Great American Insurance Co. v. E.L. Bailey & Co.

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 16a0269p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
GREAT AMERICAN INSURANCE COMPANY, ┐
Plaintiff-Appellee, │
│
│
v. > No. 15-2149
│
│
E.L. BAILEY & COMPANY, INC.; EDWARD L. BAILEY, │
Defendants-Appellants. │
┘
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 2:12-cv-13033—Arthur J. Tarnow, District Judge.
Argued: September 28, 2016
Decided and Filed: November 7, 2016
Before: GILMAN, GIBBONS, and STRANCH, Circuit Judges.
_________________
COUNSEL
ARGUED: Thomas D. Noonan, STRENGER & NOONAN, Bloomfield Hills, Michigan, for
Appellants. Lawrence R. Moelmann, HINSHAW & CULBERTSON LLP, Chicago, Illinois, for
Appellee. ON BRIEF: Thomas D. Noonan, STRENGER & NOONAN, Bloomfield Hills,
Michigan, Michael F. Smith, THE SMITH APPELLATE LAW FIRM, Washington, D.C., for
Appellants. Lawrence R. Moelmann, Stephen R. Swofford, HINSHAW & CULBERTSON
LLP, Chicago, Illinois, for Appellee.
_________________
OPINION
_________________
JANE B. STRANCH, Circuit Judge. The State of Michigan contracted with E.L. Bailey
& Company, Inc., a general contractor, to construct a prison kitchen. After delays, Bailey and
1
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 2
the State sued each other for breach of contract in the Michigan Court of Claims. As required by
Michigan law, Bailey had obtained surety bonds guaranteeing its performance from Great
American Insurance Company (GAIC) in exchange for which Bailey agreed to assign GAIC the
right to settle claims related to the construction project if Bailey allegedly breached the
construction contract. Exercising this right, GAIC negotiated with the State to settle Bailey’s
claims without Bailey’s knowledge. GAIC then sought a declaratory judgment from the district
court recognizing its right to settle. The district court granted summary judgment to GAIC. On
appeal, Bailey’s sole argument is that GAIC settled Bailey’s claims against the State in bad faith.
Because Bailey presented insufficient evidence of bad faith, we AFFIRM.
I. BACKGROUND
A. Factual History
Bailey1 and GAIC entered into a surety agreement (the Agreement) in 2006 under which
GAIC would issue surety bonds on behalf of Bailey, as required by Michigan law for Bailey to
contract with the State of Michigan. In this three-way surety relationship, Bailey, the
“principal,” paid GAIC, the “surety,” to provide bonds guaranteeing contract performance to the
State, the “obligee” or “owner.” In September 2009, Bailey entered into a nearly $5,000,000
contract with the State to serve as the general contractor for the construction of a prison kitchen
at the Huron Valley Women’s Correctional Facility in Ypsilanti, Michigan (the Project). In
connection with this construction contract, GAIC provided a performance bond, guaranteeing
performance of the contract work, and a payment bond, guaranteeing payments to subcontractors
and suppliers. Under the Agreement, Bailey agreed to indemnify GAIC for all payments or other
expenses GAIC incurred due to either bond, and to pay upon demand collateral in an amount to
be determined by GAIC. In the event of an alleged breach of Bailey’s contract with the State, its
contracts with its subcontractors, or the Agreement itself, the Agreement assigned to GAIC all
Bailey’s rights “growing in any manner out of” its contract with the State, as well as all its
1
Both E.L. Bailey & Company, Inc. and Edward L. Bailey, its president, are defendants. When referring to
the defendants’ positions in court, this opinion refers to the defendants jointly as “Bailey.” In discussions of the
factual history of this case, “Bailey” refers to E.L. Bailey & Company, Inc.
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 3
claims “against any party” and the resulting proceeds. The Agreement further granted GAIC the
right to settle any claim in connection with any related contract.
