United States Court of Appeals
For the First Circuit
No. 02-1006
FIREMAN'S INSURANCE CO. OF NEWARK, NEW JERSEY,
Plaintiff, Appellee,
v.
TODESCA EQUIPMENT CO., INC., TODESCA EQUIPMENT COMPANY,
POWER LINE, INC., RHODE ISLAND SAND & GRAVEL CO., INC.,
EAST PROVIDENCE ASPHALT & CONCRETE CO., ALBERT M. TODESCA,
THOMAS RUSSO, CHARLES TODESCA AND PAUL TODESCA,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Mary M. Lisi, U.S. District Judge]
Before
Selya, Circuit Judge,
Coffin and B. Fletcher*, Senior Circuit Judges.
D. Ethan Jeffery with whom Charles R. Bennett, Jr., and Hanify
& King were on brief for appellants.
Brian J. Lamoureux with whom William M. Dolan III and Brown
Rudnick Berlack Israels LLP were on brief for appellee.
November 6, 2002
*
Hon. Betty B. Fletcher, of the Ninth Circuit, sitting by
designation.
COFFIN, Senior Circuit Judge. Appellants, a group of
affiliated construction companies and related individuals, appeal
from an order of the district court granting summary judgment to
appellee, surety, on its complaint seeking indemnification from
appellants for certain payments the surety made on behalf of
appellants. Finding no errors of law, we affirm.
I. Background
Appellants, as principals and indemnitors, entered into a
continuing indemnity agreement with surety Fireman's Insurance
Company of Newark, New Jersey ("Fireman's"), in March 1991.
Pursuant to the indemnity agreement, Fireman’s issued various
bonds, intended to guarantee performance and payment to
subcontractors and suppliers, on behalf of appellants for
construction projects involving companies with which appellants
were allied or in which they were beneficially interested. In
exchange, appellants agreed to indemnify and hold Fireman’s
harmless for all losses and expenses it incurred under the bonds
and provided Fireman's with broad discretion to determine whether
a claim should be paid, settled, or challenged. Although
appellants also entered into indemnity agreements with Reliance
Insurance Co., previously a plaintiff and an appellee in this
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case, the Reliance portion of the district court judgment is no
longer at issue.1
In October 1993, Coken Company ("Coken") filed a lawsuit
against Fireman’s in Providence County Superior Court seeking
$44,371.53 for subcontracting work it had performed for companies
named in appellants' indemnity agreement for which it had not
been paid. Fireman's did not file an answer to Coken's
complaint, and no action occurred in the lawsuit until March
1997, when Coken filed for summary judgment. Fireman's did not
respond to Coken’s summary judgment motion and judgment was
entered against Fireman's for $139,326.34, plus interest and
costs, in June 1997.2 An execution, incorporating costs and
interest, was subsequently obtained by Coken in the amount of
$153,696.98 against Fireman’s. Although the record is unclear as
to when payment was made, the parties appear to agree that
Fireman's eventually paid Coken $207,855.55 and incurred
attorney's fees of $17,285.79 in the matter.
1
Appellants informed the court at argument that Reliance had
settled its claims. Further, appellants waived any arguments
against the district court judgment as it related to Reliance by
not raising them before this court.
2
In its complaint, Coken sought $140,072.63 from Reliance in
addition to the $44,371.53 it sought from Fireman's. The amounts
awarded by the district court judgment, $53,733.56 plus interest
and costs against Reliance and $139,326.34 plus interest and costs
against Fireman's, appear to be reversed from the amounts Coken
sought from Reliance and Fireman's in its original complaint.
Appellants' arguments with regard to this anomaly are discussed
infra.
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In August 2000, Fireman’s filed suit against appellants in
the federal district court of Rhode Island seeking recovery of
more than $315,000 that it had paid out to various claimants
under the bonds. The Coken payment constituted the largest
payout for which Fireman's sought repayment. In July 2001,
Fireman’s moved for summary judgment, and appellants objected,
based solely upon the payment to Coken.3 The motion was granted
by the district court in October 2001 based on the recommended
ruling of the magistrate judge.4
Appellants allege on appeal that the district court made
errors of law in granting summary judgment to Fireman's. We
review the district court's order de novo, "construing the record
in the light most favorable to [the non-movant] and resolving all
reasonable inferences in its favor." Davric Maine Corp. v.
Rancourt, 216 F.3d 143, 146 (1st Cir. 2000). Summary judgment is
appropriate if the evidence presented by appellants is "'merely
colorable, or is not significantly probative' to conjure a
genuine issue of material fact." Id. (quoting Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986)).
