Ray G. Mair v. Earl Schwartz , 90 F.3d 1388 ( 1996 )

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No. 94-3867
No. 94-3919
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United States of America, *
*
Plaintiff, *
*
Ray G. Mair, also known as Ray *
Mair, as personal representative*
for the estate of Juniet N. *
Mair, *
*
Appellant/Cross Appellee, *
*
v. * Appeals from the United States
* District Court for the District
Earl Schwartz; Gladys Schwartz; * of Minnesota.
Earl Schwartz Co.; Kay Schwartz *
York; Kathy Schwartz Mau; Ray *
York; Jarvis York; Jardy York; *
Joanna Kay York; Robert Mau; *
Cassandra Mau; Brekka Mau; *
Kara Lea Schwartz Johnson; *
Crookston Cattle Co., *
*
Appellees/Cross Appellants.*
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Submitted: October 19, 1995
Filed: July 30, 1996
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Before MORRIS SHEPPARD ARNOLD, FLOYD R. GIBSON and ROSS, Circuit Judges.
___________
ROSS, Circuit Judge.
Appellant Ray Mair appeals from the district court's ruling that his
bad faith misconduct relieved Earl and Gladys Schwartz and the Schwartz
family partnership (the Schwartzes) of their duty to
indemnify Mair on certain notes held by the FmHA. Mair also appeals from
the court's grant of summary judgment in favor of the Schwartzes on Mair's
claim seeking damages for breach of contract. The Schwartzes, in turn,
cross-appeal on certain issues relating to damages. We affirm in part and
reverse in part.
I.
In 1981, appellant Raymond Mair, a cattle rancher, along with his
wife, borrowed a total of $1,148,275.84 from the FmHA for use in their
business, the Crookston Cattle Company (CCC). The Mairs signed two
promissory notes, both individually and on behalf of the corporation (the
notes). In 1984, the Mairs sold all of the stock in CCC for $5,747,500 to
the Schwartzes, payable in a combination of cash payments over time and the
assumption of two mortgages on the land and various CCC debts, including
the two FmHA promissory notes. The Schwartzes claim that because Mair
misrepresented the amount of tillable acreage owned by CCC, and because of
the general failure of the farm economy in the mid-1980's, they were unable
to pay the Mairs the amounts called for under the purchase agreement.
Ultimately, the primary and secondary lenders foreclosed on the farm. The
FmHA, which held a third secured position, did not collect on its notes.
In 1986, the Mairs filed suit in Minnesota state court for breach of
the purchase agreement, alleging that the Schwartzes had failed to make the
payments to both the Mairs and the FmHA. The Schwartzes counterclaimed for
fraud in the inducement, asserting the Mairs had misrepresented the number
of tillable acres. Through discovery, the Mairs learned that the
Schwartzes were converting FmHA's collateral that secured payment of the
notes by commingling the collateral pledged to the FmHA with other
collateral owned by another Schwartz entity known as Schwartz Farms.
In 1989, the parties adopted a settlement agreement, whereby
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the Schwartzes agreed to pay the Mairs $1.95 million in cash over time and
to indemnify the Mairs from claims that could be asserted by certain third
parties, including the FmHA. As part of the agreement, the Schwartzes
agreed to resolve or cure any claim within ten days following receipt of
a notice of claim as defined in paragraph 4 of the settlement agreement:
Schwartzes will indemnify Mairs from any and all charges,
claims and liabilities that may arise out of Mairs' personal
obligations under the mortgages and security agreements and
notes which they secure against [CCC] land and assets held by
. . . the FmHA. Mairs agree to notify Schwartzes by certified
mail of any charges, claims or liabilities arising out of the
above-referenced mortgages, security agreements and notes or
Mairs' personal guarantees thereof. Any such notice shall
include information pertaining to the nature and extent of the
claim. A description thereof, including the amount and
particulars of any such charge, claim or liability shall be
included in any such notice. Schwartzes shall have ten days
following receipt of any such notice in which to resolve or
cure the charge, claim or liability to which reference is made.
