BMD CONTRACTORS v. Fidelity and Deposit Co. of Md.

In the

United States Court of Appeals

For the Seventh Circuit

No. 11-1345

BMD C ONTRACTORS, INC.,

Plaintiff-Appellant,

v.

F IDELITY AND D EPOSIT C OMPANY

OF M ARYLAND ,

Defendant-Appellee.

Appeal from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. 1:09-cv-0121-TWP-DML—Tanya Walton Pratt, Judge.

A RGUED S EPTEMBER 15, 2011—D ECIDED M AY 11, 2012

Before F LAUM, M ANION, and SYKES, Circuit Judges.

S YKES, Circuit Judge. This case requires us to decide

an increasingly important question in complex multi-

tiered construction contracts—if the property owner

becomes insolvent or otherwise defaults in payment,

preventing a contractor from paying a subcontractor,

which contractor bears the risk of loss? There is an addi-

tional wrinkle here because the question arises in a

suit on a payment bond.

2 No. 11-1345

BMD Contractors, Inc. (“BMD”) was a subcontractor

for Industrial Power Systems, Inc. (“Industrial Power”),

which was itself a subcontractor for Walbridge Aldinger

Company (“Walbridge”), the general contractor over-

seeing the construction of a manufacturing plant near

Indianapolis, Indiana. Industrial Power executed a pay-

ment bond with Fidelity and Deposit Company of Mary-

land (“Fidelity”), making Fidelity a surety for Industrial

Power’s payment obligations to BMD. The construction

project proceeded on schedule for about a year, but the

manufacturer then declared bankruptcy, causing a series

of payment defaults to flow down the levels of con-

tractors and subcontractors. Walbridge failed to pay

Industrial Power, Industrial Power failed to pay BMD,

and Fidelity refused to pay BMD. BMD sued Fidelity on

the bond.

The subcontract between Industrial Power and BMD

contains language conditioning Industrial Power’s duty

to pay on its own receipt of payment. The district court

construed this language as a “pay if paid” clause, which

requires Industrial Power to pay BMD only if it

receives payment under its own contract with Walbridge.

The court rejected BMD’s counterargument that the

contract language in question is a “pay when paid”

clause, which would have controlled only the timing

of Industrial Power’s payment obligation, not its

ultimate duty to pay. The court also rejected BMD’s

argument that pay-if-paid clauses are void under

Indiana public policy. Finally, the court held that Fidelity,

as a surety, could assert all the defenses of its principal,

Industrial Power, even though the bond itself did not

No. 11-1345 3

specifically incorporate the pay-if-paid language. Based

on these holdings, the court granted summary judg-

ment in favor of Fidelity, and BMD appealed.

We affirm. The Industrial Power/BMD subcontract

expressly provides that Industrial Power’s receipt of

payment is a condition precedent to its obligation to

pay BMD. This language is clear and properly construed

as a pay-if-paid clause. While the subcontract might

have gone further—for example, it might also have

said that BMD assumed the risk of the property owner’s

insolvency—this additional language was not necessary

to create an enforceable pay-if-paid provision. We also

agree with the district court that pay-if-paid clauses

are not void under Indiana public policy. Finally, under

basic Indiana surety-law principles—reinforced by the

weight of authority from other jurisdictions—Fidelity

may assert all the defenses of its principal. Because In-

dustrial Power was never obligated to pay BMD in the

first place, BMD may not recover against Fidelity on

the payment bond.

I. Background

In early 2007 Getrag Corporate Group created Getrag

Transmission Manufacturing, LLC (“Getrag”), for the

purpose of manufacturing automobile transmissions for

Chrysler at a plant to be built in Tipton, Indiana. Getrag

hired Walbridge as the general contractor for the con-

struction of the facility, and Walbridge entered into

multiple subcontracts, including one with Industrial

4 No. 11-1345

Power for mechanical piping work.1 Industrial Power

entered into a second-level subcontract, hiring BMD

to perform the piping work required under the Walbridge/

Industrial Power subcontract. BMD, in turn, ordered

supplies from Ferguson Enterprises, Inc.

Pursuant to the Walbridge/Industrial Power contract,

Industrial Power executed a payment bond with Fidelity.

The bond named Industrial Power as principal, Fidelity

as surety, and BMD as a claimant. In essence, Fidelity

promised to pay what Industrial Power owed to BMD

under the Industrial Power/BMD subcontract if Indus-

trial Power did not itself pay what was owed.

BMD began work on the project in November 2007.

Over the next year, Walbridge paid Industrial Power

from the payments it received from Getrag, and Industrial

Power paid BMD from the payments it received from

Walbridge, in accordance with their respective contracts.

In October 2008 Getrag filed for bankruptcy. All work

on the project ceased, and a cascade of missed pay-

ments flowed down the hierarchy of subcontractors.

When this appeal was filed, Getrag owed Walbridge

$40 million, Walbridge owed Industrial Power $11 million,

Industrial Power owed BMD $1.5 million, and BMD

owed Ferguson $700,000.

BMD and Ferguson filed mechanic’s liens against the

Getrag property, and BMD assigned Ferguson a portion

1

Walbridge actually entered into several subcontracts with

Industrial Power, but only one is relevant to this case and will

be referred to simply as the Walbridge/Industrial Power

contract.

No. 11-1345 5

of its rights under the payment bond.2 BMD and

Ferguson sought to recover the rest of what they were

owed from Industrial Power, but Industrial Power

refused to pay. BMD and Ferguson turned to Fidelity

and demanded payment under the bond, but Fidelity

refused as well. BMD and Ferguson then sued Fidelity

on the bond.3 The dispute centers on the interpretation

and effect of key provisions in the following contracts:

(1) the Industrial Power/BMD contract; (2) the

Walbridge/Industrial Power contract; and (3) the

Fidelity payment bond.

