Feed Management Systems, Inc. v. Comco Systems, Inc. , 823 F.3d 488 ( 2016 )

United States Court of Appeals
For the Eighth Circuit
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No. 15-1739
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Feed Management Systems, Inc.
lllllllllllllllllllll Plaintiff - Appellant
v.
Comco Systems, Inc.; Comco Manufacturing, Ltd.
lllllllllllllllllllll Defendants - Appellees
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No. 15-1840
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Feed Management Systems, Inc.
lllllllllllllllllllll Plaintiff - Appellee
v.
Comco Systems, Inc.; Comco Manufacturing, Ltd.
lllllllllllllllllllll Defendants - Appellants
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Appeals from United States District Court
for the District of Minnesota - Minneapolis
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Submitted: November 17, 2015
Filed: May 23, 2016
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Before SMITH, BYE, and BENTON, Circuit Judges.1
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SMITH, Circuit Judge.
In July 2008, Feed Management Systems, Inc. (FMS) and Comco Systems, Inc.
("Comco") entered into an agreement ("Management Agreement"). Among other
things, the Management Agreement obligated Comco to broadly indemnify FMS as
well as reimburse FMS for reasonable costs and expenses, including attorneys' fees.
After Comco refused to indemnify FMS in a lawsuit involving non-parties Brilliant
Alternatives, Inc. and Robert Brill (collectively, "Brill"), FMS sued Comco for
reimbursement of attorneys' fees and other expenses that resulted from the lawsuit.
FMS and Comco filed cross-motions for summary judgment. The district court2
granted both motions in part. FMS and Comco each appeal. We affirm.
I. Background
Before entering into the Management Agreement, FMS and Comco each had
dealings with Brill. In January 2008, Comco entered into an agreement with Brill
("Comco–Brill Agreement") to acquire Brill's rights to certain software products
related to animal feed management and an international distribution network of sales
agents. During the Comco–Brill Agreement negotiations, and after its execution, FMS
defended itself in litigation filed against it by Brill. Comco entered the Comco–Brill
1
This opinion is being filed by Judge Smith and Judge Benton pursuant to 8th
Cir. Rule 47E.
2
The Honorable David S. Doty, United States District Judge for the District of
Minnesota.
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Agreement, in part, to assume control of the litigation. In return for control over the
litigation and the acquisition of Brill's above-listed rights, Comco agreed to market
and distribute the software and pay Brill royalties and a contractor fee.
In exercising its control over the ongoing litigation between FMS and Brill,
Comco took over settlement negotiations with FMS from Brill. During the
negotiations, FMS and Comco discussed the potential for a business relationship.
Ultimately, the settlement discussions resulted in the Management Agreement. As
part of the Management Agreement, Comco "appoint[ed] FMS . . . to render
management services to [Comco] pursuant to the terms of [the Management]
Agreement." These management services included (i) "billing, collecting, and paying
the agents which comprise the [d]istribution [n]etwork," and (ii) "providing work
direction to Brill . . . in order to enable Brill to fulfill [its] obligations under the
[Comco–Brill] Agreement." Unsurprisingly, because of its history with Brill, FMS
insisted on broad protections against any litigation that Brill might bring. To address
this concern, the Management Agreement required Comco to indemnify FMS
from and against any and all losses, costs, expenses, claims, damages
and liabilities whatsoever . . . to which [FMS] may become subject
under any applicable law, or any claim made by any third party, or
otherwise, to the extent they relate to or arise out of or in connection
with the performance of the Services contemplated by this Agreement
or the engagement of FMS pursuant to, and the performance by FMS of
the Services contemplated by, this Agreement.
Comco also agreed to reimburse FMS for "all reasonable costs and expenses
(including reasonable attorneys' fees and expenses . . . ) as they are incurred in
connection with the investigation of, preparation for or defense of any pending or
threatened claim for which [FMS] would be entitled to indemnification . . . or any
action or proceeding arising therefrom." FMS and Comco agreed that these provisions
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would survive the termination of the Management Agreement. On March 16, 2009,
FMS terminated the Management Agreement.
By this point, Comco had already severed its relationship with Brill and was
engaged in litigation initiated by Brill. After Comco reached a settlement with Brill
at the end of July 2009, Brill brought suit against FMS on August 27, 2009
("Brill–FMS Litigation"). Brill alleged that the Management Agreement was an
impermissible assignment of Comco's rights and obligations under the Comco–Brill
Agreement and that FMS engaged in intentional misconduct under the Management
Agreement.
