Capitol Indemnity v. Superior Management ( 2002 )


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  •                             PUBLISHED
    UNITED STATES COURT OF APPEALS
    FOR THE FOURTH CIRCUIT
    CAPITOL INDEMNITY CORPORATION,         
    Plaintiff-Appellee,
    v.
    BALJIT S. AULAKH; PAVITAR P.
    AULAKH,
    Defendants-Appellants,               No. 02-1160
    and
    SUPERIOR MANAGEMENT SERVICES,
    INCORPORATED,
    Defendant.
    
    Appeal from the United States District Court
    for the Eastern District of Virginia, at Alexandria.
    Claude M. Hilton, Chief District Judge.
    (CA-01-1068-A)
    Argued: October 30, 2002
    Decided: December 12, 2002
    Before WIDENER, WILLIAMS, and MOTZ, Circuit Judges.
    Affirmed by published opinion. Judge Motz wrote the opinion, in
    which Judge Widener and Judge Williams joined.
    COUNSEL
    ARGUED: Daniel Mark Press, CHUNG & PRESS, P.C., McLean,
    Virginia, for Appellants. Brian Paul Waagner, WICKWIRE GAVIN,
    2                CAPITOL INDEMNITY CORP. v. AULAKH
    P.C., Vienna, Virginia, for Appellee. ON BRIEF: Russell B. Adams,
    III, CHUNG & PRESS, P.C., McLean, Virginia, for Appellants.
    Edward G. Gallagher, WICKWIRE GAVIN, P.C., Vienna, Virginia,
    for Appellee.
    OPINION
    DIANA GRIBBON MOTZ, Circuit Judge:
    The district court granted summary judgment to Capitol Indemnity
    Corporation on its claim that Baljit S. Aulakh and his wife, Pavitar
    Aulakh, breached an indemnity agreement they had entered into with
    Capitol Indemnity pursuant to a surety bond. The Aulakhs appeal,
    contending that the indemnification agreement cannot be enforced
    against one or both of them because Capitol required Pavitar Aulakh
    to sign the agreement in violation of the Equal Credit Opportunity Act
    and its Virginia counterpart. Because a surety bond does not consti-
    tute a credit transaction under these statutes, we affirm the district
    court’s grant of summary judgment to Capitol.
    I.
    The parties do not dispute the following facts. Baljit Aulakh is the
    president and sole shareholder of Superior Management Services,
    Incorporated ("SMS"), a Maryland corporation in the construction
    business. Pavitar Aulakh is Baljit Aulakh’s wife.
    Capitol Indemnity Corporation ("Capitol") is an insurance com-
    pany authorized to write surety bonds in the Commonwealth of Vir-
    ginia. By means of a surety bond, a surety (in this case, Capitol)
    agrees to protect the obligee if the principal (SMS) defaults in per-
    forming the principal’s contractual obligations. The bond is the instru-
    ment that binds the surety. See Black’s Law Dictionary 181 (6th ed.
    1990).
    On January 2, 1998, the Aulakhs executed an indemnity agreement
    with Capitol obligating them to indemnify the insurer for losses and
    expenses incurred by Capitol in providing surety bonds for SMS proj-
    CAPITOL INDEMNITY CORP. v. AULAKH                     3
    ects. Following the execution of the indemnity agreement, Capitol
    issued various performance and payment bonds as surety for SMS
    construction projects. SMS later defaulted on a series of contracts
    involving work at Bolling Air Force Base. In paying out on the appli-
    cable surety bonds, Capitol incurred $92,594 in losses and expenses.
    Accordingly, Capitol filed this indemnity action seeking judgment
    against SMS, Baljit S. Aulakh, and Pavitar Aulakh, jointly and sever-
    ally, for the amount of its losses, as well as attorney’s fees and costs.
    SMS and the Aulakhs responded initially by questioning whether
    Capitol incurred its losses in good faith. After deposing Capitol’s cor-
    porate designee, they conceded the point.
    Capitol then moved for summary judgment. SMS admitted liability
    for the full amount of Capitol’s claim. The Aulakhs, however, con-
    tended that the indemnity agreement was unenforceable as to one or
    both of them because Pavitar Aulakh’s signature had been secured in
    violation of the Federal Equal Credit Opportunity Act, 
    15 U.S.C. § 1691
     et seq. (1998) ("ECOA"), and its Virginia analogue, the Vir-
    ginia Equal Credit Opportunity Act, 
    Va. Code Ann. § 59.1-21.19
     et
    seq. (2001) ("Virginia ECOA"). They argued that because Pavitar
    Aulakh had no involvement in the business of SMS, other than the
    fact that she was married to its sole shareholder, Capitol’s require-
    ment that she sign the indemnity agreement constituted credit dis-
    crimination under the equal credit opportunity statutes. The district
    court granted summary judgment to Capitol, ruling that neither the
    ECOA nor the Virginia ECOA applied to the transaction underlying
    Capitol’s indemnity claim.
