Hanover Insurance Company v. Northern Building Company , 751 F.3d 788 ( 2014 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 13-2675
HANOVER INSURANCE COMPANY,
Plaintiff-Appellee,
v.
NORTHERN BUILDING COMPANY and
THOMAS VANDUINEN,
Defendants-Appellants.
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 1:11-cv-02020 — Elaine E. Bucklo, Judge.
ARGUED DECEMBER 13, 2013 — DECIDED MAY 8, 2014
Before EASTERBROOK, KANNE, and ROVNER, Circuit Judges.
KANNE, Circuit Judge. This is a breach of contract action
brought before us pursuant to our diversity jurisdiction. In
2008, Northern Building Company (“Northern”), operated by
Thomas VanDuinen out of his home in Alpena, Michigan, won
a contract to do various work at Midway International Airport
2 No. 13-2675
in Chicago under the supervision of a project manager.
Hanover Insurance Company (“Hanover”) served as North-
ern’s bonding agent for the project, issuing surety bonds on
Northern’s behalf. In exchange, Hanover required Northern to
enter into an Indemnity Agreement (“the Agreement”)
outlining Northern’s obligations with respect to any claims
asserted against those bonds.
After a dispute arose between the project manager, North-
ern, and two of Northern’s subcontractors, claims were
asserted against the bonds issued by Hanover. Hanover
resolved those claims in a manner explicitly permitted by the
Agreement, a salient fact which Northern’s attorney conceded
at oral argument. Hanover sought indemnity from Northern,
which was also explicitly permitted by the Agreement, but
Northern refused to cooperate. Hanover brought a breach of
contract action in the Northern District of Illinois, hoping to
compel Northern to do what it was clearly obligated to do. The
parties filed cross-motions for summary judgment, and
Hanover’s was granted. Northern appeals. The Agreement is
unambiguous. Northern breached it, and Hanover is entitled
to contractual damages. We affirm.
I. BACKGROUND
At all relevant times, Northern, operated by Thomas
VanDuinen, was in the business of performing general con-
tracting services related to public construction projects. State
and federal law required Northern1 to obtain surety bonds for
1
We will occasionally use “Northern” to refer to both Northern and
(continued...)
No. 13-2675 3
such projects to secure both Northern’s performance of the
work and its payment of any amounts owed to subcontractors
and suppliers. Hanover was Northern’s bonding agent. In
consideration for its issuance of the surety bonds, Hanover
required Northern to enter into an Indemnity Agreement,
which VanDuinen signed in his individual capacity and in his
capacity as President of Northern.
The Midway International Airport Project (“the Project”)
was financed by the Federal Aviation Association (“FAA”) and
managed by Parsons Infrastructure & Technology Group,
Incorporated (“Parsons”). In 2008, Northern won the bid for
the Project, and began contracting with various subcontractors
to perform the work required. Not long thereafter, things went
awry. Beginning in 2009, certain subcontractors hired to
upgrade the fire alarm systems at Midway—McDaniel Fire
Systems (“McDaniel”) and Rex Electric—began to complain
that Northern had failed to pay them in accordance with the
surety bonds and contract documents for the Project. The
dispute between Northern and its subcontractors meant that
the work was halted, which led to a separate complaint, from
Parsons, that Northern was failing to complete the Project as
required. The FAA opted to retain possession of the remaining
contract funds, totaling $127,086.00, pending resolution of the
various disputes and completion of the work required.
Ultimately, Hanover received two types of claims against
the surety bonds: (1) claims for payment from subcontractors
1
(...continued)
VanDuinen, as their interests are identical for our purposes.
4 No. 13-2675
McDaniel (for $127,452.78) and Rex Electric (for $78,495.00)2
and (2) a claim for performance from the project manager,
Parsons. Hanover demanded collateral from Northern, as was
its right under the Agreement. Northern refused to post
collateral or to indemnify Hanover in any respect. Hanover
hired counsel to assist with investigating the claims against the
bonds and with enforcing the Agreement against Northern.
On September 9, 2009, McDaniel filed for bankruptcy relief
in the Northern District of Indiana. On March 2, 2010, the
bankruptcy trustee brought suit against Hanover seeking the
amount McDaniel claimed it was owed for work already
performed. On September 22, 2012, Hanover paid the bank-
ruptcy trustee $127,452.78 to resolve both McDaniels’s and Rex
Electric’s payment claims against the bond.