Under Bailey’s contract with the State, if different stages of Project work were not
complete after set numbers of days, the contract permitted the State to withhold liquidated
damages of $1,000 per day. Bailey and the State have disputed the Project’s due dates, but the
latest due date for what the contract referred to as “substantial completion” was April 2, 2011
(after multiple extensions agreed to by the State). The contract required “final completion” sixty
days later, which would have been June 1, 2011. The State alleged in the Michigan Court of
Claims that Bailey achieved substantial completion on April 4, 2012, and had not achieved final
completion as of January 1, 2013. Bailey argued that it achieved substantial completion on
December 15, 2011. Bailey never finalized completion, and GAIC later reached an agreement
with the State to have another contractor complete the Project.
A State-appointed mediator reviewed the evidence submitted by both parties in August
2012 and found that substantial completion occurred on April 4, 2012, 368 days after the April 2,
2011 due date. The mediator apportioned 278.5 days of this delay to Bailey and 89.5 days to the
State. In addition, the mediator noted that prior to this due date Bailey had requested a fourteen-
week extension, but the State granted Bailey only an eight-week extension and did not pay
Bailey for the additional six weeks. The record and briefs contain no specific identification of
the number of days for which the State withheld liquidated damages or for which Bailey was
unpaid, except that Bailey agreed at the mediation hearing that it had been compensated through
November 16, 2010. It appears that the State withheld $1,000 per day for both the 368 days
following the due date and for the six weeks (42 days) of ungranted extension time prior to the
due date, for a total of 410 days. This number nearly matches the $411,000 amount that the
State, in email negotiations with GAIC, said it had withheld.
Bailey blames the Project’s delays on the State and its architect/engineer, Byce
& Associates. Bailey alleges that Byce’s design plans contained numerous defects that
prevented construction progress until the State and Byce provided Bailey with viable alternative
designs. As its primary example, Bailey alleges that Byce’s original design for the main power
source for the new food service building was impossible to construct, and that after Bailey
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 4
notified Byce about the defects it took Byce and the State 344 days to provide a viable
alternative. According to an expert consultant retained by Bailey to calculate its claims against
the State, this redesign may have ultimately delayed the Project by 42 days. The State
acknowledged in an email that the original design for the power source represented a “serious
design flaw.”
B. Litigation History
The procedural history of this case includes litigation before three courts, of which we
recite only the details relevant to this decision. First, Bailey and the State brought claims against
each other in the Michigan Court of Claims in October 2011. The Court of Claims stayed the
case pending mediation, and in August 2012 the mediator recommended that the State offer
Bailey $220,400.75 to resolve all claims. The State rejected the mediator’s recommendation.
The claims between Bailey and the State were later transferred to another mediation-like method
of alternative dispute resolution called facilitation, scheduled for September 12, 2013.
On September 11, GAIC’s counsel informed Bailey’s counsel that GAIC had agreed to a
proposed settlement with the State, releasing Bailey’s claims against the State with prejudice in
exchange for the State paying GAIC $358,000, representing final payment under the construction
contract. The State did not attend the following day’s facilitation. Bailey alleges that GAIC had
secretly negotiated with the State since February 2013, and that Bailey was unaware of the
negotiations until the agreement had already been reached.
Second, some of Bailey’s subcontractors brought claims in Washtenaw County Circuit
Court against Bailey and against GAIC under the payment bond for amounts due for Project
work. In April 2012, GAIC demanded $1.4 million in collateral from Bailey for these
subcontractor claims. Bailey offered to pledge as collateral its accounts receivable, including its
claims against the State, which GAIC rejected. In November 2013, GAIC reduced its demand
for collateral to $653,998. Bailey never provided any collateral in response to either demand.
GAIC ultimately settled the subcontractors’ claims, paying out $645,287.55 and incurring over
$260,000 in expenses and attorney’s fees.
