The Guarantee Company of North America USA et al v. Housing and Land Development Corporation et al

1
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
§
§
§
§
§
§
§
§
§
§
§
§
THE GUARANTEE COMPANY OF
NORTH AMERICA USA, et al.,
Plaintiffs,
Case No. 4:23-cv-01456
v.
HOUSING AND LAND
DEVELOPMENT CORPORATION, et
al.,
Defendants.
MAGISTRATE JUDGE’S REPORT AND RECOMMENDATION 1
This is a construction bond and surety case. Defendant Housing and Land
Development Corporation, Inc. d/b/a IKLO Construction (“IKLO”) entered into a
construction contract with the City of Houston (“the City”). IKLO also executed an
indemnity agreement with sureties The Guarantee Company of North America USA
and Atlantic Specialty Insurance Company (“Plaintiffs”). Plaintiffs originally filed
suit alleging IKLO and others breached the indemnity agreement. Compl., ECF
No. 1. Pending before the Court are competing motions for summary judgment.
Plaintiffs’ Motion, ECF No. 77; IKLO’s Motion, ECF No. 80. Plaintiffs seek partial
1 The district judge to whom this case is assigned referred this matter for all pretrial purposes
pursuant to 28 U.S.C. § 636. Order, ECF No. 48. A motion for summary judgment is dispositive
and therefore is appropriate for a report and recommendation. 28 U.S.C. § 636(b)(1)(A).
United States District Court
Southern District of Texas
ENTERED
December 30, 2025
Nathan Ochsner, Clerk
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 1 of 20

2
summary judgment on their breach of contract claim. ECF No. 78 at 7. IKLO seeks
summary judgment on whether Plaintiffs failed to satisfy a condition precedent,
arguing this is an essential element of Plaintiffs’ prima facie case. ECF No. 80 at 7.
Having thoroughly considered the briefing, 2 the evidence, and the applicable law,
the Court recommends denying both motions because factual disputes remain.
I. 	FACTUAL AND PROCEDURAL BACKGROUND
IKLO’s construction contract with the City required it to obtain bonds to
guarantee performance. Plaintiffs are sureties on an indemnity agreement with IKLO
and issued bonds related to the City construction project. As the work was performed
during the COVID-19 Pandemic, IKLO had trouble staffing the work, encountered
delays in obtaining materials due to supply chain issues, and encountered delays
because of the City’s use of the construction site for other purposes and delay in
approving change orders. The City terminated the contract with IKLO for non-
performance, triggering a default under the contract. The City demanded that
Plaintiffs perform under the bonds. Plaintiffs performed and sued IKLO to recover
under the indemnity agreement.
A. The Underlying Contracts
In May of 2020, IKLO entered into an Indemnity Agreement with Plaintiffs.
2 Plaintiffs filed a separate memorandum of law, ECF No. 78, and supporting evidence, ECF
No. 79. IKLO filed a response to Plaintiffs’ motion, ECF No. 85. Plaintiffs filed a response to
IKLO’s motion, ECF No. 84.
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 2 of 20

3
ECF No. 63 ¶ 17. The Indemnity Agreement, ECF No. 63-1, contains the following
relevant provisions under the title of “Security to Surety”:
As collateral security to Surety [Plaintiffs] for the agreement of
the indemnitors to repay all loss and expense to Surety, whether
heretofore or hereafter incurred, the Indemnitors [IKLO]:
1. Assign to Surety and grant a security interest to Surety in all
rights of the Indemnitors in, or in any manner growing out of:
a. all rights of the Indemnitors in all contracts referred to in the
Bonds, or secured by the Bonds and all money or property due or to
become due Indemnitors arising out of or in any way relating to
contracts 	performed 	by 	Indemnitors, 	whether 	secured 	by 	Bonds
executed 	by 	Surety 	or 	not, 	including, 	but 	not 	limited 	to, 	. 	. 	.
compensation for extra work and claims and the proceeds thereof;
. . .
h. all claims, causes of action, actions or demands and proceeds
thereof which Indemnitors may have against any subcontractor, vendor,
materialman, owner, architect, engineer, accountant or others, whether
raising out of contracts secured by Bond(s) executed by Surety or not.
. . .
This ASSIGNMENT shall be effective as of the date of this
Agreement but shall be enforceable only in the event of the occurrence
of an Event of Default. The Indemnitors hereby authorize the Surety, at
its option, to prosecute or enforce said assigned rights in the name of
the Surety or in that of the Indemnitors and to endorse and to collect in
the name of the Indemnitors or payee any . . . payment of any such
assigned rights. Surety’s exercise of any of its rights as a secured
creditor under this Agreement shall not be a waiver of any of Surety’s
legal or equitable rights or remedies, including the Surety’s rights of
subrogation.
Id. at 3–4. Under the title of “Surety’s Remedies in Event of Default,” the Indemnity
Agreement further provides that:
Surety, without notice to the Indemnitors, shall have the right, at
its sole discretion, to:
. . .
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 3 of 20