Around the same time, Hanover agreed to resolve Parson’s
bond claim for performance by stepping into Northern’s
previous role as general contractor and arranging for comple-
tion of the Project. In exchange, in July 2011, Parsons paid
Hanover the $127,086.00 of contract funds the FAA had
withheld from Northern due to the failure of Northern and its
subcontractors to complete the Project.
In March 2011, Hanover filed this lawsuit against Northern
and VanDuinen to force compliance with the Agreement.
Specifically, Hanover sought to settle its right to the
$127,086.00 of contract funds initially withheld by the
2
Rex Electric was a subcontractor to McDaniel, whose own payment
therefore depended on (and would be drawn from) Northern’s payment to
McDaniel.
No. 13-2675 5
FAA—Northern still believed it had a right to payment of
those funds—and to recoup attorney fees and costs incurred in
resolving the performance and payment claims against the
bonds.3 The district court granted summary judgment in
Hanover’s favor. Northern and VanDuinen appeal.
II. ANALYSIS
We begin by briefly discussing Northern’s challenge to the
district court’s subject matter jurisdiction. Northern believes
that the money Hanover was eventually paid for completing
the Project by Parsons and the FAA—totaling
$127,086.00—was never genuinely “in controversy” and
therefore cannot be counted towards the $75,000.00 threshold
for diversity jurisdiction. See 28 U.S.C. § 1332(a). That argu-
ment is nonsense. It does not matter whether Hanover knew at
the time of filing that it would be able to gain possession of
those funds through settlement. What matters is that Hanover
still had to settle the legal question of its right to possess, or its
ownership of, those funds. Under the original contract for the
Project, the funds were slated to go to Northern, and Northern
still appears to believe it should have been paid. Both parties
claimed the money; Hanover sued to establish that the money
rightfully belonged to it. That amount was therefore “in
controversy,” regardless of whether it would actually change
hands before final judgment was entered.4
3
The fee amount claimed increased throughout the course of this litigation,
ultimately totaling $76,016.69 as of the district court’s entry of judgment.
4
Nor would it defeat subject matter jurisdiction for Northern to concede,
(continued...)
6 No. 13-2675
Substantively, Northern’s appeal asks us to review the
district court’s grant of summary judgment, a task which we
undertake de novo. Swetlik v. Crawford, 738 F.3d 818, 826 (7th
Cir. 2013). Summary judgment is proper where the admissible
evidence shows that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment
as a matter of law. Fed. R. Civ. P. 56(c); Lawson v. CSX Transp.,
Inc., 245 F.3d 916, 922 (7th Cir. 2001). A “material fact” is one
identified by the substantive law as affecting the outcome of
the suit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
A “genuine issue” exists with respect to any such material fact,
and summary judgment is therefore inappropriate, when “the
evidence is such that a reasonable jury could return a verdict
for the non-moving party.” Id. On the other hand, where the
factual record taken as a whole could not lead a rational trier
of fact to find for the non-moving party, there is no genuine
issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 587 (1986). In determining whether a genuine
issue of material fact exists, we view the record in the light
most favorable to the nonmoving party. Anderson, 477 U.S. at
255. Contract cases such as this one are often prime candidates
for summary judgment because contract interpretation is a
question of law. SAMS Hotel Grp., LLC v. Environs, Inc., 716
F.3d 432, 434 (7th Cir. 2013).
4
(...continued)
now, that the money belongs to Hanover. That might be a good way for
Northern to lose the case, but it would not be a good reason why the district
court could not hear the case in the first place, given that the money would
still have been in controversy at the time of filing.
No. 13-2675 7
Northern has tried to make this into a multi-issue, complex
proceeding. But it is actually very simple. Only a few basic
observations need to be made. First, the Agreement in this case
is clear and unambiguous in all relevant aspects. Northern
clearly breached it; Hanover did not. Second, Northern’s
arguments against the enforceability of the Agreement are
unsupported and unpersuasive. Third, Northern’s argument
against the fee award is meritless and reflects a lack of under-
standing of the summary judgment mechanism. We will work
through each of these points in turn, ultimately affirming the
judgment of the district court.
