BMD CONTRACTORS v. Fidelity and Deposit Co. of Md.

In the

United States Court of Appeals
For the Seventh Circuit

No. 11-1345

BMD C ONTRACTORS, INC.,
Plaintiff-Appellant,
v.

F IDELITY AND D EPOSIT C OMPANY
OF M ARYLAND ,
Defendant-Appellee.

Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 1:09-cv-0121-TWP-DML—Tanya Walton Pratt, Judge.

A RGUED S EPTEMBER 15, 2011—D ECIDED M AY 11, 2012

Before F LAUM, M ANION, and SYKES, Circuit Judges.
S YKES, Circuit Judge. This case requires us to decide
an increasingly important question in complex multi-
tiered construction contracts—if the property owner
becomes insolvent or otherwise defaults in payment,
preventing a contractor from paying a subcontractor,
which contractor bears the risk of loss? There is an addi-
tional wrinkle here because the question arises in a
suit on a payment bond.
2 No. 11-1345

BMD Contractors, Inc. (“BMD”) was a subcontractor
for Industrial Power Systems, Inc. (“Industrial Power”),
which was itself a subcontractor for Walbridge Aldinger
Company (“Walbridge”), the general contractor over-
seeing the construction of a manufacturing plant near
Indianapolis, Indiana. Industrial Power executed a pay-
ment bond with Fidelity and Deposit Company of Mary-
land (“Fidelity”), making Fidelity a surety for Industrial
Power’s payment obligations to BMD. The construction
project proceeded on schedule for about a year, but the
manufacturer then declared bankruptcy, causing a series
of payment defaults to flow down the levels of con-
tractors and subcontractors. Walbridge failed to pay
Industrial Power, Industrial Power failed to pay BMD,
and Fidelity refused to pay BMD. BMD sued Fidelity on
the bond.
The subcontract between Industrial Power and BMD
contains language conditioning Industrial Power’s duty
to pay on its own receipt of payment. The district court
construed this language as a “pay if paid” clause, which
requires Industrial Power to pay BMD only if it
receives payment under its own contract with Walbridge.
The court rejected BMD’s counterargument that the
contract language in question is a “pay when paid”
clause, which would have controlled only the timing
of Industrial Power’s payment obligation, not its
ultimate duty to pay. The court also rejected BMD’s
argument that pay-if-paid clauses are void under
Indiana public policy. Finally, the court held that Fidelity,
as a surety, could assert all the defenses of its principal,
Industrial Power, even though the bond itself did not
No. 11-1345 3

specifically incorporate the pay-if-paid language. Based
on these holdings, the court granted summary judg-
ment in favor of Fidelity, and BMD appealed.
We affirm. The Industrial Power/BMD subcontract
expressly provides that Industrial Power’s receipt of
payment is a condition precedent to its obligation to
pay BMD. This language is clear and properly construed
as a pay-if-paid clause. While the subcontract might
have gone further—for example, it might also have
said that BMD assumed the risk of the property owner’s
insolvency—this additional language was not necessary
to create an enforceable pay-if-paid provision. We also
agree with the district court that pay-if-paid clauses
are not void under Indiana public policy. Finally, under
basic Indiana surety-law principles—reinforced by the
weight of authority from other jurisdictions—Fidelity
may assert all the defenses of its principal. Because In-
dustrial Power was never obligated to pay BMD in the
first place, BMD may not recover against Fidelity on
the payment bond.

I. Background
In early 2007 Getrag Corporate Group created Getrag
Transmission Manufacturing, LLC (“Getrag”), for the
purpose of manufacturing automobile transmissions for
Chrysler at a plant to be built in Tipton, Indiana. Getrag
hired Walbridge as the general contractor for the con-
struction of the facility, and Walbridge entered into
multiple subcontracts, including one with Industrial
4 No. 11-1345

Power for mechanical piping work.1 Industrial Power
entered into a second-level subcontract, hiring BMD
to perform the piping work required under the Walbridge/
Industrial Power subcontract. BMD, in turn, ordered
supplies from Ferguson Enterprises, Inc.
Pursuant to the Walbridge/Industrial Power contract,
Industrial Power executed a payment bond with Fidelity.
The bond named Industrial Power as principal, Fidelity
as surety, and BMD as a claimant. In essence, Fidelity
promised to pay what Industrial Power owed to BMD
under the Industrial Power/BMD subcontract if Indus-
trial Power did not itself pay what was owed.
BMD began work on the project in November 2007.
Over the next year, Walbridge paid Industrial Power
from the payments it received from Getrag, and Industrial
Power paid BMD from the payments it received from
Walbridge, in accordance with their respective contracts.
In October 2008 Getrag filed for bankruptcy. All work
on the project ceased, and a cascade of missed pay-
ments flowed down the hierarchy of subcontractors.
When this appeal was filed, Getrag owed Walbridge
$40 million, Walbridge owed Industrial Power $11 million,
Industrial Power owed BMD $1.5 million, and BMD
owed Ferguson $700,000.
BMD and Ferguson filed mechanic’s liens against the
Getrag property, and BMD assigned Ferguson a portion

1
Walbridge actually entered into several subcontracts with
Industrial Power, but only one is relevant to this case and will
be referred to simply as the Walbridge/Industrial Power
contract.
No. 11-1345 5

of its rights under the payment bond.2 BMD and
Ferguson sought to recover the rest of what they were
owed from Industrial Power, but Industrial Power
refused to pay. BMD and Ferguson turned to Fidelity
and demanded payment under the bond, but Fidelity
refused as well. BMD and Ferguson then sued Fidelity
on the bond.3 The dispute centers on the interpretation
and effect of key provisions in the following contracts:
(1) the Industrial Power/BMD contract; (2) the
Walbridge/Industrial Power contract; and (3) the
Fidelity payment bond.
Taking the last of these contracts first, the terms of the
payment bond obligate Fidelity to pay “claimants” of
Industrial Power under the Walbridge/Industrial
Power contract in the event that Industrial Power itself
did not pay what was owed. Specifically, the bond pro-
vides:
[I]f the Principal shall promptly make payments to
all claimants as hereinafter defined, for all labor and
material used or reasonably required for use in the
performance of the subcontract, then this obliga-
tion shall be void; otherwise it shall remain in full
force and effect, subject to the following conditions.

