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How COVID-19 impacts surety bond placement

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Placing surety bonds has become more challenging with the social distancing precautions underway with the COVID-19 pandemic, but it is possible to do this electronically, says an association representing insurers who write surety bonds. Surety bonds can now be placed without people physically meeting or mailing paper documents, and they are enforceable by law, Steven Ness, president of the Surety Association of Canada, said in an interview. “Anyone who is seriously engaged in the surety business in this country has the ability to provide electronic bonds or digital bonds,” said Ness. “And if you are not, my message to you is: ‘The world is not going to sit still for you. Get yourself into the 21st century if you want to keep doing business.’” Though surety bonds are provided by property and casualty insurers, they are different from insurance contracts in several ways. Surety bonds are three-way agreements for the benefit of the client’s clients. They are not conventional contracts where one party agrees to pay money to a party who supplies something. With a surety bond, the insurer – in this context known as the surety – writes a bond for its customer, often a construction contractor and known as the “principal” for the purpose of the surety bond. If the principal fails to fulfill the terms of its contract, then the surety (the insurance carrier) might have to make a payment to the “obligee,” which is often a construction project owner (a municipality or real estate developer, for example). Often the construction contractor cannot get the job without a surety bond. One risk that surety bonds are intended to transfer is the risk to a project owner if a contractor fails to finish the job or pay its subcontractors and suppliers. Although Ontario is under a state of emergency during the COVID-19 pandemic, many types of construction projects are considered essential – and therefore exempt from the workplace shutdowns. But some brokerages are facing a logistical challenge now in delivering properly sealed surety bonds to project owners and clients, the Surety Association of Canada observes. “Surety bonds are an interesting animal because they are not contracts,” said Ness. “They are deeds, which means they must be executed under seal. It creates a logistical challenge but we have managed to overcome that.” The distinction is important in “common law” provinces because a two-way contract is one in which a seller gets “consideration,” or payment, for what it gives the buyer. So a surety bond is not technically a contract because the obligee, the project owner, is transferring its risk without paying a premium. Instead, it is the principal, not the obligee, that pays the premium to the surety. Traditionally, legal documents were sealed by making some sort of impression in wax or putting self-adhesive wax on to the document, Toronto lawyer Albert Frank wrote in an earlier paper about corporate seals. Today, several vendors in the market offer software and services that deliver sealed and legally enforceable surety bonds, Ness told Canadian Underwriter Tuesday. If you want to use those, the Surety Association of Canada has several pieces of advice. The electronic bonding process needs to have: Integrity of Content: the parties are assured that the document received is the true document executed and the content has not been changed or altered; Secure Access: Only those who are authorized to view or download the document have access; and Verifiability/Enforceability – the parties are assured that the document was duly executed by the parties identified and that it is enforceable in law.

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Does COVID-19 Make a Contract Impossible to Perform?