A. Hanover’s Conduct was Entirely Consistent with the
Agreement.
Since this case involves a breach of contract claim, we must
begin by determining what the Agreement itself requires of
Hanover and Northern. In diversity cases, we apply federal
procedural and state substantive law. Allen v. Cedar Real Estate
Grp., LLP, 236 F.3d 374, 380 (7th Cir. 2001). Rules of contract
interpretation are substantive, so the Agreement must be
interpreted according to state law—in this case, the laws of the
State of Illinois. Id. In Illinois, the main objective in contract
interpretation is to give effect to the intent of the parties.
C.A.M. Affiliates, Inc. v. First Am. Title Ins. Co., 715 N.E.2d 778,
782 (Ill. App. Ct. 1999). “If a contract is clear and unambiguous,
the court must determine the intent of the parties solely from
the plain language of the contract.” Id. A review of the plain
language of the contract in this case shows not only that the
contract language is clear and unambiguous, but that Hanover
complied with it and Northern did not.
8 No. 13-2675
We begin by observing that it is undisputed that Hanover
received claims against the surety bonds it issued on North-
ern’s behalf. McDaniel and Rex Electric made claims for
payment, and Parsons made a claim for performance. Once
Hanover received the claims, it asked Northern to post
collateral in an amount certain to cover the payment claims by
the subcontractors. That was in keeping with the plain lan-
guage of the Agreement:
2. The Indemnitors shall exonerate, indemnity, save
harmless the Surety from and against every claim,
demand, liability, cost, charge, suit, judgment and
expense which the Surety may pay or incur, includ-
ing, but not limited to, loss, interest, court costs and
consultant and attorney’s fees[.]
* * *
3. Payment shall be made to the Surety by the
Indemnitors as soon as liability exists or is asserted
against the Surety, whether or not the Surety shall have
made any payment therefor. Such payment to the
Surety shall be: a) if the amount asserted as a claim,
demand or suit is an ascertainable or liquidated
amount, the amount of the claim, demand or suit
asserted against the bond or bonds by any claimant
or obligee, plus the amount the Surety deems suffi-
cient, in its sole discretion, to indemnify and hold it
harmless from and against any loss, cost, interest,
and expense necessary to defend, investigate, or
adjust the claim, demand or suit[.]
No. 13-2675 9
(emphasis added.) But Northern—the Indemnitor—refused to
comply with the Agreement it signed. That is a breach.
So, Hanover took matters into its own hands, and resolved
the payment claims against the bond by settling with McDaniel
and Rex Electric for a monetary payout. That was in keeping
with the plain language of the Agreement, as well:
The Surety shall have exclusive right to adjust, settle, or
compromise any claim, demand, suit or any other
proceeding arising out of any bond against the Surety
and/or the Indemnitors, take whatever action it deems
appropriate in response thereto, and its determination
of whether to defend or settle the same shall be binding
and conclusive upon the Indemnitors.
With the monetary claims resolved, Hanover settled Parsons’s
bond claim for performance by stepping into Northern’s shoes
and arranging for the completion of the Project. That, too, was
in keeping with the plain language of the Agreement:
In the event the Indemnitors, or any one or more of
them, shall: (a) whether actually or allegedly (as de-
clared by the obligee or owner), delay, abandon, forfeit
or breach any contract secured by a bond, or (b) fail,
neglect or refuse in any manner to timely pay for any
labor or material used in the prosecution of any contract
secured by a bond, or (c) change its character identity,
control, beneficial ownership, or existence, or (d) fail to
perform, or comply with any of the terms, covenants, or
obligations of this Agreement, including the appoint-
ment of a receiver or trustee whether such
Indemnitor(s) is/are insolvent or not … then the Surety,
10 No. 13-2675
in its sole discretion, shall have the right, but not the
obligation, to take possession of the work under the
contract and any other contract, in connection with
which the Surety has issued a bond or bond(s) and, at
the expense of the Indemnitors, to complete, to arrange
for completion, or to agree to the re-letting or comple-
tion by the obligee or owner of the contract work.
