Article by: Nell M. Hurley
A recent Maryland federal court decision highlights the standard required for creditor notification in a ruling that allowed an unnotified surety-creditor to assert previously discharged claims against a debtor/co-indemnitor.1 While the standard is not an exacting one (“reasonably diligent efforts”), the facts of the case show how easily an unknowing surety-creditor can slip through the cracks, putting recovery and salvage efforts against indemnitors at risk.
The matter stems from surety bonds issued in Maryland in 2016. The construction company that sought the bonds from North American Specialty Insurance Company (“NASIC”) was required to execute a standard indemnity agreement, as were the husband-and-wife company owners, each in their individual capacities. NASIC then issued seven construction surety bonds. Following the contractor’s financial difficulties a few years later, claims were made on some of the bonds. NASIC was obligated to pay and did.
In 2019, the wife filed a Chapter 13 bankruptcy petition, listing “North American Surety” as a creditor but providing the address of another unrelated surety industry company.2 Having not been notified, NASIC did not file a proof of claim. The wife completed her plan payments, and the case was closed in January 2020.
Soon after, the husband filed a bankruptcy petition, listing the surety-creditor and address in the same manner as the wife. Months later, his schedules were amended to include NASIC at its correct address. NASIC was notified of the couple’s bankruptcy cases and filed a proof of claim in the husband’s case. NASIC then sought a declaratory judgment that its claims were not discharged by the wife’s bankruptcy and was granted summary judgment on the issue by the bankruptcy court. The husband appealed to the U.S. District Court.
That court affirmed, finding that not only did NASIC lack actual notice as required for the wife to obtain discharge, but that she failed to use “reasonable diligence” to identify and notify NASIC as a creditor. The wife’s failure to make a careful examination of her own books and records when listing her creditors meant that her obligation to NASIC under the indemnity agreement was not discharged by her bankruptcy.
The most obvious record ignored was the indemnity agreement itself, stated the court, which expressly lists NASIC as “Surety.” Other records available included (1) seven bonds issued to the construction company; (2) nine letters sent to the company and to the husband; and (3) one letter sent directly to the wife and copies of another two addressed to the company. All these documents provided NASIC’s name and correct address. The couple failed to ask counsel for assistance and instead “stitched the address of one company to the name of another”, neither of which belonged to NASIC. This decision lacked reasonable diligence, ruled the court.
The court rejected arguments that NASIC received actual notice of the wife’s bankruptcy though other means. The husband claimed to have mentioned the wife’s bankruptcy to the surety bond producer. The agent denied being notified of that bankruptcy and there was no proof that he had knowledge of facts sufficient to apprise NASIC that a case was filed or where it was pending.
The husband further asserted that the couple discussed the wife’s bankruptcy in 2019 with its bank and sought to impute that knowledge to the bank’s subsidiary insurance company which had procured the bonds from NASIC. This chain was too attenuated and lacked support in the record to show actual knowledge, concluded the court.
Facts like these may be all too common when bonding smaller contractors, with unsophisticated owners and their spouses as indemnitors. While comforting for sureties that the discharge was lifted, it was not without additional and unexpected costs to the surety for the mere right to file a proof of claim, through no fault of its own.
- Foxson v. N. Am. Specialty Ins. Co., 2024 WL 3252957 [D. Md. July 1, 2024].
- The address was that of JW Surety Bonds in Pipersville, PA, a bond producer that was not involved with the NASIC bonds at issue here.
