Surety's Indemnity Agreement

Mike Pipkin’s wide range of experience allows him to be creative when crafting strategies and solutions for his clients. Throughout his 25 year legal career, Mike has represented clients in complex business, surety, construction, fidelity, professional liability, and insurance litigation and trials, as well as legal analysis and counseling to businesses of all varieties.Mike’s approach is to work with his clients to determine one or more desirable outcomes, then fashion the appropriate plan to achieve success. Throughout the course of the engagement, Mike and his team keep in close contact with the client, so that they are aware of current developments, and expectations are established and managed using the latest information.Mike is recognized nationally as a thought leader in the legal industry. Mike is a Past Chair of the ABA Tort Trial and Insurance Practice Section Fidelity and Surety Law Committee and currently serves as one of eight attorneys in the USA on the National Association of Surety Bond Producers (NASBP) Attorney Advisory Council. In 2016, Mike was elected to membership in the Federation of Defense & Corporate Counsel (FDCC), an organization comprised of leaders in the insurance and corporate defense bar. FDCC membership is selective and by invitation to those who have been judged by their peers to have achieved professional distinction. In 2017, Mike was named a Charter Fellow in the Construction Lawyers Society of America, an invitation-only construction lawyer honorary society with membership limited to 1,200 practicing Fellows from the United States and internationally.Also in 2017, Mike passed the Louisiana State Bar Examination, allowing WRP to expand its base of services beyond Texas, Oklahoma, and Arkansas.Partner with SMTD Law LLP, Los Angeles, California. She received her Bachelor of Science degree in Political Science from Santa Clara University in 1975 (with honors) and her J.D. from University of California, Hastings College of the Law in 1978 (Thurston Society). She served as the 2003-2004 Chair of the ABA/TIPS Fidelity and Surety Law Committee and received the FSLC Martin J. Andrew Award for Lifetime Achievement in Fidelity and Surety Law in 2017. Partner with thelaw firm of Wright, Constable & Skeen, LLP, in Baltimore, Maryland. Mr.Bachrach is a graduate of Harvard University in 1971 (with honors), andGeorgetown University Law Center in 1974. He served as the 2001-2002 Chair ofthe Fidelity and Surety Law Committee and received the FSLC Martin J. AndrewAward for Lifetime Achievement in Fidelity and Surety Law in 2009. In 2018, Mr.Bachrach received the Chairman’s Award from the National Bond ClaimsAssociation for contributions made to the fidelity and surety industry.VP & Director of Fidelity, Surety, Trade Credit and Political Risk claims with Zurich American Insurance Company in Dallas, Texas. She received both her Bachelor of Business Administration and her Bachelor of Arts degrees from Southern Methodist University in 1987, and her J.D. from Southern Methodist University Dedman School of Law in 1990. She served as the 2007-2008 Chair of the ABA/TIPS Fidelity and Surety Law Committee.

• TABLE OF CONTENTSPreface .....................................................................................................iiiEditors andAuthors.................................................................................. vChapter IINTRODUCTIONTO THE SURETY’S RIGHTS AS THEFOUNDATION FORTHE INDEMNITYAGREEMENT.......................1A. Background andSummary........................................................... 11.      The Nature of Suretyship...................................................... 22.      Comparison with Insurance: The Extension of CreditConcept and Other Distinctions ............................................ 4a.      Underwriting Issues and Considerations ........................ 7b.      It is the Surety’s Hope and Expectation that It WillSuffer No Loss ................................................................ 8B.      The Surety’sCommon Law and Statutory Rights ....................... 91.      The Surety’s Common Law Right to Protection from Loss:Exoneration........................................................................... 92.      The Surety’s Common Law and Statutory Rights toReimbursement.................................................................... 103.      The Surety’s Subrogation Rights and the IndemnityAgreement ........................................................................... 15a.      The Surety’s Subrogation Rights—Basis at Law and inEquity............................................................................ 15b.      The Surety’s Subrogation Rights—Practice and Effect 19(i)    The Surety’s Subrogation to the Obligee’s Rights . 19(ii)  The Surety’s Subrogation to the Principal’s Rights21(iii) The Surety’sSubrogation to the Rights ofSubcontractorsand Suppliers ................................. 22(iv) The Property Subject to the Surety’s SubrogationRights..................................................................... 22c.      Comparing and Contrasting the Surety’s Subrogation Rightsto the Surety’s Reimbursement Rights Under the Indemnity Agreement ................................................... 23(i)    Advantages of Subrogation in Comparison with......................................................... 24d. The Effect of theSurety’s Rights Under Its Indemnity Agreement on Subrogation–Selectionand Election of Rights ............................................................................ 25C. Conclusion................................................................................. 26Chapter IICREATION OFTHE RELATIONSHIP AMONG THE SURETY, THE PRINCIPAL, AND THE INDEMNITORS—WHO ANDHOW .......... 29A. The Parties to the Indemnity Agreement andits Execution....... 291.      Principal and Indemnitors................................................... 29a.      Individuals.................................................................... 30b.      Corporation ................................................................... 31(i)    Subchapter C Corporations.................................... 31(ii)  Subchapter SCorporations..................................... 35(iii) HoldingCompany .................................................. 36c.      Limited Liability Company.......................................... 36d.      Partnership .................................................................... 