By Matthew Sellers
A $3 million bankruptcy battle between Hartford Accident and Indemnity and Capital Credit Union is putting surety agreements under the spotlight for insurers nationwide.
When North Dakota-based Pro-Mark Services, Inc. filed for Chapter 7 bankruptcy in April 2024, it set off a contest over more than $3.3 million held in the company’s deposit accounts at Capital Credit Union. Hartford, which had issued payment and performance bonds for Pro-Mark as required by the Miller Act, claimed that its agreements entitled it to the funds – particularly if the money was related to bonded contracts.
The dispute centers on two contracts: the General Indemnity Agreement (GIA) and the Intercreditor Collateral Agreement (ICA). The GIA, signed in July 2020, assigned to Hartford all of Pro-Mark’s rights in or related to the bonds. In December 2021, Pro-Mark entered into two business loan agreements with Capital Credit Union, secured by most of Pro-Mark’s assets, including its deposit accounts. Recognizing potential overlapping interests, Hartford and Capital Credit Union executed the ICA in July 2022. The ICA defined “Bank Priority Collateral” and “Surety Priority Collateral,” and set out how proceeds, including insurance proceeds, would be distributed between the parties.
After Pro-Mark filed for bankruptcy, Capital Credit Union placed an administrative freeze on the deposit accounts and filed a motion in bankruptcy court seeking relief from the automatic stay to set off the funds against Pro-Mark’s debt. Hartford objected, arguing that under the GIA and ICA, it had a superior claim to the funds if they were proceeds from bonded contracts. The bankruptcy court granted the credit union’s motion, focusing on the GIA and the Uniform Commercial Code as adopted in North Dakota. The court determined that Hartford did not have an enforceable interest in the deposited funds because the GIA’s assignment provision did not specifically include the word “proceeds.” As a result, the court allowed the credit union to set off the funds.
On Oct. 20, the United States Bankruptcy Appellate Panel for the Eighth Circuit reversed the bankruptcy court’s decision. The panel held that the bankruptcy court erred by not analyzing the parties’ priority positions according to the ICA, which was expressly intended to govern the priorities between Hartford and Capital Credit Union. The appellate panel emphasized that parties may contract around the provisions of the UCC, and that the ICA’s definitions and priority rules should have been the primary basis for determining rights to the funds. The case was remanded for further proceedings consistent with this opinion.
For insurance professionals, this case highlights the importance of carefully drafted intercreditor agreements and the need for courts to honor the contractual arrangements made between sophisticated parties. The outcome will depend on how the bankruptcy court applies the ICA’s terms to the facts of the case. No specific insurance policy clauses were discussed in the appellate decision, but the case underscores the critical role of indemnity and intercreditor agreements in the surety and commercial insurance context.
With the case now returning to bankruptcy court, insurers and lenders will be watching closely. The final resolution will clarify how such agreements are interpreted in bankruptcy and may influence how future deals are structured when multiple creditors have claims to the same assets. In high-stakes insolvencies, the details of your contracts remain essential.