2
Prior to filing this appeal, BMD recovered almost half of
what it was owed after the Getrag plant was sold in bank-
ruptcy. The parties dispute whether we may take judicial
notice of these proceedings, but that question ultimately has
no bearing on our disposition of the case.
3
Unless the context requires otherwise, we refer to BMD and
Ferguson collectively as “BMD.”
6 No. 11-1345

The bond then defines “claimant” as “one having a
direct contract with the Principal for labor, material, or
both, used or reasonably required for use in the perfor-
mance of the contract.” The bond describes a claimant’s
right to sue as follows:
[E]very claimant as herein defined, who has not
been paid in full before the expiration of a period
of ninety (90) days after the date on which the last
of such claimant’s work or labor was done or per-
formed, or materials were furnished by such
claimant, may sue on this bond for the use of such
claimant, prosecute the suit to final judgment for
such sum or sums as may be justly due claimant, and
have execution thereon.
(Emphasis added.)
The Industrial Power/BMD subcontract contains the
clause at the heart of this dispute. It states: “IT IS EXPRESSLY
AGREED THAT OWNER’ S ACCEPTANCE OF SUBCONTRACTOR’ S
WORK AND PAYMENT TO THE CONTRACTOR FOR THE SUB-
CONTRACTOR’ S WORK ARE CONDITIONS PRECEDENT TO
THE SUBCONTRACTOR’ S RIGHT TO PAYMENTS BY THE CON -
TRACTOR.” Other parts of the subcontract use similar
language. For example, Article 2(g) provides that “it is a
condition precedent to Contractor’s obligation to make
final payment to Subcontractor that Owner shall have
tendered full payment for Subcontractor’s Work to Con-
tractor and that [C]ontractor shall have accepted such
full payment from Owner.”
The Walbridge/Industrial Power contract contains
a similar provision stating that Industrial Power will
No. 11-1345 7

be paid only if Walbridge itself is paid. More specifically,
Article XXII states as follows:
[Industrial Power] acknowledges that it has con-
sidered [Getrag’s] solvency and [Getrag’s] ability to
perform the terms of its contract with [Walbridge]
before entering into this Subcontract. [Industrial
Power] acknowledges that it relies on the credit and
ability to pay of [Getrag], and not [Walbridge], for
payment for work performed hereunder. [Industrial
Power] is entering into this Subcontract with the
full understanding that [Industrial Power] is
accepting the risk that [Getrag] may be unable to
perform the terms of its contract with [Walbridge].
[Industrial Power] agrees that as a condition
precedent to [Walbridge’s] obligation to make any
payment to [Industrial Power], [Walbridge] must
receive payment from [Getrag].
Based on these contract provisions, BMD and Fidelity
each filed motions for summary judgment. Fidelity
argued that the language we have quoted in the Industrial
Power/BMD contract was properly construed as a pay-if-
paid clause, which conditioned Industrial Power’s duty
to pay BMD on its own receipt of payment from
Walbridge. Because Industrial Power had not been paid,
it could not itself be liable to BMD, and as Industrial
Power’s surety, Fidelity could not be liable either.
BMD argued that the conditional language in the con-
tract was not a pay-if-paid clause but, rather, a pay-when-
paid clause, which governed only the timing of Industrial
Power’s payment to BMD, not its ultimate obligation
8 No. 11-1345

to pay. Industrial Power remained liable on the contract,
BMD argued, so Fidelity was liable on the payment
bond. In the alternative BMD maintained that if the
conditional language was a pay-if-paid clause, it was
contrary to Indiana public policy and therefore void.
Finally, BMD argued that because the payment bond
neither incorporated the Industrial Power/BMD contract
nor contained a separate pay-if-paid clause, Fidelity
was independently liable under the bond, even if
Industrial Power itself was not liable under the subcon-
tract.
The district court entered summary judgment for
Fidelity. The court held that even though the Industrial
Power/BMD contract did not contain express language
stating that BMD assumed the risk of Getrag’s insolvency,
the “condition precedent” language was clear and
properly construed as a pay-if-paid provision. The court
also rejected BMD’s public-policy argument because no
Indiana statute directly addresses pay-if-paid clauses
and Indiana courts apply a strong presumption in favor
of the freedom of contract. Finally, the court held that
a surety bond makes the surety liable only to the extent
that the principal itself has an obligation to pay, so the
Fidelity bond need not have explicitly incorporated the
terms of the Industrial Power/BMD contract. The court
acknowledged that this court’s decision in Culligan Corp.
v. Transamerica Insurance Co., 580 F.2d 251 (7th Cir. 1978),
seems to point in the other direction. But the court
held that Culligan was distinguishable based on the
“sums justly due” language in the Fidelity bond. More
generally, the court noted that Culligan was dated—the
No. 11-1345 9

case was decided more than 30 years ago when pay-if-
paid clauses were still new—and also noted that it did
not cite Indiana caselaw explaining well-settled surety
principles. This appeal followed.