38(i)    General Partnerships .............................................. 39(ii)  Limited Partnerships..............................................40(iii) LimitedLiability Partnership ................................. 41e.      JointVenture................................................................. 42(i)    Multiple Purpose/MultipleProjects........................ 42(ii)  Single Purpose/Single Project Joint Venture.......... 44f.       ESOP (Employee Stock Ownership Plans)................... 44g.      Foreign Entity ............................................................... 45(i)    ForeignCorporations.............................................. 45(ii)  ForeignSovereigns................................................. 46(iii) SovereignTribal Nations ....................................... 47(iv) TribalAffiliates/Entities......................................... 50(v)   Alaska Native Corporations................................... 51h.      Trust/Trust Beneficiaries .............................................. 51(i)    TestamentaryTrust................................................. 52(ii)  BusinessTrusts....................................................... 53(iii) AssetProtection/Spendthrift Trusts ....................... 54(iv) Family or Special Interest Trust .............................55 xii2.      Surety.................................................................................. 55a.      Corporate Surety ........................................................... 56b.      Personal Surety ............................................................. 56c.      Compensated Surety..................................................... 56d.      Uncompensated Surety................................................. 57e.      Co-Surety ...................................................................... 57(i)    Contractual Co-Surety............................................ 57(ii)  Successor/Predecessor Surety................................ 58f.       Reinsurer....................................................................... 59g.      Surety in Receivership.................................................. 60h.      Surety in Liquidation.................................................... 613.      Signatures and Requirements for Signature ........................ 61a.      Execution by All Parties............................................... 61b.      Notarial Acknowledgment............................................ 62(i)    Purpose (Forged Signatures) .................................. 62(ii)  Protections (Notary Liability)................................ 63c.      Corporate Resolution .................................................... 64d.      Need for OriginalSignature.......................................... 654.      Surety’s Acceptance—By WritingBonds........................... 65B. The Principal’s and the Indemnitors’Representations andWarranties .................................................................................. 651.      The Right, Power, and Authority to Execute and Performthe IndemnityAgreement.......................................................... 652.      The Financial Information Provided to the Surety .............. 67a.      Right to Have Access to Principal’s and Indemnitors’Books andRecords ....................................................... 68b.      Right to Financial Information from Third Parties .......683.      Acknowledgment that There are No Oral or Other Agreementsas a Condition Precedent or to Induce the Execution of the Indemnity Agreement. ............................. 72C. Consideration ............................................................................. 75D. Severability and PartialExecution............................................. 791.      Severability of Invalid, Illegal, Void, or UnenforceableProvisions of the Indemnity Agreement.............................. 802.      Partial Execution of the Indemnity Agreement ................... 82 xiiia. One or More PartiesFails to Execute the Indemnity Agreement..................................................................... 82E.      The Executionof the Indemnity Agreement by One or More Parties is Defective or Invalid forAny Reason ......................... 82F.      MultipleIndemnity Agreements ................................................ 841.      With the SameSurety.......................................................... 852.      With Two or MoreSureties................................................. 86G.     The BondsIncluded Under the Indemnity Agreement .............. 871.      Bonds Executed On or After the Date of the IndemnityAgreement ........................................................................... 872.      Bonds Executed Prior to the Date of the IndemnityAgreement ........................................................................... 88H.     The Surety’sRight to Decline to Execute Bonds ...................... 911.      The Principal is Not Obligated to Obtain Bonds from theSurety.................................................................................. 912.      The Surety’s Right to Decline to Execute Any New Bonds 923.      The Surety’s Right to Decline to Execute Any Final Bonds............................................................................................. 924.      Bid Bond Losses Where Final Bonds Not Issued............... 955.      Surety Liability for Defective or Rejected Bonds ............... 95I.       The Rights of Other Sureties, Co-Sureties, and Reinsurers .......96J.       Termination of the Indemnity Agreement Relationship ............ 981.      The Indemnity Agreement as a Continuing Obligation ...... 982.      Method of Termination..................................................... 100a.      Written Notice Required............................................. 100b.      Delivery of Written Notice to the Surety–Manner ..... 101c.      Time Conditions—Termination Effective Date.......... 1023.      Effectiveness of Termination with Respect to the Bonds . 102a.      Bonds Executed Prior to the Termination Effective Date.................................................................................... 102b.      Bonds Executed After the Termination Effective Date.................................................................................... 103c.      Future Liability for Additional Bonds Executed After theTermination Effective Date ........................................ 