Taking the last of these contracts first, the terms of the

payment bond obligate Fidelity to pay “claimants” of

Industrial Power under the Walbridge/Industrial

Power contract in the event that Industrial Power itself

did not pay what was owed. Specifically, the bond pro-

vides:

[I]f the Principal shall promptly make payments to

all claimants as hereinafter defined, for all labor and

material used or reasonably required for use in the

performance of the subcontract, then this obliga-

tion shall be void; otherwise it shall remain in full

force and effect, subject to the following conditions.

2

Prior to filing this appeal, BMD recovered almost half of

what it was owed after the Getrag plant was sold in bank-

ruptcy. The parties dispute whether we may take judicial

notice of these proceedings, but that question ultimately has

no bearing on our disposition of the case.

3

Unless the context requires otherwise, we refer to BMD and

Ferguson collectively as “BMD.”

6 No. 11-1345

The bond then defines “claimant” as “one having a

direct contract with the Principal for labor, material, or

both, used or reasonably required for use in the perfor-

mance of the contract.” The bond describes a claimant’s

right to sue as follows:

[E]very claimant as herein defined, who has not

been paid in full before the expiration of a period

of ninety (90) days after the date on which the last

of such claimant’s work or labor was done or per-

formed, or materials were furnished by such

claimant, may sue on this bond for the use of such

claimant, prosecute the suit to final judgment for

such sum or sums as may be justly due claimant, and

have execution thereon.

(Emphasis added.)

The Industrial Power/BMD subcontract contains the

clause at the heart of this dispute. It states: “IT IS EXPRESSLY

AGREED THAT OWNER’ S ACCEPTANCE OF SUBCONTRACTOR’ S

WORK AND PAYMENT TO THE CONTRACTOR FOR THE SUB-

CONTRACTOR’ S WORK ARE CONDITIONS PRECEDENT TO

THE SUBCONTRACTOR’ S RIGHT TO PAYMENTS BY THE CON -

TRACTOR.” Other parts of the subcontract use similar

language. For example, Article 2(g) provides that “it is a

condition precedent to Contractor’s obligation to make

final payment to Subcontractor that Owner shall have

tendered full payment for Subcontractor’s Work to Con-

tractor and that [C]ontractor shall have accepted such

full payment from Owner.”

The Walbridge/Industrial Power contract contains

a similar provision stating that Industrial Power will

No. 11-1345 7

be paid only if Walbridge itself is paid. More specifically,

Article XXII states as follows:

[Industrial Power] acknowledges that it has con-

sidered [Getrag’s] solvency and [Getrag’s] ability to

perform the terms of its contract with [Walbridge]

before entering into this Subcontract. [Industrial

Power] acknowledges that it relies on the credit and

ability to pay of [Getrag], and not [Walbridge], for

payment for work performed hereunder. [Industrial

Power] is entering into this Subcontract with the

full understanding that [Industrial Power] is

accepting the risk that [Getrag] may be unable to

perform the terms of its contract with [Walbridge].

[Industrial Power] agrees that as a condition

precedent to [Walbridge’s] obligation to make any

payment to [Industrial Power], [Walbridge] must

receive payment from [Getrag].

Based on these contract provisions, BMD and Fidelity

each filed motions for summary judgment. Fidelity

argued that the language we have quoted in the Industrial

Power/BMD contract was properly construed as a pay-if-

paid clause, which conditioned Industrial Power’s duty

to pay BMD on its own receipt of payment from

Walbridge. Because Industrial Power had not been paid,

it could not itself be liable to BMD, and as Industrial

Power’s surety, Fidelity could not be liable either.

BMD argued that the conditional language in the con-

tract was not a pay-if-paid clause but, rather, a pay-when-

paid clause, which governed only the timing of Industrial

Power’s payment to BMD, not its ultimate obligation

8 No. 11-1345

to pay. Industrial Power remained liable on the contract,

BMD argued, so Fidelity was liable on the payment

bond. In the alternative BMD maintained that if the

conditional language was a pay-if-paid clause, it was

contrary to Indiana public policy and therefore void.

Finally, BMD argued that because the payment bond

neither incorporated the Industrial Power/BMD contract

nor contained a separate pay-if-paid clause, Fidelity

was independently liable under the bond, even if

Industrial Power itself was not liable under the subcon-

tract.

The district court entered summary judgment for

Fidelity. The court held that even though the Industrial

Power/BMD contract did not contain express language

stating that BMD assumed the risk of Getrag’s insolvency,

the “condition precedent” language was clear and

properly construed as a pay-if-paid provision. The court

also rejected BMD’s public-policy argument because no

Indiana statute directly addresses pay-if-paid clauses

and Indiana courts apply a strong presumption in favor

of the freedom of contract. Finally, the court held that

a surety bond makes the surety liable only to the extent

that the principal itself has an obligation to pay, so the

Fidelity bond need not have explicitly incorporated the

terms of the Industrial Power/BMD contract. The court

acknowledged that this court’s decision in Culligan Corp.

v. Transamerica Insurance Co., 580 F.2d 251 (7th Cir. 1978),

seems to point in the other direction. But the court

held that Culligan was distinguishable based on the

“sums justly due” language in the Fidelity bond. More

generally, the court noted that Culligan was dated—the

No. 11-1345 9

case was decided more than 30 years ago when pay-if-

paid clauses were still new—and also noted that it did

not cite Indiana caselaw explaining well-settled surety

principles. This appeal followed.