II. Discussion
We review de novo a district court’s grant of summary
judgment. Musch v. Domtar Indus., Inc., 587 F.3d 857, 859
(7th Cir. 2009). There are no material factual disputes;
Fidelity’s liability turns on the interpretation of con-
tractual language, raising only legal questions for
which summary judgment is particularly appropriate. See
Slutsky-Peltz Plumbing & Heating Co., Inc. v. Vincennes
Cmty. Sch. Corp., 556 N.E.2d 344, 345 (Ind. Ct. App. 1990).
Sitting in diversity and applying Indiana law, we are
required to make our best prediction of how the Indiana
Supreme Court would decide the case. Research Sys.
Corp. v. IPSOS Publicité, 276 F.3d 914, 925 (7th Cir. 2002).
If the state supreme court has not spoken on a
particular issue, then decisions of the intermediate ap-
pellate court will control “ ‘unless there are persuasive
indications that the state supreme court would decide
the issue differently.’ ” Id. (quoting Lexington Ins. Co. v.
Rugg & Knopp, Inc., 165 F.3d 1087, 1090 (7th Cir. 1999)).
Finally, if there are no directly applicable state decisions
at all, then we may consult “ ‘relevant state precedents,
analogous decisions, considered dicta, scholarly works,
and any other reliable data’ ” that might be persuasive
on the question of how the Indiana Supreme Court
would likely rule. See Pisciotta v. Old Nat’l Bancorp., 499
10 No. 11-1345

F.3d 629, 635 (7th Cir. 2007) (quoting McKenna v. Ortho
Pharm. Corp., 622 F.2d 657, 663 (3d Cir. 1980)).

A. Interpreting the Industrial Power/BMD Contract
As construction projects have become more complex,
contractors and subcontractors have developed tools to
manage the possibility that some “upstream” contracting
party will become insolvent or otherwise default in pay-
ment, raising the question of which “downstream” parties
bear the risk of nonpayment. Two increasingly common
contractual provisions address distinct kinds of pay-
ment risk in construction subcontracting: pay-if-paid
clauses and pay-when-paid clauses.
A pay-when-paid clause governs the timing of a con-
tractor’s payment obligation to the subcontractor,
usually by indicating that the subcontractor will be paid
within some fixed time period after the contractor itself
is paid by the property owner. A typical clause of this
type might say: “Contractor shall pay subcontractor
within seven days of contractor’s receipt of payment
from the owner.” Robert F. Carney & Adam Cizek, Payment
Provisions in Construction Contracts and Construction Trust
Fund Statutes, 24 C ONSTRUCTION L AW., Fall 2004, at 5, 5.
These clauses address the timing of payment, not the
obligation to pay. They do not excuse a contractor’s
ultimate liability if it does not receive payment by the
property owner, so they do not transfer the risk of “up-
stream” insolvency from contractor to subcontractor and
on down the chain.
No. 11-1345 11

In contrast, a pay-if-paid clause, as the name suggests,
provides that a subcontractor will be paid only if the
contractor is paid and thus ensures that each con-
tracting party bears the risk of loss only for its own work.
A typical clause of this type might say: “Contractor’s
receipt of payment from the owner is a condition
precedent to contractor’s obligation to make payment to
the subcontractor; the subcontractor expressly assumes
the risk of the owner’s nonpayment and the subcontract
price includes the risk.” Id. at 5-6.
BMD argues that the conditional language in its sub-
contract with Industrial Power was only a pay-when-paid
clause and that Industrial Power remained liable even
though it did not receive full payment from Walbridge.
Fidelity argues that the provision is a pay-if-paid clause,
and because Industrial Power did not receive payment,
it had no duty to pay the balance due to BMD. To
repeat, the relevant clause in the subcontract states: “It is
expressly agreed that owner’s acceptance of subcontrac-
tor’s work and payment to the contractor for the sub-
contractor’s work are conditions precedent to the subcon-
tractor’s right to payments by the contractor.” (Emphasis
added.)
This language is plain. Industrial Power’s receipt of
payment is a condition precedent to its obligation to pay
BMD. True, the clause does not say in so many words
that BMD assumes the risk of upstream nonpayment.
The question here is whether express “transfer of risk”
language is necessary to create a pay-if-paid clause or
whether condition-precedent language is enough. We
12 No. 11-1345

conclude that the condition-precedent language is clear
and sufficient on its face to unambiguously demonstrate
the parties’ intent that BMD would not be paid unless
Industrial Power itself was paid. Additional transfer-of-
risk language is not necessary.
The Indiana courts have not squarely addressed pay-if-
paid clauses, but most jurisdictions that have done so
have interpreted condition-precedent language as suffi-
cient to create a pay-if-paid clause. See, e.g., Envirocorp
Well Servs., Inc. v. Camp Dresser & McKee, Inc.,
No. IP99-1575-C-T/G, 2000 WL 1617840, at *5 (S.D. Ind.
Oct. 25, 2000) (explaining that “[c]ourts that have
enforced [pay-if-paid] provisions do so when the provi-
sions explicitly provide that payment to the contractor
by the owner is a condition precedent to payment to the
subcontractor by the contractor”); see also L. Harvey Con-
crete, Inc. v. Agro Constr. & Supply Co., 939 P.2d 811, 814-15
(Ariz. Ct. App. 1997) (enforcing as a pay-if-paid clause
a provision stating that contractor’s receipt of payment
from owner was a condition precedent to its obligation
to pay subcontractor); Gilbane Bldg. Co. v. Brisk Water-
proofing Co., 585 A.2d 248, 249-51 (Md. Ct. Spec. App.
1991) (same); Berkel & Co. Contractors v. Christman Co.,
533 N.W.2d 838, 839 (Mich. Ct. App. 1995) (same).
BMD cites several cases suggesting that a pay-if-
paid clause requires explicit language shifting the risk
of nonpayment to the subcontractor. See Thos. J. Dyer Co.
v. Bishop Int’l Eng’g Co., 303 F.2d 655, 661 (6th Cir. 1962)
(“[T]o transfer [risk of default] . . . from the general con-
tractor to the subcontractor, the contract . . . should
No. 11-1345 13