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 5
Third, GAIC brought this case in federal court in July 2012, seeking indemnification for
Bailey’s alleged breach of the Agreement by failing to provide collateral for the subcontractor
claims. GAIC amended its complaint in December 2014 to add a declaratory judgment claim
regarding GAIC’s right to settle Bailey’s claims against the State. Bailey’s answer asserted bad
faith as an affirmative defense. GAIC moved for summary judgment on the declaratory
judgment and indemnification claims, and Bailey responded by contesting GAIC’s right to settle
Bailey’s claims against the State. Although Bailey’s response discussed its allegation that GAIC
settled in bad faith, it argued that the bad faith issue was not ripe for review until the court
determined whether GAIC had a right to settle Bailey’s claims. The district court granted
summary judgment to GAIC, finding that GAIC had that right under the Agreement and
awarding damages for the indemnification claim. Despite Bailey’s position that a bad faith
defense was not yet ripe, the court considered and rejected Bailey’s bad faith argument, finding
that Bailey’s argument was based only on its disagreement with the settlement amount. Bailey
timely appealed, contesting only the bad faith finding.
II. ANALYSIS
We review grants of summary judgment de novo. V & M Star Steel v. Centimark Corp.,
678 F.3d 459, 465 (6th Cir. 2012). “Summary judgment is appropriate only when the evidence,
taken in the light most favorable to the nonmoving party, establishes that there is no genuine
issue as to any material fact and the movant is entitled to judgment as a matter of law.” Id.
(citing Fed. R. Civ. P. 56(c)).
As a federal court hearing a breach of contract claim based upon diversity jurisdiction,
we apply the choice of law rules of the forum state, Michigan. NILAC Int’l Mktg. Grp. v.
Ameritech Servs., Inc., 362 F.3d 354, 358 (6th Cir. 2004). The contract at issue here, the
Agreement, has no choice-of-law provision, so Michigan courts would apply Michigan law
unless an exception applied. Id. Since no exception applies, Michigan law governs the
interpretation of the Agreement.
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 6
A. Waiver
As a threshold matter, we must determine whether Bailey waived its bad faith argument.
“[O]rdinarily an appellate court does not give consideration to issues not raised below.” Smoot
v. United Transp. Union, 246 F.3d 633, 648 n.7 (6th Cir. 2001) (quoting Hormel v. Helvering,
312 U.S. 552, 556 (1941)). The two main purposes of the waiver rule are to ease appellate
review by ensuring that district courts consider issues first, and to prevent surprise to litigants.
See Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 552 (6th Cir. 2008).
Waiver is a close question in this case, because neither party fully developed the facts or
law on bad faith in the district court, and because Bailey expressly disclaimed the relevance of its
bad faith argument to the district court’s decision. Nonetheless, GAIC had notice of Bailey’s
bad faith argument, and the district court considered it from the bench. Bailey asserted bad faith
in its affirmative defenses, and GAIC referenced Bailey’s bad faith argument in its own
summary judgment motion. Although Bailey’s response to the summary judgment motion
argued that it was not yet appropriate to address the issue, Bailey put the court and GAIC on
notice of its argument. At the summary judgment hearing, the district court expressly considered
bad faith, giving Bailey’s counsel the opportunity to argue bad faith and GAIC’s counsel an
opportunity to respond with argument about its investigation into Bailey’s claims. The transcript
thus shows that Bailey raised and argued, and GAIC had the opportunity to contest, Bailey’s
allegation that GAIC had settled in bad faith. The issue is therefore appropriate for appellate
review.
B. Bad Faith
1. Proper Forum for Bailey’s Bad Faith Argument
Bailey’s confusion about the proper forum for its bad faith argument was reasonable
given this case’s unusual posture. Fairness dictates that Bailey should have an opportunity to
litigate its bad faith argument somewhere. Exactly where and when bad faith can be raised by a
party in Bailey’s position involves two questions that are unanswered under Michigan law.
