No Bond Coverage for Financing Disguised as Sale–Leaseback; Surety May Invoke Parol Evidence as a “Stranger”; Prevailing Defendants Can Recover § 936 Fees Based on Suit’s Gravamen

Introduction

In Insight Investments, LLC v. North American Specialty Insurance Company, Nos. 24-6068 & 24-6076 (10th Cir. Sept. 25, 2025), the Tenth Circuit resolved three recurring questions in construction surety and Oklahoma fee-shifting litigation:

• Whether a financier that purchases a completed asset and leases it back to the subcontractor qualifies as a “claimant” under a subcontract labor-and-material payment bond;
• Whether the parol-evidence rule precludes a surety—who is not a party to a separate financing/lease agreement—from presenting extrinsic evidence of the parties’ true relationship; and
• Whether a prevailing defendant is entitled to attorney fees under Okla. Stat. tit. 12, § 936(A) when the plaintiff’s suit seeks recovery for labor or services but fails on the merits.

The underlying project involved a modular building used as a temporary medical clinic on Vance Air Force Base during renovation of the permanent clinic. The prime contractor (United Excel) required its subcontractor, Icon Construction, Inc. (Sub), to furnish a payment bond from North American Specialty Insurance Company (NASIC) protecting claimants providing labor or materials to Sub. Insight Investments later entered a sale–leaseback with Sub, advanced cash, and, when not repaid, claimed under the bond. NASIC denied coverage on the ground that Insight provided financing, not labor or materials. The district court granted summary judgment to NASIC and later denied NASIC’s fee request under § 936.

On appeal, the Tenth Circuit affirmed summary judgment for NASIC, held that the parol-evidence rule does not bar a non-party surety from introducing extrinsic evidence (the “stranger exception”), and reversed the denial of prevailing-party attorney fees under § 936(A), remanding for a fee determination. Judge Eid concurred on the merits but dissented from the fee ruling.

Although issued as an Order and Judgment (nonprecedential except under law-of-the-case, res judicata, and collateral estoppel), the decision is citable for persuasive value and clarifies doctrine in three important areas.

Summary of the Opinion

• Bond Coverage: Financing is not “labor or material.” A party that advances money through a sale–leaseback of a completed asset does not qualify as a “claimant” under a subcontract labor-and-material payment bond. The module (the project’s end product) is not “equipment,” and, in any event, was not “used or reasonably required for use in the performance” of the subcontract.
• Parol Evidence: The parol-evidence rule binds only parties (and true privies) to the instrument. A surety, as a non-party to the separate sale–leaseback, could introduce extrinsic evidence establishing the transaction’s true nature (financing), notwithstanding the agreement’s “lease” label.
• Attorney Fees: Under Okla. Stat. tit. 12, § 936(A), the “underlying nature” or “gravamen” of the suit controls fee eligibility. Because Insight’s suit sought to recover for labor/material under a payment bond—even though Insight ultimately proved to be a financier and lost—NASIC, as the prevailing party, is entitled to reasonable attorney fees. The majority rejected a contrary reading that would effectively award fees only to plaintiffs. Judge Eid dissented on this point, arguing § 936 applies only when labor/services were actually rendered under a direct contract and the claim is not collateral.