4
Assert, pursue or prosecute, in its discretion, and at the expense
of Indemnitors in the name of Principal or in the name of Surety, all
claims of Principal . . . against any person, subcontractor, supplier,
government or governmental agency arising or growing out of contracts
or work done thereunder secured by Bonds executed, provided or
procured by Surety. The Authority and power to prosecute said claims
shall include the authority to settle said claims or any part thereof on
such terms as the Surety believes to be in Surety’s best interest.
Id. at 3. Default under the Indemnity Agreement occurs by “declaration” of any
project owner, or by any “breach . . . whether actual or alleged” on “any Contract,
or any obligation contained therein.” Id. at 1. The Indemnity Agreement requires
IKLO indemnify Plaintiffs under the following circumstances:
3. In the event of any payment of any kind by the Surety, the
indemnitors further agree that the liability of the Indemnitors shall
extend to and include, and the Surety shall be entitled to charge and
recovery for, any and all disbursements made by it in good faith and
under the belief that:
a. any Principal or Indemnitor is or has been in default under or
pursuant to this Agreement;
b. the Surety was or might be liable to pay the claims asserted or
the sums paid, whether or not such liability actually existed; or
c. such payments were or are necessary and expedient, in the
Surety’s sole and absolute discretion, to protect any of the
Surety’s rights or interests or the avoid or lessen the Surety’s
liability or alleged liability, whether or not such liability,
necessity or expediency actually existed.
ECF No. 80-1 at 3 (emphasis added).
IKLO’s contract with the City to restore the Houston City Hall basement after
Hurricane Harvey (“Restoration Contract”) makes all work subject to the City
Engineer’s approval, ECF No. 37-2 at 59 (Section 4.1.10). The City Engineer’s
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 4 of 20

5
decisions on Restoration Contract questions of interpretation or performance
submitted to the Engineer are considered “final and binding on the Parties.” Id. at 59
(Section 4.1.9). Under the dispute resolution provisions, any claims or disputes must
be submitted to the City Engineer for resolution. Id. at 59–61 (Sections 4.3, 4.4). The
City Engineer’s final decision on any claim is a condition precedent to suit. Id. at 61
(Section 4.5.1).
B. Contract Performance Issues.
After IKLO began work on the Restoration Contract, and pursuant to the
Indemnity Agreement, Plaintiffs executed a performance bond in case of default,
ECF No. 35 ¶ 11. The City interfered with IKLO’s ability to perform its obligations
on several occasions, eventually resulting in the termination of the Restoration
Contract on August 17, 2022. Id. ¶¶ 12–14. The City’s notice of default stated IKLO
failed to supply enough skilled workers or proper products and failed to achieve
substantial completion by the deadline. ECF No. 80-4 at 2–3. In response, IKLO
informed the City that its actions, including delaying approving change orders and
obstructing 30% of the worksite with temporary air conditioning ducts, impeded
IKLO’s ability to perform timely. This delay impacted its schedule and ability to
keep its workers on the job in accordance with the planned schedule. Finally, the
Pandemic created supply chain issues and workforce shortages, which were beyond
IKLO’s control and provided justification for extension of the deadline to complete
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 5 of 20

