Spencer v. Frontier Insurance , 290 F. App'x 571 ( 2008 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 05-2391
THOMAS R. SPENCER; CURTIS SPENCER,
Plaintiffs - Appellees,
v.
FRONTIER INSURANCE COMPANY,
Defendant - Appellant.
No. 06-1551
CURTIS SPENCER, individually, and as Trustee of the Thomas R.
Spencer Trust,
Plaintiff - Appellee,
v.
FRONTIER INSURANCE COMPANY,
Defendant - Appellant.
Appeals from the United States District Court for the District of
South Carolina, at Columbia. Joseph F. Anderson, Jr., Chief
District Judge. (CA-02-3431; 3:02-cv-03431-JFA)
Argued: May 13, 2008 Decided: August 26, 2008
Before WILLIAMS, Chief Judge, Joseph R. GOODWIN, Chief United
States District Judge for the Southern District of West Virginia,
sitting by designation, and Claude M. HILTON, Senior United States
District Judge for the Eastern District of Virginia, sitting by
designation.
Affirmed by unpublished per curiam opinion.
ARGUED: Clifford F. Altekruse, SMITH, CURRIE & HANCOCK, LLP,
Atlanta, Georgia, for Appellant. David C. Holler, LEE, ERTER,
WILSON, JAMES, HOLLER & SMITH, LLC, Sumter, South Carolina, for
Appellees. ON BRIEF: John E. Menechino, Jr., SMITH, CURRIE &
HANCOCK, LLP, Atlanta, Georgia, for Appellant.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
Curtis Spencer, individually and as trustee of his father’s
trust, brought suit against Frontier Insurance Company (Frontier)
seeking recovery under a surety bond. After Frontier removed the
action from South Carolina state court, the district court granted
Frontier’s motion to stay the action as Frontier had entered
rehabilitation proceedings in New York. After approximately 27
months, the district court granted Spencer’s motion to lift the
stay and later entered summary judgment in favor of Spencer,
holding Frontier liable on the surety bond. The district court
held a bench trial to determine damages and entered judgment for
Spencer in the amount of $1,559,256.78. Frontier appeals the
district court’s decisions to lift the stay, enter summary judgment
in favor of Spencer on the issue of liability, and the award of
damages to Spencer. We affirm.
I.
In September, 1999, Thomas Spencer, now deceased, and his son
Curtis Spencer (collectively “Spencer”) sold their family business
to Trailer Holdings, Inc., which later assigned its rights to C.T.
Acquisition Corp. (CTAC). The initial sale of the Spencer business
was made pursuant to a stock purchase agreement (SPA). When CTAC
acquired its rights from Trailer Holdings, it delivered a $1.2
million five-year note to Spencer. The note required CTAC to make
3
monthly interest-only payments and a single principal payment of
$1.2 million due at maturity. Along with the note, CTAC delivered
a surety bond making Frontier jointly and severally liable with
CTAC in the event CTAC defaulted on the note. Three CTAC owners
and officers, Timothy Durham, J.R. Hitchcock, and Terry Whitesell
(collectively “Durham”), agreed to personally indemnify Frontier in
the event Frontier became liable on the bond. CTAC defaulted on
June 1, 2002. Shortly thereafter, Spencer filed suit against
Frontier in South Carolina.
Prior to default, on October 15, 2001, Frontier entered
rehabilitation proceedings in New York, which remain ongoing.
These proceedings arise from New York’s insurance regulatory
statutes that provide for uniform treatment of claims against an
insurer in rehabilitation. Part 19 of the Supreme Court of New
York issued an order declaring Frontier insolvent and appointing
the New York Superintendent of Insurance (Superintendent) as
Rehabilitator. The order states that “[a]ll persons are enjoined
and restrained from commencing or prosecuting any actions,
lawsuits, or proceedings against Frontier, or the Superintendent as
Rehabilitator.” This order and its anti-suit injunction remain in
effect today.
On May 11, 2004, as part of its rehabilitation proceedings,
Frontier requested and received the authority to dispose of surety
claims against it. The procedure allowed the Superintendent to
4
examine all surety claims and provide each claimant with a “Notice
of Determination” describing the amount, if any, recommended for
allowance by Frontier. Claimants are permitted to object to the
Superintendent’s determination and such contested claims are
reviewed by a “referee appointed by the Court.” There is no
evidence of any independent procedure for judicial review of the
referee’s determination. On September 23, 2005, Frontier mailed a
notice of determination to Spencer stating that the Superintendent
had disallowed the Spencer claim. The reason for disallowance was
“[t]he Principal was substituted without prior written consent of
the Surety.” Spencer has timely objected to this decision in the
New York rehabilitation proceeding.
