Court Opinion

ID: 9705887
Source: CourtListenerOpinion
Date Created: 2023-08-26 01:25:22.724796+00
Date Added: 2024-06-11T18:22:17.284356
License: Public Domain

BATTAGLIA, Judge,
dissenting, joined by BELL, C.J. and ELDRIDGE, J.
The majority gets it right in this case — almost. I cannot quarrel with the majority’s conclusion that “the repairs made by Clearwater to Atlantic’s equipment added to the value of that equipment and, thus, were not ‘labor and materials’ covered by the bond.” Majority op. at 306. Nor do I dispute the majority’s holding that a surety’s duty of good faith requires it to act reasonably in settling or paying claims. Id. at 307. I even agree with the majority that the record does not establish, as a matter of law, that the payment by Ulico (the surety) to Clearwater (the obligee) over the objection of Atlantic (the principal) was made in bad faith or was unreasonable. Where the majority falters, however, is in deciding that the payment was reasonable, per se.
The traditional definition of a surety is “someone who contracts to answer for the debt or default of another.” Edward G. Gallagher, The Law of Suretyship 1 (2d. ed. 2000) (hereinafter “Gallagher”); SNML Corp. v. Bank of North Carolina, 41 N.C.App. 28, 254 S.E.2d 274 (1979). Defined more narrowly, “a surety is a person who binds himself for the payment of a sum of money, or for the performance of something else, for another who is already bound for such payment or performance.” SNML Corp., 254 S.E.2d at 279. A surety relationship involves three parties: (1) the principal, “the one for whose account the contract is made, whose debt or default is the subject of the transaction”; (2) the obligee, “the one to whom the debt or obligation runs”; and (3) the surety, “the one who agrees that the debt or obligation *319running from the principal to the [obligee] shall be performed [or paid], and who undertakes on his own part to perform [or pay] it if the principal does not.” Arthur A. Stearns, Law op Suretyship § 1.4 (5th ed. 1951); Gallagher at 1. Typically, in such an arrangement, the surety only suffers a loss if the principal does not perform its obligation to the obligee and then is unable to reimburse the surety for payments that the surety made to the obligee. Gallager at 1. A surety also suffers loss, however, when it fails to exercise good faith in paying an obligee’s claim that falls outside the terms of the bond agreement. See The Hartford v. Tanner, 22 Kan.App.2d 64, 910 P.2d 872, 877 (1996); City of Portland v. George D. Ward & Assoc., Inc., 89 Or.App. 452, 750 P.2d 171, 174 (1988).
Most courts agree that sureties should not be reimbursed for claim payments unless the payments were made in good faith. This is so for two reasons. First, the indemnity agreements that often accompany bonds usually provide that reimbursement is available only if the surety paid the obligee’s claim in good faith. Gallagher at 488. Second, in the absence of such a “good faith” provision, courts have held that the surety’s duty to exercise good faith arises from an implied covenant of good faith and fair dealing, which is inherent in all contracts. Id. at 534; Tanner, 910 P.2d at 878 (“The obligation of good faith and fair dealing on the part of the surety is implied and in a sense superimposed on the entire surety contract.”); City of Portland, 750 P.2d at 175 (stating that, although the indemnity agreement contained no “good faith” clause, the surety “was bound by its implied covenant of good faith to exercise its discretion in compromising the claim”).
Although courts generally agree that sureties are entitled to be reimbursed for claims paid in good faith, they are sharply divided as to what it means to exercise good faith. A number of courts have concluded that a surety has breached its duty of good faith only when the surety acted with an improper motive. See Gallagher at 491 (describing the majority view and citing cases in which courts have adopted it). That is, in order for the principal to show that the surety paid a claim to the obligee in bad faith, the principal must present evidence *320demonstrating that the surety acted fraudulently or with illwill. See, e.g., PSE Consulting, Inc. v. Frank Mercede & Sons, Inc., 267 Conn. 279, 838 A.2d 135, 152 (2004); Fidelity and Deposit Co. of Maryland v. Bristol Steel & Iron Works, Inc., 722 F.2d 1160, 1165 (4th Cir.1983); Engbrock v. Federal Ins. Co., 370 F.2d 784, 787 (5th Cir.1967). As one court explained, “[g]ross negligence or bad judgment is insufficient to amount to bad faith.” U.S. Fidelity & Guar. Co. v. Feibus, 15 F.Supp.2d 579, 587 (M.D.Pa.1998), aff'd 185 F.3d 864 (3rd Cir.1999).