6
work. ECF No. 80-6 at 2–3. IKLO further alleges that the City Engineer’s decision
to terminate was improper and made in bad faith. ECF No. 35 ¶¶ 23–24.
Upon 	receipt 	of 	the 	City’s 	notices 	of 	alleged 	deficiencies 	under 	the
Restoration Contract, Plaintiff retained J.S. Held to investigate the project, its status,
and the alleged deficiencies. ECF No. 63 ¶ 30; see also ECF No. 63-2 at 3. This
included investigating the City’s default allegations, evaluating any responses or
defenses IKLO raised, and communicating with the City about the investigation as
it unfolded. ECF No. 79 at 96–97. J.S. Held generally evaluated the state of the
project, what was left outstanding on the Restoration Contract, and expected costs
to complete those outstanding items. Id. at 99. J.S. Held concluded that the City was
not in breach because IKLO had not provided sufficient information for the
investigators “to be sure that the City was in breach.” Id. at 109. Based on this
conclusion, Plaintiffs then paid J.S Held to hire a replacement contractor to finish
the construction project for the City. ECF No. 63 ¶ 32.
II. 	SUMMARY JUDGMENT STANDRAD.
Summary judgment is appropriate when the movant has established that the
pleadings, affidavits, and other evidence available to the court demonstrate that no
genuine issue of material fact exists, and the movant is thus entitled to judgment as
a matter of law. FED. R. CIV. P. 56(c). “A genuine dispute of material fact exists
when the ‘evidence is such that a reasonable jury could return a verdict for the
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 6 of 20

7
nonmoving party.’” Bennett v. Hartford Ins. Co. of Midwest, 890 F.3d 597, 604 (5th
Cir. 2018) (internal quotation omitted). A fact is material “if and only if proof of its
existence might affect the outcome of the case.” Roy v. City of Monroe, 950 F.3d
245, 254 (5th Cir. 2020). “Once the moving party has initially shown ‘that there is
an absence of evidence to support the non-moving party’s cause,’ the non-movant
must come forward with ‘specific facts’ showing a genuine factual issue for trial.”
Hous. v. Tex. Dep’t of Agric., 17 F.4th 576, 581 (5th Cir. 2021) (quoting TIG Ins.
Co. v. Sedgwick James of Washington, 276 F.3d 754, 759 (5th Cir. 2002)).
“Summary judgment cannot be defeated through ‘[c]onclusional allegations
and denials, speculation, improbable inferences, unsubstantiated assertions, and
legalistic argumentation.’” Acker v. Gen. Motors, L.L.C., 853 F.3d 784, 788 (5th Cir.
2017) (quoting Oliver v. Scott, 276 F.3d 736, 744 (5th Cir. 2002)). When ruling on
a motion for summary judgment, the Court views all facts and inferences in the light
most favorable to the nonmoving party and resolves all disputed facts in favor of the
nonmoving party. Rodriguez v. City of Laredo, 459 F. Supp. 3d 809, 814 (S.D. Tex.
2020). The Court “may not make credibility determinations or weigh the evidence”
in ruling on a summary-judgment motion. 	Id. (quoting 	Reeves v. Sanderson
Plumbing Prods., Inc., 530 U.S. 133, 150 (2000)).
III. 	IKLO’S EVIDENTIARY OBJECTIONS.
IKLO raises multiple objections to Plaintiffs’ summary judgment evidence.
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 7 of 20

8
ECF No. 85 at 9–12. IKLO objects to paragraphs 3–11 of Plaintiffs’ Exhibit B as
inadmissible hearsay. Id. at 9–10. Exhibit B is a declaration from Kelly Roeschke,
Vice President for J.S. Held, the company Plaintiffs hired to consult on investigating
the City’s claims against IKLO. ECF No. 79 at 49. IKLO asserts that Roeschke’s
statements are based on out-of-court records that she relied on to prove the truth of
her statements, but those records are not specifically identified or provided,
preventing IKLO from being able to evaluate whether those documents are
themselves objectionable. ECF No. 85 at 9–10; see also ECF No. 79 at 49.
Hearsay is an inadmissible statement that “the declarant does not make while
testifying at the current trial or hearing” that is offered “in evidence to prove the
truth of the matter asserted in the statement.” FED. R. E VID. 801(c), 802. An
exception to hearsay applies when a qualified witness establishes that the records are
“kept in the course of a regularly conducted activity of a business” and making that
record is a regular practice of that business. FED. R. E VID. 803(6). A qualified witness
can be a designated records custodian, or another qualified witness who can explain
the 	organization’s 	record 	keeping 	system 	and 	confirm 	that 	the 	Rule 	803(6)
requirements are met. Weinhoffer v. Davie Shoring, Inc., 23 F.4th 579, 583 (5th Cir.
2022) (quoting United States v. Iredia, 866 F.2d 114, 120 (5th Cir. 1989)). It is not
apparent from her declaration, however, that Roeschke is qualified under either
definition. The statements at issue are therefore inadmissible hearsay and IKLO’s
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 8 of 20

