The Surety's Indemnity Agreement

Mike Pipkin’s wide range of experience allows him to be creative when crafting strategies and solutions for his clients. Throughout his 25 year legal career, Mike has represented clients in complex business, surety, construction, fidelity, professional liability, and insurance litigation and trials, as well as legal analysis and counseling to businesses of all varieties. Mike’s approach is to work with his clients to determine one or more desirable outcomes, then fashion the appropriate plan to achieve success. Throughout the course of the engagement, Mike and his team keep in close contact with the client, so that they are aware of current developments, and expectations are established and managed using the latest information. Mike is recognized nationally as a thought leader in the legal industry. Mike is a Past Chair of the ABA Tort Trial and Insurance Practice Section Fidelity and Surety Law Committee and currently serves as one of eight attorneys in the USA on the National Association of Surety Bond Producers (NASBP) Attorney Advisory Council. In 2016, Mike was elected to membership in the Federation of Defense & Corporate Counsel (FDCC), an organization comprised of leaders in the insurance and corporate defense bar. FDCC membership is selective and by invitation to those who have been judged by their peers to have achieved professional distinction. In 2017, Mike was named a Charter Fellow in the Construction Lawyers Society of America, an invitation-only construction lawyer honorary society with membership limited to 1,200 practicing Fellows from the United States and internationally. Also in 2017, Mike passed the Louisiana State Bar Examination, allowing WRP to expand its base of services beyond Texas, Oklahoma, and Arkansas. Partner with SMTD Law LLP, Los Angeles, California. She received her Bachelor of Science degree in Political Science from Santa Clara University in 1975 (with honors) and her J.D. from University of California, Hastings College of the Law in 1978 (Thurston Society). She served as the 2003-2004 Chair of the ABA/TIPS Fidelity and Surety Law Committee and received the FSLC Martin J. Andrew Award for Lifetime Achievement in Fidelity and Surety Law in 2017. Partner with the law firm of Wright, Constable & Skeen, LLP, in Baltimore, Maryland. Mr. Bachrach is a graduate of Harvard University in 1971 (with honors), and Georgetown University Law Center in 1974. He served as the 2001-2002 Chair of the Fidelity and Surety Law Committee and received the FSLC Martin J. Andrew Award for Lifetime Achievement in Fidelity and Surety Law in 2009. In 2018, Mr. Bachrach received the Chairman’s Award from the National Bond Claims Association for contributions made to the fidelity and surety industry. VP & Director of Fidelity, Surety, Trade Credit and Political Risk claims with Zurich American Insurance Company in Dallas, Texas. She received both her Bachelor of Business Administration and her Bachelor of Arts degrees from Southern Methodist University in 1987, and her J.D. from Southern Methodist University Dedman School of Law in 1990. She served as the 2007-2008 Chair of the ABA/TIPS Fidelity and Surety Law Committee.

TABLE OF CONTENTS



Preface .....................................................................................................iii



Editors and
Authors
.................................................................................. v



Chapter I



INTRODUCTION
TO THE SURETY’S RIGHTS AS THE



FOUNDATION FOR
THE INDEMNITYAGREEMENT.......................
1



A. Background and
Summary........................................................... 1



1.      
The Nature of Suretyship
...................................................... 2



2.      
Comparison with Insurance: The Extension of Credit
Concept and Other Distinctions ............................................ 4



a.      
Underwriting Issues and Considerations ........................ 7



b.      
It is the Surety’s Hope and Expectation that It Will



Suffer No Loss ................................................................ 8



B.      The Surety’s
Common Law and Statutory Rights ....................... 9



1.      
The Surety’s Common Law Right to Protection from Loss:



Exoneration
........................................................................... 9



2.      
The Surety’s Common Law and Statutory Rights to



Reimbursement.................................................................... 10



3.      
The Surety’s Subrogation Rights and the Indemnity



Agreement ........................................................................... 15



a.      
The Surety’s Subrogation Rights—Basis at Law and in
Equity............................................................................ 15



b.      
The Surety’s Subrogation Rights—Practice and Effect 19



(i)    
The Surety’s Subrogation to the Obligee’s Rights . 19



(ii)  
The Surety’s Subrogation to the Principal’s Rights21



(iii) The Surety’s
Subrogation to the Rights of



Subcontractors
and Suppliers ................................. 22



(iv) 
The Property Subject to the Surety’s Subrogation



Rights
..................................................................... 22



c.      
Comparing and Contrasting the Surety’s Subrogation Rights
to the Surety’s Reimbursement Rights Under the Indemnity Agreement ................................................... 23



(i)    
Advantages of Subrogation in Comparison with



......................................................... 24











d. The Effect of the
Surety’s Rights Under Its Indemnity Agreement on Subrogation–Selection
and Election of Rights ............................................................................ 25



C. Conclusion
................................................................................. 26



Chapter II



CREATION OF
THE RELATIONSHIP AMONG THE SURETY, THE PRINCIPAL, AND THE INDEMNITORS—WHO AND
HOW .......... 29



A. The Parties to the Indemnity Agreement and
its Execution....... 29



1.      
Principal and Indemnitors
................................................... 29



a.      
Individuals
.................................................................... 30



b.      
Corporation ................................................................... 31



