Duncan-Williams, Inc. v. Capstone Development, LLC

Citations: 908 F. Supp. 2d 898; 2012 U.S. Dist. LEXIS 173961; 2012 WL 6100297Docket: Civil Action Case No. 2:09-cv-02098-WGY

Court: District Court, W.D. Tennessee; December 6, 2012; Federal District Court

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Duncan-Williams, Inc. seeks $1,200,000 from the Borgosz entities—Eugene H. Borgosz, Capstone Development, LLC, Triangle Construction Management, LLC, and Selective Services, Inc.—related to indemnity and contribution claims stemming from their involvement in a bond-funded real estate development. The case originated in Shelby County Chancery Court but was removed to federal court in February 2009 by Nexsen Pruet, LLC. The original presiding judge was Samuel H. Mays, Jr., who set a trial date for January 2011. Multiple motions to dismiss were filed by various defendants in early 2009, with the court ultimately determining jurisdiction over Hilburn and the Borgosz entities while dismissing Tanner for lack of jurisdiction. In 2011, Hilburn and Nexsen Pruet, LLC were dismissed with prejudice following joint stipulations. Duncan-Williams did not serve University Club Group, Inc. and UC Properties, LLC. A joint stipulation on June 26, 2009, assigned rights from Capstone Improvement District to Duncan-Williams. The plaintiff amended its complaint in July 2011 to include claims under the Tennessee Securities Act and the Tennessee Uniform Contribution Among Tortfeasors Act. The case had been administratively closed and consolidated with another case, and trial dates were reset multiple times. The Borgosz entities filed a motion for summary judgment on February 9, 2012, which was extensively briefed and later set for oral argument in July 2012. The court took the motion under advisement until September 2012, allowing the parties time for private resolution, but ultimately addresses the motion for summary judgment after being informed that no resolution was reached. Duncan-Williams is identified as a Memphis-based securities firm, while Capstone Improvement District is a political subdivision of Alabama that issued bonds for the Capstone Development Project.

Capstone Development, LLC (the Developer) was responsible for a real estate project, with construction managed by Selective Services, Inc. and Triangle Construction Management, LLC. Eugene H. Borgosz owned or controlled both construction firms. The Tanner law firm represented both the Developer and the District, while Hilburn acted as underwriters' counsel for Southern Financial and Duncan-Williams. University Club Group, Inc. issued bonds for the project, with UC Properties, LLC also providing security for those bonds. Nexsen Pruet, LLC allegedly committed torts and breached its contract with Duncan-Williams.

Duncan-Williams, alongside Southern Financial, underwrote a $13 million bond offering for a 544-lot residential development in Brookwood, Alabama, known as Capstone Development, with the Capstone Improvement District issuing the bonds. Duncan-Williams and Southern Financial each purchased half of the bonds and later resold them. The project faced cost overruns starting in 2001, leading to Selective Services and Triangle Construction abandoning the job. Despite having a completion bond, the Developer did not hire a new construction company, resulting in the project's non-completion and subsequent financial failure. This led to a default on the bonds in August 2003.

Following the default, two customers of Duncan-Williams, Ruskin A. Vest, Jr. and Industrial Products Company, sued Duncan-Williams in Tennessee, claiming violations of Blue Sky Laws, breach of fiduciary duty, negligence, and common law fraud due to non-disclosure of the project's financial issues. The trial commenced in January 2008. Vest, a Tennessee resident, along with his company, had previously invested in the Capstone bonds based on Duncan-Williams' recommendations, relying on their expertise in municipal bonds.

Vest relied on Duncan-Williams for recommendations on municipal bonds, having previously purchased a significant quantity from them. A representative assured Vest of their familiarity with the Capstone project and its strong ties to the University of Alabama, suggesting that failure of the project was unlikely. Vest had no prior dealings with Eugene H. Borgosz before meeting him in 2003 and 2004, holding the Capstone bonds until February 2007. In the Vest v. Duncan-Williams state court case, Duncan-Williams argued that the misconduct of other defendants caused the Vest Plaintiffs' losses, asserting comparative fault but not joint or intentional tort claims against others. The jury ruled in favor of the Vest Plaintiffs, finding Duncan-Williams guilty of misrepresentation, breach of fiduciary duty, negligence, and violations of the Tennessee Securities Act and Consumer Protection Act, and recommended punitive damages. Borgosz testified but was not a party to the trial, and the jury found no fault on the part of Borgosz entities. The parties settled for $1,200,000 before the punitive damages hearing, without an allocation agreement for the settlement amount. Disputes arose regarding discussions of releasing Vest’s claims against other parties. No indemnification agreement existed between the Moving Defendants and Duncan-Williams concerning the Capstone issue. The Developer Agreement allowed for indemnification of the Capstone Bond District but did not extend such provisions to Duncan-Williams. Before paying the judgment, Duncan-Williams did not inform Borgosz of any intention to seek indemnification. The case was removed to federal court based on diversity jurisdiction, with all defendants being Alabama citizens and the plaintiff a Tennessee citizen, involving an amount in controversy of $1,200,000. Summary judgment is appropriate when no genuine material fact issues exist, as defined by Federal Rule of Civil Procedure 56.