On October 29, 2004, approximately one year before Spencer’s
claim was disallowed in New York, Frontier initiated an action
against Durham in United States District Court for the Southern
District of Indiana. Frontier sought to recover upon the indemnity
agreement signed by Durham. Spencer moved to intervene, but the
Indiana district court denied the motion reasoning that “[t]he
South Carolina district court can protect Mr. Spencer’s interests
in the action pending there.” The court later dismissed Frontier’s
action without prejudice as being prematurely asserted under the
terms of the indemnity agreement.
After removing Spencer’s action to the district court,
Frontier moved to dismiss or stay the action pending final
5
resolution of Frontier’s rehabilitation proceeding in New York.
The district court granted a stay on May 27, 2003, under Burford v.
Sun Oil Co., 319 U.S. 315 (1943), and directed the parties to file
quarterly status reports on the progress of Frontier’s
rehabilitation. After denying Spencer’s request to lift the stay
in October, 2003, the district court granted Spencer’s motion to
lift the stay on November 10, 2005. On February 10, 2006, the
district court granted Spencer’s motion for summary judgment as to
Frontier’s liability on the bond but denied Spencer’s motion with
respect to damages. On March 22, 2006, the district court held a
bench trial to determine damages and issued an order awarding
Spencer $1,559,256.78.
II.
This Court reviews a district court’s decision to abstain
under Burford for abuse of discretion. Martin v. Stewart, 499 F.3d
360, 363 (4th Cir. 2007)(citing Harper v. Pub Serv. Comm’n, 396
F.3d 348, 357-58 (4th Cir. 2005)). A district court abuses its
discretion whenever “its decision is guided by erroneous legal
principles.” Id. (internal quotation marks omitted); see also Koon
v. United States, 518 U.S. 81, 100 (1996)(“A district court by
definition abuses its discretion when it makes an error of law”).
Moreover, “there is little or no discretion to abstain in a case
6
which does not meet traditional abstention requirements.” Martin,
499 F.3d at 363 (internal quotation marks omitted).
We have stated that “a federal court may abstain under Burford
from its ‘strict duty to exercise’ congressionally conferred
jurisdiction only when the importance of difficult questions of
state law or the state’s interest in uniform regulation outweighs
the federal interest in adjudicating the case at bar.” Id. at 365
(citing Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716
(1996)). In Burford, the Supreme Court held that a federal court’s
abstention is appropriate when judicial review in the designed
state forum is “expeditious and adequate,” and that proceedings in
federal court could cause “delay, misunderstanding of local law and
federal conflict with state policy.” Burford, 319 U.S. at 327-34.
In its initial decision to stay the case, the district court
noted that “[t]he rehabilitation of a very large insurance company
by the State of New York is indisputably a matter of substantial
public concern in New York, and for this case to proceed against
Frontier could disturb that rehabilitation.” In its decision to
lift the stay, the district court reasoned:
[t]he court . . . is not convinced that [Spencer’s] due
process rights are being adequately protected . . . .
This court has an interest in the fair and efficient
administration of justice for litigants residing in this
district. [Spencer] has waited almost three years for his
day in court and under the procedures in place in the New
York rehabilitation action, there is no end in sight . .
. . Meanwhile, [Frontier] takes seemingly inconsistent
positions by denying [Spencer’s] claim while
simultaneously seeking indemnification for that claim in
7
Indiana. The Burford abstention doctrine should not be
used as a shield to delay justice indefinitely.
We agree with the district court that there is a strong federal
interest in adjudicating this case, given the lengthy
rehabilitation proceedings in New York. Moreover, we conclude that
the district court did not abuse its discretion by lifting the stay
because this case does not meet the requirements for abstention
under Burford.
First, this case does not present difficult questions of New
York state law. Spencer’s complaint simply requires the
interpretation and construction of three documents — the SPA, note,
and bond — each of which is to be construed under South Carolina
law. Indeed, a United States court sitting in South Carolina is
likely to be far more competent in interpreting South Carolina
contract law than a New York Supreme Court or the New York
Superintendent of Insurance. Moreover, contract interpretation
issues of this sort rarely present difficult questions of state law
no matter the jurisdiction.
Second, although New York clearly has an interest in the
uniform regulation of its insurance industry, a judgment in this
case would not upset that uniformity. Possessing a judgment in its
favor, Spencer would still be required to appeal to New York courts
to enforce that judgment. Once Spencer seeks to enforce its
judgment in New York, a New York court may evaluate Spencer’s claim
8
in the context of Frontier’s ongoing rehabilitation by determining
its priority relative to other similar claims against Frontier.
Frontier cites two decisions by this Court upholding a
district court’s decision to dismiss or abstain under Burford an
action against entities embroiled in state regulatory proceedings.