1044.      Continuing Liability of Non-Terminating Indemnitors..... 104 xiv5.      Termination By Operation of Law (Voiding of a Bond orBonded Contract and its Effect on the Indemnity Agreement)........................................................................................... 1046.      Disputes Between the Principal and the Indemnitors and/orAmong the Indemnitors..................................................... 105 Chapter IIIDOCUMENTS ANDAGREEMENTS RELATED TO THE INDEMNITY AGREEMENT.............................................................. 107A.     The Surety’sAgreements with the Principal and Indemnitors 1081.      Subsequent IndemnityAgreements...................................1082.      Subordination Agreements................................................ 109a.      Subordination of Debt to and from Affiliate Entities . 110b.      Indemnitor Loans as Subordinated Debt.................... 1123.      Collateral Agreements....................................................... 1124.      Capital RetentionAgreements........................................... 1125.      TribalAddenda.................................................................. 1146.      Funds ControlAgreements................................................ 121a.      Joint Account Agreements.......................................... 122b.      TrustAgreements........................................................ 123c.      Third-Party Funds Control Agreements..................... 125d.      Cash Collateral Agreements....................................... 1267.      Lending, Financing, Security Type Agreements ............... 130a.      Direct Lending ............................................................ 130b.      Indirect Lending.......................................................... 1318.      Underwriting Agreements................................................. 1329.      Standstill Agreements....................................................... 13610.  Opinions of Counsel.......................................................... 13711.  Confidentiality Agreements..............................................138B.      Collateral forthe Surety........................................................... 1381.      What Kinds ofCollateral................................................... 138a.      Irrevocable Letter of Credit........................................ 138(i)    Issuing Entity Requirements–Capacity and Format.............................................................................. 139(ii)  Evergreen (Automatically Renewable) Clause. ... 140b.      Certificates of Deposit/Demand Deposit Accounts .... 141 xvc.      Real Property.............................................................. 141d.      Personal Property ........................................................ 142(i)    Equipment ............................................................ 143(ii)  Inventory and Materials....................................... 143(iii) Stocks andBonds ................................................. 144(iv) General Intangibles .............................................. 144(v)   Intellectual Property (e.g., Patents)...................... 144(vi) Life Insurance (e.g., Key Personnel) .................... 1452.      Priority Rights in theCollateral......................................... 146a.      Prior Liens .................................................................. 146b.      Subordination Agreements......................................... 1463.      Acquiring the Collateral—Means andMethods................ 147a.      Real Property–Mortgages and Deeds of Trust ............ 147b.      Personal Property ........................................................ 148(i)    Assignment or Security Agreement ..................... 148(ii)  Attachment ........................................................... 150(iii) Types ofSecurity Agreements ............................. 1504.      Perfection.......................................................................... 152a.      Filing a UCC-1 FinancingStatement.......................... 152b.      Possession of the Collateral ........................................ 152c.      Control ........................................................................ 153d.      Automatic Perfection upon Attachment..................... 153e.      Other Required Filings (Examples Only)................... 1535.      Losing the Collateral......................................................... 154a.      Failing to Obtain Perfected Lien Rights in the Collateral154b.      Failing to Maintain the Collateral ............................... 154c.      Third Party Actions Taken Against the Collateral...... 155(i)    Senior Lien Creditors...........................................155(ii)  Debtors/Trustees in Bankruptcy ...........................155(iii) Others (e.g.,Taxing Authorities and JudgmentCreditors).............................................................. 157d.      Failing to Insure the Collateral................................... 1586.      Realizing on the Collateral and Application of theCollateralProceeds tothe Surety’s Loss............................................ 158 xvia.      By Contract (Indemnity Agreement, Separate CollateralAgreement, Settlement Agreement, or Other) ............ 158b.      Allocation of Collateral and Its Proceeds By Operation ofLaw ......................................................................... 1617.      Releasing the Collateral.................................................... 162a.      Satisfactory Evidence of the Surety’s Release andDischarge FromAll of its Liabilities under the Bonds162b.      Payment of All of the Surety’sLosses........................ 163C.      The Surety’sAgreements with Entities with Whom the Principaland/orIndemnitors Have Relationships................................... 1631.      Inter-Creditor Agreements................................................ 1632.      Subordination Agreements................................................ 1683.      Guarantees in Favor of Existing Lenders; GuaranteesSupporting New Credit...................................................... 1694.      Equipment, Facility, and Intellectual PropertyUtilizationAgreements........................................................................ 1695.      Joint Venture Applications and Related Agreements........ 171D.     