II. Discussion

We review de novo a district court’s grant of summary

judgment. Musch v. Domtar Indus., Inc., 587 F.3d 857, 859

(7th Cir. 2009). There are no material factual disputes;

Fidelity’s liability turns on the interpretation of con-

tractual language, raising only legal questions for

which summary judgment is particularly appropriate. See

Slutsky-Peltz Plumbing & Heating Co., Inc. v. Vincennes

Cmty. Sch. Corp., 556 N.E.2d 344, 345 (Ind. Ct. App. 1990).

Sitting in diversity and applying Indiana law, we are

required to make our best prediction of how the Indiana

Supreme Court would decide the case. Research Sys.

Corp. v. IPSOS Publicité, 276 F.3d 914, 925 (7th Cir. 2002).

If the state supreme court has not spoken on a

particular issue, then decisions of the intermediate ap-

pellate court will control “ ‘unless there are persuasive

indications that the state supreme court would decide

the issue differently.’ ” Id. (quoting Lexington Ins. Co. v.

Rugg & Knopp, Inc., 165 F.3d 1087, 1090 (7th Cir. 1999)).

Finally, if there are no directly applicable state decisions

at all, then we may consult “ ‘relevant state precedents,

analogous decisions, considered dicta, scholarly works,

and any other reliable data’ ” that might be persuasive

on the question of how the Indiana Supreme Court

would likely rule. See Pisciotta v. Old Nat’l Bancorp., 499

10 No. 11-1345

F.3d 629, 635 (7th Cir. 2007) (quoting McKenna v. Ortho

Pharm. Corp., 622 F.2d 657, 663 (3d Cir. 1980)).

A. Interpreting the Industrial Power/BMD Contract

As construction projects have become more complex,

contractors and subcontractors have developed tools to

manage the possibility that some “upstream” contracting

party will become insolvent or otherwise default in pay-

ment, raising the question of which “downstream” parties

bear the risk of nonpayment. Two increasingly common

contractual provisions address distinct kinds of pay-

ment risk in construction subcontracting: pay-if-paid

clauses and pay-when-paid clauses.

A pay-when-paid clause governs the timing of a con-

tractor’s payment obligation to the subcontractor,

usually by indicating that the subcontractor will be paid

within some fixed time period after the contractor itself

is paid by the property owner. A typical clause of this

type might say: “Contractor shall pay subcontractor

within seven days of contractor’s receipt of payment

from the owner.” Robert F. Carney & Adam Cizek, Payment

Provisions in Construction Contracts and Construction Trust

Fund Statutes, 24 C ONSTRUCTION L AW., Fall 2004, at 5, 5.

These clauses address the timing of payment, not the

obligation to pay. They do not excuse a contractor’s

ultimate liability if it does not receive payment by the

property owner, so they do not transfer the risk of “up-

stream” insolvency from contractor to subcontractor and

on down the chain.

No. 11-1345 11

In contrast, a pay-if-paid clause, as the name suggests,

provides that a subcontractor will be paid only if the

contractor is paid and thus ensures that each con-

tracting party bears the risk of loss only for its own work.

A typical clause of this type might say: “Contractor’s

receipt of payment from the owner is a condition

precedent to contractor’s obligation to make payment to

the subcontractor; the subcontractor expressly assumes

the risk of the owner’s nonpayment and the subcontract

price includes the risk.” Id. at 5-6.

BMD argues that the conditional language in its sub-

contract with Industrial Power was only a pay-when-paid

clause and that Industrial Power remained liable even

though it did not receive full payment from Walbridge.

Fidelity argues that the provision is a pay-if-paid clause,

and because Industrial Power did not receive payment,

it had no duty to pay the balance due to BMD. To

repeat, the relevant clause in the subcontract states: “It is

expressly agreed that owner’s acceptance of subcontrac-

tor’s work and payment to the contractor for the sub-

contractor’s work are conditions precedent to the subcon-

tractor’s right to payments by the contractor.” (Emphasis

added.)

This language is plain. Industrial Power’s receipt of

payment is a condition precedent to its obligation to pay

BMD. True, the clause does not say in so many words

that BMD assumes the risk of upstream nonpayment.

The question here is whether express “transfer of risk”

language is necessary to create a pay-if-paid clause or

whether condition-precedent language is enough. We

12 No. 11-1345

conclude that the condition-precedent language is clear

and sufficient on its face to unambiguously demonstrate

the parties’ intent that BMD would not be paid unless

Industrial Power itself was paid. Additional transfer-of-

risk language is not necessary.

The Indiana courts have not squarely addressed pay-if-

paid clauses, but most jurisdictions that have done so

have interpreted condition-precedent language as suffi-

cient to create a pay-if-paid clause. See, e.g., Envirocorp

Well Servs., Inc. v. Camp Dresser & McKee, Inc.,

No. IP99-1575-C-T/G, 2000 WL 1617840, at *5 (S.D. Ind.

Oct. 25, 2000) (explaining that “[c]ourts that have

enforced [pay-if-paid] provisions do so when the provi-

sions explicitly provide that payment to the contractor

by the owner is a condition precedent to payment to the

subcontractor by the contractor”); see also L. Harvey Con-

crete, Inc. v. Agro Constr. & Supply Co., 939 P.2d 811, 814-15

(Ariz. Ct. App. 1997) (enforcing as a pay-if-paid clause

a provision stating that contractor’s receipt of payment

from owner was a condition precedent to its obligation

to pay subcontractor); Gilbane Bldg. Co. v. Brisk Water-

proofing Co., 585 A.2d 248, 249-51 (Md. Ct. Spec. App.