    II.
    This case presents an issue of first impression in the federal appel-
    late courts: whether the ECOA and its state analogues apply to surety
    bonds.
    By their terms, these statutes only govern credit transactions
    between statutorily-defined credit applicants and creditors. The ani-
    mating principle of the ECOA and its state analogues is to prevent
    discrimination against those applying for credit. As such, they contain
    broad anti-discrimination provisions that "make it unlawful for any
    4                 CAPITOL INDEMNITY CORP. v. AULAKH
    creditor to discriminate against any applicant with respect to any
    credit transaction on the basis of race, color, religion, national origin,
    sex or marital status, or age." 
    15 U.S.C. § 1691
    (a)(1); 
    Va. Code Ann. § 59.1-21.21
    :1(a)(1).
    In explicitly identifying "sex or marital status" as one of the prohib-
    ited bases for discrimination in credit transactions, legislatures sought
    to eradicate credit discrimination against women, particularly married
    women with whom creditors traditionally had refused to deal. See
    Markham v. Colonial Mortgage Service Co., 
    605 F.2d 566
    , 569 (D.C.
    Cir. 1979) (stating that "one, perhaps even the main, purpose of the
    [ECOA] was to eradicate credit discrimination waged against women,
    especially married women whom creditors traditionally refused to
    consider apart from their husbands as individually worthy of credit");
    see also Riggs Nat’l Bank v. Linch, 
    36 F.3d 370
    , 374 (4th Cir. 1994).
    Regulations implementing the ECOA offer explicit guidance in this
    respect. See 
    12 C.F.R. § 202.7
    (d)(1) (2002) ("Except as provided in
    this paragraph, a creditor shall not require the signature of an appli-
    cant’s spouse . . . on any credit instrument if the applicant qualifies
    under the creditor’s standards of creditworthiness for the amount and
    terms of the credit requested."). Therefore, since Capitol has not
    offered any reason why requiring Ms. Aulakh to sign the indemnity
    agreement would not have violated the ECOA and the Virginia
    ECOA if those statutes governed the agreement, summary judgment
    to Capitol was only appropriate if the equal credit statutes did not
    apply here.
    Resolution of this question turns on whether the surety bond
    arrangement between SMS and Capitol (and the issuance of surety
    bonds in general) qualifies as a "credit transaction" under the terms
    of the equal credit statutes, thus triggering the anti-discrimination pro-
    visions. Both statutes define "credit" as "the right granted by a credi-
    tor to a debtor to defer payment of debt or to incur debts and defer
    its payment or to purchase property and services and defer payment
    therefor." 15 U.S.C. § 1691a(d); 
    Va. Code Ann. § 59.1-21.20
    (b)
    (emphasis added). The statutes define a "creditor," in relevant part, as
    "any person who regularly arranges for the extension, renewal, or
    continuation of credit." 15 U.S.C. § 1691a(e); 
    Va. Code Ann. § 59.1
    -
    21.20(c). Finally, a "credit transaction" is defined as "every aspect of
    an applicant’s dealings with a creditor regarding an application for
    CAPITOL INDEMNITY CORP. v. AULAKH                     5
    credit or an existing extension of credit." 
    12 C.F.R. § 202.2
    (m)
    (2002).
    These provisions read together make clear that the essence of the
    "credit" relationship under the equal credit statutes is one that pro-
    vides a right to defer payment on a debt or other obligation. This con-
    clusion finds ample support in the case law. See, e.g., Riethman v.
    Berry, 
    287 F.3d 274
    , 277 (3d Cir. 2002) ("The hallmark of ‘credit’
    under the ECOA is the right of one party to make deferred pay-
    ment."); Shaumyan v. Sidetex Co., 
    900 F.2d 16
    , 18 (2d Cir. 1990)
    ("[I]t is apparent that the ECOA extends only to instances in which
    the right to defer payment of an obligation is granted. Absent a right
    to defer payment for a monetary debt, property or services, the ECOA
    is inapplicable.").
    The Aulakhs argue that because the "surety, through the issuance
    of a surety bond, ‘arranges’ for subcontractors and suppliers to extend
    ‘credit’ to the principal," the surety falls within the ECOA’s definition
    of creditor. Brief of Appellants at 10. Although they admit that "the
    bonds do not necessarily extend the ‘right’ to incur debt and defer
    payment beyond a subcontractor or supplier’s payment terms," they
    contend that "the bond gives the principal the right to incur debt to
    subcontractors and suppliers that is not C.O.D. or paid in advance, a
    right that the principal would not have without the surety bond." 
    Id.
    Consequently, the Aulakhs claim, surety bonds effectively function as
    "credit transactions" under the ECOA. 
    Id.
     According to this line of
    reasoning, indemnity agreements executed in conjunction with and as
    a requirement for the issuance of surety bonds thus qualify as aspects
    of "credit transactions" and are subject to the anti-discrimination pro-
    visions of ECOA.