The court is required to evaluate disputed facts and draw inferences favorably for the nonmoving party, disregarding evidence from the moving party unless it is mutually acknowledged. Specifically, the court will not consider evidence that the moving party must prove, even if it remains unchallenged. 

In Count I, Duncan-Williams asserts claims for express and implied indemnity against the Moving Defendants. The Moving Defendants argue that these claims are precluded by collateral estoppel based on a prior Eleventh Circuit ruling against Duncan-Williams involving U.S. Bank National Association. In that case, the court ruled that Duncan-Williams could not recover indemnity or contribution under Alabama or Tennessee law due to the absence of a legal basis for such claims between joint tortfeasors. According to relevant case law, indemnity is only permissible when a party is liable solely by virtue of their relationship with a wrongdoer. Furthermore, the Tennessee Supreme Court clarified that collateral estoppel applies only when an issue has been litigated between the same parties, which is not the case here since the Moving Defendants were not involved in the prior action.

Additionally, the express indemnity claim fails under Alabama law because a stipulation in 2009 assigned contractual indemnity rights to Duncan-Williams. The governing law for this claim is determined by a choice-of-law clause in the Developer Agreement, which specifies Alabama law. In diversity actions, the law of the forum state, Tennessee, will respect this choice of law as long as it is reasonably related to the transaction and does not conflict with Tennessee’s public policy.

The Capstone Improvement Project was situated in Brookwood, Alabama, involving Alabama residents and companies, establishing a reasonable relationship justifying the application of Alabama law as per the Developer Agreement's choice-of-law provision. Under Alabama law, an indemnitee must provide timely notice to the indemnitor to maintain an indemnity claim, as established in Ex parte Jones and Burkes Mechanical, Inc. This notice must be timely enough to avoid prejudicing the indemnitor's ability to prepare a defense; however, tardiness alone does not negate a claim if no prejudice occurs. In this case, the Moving Defendants were aware of the suit at least by October 2004, approximately thirteen months after the alleged bond default in September 2003, indicating no prejudice from the timing of the suit. 

Moreover, Alabama law prohibits indemnification among joint tortfeasors, as reiterated in Ex parte Stenum Hospital and J.C. Bradford Co. v. Calhoun. Exceptions exist for situations where a joint tortfeasor is only technically at fault or where another tortfeasor is primarily responsible. The viability of Duncan-Williams's indemnity claim hinges on whether it qualifies as a joint tortfeasor and the nature of any alleged culpable actions. Although Duncan-Williams acknowledges a jury found it at fault, it contests that a judgment was entered on this verdict and that it claimed the Moving Defendants were joint tortfeasors at trial. An examination of the actual judgment in the Vest action is necessary to resolve this dispute.

The court rendered a judgment on January 16, 2008, in favor of the Plaintiffs, awarding $1,200,000 against the Defendant, Duncan-Williams, which includes discretionary costs and attorney’s fees. The judgment is supported by a jury's deliberation and the presentation of evidence. The court's order reflects the jury’s finding of liability against Duncan-Williams for intentional or reckless misrepresentation, while exonerating Borgosz, the Developer, and Selective Services from fault. Although typically a settlement negates a pending jury verdict, the Tennessee judge accepted the damages amount proposed by the parties while affirming the jury's verdict. The court concluded that the judge understood the implications of his ruling, indicating Duncan-Williams was at fault and a tortfeasor, leading to the denial of its express indemnity claim under Alabama law. Additionally, Duncan-Williams’s implied indemnity claims were found to fail under both Alabama and Tennessee law, with the choice-of-law analysis favoring the law of the state where the injury occurred, particularly under Tennessee's "most significant relationship" approach.

The Sixth Circuit indicates that the law governing indemnity claims should align with the law of the jurisdiction where the underlying tort occurred. It would be inconsistent to apply the workers' state law to personal injury claims while applying Michigan law to subsequent indemnity claims. Although the parties did not specifically address choice of law in this diversity case, the indemnity agreement executed in Tennessee necessitates the application of Tennessee law. However, Alabama law will also apply to the implied indemnity claims due to the significant connections to Alabama. 

To determine the state with the most significant relationship, Tennessee courts evaluate seven principles, including interstate needs, relevant policies, protection of justified expectations, and ease of law application. Four factors are also considered: the location of the injury, the conduct causing the injury, the domicile and business locations of the parties, and the center of their relationship. Duncan-Williams, a Tennessee corporation, acknowledges that all Moving Defendants are Alabama residents. The injury is connected to events in Alabama, primarily stemming from a Developer Agreement signed in Alabama, which included Alabama choice-of-law provisions. 