9
objections to paragraphs 3–11 of Roeschke’s declaration are sustained.
IKLO’s next objection is to Plaintiffs’ Exhibit A-3 as vague, confusing,
misleading, and unfairly prejudicial in violation of Federal Rule of Evidence 403.
ECF No. 85 at 10–11. Plaintiffs describe Exhibit A-3 as “loss statements,” ECF
No. 79 at 1, and the exhibit appears to be a summary of itemized billing statements
related to the Restoration Contract. ECF No. 79 at 43–47. Nothing else is provided.
Excluding “probative evidence under Rule 403 is ‘an extraordinary remedy that must
be used sparingly.’” Gibson, Inc. v. Armadillo Distrib. Enters., Inc., 107 F.4th 441,
450 (5th Cir. 2024), as revised (Aug. 8, 2024) (quoting Herrington v. Hiller, 883
F.2d 411, 414 (5th Cir. 1989)). Courts evaluating an objection based on Rule 403
must “balance the proffered evidence with the risk of countervailing concerns.” Id.
Before weighing IKLO’s Rule 403 objections, the Court must decide the
preliminary question of the evidence’s admissibility. F ED. R. E VID. 104(a). The
Court finds that the summary is inadmissible because Plaintiffs have failed to satisfy
the requirements of summaries being used to prove content. A party seeking to use
such a summary “must make the underlying originals or duplicates available for
examination or copying, or both, by other parties at a reasonable time and place.”
FED. R. E VID. 1006(b) (emphasis added). Plaintiffs failed to show that the originals
have been made available to Defendant. The evidence therefore must be excluded.
FED. R. E VID. 104(a), 1006(b). IKLO’s objection is sustained and the evidence is
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 9 of 20

10
excluded for summary judgment purposes.
IKLO’s final objection is to Plaintiffs’ Exhibits C and C-1 as unsupported by
binding authority. ECF No. 85 at 11–12. Exhibit C is a declaration by Plaintiffs’
counsel, and Exhibit C-1 is a detailed billing statement of work performed by
counsel on this matter. ECF No. 79 at 54–87. Both are offered in support of
attorneys’ fees. ECF No. 78 at 28–29. IKLO objects to the exhibits for “fail[ing] to
include any binding authority to support their claims for attorney’s fees under Texas
law,” apparently within the exhibits themselves. ECF No. 85 at 11–12. IKLO does
not cite to, nor is the Court able to find, authority requiring a party seeking attorney’s
fees to include a reference to binding authority within the exhibits themselves. The
objection is therefore overruled.
IV. 	FACT 	QUESTIONS 	RENDER 	SUMMARY 	JUDGMENT
IMPROPER.
Federal courts sitting in diversity are required to apply the substantive state
law of the forum state. NGM Ins. Co. v. Benchmark Util. Contractors, Inc.,
No. SA19CA221FBHJB, 2020 WL 7973920, at *2 (W.D. Tex. Feb. 21, 2020)
(citing Klocke v. Watson, 936 F.3d 240, 244 (5th Cir. 2019) (citing Hanna v. Plumer,
380 U.S. 460, 465 (1965))). Under Texas law, to prevail on summary judgment in
an indemnity action, the movant must establish the following five prima facie
elements: (1) there was a contractual indemnity agreement between the parties;
(2) the agreement obligates the defendant to indemnify the plaintiff if claims were
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 10 of 20