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Wanting to diversify his investments, Ernest “Big Daddy” Bux signed a franchise agreement with GA Fitness last year. Construction by Big Daddy’s contractor Bill Toosuit is scheduled to be completed for in time for an early May grand opening in the new strip center owned and managed by Mawl & Mawl. Last week, in response to the COVID-19 pandemic, the town’s mayor and the state governor prohibited any gathering of more than 10 people and directed that all bars, restaurants and gymnasiums close. Now that gymnasiums are prohibited from opening, Big Daddy’s business is almost certain to fail, and Mawl & Mawl loses a tenant. If Big Daddy stops construction and buys out his current lease obligation, Bill Toosuit loses his construction project and Mawl & Mawl loses a long-term tenant. Can Big Daddy get out of his lease obligations? And his construction contract? Are there other options to get to a win-win? Legally Maybe and probably. If Big Daddy is looking to set aside or suspend his obligations under the lease and construction contracts, he should first examine them for a force majeure clause, which is addressed here. If Big Daddy’s contracts do not contain a force majeure clause or the clause does not cover pandemics like COVID-19, hope is not lost. Impossibility Defense The Texas Supreme Court recognizes an impossibility-of-performance defense – upon an event occurring that the contracting parties assumed would not occur. Unlike force majeure clauses, a successful impossibility defense must also demonstrate reasonable efforts to surmount the obstacle to performance and, only then, performance is excused if it is impracticable in spite of such efforts. Texas courts have applied the impossibility defense narrowly and upheld it in three scenarios: (i) a person necessary for performance dies or becomes incapacitated; (ii) the thing necessary for performance is destroyed or deteriorates; and (iii) the law changes making performance illegal. Consistent with force majeure clauses, the impossibility defense is not satisfied simply because performance is more inconvenient or economically burdensome than anticipated – increased difficulty or expense is judicially regarded as being covered within a fixed-price contract. The COVID-19 pandemic could cause the first and third scenarios—a person who entered into a contract to provide services could become infected or governmental decrees or regulations issued to combat the virus could prevent parties from performing their contractual obligations. For instance, the recent order banning gatherings of more than 50 people in Dallas County would “make performance illegal” of a contract to host a large party or concert. Businesses affected by COVID-19 might also argue for expansion of the impossibility defense beyond these three recognized scenarios. Some authority excuses performance if there is either a risk of injury to persons disproportionate to the purpose of performance or a severe shortage of raw materials or supplies. And courts may be receptive to expanding the defense, given that a pandemic causing a broad economic shutdown is a rare and devastating event. For those sellers and lessors of goods, the Universal Commercial Code (UCC) may offer some COVID-19 relief. In Texas’s version, delays in delivery by sellers, lessors or suppliers of goods is not a breach “if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made” or by good faith compliance with a governmental order or regulation. Notably, these only protect sellers and lessors of goods from one type of breach—delay in delivering the sold or lease goods. Practically As with invoking a contract’s force majeure clause, stopping performance based on the impossibility defense is risky because, if done improperly, it could itself amount to a breach of the contract – entitling the other party to terminate and sue for damages. Consult with an attorney to assess whether the defense applies to your case. Bottom line: it’s risky and there will be a cost—win or lose. Tilting the Scales in Your Favor If you believe that this COVID-19 pandemic is permanent and terminal, abandon all hope! Big Daddy’s business will fail. Bill Toosuit will lose his construction contract (likely only one among many). Mawl & Mawl will lose a long term tenant. The local citizens will lose the positive economic impact of a new business – and a gym! If, on the other hand, you believe that by working together we can beat this short-term challenge – nearing a panic – consider these: Collaborate. Share the short-term risk. Find common grounds of trust. Then, get creative and flexible. For Big Daddy, almost everyone would agree that the scheduled grand opening of his new business in early May is a bad idea – probably terminal for his business. The closure would significantly impact his landlord Mawl & Mawl, who would probably prefer a multiple-year tenant to a short-term cash settlement, Bill Toosuit would lose the rest of his construction project and cash flow for his workers and subcontractors. This is just one of many legal issues the pandemic is raising. For Gray Reed resources on additional issues, check out our firm’s COVID-19 Resource Center. https://www.jdsupra.com/legalnews/does-covid-19-make-a-contract-69401/

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Swiss Re Americas Issues Public Comment on Treasury’s Fiscal Service Bureau