contain an express condition clearly showing that to be
the intention of the parties.”); Midland Eng’g Co. v. John A.
Hall Constr. Co., 398 F. Supp. 981, 993-94 (N.D. Ind. 1975)
(discussing Dyer); Oberle & Assocs., Inc. v. Richmond Hotel,
Ltd., No. 33C01-8706-CP-130, 1998 WL 35297806, at *5-7
(Ind. Cir. Ct. July 2, 1998) (quoting the language from
Dyer excerpted above).
The Sixth Circuit’s decision in Dyer is the leading case
in this group—the others simply follow it—but BMD
misreads that opinion by conflating two distinct con-
cepts: (1) a requirement of express language demon-
strating the parties’ intent to transfer the risk of insol-
vency, and (2) a requirement that the parties use particular
language to express that intent (for example, by stating that
the subcontractor “assumes the risk” of the owner’s
insolvency, or something very similar). We do not
disagree that to transfer the risk of upstream insolvency
or default, the contracting parties must expressly demon-
strate their intent to do so; that is the rule from Dyer.
But by clearly stating that the contractor’s receipt of
payment from the owner is a condition precedent to the
subcontractor’s right to payment, the parties have ex-
pressly demonstrated exactly that intent. Adding specific
assumption-of-risk language would reinforce that
intent but is not strictly necessary to create an enforce-
able pay-if-paid clause. Dyer does not hold otherwise.
“Condition precedent” is a legal term of art with a
clear meaning: “An act or event, other than a lapse of time,
that must exist or occur before a duty to perform some-
thing promised arises.” B LACK’S L AW D ICTIONARY 334
14 No. 11-1345

(9th ed. 2009). The Industrial Power/BMD contract unam-
biguously states that Industrial Power’s receipt of pay-
ment is a condition precedent to BMD’s right to payment.
This provision means just what it says—that Industrial
Power’s duty to pay BMD is expressly conditioned on its
own receipt of payment—thus evincing the parties’
unambiguous intent that each party assumes its own
risk of loss if Getrag becomes insolvent or otherwise
defaults.
Notably, the subcontracts at issue in Dyer, Midland, and
Oberle did not use condition-precedent language like
that at issue here, so those cases cannot be read as sug-
gesting that the use of this terminology is insufficient
to create a pay-if-paid provision. Although it’s possible
to reinforce the clarity of a pay-if-paid clause by
using redundant language—e.g., “in agreeing to this
condition precedent, subcontractor assumes the risk of
owner’s insolvency”—additional language like this is
not necessary if the meaning of the condition precedent
is otherwise clear. MidAmerica Constr. Mgmt., Inc. v. MasTec
N. Am., Inc., 436 F.3d 1257, 1263 (10th Cir. 2006) (noting
that a similarly worded subcontract’s “failure to say all
that it might have said is not enough to throw the intent
of the contracting parties into doubt”).
BMD identifies a single district-court decision in which
condition-precedent language was held to create only a
pay-when-paid clause. See Sloan Co. v. Liberty Mut. Ins. Co.,
No. 07-5325, 2009 WL 2616715, at *6 (E.D. Pa. Aug. 25,
2009) (“[T]he mere presence of language such as ‘condi-
tion precedent’ . . . is insufficient to determine whether
No. 11-1345 15

a clause is a pay-if-paid or pay-when-paid provision.”).
Sloan, of course, is not controlling, and we do not find
it persuasive. It stands in marked contrast to the weight
of other authority. Even taken on its own terms,
Sloan would not resolve this case. There, the district
court asked “whether the clause reveals the parties’
intent to shift the risk,” id., and held that the parties’
use of condition-precedent language, while not sufficient,
was strong evidence of that intent, see id. at *5 (“ ‘A pay-if-
paid condition generally requires words such as “condi-
tion,” “if and only if,” or “unless and until” that convey
the parties’ intention that a payment to a subcontractor
is contingent on the contractor’s receipt of those funds.’ ”
(quoting LBL Skysystems (USA), Inc. v. APG-Am., Inc.,
No. Civ. A. 02-5379, 2005 WL 2140240, at *32 (E.D. Pa.
Aug. 31, 2005))).
Moreover, the contract provision in Sloan, unlike the
one at issue here, had attributes of a pay-when-paid
provision. It provided that “[f]inal payment [to the Sub-
contractor] shall be made within thirty (30) days after the
last of the following to occur, the occurrence of all of
which shall be conditions precedent to such final pay-
ment: . . . (6) Contractor shall have received final pay-
ment from the Owner . . . .” Sloan, 2009 WL 2616715, at *4.
Establishing a specific time frame in which payment
must be made is the hallmark of pay-when-paid clauses.
In contrast, the relevant contract clause in this case
makes no mention of the timing of payment; instead, it
identifies the owner’s acceptance of BMD’s work and
Industrial Power’s receipt of payment as conditions
16 No. 11-1345

precedent to Industrial Power’s duty to pay BMD.4 To
the extent that Sloan can be read to require that con-
tracting parties use specific words to create a pay-if-paid
clause, we disagree, for the reasons we have explained.
Finally, BMD argues that the operative language in the
subcontract is ambiguous and as such should be inter-
preted against Industrial Power, the drafter of the con-
tract. See MPACT Constr. Grp., LLC v. Superior Concrete
Constructors, Inc., 802 N.E.2d 901, 910 (Ind. 2004) (am-