Shortly after Brill filed its complaint against FMS, FMS tendered defense to
Comco pursuant to the indemnification provision of the Management Agreement.
Comco rejected FMS's tender, arguing that the claims that Brill asserted were outside
the scope of the indemnity provision. Specifically, Comco argued that the claims did
not relate to the performance of services listed in the Management Agreement and
enforcing indemnification would violate public policy because FMS was accused of
intentional misconduct. FMS responded to Comco's refusal, noting its disagreement
with Comco's position and reserving its right to seek indemnification and
reimbursement for defense costs and fees. Consequently, FMS sought coverage from
its insurer, Scottsdale Indemnity Company ("Scottsdale"). Scottsdale accepted the
tender on November 19, 2009. Scottsdale agreed to FMS's request that Bowman and
Brooke, LLP serve as lead counsel but required FMS to pay any amounts exceeding
the approved partner rate.
While the Brill–FMS Litigation was ongoing, Cargill, Inc. ("Cargill")
purchased FMS and assumed control of the litigation after the merger. Cargill,
however, did not contribute to defraying the cost of the litigation. Instead, Cargill,
FMS, and FMS's Series A Stockholders "agreed to establish a joint defense fund to
provide for the defense and settlement of the [Brill–FMS] Litigation." To establish
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the joint defense fund, these companies set aside $500,000 that would otherwise have
been paid to the Series A Stockholders.
Nearly three years after the Brill–FMS Litigation began, FMS prevailed in
having all of Brill's claims dismissed on summary judgment, but the cost of the
defense was substantial. Bowman and Brooke alone billed $1,077,880.30. Three other
law firms also provided services. Nall & Miller, LLP served as local counsel, billing
a total of $10,667.56. Soffer Charbonnet Law Group, PLLC ("Soffer Charbonnet")
assisted FMS in seeking indemnification from Scottsdale and Comco and billed
$19,350.00. Lommen Abdo, P.A. billed $25,917.50 for representing the Series A
Stockholders during the Cargill merger. The total cost of the defense was
$1,133,815.36 in attorneys' fees, costs, and other expenses.3
At the end of January 2013, FMS sought reimbursement from Comco for the
full cost of the Brill–FMS Litigation. Comco maintained its position that it was not
required to indemnify or reimburse FMS under the Management Agreement because
of the nature of the claims that Brill asserted. Approximately two months later, FMS
brought this breach-of-contract suit against Comco. FMS and Comco filed cross-
motions for summary judgment. The district court granted partial summary judgment
in favor of both FMS and Comco, holding that Comco was obligated to (1) indemnify
FMS against claims brought by Brill, and (2) reimburse FMS for $87,350 in attorneys'
fees and other expenses but not the entire $1,133,815.36 that FMS claimed. FMS and
Comco each appeal the judgment of the district court.
3
Together, FMS, the Series A Stockholders, and Scottsdale paid for the total
cost of the Brill–FMS Litigation. Of the $1,088,547.86 billed by Bowman and Brooke
and Nall & Miller, FMS paid $68,000; Scottsdale paid $859,144.69; and the Series
A Stockholders paid $161,403.17. In addition, FMS paid the full amount billed by
Soffer Charbonnet, and the Series A Stockholders paid the full amount billed by
Lommen Abdo. In total, Scottsdale paid $859,144.69, the Series A Stockholders paid
$187,320.67, and FMS paid $87,350.
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II. Discussion
We review de novo the district court's decision on cross-motions for summary
judgment. Dunn v. Aamodt, 695 F.3d 797, 799 (8th Cir. 2012). Summary judgment
is appropriate when "there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The case is
before us on diversity jurisdiction, and by the terms of the Management Agreement,
Minnesota law governs. Under Minnesota law, "[t]he meaning of an indemnity
clause, like the construction of any other written contract, is a question of law." Art
Goebel, Inc. v. N. Suburban Agencies, Inc., 567 N.W.2d 511, 515 (Minn. 1997)
(citation omitted).
A. Indemnification
Comco takes issue with the district court's determination that the Brill–FMS
Litigation is within the scope of the Management Agreement's indemnity provision.
Comco argues that it is only obligated "to indemnify FMS for claims that arise out of
(1) FMS's performance of 'services' under the Agreement, i.e., billing and paying
agents, and providing work direction for Brill, [or] (2) the engagement of FMS to
perform such services." According to Comco, neither category encompasses the
Brill–FMS Litigation. Building on this point, Comco further argues that it was not
obligated to indemnify FMS because Brill's claims in the Brill–FMS Litigation
alleged intentional misconduct.