Other courts have assigned a different meaning to “good faith.,” one that evaluates a surety’s payment according to a standard of reasonableness. These courts have concluded that, even if there is no evidence of fraud or ill-will, the surety has fallen short of its good-faith duty by unreasonably or negligently paying an obligee’s claim on the bond. Arntz Contracting Co. v. St. Paul Fire & Marine Ins. Co., 47 Cal.App.4th 464, 483 (1996) (“[T]he covenant of good faith can be breached for objectively unreasonable conduct, regardless of the actor’s motive.”); Tanner, 910 P.2d at 880; City of Portland, 750 P.2d at 174; see Gallagher at 493. Therefore, as the court in City of Portland reflected, to show bad faith under this standard, the principal “[need] only prove that [the surety] failed to make a reasonable investigation of the validity of the claims against them or to consider reasonably the viability of their counterclaims and defenses, not that [the surety] acted for dishonest purposes or improper motives.” 750 P.2d at 175.
The parties in the present case entered into an indemnity agreement in which Atlantic promised to reimburse Ulico “for any and all disbursements made by it in good faith, under the belief that it was liable, or that such disbursement was necessary or prudent.” This provision serves as the source of Ulieo’s duty to exercise good faith in paying Clearwater’s claim. In determining the meaning of “good faith” in this context, the majority correctly embraced the latter of the two views described above, stating the duty of good faith “allows the surety a discretion limited by the bounds of reasonable*321ness, rather than the bounds of fraud.” Majority op. at 309 (emphasis added).
The trial judge in this case, however, did not apply this standard of good faith. The judge’s order stated: “Because [Atlantic] failed to prove fraud on the part of [Ulico], it is clear that [Ulico] has proven its case and is entitled to stand upon the letter of the [indemnity agreement].” As the majority explains, however, Atlantic did not have to prove fraud to show bad faith and avoid having to reimburse Ulico; rather, the question of bad faith turned on whether Ulico’s payment to Clearwater was reasonable. Majority op. at 308-09. Up to this point in the analysis, I share the majority’s views.
The majority’s analysis goes awry, however, when it fails to delegate the determination of the reasonableness of Ulico’s payment to the fact-finder. Instead of remanding this case for such a fact-finding, the majority assumes the role of fact-finder and finds that the surety’s payment here was reasonable as a matter of law. This approach is flawed for three reasons: the question of reasonableness is for the fact-finder; the circumstances in this case do not establish that Ulico’s payment was reasonable; and, the majority’s holding will allow courts to enforce indemnity agreements where the surety has paid a claim unreasonably.
First, appellate courts should not make determinations of reasonableness because, as this Court has observed, such questions generally fall within the province of the fact-finder. Murphy v. 24th Street Cadillac Corp., 353 Md. 480, 494, 727 A.2d 915, 922 (1999). Appellate courts ordinarily do not determine reasonableness because the trier of fact is in the best position to “account[ ] for the circumstances of the individual case and the credibility of the witnesses and evidence presented at trial.” Id.; Informed Physician v. Blee Cross, 350 Md. 308, 332, 711 A.2d 1330, 1342 (1998) (“[W]hat will constitute reasonable efforts under a contract expressly or impliedly calling for them is largely a question of fact in each particular case ....”) (quoting Allview Acres v. Howard, 229 Md. 238, 244, 182 A.2d 793, 796 (1962)); Wilson v. Morris, 317 *322Md. 284, 295, 563 A.2d 392, 397 (1989) (stating that the issue of reasonableness was “a question of fact for the jury”); see Lynx, Inc. v. Ordnance Products, Inc., 273 Md. 1, 13, 327 A.2d 502, 512 (1974) (stating that what constitutes a “reasonable time” is ordinarily a “question[] of fact based upon all the surrounding circumstances”). In the specific context of this case — where the good faith of a surety is determined by the reasonableness of its payment of a bond claim — courts have assigned the reasonableness inquiry to the trier of fact. See Tanner, 910 P.2d at 880 (explaining that, in previous appellate proceedings in the case, the court had remanded the case because “the reasonableness of the payments made by [the surety] is a fact question that must be litigated”); City of Portland, 750 P.2d at 175 (reviewing a whether sufficient evidence supported the jury’s determination of good faith under a reasonableness standard). Because this Court and other courts disfavor the practice of appellate courts declaring what is reasonable, this case should be sent back to the trial court for a fact-finder’s assessment of Ulico’s good faith under the reasonableness standard.