3
When the magistrate judge asked appellants whether they had
objection to any of the other claims paid by Fireman's, appellants
responded that they did not, waiving any such claims.
4
References to the district court opinion refer to the
magistrate judge's report and recommendation, which was adopted in
whole by the district court.
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II. Discussion
Appellants allege that the district court erred in two
respects when it granted appellee's motion for summary judgment.
First, appellants argue that the district court misapplied the
holding of the Rhode Island Supreme Court in Massachusetts
Bonding & Insurance Co. v. Gautieri, 30 A.2d 848 (R.I. 1943),
and, in doing so, erroneously ignored the common law rule that
every contract contains an implied covenant of good faith and
fair dealing. Second, appellants contend that the district court
incorrectly concluded that they had failed to raise a genuine
issue of material fact.
A. Applicability of Massachusetts Bonding
In granting appellee’s summary judgment motion, the district
court relied upon the rule enunciated in Massachusetts Bonding,
namely that when a surety brings an action pursuant to an
indemnity agreement giving the surety broad discretion to pay
claims, the only defense an indemnitor can raise is that the
surety committed fraud or collusion in paying the claim. In
Massachusetts Bonding, a surety sought recovery from the
indemnitors for funds the surety paid to the United States
government due to a penalty for alleged illegal activity by the
principals. Massachusetts Bonding, the surety, settled the
government's claim despite the principals' urging that valid
defenses to the claim should be raised.
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The language of the indemnity agreement required the
indemnitors to pay Massachusetts Bonding for all sums that it
paid "on account of any damages, costs, charges, and expenses of
whatsoever kind or nature." The critical language of the
agreement furnished Massachusetts Bonding with broad latitude to
determine whether a claim should be paid:
"And the Indemnitors further agree that in any
accounting which may be had between the indemnitors and
[Massachusetts Bonding], [Massachusetts Bonding] shall
be entitled to credit for any and all disbursements, in
and about matters herein contemplated, made by it in
good faith under the belief that it is or was liable
for the sums and amounts so disbursed, or that it was
necessary or expedient to make such disbursements,
whether such liability, necessity or expediency existed
or not" (italics ours).
Massachusetts Bonding, 30 A.2d at 850 ("This last clause which we
have emphasized by italics is indeed of a most sweeping
character.").
The court held that the expansive character of this
provision, most notably the final clause, indicated that the
parties had "lodged in the indemnitee a discretion limited only
by the bounds of fraud." Id. As such, in order to show bad
faith by the surety, the indemnitors were required to prove that
the surety committed fraud or engaged in collusion with the
United States in order to avoid repaying the surety. See id.
The appellants' argument that Massachusetts Bonding was
incorrectly applied rests on an alleged critical factual
difference between the two cases. The relevant difference,
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appellants argue, is that in Massachusetts Bonding the principals
contended that the claim should not have been paid at all, while
appellants here urge that they are not responsible for any amount
paid by the surety over that "actually owed" to Coken. In other
words, appellants admit potential liability for the amount
initially claimed by Coken, but protest liability for any
increase in that amount due to the passage of time or the
possible incorrect judgment amount.5 Appellants characterize
Massachusetts Bonding as a case about liability, and the current
case as revolving around "damages."
Because the essence of the Massachusetts Bonding holding
derived from the nature of the agreement between the parties, we
look to the language in the agreement between Fireman's and
appellants. Similar to the agreement in Massachusetts Bonding,
the Fireman's agreement provided:
In the event of any payment by SURETY, SURETY shall be
entitled in any accounting with PRINCIPAL or
INDEMNITOR(S) to reimbursement for any and all
disbursements made by it in good faith in and about the
matters contemplated by this Agreement under the belief
that it is or was liable for the sums and amounts so
disbursed, or that it was necessary or expedient to
5
In their opposition to the summary judgment motion,
appellants remarked that as to the original amount Coken sought
from Fireman's, "Fireman's would have a good argument that it is
due reimbursement of the nearly $45,000 through the indemnification
clause in the bond agreement." In their brief on appeal,
appellants characterized the issue thus: "[T]he dispute here is
what amount Fireman's may be entitled to recover under the
Fireman's Bond -- is it entitled to recover the amounts it paid to
Coken above what Coken was actually owed . . . ?"
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make such disbursements, whether or not such liability,
necessity, or expediency existed.