11
made on the bonds plaintiff issued; (3) claims were made on the bonds issued; (4) all
conditions precedent to recovery had occurred or were performed, waived, or
excused; and (5) the plaintiff suffered damages. Great Am. Ins. Co. v. Salem Group,
Inc., No. 4:22-CV-01609, 2023 WL 5944098, at *3 (S.D. Tex. Sept. 11, 2023)
(citing Transamerica Ins. Co. v. Avenell, 66 F.3d 715, 719 (5th Cir. 1995)); Phila.
Indem. Ins. Co. v. Mendiola, No. 4:20-CV-981, 2021 WL 9031095, at *4 (S.D. Tex.
Dec. 22, 2021) (same); Allied World Ins. Co. v. Am. W. Steel, LLC, No. CV H-17-
3608, 2018 WL 6602153, at *2 (S.D. Tex. Dec. 17, 2018) (same); AXA Corp. Sols.
v. Lectrus Corp., No. 4:15-CV-3606, 2016 WL 6601049, at *3 (S.D. Tex. Nov. 8,
2016) (same); Palestine Water Well Serv., Inc. v. Wash. Int’l Ins. Co., No. DR: 15-
CV-016-AF-CW, 2015 WL 12910046, at *18 (W.D. Tex. Sept. 30, 2015) (same).
These requirements go beyond the elements in a standard breach of contract
claim, on which Plaintiffs primarily rest. ECF No. 78 at 20–23; see Valley Forge,
Inc. v. CK Constr., Inc., 677 S.W.3d 127, 132 (Tex. App.—El Paso 2023, no pet.)
(quoting Pathfinder Oil & Gas, Inc. v. Great W. Drilling, Ltd., 574 S.W.3d 882, 890
(Tex. 2019)). Because these elements are specific to claims for a breach of indemnity
agreement such as the one underlying the instant case—and because the Fifth Circuit
has found that these are the required elements for such a claim under Texas law—
the Court applies the more specific elements in deciding the instant motions, rather
than the standard breach of contract elements. See Great Am. Ins. Co., 2023 WL
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 11 of 20

12
5944098, at *3. Plaintiffs did allege in their Complaint that all conditions precedent
were satisfied, ECF No. 63 ¶ 33. However, their motion for summary judgment
focuses primarily on why the good faith question is irrelevant, ECF No. 78 at 23–
24, and even if it is relevant, they satisfied the good faith requirement because their
investigation was sufficiently reasonable, id. at 24–28.
A. Good 	Faith 	Is 	A 	Condition 	Precedent 	Under 	The 	Surety
Agreement.
In Texas, indemnity agreements are construed under the normal rules of
contract construction and strictly in favor of the indemnitors. Great Am. Ins. Co.,
2023 WL 5944098, at *4. Where an indemnity agreement contains language
requiring a surety to settle claims in good faith, the Texas Supreme Court has held
that doing so is a condition precedent to recovery under an indemnity agreement. Id.
(citing Associated Indem. Corp. v. CAT Contracting, Inc., 964 S.W.2d 276, 285
(Tex. 1998)).
Here, the Surety Agreement states Plaintiffs are entitled to recover for “all
disbursements made by [them] in good faith.” ECF No. 80-1 at 3 (emphasis added).
Therefore, settling the disbursements in good faith is a condition precedent to
recover under Texas law. Plaintiffs’ motion for partial summary judgment fails
because it relies on the general breach of contract standard and fails to establish that
“conditions precedent to recovery had occurred or were performed, waived, or
excused.” Great Am. Ins. Co., 2023 WL 5944098, at *3. Instead, they seek to
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 12 of 20