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 7
First, can bad faith be raised as a defense in a surety’s declaratory judgment action
regarding its right to settle claims involving the principal? Or must the principal wait until the
surety brings an indemnification claim to recover its payout from the disputed settlement?
Bailey relied on decisions from other jurisdictions to argue in the district court that it could not
yet raise bad faith as a defense to GAIC’s declaratory judgment claim. See Bell BCI Co. v. Old
Dominion Demolition Corp., 294 F. Supp. 2d 807, 815 (E.D. Va. 2003) (holding that a
declaratory judgment action was “not the proper forum for [the principal] to make its ‘bad faith’
argument,” which instead “is properly asserted as a defense to the Surety’s claim against [the
principal] for indemnification”); accord Safeco Ins. Co. of Am. v. M.E.S., Inc., No. 09-CV-3312
(ARR)(ALC), 2010 WL 5437208, at *14 (E.D.N.Y. Dec. 17, 2010) (citing Bell), aff’d sub nom.
Safeco Ins. Co. of Am. v. Hirani/MES, JV, 480 F. App’x 606, 608–09 (2d Cir. 2012). In both
Bell and Safeco, the alleged bad faith of particular settlements was irrelevant to determining
whether the surety agreements authorized the sureties to settle, and therefore those courts held
off adjudication of bad faith until the sureties brought indemnification claims to recover the
settlement payments.
This procedure makes sense in most cases challenging surety settlements, where the
disputed settlement requires the surety to make a payment on the principal’s behalf, for which the
surety then seeks indemnification. The principal can argue bad faith as an affirmative defense in
the follow-up indemnity action. In contrast, GAIC’s settlement requires the State to pay GAIC,
making a follow-up indemnity action by GAIC unnecessary with regard to the State’s claim,
potentially denying Bailey a forum to assert bad faith as an affirmative defense. Thus, Bell and
SafeCo have limited applicability to this case.
Further complicating matters, GAIC did bring an indemnification claim here, and Bailey
did raise bad faith as an affirmative defense. GAIC’s indemnification claim, however, was for
payments made to settle the subcontractors’ claims, not Bailey’s controversy with the State. This
case thus presents the second open question of whether a court may adjudicate the bad faith of
one settlement as a defense to an indemnity claim for payment of a separate settlement. In
limited caselaw from other jurisdictions, courts have found it proper to adjudicate such bad faith
allegations, at least if the two settlements arise from the same surety agreement. See Gen. Ins.
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 8
Co. of Am. v. Mezzacappa Bros., No. 01-CV-7394 (FB), 2003 WL 22244964, at *1, *4, *5
(E.D.N.Y. Oct. 1, 2003) (adjudicating whether the surety settled the principal’s claims in bad
faith, raised as a defense to a separate indemnification claim arising from the same construction
project), aff’d, 110 F. App’x 183 (2d Cir. 2004); cf. John Wm. Brown Co. v. State Emps.’ Credit
Union, 752 S.E.2d 185, 187–88, 189 & n.3 (N.C. Ct. App. 2013) (instructing the principal to
raise allegations that the surety settled the principal’s claims in bad faith as a defense in the
surety’s federal court indemnity action seeking payments made under separate but related
settlements with subcontractors). Simultaneously adjudicating issues surrounding separate
settlements arising from the same construction project and governed by the same surety
agreement is logical because the facts relate and payments may offset one another.
Ultimately, whether a principal can raise bad faith should depend on fairness: if there is
not another, more appropriate forum where the principal can raise the issue, then the court should
consider it in a declaratory judgment action. Adjudicating bad faith is especially appropriate in a
case like Bailey’s, where the declaratory judgment claim is already joined with an
indemnification claim against the same principal, because payments might well offset one
another. See Liberty Mut. Ins. Co. v. Aventura Eng’g & Constr. Corp., 534 F. Supp. 2d 1290,
1316–17, 1318–20 (S.D. Fla. 2008) (adjudicating bad faith in a surety’s action seeking both
indemnification and a declaratory judgment regarding the right to release the principal’s claims).