Further, the agreement placed complete and exclusive authority in
Fireman's to determine if claims should be paid:
SURETY shall have the exclusive right in its name or in
the name of PRINCIPAL to adjust, settle or compromise
any claim, counterclaim, demand, suit or judgment
involving any BOND or to take whatever other action it
may deem necessary, expedient or appropriate. SURETY'S
determination as to whether any such claim,
counterclaim, demand, suit or judgment should be
settled or defended shall be binding and conclusive
upon PRINCIPAL and INDEMNITORS.
Finally, the agreement required that its terms be "liberally
construed so as to protect, exonerate, and indemnify SURETY."
Thus, the agreement affords Fireman's the same broad discretion
to settle claims as given to the surety in the Massachusetts
Bonding agreement and in fact contains the very same language
that most impressed the court in that case.
The difference between asserting that a surety should pay
nothing on a claim, as opposed to arguing that a surety paid too
much on a claim, is insignificant to our analysis. As the court
held in Massachusetts Bonding:
[U]nless it could be shown that such loss as the indemnitee
suffered in the instant case was the result of fraud on its
part, or of collusion between it and the agents of the
United States, which would be the same thing as fraud, these
defendants would be foreclosed by the very terms of the bond
from claiming that the plaintiff had not acted in good faith
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in settling the government's claim despite defendants' prior
refusal to consent to such settlement.6
Given the broad discretion provided Fireman's by the indemnity
agreement and the resultant applicability of the rule of
Massachusetts Bonding, appellants were required to allege and
prove fraud or collusion in order to avoid repayment of the claim
paid by Fireman's.
Appellants next argue that even if Massachusetts Bonding
applies, it should not be construed to override the Rhode Island
common law principle that all contracts contain an implicit
covenant of good faith and fair dealing, citing Ross-Simons of
Warwick, Inc. v. Baccarat, Inc., 66 F.Supp.2d 317, 329 (D.R.I.
1999), aff'd, 217 F.3d 8 (1st Cir. 2000). Ross-Simons, however,
6
Several courts outside of Rhode Island have defined the
standard slightly differently, holding that indemnification may be
avoided when the surety has exhibited "fraud or bad faith." See,
e.g., Fidelity & Deposit Co. of Maryland v. Bristol Steel & Iron
Works, Inc., 722 F.2d 1160, 1163 (4th Cir. 1983) ("The only
exception to this provision arises when the payment has been made
'through fraud or lack of good faith' on the part of the surety but
any challenge to such payment must be rested solely on that claim
of bad faith or fraud." (internal citations omitted)); Engbrock v.
Federal Ins. Co., 370 F.2d 784, 786 (5th Cir. 1967) ("In the face
of these provisions [granting Surety the right to finally,
conclusively, and unconditionally bind Indemnitor by paying
claims], an indemnitor may successfully attack payments made by
Surety only by pleading and proving fraud or lack of good faith by
Surety."); Ins. Co. of North America v. Bath, 726 F. Supp. 1247,
1251 (D. Wyo. 1989) ("Although indemnity agreements are broadly
construed to effect the parties' intent, such a rule has an
exception where the surety has performed on its bond either through
fraud or in bad faith."). Nevertheless, the formulation of the
standard enunciated in Massachusetts Bonding, requiring fraud or
collusion to establish bad faith, continues to be the rule under
Rhode Island law.
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concerned the alleged breach of a settlement agreement, a very
different form of contract than an indemnity agreement.
The court in Massachusetts Bonding considered the precise
question of whether the strict language of the indemnity
agreement preempted the common law rule that contracts contain an
implied covenant of good faith and fair dealing. The court
concluded that common law covenants were inapplicable given the
stringent language of the indemnity agreement. See Massachusetts
Bonding, 30 A.2d at 851 (finding inapplicable the cases cited by
the indemnitors that were reliant on common law principles).7
Further, the court in Massachusetts Bonding made no distinction
between liability and damages and we perceive no such
differentiation in the terms of the indemnity agreement itself.
Appellants must live by the terms of their agreement, which
entitle Fireman's to repayment for all claims paid by it in the
absence of fraud or collusion.