(i)    
Subchapter C Corporations
.................................... 31



(ii)  
Subchapter S
Corporations..................................... 35



(iii) Holding
Company .................................................. 36



c.      
Limited Liability Company
.......................................... 36



d.      
Partnership .................................................................... 38



(i)    
General Partnerships .............................................. 39



(ii)  
Limited Partnerships
..............................................
40



(iii) Limited
Liability Partnership ................................. 41



e.      
Joint
Venture................................................................. 42



(i)    
Multiple Purpose/Multiple
Projects........................ 42



(ii)  
Single Purpose/Single Project Joint Venture.......... 44



f.       
ESOP (Employee Stock Ownership Plans)................... 44



g.      
Foreign Entity ............................................................... 45



(i)    
Foreign
Corporations.............................................. 45



(ii)  
Foreign
Sovereigns................................................. 46



(iii) Sovereign
Tribal Nations ....................................... 47



(iv) 
Tribal
Affiliates/Entities......................................... 50



(v)   
Alaska Native Corporations
................................... 51



h.      
Trust/Trust Beneficiaries .............................................. 51



(i)    
Testamentary
Trust................................................. 52



(ii)  
Business
Trusts....................................................... 53



(iii) Asset
Protection/Spendthrift Trusts ....................... 54



(iv) 
Family or Special Interest Trust .............................
55



 



xii











2.      
Surety
.................................................................................. 55



a.      
Corporate Surety ........................................................... 56



b.      
Personal Surety ............................................................. 56



c.      
Compensated Surety
..................................................... 56



d.      
Uncompensated Surety
................................................. 57



e.      
Co-Surety ...................................................................... 57



(i)    
Contractual Co-Surety............................................ 57



(ii)  
Successor/Predecessor Surety
................................ 58



f.       
Reinsurer....................................................................... 59



g.      
Surety in Receivership
.................................................. 60



h.      
Surety in Liquidation
.................................................... 61



3.      
Signatures and Requirements for Signature ........................ 61



a.      
Execution by All Parties
............................................... 61



b.      
Notarial Acknowledgment
............................................ 62



(i)    
Purpose (Forged Signatures) .................................. 62



(ii)  
Protections (Notary Liability)
................................ 63



c.      
Corporate Resolution .................................................... 64



d.      
Need for Original
Signature.......................................... 65



4.      
Surety’s Acceptance—By Writing
Bonds........................... 65



B. The Principal’s and the Indemnitors’
Representations and



Warranties .................................................................................. 65



1.      
The Right, Power, and Authority to Execute and Perform
the Indemnity
Agreement.......................................................... 65



2.      
The Financial Information Provided to the Surety .............. 67



a.      
Right to Have Access to Principal’s and Indemnitors’



Books and
Records ....................................................... 68



b.      
Right to Financial Information from Third Parties .......
68



3.      
Acknowledgment that There are No Oral or Other Agreements
as a Condition Precedent or to Induce the Execution of the Indemnity Agreement. ............................. 72



C. Consideration ............................................................................. 75



D. Severability and Partial
Execution............................................. 79



1.      
Severability of Invalid, Illegal, Void, or Unenforceable
Provisions of the Indemnity Agreement.............................. 80



2.      
Partial Execution of the Indemnity Agreement ................... 82



 



xiii











a. One or More Parties
Fails to Execute the Indemnity Agreement..................................................................... 82



E.      The Execution
of the Indemnity Agreement by One or More Parties is Defective or Invalid for
Any Reason ......................... 82



F.      Multiple
Indemnity Agreements ................................................ 84



1.      
With the Same
Surety.......................................................... 85



2.      
With Two or More
Sureties................................................. 86



G.     The Bonds
Included Under the Indemnity Agreement .............. 87



1.      
Bonds Executed On or After the Date of the Indemnity
Agreement ........................................................................... 87



2.      
Bonds Executed Prior to the Date of the Indemnity
Agreement ........................................................................... 88



H.     The Surety’s
Right to Decline to Execute Bonds ...................... 91



1.      
The Principal is Not Obligated to Obtain Bonds from the
Surety
.................................................................................. 91



2.      
The Surety’s Right to Decline to Execute Any New Bonds 92



3.      
The Surety’s Right to Decline to Execute Any Final Bonds



............................................................................................. 92



4.      
Bid Bond Losses Where Final Bonds Not Issued
............... 95



5.      
Surety Liability for Defective or Rejected Bonds ............... 95



I.       
The Rights of Other Sureties, Co-Sureties, and Reinsurers .......
96



J.       
Termination of the Indemnity Agreement Relationship ............ 98



1.      
The Indemnity Agreement as a Continuing Obligation ...... 98



2.      
Method of Termination
..................................................... 100



a.      
Written Notice Required
............................................. 100



b.      
Delivery of Written Notice to the Surety–Manner ..... 101



c.      
Time Conditions—Termination Effective Date.......... 102



3.      
Effectiveness of Termination with Respect to the Bonds . 102



a.      
Bonds Executed Prior to the Termination Effective Date



.................................................................................... 102



b.      
Bonds Executed After the Termination Effective Date



.................................................................................... 103



c.      
Future Liability for Additional Bonds Executed After the
Termination Effective Date ........................................ 104