Duncan-Williams claims that Selective Services breached the contract by not completing construction after payment, with the construction site situated in Alabama. The alleged disruption of the Capstone Development in Alabama by Alabama-based defendants further establishes that the conduct resulting in injuries predominantly occurred in Alabama. Even if the relationship between parties is centered in Tennessee, the application of Alabama law is warranted due to the injury location and the actions of the parties. Consequently, if Alabama law applies, summary judgment on implied indemnity claims would be justified; however, the court suggests that allowing these claims to proceed under Tennessee law might be appropriate due to the close nature of the case.

In Tennessee, indemnification may be implied from the parties' relationship when it is necessary or fair to shift a loss to a party whose fault is significantly different. Indemnification is implied only if the party seeking it breached a contract or engaged in tortious conduct unless a contractual provision exists. The doctrine of unclean hands can bar indemnity if the payor's wrongful conduct led to the claim. A prior state court ruling against Duncan-Williams established fault, which further bars the implied indemnity claim under Tennessee law. Consequently, the court grants summary judgment on the indemnity claim.

For the contribution claim under the Tennessee Securities Act, which allows for contribution among liable parties, this claim is barred by the statute of repose, which requires actions to be initiated within five years of the violation or two years after discovering the violation. Duncan-Williams contends that their contribution claim does not fall under this section, but precedent indicates that the statute can bar contribution claims even if not yet accrued. Although the Act limits contribution claims, it permits defendants to file third-party claims for contribution immediately upon being sued, and such claims are not considered premature. Ultimately, the right to contribution under the Tennessee Securities Act is subject to stringent conditions imposed by the legislature.

The Vest Plaintiffs purchased Capstone bonds in 2000 and 2001, with their lawsuit filed in May 2003. A subsequent lawsuit was initiated in 2009, which was outside the applicable two-year and five-year statutes of limitations, resulting in the court granting summary judgment on the Tennessee Securities Act contribution claim. 

Duncan-Williams’ second claim for contribution under the Tennessee Uniform Contribution Among Tort-feasors Act was not barred by collateral estoppel, as the Moving Defendants were not parties to the prior Vest action, thus failing to meet the requirements for collateral estoppel under Tennessee law. 

However, Count III was dismissed as a matter of law based on undisputed facts. Under the Act, a tort-feasor who settles with a claimant cannot seek contribution from another tort-feasor whose liability remains. The Act specifies that a release to one tort-feasor does not discharge others unless explicitly stated. The Moving Defendants argued that the settlement with the Vest Plaintiffs did not release any claims against them. 

Duncan-Williams attempted to support its claim with affidavits asserting that the settlement included releases for the Moving Defendants. However, the court found that there was insufficient record evidence of such a settlement agreement or releases. Consequently, Duncan-Williams’ contribution claim was dismissed for lack of legal and factual basis.

The Court grants summary judgment on Count III regarding contribution under the Uniform Contribution Among Tort-Feasors Act, concluding that the three counts fail legally or factually. The ruling does not imply that the Borgosz entities are free of fault; instead, it determines that Duncan-Williams cannot seek indemnity or contribution from the Moving Defendants due to relevant judicial decisions and significant delays in filing the lawsuit. The judgment applies to all three counts. Judge Samuel Mays, Jr. highlights that Capstone Development, LLC, Selective Services, Inc., and Triangle Construction Management, LLC were under the control of Eugene H. Borgosz during the relevant transactions, collectively referred to as the "Borgosz entities." The case references an associated case and notes that the amended complaint incorporates prior allegations. Duncan-Williams disputes the authority of individuals making bond purchase decisions, yet for summary judgment purposes, does not contest the facts. Duncan-Williams also claims rights of indemnity based on common law and an assignment from the District, which includes rights against various parties involved in the bond issuance. Alabama law governs the contracting parties' rights and obligations as the contract was executed in Alabama.

The lex loci contractus, or law of the place where a contract is made, is integral to the contract itself, implying that parties are presumed to have intended for that law to govern their agreement unless stated otherwise. In the case of Ellis v. Pauline S. Sprouse Residuary Trust, the court reinforced this principle. The Developer Agreement involved signatures certified by Alabama notaries from key individuals associated with Triangle Properties, LLC, and Capstone Development, LLC. While the plaintiffs did not specify the signing location, there is consensus on this fact.

The court clarified that, unlike in previous cases, the jury's verdict did not need to address punitive damages directly. The final judgment included fees and costs, indicating punitive damages may have been considered. Despite the jury's lack of liability findings against Triangle Construction, the intentional or reckless actions of Duncan-Williams negate potential exceptions to the prohibition against indemnity among joint tortfeasors. The case highlights allegations of forum shopping by Duncan-Williams, which previously faced an indemnity case in Alabama and may have sought to bring this lawsuit in Tennessee to benefit from its laws.

Judge Mays, in a July 2010 Order, emphasized the connections between the Borgosz entities and Tennessee, affirming the court's personal jurisdiction. Notably, some misrepresentations occurred in Tennessee, impacting a Tennessee company and its residents, thus illustrating Tennessee's vested interest in the case.