13
disclaim its relevance, ECF No. 78 at 23–24, and claim that even if good faith is
somehow relevant, it was nevertheless satisfied by the in-depth investigation, id. at
24–28. Plaintiffs’ argument ignores the Fifth Circuit’s holding that good faith is a
condition precedent and must be shown under Texas law and must fail. See Great
Am. Ins. Co., 2023 WL 5944098, at *3–4. Their second argument that their in-depth
investigation satisfies good faith fails because of the fact questions described in
greater detail below.
B. Fact Questions Preclude Summary Judgment On The Issue Of
Whether The Disbursements Were In Made Good Faith.
IKLO argues that Plaintiffs failed to show they made their disbursements in
good faith and therefore failed to show that all conditions precedent had occurred,
been performed, were waived, or were excused. ECF No. 80 at 23–27. 3 Instead,
IKLO asserts that Plaintiffs willfully ignored relevant facts, including the City’s
breach of the Restoration Contract, the Restoration Contract provision allowing
IKLO to request an extension when a delay in performance “‘arises from causes
beyond control and without fault or negligence of [IKLO],’” and the COVID-19
Pandemic’s workforce and supply chain impacts were causes beyond its control,
fault, or negligence. Id. at 25–26. 4 IKLO’s position is they are entitled to summary
3 Plaintiffs asserted that all conditions precedent were satisfied in their Amended Complaint. ECF
No. 63 at ¶ 33. IKLO denied this in their Answer. ECF No. 13 at ¶ 37.
4 IKLO suggests that because no Texas courts have defined “willful ignorance” in the surety
context, the Court should borrow the United States Supreme Court’s definition of “willful
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 13 of 20

14
judgment because Plaintiffs cannot show one of their prima facie elements.
Plaintiffs argue that, even if they had to show good faith, they did so.
According to Plaintiffs, the only limit on their conduct is they cannot engage in
fraudulent behavior, since the Indemnity Agreement requires IKLO to reimburse for
good faith disbursement regardless of whether there is actually liability, and
Plaintiffs did not engage in fraudulent conduct. ECF No. 78 at 24 (citing CAT
Contracting, Inc., 964 S.W.2d at 284). Plaintiffs further assert that there was no
obligation 	to 	conduct 	a 	reasonable 	investigation 	and 	any 	alleged 	failure 	to
sufficiently investigate the claim is immaterial under the Indemnity Agreement.
Finally, Plaintiffs argue that the bond claims were settled in good faith. Id. at 24–28.
The Texas Supreme Court has defined the standards of good faith and bad
faith as related to surety agreements. “Good faith” means “‘conduct which is honest
blindness” in a patent infringement case addressing the alleged infringer’s knowledge of an
existing patent. ECF No. 80 at 23 (citing Glob.-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754,
131 S. Ct. 2060, 179 L. Ed. 2d 1167 (2011)). However, Texas courts apply a plain meaning, fact-
specific analysis of the term in other areas of the law where it is similarly undefined. See, e.g.,
Teligistics, Inc. v. Advanced Pers. Computing, Inc., No. 14-23-00953-CV, 2025 WL 3032943, at
*9–11 (Tex. App.—Houston [14th Dist.] Oct. 30, 2025, no pet. h.) (discussing a jury finding of
bad faith in violation of the Texas Uniform Trade Secrets Act based on “willful ignorance” of facts
but not defining the term); Marshall as Tr. of Marshall Grandchildren's Tr. v. Marshall, No. 14-
23-00276-CV, 2025 WL 3165810, at *13 (Tex. App.—Houston [14th Dist.] Nov. 13, 2025,
no pet. h.) (analyzing a trustee’s duty of good faith and noting that the Texas Supreme Court had
previously held that “good faith” in the context of the government official immunity defense
“meant conduct that is ‘honest in fact and is free of both improper motive and willful ignorance of
the facts at hand’”) (citing R.R. Comm’n of Tex. v. Gulf Energy Expl. Corp., 482 S.W.3d 559, 568–
69 (Tex. 2016)); Frenkel v. Courtney, No. 05-21-01114-CV, 2023 WL 3914549, at *6 (Tex. App.—
Dallas June 9, 2023, pet. denied) (addressing courts’ inherent authority to sanction attorneys for
bad faith behavior and including willful ignorance of the facts as a basis for finding bad faith)
(citing Brewer v. Lennox Hearth Products, LLC, 601 S.W.3d 704, 718–719 (Tex. 2020)).
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 14 of 20