Finally, having resolved all claims against the bond in exactly
the manner contemplated by the Agreement, Hanover turned
to recouping its costs from Northern, the recalcitrant
Indemnitor. This, of course, was also in keeping with the plain
language of the Agreement:
In the event of any payment or disbursement by the
Surety, the Indemnitors agree to immediately reimburse
the Surety for any and all payments and disbursement
made (including but not limited to, interest from the
date of the Surety’s payments at the maximum rate
allowable) under the Surety’s belief that liability for the
payment existed or that payment was necessary or
expedient, whether or not such liability, necessity or
expediency existed. Vouchers or other evidence of
payment by the Surety shall be conclusive evidence of
the fact and amount of such liability, necessity, or
expediency and of the Indemnitors’ liability to the
Surety therefor.
Northern still refuses to comply, which obviously constitutes
an additional breach. Thus, the core of the case is very simple.
Hanover and Northern entered into the Agreement. Hanover
adhered to the Agreement, and Northern refused to indemnify
No. 13-2675 11
Hanover as it was required to do, or to cover fees and costs, as
it was also required to do. Again, that is breach. That should
have been the end of it.
Northern’s only argument against breach is based on a
fundamental (and unreasonable) misreading of the Agreement.
Northern believes that its own indemnification duties, and
Hanover’s powers to investigate and settle any claims, could
not be triggered unless Northern was actually found conclu-
sively liable for a breach of the accompanying surety bonds.
That reading has no basis whatsoever in the text of the Agree-
ment. The plain language says that it is the claim against the
surety bonds, not the existence of any actual liability on
Northern’s part, that triggers those rights and responsibilities.
There can be no genuine dispute that claims were made. There
is nothing for a jury to do, and summary judgment was
appropriate.
B. Attacks on Enforceability
Northern, of course, still does not want to pay what it owes.
Toward that end, its brief includes a pair of attacks on the
enforceability of the Agreement. Northern argues that the
Agreement was unconscionable,5 and in the alternative that it
was unenforceable because Hanover acted in bad faith. But
Northern has made no legal or factual showing to support
either contention. We do not find Northern’s cursory defenses
against enforceability persuasive.
5
This argument appears in Northern’s statement of the issues, but we
cannot find it thoroughly developed anytime thereafter.
12 No. 13-2675
Whether a contract is unconscionable is a question of law to
be decided by the court, not a jury. Cooper Tire & Rubber Co. v.
Farese, 423 F.3d 446, 458 (5th Cir. 2005); see also Dilworth v.
Dudley, 75 F.3d 307, 309 (7th Cir. 1996) (“The fixing of the
boundary between questions of law and questions of fact, is a
matter of federal procedural law and therefore governed by
federal rather than state law in diversity as in other federal
suits.”). We review such questions of law de novo. Phillips v.
Asset Acceptance, LLC, 736 F.3d 1076, 1081 (7th Cir. 2013). In
Illinois, a contract is procedurally unconscionable if an impro-
priety in the process of forming the contract deprived a party
of a meaningful choice. Kinkel v. Cingular Wireless, LLC, 857
N.E.2d 250, 264–65 (Ill. 2006) (citations omitted). On the other
hand, a contract is substantively unconscionable when a clause
or term in the contract is totally one-sided or harsh. Bishop v.
We Care Hair Dev. Corp., 738 N.E.2d 610, 621 (Ill. App. Ct. 2000).
A contract or a clause within a contract may be unenforce-
able for either reason, but Northern has given us nothing to
work with. Northern repeatedly alleges that the Agreement
was “unfair”—suggesting substantive unconscionability—on
the grounds that Hanover stands to profit from it at Northern’s
expense without any wrongdoing on Northern’s part. That
simply is not true. Hanover has not profited one cent. Putting
aside the practical cost of the time and effort Northern has
forced Hanover to pour into what should have been an open-
and-shut case, the money Hanover obtained from Parsons and
the FAA did not even cover the money Hanover paid out to
McDaniel and Rex Electric. The remainder of Hanover’s
recovery goes to outside counsel fees and costs. Where is the
profit? In any case, there is nothing substantively unconsciona-
No. 13-2675 13
ble, or even unusual, about an indemnity agreement that
operates in this way. See Lamp, Inc. v. Int’l Fid. Ins. Co., 493
N.E.2d 146, 149 (Ill. App. Ct. 1986) (collecting cases in which a
surety’s “right to settle” is triggered by the existence of a claim
against that surety, not by the establishment of actual liability).