1991) (same); Berkel & Co. Contractors v. Christman Co.,

533 N.W.2d 838, 839 (Mich. Ct. App. 1995) (same).

BMD cites several cases suggesting that a pay-if-

paid clause requires explicit language shifting the risk

of nonpayment to the subcontractor. See Thos. J. Dyer Co.

v. Bishop Int’l Eng’g Co., 303 F.2d 655, 661 (6th Cir. 1962)

(“[T]o transfer [risk of default] . . . from the general con-

tractor to the subcontractor, the contract . . . should

No. 11-1345 13

contain an express condition clearly showing that to be

the intention of the parties.”); Midland Eng’g Co. v. John A.

Hall Constr. Co., 398 F. Supp. 981, 993-94 (N.D. Ind. 1975)

(discussing Dyer); Oberle & Assocs., Inc. v. Richmond Hotel,

Ltd., No. 33C01-8706-CP-130, 1998 WL 35297806, at *5-7

(Ind. Cir. Ct. July 2, 1998) (quoting the language from

Dyer excerpted above).

The Sixth Circuit’s decision in Dyer is the leading case

in this group—the others simply follow it—but BMD

misreads that opinion by conflating two distinct con-

cepts: (1) a requirement of express language demon-

strating the parties’ intent to transfer the risk of insol-

vency, and (2) a requirement that the parties use particular

language to express that intent (for example, by stating that

the subcontractor “assumes the risk” of the owner’s

insolvency, or something very similar). We do not

disagree that to transfer the risk of upstream insolvency

or default, the contracting parties must expressly demon-

strate their intent to do so; that is the rule from Dyer.

But by clearly stating that the contractor’s receipt of

payment from the owner is a condition precedent to the

subcontractor’s right to payment, the parties have ex-

pressly demonstrated exactly that intent. Adding specific

assumption-of-risk language would reinforce that

intent but is not strictly necessary to create an enforce-

able pay-if-paid clause. Dyer does not hold otherwise.

“Condition precedent” is a legal term of art with a

clear meaning: “An act or event, other than a lapse of time,

that must exist or occur before a duty to perform some-

thing promised arises.” B LACK’S L AW D ICTIONARY 334

14 No. 11-1345

(9th ed. 2009). The Industrial Power/BMD contract unam-

biguously states that Industrial Power’s receipt of pay-

ment is a condition precedent to BMD’s right to payment.

This provision means just what it says—that Industrial

Power’s duty to pay BMD is expressly conditioned on its

own receipt of payment—thus evincing the parties’

unambiguous intent that each party assumes its own

risk of loss if Getrag becomes insolvent or otherwise

defaults.

Notably, the subcontracts at issue in Dyer, Midland, and

Oberle did not use condition-precedent language like

that at issue here, so those cases cannot be read as sug-

gesting that the use of this terminology is insufficient

to create a pay-if-paid provision. Although it’s possible

to reinforce the clarity of a pay-if-paid clause by

using redundant language—e.g., “in agreeing to this

condition precedent, subcontractor assumes the risk of

owner’s insolvency”—additional language like this is

not necessary if the meaning of the condition precedent

is otherwise clear. MidAmerica Constr. Mgmt., Inc. v. MasTec

N. Am., Inc., 436 F.3d 1257, 1263 (10th Cir. 2006) (noting

that a similarly worded subcontract’s “failure to say all

that it might have said is not enough to throw the intent

of the contracting parties into doubt”).

BMD identifies a single district-court decision in which

condition-precedent language was held to create only a

pay-when-paid clause. See Sloan Co. v. Liberty Mut. Ins. Co.,

No. 07-5325, 2009 WL 2616715, at *6 (E.D. Pa. Aug. 25,

2009) (“[T]he mere presence of language such as ‘condi-

tion precedent’ . . . is insufficient to determine whether

No. 11-1345 15

a clause is a pay-if-paid or pay-when-paid provision.”).

Sloan, of course, is not controlling, and we do not find

it persuasive. It stands in marked contrast to the weight

of other authority. Even taken on its own terms,

Sloan would not resolve this case. There, the district

court asked “whether the clause reveals the parties’

intent to shift the risk,” id., and held that the parties’

use of condition-precedent language, while not sufficient,

was strong evidence of that intent, see id. at *5 (“ ‘A pay-if-

paid condition generally requires words such as “condi-

tion,” “if and only if,” or “unless and until” that convey

the parties’ intention that a payment to a subcontractor

is contingent on the contractor’s receipt of those funds.’ ”

(quoting LBL Skysystems (USA), Inc. v. APG-Am., Inc.,

No. Civ. A. 02-5379, 2005 WL 2140240, at *32 (E.D. Pa.

Aug. 31, 2005))).

Moreover, the contract provision in Sloan, unlike the

one at issue here, had attributes of a pay-when-paid

provision. It provided that “[f]inal payment [to the Sub-

contractor] shall be made within thirty (30) days after the

last of the following to occur, the occurrence of all of

which shall be conditions precedent to such final pay-

ment: . . . (6) Contractor shall have received final pay-

ment from the Owner . . . .” Sloan, 2009 WL 2616715, at *4.

Establishing a specific time frame in which payment

must be made is the hallmark of pay-when-paid clauses.

In contrast, the relevant contract clause in this case

makes no mention of the timing of payment; instead, it

identifies the owner’s acceptance of BMD’s work and

Industrial Power’s receipt of payment as conditions

16 No. 11-1345

precedent to Industrial Power’s duty to pay BMD.4 To

the extent that Sloan can be read to require that con-

tracting parties use specific words to create a pay-if-paid

clause, we disagree, for the reasons we have explained.

