Reliance Insurance v. Oklahoma Gas & Electric Co.

Citations: 257 Ark. 466; 517 S.W.2d 499; 1975 Ark. LEXIS 1812Docket: 74-186

Court: Supreme Court of Arkansas; January 13, 1975; Arkansas; State Supreme Court

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Reliance Insurance Company appeals a circuit court judgment granting $3,501.92, along with penalties and attorney's fees, based on a surety bond issued in favor of Oklahoma Gas and Electric Company. Reliance argues that the trial court improperly held the surety liable for unpaid electric services provided to J. P. O. Enterprises Corporation, which was in bankruptcy proceedings. 

J. P. O., which operated retail outlets and received electricity from Oklahoma Gas and Electric, was required to secure future payments with a cash deposit or surety bond due to issues with unpaid bills. On November 15, 1972, Reliance, as surety, executed a bond for up to $5,500, allowing for cancellation with 60 days' notice. Following J. P. O.'s bankruptcy filing on January 3, 1973, it owed Oklahoma Gas and Electric $363.19. Upon learning of the bankruptcy, Oklahoma Gas and Electric sought a new bond or cash deposit from the bankruptcy trustee, who declined but verbally agreed to cover electric bills during the store's operation.

On January 19, 1973, Reliance exercised its cancellation right. Subsequently, on April 23, 1973, Oklahoma Gas and Electric filed a proof of claim in the bankruptcy court, asserting a debt of $4,841.80 for services rendered post-bankruptcy filing, of which only $1,000 had been paid. The trustee reported threats from utility companies to terminate services, prompting a request for an injunction to prevent such actions against the stores.

On March 22, 1973, a temporary injunction was granted, with notice provided to show cause for making it permanent. Oklahoma Gas and Electric (OG&E) requested the temporary restraining order be vacated or that the trustee provide a cash deposit or surety bond for utility payments. In its March 29, 1973 affidavit, OG&E outlined difficulties in collecting payments from J. P. O. and referenced a prior demand for a cash deposit or bond made on October 27, 1972. JPO Enterprise Corporation provided a surety bond, which was later canceled on January 3, 1973. Shortly thereafter, JPO filed for bankruptcy, and Hugh W. Thistelthwaite was appointed as receiver to manage operations pending bankruptcy proceedings. OG&E was informed by the receiver's administrator, Joe Lopez, that billing would remain unchanged and would be managed by the trustee.

OG&E filed a complaint on June 11, 1973, detailing the bond's execution and alleging JPO owed $3,508.90. Reliance Insurance Company, in its February 5, 1973 response, acknowledged liability for electric bills up to January 3, 1973, when the receiver was appointed, but argued that the trustee was responsible for bills incurred after that date. Reliance claimed the trustee should be liable on his official bond for services provided post-bankruptcy. The case was tried, leading the court to find that JPO owed OG&E $363.19 for services up to January 3, 1973, and $3,501 as of March 19, 1973, after the bond cancellation notice, which was less than the original claim.

Reliance Insurance Company offered a payment of $363.19 to settle its debt to Oklahoma Gas and Electric, which was declined. Oklahoma Gas and Electric claimed $3,501.92, which Reliance refused to pay. The trial court ruled in favor of Oklahoma Gas and Electric, awarding them $3,501.92 plus a 12% penalty and $750 in attorney’s fees, totaling $4,672.15 with 6% interest until paid. However, it was determined that the trial court mistakenly held Reliance liable for services provided after January 3, 1973. The bond in question specified that J. P. O. Enterprises Corporation (the Principal) and Reliance Insurance Company (the Surety) were jointly bound to pay for electric services received, with specific provisions regarding liability and cancellation. Notably, the bond binds the Principal’s successors, including a bankruptcy trustee, but Reliance is not considered a successor or assign of the Principal. The appellee's argument, referencing the Bankruptcy Act regarding co-debtors and sureties, was not accepted, as the court found Reliance Insurance Company did not fall within the defined categories.

Reliance Insurance Company, as the surety, is jointly and severally liable to Oklahoma Gas and Electric for payments due under a bond, alongside J. P. O. Enterprises. The bond binds both the principal and the surety, as well as their respective heirs, executors, administrators, successors, and assigns. However, Reliance's obligation does not extend to defaults occurring due to debts incurred by J. P. O.'s heirs or assigns. J. P. O. Enterprises is responsible for paying for electric services acquired from Oklahoma Gas and Electric and has committed its successors to this obligation. Reliance is also responsible to ensure payment for services if J. P. O. or its successors fail to do so. Notably, J. P. O. did not receive any electric service after January 3, 1973, which Oklahoma Gas and Electric recognized, considering its obligations ended on that date. Service continued only due to regulatory constraints and a bankruptcy injunction. The appellee references the case of People v. United States Fidelity Guaranty Co., where a surety was held liable for taxes on goods sold after a principal's bankruptcy, suggesting that similar liability might apply for services provided up to bankruptcy. However, the key difference in the People case was that the goods were manufactured before the bankruptcy, while in this instance, service was not provided post-bankruptcy.

The appellant argued that the license of Bailey Brewing Company to manufacture and sell beer ended with the appointment of a receiver, thus no tax was owed by the brewing company or its surety. The court found it unnecessary to analyze other cited cases, noting that no surety was held liable for obligations to a trustee in bankruptcy under a new agreement. The court acknowledged past cases where surety liabilities ceased due to mergers but distinguished them from the present case. Reliance Insurance Company was deemed only liable for utility services provided to J.P. O. Enterprises, not for the trustee's obligations under a separate agreement. The judgment was affirmed for $363.19 owed to J.P. O. Enterprises, but reversed regarding the penalty, attorney’s fees, and the $3,501.91 owed to the bankruptcy trustee. The case involved a bankruptcy arrangement under Chapter XI, followed by the appointment of a trustee.