In this case, in fact, the district court made the amount of the damages award for GAIC’s
indemnification claim explicitly dependent on the final value of GAIC’s settlement with the
State. Given this analysis and the limited caselaw available, Bailey’s bad faith argument was not
premature and the district court did not err by considering it.
2. Surety’s Duty of Good Faith under Michigan Law
“Michigan law infers a duty of good faith in every contract, which a party may breach by
performing in bad faith.”2 Travelers Cas. & Sur. Co. of Am. v. J.O.A. Constr. Co., 479 F. App’x
684, 689–90 (6th Cir. 2012). “But, as an affirmative defense, Appellants bore the burden of
2
Bailey also argues that the Agreement expressly imposes a duty of good faith, but this argument misreads
the Agreement. The Agreement permits GAIC to charge Bailey only for “disbursements made by the Surety in good
faith,” but that term applies only to payments like those GAIC made to Bailey’s subcontractors, not to GAIC’s
decisions about settlement. Bailey does not challenge the good faith of those payments.
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 9
pleading and substantiating the issue to place it in dispute.” Id. at 690 (citing State Auto. Mut.
Ins. Co. v. Reschke, No. 2:06–cv–15410, 2008 WL 4937971, at *6 (E.D. Mich. Nov. 14, 2008)).
As in Travelers and Reschke, it was Bailey’s burden to substantiate its affirmative defense of bad
faith, not GAIC’s burden to substantiate its good faith.
GAIC does not dispute that its settlement of Bailey’s claims had to be done in good faith,
but the parties do dispute the standard for establishing a surety’s bad faith under Michigan law.
The Agreement does not define the term “good faith,” and “[u]nless otherwise defined,
contractual language is given its plain and ordinary meaning.” Premier Ctr. of Canton, L.L.C. v.
N. Am. Specialty Ins. Co., No. 297799, 2011 WL 5964611, at *4 (Mich. Ct. App. Nov. 29, 2011)
(reviewing Michigan courts’ definitions of “good faith” to interpret a good faith requirement in a
surety agreement).
In interpreting a criminal statute, the Michigan Supreme Court noted that the term
“‘[g]ood faith’ consistently has been deemed a standard measuring the state of mind and
perception of the defendant—a measure of honest belief and intention.” People v. Downes,
228 N.W.2d 212, 217 (Mich. 1975); see also Miller v. Riverwood Recreation Ctr., Inc.,
546 N.W.2d 684, 689 (Mich. Ct. App. 1996) (“‘Good faith’ has been defined as a standard
measuring the state of mind, perceptions, honest beliefs, and intentions of the parties.”).
Bailey relies most heavily on a Michigan Supreme Court opinion defining bad faith in the
insurance context, Commercial Union Insurance Co. v. Liberty Mutual Insurance Co.,
393 N.W.2d 161 (Mich. 1986), where an insurance company was sued for rejecting a settlement
offer allegedly in bad faith. Commercial Union defined bad faith as more than negligence but
less than fraud, and provided the following definition for jury instructions in insurance cases:
“arbitrary, reckless, indifferent, or intentional disregard of the interests of the person owed a
duty.” Id. at 164. Commercial Union continued:
Good-faith denials, offers of compromise, or other honest errors of judgment are
not sufficient to establish bad faith. Further, claims of bad faith cannot be based
upon negligence or bad judgment, so long as the actions were made honestly and
without concealment. However, because bad faith is a state of mind, there can be
bad faith without actual dishonesty or fraud. If the insurer is motivated by selfish
purpose or by a desire to protect its own interests at the expense of its insured’s
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 10
interest, bad faith exists, even though the insurer’s actions were not actually
dishonest or fraudulent.
Id. (footnote omitted). In addition, Commercial Union listed twelve factors that trial courts may
choose in their discretion to include in jury instructions on insurers’ bad faith. Id. at 165–66.