When interpreting a contract, Minnesota courts "look to its language to
determine the parties' intent." Savela v. City of Duluth, 806 N.W.2d 793, 796 (Minn.
2011) (citation omitted). "Where there is a written instrument, the intent of the parties
is determined from the plain language of the instrument itself." Travertine Corp. v.
Lexington-Silverwood, 683 N.W.2d 267, 271 (Minn. 2004) (citation omitted).
Minnesota courts assign unambiguous contract language its plain meaning and refrain
from rewriting, modifying, or limiting its effect by a strained construction. Id.
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The indemnification provision in the Management Agreement states that
Comco will indemnify FMS
from and against any and all losses, costs, expenses, claims, damages
and liabilities whatsoever . . . to which [FMS] may become subject
under any applicable law, or any claim made by any third party, or
otherwise, to the extent they relate to or arise out of or in connection
with the performance of the Services contemplated by this Agreement
or the engagement of FMS pursuant to, and the performance by FMS of
the Services contemplated by, this Agreement.
As a preliminary matter, we do not find the language ambiguous.4 The
indemnification provision covers any third-party claim that relates to, arises out of,
or is connected with the engagement or duties of FMS under the Management
Agreement. Although the language is broad, ambiguity does not inhere in breadth.
See Latterell v. Progressive N. Ins. Co., 801 N.W.2d 917, 921 (Minn. 2011)
(explaining that "just because contractual language is broad does not mean it is
ambiguous").
When the indemnity provision is applied to the Brill–FMS Litigation, the
claims asserted therein plainly fall within the ambit of the provision. Comco points
to five of Brill's claims in support of its argument:
1. FMS intentionally interfered with the contract and business
relationship between Brill and Comco by inducing Comco to terminate
Brill's contract with Comco;
2. FMS committed fraud at a meeting in August 2008 by intentionally
failing to disclose material facts;
4
It is unclear whether this is in dispute. In its brief, Comco refers to the
language of the indemnity provision as both "ambiguous" and "clear and
unambiguous."
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3. FMS misappropriated business opportunities through issuance of its
own press releases;
4. FMS was unjustly enriched through receiving information from Brill
that was "not used by Comco" but instead used by FMS for personal
gain; and
5. Brill is an intended third-party beneficiary of the Comco-FMS
contract.
(Citations omitted and bold omitted.) Yet, on closer examination, all of these claims
related to, arose out of, or were connected "with . . . the engagement of FMS pursuant
to, and the performance by FMS of the Services contemplated by" the Management
Agreement. Sections 2(a) and 2(c) of the Management Agreement charged FMS with
"providing work direction to Brill as an independent contractor to [Comco]" and gave
FMS "exclusive discretion and authority to determine the manner in which it provides
Services pursuant to [the Management] Agreement."
In Brill's complaint, the intentional interference claim is based upon FMS
"gaining unfettered access to the [d]istribution [n]etwork" pursuant to the
Management Agreement. Likewise, the claims for fraud and unjust enrichment are
based upon occurrences that took place at a meeting held pursuant to the Management
Agreement. The misappropriated-business-opportunity claim is based upon actions
that FMS took that allegedly transferred benefits from Comco to FMS wrongfully
"pursuant to the . . . Management Agreement." Finally, the third-party beneficiary
claim asserts that Brill is an intended third-party beneficiary "of the . . . Management
Agreement." Brill's complaint allegations reveal that Brill's dispute arose from the
Management Agreement.
We reject Comco's assertion that the plain language of the indemnity provision
excludes the Brill–FMS Litigation. Comco asks us to strictly construe the
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indemnification language because it shifts liability for FMS's own misconduct. Under
a strict construction, Comco argues that the provision does not clearly and
unequivocally shift liability from FMS to Comco. Specifically, Comco contends that
the provision does not cover the Brill–FMS Litigation because it does not expressly
cover actions arising out of FMS's own misconduct.
"When applying Minnesota law, we strictly construe indemnification
agreements that shift liability for the indemnitee's own negligence." Harleysville Ins.
Co. v. Physical Distribution Servs., Inc., 716 F.3d 451, 457 (8th Cir. 2013) (citation
omitted). Indemnification provisions that shift liability "are not favored by the law
and are not construed in favor of indemnification unless such intention is expressed
in clear and unequivocal terms, or unless no other meaning can be ascribed to it."
