Amaya v. Garden City Irrigation, Inc. 2011 WL 564721 (EDNY, Feb 15, 2011)

Employees sued for unpaid wages from their former contractor/employer and several sureties who had issued payment bonds. The sureties in turn brought an action against their indemnitors for contractual indemnification seeking to recover amounts paid in settlement of claims on their bonds, as well as attorneys fees incurred litigating those claims and pursuing their claim against the indemnitors. Under NY law the indemnity agreement entitles a surety to indemnification as long as “it acted in good faith and the amount it paid was reasonable.” One of the sureties moved for summary judgment against its indemnitor, and the indemnitor challenged both the surety’s good faith in settling the employees’ claims, and the reasonableness of the amount of its claim for attorneys fees. As to good faith, the indemnitor first argued that the surety acted in bad faith by not defending against the employees’ claims. The court however disagreed stating that in NY the bad faith is equated with fraud and collusion, and that the employees had not offered any evidence that the surety’s decision to settle with the employees was the product of either fraud or collusion. The court further stated, “it is clear, however, that a surety’s failure to pursue a viable defense does not suffice.” Also, a surety is entitled to indemnity “regardless of whether the principal was actually in default or liable under the contract with the obligee.” Regarding reasonableness of the surety’s claim for attorneys fees and costs, the indemnitor raised two arguments. First the indemnitor argued that fees were disproportionate to the amount of settlement. The court quickly dispatched of that argument stating, “As a matter of common sense, however, there is not necessarily any correlation between the amount of fees incurred defending a claim and the results obtained.” The indemnitor, however, raised a second argument which the court accepted, that the surety improperly sought to recover its legal fees and costs incurred to enforce the indemnity agreement. The court agreed with the indemnitor saying, “While this is not, strictly speaking, an issue of reasonableness, the Court agrees that such fees and costs are not within the ambit of the indemnity agreement.” Noted: Based on the language of this particular indemnity agreement the court held that surety would not only be able to recover its fees incurred in defending the claims on its bonds, but not those incurred in seeking recovery from the indemnitors. The indemnity agreement in this case, unlike most, did not specifically give the surety the right to recover its attorney fees incurred in enforcing the indemnity agreement. Had the language been presented there is little doubt that the surety would have been able to recover such attorneys’ fees.