4.      
Continuing Liability of Non-Terminating Indemnitors..... 104



 



xiv











5.      
Termination By Operation of Law (Voiding of a Bond or
Bonded Contract and its Effect on the Indemnity Agreement)



........................................................................................... 104



6.      
Disputes Between the Principal and the Indemnitors and/or
Among the Indemnitors..................................................... 105



 



Chapter III



DOCUMENTS AND
AGREEMENTS RELATED TO THE INDEMNITY AGREEMENT
.............................................................. 107



A.     The Surety’s
Agreements with the Principal and Indemnitors 108



1.      
Subsequent Indemnity
Agreements...................................
108



2.      
Subordination Agreements
................................................ 109



a.      
Subordination of Debt to and from Affiliate Entities . 110



b.      
Indemnitor Loans as Subordinated Debt
.................... 112



3.      
Collateral Agreements
....................................................... 112



4.      
Capital Retention
Agreements........................................... 112



5.      
Tribal
Addenda.................................................................. 114



6.      
Funds Control
Agreements................................................ 121



a.      
Joint Account Agreements.......................................... 122



b.      
Trust
Agreements........................................................ 123



c.      
Third-Party Funds Control Agreements
..................... 125



d.      
Cash Collateral Agreements
....................................... 126



7.      
Lending, Financing, Security Type Agreements ............... 130



a.      
Direct Lending ............................................................ 130



b.      
Indirect Lending.......................................................... 131



8.      
Underwriting Agreements
................................................. 132



9.      
Standstill Agreements
....................................................... 136



10.  
Opinions of Counsel.......................................................... 137



11.  
Confidentiality Agreements
..............................................
138



B.      Collateral for
the Surety........................................................... 138



1.      
What Kinds of
Collateral................................................... 138



a.      
Irrevocable Letter of Credit
........................................ 138



(i)    
Issuing Entity Requirements–Capacity and Format



.............................................................................. 139



(ii)  
Evergreen (Automatically Renewable) Clause. ... 140



b.      
Certificates of Deposit/Demand Deposit Accounts .... 141



 



xv











c.      
Real Property
.............................................................. 141



d.      
Personal Property ........................................................ 142



(i)    
Equipment ............................................................ 143



(ii)  
Inventory and Materials
....................................... 143



(iii) Stocks and
Bonds ................................................. 144



(iv) 
General Intangibles .............................................. 144



(v)   
Intellectual Property (e.g., Patents)
...................... 144



(vi) 
Life Insurance (e.g., Key Personnel) .................... 145



2.      
Priority Rights in the
Collateral......................................... 146



a.      
Prior Liens .................................................................. 146



b.      
Subordination Agreements
......................................... 146



3.      
Acquiring the Collateral—Means and
Methods................ 147



a.      
Real Property–Mortgages and Deeds of Trust ............ 147



b.      
Personal Property ........................................................ 148



(i)    
Assignment or Security Agreement ..................... 148



(ii)  
Attachment ........................................................... 150



(iii) Types of
Security Agreements ............................. 150



4.      
Perfection
.......................................................................... 152



a.      
Filing a UCC-1 Financing
Statement.......................... 152



b.      
Possession of the Collateral ........................................ 152



c.      
Control ........................................................................ 153



d.      
Automatic Perfection upon Attachment
..................... 153



e.      
Other Required Filings (Examples Only)
................... 153



5.      
Losing the Collateral
......................................................... 154



a.      
Failing to Obtain Perfected Lien Rights in the Collateral
154



b.      
Failing to Maintain the Collateral ............................... 154



c.      
Third Party Actions Taken Against the Collateral...... 155



(i)    
Senior Lien Creditors
...........................................
155



(ii)  
Debtors/Trustees in Bankruptcy ...........................
155



(iii) Others (e.g.,
Taxing Authorities and Judgment
Creditors).............................................................. 157



d.      
Failing to Insure the Collateral
................................... 158



6.      
Realizing on the Collateral and Application of the
Collateral



Proceeds to
the Surety’s Loss............................................ 158



 



xvi











a.      
By Contract (Indemnity Agreement, Separate Collateral
Agreement, Settlement Agreement, or Other) ............ 158



b.      
Allocation of Collateral and Its Proceeds By Operation of
Law ......................................................................... 161



7.      
Releasing the Collateral
.................................................... 162



a.      
Satisfactory Evidence of the Surety’s Release and



Discharge From
All of its Liabilities under the Bonds162



b.      
Payment of All of the Surety’s
Losses........................ 163



C.      The Surety’s
Agreements with Entities with Whom the Principal



and/or
Indemnitors Have Relationships................................... 163



1.      
Inter-Creditor Agreements
................................................ 163



2.      
Subordination Agreements
................................................ 168



3.      
Guarantees in Favor of Existing Lenders; Guarantees
Supporting New Credit...................................................... 169



4.      
Equipment, Facility, and Intellectual Property
Utilization
Agreements........................................................................ 169