Nat'l Hydro Sys. v. M.A. Mortenson Co., 529 N.W.2d 690, 694 (Minn. 1995)
(quotation and citation omitted). "Notice is the mainspring of an enforceable
indemnification provision—to shift liability, an indemnification provision must 'fairly
apprise[] [the indemnitor] of an obligation to indemnify [the indemnitee].'"
Harleysville, 716 F.3d at 457 (alterations in original) (quoting Yang v. Voyagaire
Houseboats, Inc., 701 N.W.2d 783, 791–92 n.5 (Minn. 2005)).
Comco's urging notwithstanding, we decline to strictly construe the indemnity
provision. As the district court noted, "the provision did not actually shift liability for
misconduct by FMS . . . because FMS was not found liable for the conduct that Brill
alleged." Minnesota law directs courts to strictly construe indemnity provisions
"when the indemnitee . . . seeks to be indemnified for its own negligence," Nat'l
Hydro Sys., 529 N.W.2d at 694 (alteration in original) (quotation and citation
omitted), not when a complaint merely alleges such misconduct. See Seifert v.
Regents of Univ. of Minn., 505 N.W.2d 83, 85–86 (Minn. Ct. App. 1993) (holding
that allegation of negligence did not invalidate indemnity provision where the record
did not support a finding of negligence). An indemnity provision holds harmless an
indemnitee from certain actions and consequences. Unless clearly and unequivocally
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provided, Minnesota law excludes an indemnitee's own misconduct from the range
of actions and consequences covered. Importantly, it is the indemnitee's conduct that
triggers strict construction. The purpose behind strictly construing an indemnity
provision—preventing an indemnitor from becoming an unwitting insurer—is absent
here. The record does not support a finding that FMS committed any of the
misconduct alleged by Brill.
Even if we were to strictly construe the provision, our decision in Harleysville
forecloses Comco's argument. In Harleysville, we strictly construed a provision that
indemnified an indemnitee "from any and all claims, actions, or causes of action in
any way relating to personnel assigned to [the indemnitee], including, but not limited
to, personal injury." 716 F.3d at 458 n.9 (quotation and emphases omitted). We held
that this broad "provision gave [the indemnitor] clear notice of an obligation to
indemnify [the indemnitee] for future personal injury claims arising from [the
indemnitee's] negligence." Id. at 458. When confronted at oral argument with
Harleysville, counsel for Comco did not attempt to distinguish Harleysville or explain
why it did not apply. Instead, counsel asked that we reject the holding in Harleysville
as incorrectly decided. We do not find any meaningful distinction between the broad
indemnity provision at issue in Harleysville and the broad indemnity provision at
issue here, and thus, we are bound by the holding in Harleysville.
The district court correctly interpreted the indemnity provision as covering the
Brill–FMS Litigation.
B. Reimbursement
FMS argues that the district court erred in limiting its recovery to the $87,350
that it paid out of pocket. FMS contends that the plain language of the Management
Agreement requires Comco to reimburse it for the entire $1,133,815.36 in fees, costs,
and expenses that resulted from the Brill–FMS Litigation. FMS further argues that
the district court erred in holding that it could not pursue recovery as "the real party
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in interest because its losses include and exceed the amounts Scottsdale and the Series
A [Stockholders] contributed." Finally, FMS points to the subrogation provision in
its insurance policy with Scottsdale and its oral agreement to reimburse the Series A
Stockholders as evidence that it would not receive a windfall were it allowed to
recover the entire $1,133,815.36.
The Management Agreement obligated Comco to "pay and reimburse, on
demand, [FMS] for all reasonable costs and expenses (including reasonable attorneys'
fees and expenses, which may be required to be paid in advance) as they are incurred
in connection with [any indemnified liability]." Comco breached this provision when
it rejected FMS's tender because the Management Agreement required Comco to pay
for FMS's defense costs "as they are incurred" or, if required, "in advance."
(Emphasis added.)
"The rule of the common law is that where a party sustains a loss by reason of
a breach of contract, he is, so far as money can do it, to be placed in the same
situation, with respect to damages, as if the contract had been performed." Paine v.
Sherwood, 21 Minn. 225, 232 (1875) (quotation and citation omitted); see also
Kellogg v. Woods, 720 N.W.2d 845, 853 (Minn. Ct. App. 2006) (explaining that
"[t]he appropriate measure for breach-of-contract damages is the amount that will
place the nonbreaching party in the same position he would be in had the contract
been performed" (citation omitted)). Nevertheless, "it is well established in Minnesota
that in the case of a breach of contract the injured party must use reasonable diligence
to minimize his damages." Lanesboro Produce & Hatchery Co. v. Forthun, 16
N.W.2d 326, 328 (Minn. 1944) (citing Barron G. Collier, Inc. v. Women's Garment
Store, Inc., 189 N.W. 403, 404 (Minn. 1922); Barron G. Collier, Inc. v. Kindy, 178
N.W. 584, 585 (Minn. 1920); Wavra v. Karr, 172 N.W. 118, 120 (Minn. 1919)).