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WASHINGTON, March 6 — Matthew Wulf, head of state regulatory affairs at Swiss Re Americas, Armonk, New York, has issued a public comment on the U.S. Treasury Department’s Bureau of the Fiscal Service notice entitled “Surety Companies Doing Business with the United States; Request for Information”. The comment was written on Feb. 13, 2020, and posted on March 5, 2020: Thank you for the opportunity to respond to the Bureau of the Fiscal Service’s (Bureau) Request for Information (RFI) on the corporate federal surety bond program. The most important element Treasury and the Bureau can address to modernize and improve the surety bond program is to reconcile the inconsistency between state insurance regulation and the Bureau’s current practice regarding recognized credit for reinsurance and required collateral. Treasury should amend its rules to: (1) allow credit for reinsurance that is provided by reinsurers that meet certain stringent requirements such as those contained in the covered agreements and the recently revised NAIC Credit for Reinsurance models and (2) eliminate collateral requirements for non-US reinsurers from reciprocal jurisdictions that are recognized at the state level as meeting stringent requirements protecting U.S. ceding insurers. The Bureau has a historic view that uncollateralized reinsurance recoverables of a non-US reinsurer may not be counted as an asset for a capital and surplus calculation. This position is out of step with the authoritative sources of reinsurance collateral regulation in the United States, i.e., standards set by the National Association of Insurance Commissioners (NAIC) in 2010 and codified in all states’ laws and regulations. Additionally, it is inconsistent with the purpose of the Dodd-Frank Act, Title V, and recent US-EU and US-UK covered agreements. Thus, the inconsistency exists not only between the Bureau and state law, but also between the Bureau and federal law, and within Treasury itself, between the Bureau and the Federal Insurance office (FIO). A minor change to the application process, data considered, and the analytical methods used in evaluating financial condition will resolve this inconsistency and will not result in diminished protection of US government interests. The Bureau should revise its practices and rules regarding credit for reinsurance to align analysis by Treasury with the analysis conducted by state insurance regulators. Additionally, Treasury’s collateral requirements should be consistent with those it has directed state regulators to adopt and those that Treasury has itself negotiated in the covered agreements. These changes will not negatively affect the ultimate ability of a surety company to carry out its contracts and will not harm the financial interests of the United States or its taxpayers. As the Bureau of Fiscal Service explores ways to modernize and improve how it evaluates the financial condition of companies seeking to underwrite and reinsure federal surety bonds or act as admitted reinsurers, it is important to appreciate that notwithstanding the “doing business with the United States” scope of Treasury’s regulation, it has been historically de facto regulation of both governmental and non-governmental surety bond business. Thus, the scope of consideration must go beyond strictly federal surety interests. Responses to specific RFI questions Because Swiss Re’s comments all center on the treatment of credit for reinsurance, the following should be considered responsive to the RFI questions 1, 3, 4 and 5. The practice by the Bureau of Fiscal Service of not recognizing uncollateralized reinsurance that is otherwise recognized on company statutory financial statements by the states is inconsistent with the primacy of state regulation, inconsistent with public policy enshrined in the US-EU and US-UK covered agreements, punitive to companies complying with state prudential insurance regulation, and it does nothing to further protect the financial interests of the United States or its taxpayers. US public policy on reinsurance regulatory collateral requirements has been clearly articulated by Treasury through the Federal Insurance Office via the covered agreements and establishes that financially sound, well-regulated companies may provide creditable reinsurance to US cedents without the need for 100% regulatory collateral. The decision to move from a 100% collateral system for non-US assuming insurers to a system based on financial soundness, business practice, and regulatory reliability was made after years of debate and has proven to be sound public policy. Since non-US assuming insurers began providing reinsurance without 100% collateral in 2010, there has been no corresponding increase in uncollectible reinsurance. In order to be eligible to provide creditable reinsurance to US cedents, non-US reinsurers must comply with rigorous financial statement/condition filing requirements at the state level and their home country must be vetted and approved by a state as a qualified or reciprocal jurisdiction. A Bureau of Fiscal Service determination of credit for reinsurance on a separate basis than the states undermines the state-based insurance regulatory system in the US and could be the basis for a US state to challenge the preemptive authority of the FIO to enforce the covered agreements. Because the Bureau of the Fiscal Service and FIO both sit in Treasury, the failure of one office to recognize the public policy set by another establishes the argument that an integral purpose of the covered agreements is frustrated and without meaning, and therefore is unenforceable. Further, a second key element of the covered agreements is the recognition of US state regulatory authority and prohibition against local presence and other doing business requirements abroad. If the EU or UK believes a covered agreement is not being enforced, non-US countries will be able to retaliate against US companies doing business internationally. Fiscal Service could accomplish the proper credit for reinsurance recognition solely through the annual letter. However, if a change in regulation for clarity is desired, the following amendment to section 223.9 is recommended (new language underlined): Sec. 223.9 Valuation of assets and liabilities. In determining the financial condition of every such company, its assets and liabilities will be computed in accordance with the guidelines contained in the Treasury’s current Annual Letter to Executive Heads of Surety Companies. However, the Secretary of the Treasury may value the assets and liabilities of such companies in his discretion.