The Surety’sAgreements with Entities with Whom the SuretyhasRelationships..................................................................... 1711.      Reinsurance ....................................................................... 1712.      Co-Surety.......................................................................... 173a.      Single Indemnity Agreement for the Co-Sureties....... 174b.      Multiple Indemnity Agreements for the Co-Sureties.. 175c.      Co-Surety Side Agreement Among the Sureties Only 175(i)    Percentages........................................................... 178(ii)  Lead Surety.......................................................... 179(iii) SolvencyIssues .................................................... 180d.      Accommodation Surety .............................................. 180e.      Fronting Agreements.................................................. 1813.      The Guiding Claim Procedures ......................................... 181Chapter IVLIABILITY OFTHE PRINCIPAL AND INDEMNITORS TO INDEMNIFY AND REIMBURSE THE SURETY............................. 187A. The Liability of the Principal andIndemnitors ........................ 1891. What is a “Principal”? ....................................................... 189 xvii2.      Who can be a “Principal”?................................................ 190a.      Individuals.................................................................. 190b.      Corporations or Limited Liability Companies ............ 191c.      Partnerships, Limited Liability Partnerships, JointVentures, or Their Partners ......................................... 1923.      What is an“Indemnitor”?.................................................. 1924.      Who can be an “Indemnitor”? ........................................... 192a.      Individuals.................................................................. 192b.      Corporation or Limited Liability Company ................ 194c.      Partnership, Limited Liability Partnership, JointVenture, or Their Partners ......................................................... 195d.      Trust/Trust Beneficiaries............................................1955.      The Joint and Several Liability of the Principal and theIndemnitors to the Surety .................................................. 196B. The Reimbursement and Indemnification ofthe Surety .......... 1971.      Indemnification Against Liability..................................... 1992.      Indemnification Against Loss........................................... 201C. The Basis for the Surety’s Claim forReimbursement ............. 2021.      The Surety Incurs Loss in Connection With Any Bonds .. 2082.      The Surety’s Execution, Procurement, Renewal, orContinuationof Any Bonds............................................... 2093.      The Failure of the Principal and the Indemnitors toComply With Obligations under the Indemnity Agreement ........... 2124.      The Surety’s Enforcement of Its Rights under theIndemnityAgreement ......................................................................... 213D. The Surety’s Loss—Types of Damages forWhich the Surety Seeks Reimbursement(Indemnification)................................. 2141.      Unpaid Premiums .............................................................. 2142.      The Surety’s Payment ofClaims.......................................2153.      The Surety’s Advances and Loans .................................... 2184.      Interest ............................................................................... 2195.      Recovery of Attorneys’ Fees ............................................. 220a.      Requirement that “All” Fees are Recoverable ............ 222b.      Requirement that Fees Must be Necessary and Incurred inGood Faith .............................................................. 223 xviiic.      Requirement that Fees Must be Reasonable ............... 224d.      The Principal’s Offer to Defend................................. 2286.      Expenses............................................................................ 2317.      Bad Faith Claims ............................................................... 234Chapter VTHE SURETY’SENFORCEMENT OF ITS RIGHTS OFREIMBURSEMENT(INDEMNITY) .................................................. 237A.     Initial StepsSureties Take to Enforce Their Reimbursement (Indemnity) Rights ................................................................... 2371.      Reviewing the Underwriting File ...................................... 2372.      Obtaining Asset, Lien, and Internet Searches................... 2403.      Sending Notice and/or Demand to Principal and Indemnitors........................................................................................... 240B.      Initial StepsSureties Take Under the Indemnity Agreement ..2421.      Perfecting SecurityInterests.............................................. 2422.      Making a Collateral Demand............................................2443.      Using the Authorizations in the Indemnity Agreement..... 247C.      Filing SuitAgainst the Principal and/or the Indemnitors ........ 2491.      Surety’s Right to Bring SeparateSuits.............................. 249a.      Suits Against Separate Individuals orEntities............ 249(i)    Suits Against the Surety’s Principal ..................... 249(ii)  Suits Against the Surety’s Indemnitors ................ 251b.      Suits for Separate SuretyLosses................................. 253(i)    Direct Suits Against the Principal and/or Indemnitors.......................................................... 253(ii)  Cross-Claims and Third-Party Claims. ................ 2562.      Third-Party BeneficiaryProvisions...................................2573.      Personal Jurisdiction and Joinder Provisions.................... 2584.      Venue for Suit Provisions................................................. 2625.      Service of Process Provisions...........................................2646.      Confession of JudgmentProvision....................................2647.      Choice of Governing LawProvision................................. 2688.      Waiver of Trial by Jury..................................................... 269 xixD.     Filing a ClaimAgainst an Indemnitor’s Probate Estate UponDeath of theIndemnitor ........................................................... 271E.      