15
in fact, free of improper motive or willful ignorance of the facts at hand.’” NGM
Ins., 2020 WL 7973920, at *5 (quoting CAT Contracting, Inc., 964 S.W.2d at 285).
“Bad faith” is the corollary “‘more than merely negligent or unreasonable conduct;
it requires proof of an improper motive or willful ignorance of the facts.’” Id. A
surety need not show proof of a “reasonable” investigation to meet the bar of acting
in good faith. Id. Whether a surety acted in good faith is a question of fact. See, e.g.,
Palestine Water, 2015 WL 12910046, at *7–9 (granting a surety summary judgment
where principal failed to produce evidence of surety settling claims in bad faith).
To defeat summary judgment, IKLO must raise a question of material fact as
to whether the Plaintiffs made the bond payment in good faith. The Surety
Agreement provides that “[a]n itemized statement of loss and expense incurred by
[Plaintiffs] . . . shall be prima facie evidence of the fact and extent” of IKLO’s
liability to Plaintiffs. ECF No. 80-1 at 3. Here, the Plaintiff’s itemized statement has
been struck and therefore it presents no itemized evidence to establish the amount of
the payments made. See supra at Part III. Notwithstanding the lack of evidence, as
the court found in Palestine Water, such provisions are not entirely conclusive, but
instead “shift the burden of production—but not the burden of persuasion—to
[IKLO] to demonstrate what would essentially amount to bad faith.” 2015 WL
12910046, at *8 (citing CAT Contracting, Inc., 964 S.W.2d at 283 n.5).
To show lack of good faith, IKLO argues Plaintiffs willfully ignored the
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 15 of 20

16
COVID-19 Pandemic’s impact on workforce availability and supply chains as well
as the City’s breach on the Restoration Contract. ECF No. 80 at 24–26. Plaintiffs
disagree, arguing they “undertook an in-depth investigation of the claims [the City]
asserted” and determined that IKLO’s defenses to breaching the contract with the
City could not be substantiated. ECF No. 78 at 27–28.
IKLO produces evidence that tends to support finding a fact question on
whether Plaintiffs disbursed payment on the bond claims in good faith. ECF No. 80
at 24–27 (citing ECF Nos. 80-8 at 21 (74:6–14, 75:11–23), 26 (94:25–95:13)). IKLO
shows that Plaintiffs had relevant information concerning the City’s alleged breaches
at the time of making disbursements on the City’s claims to the bonds. IKLO cites
the deposition testimony of Ashlee Rudnick, a lawyer and the claims manager
Plaintiffs assigned to investigate the City’s claim. ECF No. 80-8 at 6 (14:3–5), 12
(40:15–23). Rudnick testified she recalled conversations with J.S. Held about
IKLO’s contention that the City breached the Restoration Contract when it failed “to
provide the proper space and availability of area for the work to be performed”
because ductwork the City installed obstructed more than 30% of the workspace,
impeding IKLO’s ability to perform under the contract. Id. at 18; ECF No. 80-8 at
22 (78:11–79:12). She also testified she discussed the COVID-19 Pandemic’s
project impacts with IKLO and the City, referring to the Restoration Contract
provision requiring time extensions for epidemics. ECF No. 80-8 at 26 (94:25–
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 16 of 20

17
95:13, 96:6–17). She further testified that Plaintiffs considered the City’s potential
breaches in deciding to disburse on the bonds, ultimately determining that IKLO
lacked “sufficient evidence to show that [the City was] in breach.” Id. at 29 (108:18–
109:15).
Defendant also argues that Rudnick is a lawyer who was charged with making
the determination whether the City or IKLO was in breach, but instead of making
her own legal analysis based on the facts, she relied on the non-lawyer J.S. Held
investigators to make the determination of who was in breach and whether the Surety
was liable for payment. ECF Nos. 80 at 18–19; 80-8 at 17 (58:6–59:1, 59:22–60:2,
60:21–61:6), 18 (63:2–12). Furthermore, J.S. Held had an interest in finding a breach
because it was then paid to hire and supervise the contractor that replaced IKLO.
ECF No. 79 at 28 (“[Surety] hired J.S. Held to investigate the project status and to
oversee completion of the project takeover”); see also ECF No. 80-8 at 37 (138:16–
23) (deposition testimony explaining that J.S. Held conducted analysis of bids from
contractors to replace IKLO); 39 (146:13–15) (deposition testimony stating that J.S.
Held would have the answer to what the punch list items were during the project).
In addition, IKLO produced a letter it sent to the City in June 2022 outlining the
various impediments outside of IKLO’s control: ducting work blocking IKLO’s
access, slow responses to change proposals, and the COVID-19 Pandemic’s impacts.
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 17 of 20