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Surety’s claims against bank fail [Hudson]

Blog, Claims, Court, Market, Repost, Surety / /

A surety that paid out more than $3.7 million in claims failed in its attempt to sue the principal’s bank because its claims were time-barred, a negligence claim failed as a matter of law, there was no confidential relationship as required for a constructive fraud claim and the elements of breach of trust, constructive trust or accounting were not satisfied. Background In 2009, Andy Persaud, president of Persaud Companies Inc., or PCI, opened an account at the Bank of Georgetown. In December 2010, Persaud established a bonding program with Hudson Insurance Company, a surety that agreed to issue payment and performance bonds on PCI’s behalf. In the course of underwriting the bonding program, Hudson’s agent obtained from Persaud documents showing all banks with a security interest in PCI as well as the promissory note and loan documents between PCI and the bank. In late 2011, Persaud requested an expansion of the bonding program. Hudson agreed to execute an amended general indemnity agreement on two conditions: first, that an additional indemnitor be added, and second, that all funds from contracts relating to the agreement run through a third-party escrow account. Gary W. Day agreed to serve as a second indemnitor in exchange for payment to Day of 1% of the face amount of all bonds issued by Hudson. A few months later in the spring of 2012, Hudson began receiving claims on PCI’s projects. Hudson ultimately lost $3.7 million by paying out claims related to PCI. Hudson and Day obtained default judgments against PCI and Persaud, who is believed to be penniless. Day obtained the assignment of Hudson’s claims against the bank. Day asserts that, had Hudson been aware of the nature of the banking relationship between Persaud and the bank, it would never have agreed to issue the bonds on which it suffered losses. Analysis The district court held Day failed to state a claim and so dismissed his suit, and, alternatively, granted summary judgment finding all of Day’s claims time-barred. With respect to the latter, it recognized that, under Maryland law, an action only accrues when the claimant in fact knew or was on inquiry notice of the alleged wrong. The court concluded that Day was on inquiry notice no later than October 2011, when Day, Hudson, and Persaud executed the amended general indemnity agreement. At that time, Hudson was already concerned about the state of Persaud’s finances and possessed the bank’s UCC filing and the loan documents memorializing the agreement between the bank and Persaud. We agree with the district court’s analysis. The latest Day could have filed suit within the limitations period was therefore October 2014; he did not actually file suit until April 2016. Day’s claim is therefore time-barred. We also agree that Day’s complaint fails to state a claim. The district court rejected Day’s negligence claim on multiple grounds, concluding that the statute did not establish a duty to Day on the part of the bank and that Maryland law precluded Day’s recovery in tort for purely  economic losses. Next, the court dismissed Day’s attempts to sue directly under the anti-assignment act, concluding that Day lacked a cause of action and that there was no authority to support his argument that he may be subrogated to the government. Day’s constructive fraud claim also failed because, as the district court explained, Day could show neither violation of a duty nor the existence of a confidential relationship between Day and the bank, both necessary prerequisites to stating a constructive fraud claim. Finally, the district court properly dismissed Day’s counts seeking equitable relief, noting that Day could not meet the elements of breach of trust, constructive trust or accounting. This analysis is sound. Affirmed. Day v. United Bank, Appeal No. 18-1961, Feb. 20, 2020. 4th Cir. (per curiam), from DMD at Greenbelt (Xinis). David Hilton Wise for Appellant, Richard E. Hagerty for Appellee. VLW 020-2-036. 6 pp.