Commercial Union discussed good faith in the context of an insurer-insured relationship,
and its applicability to sureties is not clear. Although the Michigan Court of Appeals cited
Commercial Union’s good faith standards in Premier Center of Canton, No. 297799, 2011 WL
5964611, at *4, a surety case, insurance is not identical to suretyship. Unlike the two-way
relationship of insurance, suretyship is a three-way relationship where the principal contracts
with the surety to provide bonds that protect the obligee (the owner of the project), not the
principal. It is the obligee of a surety, not the principal, who is analogous to the insured of an
insurer. Therefore, the Southern District of Ohio held that “while a surety owes a duty of good
faith to the obligee, a surety owes no such duty to the principal.” Int’l Fid. Ins. Co. v. Vimas
Painting Co., No. 2:07-CV-298, 2008 WL 926577, at *5 (S.D. Ohio Apr. 3, 2008) (collecting
cases on sureties owing a duty to obligees rather than principals). Even though surety
agreements in Michigan do carry an implied duty of good faith, that duty of good faith may not
incorporate all of the duties implied by Commercial Union’s language due to the differences
between insurers’ duties to their insured and sureties’ duties to principals.
To the extent Commercial Union does apply to sureties, it does not deviate from the
definitions in Downes and Miller. Like those cases, Commercial Union stated that “bad faith is a
state of mind.” 393 N.W.2d at 164. Although “there can be bad faith without actual dishonesty
or fraud,” such as when “the insurer is motivated by selfish purpose or by a desire to protect its
own interests at the expense of its insured’s interest,” “offers of compromise” or “honest errors
of judgment are not sufficient to establish bad faith.” Id.
3. Evidence of GAIC’s State of Mind
Bailey provided neither evidence about GAIC’s state of mind nor any reason why
GAIC’s interest in settling would differ from Bailey’s. There is no evidence that GAIC’s
settlement of Bailey’s claims was undertaken with selfish purpose at Bailey’s expense; rather,
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 11
GAIC and Bailey share an interest in securing the highest settlement possible from the State.
Even if GAIC misunderstood Michigan law, leading it to miscalculate its liability and accept a
lower settlement, “honest errors of judgment are not sufficient to establish bad faith.” Id.
Furthermore, some evidence suggests that GAIC negotiated in good faith. The emails
between GAIC and the State portray a genuinely adversarial negotiation, in which GAIC pushed
for multiple settlement terms with which the State “strenuously,” “strongly,” and “adamantly
disagree[d].” This negotiation secured $358,000, well more than the mediator’s recommendation
of $220,000. Without evidence of GAIC’s state of mind or intentions, Bailey failed to establish
the essence of the definition of bad faith in Michigan.
4. Concealment
Bailey argues that GAIC acted in bad faith by concealing its negotiations with the State
until the latter two reached an agreement on the eve of the facilitation. GAIC does not admit but
also does not contest that it did not communicate with Bailey about its negotiations before they
were complete. A surety’s concealment of its settlement negotiations does raise concerns.
Settling a party’s claim in secret, even when that claim has been assigned away by contract,
deprives that party of the time to prepare objections and the opportunity to consider its options
appropriately. By not informing Bailey until the day before its facilitation with the State, GAIC
wasted Bailey’s and its counsel’s time and resources preparing for the facilitation.
An unpublished Michigan appellate decision suggests that concealment is a factor to be
considered in determining whether a surety settled in bad faith: “A claim of bad faith cannot be
based upon negligence or bad judgment ‘if the actions were made honestly and without
concealment.’” Premier Ctr. of Canton, No. 297799, 2011 WL 5964611, at *4 (brackets
omitted) (quoting Miller, 546 N.W.2d at 689 (quoting Commercial Union, 393 N.W.2d at 164)).
