The American Insurance Company, a Nebraska Corporation v. Lawrence Egerton, Jr.

Citations: 59 F.3d 165; 1995 U.S. App. LEXIS 23230; 1995 WL 371452Docket: 94-1911

Court: Court of Appeals for the Fourth Circuit; June 21, 1995; Federal Appellate Court

Combined Opinion SummaryCombined Opinion Original

EnglishEspañolSimplified EnglishEspañol Fácil

Lawrence Egerton, Jr. appeals a district court decision granting summary judgment in favor of the American Insurance Company regarding his liability under a written indemnification agreement. The court determined that Egerton was liable as an indemnitor for taxes related to motor fuel tax bonds issued by American on behalf of U-Fill'Er-Up, Inc., a company he co-owned. Egerton's appeal includes challenges to the court's liability ruling and its order for him to deposit collateral, as well as its award of attorneys' fees.

Egerton had signed a general indemnity agreement in 1977, promising to indemnify American and its subsidiaries for liabilities incurred through bonds issued for U-Fill'Er-Up. Between 1977 and 1991, American issued at least three bonds, two for Virginia and one for North Carolina, with varying amounts of liability specified. U-Fill'Er-Up incurred a tax liability exceeding $859,000, confirmed by the North Carolina Supreme Court's refusal to review the case.

In 1991, amid a management dispute with co-owner J.J. Chamberlain, Egerton resigned from U-Fill'Er-Up and attempted to withdraw his personal guarantees related to the company's obligations. American asserted that his liability under the indemnity agreement persisted for bonds issued before his resignation or within thirty days thereafter. The appellate court affirmed the district court's judgment but reduced the collateral amount Egerton was required to post.

U-Fill'Er-Up filed for Chapter 11 bankruptcy on November 5, 1991. Following this, Virginia demanded $100,000 from American under a motor fuel tax bond due to U-Fill'Er-Up's unpaid taxes for September 1991. On December 4, American requested that Egerton provide $258,000 in security collateral as specified in the indemnity agreement, warning him of potential legal action if he did not respond within five days. Despite receiving two letters from American, Egerton did not reply. Subsequently, on December 9, Virginia executed a Conditional Release related to the $100,000 bond, which American settled shortly thereafter. Virginia later filed a separate claim against another bond, which American paid in 1992. North Carolina indicated a potential claim against a $158,000 bond but opted to wait until U-Fill'Er-Up's bankruptcy claims were resolved.

American initiated legal action in the United States District Court for the Middle District of North Carolina, claiming $110,289.54 from Egerton under the indemnity agreement and asserting his obligation to post $258,000 in collateral. The district court granted American's motion for summary judgment, awarding the claimed amount, mandating Egerton to post the collateral, and granting attorneys' fees. Egerton appealed, but the court upheld the judgment and specific performance requirement while reducing the collateral to $158,000 to match American's exposure for the North Carolina bond. The court noted that summary judgment is appropriate when no genuine material facts are in dispute and emphasized that the indemnity agreement should be enforced based on its clear terms, rather than general indemnity principles.

Paragraph 2 of the indemnity agreement establishes that the Indemnitors must indemnify the Surety for any liability, losses, costs, damages, attorney fees, and other expenses incurred due to the execution of bonds, including expenses related to claims, suits, judgments, and enforcement efforts. Paragraph 19 allows any indemnitor to terminate the agreement with a written notice of at least thirty days, explicitly stating that such termination does not affect liability for bonds executed before the notice period ends. The district court granted American's motion for summary judgment, ruling that the indemnity agreement entitled American to the requested relief, holding Egerton liable for payments made to settle claims against the bonds and for providing collateral for potential liabilities. American argues that paragraph 84 gives it the authority to settle claims made under issued bonds and that Egerton waived his right to notice regarding the settlement by ignoring a prior letter. Egerton disputes this, claiming a lack of waiver and alleging bad faith on American's part in the settlement process. The district court rejected Egerton's claims, interpreting paragraph 10 as a waiver of notification regarding bond execution, and determined that American did not act in bad faith. On appeal, Egerton maintains that American's notification failure regarding claims settlements is a breach, but it is concluded that he waived this notification right regardless of his claims about paragraph 10.

The Commonwealth of Virginia submitted a claim against a $100,000 bond on November 6, 1991. American responded on November 7, denying Egerton's request for release from the bond and affirming his liability. Egerton did not reply and, on December 4, American demanded that he deposit $258,000 in collateral as per their indemnity agreement, referencing claims from both Virginia and North Carolina. Egerton, a practicing attorney involved with U-Fill'Er-Up's legal matters, was deemed to be aware of Virginia's claims, and the court found he waived his right to notice regarding these claims.

Egerton argued that American acted in bad faith by not seeking payment from the bankruptcy estate for Virginia's claim, asserting that American could be subrogated to Virginia's priority tax status under Section 507(a)(7) of the Bankruptcy Code. The court rejected this argument, concluding that subrogation to such priority was not intended for third parties.

Additionally, Egerton claimed American's quick settlement of Virginia's bond claim indicated bad faith. The court affirmed that American had the right to settle claims at its discretion and that its prompt payment did not demonstrate bad faith, given the nature of joint and several liability. The bankruptcy's automatic stay did not impede state court actions against sureties.

Ultimately, the district court mandated Egerton to post $258,000 in collateral with American, and he challenged this decision. The court's ruling on specific performance is reviewed for abuse of discretion.

Paragraph 3 of the indemnity agreement requires Egerton to provide collateral upon demand, corresponding to any reserve American establishes for claims or liabilities. American set aside $258,000 to cover its potential liabilities related to Virginia and North Carolina bonds and notified Egerton of this demand in a December 4, 1991 letter. However, the $258,000 amount includes liabilities for both states, while the judgment mandates Egerton to reimburse American solely for payments made under the Virginia bonds. Consequently, the required collateral should have been limited to $158,000, reflecting only American's potential liability under the North Carolina bond.

Egerton's argument against the recovery of attorneys' fees was found to lack merit. He contended that paragraph 2 of the indemnity agreement restricts American to recovering only 'expenses' for litigation enforcement. However, the court clarified that the phrase 'expenses paid or incurred in enforcing the terms hereof' is part of a non-exhaustive list, which does not negate the broader indemnification language in paragraph 2 that covers all liabilities, including attorney fees.

The district court's summary judgment and award of attorneys' fees are affirmed but modified to require Egerton to post security for American's $158,000 exposure related to the North Carolina bond. The indemnity agreement grants the Surety exclusive rights to determine the handling of claims or liabilities, with the indemnitors obliged to reimburse for payments made by the Surety, supported by an itemized statement as prima facie evidence of liability.

Paragraph 10 of the indemnity agreement establishes that indemnitors waive any notice regarding the execution of bonds or any information affecting the Surety's rights or liabilities under those bonds. This waiver supports the position that American did not act in bad faith by settling Virginia's claims without notifying Egerton. Paragraph 9 empowers the Surety to act at its discretion to secure release from liability, while Paragraph 17 designates the Surety as the Attorney in Fact for the indemnitors, allowing it to exercise their rights without obligation, with indemnitors ratifying the Surety's actions. Additionally, a recent amendment to section 507(a) renumbered the priority for governmental units' unsecured tax claims to 11 U.S.C.A. Sec. 507(a)(8), though the opinion references it by its previous number. The district court concluded that American was not required to delay actions pending bankruptcy outcomes, noting the joint and several liability of American and Egerton under the indemnity agreement, despite the absence of similar language in that agreement. Nonetheless, general legal principles affirm their joint and several liability.