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Talisman Casualty Denied Diversity Jurisdiction Of Protected Cell Series LLC In National WW II Museum Case

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A captive insurance company (usually just referred to as a “captive” in short) is an insurance company that is set up to provide for the insurance needs of its owners, and them only. There are many types of captives, and they can be organized in many ways, most typically as corporations but also as LLCs and some other more exotic types of entities. A captive can be organized — and many are — as a Series LLC. That particular form of LLC is very complex, and consists of a larger LLC (called the “series organization”) which is then subdivided into many smaller units (called “protected series”). Very similar in many respects to a parent/subsidiaries structure, Series LLCs offer certain benefits in the captive insurance field when it comes to insurance licensing and capital requirements. In 2016, the National WW II Museum (New Orleans) ordered a steel truss canopy from Gava Steel, Inc., and paid about $3 million. To protect itself, the Museum obtained a bond in the same amount from Talisman Casualty Insurance Company, LLC, which is purportedly managed (which is different than owned) by Jeffrey Schaff of Louisiana. For whatever reason, Gava Steel didn’t perform as promised, and the Museum made a claim on Talisman’s bond. Claiming that no valid bond was ever issued, Talisman didn’t honor the bond. So, Museum sued Talisman in the Civil District Court of the Parish of Orleans. Talisman then removed the case to the U.S. District Court for the Eastern District of Louisiana. claiming diversity jurisdiction since Talisman was organized in Nevada and the Museum is in Louisiana. As an aside, federal law requires what is known as “complete diversity” of citizenship in order for diversity jurisdiction to apply, i.e., no plaintiff can be from the same state as any defendant. Where a party is an LLC, the court looks through the LLC to see where its members are located. Museum then filed a motion to remand the case back to the Parish of Orleans court, arguing that because Talisman was an LLC, and because its (undefined) owner is a resident of Louisiana, both the plaintiff and the defendant were located in Louisiana and so there was no complete diversity such as would support diversity jurisdiction in the federal court. Talisman made two arguments why complete diversity was present. The first argument was that because Talisman was a licensed captive insurance company, it should be treated as a corporation with its location in Nevada, instead of as an LLC where the jurisdiction of its owner (Schaff) would place it in Louisiana. Second, and most interestingly, Talisman argued that it was a Series LLC, that only protected cell #01 was potentially liable on the bond, and that cell #01 didn’t have any members at all, much less any members in Louisiana — other of Talisman’s protected cells might have Louisiana members, but not protected cell #01. To support this second argument, Talisman submitted an affidavit which said that protected cell #01 had no members. All this resulted in the opinion of the U.S. District Court that I shall next relate. The court took these arguments in reverse. As to Talisman’s argument that protected cell #01 had no members, that argument immediately backfired. The court pointed out that under long-standing law, if an LLC has no members, then it is “stateless”, and a stateless LLC cannot establish diversity of jurisdiction. Since Talisman had submitted an affidavit that protected cell #01 had no members, it had effectively shot itself in the foot on this issue. Talisman’s other argument, that even though it was organized as an LLC, Talisman should be treated as a corporation because it was a licensed captive insurance company, also fell on deaf ears. The court noted that 175 years ago, the U.S. Supreme Court allowed corporations to be treated as citizens for purposes of diversity citizenship, but since then the Supreme Court has consistently restricted business entities’ access to the federal courts by way of diversity jurisdictions, to which Talisman’s argument for an expansion of such jurisdiction clearly ran counter. Moreover, in footnote 2, the court pointed out that the Museum had sued Talisman generally, and not just protected cell #01, and Talisman did in fact have its only member in Louisiana such that complete diversity was destroyed. ANALYSIS What this case highlights is that there are many nuances about Series LLCs that are yet to be discovered. While it may be possible to structure things with a Series LLC that could not be so structured with any other form of business entity, all the ramifications of doing that are probably impossible to predict. Here, for whatever reason, protected series #01 was structured in a way that it did not have any “members” in the sense that an ordinary LLC typically would, but that ended up having a negative repercussion as it defeated Talisman’s attempt to move the case out of Louisiana state court and into the federal courts. Yes, Series LLCs are extremely versatile: They are also dangerous. As I have pointed out on numerous occasions, if an ordinary LLC is a Cessna 172 with few systems and controls, a Series LLC is a 747 with hundreds of systems and controls thus making it very easy for a fatal mistake to be made. Or, as my friend and colleague Tom Rutledge is so fond of pointing out, for most folks the creation of a Series LLC is like giving an Uzi to a three-year old. On a more practical note, Talisman’s argument that protected series #01 did not have any members is probably technically incorrect, for the reason that in the absence of members the series organization itself is the member, in this case being Talisman the main company. Thus, the court could probably have correctly held that protected series #01’s member was Talisman, and Talisman’s member was Schaff, and so therefore protected series #01 was located in Louisiana for purposes of testing diversity jurisdiction. An alternative construct would be that without members, protected series #01

