Sears Roebuck & Co. v. Allied Commercial Corporation, and Its Successor by Merger, Healthcare Receivables Management, Inc., Defendant/third Party v. Benton Carroll, Jr., and Vera Mae Carroll, Individually, and as Independent of the Estate of Benton Carroll, Sr., Third Party
Docket: 94-1016
Court: Court of Appeals for the Third Circuit; April 25, 1995; Federal Appellate Court
Sears, Roebuck & Co. entered a contract with Allied Commercial Corp. in August 1988, designating Allied as an independent contractor to collect debts on Sears’ behalf. The contract required Allied to defend and indemnify Sears against any damages resulting from its collection activities and mandated that Allied procure $1,000,000 in general liability insurance, listing Sears as an additional insured. Allied failed to acquire the required insurance. During their collection efforts, Allied's employees allegedly harassed Benton Carroll, Sr., contributing to his heart attack and subsequent death, leading his family to sue both Allied and Sears in Texas state court. Initially, the complaint claimed Allied’s practices were the proximate cause of Mr. Carroll's death and sought to hold Sears derivatively and independently liable for negligent hiring and supervision.
Allied initially defended Sears but later withdrew, prompting Sears to discover the lack of insurance coverage. The Carrolls amended their complaint to allege only Sears’ independent liability for negligent hiring and supervision. After settling with the Carrolls for $310,000, Allied secured a settlement that required the Carrolls to indemnify it against Sears. Subsequently, Sears settled with the Carrolls for approximately $250,000, agreeing to indemnify them against Allied.
Sears then filed a breach of contract action against Allied, seeking recovery for costs incurred in defending the Carroll lawsuit, based on diversity jurisdiction. Allied responded with a third-party complaint against the Carrolls for indemnity. Both parties filed motions for summary judgment, with Sears asserting its contract interpretation justified judgment in its favor, while Allied argued that Sears had waived its insurance claims and was not entitled to indemnification for its own negligence. The court's opinions on these motions would follow.
The district court ruled on cross-motions for summary judgment regarding Sears' breach of the Collection Services Agreement. It denied Allied's motion for summary judgment but granted Sears' motion against Allied. The court first examined the insurance provision, affirming that Allied was required to purchase general liability insurance naming Sears as an additional insured and that no waiver of this provision had occurred. The court noted that the contract did not stipulate a requirement for delivering a copy of the policy to Sears, nor was there evidence of an implied waiver under Illinois law.
Next, the court addressed the defense provision, determining that Allied was obliged to defend Sears, a breach that Allied did not contest, and deferred the issue of damages. Regarding the indemnification provision, Allied claimed it was not required to indemnify Sears for actions considered Sears' own negligence, citing the Carroll family's allegations of Sears' negligence in the selection and supervision of Allied. However, the court pointed out that Sears had settled the Texas lawsuit before trial, and there was no judicial finding of Sears' independent negligence. The court concluded that for Allied to win on summary judgment, the evidence had to unequivocally show only direct negligence by Sears, which was not established.
In reviewing Sears' motion for summary judgment, the court stated that Sears had to prove its settlement with the Carroll family was based solely on its derivative negligence. Allied attempted to reference the original complaint from the Texas lawsuit to support its position, but the court ruled this was not permissible under Rule 56(e), as it did not create a genuine issue of material fact regarding Sears' direct negligence. Consequently, the court found that Allied failed to raise a genuine issue of triable fact, leading to the conclusion in favor of Sears.
The district court granted summary judgment in favor of Sears, determining that Sears was entitled to indemnification from Allied due to Allied's breach of its contractual obligation to provide required insurance coverage. Sears established that its settlement with the Carrolls stemmed from its derivative negligence, not direct negligence, and Allied did not present a rebuttal. The court deferred its ruling on Allied's third-party complaint against the Carrolls.
In a separate matter, the court examined the settlement agreement between the Carrolls and Allied, which concluded the Texas litigation where the Carroll family alleged that Allied’s collection practices caused Benton Carroll, Sr. to suffer a fatal heart attack. The complaint claimed Sears was vicariously liable for Allied’s actions and negligent in selecting and supervising Allied. Initially, Allied defended Sears in the state litigation but later withdrew.