4
A separate provision of the Industrial Power/BMD subcon-
tract—Article 2(g)— does mention a specific time frame for the
final contract payment: “Contractor shall pay the balance of the
Subcontract Amount to Subcontractor sixty (60) days after final
completion of Subcontractor’s Work . . . . However, it is a
condition precedent to Contractor’s obligation to make final
payment to Subcontractor that Owner shall have tendered
full payment for Subcontractor’s Work . . . .”
Whether this provision standing alone would constitute a pay-
if-paid clause is a closer question on which other courts have
split. Compare Sloan Co. v. Liberty Mut. Ins. Co., No. 07-5325,
2009 WL 2616715, at *8 (E.D. Pa. Aug. 25, 2009), with Gilbane
Bldg. Co. v. Brisk Waterproofing Co., 585 A.2d 248, 250-51 (Md. Ct.
Spec. App. 1991). For the reasons we have already stated,
“condition precedent” is a clear legal term of art that is ordi-
narily sufficient to create a pay-if-paid clause where a
natural reading of the contract suggests as much. We need
not address the separate question whether Article 2(g) is a pay-
if-paid clause. Even if it is properly interpreted as a pay-when-
paid clause, the condition-precedent language primarily at issue
here does not contain any reference to the timing of payment
and therefore cannot be read as a pay-when-paid clause.
No. 11-1345 17

biguity in a contract is construed against its drafter).
Contract language is ambiguous only if it is “susceptible
to more than one interpretation and reasonably intel-
ligent persons would honestly differ as to its meaning.”
Ind. Dep’t of Transp. v. Shelly & Sands, Inc., 756 N.E.2d
1063, 1069-70 (Ind. Ct. App. 2001). As we have ex-
plained, the condition-precedent language in this
contract is not ambiguous. The provision contains none
of the standard features of a pay-when-paid clause and
therefore is not reasonably susceptible of more than
one meaning.
BMD argues in the alternative that the condition-prece-
dent provision is ambiguous by comparison to a similar
provision in the separate Walbridge/Industrial Power
subcontract, which adds specific language to the effect
that the subcontractor (there, Industrial Power) assumes
the risk of the owner’s insolvency. BMD argues that
the presence of this additional assumption-of-risk
language in the Walbridge/Industrial Power stands in
“direct conflict” with the parallel provision in the Indus-
trial Power/BMD subcontract, which does not include
similar additional language. There is no conflict—at
least not one that carries any dispositive significance.
One contract is just more explicit than the other.

B. Indiana Public Policy
BMD argues in the alternative that pay-if-paid clauses
are void under Indiana public policy. This argument
is easily rejected. As a preliminary matter, Indiana has
a strong background presumption favoring freedom of
18 No. 11-1345

contract. See Zollman v. Geneva Leasing Assocs., Inc.,
780 N.E.2d 387, 392 (Ind. Ct. App. 2002) (“[A]s a
general rule, the law allows competent adults the utmost
liberty in entering into contracts that, when entered into
freely and voluntarily, will be enforced by the courts.”).
Indiana courts will not enforce contracts that violate
state statutes, but they will not find a violation
“ ‘unless the language of the implicated statute is clear
and unambiguous that the legislature intended that the
courts not be available for either party to enforce a
bargain made in violation thereof.’ ” Shelly & Sands, 756
N.E.2d at 1073 (quoting Cont’l Basketball Ass’n, Inc. v.
Ellenstein Enters., Inc., 669 N.E.2d 134, 140 (Ind. 1996)).
BMD cites two Indiana statutes in support of its posi-
tion, but neither is on point. The first is a statute
voiding waivers of claims against payment bonds.
Section 32-28-3-16(b) of the Indiana Code provides in
relevant part:
(b) A provision in a contract for the improvement
of real estate in Indiana is void if the provision
requires a person . . . who furnishes labor, materials,
or machinery to waive a right to:
...
(2) a claim against a payment bond;
before the person is paid for the labor or materials
furnished.
This statute invalidates any contract provision that
requires a party to waive its claims under a payment
bond; it does not cast doubt on the validity of pay-if-
No. 11-1345 19

paid clauses. Nothing in the Industrial/BMD subcontract
required BMD to waive its right to recover under the
payment bond. Rather, the subcontract allocated the risk
of loss if Getrag defaulted on payment, ensuring that
each party would bear the risk of loss only for its own
work. Under the terms of the pay-if-paid clause, Industrial
Power’s obligation to pay BMD was conditioned on its
own receipt of payment; the clause is not a waiver of
BMD’s right to make a claim under the Fidelity bond.
BMD insists that this distinction is illusory and that pay-
if-paid clauses, in effect, always amount to waiver of
payment, thus defeating the entire purpose of the pay-
ment bond. This argument mistakenly assumes that
the purpose of a payment bond is to guarantee pay-
ment under any set of circumstances, rather than when
payment is otherwise due under the specific terms of the
subcontract. If the condition precedent here had oc-
curred—if Industrial Power had been fully paid but
refused to pay BMD—then BMD would have a valid
claim against Fidelity under the payment bond. The
bond’s coverage is therefore not illusory; BMD’s right
to recovery is simply limited by the terms of its subcon-
tract with Industrial Power.
BMD also relies on section 32-28-3-18(c) of the Indiana
Code, which prohibits certain conditions on lien rights:
(c) An obligor’s receipt of payment from a third
person may not:
(1) be a condition precedent to;
...
20 No. 11-1345

the provider’s right to record or foreclose a lien
against the real estate that was improved by the pro-
vider’s labor, material, or equipment.
By its terms this statute only prohibits contract condi-
tions that operate on a contractor’s lien rights. Nothing
in the pay-if-paid clause limits BMD’s right to file a
lien against the subject property. To the contrary, both
BMD and Ferguson filed mechanic’s liens against the
Getrag property. The liens were uncontested and yielded
substantial payments when the property was sold.
This statute does not affect the validity of pay-if-paid
clauses.