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Supreme Court of Canada could review ‘joint and several liability’ clause in surety bond [Intact]

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he Guarantee Company of North America wants to take a disputed claim on a 20-year-old performance bond to the Supreme Court of Canada. The top court announced Feb. 7 that The Guarantee is applying for leave to appeal HOOPP Realty Inc. v. The Guarantee Company of North America, released this past November by the Court of Appeal of Alberta. It all began in 1999 when The Guarantee wrote a $3.9-million performance bond for a warehouse in Alberta. It was a design-build project owned by HOOPP Realty, part of the Healthcare of Ontario Pension Plan. A problem with a floor in the building – completed in 2000 – led to a dispute been HOOPP Realty and a contractor, AG Clark Holdings Ltd. HOOPP Realty’s lawsuit against Clark was thrown out of Alberta court in 2013 because of mandatory arbitration clauses in the design-build contract and the statute of limitations. HOOPP Realty is now trying to recover some of its costs under the performance bond written by The Guarantee. The 1999 bond was replaced in 2004. The Guarantee argued that HOOPP Realty cannot claim on the performance bond, unless there is an enforceable claim against Clark Builders. The Guarantee also argued that a surety is entitled to raise any defence that the principal could raise. A surety bond is a three-way contract between a surety, principal and obligee. The principal, often a construction contractor, is the surety’s client. If the principal fails to fulfill the terms of a separate contract with the principal’s customer (the obligee, often a real estate developer), then the obligee could make a claim with the surety. In 2018, Justice Michael Lema of the Alberta Court of Queen’s Bench ruled that the Guarantee remains liable to the obligee, HOOPP Realty, under the bond that The Guarantee wrote for Clark. This despite the fact that Clark as principal is not liable to HOOPP Realty as obligee. That decision was upheld in the Court of Appeal of Alberta’s unanimous ruling released Nov. 19, 2019. On the original project, Clark ultimately corrected a floor problem. But then HOOPP Realty tried to sue Clark to recover investigation, consulting and engineering costs – which were not broken down in the court ruling. That dispute dragged on for more than 10 years. The Guarantee (acquired in 2019 by Intact Financial Corporation) is arguing that a company writing a surety bond is only liable to an obligee if the principal is. If the Supreme Court of Canada grants The Guarantee leave to appeal, it means the top court could potentially reverse last year’s ruling against The Guarantee. The Supreme Court of Canada could also deny leave to appeal, meaning the Court of Appeal of Alberta ruling is final. Ultimately, HOOPP Realty’s lawsuit against Clark was dismissed without any ruling on whether Clark Builders was liable to HOOP for its claim for investigation, consulting and engineering costs. “If The Guarantee Company had intended to make its obligations conditional upon HOOPP Realty pursuing Clark Builders, it should have specified that in the bond,” the Court of Appeal of Alberta found. There was no clear wording in the surety bond that that makes the liability of The Guarantee Company contingent on the liability of Clark Builders, the Court of Appeal of Alberta observed. Instead, the bond stipulates that The Guarantee Company and Clark Builders are ‘jointly and severally’ liable under the bond. “This signals that The Guarantee Company owes freestanding obligations to HOOPP Realty under the performance bond, and that its obligations are not merely concurrent with or secondary to the obligations of Clark Builders.” The 2019 Court of Appeal of Alberta ruling – by judges Frans Slatter, Frederica Schutz and Ritu Khullar – was attributed to “the court.” In his 2018 ruling, Court of Queen’s Bench Justice Lema said the performance bond could have stipulated that if HOOPP’s cause of action against Clark is extinguished, that The Guarantee has no further liability to HOOPP. The bond also could have had any other provision clearing The Guarantee of liability if Clark obtained protection from its liability in any way. The Guarantee had argued that the joint and several liability provision of the bond was meant to ensure that if the surety makes a payment, the surety can recover from the principal. “The general surety law does not allow a surety to invoke every defence available to the principal debtor,” Justice Lema countered in his 2018 ruling. “The ‘joint and several’ clause confirms that HOOPP has a separate and distinct claim against [The Guarantee]. At worst, it does not detract from that position.”

