Surety Finds Quia Timet Remedy Not in Play Under Contract Terms

By Don R. Sampen, published, Chicago Daily Law Bulletin July 30, 2019

The 7th U.S. Circuit Court of Appeals recently held that a surety for a financially disabled construction contractor was not entitled to use the common-law doctrine of quia timet for relief against the contractor, in light of the surety’s express contractual remedies.

The case is Fidelity & Deposit Company of Maryland v. Edward E. Gillen Co., 2019 U.S. App. Lexis 16596 (7th Cir., June 3). The surety, Fidelity, was represented by Schuyler, Roche & Crisham P.C. The Halloin Law Group S.C. of Milwaukee represented the contractor, Gillen.

Gillen formed a joint venture to obtain a harbor construction contract with the Public Building Commission of Chicago. The joint venture subcontracted some of the work to Gillen and some to various other companies.

To secure the work, the joint venture obtained a performance bond from Fidelity. In return, Fidelity received its premium plus an indemnity agreement and net worth retention agreement from Gillen. These agreements obligated Gillen to indemnify Fidelity for all losses incurred on the bonds and to maintain a net worth greater than $7.5 million.

In 2012, more than a dozen subcontractors sued Gillen for failure to pay for labor and materials and they named Fidelity as a co-defendant on the bond obligations. Some of those lawsuits were settled.

In addition, Fidelity sued Gillen in federal court on various counts. These included breach of the indemnity and net worth agreements and a count for quia timet relief.

The latter is a common-law doctrine used to prevent wrongs or anticipated mischief or otherwise to pursue pre-emptive relief before the wrongdoing actually occurs.

Historically, the doctrine was used by sureties at common law to obtain assurance of the principal’s future performance and to obtain various equitable remedies. In this case, Fidelity’s quia timet claim sought $2.5 million in cash collateral from Gillen as well as an order requiring Gillen to satisfy bond claims.

The U.S. District Court referred the case to a magistrate judge for mediation. As a result, the parties settled all claims except for the quia timet claim. They agreed, moreover, that their settlement would not affect that claim in any manner. Gillen then filed for summary judgment, which the district court granted, with an award of costs against Fidelity. Fidelity then brought this appeal.

Analysis

In an opinion by Judge Michael B. Brennan, the 7th Circuit affirmed. He observed initially that the district court’s decision put Fidelity in a Catch-22. It held, in effect, that Fidelity’s basis for quia timet relief was Gillen’s alleged insolvency; that Gillen was unable to provide security to Fidelity if it was insolvent; but that if Gillen was not insolvent, then there was no basis for the relief.

Brennan disagreed with the district court’s reasoning. He observed that insolvency does not preclude quia timet relief, even if Gillen could not comply with it. The judgment could still have legal effect. Thus, Brennan said, a surety’s principal need not be solvent for quia timet relief to be appropriate.

As an alternative argument, however, Gillen contended that Fidelity could not use an equitable doctrine to supplement its contractual rights. With this point, Brennan agreed.

Before he considered it substantively, he detoured to address choice of law. He noted that Gillen is a Wisconsin company. But as between Wisconsin and Illinois, Brennan found that the choice-of-law factors favored application of Illinois law. A closer question, though, Brennan said, was whether federal common law should apply or Illinois common law.

Ultimately, he found it was not necessary to decide, because the outcome was the same under either. He noted under Illinois common law, for example, that the general rule was that an indemnity agreement renders unavailable common law theories of implied indemnity, thus limiting the indemnitee to contract remedies.

Brennan reasoned that the same general approach would apply to prohibit quia timet relief where the parties, by contract, have provided mechanisms for Fidelity to demand bond collateral and indemnification.

Similarly, federal courts have declined to use their equitable powers to supplement a surety’s rights under a written contract. As a result, after negotiating for specific collateralization and indemnification rights, Fidelity cannot now use this ancient equitable doctrine to gain additional relief.

As an add-on point, Fidelity challenged the order for costs as part of the appeal. Brennan found that it was out of luck. Under Federal Rule of Civil Procedure 54(d), he said that Fidelity could have sought district court review of the decision by the clerk of court to tax costs, but it failed to do so. Without a district court decision on the matter, the appeals court lacked jurisdiction to address costs.

The court, therefore, affirmed in favor of Gillen.

Key points

•The equitable doctrine of quia timet is not available to a surety upon default by its principal, where the surety and principal have agreed to specific contract rights for the protection of the surety’s interests.

•An award of costs is not appealable in the absence of district court review of the award pursuant to Rule 54(d).