The amounts paid by Scottsdale and the Series A Stockholders are not damages
that FMS suffered as a result of Comco's breach. FMS makes much of the term
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"incur," arguing that it merely refers to a liability and not an actual payment. FMS
points out that although it did not pay for all of the expenses associated with the
Brill–FMS Litigation, it became liable for all of the expenses. As such, FMS seeks
damages for all expenses "incurred." This argument, however, ignores the measure
of damages resulting from a breach of contract. If Comco had not breached the
contract, FMS may be correct that the language of the Management Agreement would
entitle it to all reasonable fees, costs, and expenses resulting from the Brill–FMS
Litigation. But Comco did breach, and FMS, in accord with its legal duty, mitigated
its damages by tendering the defense to Scottsdale and arranging funding with the
Series A Stockholders.5
FMS attempts to escape this conclusion by arguing that it would not receive a
windfall were it to recover the entire $1,133,815.36. According to FMS, the
subrogation provision6 in its insurance policy with Scottsdale demonstrates that FMS
has agreed to reimburse Scottsdale. However, FMS has provided no authority
suggesting that the general rules on damages are supplanted by the subrogation
5
FMS may have additional damages as a result of tendering its defense to
Scottsdale (such as subsequently higher premiums), but it has not sought relief for
anything other than the full amount of fees, costs, and expenses resulting from the
Brill–FMS Litigation.
6
FMS's insurance policy with Scottsdale contains the following subrogation
provision:
In the event of any payments under this Policy, Insurer shall be
subrogated to the extent of such payment to all of the Insureds' rights of
recovery against any person or entity. The Insureds shall execute all
papers required and shall do everything that may be necessary to secure
and preserve such rights, including the execution of such documents as
are necessary to enable Insurer effectively to bring suit or otherwise
pursue subrogation in the name of the Insureds, and shall provide all
other assistance and cooperation which Insurer may reasonably require.
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agreement. After mitigating its damages, FMS paid $87,350 out-of-pocket. Thus
FMS's award of $87,350 places it "in the same situation, with respect to damages, as
if the contract had been performed." Paine, 21 Minn. at 232; see also Am. Sur. Co.
v. State Farm Mut. Auto. Ins. Co., 142 N.W.2d 304, 306 (Minn. 1966) (finding that
insured "was not damaged by [insurer-]defendant's refusal to defend in violation of
its obligations under the policy" because insured's second insurer "was required [to
defend] under its own policy"); Concord Hosp. v. N.H. Med. Malpractice Joint
Underwriting Ass'n, 694 A.2d 996 (N.H. 1997) (refusing to award more than out-of-
pocket expenses to a hospital after one of its insurers refused to pay litigation
expenses).7
FMS also argues that it will not benefit from a windfall because it has orally
agreed to reimburse the Series A Stockholders for their contribution to the joint
defense fund. FMS overlooks the fact that it cannot recover from Comco what
rightfully belongs to the Series A Stockholders. "Because a corporation and its
stockholders are separate entities," FMS's ability to successfully sue on behalf of the
Series A Stockholders is dubious at best. See Singer v. Allied Factors, Inc., 13
N.W.2d 378, 380 (Minn. 1944) (citations omitted).
The district court correctly limited FMS's recovery from Comco to the $87,350
FMS paid out of pocket.
7
FMS relies on a line of Minnesota cases holding that if an "insured retains
some interest in the cause of action, the suit may be brought in his name. If he makes
recovery, he has the right to reimburse himself for his loss and expenses and then
hold the balance of his recovery in trust for the insurer." Blair v. Espeland, 43
N.W.2d 274, 276 (Minn. 1950) (citations omitted); see also Lines v. Ryan, 272
N.W.2d 896, 904 (Minn. 1978) (same); Flor v. Buck, 248 N.W.2d 743, 744 (Minn.
1933) (same). Those cases involved injured parties that had received judgments. This
is a contract case, not a tort case. FMS has not demonstrated that Minnesota would
similarly allow double-recoveries for contract disputes.
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III. Conclusion
Accordingly, we affirm the judgment of the district court.
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