Lanak & Hanna Principal Attorney Natasha Buchanan recently secured a complete summary judgment victory for a surety client in a long-running performance and payment bonds and indemnity dispute, obtaining approximately $650,000 in principal and accrued interest, with attorneys’ fees and costs to follow. The Court granted summary judgment on the surety’s affirmative indemnity and judicial foreclosure claims and simultaneously defeated the indemnitors’ cross-claims for breach of contract and breach of the implied covenant of good faith and fair dealing.
Ms. Buchanan handled the matter from its inception in September 2017 through the recent summary judgment victory, representing the surety throughout the underlying bond claim, performance bond litigation, and subsequent indemnity action.
The matter began in September 2017, when the firm’s surety client received a claim against its Performance Bond following the termination of its bond principal from a public works project. The surety undertook an investigation, including retaining an independent consultant to evaluate the status of the project and the cost to complete the principal’s remaining work. The surety subsequently received and investigated several Payment Bond claims submitted by unpaid subcontractors.
The dispute evolved into years of litigation. The principal sued both the public entity and the surety, and the public entity subsequently asserted a claim against the surety under the Performance Bond. Although the principal later dismissed the surety from its complaint, the surety continued defending the Performance Bond claim for nearly five years.
Ultimately, the public entity dismissed its Performance Bond claim against the surety with prejudice. The surety paid nothing under the Performance Bond and recovered its litigation costs.
Following conclusion of the underlying litigation, the surety sought reimbursement from the principal and individual indemnitors pursuant to the General Indemnity Agreement (“GIA”) for Payment Bond losses and the attorneys’ fees, consultant fees, costs, and other expenses incurred as a result of issuing the Bonds. When the indemnitors failed to reimburse the surety, the surety commenced an indemnity action. The indemnitors responded with a cross-complaint alleging, among other things, that the surety inadequately investigated the underlying claims, improperly paid Payment Bond claims, incurred unreasonable attorneys’ and consultant fees, and breached both the GIA and the implied covenant of good faith and fair dealing.
Ms. Buchanan, on behalf of the surety, moved for summary judgment on both the surety’s affirmative claims and the indemnitors’ cross-complaint. Following oral argument, the San Diego Superior Court granted summary judgment in the surety’s favor in its entirety.
The GIA’s Condition Precedent Was Enforced
Central to the Court’s ruling was a provision of the GIA granting the surety broad discretion in investigating, defending, compromising, and resolving claims against the Bonds. The GIA also established express conditions precedent that the indemnitors were required to satisfy before challenging the surety’s good faith in resolving claims. Because the indemnitors failed to satisfy those contractual conditions, the Court held that the GIA barred their challenge to the surety’s good faith in resolving the Performance and Payment Bond claims. The ruling is particularly significant for sureties because the Court enforced the parties’ negotiated contractual procedures rather than permitting the indemnitors to circumvent those provisions by recasting their disagreement with the surety’s claims decisions as a claim for bad faith.
The Court Enforced the GIA’s Prima Facie Evidence Clause
The Court also enforced the GIA’s prima facie evidence provision governing proof of the surety’s losses. Under the particular language of the GIA, the surety’s sworn statement concerning its payments and losses constituted prima facie evidence of the fact and extent of the indemnitors’ liability and was binding absent actual fraud. The Court found the surety’s evidence sufficient to invoke the provision, shifting the burden to the indemnitors. The indemnitors presented no evidence of actual fraud.
Contractual Interest and Collateral Rights Also Enforced
The Court separately rejected the indemnitors’ challenge to the surety’s contractual interest claim. The GIA expressly required the indemnitors to pay interest on covered payments from the date the surety made each payment. Significantly, the Court also granted summary judgment on the surety’s judicial foreclosure claims, finding that the GIA authorized the surety, acting as attorney-in-fact for the indemnitors, to execute deeds of trust securing the indemnitors’ obligations. The ruling therefore enforced not only the surety’s right to indemnification, but also important contractual mechanisms designed to secure that obligation.
What began as a Performance Bond claim in September 2017 ultimately resulted in a complete victory for Lanak & Hanna’s surety client nearly nine years later: no payment under the Performance Bond, successful defense of the underlying litigation, approximately $650,000 in principal and accrued interest awarded on the indemnity claims, defeat of the indemnitors’ cross-claims for bad faith, enforcement of contractual interest, and summary judgment on the surety’s judicial foreclosure claims. Attorneys’ fees and costs remain to be determined.