Finally, BMD argues that the operative language in the

subcontract is ambiguous and as such should be inter-

preted against Industrial Power, the drafter of the con-

tract. See MPACT Constr. Grp., LLC v. Superior Concrete

Constructors, Inc., 802 N.E.2d 901, 910 (Ind. 2004) (am-

4

A separate provision of the Industrial Power/BMD subcon-

tract—Article 2(g)— does mention a specific time frame for the

final contract payment: “Contractor shall pay the balance of the

Subcontract Amount to Subcontractor sixty (60) days after final

completion of Subcontractor’s Work . . . . However, it is a

condition precedent to Contractor’s obligation to make final

payment to Subcontractor that Owner shall have tendered

full payment for Subcontractor’s Work . . . .”

Whether this provision standing alone would constitute a pay-

if-paid clause is a closer question on which other courts have

split. Compare Sloan Co. v. Liberty Mut. Ins. Co., No. 07-5325,

2009 WL 2616715, at *8 (E.D. Pa. Aug. 25, 2009), with Gilbane

Bldg. Co. v. Brisk Waterproofing Co., 585 A.2d 248, 250-51 (Md. Ct.

Spec. App. 1991). For the reasons we have already stated,

“condition precedent” is a clear legal term of art that is ordi-

narily sufficient to create a pay-if-paid clause where a

natural reading of the contract suggests as much. We need

not address the separate question whether Article 2(g) is a pay-

if-paid clause. Even if it is properly interpreted as a pay-when-

paid clause, the condition-precedent language primarily at issue

here does not contain any reference to the timing of payment

and therefore cannot be read as a pay-when-paid clause.

No. 11-1345 17

biguity in a contract is construed against its drafter).

Contract language is ambiguous only if it is “susceptible

to more than one interpretation and reasonably intel-

ligent persons would honestly differ as to its meaning.”

Ind. Dep’t of Transp. v. Shelly & Sands, Inc., 756 N.E.2d

1063, 1069-70 (Ind. Ct. App. 2001). As we have ex-

plained, the condition-precedent language in this

contract is not ambiguous. The provision contains none

of the standard features of a pay-when-paid clause and

therefore is not reasonably susceptible of more than

one meaning.

BMD argues in the alternative that the condition-prece-

dent provision is ambiguous by comparison to a similar

provision in the separate Walbridge/Industrial Power

subcontract, which adds specific language to the effect

that the subcontractor (there, Industrial Power) assumes

the risk of the owner’s insolvency. BMD argues that

the presence of this additional assumption-of-risk

language in the Walbridge/Industrial Power stands in

“direct conflict” with the parallel provision in the Indus-

trial Power/BMD subcontract, which does not include

similar additional language. There is no conflict—at

least not one that carries any dispositive significance.

One contract is just more explicit than the other.

B. Indiana Public Policy

BMD argues in the alternative that pay-if-paid clauses

are void under Indiana public policy. This argument

is easily rejected. As a preliminary matter, Indiana has

a strong background presumption favoring freedom of

18 No. 11-1345

contract. See Zollman v. Geneva Leasing Assocs., Inc.,

780 N.E.2d 387, 392 (Ind. Ct. App. 2002) (“[A]s a

general rule, the law allows competent adults the utmost

liberty in entering into contracts that, when entered into

freely and voluntarily, will be enforced by the courts.”).

Indiana courts will not enforce contracts that violate

state statutes, but they will not find a violation

“ ‘unless the language of the implicated statute is clear

and unambiguous that the legislature intended that the

courts not be available for either party to enforce a

bargain made in violation thereof.’ ” Shelly & Sands, 756

N.E.2d at 1073 (quoting Cont’l Basketball Ass’n, Inc. v.

Ellenstein Enters., Inc., 669 N.E.2d 134, 140 (Ind. 1996)).

BMD cites two Indiana statutes in support of its posi-

tion, but neither is on point. The first is a statute

voiding waivers of claims against payment bonds.

Section 32-28-3-16(b) of the Indiana Code provides in

relevant part:

(b) A provision in a contract for the improvement

of real estate in Indiana is void if the provision

requires a person . . . who furnishes labor, materials,

or machinery to waive a right to:

...

(2) a claim against a payment bond;

before the person is paid for the labor or materials

furnished.

This statute invalidates any contract provision that

requires a party to waive its claims under a payment

bond; it does not cast doubt on the validity of pay-if-

No. 11-1345 19

paid clauses. Nothing in the Industrial/BMD subcontract

required BMD to waive its right to recover under the

payment bond. Rather, the subcontract allocated the risk

of loss if Getrag defaulted on payment, ensuring that

each party would bear the risk of loss only for its own

work. Under the terms of the pay-if-paid clause, Industrial

Power’s obligation to pay BMD was conditioned on its

own receipt of payment; the clause is not a waiver of

BMD’s right to make a claim under the Fidelity bond.

BMD insists that this distinction is illusory and that pay-

if-paid clauses, in effect, always amount to waiver of

payment, thus defeating the entire purpose of the pay-

ment bond. This argument mistakenly assumes that

the purpose of a payment bond is to guarantee pay-

ment under any set of circumstances, rather than when

payment is otherwise due under the specific terms of the

subcontract. If the condition precedent here had oc-

curred—if Industrial Power had been fully paid but

refused to pay BMD—then BMD would have a valid

claim against Fidelity under the payment bond. The

bond’s coverage is therefore not illusory; BMD’s right

to recovery is simply limited by the terms of its subcon-

tract with Industrial Power.