C. Surety Liability
Finally, BMD argues that because the payment bond
does not expressly incorporate the terms of the Industrial
Power/BMD subcontract, Fidelity can be liable to BMD
under the bond even though Industrial Power is not
liable under the subcontract. This argument contradicts
basic principles of surety law. In Indiana, as elsewhere,
a surety must answer only for the debts of the principal
and cannot be liable where the principal is not.
Under Indiana law a surety contract obligates the
surety “to answer for the debt, default, or miscarriage of
another.” Meyer v. Bldg. & Realty Serv. Co., 196 N.E. 250,
253-54 (Ind. 1935). Surety contracts are not bilateral,
but rather create a “tripartite relation between the party
secured, the principal obligor, and the party secondarily
liable, and the rights, remedies, and defenses of a surety
No. 11-1345 21

cannot be disassociated from this relationship.” Id. at 253.
Indiana courts therefore recognize that “ ‘[g]enerally,
a surety’s liability is no greater than the principal’s.’ ”
In re Kemper Ins. Cos., 819 N.E.2d 485, 491 (Ind. Ct. App.
2004) (quoting Goeke v. Merch. Nat’l Bank & Trust Co. of
Indianapolis, 467 N.E.2d 760, 768 (Ind. Ct. App. 1984)). This
is the general rule regarding the scope of surety liabil-
ity. See, e.g., 74 A M . JUR. 2D Suretyship § 88 (2001) (“As a
general rule, a surety on a bond is not liable unless
the principal is, and, therefore, he may plead any
defense available to the principal.”); 72 C.J.S. Principal
and Surety § 79 (2005) (“[A] surety is not liable to an
obligee unless its principal is also liable.”).
BMD relies on the principle that surety contracts, like
insurance contracts, are construed “strictly” against the
surety, with any ambiguity resolved in favor of the
covered party. See, e.g., Garco Indus. Equip. Co., Inc. v.
Mallory, 485 N.E.2d 652, 654 (Ind. Ct. App. 1985) (“[T]he
contract of a surety for hire is viewed as analogous to
an insurance contract, and is construed most strictly
against the surety and in favor of the person to be pro-
tected.”). This is perfectly true but perfectly irrelevant.
This case raises a question about the scope of Industrial
Power’s liability to BMD and whether Fidelity’s liability
as a surety is coextensive with its principal’s. The rule
that ambiguities in a surety bond are strictly construed
against the surety does not help answer the pertinent
questions here.
On this point the Indiana Supreme Court’s decision
in Meyer is instructive:
22 No. 11-1345

In construing an ambiguous provision in a corporate
surety contract, the courts apply the rule applicable
to insurance policies, namely, that the language will
be construed most strongly against the insurance
company. . . . But when the courts are dealing with
the rights, remedies, and defenses of a surety, the
rules of insurance furnish no help.
196 N.E. at 253. Fidelity is liable up to, but not beyond, the
full liability of its principal, unless the surety contract
clearly says otherwise. See Kemper, 819 N.E.2d at 493-95.
BMD has not identified anything in the surety contract
that says otherwise.
BMD emphasizes that the payment bond does not
expressly incorporate the terms of the Industrial
Power/BMD subcontract, but this is legally insignificant.
As we have explained, surety contracts create tripartite
relationships—the very existence of a surety implies an
underlying obligation between the principal and its
obligee. Accordingly, Indiana courts have recognized
that where a contract and a surety bond are executed
together, they must also be construed together. See Weed
Sewing Mach. Co. v. Winchell, 7 N.E. 881, 883 (Ind. 1886);
Vanek v. Ind. Nat’l Bank, 540 N.E.2d 81, 84 (Ind. Ct. App.
1989). This principle of joint construction is really just
a restatement of the more general rule that a surety
will not be liable where the principal is not.
BMD contends that the payment bond and the
Industrial Power/BMD subcontract were not in fact exe-
cuted concurrently. BMD is not entirely clear about
the record support for this claim, but it seems to be
No. 11-1345 23