18
ECF No. 80-6 at 2–3. 5 All this evidence, according to IKLO, raises a fact question
about whether Plaintiffs showed they satisfied the condition precedent of good faith
disbursement.
In 	contrast, 	Plaintiffs 	argue 	that 	their 	evidence 	shows 	they 	made 	the
disbursements in good faith, arguing that they did not willfully ignore the facts, but
instead determined IKLO “failed to substantiate [their] defenses to the City’s claim”
after a lengthy, in-depth investigation. ECF No. 78 at 27–28 (citing ECF No. 79
at 100–01 (63:20–64:8)).
The Court finds that this raises a factual dispute, because IKLO has produced
evidence calling into question whether, in deciding to disburse on the City’s claims,
Rudnick or Plaintiffs willfully ignored the facts about the project limitations the City
and the Pandemic caused, a question central to Plaintiffs’ prima facie case. Great
Am. Ins. Co., 2023 WL 5944098, at *3–4. Under the terms of the Restoration
Contract, if the City prevented IKLO from performing, that constituted a breach. See
ECF No. 80-2 at 51 (“When necessary for performance of the Work, the City will
provide . . . horizontal and vertical control adequate to lay out the work.”); 65
(provision noting that if the City were to have additional contractors performing
work, then “[t]he City will coordinate activities of the City’s workforce and of each
5 It is reasonable for the Court to infer that the letter or its contents was revealed during Rudnick’s
investigation because she testified that the letter’s subject matter was raised. ECF No. 80-8 at 22
(78:11–79:12), 26 (94:25–95:13, 96:6–17).
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 18 of 20

19
separate contractor with work of Contractor”). In that case, there is a fact question
about whether IKLO’s defenses were valid. 6
The evidence produced raises a fact question as to whether Plaintiffs’ decision
was in good or bad faith. Unlike in Palestine Water, IKLO has produced evidence
tending to support that there is at least a question regarding Plaintiffs’ potential
willful ignorance of the facts. The Court therefore recommends denying both
Plaintiffs’ motion for partial summary judgment and Defendants’ motion for
summary judgment.
V. 	CONCLUSION
Accordingly, the Court RECOMMENDS 	that the pending motions for
summary judgment, ECF Nos. 77 and 80, be DENIED.
The 	Parties 	have 	fourteen 	days 	from 	service 	of 	this 	Report 	and
Recommendation to file written objections. 28 U.S.C. § 636(b)(1)(C); Fed.
R. Civ. P. 72(b). Failure to file timely objections will preclude appellate review
6 The fact that the City granted a retroactive extension suggests that the delays the City caused
impeded IKLO’s ability to perform and IKLO was entitled to extensions during the process. ECF
No. 80-9 at 2–3. This further fact question is relevant to the ultimate outcome of this matter
because, if the City agreed that IKLO was entitled to an extension for circumstances outside of
IKLO’s control, it raises an inference that Plaintiffs’ determination may have been in bad faith.
The same is true of the fact that the contractors hired to complete the roughly 25% of the project
left after IKLO was fired charged $2.96 million—approximately 75% of the total contract price
for the entire project between the City and IKLO and discussed the pandemic’s impact on supply
chain and workforce issues, consistent with IKLO’s reasons for failing to perform timely. ECF
No. 80-8 at 36 (137:2–10).
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 19 of 20

20
of factual findings or legal conclusions, except for plain error. Ortiz v. San
Antonio Fire Dep’t, 806 F.3d 822, 825 (5th Cir. 2015).
Signed on December 29, 2025, at Houston, Texas.
________________________________
Dena Hanovice Palermo
United States Magistrate Judge
,
_____________________________
Dena Hanovice Palermo
United States Magistrate Judge
Case 4:23-cv-01456 Document 93 Filed 12/30/25 in TXSD Page 20 of 20