See First Penn-Pacific Life Ins. Co. v. Evans, 304 F.3d 345, 348
(4th Cir. 2002)(upholding district court decision to dismiss under
Burford an action against an insurance company in receivership in
order to avoid complicating efficient administration of insurer’s
estate); Brandenburg v. Seidel, 859 F.2d 1179, 1190-93 (4th Cir.
1988)(upholding district court decision to abstain under Burford an
action against an insolvent state-chartered savings and loan
association involved in liquidation proceedings). To hold in
Frontier’s favor on account of this precedent would be tantamount
to stating a rule that abstention would be required in this case,
a proposition neither of these cases stand for. In Evans, the
majority responded to the dissent’s criticism that it had
impermissibly widened Burford’s narrow exception to federal courts’
duty to decide cases by stating that “[t]o read the dissent, one
would think that Burford abstention was a ‘require[ment]’ in this
case. Our holding is simply that the district court did not abuse
its discretion in abstaining here.” Evans, 304 F.3d at 348 n.
1.(quoting Luttig, J., dissenting) Similarly, we decline to state
a rule that abstention was required in this case, and hold that the
9
district court did not abuse its discretion by allowing Spencer’s
action to proceed.
III.
We next consider whether the district court properly granted
summary judgment on the liability issue. This Court reviews de
novo the district court’s entry of summary judgment. See Nat’l
City Bank of Ind. v. Turnbaugh, 463 F.3d 325, 329 (4th Cir.
2006)(“We review a grant of summary judgment de novo”). Summary
judgment is appropriate where there is no genuine issue as to any
material fact. See Fed. R. Civ. P. 56(c). Once a motion for
summary judgment is properly made and supported, the opposing party
has the burden of showing that a genuine dispute exists. See
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
586-87 (1986). A material fact in dispute appears when its
existence or non-existence could lead a jury to different outcomes.
See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A
genuine issue exists when there is sufficient evidence on which a
reasonable jury could return a verdict in favor of the non-moving
party. See id. Mere speculation by the non-moving party “cannot
create a genuine issue of material fact.” Beale v. Hardy, 769 F.2d
213, 214 (4th Cir. 1985); see also Ash v. United Parcel Serv.,
Inc., 800 F.2d 409, 411-12 (4th Cir. 1986). Summary judgment is
appropriate when, after discovery, a party has failed to make a
10
“showing sufficient to establish the existence of an element
essential to that party’s case, and on which that party will bear
the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S.
317, 322 (1986). When a motion for summary judgment is made, the
evidence presented must always be taken in the light most favorable
to the non-moving party. See Smith v. Virginia Commonwealth Univ.,
84 F.3d 672, 675 (4th Cir. 1996)(en banc).
On December 14, 1999, Frontier executed the surety bond, which
specifically references the SPA that was signed on September 3,
1999. The SPA states that a note would be executed at closing,
which occurred on December 17, 1999, three days after Frontier
executed the bond. The SPA and the note contain slightly different
terms regarding the debt owed by CTAC to Spencer. Frontier argues
that because the bond pre-dated the note, this change in terms
discharges Frontier’s liability under the bond. The bond provides
that Frontier is liable as a surety:
[w]hereas, under the date of 9/3/99, [CTAC and Spencer]
entered into a written Agreement . . ., effective as of
12/17/99; and Whereas, under the Agreement, [CTAC] has
agreed to pay [Spencer] one payment of $1,200,000.00 on
the 1st day of January 2005 . . . and to secure said
Payment by the delivery to [Spencer] of a Surety Bond;
Now, therefore, in the event of default under the
Agreement, [Frontier] shall become liable for the
immediate payment to [Spencer] of a specific sum equal to
the total of all amounts due or to become due under the
Agreement, which have not been paid to [Spencer].
The SPA states that “‘Agreement’ means this Stock Purchase
Agreement, the Exhibits and schedules attached hereto and the
11
Certificates delivered in connection herewith, as the same may be
amended, supplemented or otherwise modified from time to time in
accordance with the provisions hereof.” With regard to debt, the
SPA states that:
Buyer will deliver to Sellers at Closing its Promissory
Note in the principal sum of One Million Two Hundred
Thousand Dollars . . . such Note shall have a five (5)
year term to maturity at eight percent (8%) interest per
annum . . . . Interest only shall be paid monthly on the
Note during the five (5) year term, with the principal
and accrued unpaid interest, if any, due and payable in
full on the 1st day of the 61st month following closing.
The SPA further states that “[t]he Note shall be secured by a
Surety Bond issued by Frontier Insurance Company . . . in the face
amount of [$1.2 million].”