5.      
Joint Venture Applications and Related Agreements........ 171



D.     The Surety’s
Agreements with Entities with Whom the Surety



has
Relationships
..................................................................... 171



1.      
Reinsurance ....................................................................... 171



2.      
Co-Surety
.......................................................................... 173



a.      
Single Indemnity Agreement for the Co-Sureties....... 174



b.      
Multiple Indemnity Agreements for the Co-Sureties.. 175



c.      
Co-Surety Side Agreement Among the Sureties Only 175



(i)    
Percentages........................................................... 178



(ii)  
Lead Surety
.......................................................... 179



(iii) Solvency
Issues .................................................... 180



d.      
Accommodation Surety .............................................. 180



e.      
Fronting Agreements
.................................................. 181



3.      
The Guiding Claim Procedures ......................................... 181



Chapter IV



LIABILITY OF
THE PRINCIPAL AND INDEMNITORS TO INDEMNIFY AND REIMBURSE THE SURETY
............................. 187



A. The Liability of the Principal and
Indemnitors ........................ 189



1. What is a “Principal”? ....................................................... 189



 



xvii











2.      
Who can be a “Principal”?
................................................ 190



a.      
Individuals
.................................................................. 190



b.      
Corporations or Limited Liability Companies ............ 191



c.      
Partnerships, Limited Liability Partnerships, Joint
Ventures, or Their Partners ......................................... 192



3.      
What is an
“Indemnitor”?.................................................. 192



4.      
Who can be an “Indemnitor”? ........................................... 192



a.      
Individuals
.................................................................. 192



b.      
Corporation or Limited Liability Company ................ 194



c.      
Partnership, Limited Liability Partnership, Joint
Venture, or Their Partners ......................................................... 195



d.      
Trust/Trust Beneficiaries
............................................
195



5.      
The Joint and Several Liability of the Principal and the
Indemnitors to the Surety .................................................. 196



B. The Reimbursement and Indemnification of
the Surety .......... 197



1.      
Indemnification Against Liability
..................................... 199



2.      
Indemnification Against Loss
........................................... 201



C. The Basis for the Surety’s Claim for
Reimbursement ............. 202



1.      
The Surety Incurs Loss in Connection With Any Bonds .. 208



2.      
The Surety’s Execution, Procurement, Renewal, or



Continuation
of Any Bonds............................................... 209



3.      
The Failure of the Principal and the Indemnitors to
Comply With Obligations under the Indemnity Agreement ........... 212



4.      
The Surety’s Enforcement of Its Rights under the
Indemnity



Agreement ......................................................................... 213



D. The Surety’s Loss—Types of Damages for
Which the Surety Seeks Reimbursement
(Indemnification)................................. 214



1.      
Unpaid Premiums .............................................................. 214



2.      
The Surety’s Payment of
Claims.......................................
215



3.      
The Surety’s Advances and Loans .................................... 218



4.      
Interest ............................................................................... 219



5.      
Recovery of Attorneys’ Fees ............................................. 220



a.      
Requirement that “All” Fees are Recoverable ............ 222



b.      
Requirement that Fees Must be Necessary and Incurred in
Good Faith .............................................................. 223



 



xviii











c.      
Requirement that Fees Must be Reasonable ............... 224



d.      
The Principal’s Offer to Defend
................................. 228



6.      
Expenses............................................................................ 231



7.      
Bad Faith Claims ............................................................... 234



Chapter V



THE SURETY’S
ENFORCEMENT OF ITS RIGHTS OF



REIMBURSEMENT
(INDEMNITY) .................................................. 237



A.     Initial Steps
Sureties Take to Enforce Their Reimbursement (Indemnity) Rights ................................................................... 237



1.      
Reviewing the Underwriting File ...................................... 237



2.      
Obtaining Asset, Lien, and Internet Searches
................... 240



3.      
Sending Notice and/or Demand to Principal and Indemnitors



........................................................................................... 240



B.      Initial Steps
Sureties Take Under the Indemnity Agreement ..
242



1.      
Perfecting Security
Interests.............................................. 242



2.      
Making a Collateral Demand
............................................
244



3.      
Using the Authorizations in the Indemnity Agreement..... 247



C.      Filing Suit
Against the Principal and/or the Indemnitors ........ 249



1.      
Surety’s Right to Bring Separate
Suits.............................. 249



a.      
Suits Against Separate Individuals or
Entities............ 249



(i)    
Suits Against the Surety’s Principal ..................... 249



(ii)  
Suits Against the Surety’s Indemnitors ................ 251



b.      
Suits for Separate Surety
Losses................................. 253



(i)    
Direct Suits Against the Principal and/or Indemnitors
.......................................................... 253



(ii)  
Cross-Claims and Third-Party Claims. ................ 256



2.      
Third-Party Beneficiary
Provisions...................................
257



3.      
Personal Jurisdiction and Joinder Provisions
.................... 258



4.      
Venue for Suit Provisions
................................................. 262



5.      
Service of Process Provisions
...........................................
264



6.      
Confession of Judgment
Provision....................................
264



7.      
Choice of Governing Law
Provision................................. 268



8.      
Waiver of Trial by Jury
..................................................... 269



 



xix











D.     Filing a Claim
Against an Indemnitor’s Probate Estate Upon



Death of the
Indemnitor ........................................................... 271



