BMD CONTRACTORS v. Fidelity and Deposit Co. of Md.
2012 U.S. App. LEXIS 9558
| 7th Cir. | 2012Background
- BMD, a subcontractor, performed piping work for Industrial Power under a Walbridge contract.
- Industrial Power carried a Fidelity payment bond securing its payables to BMD.
- Getrag's 2008 bankruptcy disrupted payments down the subcontract chain, causing defaults.
- Walbridge and Industrial Power paid BMD only after Industrial Power received payment; Fidelity paid only if Industrial Power did not pay.
- The district court held the Industrial Power/BMD contract's condition-precedent language created a pay-if-paid clause and ruled Fidelity could rely on that defense.
- BMD appealed, contending the clause was pay-when-paid or void as public policy; Fidelity argued the bond upheld the principal’s defenses; the Seventh Circuit affirmed the district court.
- The court held that the clause unambiguously makes Industrial Power’s receipt of payment a condition precedent to paying BMD, that pay-if-paid clauses are not void under Indiana public policy, and that Fidelity can assert the principal’s defenses; thus Fidelity was not liable on the bond.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Pay-if-paid vs pay-when-paid interpretation | BMD—pay-if-paid clause is ambiguous | Fidelity—clause clearly pay-if-paid | Pay-if-paid clause; Fidelity may defend |
| Public policy Indiana pay-if-paid clauses | Cl. voids clause under Indiana policy | Policy favors freedom of contract; no statute bans it | Not void under Indiana public policy |
| Surety liability scope | Fidelity should be liable to BMD under bond regardless of principal | Surety liable only to extent principal is liable; can rely on principal's defenses | Surety may assert defenses of its principal; Fidelity not liable where Industrial Power not obligated |
| Culligan applicability | Culligan allows independent recovery against bond | Culligan distinguishable; pay-if-paid clauses limit bond liability | Culligan distinguished; not controlling when pay-if-paid clause excuses principal |
Key Cases Cited
- Culligan Corp. v. Transamerica Ins. Co., 580 F.2d 251 (7th Cir. 1978) (owner's nonpayment did not discharge surety where pay-if-paid clause absent/insufficient)
- Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d 717 (4th Cir. 2000) (pay-if-paid clause defense rejected in part; nuanced discussion on surety liability)
- Meyer v. Bldg. & Realty Serv. Co., 196 N.E.2d 250 (Ind. 1935) (surety liability capped at principal’s liability; language construed against surety)
- Kemper v. Goeke, 819 N.E.2d 491 (Ind. 2004) (general rule: surety liability no greater than principal; joint construction matters)
- Goeke v. Merch. Nat'l Bank & Trust Co. of Indianapolis, 467 N.E.2d 760 (Ind. Ct. App. 1984) (context on surety construction principles (insufficient alone for outcome))