Of the twelve factors Commercial Union listed for determining bad faith in the insurance
context, the first factor (the only one that might apply to GAIC’s conduct) is “failure to keep the
insured fully informed of all developments in the claim or suit that could reasonably affect the
interests of the insured.” Commercial Union, 393 N.W.2d at 165. Depending on the facts,
concealment might combine with other factors to establish a surety’s bad faith.
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 12
Here, Bailey’s only evidence regarding concealment is the date on which GAIC informed
it of the settlement; no evidence substantiates its claim that GAIC had been in negotiations with
the State for months. The emails between GAIC and the State show communication only during
the week prior to reaching the agreement and GAIC’s informing Bailey. At oral argument,
GAIC’s counsel stated that settlement negotiations did not begin earlier, as earlier discussions
with the State had addressed nothing more than finding a replacement contractor for the Project.
Bailey has presented no evidence to the contrary. These facts are not sufficient evidence of
concealment to establish bad faith.
Even if Bailey did not know of GAIC’s negotiations with the State until they were
complete, Bailey had warning that GAIC might take control of these claims, just as GAIC had
settled and paid the subcontractor claims. Bailey also had the opportunity to regain control of its
claims by providing the collateral requested by GAIC. After initially demanding $1.4 million in
collateral in April 2012, GAIC reduced its demand to $653,998 in November 2013, based on the
expense GAIC had incurred as of that date. If Bailey had provided the requested collateral in the
years before summary judgment in May 2015, it would have regained the capacity to negotiate
for a higher settlement amount than GAIC reached. Bailey thus had both the notice and the
opportunity to prevent an undesirable settlement, which undermines its argument that GAIC’s
alleged concealment constitutes bad faith.
5. GAIC’s Alleged Failure to Investigate Michigan Law on Liquidated Damages
Bailey also argues that GAIC’s failure to adequately investigate Bailey’s claims against
the State constitutes bad faith. Bailey has provided no direct evidence of GAIC’s alleged failure
to investigate, such as evidence regarding the investigatory steps GAIC took. Conclusory
statements are not sufficient evidence to create an issue of fact precluding summary judgment.
See, e.g., Int’l Fid. Ins. Co. v. Podlucky, No. 07-0235, 2008 WL 1829904, at *3 (W.D. Pa. Apr.
23, 2008) (indemnitors’ statements of “belief” that the surety failed to properly investigate the
claims and thus acted in bad faith were insufficient to raise an issue of material fact).
Bailey’s argument that GAIC failed to sufficiently investigate stems from its
interpretation of Michigan law on liquidated damages. In Bailey’s view, liquidated damages
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provisions are entirely unenforceable under Michigan law if the parties are mutually responsible
for project delays. Since the mediator attributed some delay to the State, Bailey argues that the
State’s withholding of any liquidated damages was improper, and thus Bailey had an
unquestionable claim to $425,000 for wrongfully withheld liquidated damages. GAIC questions
the policy behind such a strict rule against apportioning liquidated damages, noting that one
party’s responsibility for one day of delay could nullify the other party’s responsibility for
unlimited delay.
Despite the potential unfairness of this rule, a series of century-old rulings by the
Michigan Supreme Court clearly establish that “where the delay is due to the fault of both parties
the court will not attempt to apportion [liquidated] damages.” Bd. of Educ. v. Chaussee,
177 N.W. 975, 977 (Mich. 1920) (citing Early v. Tussing, 148 N.W. 678, 683 (Mich. 1914)).
The Michigan Court of Appeals has continued to apply this non-apportionment rule. See Grand
Rapids Asphalt Paving Co. v. City of Wyoming, 185 N.W.2d 591, 594–95 (Mich. Ct. App. 1971)
(citing Chaussee and Early); see also Davey Tree Expert Co. v. Site Dev. Inc., No. 313971, 2014
WL 2600566, at *4 (Mich. Ct. App. June 10, 2014) (citing Grand Rapids and rejecting liquidated
damages without evidence that the other party was the sole cause of delay).