The November 16, 1992, settlement required Allied to pay the Carrolls $310,000, with the Carrolls agreeing to indemnify Allied against any claims from Sears resulting from this litigation. The indemnification was detailed in a 'Mediated Settlement Agreement,' where the Carrolls agreed to hold Allied and its representatives harmless from any claims related to Mr. Carroll's death. Following this, on January 7, 1993, Sears reached a settlement with the Carrolls for $253,004.90, obligating Sears to indemnify the Carrolls for any liabilities they might incur due to the indemnity agreement with Allied. If Allied or Blair recovers from the Carrolls based on this indemnity, Sears must indemnify the Carrolls to the extent of such recovery.
The district court examined the Carrolls' claim that the indemnity agreements were unenforceable due to their attempt to absolve Allied of its own negligence. The court concurred with the Carrolls, asserting that a party cannot be indemnified for its own negligence unless explicitly stated in clear terms, as established in Davis v. Marathon Oil Co. The court found no such language in the mediated settlement or release. It concluded that Allied could not seek indemnity from the Carrolls for damages owed to Sears, given that Allied's liability stemmed from its own negligence. The court rejected Allied's argument that it was not seeking indemnity for negligence but rather for breach of contract to Sears. It interpreted the indemnity agreement against Allied, noting it referred to the lawsuit initiated by the Carrolls, not a breach of contract claim by Sears.
The court determined the damages Allied owed to Sears amounted to $280,067.24, including a settlement payment of $253,004.90 plus fees and expenses. It denied Allied's motion for summary judgment due to Allied's failure to prove that the settlement between the Carrolls and Sears was solely based on Sears' direct negligence. Conversely, the court granted Sears' motion for summary judgment, finding Allied's reliance on settlement releases insufficient. The court acknowledged a significant misunderstanding regarding the pleadings in the Texas action, noting that the district court's analysis was based on the original complaint, while an amended complaint had been filed that only contained direct claims against Sears, differing from the initial version that included both direct and derivative claims.
The parties were aware of the amended complaint as evidenced by Allied's reference to it in a memorandum dated June 25, 1993. However, they chose to litigate the motion for summary judgment based solely on the earlier complaint, failing to inform the district court of the amendment. Consequently, they are required to continue the litigation on the basis of the superseded complaint and have waived any advantages the amended complaint might have provided. The court emphasized that arguments not raised in the district court are waived on appeal, and it may consider imposing sanctions for the lack of transparency from the parties.
The standards for summary judgment under Federal Rule of Civil Procedure 56(c) dictate that summary judgment is appropriate when there is no genuine issue of material fact. The court's role is not to weigh evidence but to determine if a triable issue exists. The burden is on the moving party to demonstrate an absence of evidence supporting the nonmoving party's case. The nonmoving party must provide admissible evidence rather than relying solely on pleadings. A mere "metaphysical doubt" about a fact does not suffice to prevent summary judgment.
The district court granted Sears' motion for summary judgment, determining that Sears' liability to the Carrolls was derivative and covered by the Sears-Allied indemnification agreement. This decision was based on Allied's failure to present evidence creating a genuine issue of fact regarding Sears' liability. Allied was restricted from using pleadings from the Texas litigation to oppose the motion, as per the prohibition in Rule 56(e), reinforced by the Supreme Court's ruling in Celotex Corp. v. Catrett.
The district court's interpretation of the Celotex case is viewed as overly rigid and misaligned with Rule 56(e), which prohibits a party resisting summary judgment from relying solely on its own pleadings. Previous cases confirm that a party cannot rest on its pleadings and must present additional evidence, such as stipulations, transcripts, records, and affidavits. If permitted to rely on pleadings from related Texas litigation, Allied could have demonstrated a genuine issue of material fact regarding Sears' liability to the Carrolls, which would impact the settlement terms. Consequently, the court erred in granting summary judgment to Sears regarding the indemnification agreement, necessitating a reevaluation of the insurance agreement's coverage of Sears' direct and derivative liability.
Regarding the Allied-Carroll agreement, the district court concluded that it could not cover Allied's direct negligence due to a lack of express language. However, the indemnification agreement's wording does not definitively exclude liabilities arising from Allied's failure to procure insurance for Sears. The settlement's references to "cross actions" and the ambiguous phrase "or any other Cause by Sears" suggest that the intent of the parties is unclear. If the indemnification agreement solely pertains to Allied's own negligence, it may be deemed illusory since such negligence lacks explicit coverage. Therefore, the Allied-Carroll settlement agreement's scope should encompass Allied's potential liability for breaching the insurance obligations in the Sears-Allied contract.