E.      Standards of
Proof ................................................................... 273



1.      
Generally ........................................................................... 273



2.      
Subjective Good Faith of Surety Generally Sufficient ......
275



3.      
Principal Non-Liability Generally Not a Defense ............. 278



4.      
Good Faith; Protection of Surety’s Interests ..................... 280



5.      
Good Faith and Objective Reasonableness
....................... 281



F.      The Burden of
Proof ................................................................ 284



G.     The Surety’s
Settlement with One or More Indemnitors ......... 294



Chapter VI



THE SURETY’S
ENFORCEMENT OF ITS RIGHTS TO



COLLATERAL
FROM THE PRINCIPAL AND THE INDEMNITORS



.............................................................................................................. 295



A.     Common Law and
Equitable Rights of Enforcement .............. 295



1.      
Quia timet .......................................................................... 297



2.      
Exoneration
....................................................................... 302



B.      Specific Performance
of the Surety’s Rights to Demand



Collateral
under the Indemnity Agreement.............................. 303



1.      
The Surety’s Rights ........................................................... 303



2.      
The Surety’s Remedy ........................................................ 308



C.      Specific
Performance of the Surety’s Trust Fund Rights under



the Indemnity
Agreement ........................................................ 311



1.      
The Trust Fund
Provision.................................................. 311



2.      
Legal Recognition of the
Trust.......................................... 314



a.      
Manifestation of Intent to Create a Trust .................... 315



b.      
Ascertainable Trust Res
.............................................. 317



c.      
Identification of Beneficiaries
.................................... 320



d.      
Identification of a
Trustee........................................... 320



e.      
Making Sense of the Myriad of Rulings ..................... 321



3.      
Specific Performance As a Remedy .................................. 323



4.      
Effective Use of the Trust Fund Provision ........................ 325



D.     The Surety’s
Assignment Rights ............................................. 327



1.      
The Surety’s Rights ........................................................... 327



 



xx











a.      
Origin and Nature of the Assignment Rights.............. 327



b.      
The Property Rights Assigned
.................................... 329



c.      
Right to Contract Funds
.............................................. 331



d.      
Right to Equipment and Materials ..............................
331



e.      
Right to Principal’s Subcontracts and Claims ............ 332



(i)    
Right to Settle Claims Involving the Principal..... 333



(ii)  
Right to Recover Costs and Expenses .................. 334



(iii) Right to
Offset ...................................................... 334



f.       
Right to Licenses, Patents, Copyrights, or Trade Secrets



.................................................................................... 334



g.      
Right to Other Property (i.e., General and Limited
Partnership Interests, Tax Refunds, General Intangibles, Claims Under Insurance
Policies)............................... 335



h.      
Right to Real Property
................................................ 335



2.      
The Surety’s Remedy ........................................................ 335



a.      
The Indemnity Agreement as Security Agreement..... 335



b.      
The Indemnity Agreement as a UCC-1 Financing Statement
.................................................................... 336



c.      
The Effective Date of the Assigned
Rights................. 339



d.      
Enforcement of the Surety’s Assignment Rights........ 340



e.      
The Non-Waiver of the Surety’s Other Contractual,



Legal, and
Equitable Rights........................................ 341



 



Chapter VII



THE INDEMNITY
AGREEMENT AND THE HANDLING OF SURETY CLAIMS
............................................................................... 343



A.     The Surety’s
Investigation Into the Books and Records of the



Principal and
the Indemnitors .................................................. 343



1.      
Access to Principal and Indemnitors’ Books and Records 343



a.      
In general
.................................................................... 343



b.      
Purposes ...................................................................... 344



c.      
Enforcement................................................................ 346



2.      
The Surety’s Right to Information from the Principal or



Indemnitors........................................................................ 348



3.      
Access to Information from Third Parties ......................... 350



 



xxi











4.      
The Principal’s and the Indemnitors’ Obligation to
Maintain or Furnish Surety with Accurate Books and Records or
Information........................................................................ 352



5.      
The Surety’s Right to Furnish Information to Third
Parties



........................................................................................... 353



6.      
The Surety’s Investigation at the Bonded Project Site ......
354



7.      
The Principal’s Turnover of Books and Records to the Surety Upon the Occurrence of a Default
under the Indemnity
Agreement........................................................ 354



B.      The Surety’s
Rights to Settle Claims Against Bonds .............. 355



1.      
Principal and Indemnitors’ Obligation to Notify Surety of



Claims
............................................................................... 355



2.      
The Surety’s Investigation
................................................ 356



3.      
The Surety’s Right to Settle Claims Against Its Bonds
.... 356



4.      
Effect of a Prima Facie Provision on the Surety’s Right
to



Settle.................................................................................. 363



5.      
Indemnitors’ Option to Post Collateral
............................. 366



a.      
Effect of Failure to Deposit
Collateral........................ 367



b.      
Nature and Amount of
Collateral................................ 369



c.      
The Duty of Good
Faith.............................................. 370



d.      
The Surety’s Duty to Notify Principal and Indemnitors



.................................................................................... 373



e.      
The Surety’s Investigation of Claims and Assertion of



Defenses...................................................................... 375



