NY District Court Enforces Liquidating Agreement Between Owner And Surety That Permitted Owner To Retain Recovery Obtained From Third Party To Satisfy Owner’s Claim For Damages Against Surety

Menorah Home and Hosp. for the Aged and Infirm v. Fireman’s Fund Ins. Co.
2007 U.S. Dist. LEXIS 27684 (E.D.N.Y., April 13, 2007)

The District Court for the Eastern District of New York held that a liquidating agreement between an Owner and a Surety was valid and enforceable, even though it permitted the Owner to retain any recovery it obtained from the third-party, rather than having money pass-through to the surety.

The case arose out of a project to build and renovate facilities for Menorah Home and Hospital for the Aged and Infirm (“Owner”). The Owner entered into a contract with J.A. Jones Construction Group, LLC (“Jones”) for the Project. When Jones defaulted, Fireman’s Fund Insurance Company (“FFIC”), Jones’ surety, took over and completed the Project. The Owner subsequently sued FFIC alleging that FFIC had breached its performance bond obligations by failing to complete the Project in a timely manner and correct deficiencies in the work performed by Jones.

FFIC asserted a counterclaim against the Owner for damages that it incurred in repairing a boiler/chiller that FFIC alleged was damaged as a result of the failure to maintain the equipment, and not as a result of Jones’ deficient work. The Owner filed a third-party complaint against The Trane Company (“Trane”) alleging that Trane was responsible for the damages, as it had breached its service contract with the Owner by failing to properly inspect, maintain and repair the equipment.

The Owner and FFIC subsequently settled all of their claims, except those relating to the boiler/chiller. With respect to the boiler/chiller claim, the parties entered into a liquidating agreement, which provided that the Owner accepted liability for the improper maintenance of the boiler chiller. The agreement provided that the Owner’s liability was fixed and liquidated in such an amount as the Owner was able to recover from Trane. Finally, the agreement provided that the Owner could retain any recovery it obtained from Trane as further compensation for the delay damages it incurred as a result of FFIC’s actions.

Liquidating agreements must contain three elements: (1) impose liability upon an intermediary for a damaged party’s increased costs, thereby providing the intermediary with a basis for legal action against the responsible party; (2) a liquidation of liability in the amount of the intermediary’s recovery against the responsible party; and (3) a provision for the pass-through of that recovery to the damaged party.

Trane filed a motion for summary judgment on the basis that the liquidating agreement between the Owner and FFIC was invalid and thus the Owner was barred from asserting FFIC’s boiler/chiller claim against Trane. Trane argued that the agreement was invalid because it did not contain the required pass-through provision because it provided that the intermediary (the Owner) could retain the money that it recovered from Trane (the responsible party), rather than passing it on to FFIC (the damaged party). The District Court held that the required pass-through was achieved because any recovery by the Owner satisfied FFIC’s delay damage obligations to the Owner. The Court held that the agreement could not be invalidated based on what was essentially “an accounting issue” between the Owner and FFIC.

The Court also held that the validity of a liquidating agreement depends not on the damaged party’s assertion of blame against the responsible party, but rather on the assertion of liability against the intermediary that “liquidates” the damaged party’s claim. Finally, the Court held that the liquidating agreement was valid even though FFIC, an insurance carrier, had an alternative avenue of recovery against Trane in the form of an equitable subrogation claim. The Court held that the existence of an alternative avenue of recovery cannot be used as a shield of liability by the responsible party.

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