Analysis

Precedents and Authorities Cited

• Financing vs. Labor/Materials:
  • Rockwell Bros. & Co. v. Keatley (Okla. 1915): A labor-and-material payment bond is not “broad enough” to cover money loaned to the contractor; it protects those who supply labor or materials, not parties advancing money.
  • First Nat’l Bank v. Southern Surety Co. (Okla. 1916): Aligns with the “great weight of authority” that borrowed funds fall outside labor/material coverage.
  • First Nat’l Bank v. O’Neil (Minn. 1929): Uniform rule—bonds for labor/material do not protect those who loan or advance funds to pay such claims.
  • Wasatch Bank v. Surety Ins. Co. of Cal. (Utah 1985): A surety’s liability cannot be expanded to cover loans/advances absent assent; lenders assume the risk of default unless they obtain surety consent.
  • Whale v. Rice (Okla. 1935): Surety liability is strictly limited to the bond’s terms and cannot be extended by implication.
  • Barbero v. Equitable Gen. Ins. Co. (Okla. 1980): Materialmen supplying “all labor and materials” may recover; contrasted with Insight’s purely financial role.
  • U.S. ex rel. Morgan Buildings & Spas, Inc. v. BKJ Solutions, Inc. (W.D. Okla. 2012): Claimant who constructed and installed modular buildings at the site was covered; distinguishable because Insight did not furnish labor or materials.
  • U.S. ex rel. Pileco, Inc. v. Slurry Systems, Inc. (7th Cir. 2015): Equipment lessor as subcontractor covered; distinguishable—actual equipment leased to perform work versus post hoc financing of an end product.
  • Flintco, LLC v. Total Installation Mgmt. Specialists, Inc. (Okla. 2025): Bond terms construed by their plain meaning, supporting the narrow reading of “equipment.”
• Parol Evidence—Stranger Exception:
  • Okla. Stat. tit. 15, § 137; First Nat’l Bank in Durant v. Honey Creek Ent. Corp. (Okla. 2002): Parol evidence cannot vary an integrated writing—between the parties.
  • In re Assessment of Alleged Omitted Property of Kennedy for Taxation in Osage County (Okla. 1936): Parol-evidence rule “has no application” in controversies between a party to an instrument and a stranger; the stranger may show the “true character” of the transaction.
  • Fulton v. L & N Consultants, Inc. (10th Cir. 1982) (applying Oklahoma law): Parol evidence rule binds parties and their narrow “privies,” not strangers with independent interests.
  • In re McClain (10th Cir. 1971): Trustee (a third party) could offer parol evidence to attack a security interest; rule applies only to contracting parties.
• Fee-Shifting under § 936(A):
  • Statute: Okla. Stat. tit. 12, § 936(A) requires fee awards to the prevailing party “[i]n any civil action to recover for labor or services rendered,” among other categories.
  • ABC Coating Co. v. J. Harris & Sons Ltd. (Okla. 1987): Fee entitlement turns on the “underlying nature” of the suit; distinguishes suits directly seeking payment for labor/services from those merely collateral.
  • Burrows Constr. Co. v. ISD No. 2 (Okla. 1985): Claim for lost profits (purchasing-agent designation) was collateral to labor/services; § 936 did not apply.
  • Kay v. Venezuelan Sun Oil Co. (Okla. 1991): Royalty-assignment dispute was collateral; reaffirmed that the “gravamen” controls § 936 applicability.
  • Nayles v. Dodson (Okla. Civ. App. 2020): Intermediate appellate language stating that a § 936 “labor and services” claim must centrally involve “labor and services actually rendered.” The majority reads Nayles as addressing what must be claimed, not proved; the dissent reads it to require actual labor/services for fee eligibility.
• Public Project Context:
  • Miller Act, 40 U.S.C. § 3131(b): Requires payment bonds to protect providers of labor and materials on federal public works (where liens are unavailable). Oklahoma’s “Little Miller Act” mirrors this policy (Okla. Stat. tit. 61, §§ 1–2).

Legal Reasoning

1) Financing Is Not “Labor or Material”; the End Product Is Not “Equipment” Used to Perform the Work

The bond defined “claimant” as a party in direct contract with the subcontractor “for labor, material, or both … used or reasonably required for use in the performance of the subcontract,” including certain utilities and “rental of equipment.” Insight stipulated that it “did not manufacture, deliver, or install” the module. The undisputed documentary record—the parties’ emails and the transactional documents—demonstrated that Insight advanced cash and received assigned rents and a remarketing interest: classic project financing.

The court held that the module—the end product of the subcontract—was not “equipment” within the bond’s ordinary meaning (implements or tools used in the work). Even if it were, it was not “used or reasonably required for use in the performance of the subcontract”—the module did not build itself. Accepting Insight’s theory would let a subcontractor unilaterally expand a surety’s exposure by “selling” and leasing back the finished asset, effectively converting a labor/material bond into a guaranty of financing. Surety obligations cannot be expanded beyond the bond’s terms.

2) The Parol-Evidence “Stranger Exception” Permits a Surety to Prove the Transaction’s True Nature

Insight invoked the parol-evidence rule to bind NASIC to the sale–leaseback’s “lease” label. The court rejected this, applying Oklahoma’s longstanding “stranger exception”: because NASIC was not a party (and not a privy aligned with protecting that contract’s terms), it could introduce extrinsic evidence demonstrating the economic realities of the Insight–Icon relationship. The court analogized to tests that look beyond labels to substance (e.g., employee vs. independent contractor), concluding that this was financing, not a materials or equipment lease connected to project performance.

3) Prevailing-Party Attorney Fees Under § 936 Turn on the Suit’s Gravamen, Not the Plaintiff’s Success in Proving Labor/Services

The district court denied NASIC’s fee request because Insight ultimately did not render labor or services. The Tenth Circuit reversed, emphasizing Oklahoma Supreme Court authority that “the underlying nature of the suit” controls. Insight’s complaint alleged it supplied the module, was a claimant under the bond, and sought payment—i.e., it brought “an action to recover for labor or services” within § 936’s scope. Having prevailed, NASIC qualifies for fees even though the facts proved Insight did not perform labor or furnish materials.

The majority distinguished cases denying fees where the claims were collateral to labor/services (Russell, Burrows, ABC Coating, Kay). It read Nayles as addressing the kind of claim asserted (a claim “for” labor/services as opposed to “relating to” a goods sale), not imposing an “actual performance” prerequisite that would preclude fee awards to prevailing defendants. The majority also invoked the avoidance of absurd results: a contrary reading would asymmetrically benefit only plaintiffs who sue for labor/services, never allowing prevailing defendants to recover fees.