6.      
The Duty to Cooperate
...................................................... 379



7.      
The Surety’s Right to Settle the Principal’s Affirmative



Claims
............................................................................... 380



a.      
The Surety’s Duty of Good Faith
............................... 385



b.      
The Uniform Commercial Code Commercially Reasonable
Standard................................................... 385



C.      Specific
Provisions in the Indemnity Agreement Applicable to Performance Bond Claims ....................................................... 389



1.      
The Surety’s Advances or Loans to the Principal ............. 389



a.      
The Surety’s Right to Advance Money to the Principal



.................................................................................... 390



 



xxii











b.      
The Surety’s Absolute Right to Cancel any Bank Guarantee
or Cease Advancing or Lending Money to the Principal ...................................................................... 391



c.      
The Surety’s Advances as a Loss
............................... 391



2.      
The Surety’s Takeover Rights ........................................... 392



a.      
When the Surety’s Takeover Rights May be Exercised



.................................................................................... 393



b.      
The Substance of the Surety’s Takeover Rights ......... 394



3.      
The Surety’s Assignment Rights to the Contract Balances
and to the Use of the Principal’s Subcontractors and
Suppliers............................................................................ 395



a.      
Receipt of the Contract Monies from the Obligee for the
Performance of the Work............................................ 395



b.      
Use of the Principal’s Subcontractors and Suppliers .. 398



Chapter VIII



COMPLEMENTARY
PROVISIONS OF THE INDEMNITY AGREEMENT ...................................................................................... 401



A.     The Obligee
Refuses to Accept a Bond ................................... 401



B.      Additional
Obligations of the Principal and the Indemnitors to the Surety ................................................................................. 402



1.      
Obligation and/or Right to Obtain the Release and
Discharge of the Bonds
...................................................................... 402



a.      
By the Principal and the Indemnitors
......................... 402



b.      
Rights of the Surety .................................................... 403



2.      
The Principal and Indemnitors’ Agreement to Subordinate



Certain Claims
to the Surety’s Rights ............................... 404



a.      
Claims of Indemnity and/or Contribution by the Principal
and Indemnitors Against Each Other ..........
405



b.      
Loans Between Principal and Indemnitors ................. 405



3.      
Notice Obligations of the Principal and Indemnitors ........
405



4.      
The Indemnitors’ Obligation to Know the Status of the
Principal’s Financial Condition and the Bonded Contracts



........................................................................................... 406



C.      Changes or
Modifications ........................................................ 407



1.      
Changes in the Bonds and Underlying Bonded Contracts 407



2.      
Changes in the Indemnity Agreement ...............................
410



 



xxiii











D.     Notices ..................................................................................... 411



1.      
Manner and Method
.......................................................... 411



2.      
The Principal and the Indemnitors’ Notice to the Surety
of



Claims or
Demands ........................................................... 413



E.      Waivers and
Non-Waivers ....................................................... 413



1.      
The Principal’s and the Indemnitors’ Waivers and Non-
Waivers.............................................................................. 413



a.      
Claims Against the Surety
.......................................... 413



b.      
Notices and
Defenses.................................................. 415



2.      
The Surety’s Waivers and
Non-Waivers........................... 418



a.      
The Surety Accepts, Fails to Obtain, or Releases Other
Indemnity Agreements................................................ 419



b.      
The Surety Releases One or More of the Indemnitors 420



c.      
The Surety Accepts, Fails to Obtain, or Releases
Collateral..................................................................... 421



d.      
The Surety Delays in Exercising its Rights
................ 422



3.      
The Indemnitors’ Waiver of Their Homestead Rights and



Other
Exemptions.............................................................. 424



4.      
The Indemnitors’ Waiver of Their Rights to Jury Trial .... 426



5.      
Election of Venue and Choice of Law
.............................. 428



F.      Other Surety
Rights ................................................................. 430



1.      
Power of Attorney for the Principal and the Indemnitors . 430



2.      
Confession of Judgment
.................................................... 433



3.      
Miscellaneous Other Rights and Remedies ....................... 437



a.      
Surety’s Rights in Addition to Other
Rights............... 437



b.      
Surety’s Exhaustion of Its Rights and Remedies ........ 438



c.      
No Election of the Surety’s Rights and Remedies...... 439



d.      
The Surety Shall Have Every Right, Remedy, or Defense
that a Personal Surety Without Compensation Would Have ............................................................................ 440



e.      
The Indemnity Agreement Shall be Liberally Construed to
Protect, Exonerate, and Indemnify the Surety
........ 441



 



Chapter IX
DEFENSES........................................................................................... 443



A. Defenses Common to Both the Principal and
the Indemnitors 444



 



xxiv











1.      
Disputes Over the Execution of the Indemnity Agreement



........................................................................................... 444