    The problem with this argument is that nothing in the surety bond
    transaction or the indemnity agreement entitles anyone to defer pay-
    ment of any debt or other obligation, a sine qua nom of coverage
    under the equal credit statutes. As noted above, the ECOA and its Vir-
    ginia counterpart define "credit" as "the right granted by a creditor to
    a debtor" to defer payment of a debt or other obligation. Construing
    the transactions at issue in this case as credit transactions under these
    statutes would thus require that Capitol grant a right to SMS to defer
    payment. While the surety bond may indeed have allowed SMS to
    6                CAPITOL INDEMNITY CORP. v. AULAKH
    negotiate different contractual obligations and payment terms with its
    suppliers and sub-contractors, it did not give SMS any sort of right
    to defer payment.
    Instead, the surety bond simply provided that in the event that SMS
    defaulted on its contractual obligations, Capitol would take the place
    of SMS and satisfy those obligations. By virtue of the indemnity
    agreement, Capitol could then proceed against SMS and the Aulakhs
    for indemnification from the losses and expenses incurred as a result
    of paying out the surety bond. In effect, the surety bond together with
    the indemnity agreement worked to allocate the default risk associ-
    ated with various contractual obligations incurred by SMS in the
    course of its construction business. This was not an instrument that
    allowed for any sort of deferral or restructuring of debt payments. The
    underlying cash flows attached to the specific contract would simply
    continue apace. Indeed, the surety bond worked to ensure that there
    was no interruption or deferral of these cash flows. It operated as an
    insurance instrument rather than a debt or credit instrument.
    We hold, therefore, that the issuance of surety bonds does not con-
    stitute a credit transaction as defined under the ECOA and the Vir-
    ginia ECOA. Neither Congress nor the Virginia legislature exhibited
    any intent for parties to use these statutes to escape liability from
    valid contractual obligations; and we refuse to sanction such an effort
    here. SMS needed surety bonds in order to engage in construction
    projects at Bolling Air Force base. See 
    40 U.S.C. § 270
    (a) (2001) (the
    "Miller Act") (current version at 
    40 U.S.C. § 3131
     (West, Westlaw
    current through P.L. 107-278, approved Nov. 5, 2002)). Capitol pro-
    vided those surety bonds, thereby ensuring that the contractual obliga-
    tions incurred by SMS in its construction projects would be met. In
    return, Capitol required that SMS and the Aulakhs sign an indemnity
    agreement, guaranteeing payment for losses and expenses incurred as
    a result of any default by SMS and subsequent pay out of the surety
    bonds by Capitol. Each side obtained exactly what it sought.
    We note that this conclusion comports with the view of the two dis-
    trict courts that have addressed the issue. See Cincinnati Ins. Co. v.
    Smigiel, 
    1997 U.S. Dist. LEXIS 6694
    , at *6-*10 (E.D. Mich. Mar. 20,
    1997) (rejecting a claim that ECOA applied to surety’s indemnity
    claim); Universal Bonding Ins. v. Esko & Young, Inc., 1991 WL
    CAPITOL INDEMNITY CORP. v. AULAKH                     7
    30049, at *3 (N.D. Ill. Feb. 28, 1991) (rejecting a claim that ECOA
    applied to suretyship promise on grounds that the contract extended
    no right to defer payment on debt or other obligation). Both of those
    cases involved a surety’s claim for indemnification against corporate
    and individual indemnitors, including a husband and wife who had
    signed the indemnity agreement. In both cases, the wife sought to
    escape liability through alleged violations of the anti-discrimination
    provisions of the ECOA. And in both cases, the court granted sum-
    mary judgment to the surety, holding that the ECOA does not apply
    to the execution of an indemnity agreement executed in conjunction
    with a surety bond. See also Connecticut Indem. Co. v. Ashworth,
    
    1997 Me. Super. LEXIS 60
    , at *6-8 (Me. Super. Feb. 21, 1997) (same
    result).
    Our holding should not be read to suggest that the issuance of
    surety bonds can never operate as a "credit transaction" as defined in
    a different statute or as understood in a different set of circumstances.
    Rather, we simply conclude that under the definition of credit pro-
    vided in the ECOA, specifically the right to defer payment on a debt,
    the issuance of surety bonds does not qualify as a credit transaction.
    Given the sophistication of modern capital markets, virtually all
    financial instruments have an inherent plasticity that allows them to
    operate in a variety of capacities. The linkages between insurance and
    debt markets, moreover, render suspect any attempt to develop a pre-
    cise rule that separates such instruments into one category or another.
    The law forever plays catch-up with the capital markets. This creates
    all the more reason to adhere closely to statutory language in deciding
    individual disputes such as the one at hand.
    III.
    For the foregoing reasons, the judgment of the district court is
    AFFIRMED.