Judge Eid dissented on fees, reasoning that § 936 should be strictly applied consistent with Oklahoma’s American Rule and that prior cases require (i) a direct contract and (ii) labor/services actually rendered, with claims against a surety on a separate bond being collateral. The majority responded that Oklahoma’s “gravamen” test focuses on what the suit seeks to recover, not on proof of actual labor/services, and that defendants routinely receive § 936 fees in appropriate cases.

Impact and Practical Implications

For Project Financiers, Sale–Leaseback Participants, and Factors

• Payment bonds do not insure repayment of monies advanced, even when a deal is styled as a sale–leaseback. Courts will look through labels to economic substance.
• Financiers should not expect coverage as “claimants” unless they:
  • Directly furnish labor, materials, or qualifying equipment used to perform the work; and
  • Ensure the arrangement is in substance an equipment lease used in performance, with the surety’s informed consent if necessary.
• Risk management: obtain separate credit support (e.g., guarantees), UCC security interests in receivables/equipment, direct agreements with primes/owners, or explicit surety riders acknowledging coverage. Absent that, financing risk remains with the lender.

For Sureties

• This decision reinforces the principle that bond liability is strictly limited by the instrument’s terms. Sureties can invoke the parol-evidence “stranger exception” to rebut relabeling efforts and to show financing masquerading as supply.
• Expect increased use of “economic realities” arguments and extrinsic evidence at summary judgment to defeat non-traditional “claimant” theories.

For Contractors and Subcontractors

• Efforts to monetize a completed asset (e.g., sale–leaseback) do not transform a financier into a labor/material supplier under a payment bond.
• Assignments of rents or receivables to a financier will not bind a surety absent clear bond terms or surety consent. Plan cashflow and security accordingly.

For Litigators—Attorney Fees Under § 936

• Under the Tenth Circuit’s reading of Oklahoma law, defendants prevailing in suits “to recover for labor or services” can obtain § 936 fees even where the plaintiff fails to prove labor/services were actually rendered.
• Pleadings matter. Courts will examine the gravamen of the complaint to determine whether the suit falls within § 936, even if the action also asserts bad faith, quasi-contract, or other theories.
• Beware collateral claims (e.g., warranty, trade secrets, royalty assignments): they typically fall outside § 936. Frame claims and defenses with the gravamen test in mind.

Complex Concepts Simplified

Payment Bonds vs. Performance Bonds

A performance bond guarantees completion of the work; a payment bond guarantees payment to those who supply labor or materials used to perform the work. Payment bonds are vital on public projects where mechanics’ liens are unavailable.

Who Is a “Claimant” on a Payment Bond?

A “claimant” typically must have a direct contract with the bonded contractor or subcontractor to furnish labor, materials, or qualifying equipment used in performing the bonded scope. Financing or advancing money is not within that definition.

Parol-Evidence Rule and the “Stranger Exception”

The parol-evidence rule prevents parties to a written contract from using prior or contemporaneous oral or written statements to contradict the contract’s terms. But non-parties (“strangers”) are not bound by this rule; they may offer extrinsic evidence to show the true nature of the transaction when their rights are affected.

“Equipment Rental” vs. Sale of an End Product

“Equipment” in bond forms refers to tools and machinery used to perform the work (e.g., trench cutters, cranes). Selling or leasing back the finished product of the contract (e.g., the module itself) is not equipment used in performance.

Attorney Fees Under § 936—The Gravamen Test

Oklahoma’s § 936(A) requires a fee award to the prevailing party in a civil action “to recover for labor or services rendered.” Courts look to the underlying nature (gravamen) of the suit, not merely its labels. If the claim seeks payment for labor/services, § 936 applies—even if the plaintiff ultimately fails to prove entitlement. Suits collateral to labor/services (e.g., warranty disputes, royalty assignment interpretation) typically fall outside § 936.

Conclusion

The Tenth Circuit’s decision delivers three clear messages with practical consequences:

• Financing—even when styled as a sale–leaseback—does not transform a lender into a payment-bond “claimant.” The bond protects those who actually supply labor, materials, or qualifying equipment used in project performance.
• Sureties are not bound by the labels chosen in collateral agreements to which they are not parties. Under Oklahoma’s stranger exception, they may introduce extrinsic evidence to establish the transaction’s true nature.
• Prevailing defendants may recover attorney fees under Okla. Stat. § 936(A) where the gravamen of the plaintiff’s suit is to recover for labor or services—even if the plaintiff ultimately cannot prove it performed such labor or services. Judge Eid’s partial dissent underscores an ongoing interpretive tension that practitioners should monitor.

Collectively, these rulings reinforce the strict contours of surety liability, the primacy of economic realities over contractual labels, and the bidirectional nature of Oklahoma’s fee-shifting in labor/services disputes. Financiers must secure their risks through consensual credit enhancements—not by invoking payment bonds designed for laborers and materialmen; sureties can confidently police the proper scope of bond claims; and litigants should frame pleadings with the gravamen test and potential fee exposure in mind.