BMD also relies on section 32-28-3-18(c) of the Indiana

Code, which prohibits certain conditions on lien rights:

(c) An obligor’s receipt of payment from a third

person may not:

(1) be a condition precedent to;

...

20 No. 11-1345

the provider’s right to record or foreclose a lien

against the real estate that was improved by the pro-

vider’s labor, material, or equipment.

By its terms this statute only prohibits contract condi-

tions that operate on a contractor’s lien rights. Nothing

in the pay-if-paid clause limits BMD’s right to file a

lien against the subject property. To the contrary, both

BMD and Ferguson filed mechanic’s liens against the

Getrag property. The liens were uncontested and yielded

substantial payments when the property was sold.

This statute does not affect the validity of pay-if-paid

clauses.

C. Surety Liability

Finally, BMD argues that because the payment bond

does not expressly incorporate the terms of the Industrial

Power/BMD subcontract, Fidelity can be liable to BMD

under the bond even though Industrial Power is not

liable under the subcontract. This argument contradicts

basic principles of surety law. In Indiana, as elsewhere,

a surety must answer only for the debts of the principal

and cannot be liable where the principal is not.

Under Indiana law a surety contract obligates the

surety “to answer for the debt, default, or miscarriage of

another.” Meyer v. Bldg. & Realty Serv. Co., 196 N.E. 250,

253-54 (Ind. 1935). Surety contracts are not bilateral,

but rather create a “tripartite relation between the party

secured, the principal obligor, and the party secondarily

liable, and the rights, remedies, and defenses of a surety

No. 11-1345 21

cannot be disassociated from this relationship.” Id. at 253.

Indiana courts therefore recognize that “ ‘[g]enerally,

a surety’s liability is no greater than the principal’s.’ ”

In re Kemper Ins. Cos., 819 N.E.2d 485, 491 (Ind. Ct. App.

2004) (quoting Goeke v. Merch. Nat’l Bank & Trust Co. of

Indianapolis, 467 N.E.2d 760, 768 (Ind. Ct. App. 1984)). This

is the general rule regarding the scope of surety liabil-

ity. See, e.g., 74 A M . JUR. 2D Suretyship § 88 (2001) (“As a

general rule, a surety on a bond is not liable unless

the principal is, and, therefore, he may plead any

defense available to the principal.”); 72 C.J.S. Principal

and Surety § 79 (2005) (“[A] surety is not liable to an

obligee unless its principal is also liable.”).

BMD relies on the principle that surety contracts, like

insurance contracts, are construed “strictly” against the

surety, with any ambiguity resolved in favor of the

covered party. See, e.g., Garco Indus. Equip. Co., Inc. v.

Mallory, 485 N.E.2d 652, 654 (Ind. Ct. App. 1985) (“[T]he

contract of a surety for hire is viewed as analogous to

an insurance contract, and is construed most strictly

against the surety and in favor of the person to be pro-

tected.”). This is perfectly true but perfectly irrelevant.

This case raises a question about the scope of Industrial

Power’s liability to BMD and whether Fidelity’s liability

as a surety is coextensive with its principal’s. The rule

that ambiguities in a surety bond are strictly construed

against the surety does not help answer the pertinent

questions here.

On this point the Indiana Supreme Court’s decision

in Meyer is instructive:

22 No. 11-1345

In construing an ambiguous provision in a corporate

surety contract, the courts apply the rule applicable

to insurance policies, namely, that the language will

be construed most strongly against the insurance

company. . . . But when the courts are dealing with

the rights, remedies, and defenses of a surety, the

rules of insurance furnish no help.

196 N.E. at 253. Fidelity is liable up to, but not beyond, the

full liability of its principal, unless the surety contract

clearly says otherwise. See Kemper, 819 N.E.2d at 493-95.

BMD has not identified anything in the surety contract

that says otherwise.

BMD emphasizes that the payment bond does not

expressly incorporate the terms of the Industrial

Power/BMD subcontract, but this is legally insignificant.

As we have explained, surety contracts create tripartite

relationships—the very existence of a surety implies an

underlying obligation between the principal and its

obligee. Accordingly, Indiana courts have recognized

that where a contract and a surety bond are executed

together, they must also be construed together. See Weed

Sewing Mach. Co. v. Winchell, 7 N.E. 881, 883 (Ind. 1886);

Vanek v. Ind. Nat’l Bank, 540 N.E.2d 81, 84 (Ind. Ct. App.

1989). This principle of joint construction is really just

a restatement of the more general rule that a surety

will not be liable where the principal is not.

BMD contends that the payment bond and the

Industrial Power/BMD subcontract were not in fact exe-

cuted concurrently. BMD is not entirely clear about

the record support for this claim, but it seems to be

No. 11-1345 23

relying on the fact that the payment bond does not specifi-

cally incorporate the Industrial Power/BMD contract.

As we have noted, this detail is irrelevant. The payment

bond was executed in favor of the “claimants” of

Industrial Power under the Walbridge/Industrial Power

contract, and it defines “claimant” in a way that clearly

includes BMD under its subcontract with Industrial

Power. The bond thus makes Fidelity a surety with respect

to Industrial Power’s obligations to BMD under that

subcontract. This is really just to say that the bond is, in

fact, a surety contract. Perhaps BMD is arguing that the

two contracts are not “concurrent” because one was

signed two weeks after the other. “Concurrent” here does

not mean “signed on the same day.” It is enough that the

bond clearly secures Industrial Power’s contractual

obligation to BMD; there is no ambiguity about that.

