How Will XL and BMO Harris Bank Cover Truland Losses?
Of all the decisions Robert W. Truland, chief executive of bankrupt Truland Group, and Truland's main surety, XL Specialty Insurance Co., made during the company's growth spurt, none may have been so wise as when XL, Truland and his wife, Mary, altered the terms of a surety agreement 20 months ago. In the change, the Trulands and XL agreed that the couple's $1.2-million home in Germantown, Md., was off-limits as collateral. Assets Robert co-owned with or gave to Mary and all of Robert's assets, however, would back the bonds.
Just eight months later, news broke about arc-flash problems at the National Security Agency's new federal data center in Camp Williams, Utah. Truland Group, a major electrical contractor, had a $71-million subcontract. It remains to be seen whether this problem project alone caused Truland to shut its doors with no notice on July 31.
Now, with more losses piling up since the shutdown, legal teams are scrutinizing the indemnification that was updated last year. Denver-based attorney L. Jay Labe, who has no connection to Truland Group or XL, points out that it is a typical indemnification and that, without the right to demand assets,"sureties can't take risks of this magnitude." But that doesn't stop some contractors from trying to shield or even hide assets, as did one South Carolina contractor who last year plead guilty to money laundering. Truland Group has yet to satisfy XL's demands to turn over assets or pledged collateral. And the legal teams for the Trulands, their company and XL can't agree on what the indemnification covers. The Trulands say their 401(k) is off-limits to XL, but XL says it isn't. The Trulands say they need to split off living expenses and money for lawyers and accountants; XL says this could degrade the assets.
After twice postponing the definitive account of what the company owes, Truland Group attorneys last month told the bankruptcy judge that it owes creditors $30 million.
Neither XL nor the Trulands would comment for this story.
The contractor filed for bankruptcy under Chapter 7 of the federal code, meaning it intended to liquidate and never resume work on 35 contracts it held, many not far from Truland's Reston, Va., headquarters, near Washington, D.C.
Troubled contractors and sureties often work together to finish projects and collect money from the job. Chapter 7 bankruptcies can spoil the spirit of cooperation.
"In Chapter 7, the intention isn't to remain in business, and that changes the dynamic and level of cooperation," says Joanne S. Brooks, vice president and counsel at the Surety & Fidelity Association of America. Many contractors file for bankruptcy reorganization under Chapter 11 of the federal code. This action signals their motivation to remain in business and inspires contractors to cooperate in finishing contracts and getting assets to the surety, says Brooks.
Who will win the Truland Group's assets is likely to revolve around the priority bankruptcy Judge James Cacheris assigns to different creditors. BMO Harris Bank, which also has sued the Trulands in federal court, is seeking $27 million. (The bank declined to comment on the matter.) In the same court, XL has sued the Trulands for up to $14.5 million for submitted and anticipated claims costs to finish projects.
After the bank and surety filed their lawsuits against Truland Group in early August, a brief period of relative legal peace followed. According to filings in the federal court docket, attorneys for the Trulands and XL apparently had worked out most of the terms for a restraining order under which the Trulands could sell off assets if XL agrees the assets were fairly valued.
The comparative peace was short-lived. Soon after, on Sept. 26, attorneys for Robert and Mary Truland filed replies and motions related to XL's lawsuit.
For one thing, the Trulands' lawyers argued, Robert and Mary expect to be able to split off living expenses and money needed to pay consultants. Second, the indemnifications—first executed in July 2011 and later amended—limited the Trulands' total liability to $10 million. Finally, the Trulands' retirement accounts, including a 401(k) and 408(b), are exempt from the indemnification under law in Maryland, where the Trulands reside. Maryland specifically exempts retirement accounts from claims by creditors or assignment to creditors, consistent with the federal Employee Retirement Income Security Act.