Standards ofProof ................................................................... 2731.      Generally ........................................................................... 2732.      Subjective Good Faith of Surety Generally Sufficient ......2753.      Principal Non-Liability Generally Not a Defense ............. 2784.      Good Faith; Protection of Surety’s Interests ..................... 2805.      Good Faith and Objective Reasonableness....................... 281F.      The Burden ofProof ................................................................ 284G.     The Surety’sSettlement with One or More Indemnitors ......... 294Chapter VITHE SURETY’SENFORCEMENT OF ITS RIGHTS TOCOLLATERALFROM THE PRINCIPAL AND THE INDEMNITORS.............................................................................................................. 295A.     Common Law andEquitable Rights of Enforcement .............. 2951.      Quia timet .......................................................................... 2972.      Exoneration....................................................................... 302B.      Specific Performanceof the Surety’s Rights to DemandCollateralunder the Indemnity Agreement.............................. 3031.      The Surety’s Rights ........................................................... 3032.      The Surety’s Remedy ........................................................ 308C.      SpecificPerformance of the Surety’s Trust Fund Rights underthe IndemnityAgreement ........................................................ 3111.      The Trust FundProvision.................................................. 3112.      Legal Recognition of theTrust.......................................... 314a.      Manifestation of Intent to Create a Trust .................... 315b.      Ascertainable Trust Res.............................................. 317c.      Identification of Beneficiaries.................................... 320d.      Identification of aTrustee........................................... 320e.      Making Sense of the Myriad of Rulings ..................... 3213.      Specific Performance As a Remedy .................................. 3234.      Effective Use of the Trust Fund Provision ........................ 325D.     The Surety’sAssignment Rights ............................................. 3271.      The Surety’s Rights ........................................................... 327 xxa.      Origin and Nature of the Assignment Rights.............. 327b.      The Property Rights Assigned.................................... 329c.      Right to Contract Funds.............................................. 331d.      Right to Equipment and Materials ..............................331e.      Right to Principal’s Subcontracts and Claims ............ 332(i)    Right to Settle Claims Involving the Principal..... 333(ii)  Right to Recover Costs and Expenses .................. 334(iii) Right toOffset ...................................................... 334f.       Right to Licenses, Patents, Copyrights, or Trade Secrets.................................................................................... 334g.      Right to Other Property (i.e., General and LimitedPartnership Interests, Tax Refunds, General Intangibles, Claims Under InsurancePolicies)............................... 335h.      Right to Real Property................................................ 3352.      The Surety’s Remedy ........................................................ 335a.      The Indemnity Agreement as Security Agreement..... 335b.      The Indemnity Agreement as a UCC-1 Financing Statement.................................................................... 336c.      The Effective Date of the AssignedRights................. 339d.      Enforcement of the Surety’s Assignment Rights........ 340e.      The Non-Waiver of the Surety’s Other Contractual,Legal, andEquitable Rights........................................ 341 Chapter VIITHE INDEMNITYAGREEMENT AND THE HANDLING OF SURETY CLAIMS............................................................................... 343A.     The Surety’sInvestigation Into the Books and Records of thePrincipal andthe Indemnitors .................................................. 3431.      Access to Principal and Indemnitors’ Books and Records 343a.      In general.................................................................... 343b.      Purposes ...................................................................... 344c.      Enforcement................................................................ 3462.      The Surety’s Right to Information from the Principal orIndemnitors........................................................................ 3483.      Access to Information from Third Parties ......................... 350 xxi4.      The Principal’s and the Indemnitors’ Obligation toMaintain or Furnish Surety with Accurate Books and Records orInformation........................................................................ 3525.      The Surety’s Right to Furnish Information to ThirdParties........................................................................................... 3536.      The Surety’s Investigation at the Bonded Project Site ......3547.      The Principal’s Turnover of Books and Records to the Surety Upon the Occurrence of a Defaultunder the IndemnityAgreement........................................................ 354B.      The Surety’sRights to Settle Claims Against Bonds .............. 3551.      Principal and Indemnitors’ Obligation to Notify Surety ofClaims............................................................................... 3552.      The Surety’s Investigation................................................ 3563.      The Surety’s Right to Settle Claims Against Its Bonds.... 3564.      Effect of a Prima Facie Provision on the Surety’s RighttoSettle.................................................................................. 3635.      Indemnitors’ Option to Post Collateral............................. 366a.      Effect of Failure to DepositCollateral........................ 367b.      Nature and Amount ofCollateral................................ 369c.      The Duty of GoodFaith.............................................. 370d.      The Surety’s Duty to Notify Principal and Indemnitors.................................................................................... 373e.      