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Construction Activity Can Signal When Credit Booms Go Wrong

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In Spain, private sector credit as a share of GDP almost doubled between 2000 and 2007. This increase was accompanied by a boom in housing prices—which doubled in real terms over the same period. The economy as a whole also grew at a record pace. But then in 2008, Spain’s credit bubble burst, and with it came loan defaults, bank failures, and a prolonged economic slowdown. A less-noticed development in Spain was in the construction sector, where employment grew by an astounding 47 percent, compared to the economy-wide increase of 27 percent. New IMF staff research, based on a large sample of advanced and emerging market economies since the 1970s, shows that long-lasting credit booms that featured rapid construction growth never ended well. New evidence on credit booms Rapid credit growth—known as “credit booms”—presents a trade-off between immediate, buoyant economic performance and the danger of a future crisis. The risk of a “bad boom”—where a rapid credit growth episode is followed by a financial crisis or subpar economic growth—increases when there is also a boom in house prices. Long-lasting credit booms that featured rapid construction growth never ended well. Our research shows that the experience with the dangerous combination of credit booms and rapid expansion in the construction sector goes beyond the Spanish borders and extends to time periods not related to the global financial crisis. We find that signals from construction activity may help to tell apart the dangerous booms, which need to be controlled, from the episodes of buoyant but healthy credit growth (“good booms”). Credit booms do not lift all boats alike During booms, output and employment expand faster. But not all sectors behave the same. Most of the extra growth is concentrated in a few industries—specifically, construction and, at a distant second, finance. However, the same industries that benefit the most during booms experience the most severe downturns during busts. This implies that credit booms tend to leave few long-term footprints on a country’s industrial composition. Construction is special Construction is the only sector that consistently behaves differently between good and bad credit booms. On average, output and employment in the construction sector grow between 2 and 3 percentage points more in bad booms than in good ones. In all other sectors, the difference is smaller and not significant (except trade, but only when it comes to output growth). What makes construction special? Construction does not have the growth potential of many other industries. In other words, too much investment in construction may divert resources away from more productive activities and result in lower output. Also, the temporary boost in construction employment and the relatively low level of skills needed may discourage some workers from investing in their education and skills. This may have long-lasting effects on output after the boom ends. Finally, construction projects have large up-front financing needs, and final consumers of the product (for example, houses or hotels) also tend to borrow to finance their purchases. As a result, debt may increase significantly more during booms led by construction. The predictive power of construction activity An unusually rapid expansion of the construction sector helps flag bad credit booms. A 1 percentage point increase in output and employment growth in the construction sector during a boom raises the probability of the boom being bad by 2 and 5 percentage points, respectively. Construction growth is also a strong predictor of the economic costs of bad booms than other variables. A 1 percentage point increase in output growth in the construction sector during a bad boom corresponds to nearly a 0.1 percentage point drop in aggregate output growth during the bust. Policy takeaways If policymakers observe a rapid expansion in the construction sector during a credit boom, they should consider tightening macroeconomic policies and using macroprudential tools (such as higher down payments for mortgages). In some cases, policy action will be triggered by other indicators, such as house prices or household mortgages. Sometimes, however, these other indicators may not sound the alarm (for example, because the construction boom is financed by the corporate sector or by foreigners), yet risks accumulate. Then, unusually rapid growth of construction could give a signal, for instance, to impose limits on banks’ exposure to real estate developers and other construction firms. Finally, given that data on output and employment in the construction sector are often available with a few months’ lag, higher-frequency indicators such as construction permit applications could act as valuable signals. Construction indicators should also be included in models that assess risks to future economic activity.