2.      
The Indemnitors’ Failure to Sign or Understand the



Indemnity
Agreement........................................................ 445



3.      
The Principal and the Indemnitors Contend That They Are
Not Liable for Payments Made by the Surety ................... 446



a.      
The Surety’s Failure to Make Payment in Good Faith450



b.      
The Surety’s Payment Is Not Reasonable................... 457



c.      
The Surety Acted in Bad Faith
................................... 459



4.      
Release of the Indemnitors ................................................ 460



5.      
Lack of Notice to the
Indemnitors..................................... 460



6.      
Waiver by
Surety............................................................... 462



7.      
The Surety’s Failure to Write Additional Bonds for the



Principal
............................................................................ 463



8.      
The Surety’s Failure to Finance the Principal ................... 464



9.      
Lack of Venue for Bringing Suit and/or Lack of Service of
Process............................................................................... 465



10.  
Termination of the Indemnity Agreement ......................... 467



11.  
Novation and Successive Indemnity Agreements ............. 469



12.  
Mitigation of Damages
...................................................... 469



13.  
Failure of the Principal to Execute a Bond Issued by the
Surety
................................................................................ 471



14.  
Material Change ................................................................ 472



15.  
No Proper Default by the Obligee ..................................... 474



16.  
Tortious Interference with Contract
.................................. 474



17.  
Abuse of
Rights/Domination............................................. 476



18.  
Suretyship vs.
Insurance.................................................... 476



19.  
Contracts of Adhesion
....................................................... 478



20.  
Restraint of
Trade.............................................................. 479



21.  
Fiduciary
Duty................................................................... 479



22.  
Electronic
Signatures......................................................... 480



23.  
Statute of Limitations
........................................................ 481



24.  
Death of Indemnitor
.......................................................... 482



25.  
Improper Exemptions ........................................................ 482



B. Defenses Commonly Asserted Only By The
Indemnitors ....... 483



 



xxv











1.      
Lack of Consideration
....................................................... 483



2.      
Surety’s Failure to Adequately Pursue the
Principal......... 484



3.      
The Surety’s Knowledge of the Indemnitor’s Divorce ..... 484



4.      
The Surety’s Knowledge of the Sale of the Principal’s



Business............................................................................. 485



 



Chapter X



THE INDEMNITY
AGREEMENT IN COMMERCIAL SURETY
SETTINGS............................................................................................ 487



A. Types of Commercial Surety Bonds ........................................ 488



1.      
Judicial Bonds ................................................................... 489



2.      
Fiduciary Bonds/Probate Bonds ........................................ 491



3.      
License and Permit Bonds
................................................. 492



4.      
Statutory Bonds ................................................................. 494



5.      
Release/Discharge Bonds
.................................................. 495



6.      
Commercial Surety Performance Bonds
........................... 496



a.      
Subdivision Bonds............................................................. 496



b.      
Reclamation Bonds
........................................................... 497



c.      
Other Performance Type Commercial Surety Bonds ........
497



7.      
Non-Statutory Guaranty and/or Faithful Performance Bonds



........................................................................................... 498



8.      
Public Official Bonds ........................................................ 498



B. Underwriting the Risk of Commercial Surety
Bonds .............. 499



1.      
The Basic Principles of Underwriting—The Three “Cs” .. 499



2.      
The Principal’s Character .................................................. 499



3.      
The Principal’s Capacity
................................................... 500



4.      
The Principal’s
Cash/Capital............................................. 500



5.      
The Principal’s
Collateral.................................................. 501



C. Issues Regarding Surety’s
Exposure........................................ 503



1.      
Penal Sum Issues ............................................................... 503



2.      
Length of Performance under Bonded Obligation
............ 504



3.      
Modifications to the Bonded Obligation ........................... 505



a.      
Renewal Bonds ........................................................... 505



b.      
Cancellation ................................................................ 505



D. Indemnity Agreement Considerations
..................................... 506



 



xxvi











1.      
Types of Commercial Surety Bond Indemnity Agreements



........................................................................................... 506



2.      
The Long Form Indemnity Agreement
............................. 508



a.      
Broad Definition of Principal /
Indemnitor................. 509



b.      
The Right to Cross-Indemnity Between Indemnitors . 511



c.      
Release and Discharge
Rights..................................... 511



d.      
Collateral..................................................................... 512



e.      
Place in Funds Rights
................................................. 513



f.       
The Right to Decline and/or Renew Existing Bonds .. 514



g.      
Cancellation
Rights..................................................... 515



h.      
Non-Impairment of Surety’s Rights
........................... 516



i.       
Access to Financial Information ................................. 517



j.       
Interest Provision ........................................................ 518



3.      
Differences Between Commercial Surety and Contract Surety
Bond Indemnity Agreements: The Lack of Certain Key Provisions Typically Found
in Contract Surety Bond Indemnity Agreements
...................................................... 518



a.      
Lack of Takeover Provisions
...................................... 518



b.      
Lack of Trust Fund
Provisions....................................
519



c.      
Lack of Power of Attorney Provisions
....................... 519



d.      
Lack of Advance or Financing Provisions.................. 519



e.      
Lack of Assignment and UCC Provisions .................. 520



E.      Collateral
Agreement and Other Considerations ..................... 520



1.      
Collateral Agreement
........................................................ 520



2.      
Subordination and Intercreditor Agreements
.................... 523



F.      Enforcement
Issues .................................................................. 524



1.      
Preliminary Injunctions and Temporary Restraining Orders



........................................................................................... 524



a.      
The Elements of Injunctive Relief ..............................
526



b.      
Distinction Between a Preliminary Injunction and
Temporary Restraining Order ..................................... 527



c.      
Examples of Injunctive Relief Awarded to Commercial Bond
Sureties.............................................................. 527