The Surety’s Investigation of Claims and Assertion ofDefenses...................................................................... 3756.      The Duty to Cooperate...................................................... 3797.      The Surety’s Right to Settle the Principal’s AffirmativeClaims............................................................................... 380a.      The Surety’s Duty of Good Faith............................... 385b.      The Uniform Commercial Code Commercially ReasonableStandard................................................... 385C.      SpecificProvisions in the Indemnity Agreement Applicable to Performance Bond Claims ....................................................... 3891.      The Surety’s Advances or Loans to the Principal ............. 389a.      The Surety’s Right to Advance Money to the Principal.................................................................................... 390 xxiib.      The Surety’s Absolute Right to Cancel any Bank Guaranteeor Cease Advancing or Lending Money to the Principal ...................................................................... 391c.      The Surety’s Advances as a Loss............................... 3912.      The Surety’s Takeover Rights ........................................... 392a.      When the Surety’s Takeover Rights May be Exercised.................................................................................... 393b.      The Substance of the Surety’s Takeover Rights ......... 3943.      The Surety’s Assignment Rights to the Contract Balancesand to the Use of the Principal’s Subcontractors andSuppliers............................................................................ 395a.      Receipt of the Contract Monies from the Obligee for thePerformance of the Work............................................ 395b.      Use of the Principal’s Subcontractors and Suppliers .. 398Chapter VIIICOMPLEMENTARYPROVISIONS OF THE INDEMNITY AGREEMENT ...................................................................................... 401A.     The ObligeeRefuses to Accept a Bond ................................... 401B.      AdditionalObligations of the Principal and the Indemnitors to the Surety ................................................................................. 4021.      Obligation and/or Right to Obtain the Release andDischarge of the Bonds...................................................................... 402a.      By the Principal and the Indemnitors......................... 402b.      Rights of the Surety .................................................... 4032.      The Principal and Indemnitors’ Agreement to SubordinateCertain Claimsto the Surety’s Rights ............................... 404a.      Claims of Indemnity and/or Contribution by the Principaland Indemnitors Against Each Other ..........405b.      Loans Between Principal and Indemnitors ................. 4053.      Notice Obligations of the Principal and Indemnitors ........4054.      The Indemnitors’ Obligation to Know the Status of thePrincipal’s Financial Condition and the Bonded Contracts........................................................................................... 406C.      Changes orModifications ........................................................ 4071.      Changes in the Bonds and Underlying Bonded Contracts 4072.      Changes in the Indemnity Agreement ...............................410 xxiiiD.     Notices ..................................................................................... 4111.      Manner and Method.......................................................... 4112.      The Principal and the Indemnitors’ Notice to the SuretyofClaims orDemands ........................................................... 413E.      Waivers andNon-Waivers ....................................................... 4131.      The Principal’s and the Indemnitors’ Waivers and Non-Waivers.............................................................................. 413a.      Claims Against the Surety.......................................... 413b.      Notices andDefenses.................................................. 4152.      The Surety’s Waivers andNon-Waivers........................... 418a.      The Surety Accepts, Fails to Obtain, or Releases OtherIndemnity Agreements................................................ 419b.      The Surety Releases One or More of the Indemnitors 420c.      The Surety Accepts, Fails to Obtain, or ReleasesCollateral..................................................................... 421d.      The Surety Delays in Exercising its Rights................ 4223.      The Indemnitors’ Waiver of Their Homestead Rights andOtherExemptions.............................................................. 4244.      The Indemnitors’ Waiver of Their Rights to Jury Trial .... 4265.      Election of Venue and Choice of Law.............................. 428F.      Other SuretyRights ................................................................. 4301.      Power of Attorney for the Principal and the Indemnitors . 4302.      Confession of Judgment.................................................... 4333.      Miscellaneous Other Rights and Remedies ....................... 437a.      Surety’s Rights in Addition to OtherRights............... 437b.      Surety’s Exhaustion of Its Rights and Remedies ........ 438c.      No Election of the Surety’s Rights and Remedies...... 439d.      The Surety Shall Have Every Right, Remedy, or Defensethat a Personal Surety Without Compensation Would Have ............................................................................ 440e.      The Indemnity Agreement Shall be Liberally Construed toProtect, Exonerate, and Indemnify the Surety........ 441 Chapter IXDEFENSES........................................................................................... 443A. Defenses Common to Both the Principal andthe Indemnitors 444 xxiv1.      Disputes Over the Execution of the Indemnity Agreement........................................................................................... 4442.      The Indemnitors’ Failure to Sign or Understand theIndemnityAgreement........................................................ 4453.      The Principal and the Indemnitors Contend That They AreNot Liable for Payments Made by the Surety ................... 446a.      The Surety’s Failure to Make Payment in Good Faith450b.      The Surety’s Payment Is Not Reasonable................... 457c.      The Surety Acted in Bad Faith................................... 