Both federal and other state courts, however, have been shifting away from the strict
application of this rule. One federal court in Michigan did not follow the rule when delay could
be apportioned and liquidated damages were per diem, as they are under Bailey’s contract with
the State. In re Constr. Diversification, Inc., 36 B.R. 434, 437 (E.D. Mich. 1983) (holding that
Michigan’s non-apportionment rule does not apply where responsibility for discrete days can be
apportioned under a per diem liquidated damages provision). More recently, the Tenth Circuit
reviewed the history of Kansas’s non-apportionment rule and similar rules nationwide and held
that it did not apply in circumstances similar to the present case, because “during the past 30
years” “a strong majority” of courts have adopted the “modern view and allow liquidated
damages to be apportioned when faced with damages that are in fact divisible.” Hutton
Contracting Co., Inc. v. City of Coffeyville, 487 F.3d 772, 785 (10th Cir. 2007).
In applying Michigan law, this court must follow the decisions of the Michigan Supreme
Court, not federal courts that are applying Michigan law. See Savedoff v. Access Grp., Inc.,
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 14
524 F.3d 754, 762 (6th Cir. 2008). It is unclear, however, whether the Michigan Supreme Court,
if faced with the issue today, would maintain the strict non-apportionment rule in light of the
modern view documented by the Tenth Circuit.
Even assuming that the Michigan Supreme Court would uphold the non-apportionment
rule, however, Bailey’s argument does not succeed. Bailey’s argument about Michigan law is
ultimately an argument that the settlement amount should have been higher. While a baseless
settlement amount might be one indicator of bad faith in some circumstances, the district court
was correct that simple disagreement with the monetary amount reached by settlement is
generally insufficient to establish bad faith on its own. See Premier Ctr. of Canton, 2011 WL
5964611, at *5 (“[D]isagreement with the settlement decision does not establish that [the surety]
acted in bad faith.”). Bad faith primarily concerns a party’s state of mind during the settlement
process, not its results.
Another weakness of Bailey’s liquidated damages claim is that it considers the Project
delays only until the time of substantial completion (the time period analyzed by the mediator).
But Bailey’s contract with the State has two separate liquidated damages provisions: one for
failure to achieve substantial completion on time, and another for failure to achieve final
completion on time. Bailey never achieved final completion of the Project. The record contains
no apportionment of delays after substantial completion on April 4, 2012. If Bailey were
deemed fully responsible for delays after substantial completion, or if the Michigan Supreme
Court permitted apportionment of damages, Bailey and GAIC would remain liable for ongoing
liquidated damages for each day that GAIC did not settle. Bailey fails to account for this
additional potential liability and its implications for the reasonableness of GAIC’s settlement.
Moreover, regardless of whether it is accurate, Bailey’s proposed figure represents the total
value of its claim for wrongfully withheld liquidated damages, and thus does not necessarily
account for the benefits of entering settlement such as avoiding the time, expense, and
uncertainty of further litigation.
Given all these factors, the settlement amount reached by GAIC does not indicate a
failure to investigate Bailey’s claims. In summary, Bailey did not provide sufficient evidence of
No. 15-2149 Great Am. Ins. Co. v. E.L. Bailey & Co. Page 15
bad faith to preclude summary judgment, either due to concealment or the failure to investigate
Michigan law.
III. CONCLUSION
Bailey may be correct that it was treated poorly by the State during its work on the
Project. This case, however, is governed by the rights Bailey assigned to GAIC to settle its
claims, and the district court properly ruled that GAIC had the right to settle Bailey’s claims
against the State. Although GAIC’s failure to inform Bailey of the settlement until the day
before the facilitation is concerning, this fact alone does not defeat summary judgment,
especially when GAIC shared Bailey’s interest in securing the highest settlement possible and
ultimately settled for more than the mediator recommended. Bailey’s other arguments are
unavailing. Therefore, the district court’s grant of summary judgment is AFFIRMED.