relying on the fact that the payment bond does not specifi-
cally incorporate the Industrial Power/BMD contract.
As we have noted, this detail is irrelevant. The payment
bond was executed in favor of the “claimants” of
Industrial Power under the Walbridge/Industrial Power
contract, and it defines “claimant” in a way that clearly
includes BMD under its subcontract with Industrial
Power. The bond thus makes Fidelity a surety with respect
to Industrial Power’s obligations to BMD under that
subcontract. This is really just to say that the bond is, in
fact, a surety contract. Perhaps BMD is arguing that the
two contracts are not “concurrent” because one was
signed two weeks after the other. “Concurrent” here does
not mean “signed on the same day.” It is enough that the
bond clearly secures Industrial Power’s contractual
obligation to BMD; there is no ambiguity about that.
Indiana surety law is therefore quite clear on two
general points: (1) sureties are generally liable only
where the principal itself is liable; and (2) concurrently
executed bonds and the contracts they secure are
construed together. These surety-law principles firmly
support Fidelity’s position that it cannot be liable under
the payment bond if Industrial Power is not liable under
the subcontract. Although there are no Indiana cases
applying these general principles in this particular
context, courts in other jurisdictions have done so. See
Faith Techs., Inc. v. Fid. & Deposit Co. of Md., Civ. Action
No. 10-2375-MLB, 2011 WL 251451 (D. Kan. Jan. 26, 2011);
Fixture Specialists, Inc. v. Global Constr., LLC, Civ. Action
No. 07-5614 (FLW), 2009 WL 904031 (D.N.J. Mar. 30,
2009); Wellington Power Corp. v. CNA Sur. Corp., 614 S.E.2d
24 No. 11-1345

680 (W. Va. 2005). 5 Each of these cases is essentially
identical to this case: The underlying subcontract
contained a pay-if-paid provision that excused the princi-
pal from its payment obligation; the principal failed to
pay because it did not receive payment; the subcon-
tractor sued on a payment bond; and the surety asserted
the pay-if-paid clause as a defense to liability even
though the bond itself contained no such provision. In
all three cases, the court held in favor of the surety,
relying on the general principle that the surety could
assert all the defenses of its principal.
Against this weight of authority, BMD cites Culligan,
a decision of this court that has some superficial sim-
ilarity to this case. On close reading, however, Culligan
is distinguishable. There, as in this case, a subcontractor
sued on a surety bond securing the prime contractor’s
payment on the subcontract. The property owner did not
pay the prime contractor, the prime contractor in turn
failed to pay the subcontractor, and the subcontractor
looked to the surety for payment. Applying Indiana
law, we held that the owner’s nonpayment of the

5
Fidelity finds additional support for this point in Sloan,
2009 WL 2616715—which is perhaps surprising given that
Sloan is the one case that cuts against Fidelity on the threshold
question of whether a pay-if-paid clause existed in the first
place. Although Sloan eventually found that the relevant
provision was only a pay-when-paid clause, the court first
held that a surety could assert all the defenses of its principal—
so if the clause there had been a pay-if-paid clause, the
surety could have relied on it. See id. at *4.
No. 11-1345 25

prime contractor did not affect the surety’s liability on
the bond. 580 F.2d at 254. We held that the bond’s identifi-
cation of the subcontract was merely a reference, not
an incorporation, and therefore did not change or
modify the terms of the bond itself. Id.
BMD argues that Culligan supports the proposition
that a surety bond and a subcontract may be construed
independently and that a subcontractor may recover
against a surety under the terms of the bond alone, re-
gardless of whether the principal itself was liable. Stated
as such, Culligan would seem to support BMD’s position.
But this argument elides a critical distinguishing fact—
the subcontract in Culligan contained only a pay-when-
paid clause, not a pay-if-paid clause,6 so the contractor
in that case was itself liable to the subcontractor. Not
only had the owner breached its obligation to the con-
tractor, but the contractor had also breached its
obligation to the subcontractor. Because the pay-when-
paid provision did not excuse the principal in the first
place, the surety was liable to the same extent as
the principal.
Admittedly, our decision in Culligan does not
specifically state this principle in so many words; the

6
Culligan did not use the terms “pay if paid” and “pay when
paid” in its opinion because those phrases were not yet in
common use. But the opinion specifically noted that the accep-
tance of the subcontractor’s work was not a “condition prece-
dent” to the subcontractor’s right to recovery. Culligan Corp.
v. Transamerica Ins. Co., 580 F.2d 251, 252 (7th Cir. 1978).
26 No. 11-1345

opinion simply holds that the owner’s breach did not
discharge the surety of its obligations. But as we have
noted, the subcontract in Culligan did not contain a pay-if-
paid clause, so there was no reason for the court to
address the hypothetical scenario in which a surety is
sued but the principal is not itself liable for payment. It
is telling that the primary case cited in Culligan is
Midland Engineering Co. v. John A. Hall Construction Co.,
398 F. Supp. 981 (N.D. Ind. 1975), which likewise
involved a subcontract containing only a pay-when-paid
clause.
To whatever extent Culligan can be read to contain
principles broader than its actual holding, we are autho-
rized—indeed required—to conform our decision to
predict how the current Indiana Supreme Court would
rule. See Taco Bell Corp. v. Cont’l Cas. Co., 388 F.3d 1069,
1077 (7th Cir. 2004). Indiana surety law has not changed
since Culligan was decided, but it has been explained,
and the principles relevant to this case have been
affirmed and clarified. See Kemper, 819 N.E.2d at 491
(“ ‘Generally, a surety’s liability is no greater than the
principal’s.’ ” (quoting Goeke, 467 N.E.2d at 768)).
More importantly, we are now confronted with a ques-
tion that we did not consider in Culligan—whether
the subcontractor has a claim against a payment bond
regardless of whether the principal is liable for payment
under the subcontract. Nothing in Culligan addresses
this question, so there is no contradiction in now
clarifying that the Culligan rule does not apply where a
pay-if-paid clause excuses the principal entirely. Our
holding, of course, simply affirms the prevailing general
No. 11-1345 27