4594.      Release of the Indemnitors ................................................ 4605.      Lack of Notice to theIndemnitors..................................... 4606.      Waiver bySurety............................................................... 4627.      The Surety’s Failure to Write Additional Bonds for thePrincipal............................................................................ 4638.      The Surety’s Failure to Finance the Principal ................... 4649.      Lack of Venue for Bringing Suit and/or Lack of Service ofProcess............................................................................... 46510.  Termination of the Indemnity Agreement ......................... 46711.  Novation and Successive Indemnity Agreements ............. 46912.  Mitigation of Damages...................................................... 46913.  Failure of the Principal to Execute a Bond Issued by theSurety................................................................................ 47114.  Material Change ................................................................ 47215.  No Proper Default by the Obligee ..................................... 47416.  Tortious Interference with Contract.................................. 47417.  Abuse ofRights/Domination............................................. 47618.  Suretyship vs.Insurance.................................................... 47619.  Contracts of Adhesion....................................................... 47820.  Restraint ofTrade.............................................................. 47921.  FiduciaryDuty................................................................... 47922.  ElectronicSignatures......................................................... 48023.  Statute of Limitations........................................................ 48124.  Death of Indemnitor.......................................................... 48225.  Improper Exemptions ........................................................ 482B. Defenses Commonly Asserted Only By TheIndemnitors ....... 483 xxv1.      Lack of Consideration....................................................... 4832.      Surety’s Failure to Adequately Pursue thePrincipal......... 4843.      The Surety’s Knowledge of the Indemnitor’s Divorce ..... 4844.      The Surety’s Knowledge of the Sale of the Principal’sBusiness............................................................................. 485 Chapter XTHE INDEMNITYAGREEMENT IN COMMERCIAL SURETYSETTINGS............................................................................................ 487A. Types of Commercial Surety Bonds ........................................ 4881.      Judicial Bonds ................................................................... 4892.      Fiduciary Bonds/Probate Bonds ........................................ 4913.      License and Permit Bonds................................................. 4924.      Statutory Bonds ................................................................. 4945.      Release/Discharge Bonds.................................................. 4956.      Commercial Surety Performance Bonds........................... 496a.      Subdivision Bonds............................................................. 496b.      Reclamation Bonds........................................................... 497c.      Other Performance Type Commercial Surety Bonds ........4977.      Non-Statutory Guaranty and/or Faithful Performance Bonds........................................................................................... 4988.      Public Official Bonds ........................................................ 498B. Underwriting the Risk of Commercial SuretyBonds .............. 4991.      The Basic Principles of Underwriting—The Three “Cs” .. 4992.      The Principal’s Character .................................................. 4993.      The Principal’s Capacity................................................... 5004.      The Principal’sCash/Capital............................................. 5005.      The Principal’sCollateral.................................................. 501C. Issues Regarding Surety’sExposure........................................ 5031.      Penal Sum Issues ............................................................... 5032.      Length of Performance under Bonded Obligation............ 5043.      Modifications to the Bonded Obligation ........................... 505a.      Renewal Bonds ........................................................... 505b.      Cancellation ................................................................ 505D. Indemnity Agreement Considerations..................................... 506 xxvi1.      Types of Commercial Surety Bond Indemnity Agreements........................................................................................... 5062.      The Long Form Indemnity Agreement............................. 508a.      Broad Definition of Principal /Indemnitor................. 509b.      The Right to Cross-Indemnity Between Indemnitors . 511c.      Release and DischargeRights..................................... 511d.      Collateral..................................................................... 512e.      Place in Funds Rights................................................. 513f.       The Right to Decline and/or Renew Existing Bonds .. 514g.      CancellationRights..................................................... 515h.      Non-Impairment of Surety’s Rights........................... 516i.       Access to Financial Information ................................. 517j.       Interest Provision ........................................................ 5183.      Differences Between Commercial Surety and Contract SuretyBond Indemnity Agreements: The Lack of Certain Key Provisions Typically Foundin Contract Surety Bond Indemnity Agreements...................................................... 518a.      Lack of Takeover Provisions...................................... 518b.      Lack of Trust FundProvisions....................................519c.      Lack of Power of Attorney Provisions....................... 519d.      Lack of Advance or Financing Provisions.................. 519e.      Lack of Assignment and UCC Provisions .................. 520E.      CollateralAgreement and Other Considerations ..................... 5201.      Collateral Agreement........................................................ 