Indiana surety law is therefore quite clear on two

general points: (1) sureties are generally liable only

where the principal itself is liable; and (2) concurrently

executed bonds and the contracts they secure are

construed together. These surety-law principles firmly

support Fidelity’s position that it cannot be liable under

the payment bond if Industrial Power is not liable under

the subcontract. Although there are no Indiana cases

applying these general principles in this particular

context, courts in other jurisdictions have done so. See

Faith Techs., Inc. v. Fid. & Deposit Co. of Md., Civ. Action

No. 10-2375-MLB, 2011 WL 251451 (D. Kan. Jan. 26, 2011);

Fixture Specialists, Inc. v. Global Constr., LLC, Civ. Action

No. 07-5614 (FLW), 2009 WL 904031 (D.N.J. Mar. 30,

2009); Wellington Power Corp. v. CNA Sur. Corp., 614 S.E.2d

24 No. 11-1345

680 (W. Va. 2005). 5 Each of these cases is essentially

identical to this case: The underlying subcontract

contained a pay-if-paid provision that excused the princi-

pal from its payment obligation; the principal failed to

pay because it did not receive payment; the subcon-

tractor sued on a payment bond; and the surety asserted

the pay-if-paid clause as a defense to liability even

though the bond itself contained no such provision. In

all three cases, the court held in favor of the surety,

relying on the general principle that the surety could

assert all the defenses of its principal.

Against this weight of authority, BMD cites Culligan,

a decision of this court that has some superficial sim-

ilarity to this case. On close reading, however, Culligan

is distinguishable. There, as in this case, a subcontractor

sued on a surety bond securing the prime contractor’s

payment on the subcontract. The property owner did not

pay the prime contractor, the prime contractor in turn

failed to pay the subcontractor, and the subcontractor

looked to the surety for payment. Applying Indiana

law, we held that the owner’s nonpayment of the

5

Fidelity finds additional support for this point in Sloan,

2009 WL 2616715—which is perhaps surprising given that

Sloan is the one case that cuts against Fidelity on the threshold

question of whether a pay-if-paid clause existed in the first

place. Although Sloan eventually found that the relevant

provision was only a pay-when-paid clause, the court first

held that a surety could assert all the defenses of its principal—

so if the clause there had been a pay-if-paid clause, the

surety could have relied on it. See id. at *4.

No. 11-1345 25

prime contractor did not affect the surety’s liability on

the bond. 580 F.2d at 254. We held that the bond’s identifi-

cation of the subcontract was merely a reference, not

an incorporation, and therefore did not change or

modify the terms of the bond itself. Id.

BMD argues that Culligan supports the proposition

that a surety bond and a subcontract may be construed

independently and that a subcontractor may recover

against a surety under the terms of the bond alone, re-

gardless of whether the principal itself was liable. Stated

as such, Culligan would seem to support BMD’s position.

But this argument elides a critical distinguishing fact—

the subcontract in Culligan contained only a pay-when-

paid clause, not a pay-if-paid clause,6 so the contractor

in that case was itself liable to the subcontractor. Not

only had the owner breached its obligation to the con-

tractor, but the contractor had also breached its

obligation to the subcontractor. Because the pay-when-

paid provision did not excuse the principal in the first

place, the surety was liable to the same extent as

the principal.

Admittedly, our decision in Culligan does not

specifically state this principle in so many words; the

6

Culligan did not use the terms “pay if paid” and “pay when

paid” in its opinion because those phrases were not yet in

common use. But the opinion specifically noted that the accep-

tance of the subcontractor’s work was not a “condition prece-

dent” to the subcontractor’s right to recovery. Culligan Corp.

v. Transamerica Ins. Co., 580 F.2d 251, 252 (7th Cir. 1978).

26 No. 11-1345

opinion simply holds that the owner’s breach did not

discharge the surety of its obligations. But as we have

noted, the subcontract in Culligan did not contain a pay-if-

paid clause, so there was no reason for the court to

address the hypothetical scenario in which a surety is

sued but the principal is not itself liable for payment. It

is telling that the primary case cited in Culligan is

Midland Engineering Co. v. John A. Hall Construction Co.,

398 F. Supp. 981 (N.D. Ind. 1975), which likewise

involved a subcontract containing only a pay-when-paid

clause.

To whatever extent Culligan can be read to contain

principles broader than its actual holding, we are autho-

rized—indeed required—to conform our decision to

predict how the current Indiana Supreme Court would

rule. See Taco Bell Corp. v. Cont’l Cas. Co., 388 F.3d 1069,

1077 (7th Cir. 2004). Indiana surety law has not changed

since Culligan was decided, but it has been explained,

and the principles relevant to this case have been

affirmed and clarified. See Kemper, 819 N.E.2d at 491

(“ ‘Generally, a surety’s liability is no greater than the

principal’s.’ ” (quoting Goeke, 467 N.E.2d at 768)).

More importantly, we are now confronted with a ques-

tion that we did not consider in Culligan—whether

the subcontractor has a claim against a payment bond

regardless of whether the principal is liable for payment

under the subcontract. Nothing in Culligan addresses

this question, so there is no contradiction in now

clarifying that the Culligan rule does not apply where a

pay-if-paid clause excuses the principal entirely. Our

holding, of course, simply affirms the prevailing general

No. 11-1345 27

rule that a surety is only liable where the principal

itself is liable. The district court identified a somewhat

different reason for distinguishing Culligan. The Fidelity

bond provides that a claimant may sue to recover “such

sums or sums as may be justly due claimant.” The district

court held that this language necessarily implies the

existence of the separate contract between Industrial

Power and BMD, so that the phrase “justly due” could

only refer to sums justly due under that contract. See

Taylor Constr. Inc. v. ABT Serv. Corp., 163 F.3d 1119, 1122

(9th Cir. 1998) (“sums justly due” means due under the

subcontract); U.S. for Use & Benefit of Woodington Elec. Co.

v. United Pac. Ins. Co., 545 F.2d 1381, 1383 (4th Cir. 1976)

(same). The surety bond in Culligan did not contain

similar qualifying language.