rule that a surety is only liable where the principal
itself is liable. The district court identified a somewhat
different reason for distinguishing Culligan. The Fidelity
bond provides that a claimant may sue to recover “such
sums or sums as may be justly due claimant.” The district
court held that this language necessarily implies the
existence of the separate contract between Industrial
Power and BMD, so that the phrase “justly due” could
only refer to sums justly due under that contract. See
Taylor Constr. Inc. v. ABT Serv. Corp., 163 F.3d 1119, 1122
(9th Cir. 1998) (“sums justly due” means due under the
subcontract); U.S. for Use & Benefit of Woodington Elec. Co.
v. United Pac. Ins. Co., 545 F.2d 1381, 1383 (4th Cir. 1976)
(same). The surety bond in Culligan did not contain
similar qualifying language.
This distinction is secondary to the more important
distinguishing fact that the principal in Culligan was
itself on the hook to the subcontractor, and Industrial
Power, the principal here, is not. We also note that the
cases the district court cited in support of its interpreta-
tion of the phrase “justly due” are not precisely on
point. 7 Both Taylor and Woodington interpreted the
phrase “sums justly due” as used in a federal statute, not

7
BMD suggests that “justly due” refers to the value of the
work performed by BMD. This reading is unnatural and would
lead to absurd results. If “justly due” refers to the value of the
work, then this provision in the bond makes the actual
contract price meaningless. Even if a claimant was paid in
full under the subcontract, it might still argue that the value
of the work exceeded that price, and thus that further pay-
ment was “justly due.”
28 No. 11-1345

in a payment bond. The question in those cases was not
whether the sureties were liable, but rather how much
they were obligated to pay. To answer this question,
the courts naturally looked to the subcontract. That
approach is persuasive here, but as an additional basis
to distinguish Culligan. The pay-if-paid clause in the
subcontract—not the “justly due” language in the
payment bond—does most of the work here.
Finally, BMD relies on the Fourth Circuit’s divided
decision in Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d
717, 723-24 (4th Cir. 2000), which held that even where
a pay-if-paid clause excuses the contractor’s nonpay-
ment, the subcontractor can still recover against the
surety. 8 Moore Bros. cannot overcome the countervailing
weight of authority. First, the decision is weak on the
merits. The main point made by the Moore Bros. majority
was that it would “defeat[] the very purpose of a payment
bond” to let the surety assert the pay-if-paid clause as
a defense against recovery. Id. at 723. This mistakenly
assumes that the purpose of a payment bond is to
insure subcontractors against nonpayment under any
circumstances, rather than when payment is in fact due
under the relevant contract. As Judge Wilkins noted in

8
The Moore Bros. court referred to the relevant contractual
provision as a pay-when-paid clause, but nevertheless clearly
treated it as a pay-if-paid clause. See Moore Bros. Co. v. Brown
& Root, Inc., 207 F.3d 717, 723 (4th Cir. 2000) (discussing how
the relevant clause created a condition precedent and gave
the principal a defense to liability).
No. 11-1345 29

partial dissent, “[t]he simple fact here is that some-
one—either [the contractor], the Subcontractors, or [the
surety]—had to bear the risk that [the owner] would
not pay [the contractor]. Virginia law specifically
allows subcontractors to bear that risk, and the Subcon-
tractors here agreed to do so.” Id. at 727, 729 (Wilkins, J.,
concurring in part and dissenting in part). The Moore
Bros. majority relied chiefly on a line of reasoning that
we have rejected.
Second, while the Moore Bros. majority cited three lower-
court cases purporting to support its position, see id. at
723 (majority opinion) (citing Brown & Kerr, Inc. v. St. Paul
Fire & Marine Ins. Co., 940 F. Supp. 1245 (N.D. Ill. 1996);
Shearman & Assocs. v. Cont’l Cas. Co., 901 F. Supp. 199
(D.V.I. 1995); OBS Co. v. Pace Constr. Corp., 558 So. 2d 404
(Fla. 1990)), none were exactly on point. Shearman and
OBS Co. held that a surety could not assert a pay-if-paid
clause as a defense against a suit on the bond, but the
outcome in both cases turned on the application of lien
statutes specific to those jurisdictions. In essence, those
courts held that “local lien law would be thwarted if the
protection provided by the bonds was not equal to that
which would have been provided under the liens.” Moore
Bros., 207 F.3d at 729 n.4 (Wilkins, J., concurring in part
and dissenting in part). And while the Florida Supreme
Court in OBS Co. reached the same result without specifi-
cally relying on local statutes, it also held that the sub-
contract in question contained only a pay-when-
paid clause and thus did not excuse the principal in
the first place. OBS Co., 558 So. 2d at 407.
30 No. 11-1345

Moore Bros. is therefore unpersuasive and contrary
to basic Indiana surety-law principles. It is telling that
Faith Technologies, Fixture Specialists, and Wellington
Power—all of which applied general principles of surety
law in the context of pay-if-paid subcontracts—were
decided after Moore Bros., and all three considered
and rejected the Moore Bros. position. Because our re-
sponsibility in this case is to predict how the Indiana
Supreme Court would rule on this issue, we do best to
heed the weight and trajectory of decisions in other
courts. See Ludwig v. C & A Wallcoverings, Inc., 960 F.2d
40, 42 (7th Cir. 1992) (Courts of appeals must “ ‘strive to
parse state law and, if necessary, forecast its path of
evolution.’ ” (quoting Belline v. K-Mart Corp., 940 F.2d
184, 186 (7th Cir. 1991))).
The clear trend of recent caselaw bolsters the basic
principle of Indiana law that a surety may assert all
the defenses of its principal. Fidelity, no less than Indus-
trial Power, may rely on the pay-if-paid clause in the
Industrial Power/BMD subcontract to defend against
this suit on the payment bond. Summary judgment
was properly entered in favor of Fidelity.
A FFIRMED.

5-11-12