The district court's reconsideration of the Sears-Allied agreement could render the Allied-Carroll agreement unnecessary to revisit. However, if the Sears-Allied determinations indicate Allied's liability, the court should reassess its interpretation of the Allied-Carroll indemnity agreement. While the district court may have understood the parties' intent, the agreement's language does not definitively support that interpretation. Consequently, the district court's judgment is reversed and the case is remanded for further proceedings.
Concurring, Circuit Judge Easterbrook critiques the district judge’s view that enforcing the indemnity chain would unjustly enrich Allied at the Carrolls' expense, clarifying that the Carrolls would not lose any money through this process. If indemnities are executed as stated, the Carrolls retain their resources, while Sears and Allied assume their respective costs. Easterbrook argues that the district judge's misconceptions about the indemnities necessitate a reevaluation.
He questions the understanding of direct liability within the litigation, suggesting that the parties may not fully grasp its implications. Notably, the amended Texas complaint presents a theory of direct liability from the Carrolls' viewpoint. He illustrates this with a hypothetical involving an employer's negligence in hiring a criminal, raising the issue of whether the employer could seek indemnity from the agent under similar circumstances. Easterbrook parallels this with Allied's argument about Sears being directly liable for hiring Allied.
He emphasizes that the determination of direct liability is perspective-dependent and highlights that in typical tort cases, the primary tortfeasor must indemnify the secondary tortfeasor, reinforcing the rationale for indemnity from Allied to Sears under both tort law and the contract. Unless Texas law presents an obstacle, Sears retains its right to indemnity from Allied based on the original contract, necessitating clarification of the settlement indemnities involved. The opinion notes the involvement of Judge Donald P. Lay from the Eighth Circuit by designation.
No party informed the district court about the Carrolls' amended Texas complaint during the summary judgment process. The district court based its decision on prior cases, specifically Lohman v. Morris and MFA Mut. Ins. Co. v. Crowther, while the Carroll family included the president of Allied as a party. The Sears-Allied contract is governed by Illinois law, but the Allied-Carroll agreement lacks a choice-of-law provision, suggesting Texas law likely applies due to the Texas negotiations and parties involved. Illinois employs a "most significant contacts" test for determining applicable law in contract cases. Both Texas and Illinois require explicit language for indemnification of an indemnitee's negligence, but Texas has a stricter "express negligence doctrine." The district court failed to discuss the applicability of Texas law, although both parties agree on the requirements for indemnification. The district court found Allied's waiver argument insufficient for two reasons: the "proof of insurance" clause was not a condition for performance, and Sears did not act to waive the insurance provision. On remand, the court is advised to ascertain the extent of Sears' settlement with the Carrolls relating to direct negligence versus derivative liability. Allied is liable to Sears under both indemnification and insurance procurement provisions for any settlement portion based on potential derivative liability, and cannot relitigate the waiver of the insurance procurement clause, which has been resolved in favor of Sears.
If the district court finds that Sears' settlement with the Carrolls pertains to its potential liability for direct negligence, it must assess whether the indemnification or insurance procurement clauses in the Sears-Allied contract allow Sears to recover damages stemming from its own negligence. Additionally, if the court determines that Allied owes damages to Sears under the Sears-Allied contract, it will need to evaluate whether Allied can transfer some or all of this liability to the Carrolls according to the Allied-Carroll agreement. The decision prohibits Allied from arguing that the Allied-Carroll agreement allows for indemnification for Allied's own negligence; however, Allied can examine if the agreement allows for indemnification regarding any damages owed to Sears, including those related to the insurance procurement clause linked to the settlement resolving the Carrolls' direct negligence claim against Sears. Furthermore, it is established that Allied failed to fulfill its contractual duty to defend Sears in the Texas litigation, and the district court has already determined the specific damages incurred by Sears due to this breach, which cannot be disputed by the parties. The remaining question on remand is whether the Allied-Carroll agreement requires the Carrolls to indemnify Allied for the damages owed to Sears.
