American Bonding Co. v. American Contractors Indemnity Corp.

Citation: 551 F. App'x 1146Docket: No. 12-4197

Court: Court of Appeals for the Sixth Circuit; January 5, 2014; Federal Appellate Court

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American Bonding Company, Inc. (ABC) is appealing the district court's summary judgment favoring American Contractors Indemnity Corporation (ACIC) on a breach of trust claim. The court mistakenly ruled that ABC consented to ACIC's use of trust account funds. ABC, which writes bail bonds in Ohio, cannot operate as an insurance company and must act as an agent for a licensed insurer, which led to an Agency Agreement with Roche Surety, Inc. Roche served as an intermediary, connecting ABC with ACIC, the actual bond issuer. 

The bail bond industry incentivizes companies to ensure defendants appear in court, as failures can lead to forfeiture judgments against bondsmen or their sureties. To protect against potential losses, sureties like ACIC maintain trust accounts with 'build-up funds.' Under the 2002 Agency Agreement, ABC was required to deposit 1% of each bond's face value into such an account, held in trust by ACIC for ABC. The agreement defined 'losses' broadly, including potential losses from defendants failing to appear, regardless of whether a judgment had been rendered.

ABC wrote over a million dollars in bail bonds post-agreement but breached the contract in July 2005 by not remitting owed premiums and payments. Consequently, Roche terminated their contract and sued ABC, leading to a federal court judgment against ABC for breach of contract. Before damages were set, ABC declared bankruptcy, after which an Agreed Order was established that fixed damages at $850,000 and dismissed ABC's remaining counterclaims.

ACIC withdrew funds from a build-up account during litigation with ABC, claiming the funds could be used to cover damages from ABC's breach of the Agreement. ABC initiated adversary proceedings in the U.S. Bankruptcy Court, asserting fifteen claims against ACIC, including allegations of improper withdrawals and failure to credit the account, constituting breaches of ACIC's trustee duties. ACIC counterclaimed for a declaratory judgment, arguing that ABC's claims were barred by claim preclusion due to prior litigation. In January 2012, ACIC sought summary judgment on all claims. By July, ABC moved to dismiss ACIC's counterclaim, while ACIC requested to amend its answer. On July 30, most of ABC’s claims were dismissed with prejudice, except Counts Five and Fifteen. The district court granted ACIC summary judgment on ABC’s substantive claims, ruling that ABC had consented to ACIC’s use of the account funds for damages or expenses related to the Agreement, thus absolving ACIC of liability for breach of trust. ABC appealed, arguing the court misinterpreted the Agreement, which they contended limited fund use to losses from forfeitures. The appeal centers on whether ACIC was permitted to use the account funds for broader damages or strictly for forfeiture-related losses, with ABC asserting that the Agreement's definitions of 'loss' and 'losses' are explicitly tied to forfeiture actions.

Paragraph 18's definition of 'losses' as including 'potential losses' does not broadly encompass all damages that ACIC might incur. The term 'potential' serves to modify 'loss' without providing a detailed definition. It indicates losses that have not yet occurred at the time a defendant fails to appear in court, meaning the surety has not sustained actual financial loss at that moment but faces the risk of a forfeiture action. The paragraph specifies that a loss occurs 'regardless of whether any judgment thereupon is rendered,' suggesting that a court's forfeiture judgment is anticipated. Consequently, 'potential loss' pertains to costs related to forfeitures, as supported by a subsequent requirement for ABC to make efforts to prevent forfeitures and to cover bail amounts from its resources, thereby protecting ACIC from losses associated with forfeitures rather than other damages, such as non-payment of premiums. ACIC's argument that this interpretation leads to absurd results is countered by the assertion that any failure by ABC to maintain required reserves would constitute a breach of the Agreement, allowing Roche to seek remedies. The Agreement is interpreted as limiting the build-up funds to risks associated specifically with defendants skipping bail, not general contract breaches. Therefore, Ohio Revised Code 5810.09 prohibits ABC's breach of trust claim concerning ACIC's use of build-up funds for forfeiture-related losses. However, it remains unclear how ACIC utilized these funds, leaving unresolved material facts regarding compliance with the Agreement's terms on summary judgment.

Summary judgment was not appropriate for Count Five or Count Fifteen. The district court correctly identified Count Fifteen as a claim for breach of trust, alleging that ACIC improperly retained about $28,000 in the build-up account. ABC requested the court to direct the immediate delivery of the trust fund balance to the Clerk, citing Ohio Revised Code 5810.01(B)(5), which provides remedies for breach of trust. Count Fifteen seeks an additional remedy related to ACIC's alleged breach, distinguishing it from Count Five, which seeks to address damages from funds previously removed from the account. Both counts assert a breach of trust. The court will need to determine if claim preclusion affects ABC’s claims and whether ACIC can claim reasonable reliance on the trust's terms to avoid liability under Ohio Revised Code 5810.06. These issues were not addressed by the district court. As a result, the summary judgment on both counts is reversed, and the case is remanded for further proceedings.