The majority also is wrong because the facts of this case do little to establish that Ulico acted reasonably in satisfying Clearwater’s claim. The majority points out that several factors have guided courts outside of Maryland “in determining whether a surety made a reasonable, good faith settlement under the terms of the bond and the indemnity agreement.” Majority op. at 309. The majority’s list of relevant factors includes: “(1) the obligations of the surety as provided by the terms and coverage of the bond, (2) whether the principal has made more than generalized demands that the surety deny the claim, (3) the cooperation, or lack thereof, by the principal, in dealing with the surety, [and] (4) the thoroughness of the investigation performed by the surety.” Id. (citations omitted).
Although all of these factors are relevant, the majority’s analysis places much too much emphasis on just one of these factors, the principal’s lack of cooperation with the surety. The majority states: “Atlantic did not provide adequate infor*323mation that would indicate to a reasonable surety that there was an issue with the coverage of the payment bond as to Clearwater’s work.” Majority op. at 312. The majority followed the reasoning of the state trial court decision in Glens Falls Indent. Co. v. Carobine, 36 N.Y.S.2d 253 (N.Y.City Ct.1942). The surety in that case moved for summary judgment in its suit against the principal who refused to reimburse a bond claim that the surety had satisfied. Id. at 254. Although the claim was not covered by the terms of the bond agreement and should not have been paid, the trial court granted the surety’s motion solely on the ground that the principal objected to the bond payment with nothing more than “generalities,” which “gave [the surety] no substantial basis upon which to resist payment.” Id. at 255. In the present case, Atlantic’s communication to Ulico was not so general. Atlantic informed Ulico by letter that $4,834.14 had been paid already and that the remaining bills from Clear-water were “being disputed and must be resolved prior to completion of payment.”
The reasonableness inquiry, however, should involve more than an assessment of the principal’s cooperation with the surety. The surety also has a responsibility to understand the terms and coverage of the bond agreement and carefully investigate the nature of the claim from all available sources, including the obligee. Should the surety then learn for certain that a particular claim is not covered by the bond yet pays it nonetheless, the payment, in my view, could not pass the reasonableness test. In the instant case, Atlantic was not the only source from which Ulico could have obtained information about the coverage of Clearwater’s claim. Clearwater, itself, had knowledge of the specifics of its contract with Atlantic and the work it completed on Atlantic’s machinery. The information provided by Clearwater in the Proof of Claim form and billing statements, by no means, establishes that its charges to Atlantic were covered by the surety bond. In fact, because of the nature of the work described in Clearwater’s bills to Atlantic (i.e., substantial repairs to durable machinery), the documents should have alerted Ulico that Clearwater was not *324entitled to payment under the bond agreement for “labor and materials,” a document that Ulico relied upon at trial. As an entity engaged in the business of insuring construction contracts, Ulico should have considered that such substantial repairs to durable machinery might add to the value of that equipment and, thus, fall outside the coverage of the bond.
A reasonable surety well might have investigated Clear-water’s claim with greater scrutiny before paying the claim. In Tanner, the court held that the reasonableness of a surety’s payment depends in part on the thoroughness with which it investigated each bond claim. 910 P.2d at 880-81. The court recognized that “the surety’s investigation is ‘standard practice’ in the industry.” Id. Affirming the trial court’s factual finding that the surety’s payments were unreasonable, the court was persuaded by the fact that the surety “did not conduct a thorough investigation” but rather “simply paid the claims and sought indemnification.” Id.
Evidence in the present case raises similar questions about the surety’s claim investigation. After the initial request for a Proof of Claim form, Ulico did not consult Clearwater to learn more about the nature of the service provided to Atlantic. When Atlantic’s President allegedly did attempt to contact Ulico by telephone, the surety neglected to return the messages. Considering these circumstances, a trier of fact could conclude that Ulico’s efforts to investigate the Clearwater claim were less than thorough.
Finally, not only is the majority conclusion regarding reasonableness incorrect, the precedent established by that conclusion could lead to unjust enforcement of unreasonable surety payments. If Ulico’s payments were reasonable under the present circumstances, the same could be said of a surety who pays the claim even though the principal is, for some other reason, unable to communicate promptly with the surety. Such a situation might arise where the principal is conducting business overseas or where the principal has not received the surety’s notification of the obligee claim. The majority’s holding gives broad license to sureties to settle *325claims only on the basis that they have not received detailed instructions from the principal. No longer must sureties seek clarification from sources other than the principal or concern themselves with the specific terms of the bond agreements. A finder of fact might very well determine that sureties should be held to a much higher standard of conduct than what the majority dictates is reasonable.
I would reverse the judgement of the Court of Special Appeals and remand this case for an application of the appropriate standard and so that a fact-finder, not appellate judges, can determine whether Ulico’s payment of the Clearwater claim was reasonable.
Chief Judge BELL and Judge ELDRIDGE authorize me to state that they join in this dissent.