This distinction is secondary to the more important

distinguishing fact that the principal in Culligan was

itself on the hook to the subcontractor, and Industrial

Power, the principal here, is not. We also note that the

cases the district court cited in support of its interpreta-

tion of the phrase “justly due” are not precisely on

point. 7 Both Taylor and Woodington interpreted the

phrase “sums justly due” as used in a federal statute, not

7

BMD suggests that “justly due” refers to the value of the

work performed by BMD. This reading is unnatural and would

lead to absurd results. If “justly due” refers to the value of the

work, then this provision in the bond makes the actual

contract price meaningless. Even if a claimant was paid in

full under the subcontract, it might still argue that the value

of the work exceeded that price, and thus that further pay-

ment was “justly due.”

28 No. 11-1345

in a payment bond. The question in those cases was not

whether the sureties were liable, but rather how much

they were obligated to pay. To answer this question,

the courts naturally looked to the subcontract. That

approach is persuasive here, but as an additional basis

to distinguish Culligan. The pay-if-paid clause in the

subcontract—not the “justly due” language in the

payment bond—does most of the work here.

Finally, BMD relies on the Fourth Circuit’s divided

decision in Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d

717, 723-24 (4th Cir. 2000), which held that even where

a pay-if-paid clause excuses the contractor’s nonpay-

ment, the subcontractor can still recover against the

surety. 8 Moore Bros. cannot overcome the countervailing

weight of authority. First, the decision is weak on the

merits. The main point made by the Moore Bros. majority

was that it would “defeat[] the very purpose of a payment

bond” to let the surety assert the pay-if-paid clause as

a defense against recovery. Id. at 723. This mistakenly

assumes that the purpose of a payment bond is to

insure subcontractors against nonpayment under any

circumstances, rather than when payment is in fact due

under the relevant contract. As Judge Wilkins noted in

8

The Moore Bros. court referred to the relevant contractual

provision as a pay-when-paid clause, but nevertheless clearly

treated it as a pay-if-paid clause. See Moore Bros. Co. v. Brown

& Root, Inc., 207 F.3d 717, 723 (4th Cir. 2000) (discussing how

the relevant clause created a condition precedent and gave

the principal a defense to liability).

No. 11-1345 29

partial dissent, “[t]he simple fact here is that some-

one—either [the contractor], the Subcontractors, or [the

surety]—had to bear the risk that [the owner] would

not pay [the contractor]. Virginia law specifically

allows subcontractors to bear that risk, and the Subcon-

tractors here agreed to do so.” Id. at 727, 729 (Wilkins, J.,

concurring in part and dissenting in part). The Moore

Bros. majority relied chiefly on a line of reasoning that

we have rejected.

Second, while the Moore Bros. majority cited three lower-

court cases purporting to support its position, see id. at

723 (majority opinion) (citing Brown & Kerr, Inc. v. St. Paul

Fire & Marine Ins. Co., 940 F. Supp. 1245 (N.D. Ill. 1996);

Shearman & Assocs. v. Cont’l Cas. Co., 901 F. Supp. 199

(D.V.I. 1995); OBS Co. v. Pace Constr. Corp., 558 So. 2d 404

(Fla. 1990)), none were exactly on point. Shearman and

OBS Co. held that a surety could not assert a pay-if-paid

clause as a defense against a suit on the bond, but the

outcome in both cases turned on the application of lien

statutes specific to those jurisdictions. In essence, those

courts held that “local lien law would be thwarted if the

protection provided by the bonds was not equal to that

which would have been provided under the liens.” Moore

Bros., 207 F.3d at 729 n.4 (Wilkins, J., concurring in part

and dissenting in part). And while the Florida Supreme

Court in OBS Co. reached the same result without specifi-

cally relying on local statutes, it also held that the sub-

contract in question contained only a pay-when-

paid clause and thus did not excuse the principal in

the first place. OBS Co., 558 So. 2d at 407.

30 No. 11-1345

Moore Bros. is therefore unpersuasive and contrary

to basic Indiana surety-law principles. It is telling that

Faith Technologies, Fixture Specialists, and Wellington

Power—all of which applied general principles of surety

law in the context of pay-if-paid subcontracts—were

decided after Moore Bros., and all three considered

and rejected the Moore Bros. position. Because our re-

sponsibility in this case is to predict how the Indiana

Supreme Court would rule on this issue, we do best to

heed the weight and trajectory of decisions in other

courts. See Ludwig v. C & A Wallcoverings, Inc., 960 F.2d

40, 42 (7th Cir. 1992) (Courts of appeals must “ ‘strive to

parse state law and, if necessary, forecast its path of

evolution.’ ” (quoting Belline v. K-Mart Corp., 940 F.2d

184, 186 (7th Cir. 1991))).

The clear trend of recent caselaw bolsters the basic

principle of Indiana law that a surety may assert all

the defenses of its principal. Fidelity, no less than Indus-

trial Power, may rely on the pay-if-paid clause in the

Industrial Power/BMD subcontract to defend against

this suit on the payment bond. Summary judgment

was properly entered in favor of Fidelity.

A FFIRMED.

5-11-12