Paragraph 4 also provided that, if the Schwartzes chose to contest the
claim, their obligation to resolve or cure the claim would be satisfied if
they posted "an amount in cash which would be sufficient to pay such claim,
charge or liability."
Under paragraph 5 of the settlement agreement, the Mairs agreed to
consent to any satisfaction of the FmHA indebtedness, "including an
agreement to sign an FmHA form document in which the Mairs and the
Schwartzes agree that the net recovery value to the FmHA under its mortgage
from [CCC] is zero."
The Schwartzes' obligations under the settlement agreement were
secured by two provisions in the contract, one providing for the posting
of "adequate security" as determined through an arbitration process, and
the other providing for the entry of a $3.5 million confession of judgment
in the event the Schwartzes
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defaulted on their obligations. Payments by the Schwartzes or any write-
downs of third-party obligations would reduce the confession of judgment.
Following execution of the settlement agreement, the Schwartzes made
regular payments to the Mairs. Substantially all of the $1.95 million plus
interest was paid off by December 1994. The Schwartzes, however, as
before, failed to make any payments to the FmHA.
Mrs. Mair died on October 27, 1991, and on December 31, 1991, the
FmHA filed a claim against her estate in the amount of $1,538,020, plus
additional per diem interest, for payment of the FmHA promissory notes for
which the Mairs remained primarily liable. On January 19, 1992, Mair sent
a copy of the claim to the Schwartzes in accordance with the notice
provision of paragraph 4 of the settlement agreement. The FmHA probate
claim was not allowed by Ray Mair, personal representative of the estate,
and the claim was later disallowed. The government subsequently filed a
petition for allowance, thereby reviving the claim.
On April 28, 1992, the United States filed this action in federal
court against Ray Mair personally. Mair did not inform the Schwartzes of
this lawsuit. Instead, on May 8, 1992, Mair filed the plea of confession
of judgment without notice in federal court and obtained an ex parte $2.8
million judgment against the Schwartzes.1 Mair then brought third-party
claims against the Schwartzes, seeking damages for breach of their
agreement to indemnify. During the course of the proceedings, the United
States amended its complaint to seek damages against the Schwartzes,
claiming that it was a third-party beneficiary of the settlement
1
The $2.8 million judgment resulted from the $3.5 million
agreed-upon confessed judgment, reduced by the payments the
Schwartzes had made to date.
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agreement.
On June 3, 1992, the Schwartzes contacted the FmHA and offered
$400,000 to settle the $1.5 million obligation to the FmHA. The FmHA
rejected the offer on August 14, 1992, explaining that it was "not viewed
as reasonable" but that further discussion would be welcomed if the
Schwartzes offered "a more substantial portion of the total due."
The Schwartzes moved to vacate the judgment of confession on August
3, 1992, claiming they were not given proper notice prior to its filing.
Mair opposed the motion, arguing that the Schwartzes had waived the right
to notice in the settlement agreement. The district court granted the
motion to vacate the judgment on October 5, 1992, finding that the
Schwartzes "may not have been notified of the default proceedings nor
served with the third party complaint prior to the entry of default
judgment."
In December 1992, the Schwartzes and the United States negotiated a
$900,000 settlement of the FmHA indebtedness which was conditioned upon the
release of all outstanding claims, including, according to Mair, his cross-
claim against the Schwartzes for damages resulting from their alleged
failure to indemnify. Consequently, Mair refused to join in the settlement
as written. Notwithstanding Mair's alleged failure to cooperate, the
Schwartzes successfully settled with the United States on August 23, 1993
for $900,000. In the same instrument, the government assigned the
negotiable FmHA promissory notes to the Schwartzes, including any claims
the government may have had against Mair relative to those notes.