5202.      Subordination and Intercreditor Agreements.................... 523F.      EnforcementIssues .................................................................. 5241.      Preliminary Injunctions and Temporary Restraining Orders........................................................................................... 524a.      The Elements of Injunctive Relief ..............................526b.      Distinction Between a Preliminary Injunction andTemporary Restraining Order ..................................... 527c.      Examples of Injunctive Relief Awarded to Commercial BondSureties.............................................................. 5272.      Liens .................................................................................. 529 xxviia. Surety’s EnforcementRights under the UniformCommercialCode ....................................................... 5293.      Bankruptcy ........................................................................ 531a.      Bankruptcy and the Effects on the Commercial BondSurety’sCollateral ...................................................... 531b.      Fundamental Bankruptcy Principles ...........................532c.      Pertinent Commercial Surety Bond Indemnity Agreement andCollateral Agreement Provisions Related toBankruptcy.............................................................. 533d.      Property of the Bankruptcy Estate as it Relates toDiffering Types of Collateral...................................... 534(i)    Property of the Bankruptcy Estate........................ 535(ii)  Types of Collateral and Bankruptcy Considerations.............................................................................. 536(iii) Debtor’sProperty as the Surety’s Collateral and itsUse........................................................................ 538 Chapter XITHE INDEMNITYAGREEMENT IN BANKRUPTCY ....................541A.     Bankruptcy andthe Surety’s Rights under the IndemnityAgreement................................................................................ 5411.      TheConcepts..................................................................... 541a.      Breathing Space .......................................................... 541b.      Sharing ........................................................................ 542c.      Forgiveness of Indebtedness ....................................... 5422.      The Effect of Fundamental Bankruptcy Principles on theIndemnity Agreement........................................................ 543a.      The Automatic Stay (“Breathing Space”)................... 543b.      Preference Liability (“Sharing”) ................................. 544c.      Discharge (“FreshStart”)............................................ 546B.      The Effect ofBankruptcy upon the Surety’s Rights under theIndemnityAgreement—Specific Topics ................................. 5471.      The Assertion of Indemnity Rights in the Bankruptcy Case-The Surety’sProof of Claim ............................................. 547a.      Types of Claims a Surety May Hold.......................... 549b.      Contents of Surety’s Proof ofClaim........................... 550c.      The Contingent Claim in Bankruptcy ......................... 551 xxviii2.      Prima Facie Provision and Effect upon Burden of Proof inBankruptcy ........................................................................ 5533.      Right to Settle Claims–BankruptcyCases......................... 5554.      Right to Recover Attorneys’ Fees inBankruptcy.............. 5565.      Non-Dischargeability ........................................................ 558a.      TrustFund................................................................... 558b.      Representations and Warranties Provision in the IndemnityAgreement ................................................. 5636.      Access to Documents........................................................ 565C.      Use orRestrictions of Bonded Contract Funds........................ 5671.      The Perennial Battle—Are the Bonded Contract FundsProperty of the Debtor’s Estate or Are They Subject to the Surety’s SubrogationRights? ............................................ 5672.      Indemnity Agreement Provisions that Support the Surety’sTraditionalEquitable Right to Contract Funds ................. 571a.      The Trust Fund Provision...........................................571b.      Assignment of Contract Consideration ....................... 574D.     Surety’s Useor Control of the Debtor’s Property Other ThanBondedContract Funds ........................................................... 5761.      Right of Takeover to Complete a BondedProject............. 576a.      Requirement of Principal’s Default ............................ 577b.      Ipso Facto Clauses...................................................... 578c.      Acceptance/Rejection of the Bonded Contract ........... 5802.      Assertion of Control over Debtor’s Equipment andSubcontracts ...................................................................... 582a.      Tools and Equipment .................................................. 582b.      Subcontractors andSuppliers...................................... 5833.      Taking Control or Compromising Debtor’s AffirmativeClaims............................................................................... 5844.      Surety’s Collateral............................................................. 585E.      Post-PetitionFinancing and Extension of Surety Credit ......... 5881.      Stay Relief and Rights Afforded under the IndemnityAgreement ......................................................................... 5892.      Post Petition Indemnity Agreement.................................. 590F.      Surety’s Rightto Decline, Cancel, or Not Renew Bonds ........ 591 xxixxxx1.      Right to Decline................................................................ 5912.      Right toCancel.................................................................. 5933.      Right toNon-Renew.......................................................... 597G. Bankruptcy Court Treatment of IndemnityAgreements in Chapter 11 Plans ...................................................................... 598BIBLIOGRAPHY................................................................................. 601APPENDIX OFCASES BY JURIDICTION ....................................... 623