The note contains the same principal, interest rate, and term-
to-maturity terms as the SPA, but also includes additional terms.
The note provides a penalty interest rate of two percent on
outstanding principal in the event of default, an acceleration
clause making the note’s principal balance and unpaid interest
immediately due in the event of default, and a provision for
attorney’s fees should any part of the note be collected by or
through an attorney.
Frontier argues that it should be discharged from the bond
because the additional terms in the note materially increased the
risk Frontier faced in acting as a surety to CTAC’s debt. See
Employers Ins. of Wassau v. Construction Mgmt. Engineers of
Florida, 297 S.C. 354, 358 (S.C. App. 1989)(upholding trial court’s
12
decision to discharge surety as a matter of law after subsequent
contract changed surety’s risk). This argument fails because the
SPA specifically references a promissory note to be delivered to
Spencer at the time of closing. The bond makes Frontier liable for
“a specific sum equal to the total of all amounts due or to become
due under the [SPA].” The SPA, in referring specifically to a
promissory note to be delivered at closing, by definition
incorporates the terms of that note into the SPA. As the bond
makes Frontier liable for all amounts due under the SPA, which
incorporates the terms of the note, the bond therefore makes
Frontier liable as surety for obligations due under the note.
Moreover, Frontier, a sophisticated party, chose to execute its
surety bond three days prior to closing without specifically
examining the terms of the promissory note it knew would be
delivered at closing. The note does not alter the principal,
interest rate, and term-to-maturity terms described in the SPA, but
adds extra terms concerning the amount to be paid by the borrower
in the event of default. Consequently, Frontier cannot escape its
obligation as surety by failing to examine a promissory note it
knew was being delivered on December 17.
Frontier also contends that the district court erred in
granting summary judgment on the liability issue because a genuine
issue of material fact exists as to whether changes in CTAC’s
corporate structure ought to discharge Frontier from liability
13
under the bond. See Berry v. Adams, 157 S.E. 805, 806 (S.C.
1931)(stating that a surety may be released from liability because
of a change to the principal). More than a year after Frontier
executed the bond, CTAC’s ownership changed. The three CTAC owners
who signed the indemnity agreement with Frontier sold their
interest in CTAC. Frontier argues that this change in ownership is
a significant enough change in the risk Frontier faced to create
a genuine issue of material fact to be determined at trial.
However, the bond provides that “Principal and Surety, their heirs,
executors, administrators, successors and assigns are hereby
jointly and severally liable” (emphasis added). Because the bond
specifically maintains liability in the face of ownership change,
Frontier cannot escape liability on this basis as a matter of law.
As there is no dispute that the principal has breached its
duties under the note, we agree with the district court that
Frontier is liable as surety for all payments due under the note.
IV.
We next consider the district court’s damages award. On
appeal from a bench trial, the appellate court may set aside
findings of fact only if they are clearly erroneous, and must give
due regard to the opportunity of the trial court to judge the
credibility of witnesses. See Fed. R. Civ. P. 52(a); Minyard
Enterprises Inc. v. Southeastern Chemical & Solvent Co., 184 F.3d
14373, 380 (4th Cir. 1999). “A finding is clearly erroneous when
although there is evidence to support it, the reviewing court on
the entire evidence is left with the definite and firm conviction
that a mistake has been made.” Minyard, 184 F.3d at 380 (internal
quotation marks omitted). “If the district court’s account of the
evidence is plausible in light of the record viewed in its
entirety, the court of appeals may not reverse it even though
convinced that had it been sitting as the trier of fact, it would
have weighed the evidence differently.” Provident Life & Accident
Co. v. Cohen, 423 F.3d 413, 418 (4th Cir. 2005)(citing Anderson v.
City of Bessemer, 470 U.S. 564, 573 (1985)).
After review of the record in its entirety, we find the
district court’s account of the evidence to be supported by the
evidence and not clearly erroneous.
Frontier argues that the district court’s damages award ought
to be set aside because the district court committed an error of
law by awarding damages in excess of the surety bond’s penal sum.
See North River Ins. Co. v. Claar, 382 S.E.2d 8, 10 (S.C.
1989)(stating that a surety’s liability is limited to the bond’s
penal amount). Frontier argues that the bond’s penal sum is the
$1.2 million debt described in the SPA and that the district court
erred by awarding Spencer approximately $1.56 million. This excess
damages award is explained by the penal interest rate associated
with CTAC’s breach of its obligation under the note and the award
15
of attorney’s fees pursuant to the note. Frontier’s argument fails
because we have held that the SPA and the bond both incorporate the
terms of the note, thus exposing Frontier to liability in excess of
the $1.2 million face amount.
V.
For the foregoing reasons, the judgment of the district court
is
AFFIRMED.
16