2.      
Liens .................................................................................. 529



 



xxvii











a. Surety’s Enforcement
Rights under the Uniform



Commercial
Code ....................................................... 529



3.      
Bankruptcy ........................................................................ 531



a.      
Bankruptcy and the Effects on the Commercial Bond



Surety’s
Collateral ...................................................... 531



b.      
Fundamental Bankruptcy Principles ...........................
532



c.      
Pertinent Commercial Surety Bond Indemnity Agreement and
Collateral Agreement Provisions Related to
Bankruptcy.............................................................. 533



d.      
Property of the Bankruptcy Estate as it Relates to
Differing Types of Collateral...................................... 534



(i)    
Property of the Bankruptcy Estate........................ 535



(ii)  
Types of Collateral and Bankruptcy Considerations



.............................................................................. 536



(iii) Debtor’s
Property as the Surety’s Collateral and its



Use........................................................................ 538



 



Chapter XI



THE INDEMNITY
AGREEMENT IN BANKRUPTCY ....................
541



A.     Bankruptcy and
the Surety’s Rights under the Indemnity



Agreement................................................................................ 541



1.      
The
Concepts..................................................................... 541



a.      
Breathing Space .......................................................... 541



b.      
Sharing ........................................................................ 542



c.      
Forgiveness of Indebtedness ....................................... 542



2.      
The Effect of Fundamental Bankruptcy Principles on the
Indemnity Agreement........................................................ 543



a.      
The Automatic Stay (“Breathing Space”)................... 543



b.      
Preference Liability (“Sharing”) ................................. 544



c.      
Discharge (“Fresh
Start”)............................................ 546



B.      The Effect of
Bankruptcy upon the Surety’s Rights under the



Indemnity
Agreement—Specific Topics ................................. 547



1.      
The Assertion of Indemnity Rights in the Bankruptcy Case
-



The Surety’s
Proof of Claim ............................................. 547



a.      
Types of Claims a Surety May Hold
.......................... 549



b.      
Contents of Surety’s Proof of
Claim........................... 550



c.      
The Contingent Claim in Bankruptcy ......................... 551



 



xxviii











2.      
Prima Facie Provision and Effect upon Burden of Proof in
Bankruptcy ........................................................................ 553



3.      
Right to Settle Claims–Bankruptcy
Cases......................... 555



4.      
Right to Recover Attorneys’ Fees in
Bankruptcy.............. 556



5.      
Non-Dischargeability ........................................................ 558



a.      
Trust
Fund................................................................... 558



b.      
Representations and Warranties Provision in the Indemnity
Agreement ................................................. 563



6.      
Access to Documents
........................................................ 565



C.      Use or
Restrictions of Bonded Contract Funds........................ 567



1.      
The Perennial Battle—Are the Bonded Contract Funds
Property of the Debtor’s Estate or Are They Subject to the Surety’s Subrogation
Rights? ............................................ 567



2.      
Indemnity Agreement Provisions that Support the Surety’s



Traditional
Equitable Right to Contract Funds ................. 571



a.      
The Trust Fund Provision
...........................................
571



b.      
Assignment of Contract Consideration ....................... 574



D.     Surety’s Use
or Control of the Debtor’s Property Other Than



Bonded
Contract Funds ........................................................... 576



1.      
Right of Takeover to Complete a Bonded
Project............. 576



a.      
Requirement of Principal’s Default ............................ 577



b.      
Ipso Facto Clauses
...................................................... 578



c.      
Acceptance/Rejection of the Bonded Contract ........... 580



2.      
Assertion of Control over Debtor’s Equipment and



Subcontracts ...................................................................... 582



a.      
Tools and Equipment .................................................. 582



b.      
Subcontractors and
Suppliers...................................... 583



3.      
Taking Control or Compromising Debtor’s Affirmative
Claims
............................................................................... 584



4.      
Surety’s Collateral............................................................. 585



E.      Post-Petition
Financing and Extension of Surety Credit ......... 588



1.      
Stay Relief and Rights Afforded under the Indemnity
Agreement ......................................................................... 589



2.      
Post Petition Indemnity Agreement
.................................. 590



F.      Surety’s Right
to Decline, Cancel, or Not Renew Bonds ........ 591



 



xxix









xxx



1.      
Right to Decline
................................................................ 591



2.      
Right to
Cancel.................................................................. 593



3.      
Right to
Non-Renew.......................................................... 597



G. Bankruptcy Court Treatment of Indemnity
Agreements in Chapter 11 Plans ...................................................................... 598



BIBLIOGRAPHY................................................................................. 601



APPENDIX OF
CASES BY JURIDICTION ....................................... 623