As for bad faith, Northern has presented no evidence at all.
It appears that Northern’s bad faith argument is based on the
same misunderstanding of the Agreement as Northern’s
“defense” against breach: Northern thinks Hanover’s powers
and rights under the agreement were tethered to the existence
of actual liability for a breach of the bonds (and that Hanover’s
invocation of those powers on something less than established
liability was therefore an act in bad faith). But they were not.
Hanover did exactly what it was empowered to by the Agree-
ment. We cannot call that bad faith. Northern Trust Co. v. VIII S.
Mich. Assocs., 657 N.E.2d 1095, 1104 (Ill. App. Ct. 1995)
(“Parties to a contract … are entitled to enforce the terms of the
contract to the letter and an implied covenant of good faith
cannot overrule or modify the express terms of a contract.”).
C. Fees and Costs
Northern’s final argument pertains to the amount of
attorneys’ fees awarded to Hanover by the district court. We
begin by noting that the Agreement clearly and unambigu-
ously permitted recovery of all of the types of fees claimed by
Hanover. The indemnity provisions specifically covered
attorneys’ fees incurred:
(a) by having executed or procured the execution of the
bonds; or
14 No. 13-2675
(b) in making an independent investigation of any
claim, demand, or suit; or
(c) in defending any suit, action, mediation, arbitration
or any other proceeding to obtain release from liability
whether the Surety, in its sole discretion, elects to
employ its own attorney or permits or requires
Indemnitors to defend the Surety; or
(d) in enforcing any of the covenants, terms and condi-
tions of this Agreement.
Nonetheless, Northern argues against the award on two
grounds: first, that the district court did not gather sufficient
evidence (such as itemized bills) to make a fee determination;
and second, that a jury determination was necessary because
the fees here are a part of Hanover’s contractual damages, not
the result of statutory fee-shifting or some other mechanism
traditionally determined by the judge alone.
Northern is correct as to the second point. The fees here are
part of Hanover’s legal damages. But that does not guarantee
a jury proceeding or even a bench proceeding. Legal damages,
like liability, can be determined via the summary judgment
mechanism. “If all the material issues of fact underlying a
claim, including the amount of damages, are established and
on the basis of applicable substantive law the claimant is
entitled to judgment, a summary judgment including the
award of damages may be appropriately rendered.” Sahagian
v. Dickey, 827 F.2d 90, 100 n. 8 (7th Cir. 1987) (quoting 6 Moore-
’s Federal Practice ¶ 56.17[18] (2d ed. 1986)).
No. 13-2675 15
Hanover evidenced its contractual damages with a sworn
affidavit from inside counsel stating the amount billed by
outside counsel, Hinshaw & Culbertson. Once Hanover did
that, Northern had to come forward with more than just an
ethereal suspicion that the number was too high. Vukadinovich
v. Bd. of Sch. Trs. of North Newton Sch. Corp., 278 F.3d 693, 699
(7th Cir. 2002) (“The mere existence of an alleged factual
dispute is not sufficient to defeat a summary judgment
motion,” and “[t]he nonmovant will successfully oppose
summary judgment only when it presents ‘definite, competent
evidence to rebut the motion.’”). Northern introduced no
evidence whatsoever to contradict Hanover’s figure. There is
no issue of fact, here, let alone a genuine issue. Summary
judgment on the issue of fees was warranted.
Northern’s first argument, that a more detailed evidentiary
showing was necessary to support a fee award, is not applica-
ble. The cases Northern cites requiring a more detailed
foundation for a fee award come from the fee-shifting context,
in which the fee determination is a proceeding supplemental
to the district court’s entry of a judgment, carried out within
the district court’s discretion. See, e.g., Perdue v. Kenny A. ex rel.
Winn, 559 U.S. 542, 558–559 (2010). This context is different.
The district court in this case was never calculating a “fee
award.” It asked only whether there was a genuine factual
dispute as to the amount of Hanover’s legal damages under
the Agreement. In the absence of any contrary evidence, an
affidavit from a Hanover legal officer stating the amount
Hanover had been billed by its attorneys was sufficient. Our
closing advice to Northern is to carefully consider how much
16 No. 13-2675
longer it is wise to drag this case out. Hanover’s attorney
expenses are only going to increase.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the
district court.