Inc. (Pl. 56.1 Stmt. ¶ 16.) As of April 2006, Hanover has incurred a total of $36,905.19 in attorney fees and a total of $28,691.82 in consulting fees. (Id.; Leo & Weber, P.C. Invoices, Ex. B to Grennan Aff.; Construction Consulting and Disbursement Services, Inc. Invoices, Ex. C to Grennan Aff.) Plaintiff also alleges that there remain outstanding contingency claims against Hanover for "Excepted Matters"*fn3 pursuant to ¶ 4 of the Settlement Agreement with a total liability not to exceed the penal sum amount of $1,162,300.00 (Pl. 56.1 Stmt. ¶ 15 (citing Settlement Agreement, Ex. A to Grennan Aff.).) Defendant admits that the Settlement Agreement states the penal sum amount of $1,162,300.00, but denies that Hanover will ultimately be liable for that amount. (Defendant's Response to Pl. 56.1 Stmt. ¶ 15 (citing Clark Aff. ¶ 13).)

On January 21, 2005, Plaintiff served Defendant a letter demanding that Defendant indemnify and hold Hanover harmless from the bond claims, and post collateral for the claims in accordance with the terms of the agreement. (Pl. 56.1 Stmt. ¶ 17 (citing letter from Weber to Clark of January 21, 2005, Ex. G to Plaintiff's Complaint).) Of the two indemnitors originally sued, David Clark has filed bankruptcy.*fn4 (Defendant's Response to Pl. 56.1 Stmt. ¶ 18.) Robin Clark is the only remaining indemnitor, and she has neither indemnified Hanover nor posted collateral to date. (Pl. 56.1 Stmt. ¶ 15; Defendant's Response to Pl. 56.1 Stmt. ¶ 15.) Plaintiff now seeks judgment against her.


Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file together with the affidavits, if any, indicate no genuine issue as to any material fact, entitling the moving party to judgment as a matter of law. FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Courts have found that summary judgment is an appropriate method of resolving disputes concerning indemnification agreements. See, e.g., Advanced Ground Sys. Eng'g, Inc. v. RTW Indus., 388 F.3d 1036, 1038 (7th Cir. 2004) (affirming summary judgment for plaintiff after finding that defendant had a duty to defend and indemnify plaintiff against tort claims arising from a failure of ...

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