7
Other courts have pronounced similar holdings. See Fidelity
& Deposit Co., 722 F.2d at 1163("'[R]esort to implied indemnity
principles is improper when an express indemnification contract
exists.'" (quoting Commercial Ins. Co. v. Pacific-Peru Constr., 558
F.2d 948, 953 (9th Cir. 1977)); Associated Indemnity Corp. v. CAT
Contracting, Inc., 964 S.W.2d 276, 285 (Tex. 1998) ("'[C]ommon law
principles concerning a surety who claims reimbursements for
amounts paid out by it do not apply to indemnity contracts such as
the one here involved.'" (quoting Ford v. Aetna Ins. Co., 394
S.W.2d 693, 698 (Tex. Civ. App. 1965)); Martin v. Lyons, 558 P.2d
1063, 1066 (Idaho 1977) ("It is a well established principle of
surety law in regard to indemnification that the 'surety will . .
. be permitted to rely on the exact terms of his agreement.'"
(internal citations omitted)).
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B. Appellants' Failure to Raise a Genuine Issue of
Material Fact
Appellants argue that the district court erred in holding
that they did not raise a genuine issue of material fact.
Specifically, they contend that their allegations regarding
Fireman's conduct were sufficient to raise a question of whether
Fireman's committed constructive fraud.
In Massachusetts Bonding, the principals presented the
following evidence to suggest that the surety had colluded with
the government: the government had waited over four years to make
its claim, accepted a relatively small amount in settlement of
its claim, and never brought any legal suit against the
principals. These facts were not, however, sufficient to raise a
genuine issue of material fact as to whether collusion had
occurred. See id. at 852.
Before the magistrate judge, appellants alleged the
following facts as proof of Fireman's "arbitrary and
unreasonabl[e] conduct": "complete and unreasonable inactivity"
in delaying several years before paying the Coken claim, failing
to answer Coken's complaint or oppose Coken's motion for summary
judgment, and neglecting to attempt settlement of Coken's claim.
Prior to the hearing on appellee's summary judgment motion,
appellants alleged that the amount of the Coken judgment against
Fireman's resulted directly from Fireman's delay in paying the
claim. At the hearing before the magistrate judge, however,
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appellants alleged that the Providence County Superior Court
erroneously transposed the amounts due Coken from Fireman's and
Reliance. Although the magistrate judge offered appellants the
opportunity to provide additional information regarding this
assertion, appellants neglected to do so.
Fireman's pointed out at argument that the record revealed
that Coken had prepared the judgments that were entered by the
court. Fireman's posited that it was therefore possible that
Coken reversed the amounts sought from Fireman's and Reliance in
the original complaint, but corrected the error when it drafted
the judgments. Whatever the cause of the changes in the amounts
originally sought and those awarded, appellants have failed to
present any evidence whatsoever that the manner in which this
happened implied fraud or collusion on Fireman's part.
In fact, the first time that appellants alleged that
Fireman's had committed fraud was in their objections to the
magistrate judge's report, filed with the district court. As
such, their arguments on this front must be deemed waived.
See Paterson-Leitch Co. v. Mass. Mun. Wholesale Elec. Co., 840
F.2d 985, 990-91 (1st Cir. 1988) ("We hold categorically that an
unsuccessful party is not entitled as of right to de novo review
by the judge of an argument never seasonably raised before the
magistrate."); Barden v. Sec'y of Health & Human Servs., 836 F.2d
4, 6 (1st Cir. 1987) ("Parties must take before the magistrate,
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'not only their "best shot" but all of their shots.'" (quoting
Singh v. Superintending Sch. Comm., 593 F.Supp. 1315, 1318 (D.
Me. 1984)). Even if their arguments made after the issuance of
the magistrate judge's report are considered, appellants raised
no new facts, and instead merely recast what previously had been
termed "unreasonable" as "constructive fraud."
As in Massachusetts Bonding, appellants have barely "hinted
at the possibility" of fraud and have provided no evidence in
support of their claim.8 In short, the district court properly
held that the facts alleged by appellants were insufficient to
raise a genuine issue of material fact.
Affirmed.
8
Appellants rely upon two cases to argue that they have
sufficiently pled constructive fraud: Thornley Supply Co. v.
Madigan, 154 A. 277, 278 (1931) ("It is a familiar principle of
equity that where one of two persons must suffer a loss, the loss
must be borne by the one who caused it.") and Cardoso v. Mendes,
1998 R.I. Super. LEXIS 15, 30 (R.I. Super. Ct. 1998)
("'Constructive fraud is the breach of some legal or equitable duty
which, irrespective of moral guilt, the law declares fraudulent
because of its tendency to deceive others, to violate confidence,
or injure public interests.'" (internal citations omitted)).
Neither of these cases, however, relate to the definition of fraud
in cases such as this; both consider fraud in the context of common
law equitable claims.
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