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Obscure But Important Surety and Guarantee Rules

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Texas surety law contains obscure procedural rules that can have outsized consequences. Chapter 43 of the Civil Practice and Remedies Code is an important example. Applicability This chapter applies to everything that is a “surety” as defined by the statute. The statute’s definition includes “an endorser, a guarantor, and a drawer of a draft that has been accepted; and …every other form of suretyship…” This means sureties on payment and performance bonds and even personal guarantees. Notice and Discharge A surety on a contract may send a written notice requiring the obligee to bring a suit on the contract. If the obligee fails to do so within the “first term of court” or fails to do so within the “second term of court if good cause is shown for delay” then the surety is discharged of liability. “Term of court’ is antiquated. However, that has since been construed to mean a “reasonable time.” The Priority of the Execution If a judgment is entered against a principal and a surety, then Chapter 43 requires the sheriff to first levy the principal’s property until the judgment is satisfied. If the principal does not have enough property in the county to satisfy the judgment, then the surety’s property may be levied. Subrogation The surety may also subrogate to the judgment creditor’s rights to extent the surety makes or is complelled to make payment(s) to satisfy the judgment. Waiver These rights may be waived by agreement. For this reason, these rights are often, directly or indirectly, waived. https://www.jdsupra.com/legalnews/obscure-but-important-surety-and-31078/

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Raleigh lawyer pleads guilty to lobbying-related charges after WBTV investigation [Cannon Surety]

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RALEIGH, N.C. (WBTV) – Raleigh lawyer and lobbyist Mark Bibbs pleaded guilty to six misdemeanor charges in a Wake County courtroom Monday. Bibbs was indicted on ten felony and misdemeanor charges in February 2018 following an investigation by the North Carolina Secretary of State’s Office that was prompted by a WBTV investigation. The charges included felony obstruction of justice, felony perjury and misdemeanor counts of lobbying without registration, among others. Monday’s guilty plea included a count of criminal contempt, misdemeanor obstruction of justice and four counts of lobbying without registration. Bibbs was sentenced to two years probation and is permanently banned from lobbying or practicing law, according to Wake County District Attorney Lorrin Freeman. Bibbs also must undergo a 90-day outpatient substance abuse treatment and will be subject to continuous alcohol monitoring, Freeman said. In court, Bibbs’ attorney told a judge that Bibbs had a substance abuse problem during the period in which the underlying offense conduct occurred. “We’re satisfied with this outcome inasmuch as we know that he is prohibited going forward from practicing law or being a lobbyist and we think that’s appropriate given the allegations in this meant,” Freeman told WBTV Monday afternoon. The criminal investigation began after WBTV uncovered evidence that Bibbs was lobbying at the North Carolina General Assembly on behalf of a bail bond surety company without being registered as required by law. Records previously obtained by WBTV have shown Bibbs was in frequent communication with House Speaker Tim Moore (R-Cleveland) and also in touch with then-Commissioner of Insurance Wayne Goodwin, whose agency regulated bail bond surety companies, at the time of his unregistered lobbying. That company, Cannon Surety, has since been taken over by the North Carolina Department of Insurance. Two former company employees were indicted along with Bibbs and their charges are still pending. “This guilty plea upholds the public’s right to know who is being paid to influence governmental action as well as the legislator’s right to know who is being paid to influence them,” Marshall’s statement said. Bibbs pushed back on Marshall’s comments in a statement of her own, in which he called her a “Donald Trump Democrat.” “I have just read Elaine Marshall’s windbag press release. Elaine now has the termerity and unmitigated gall to gloat over this case. As I said in open court today, thousands of lobbyists commit this registration violation each year and not one has EVER been charged, EVER,” Bibbs said. “Elaine has wasted millions of taxpayer dollars and 2 years of state employees time going after me and trying to ruin my reputation, me, a successful black lawyer who she has singled out for no good or fair reason.” Bibbs said he agreed to plead guilty as a way to help his family and because he had already decided to retire from practicing law. https://www.wbtv.com/2020/01/27/raleigh-lawyer-pleads-guilty-lobbying-related-charges-after-wbtv-investigation/

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