On August 27, 1993, four days after they were substituted as
plaintiffs for the United States, the Schwartzes filed two motions for
summary judgment. First, as third-party defendants, the Schwartzes sought
summary judgment on Mair's cross-claim for breach
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of contract, asserting that their duty as indemnitors had been discharged
because of Mair's bad faith.
Second, the Schwartzes filed a motion for summary judgment as
assignees of the United States, seeking damages of $1,722,754.10 against
Mair on the notes. Only $840,183.69 owed on the notes represented
principal, while the remaining $882,570.41 represented interest and
advances that had accrued during the nine years in which the Schwartzes
failed to make payment on the FmHA loans.
In January 1994, the district court denied the Schwartzes' motion for
summary judgment on the notes, but granted the Schwartzes' motion for
summary judgment on Mair's cross-claim. The district court concluded that
the Schwartzes' duty to indemnify had not been triggered because Mair
failed to properly notify the Schwartzes of the FmHA claim. Further, the
court held that by obtaining a confession of judgment against the
Schwartzes without first notifying them of the FmHA suit against Mair
personally or without notifying them of his intention to obtain a default
judgment, Mair breached his duty to provide notice under paragraph 4 of the
settlement agreement.
In addition, the district court held that Mair breached his duty
under paragraph 5 of the settlement agreement, which required him to
"consent to any satisfaction" of the FmHA indebtedness, when he refused to
consent to the proposed $900,000 satisfaction agreement between the
Schwartzes and the United States on the FmHA notes. The court concluded
that "any obligations the Schwartzes had under the Settlement Agreement
were eliminated by the Mairs' bad faith conduct in this matter," including
their duty to indemnify Mair. Accordingly, the court allowed the
Schwartzes to take assignment of the FmHA notes and claims and to sue Mair
on the same notes against which the Schwartzes had agreed to indemnify him.
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In May 1994, the case went forward to trial on the Schwartzes' claims
on the notes. The only issues remaining at trial were whether the
Schwartzes had impaired the collateral securing the notes and, if so, in
what amount. On May 27, 1994, the jury returned a special verdict stating
that Mair had proven an impairment of $1,200,000. The amount of impairment
was subtracted from the stipulated amount still owing on the notes, and
judgment was entered against Mair in favor of the Schwartzes in the amount
of $629,608.16.
II.
Several critical issues are raised in this appeal. We first turn to
the question of notice under the settlement agreement. The district court
concluded that the Schwartzes' indemnification obligations were never
triggered because Mair failed to properly "notify" the Schwartzes of the
FmHA claim against Mrs. Mair's estate. Specifically, the court stated that
the Mairs failed to provide the Schwartzes with information detailing a
specific loss resulting from the FmHA claim. The court held, "[w]ithout
this information, the Schwartzes had no duty to indemnify under the
Settlement Agreement."
We disagree with the district court's interpretation of the notice
requirement. Under the unambiguous terms of the agreement, the Mairs
agreed to notify the Schwartzes of, among other things, any "claims"
arising out of the mortgages, and that such notice would include
"information pertaining to the nature and extent of the claim[,] [a]
description thereof, including the amount and particulars of any such . . .
claim."
On January 19, 1992, Mair sent a certified letter to the Schwartzes,
including a copy of the claim filed by the United States, on behalf of the
FmHA, against Mrs. Mair's estate, stating that "[t]his notice is served
. . . pursuant to paragraph 4 of the
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Release and Settlement Agreement." The letter further provided that,
pursuant to paragraph 4 of the settlement agreement, the Schwartzes had ten
days following receipt of this notice to resolve or cure the claim, or to
deposit sufficient funds in escrow to cover the claim if they chose to
contest the liability.
This "notice" clearly included "information pertaining to the nature
and extent of the claim, . . . including the amount and particulars of" the
claim and therefore satisfied the terms of the settlement agreement.
Contrary to the Schwartzes' argument, Mair was not required to give notice
of a lawsuit or the commencement of another enforcement proceeding, or
notice of a specific loss resulting from the claim. On the contrary, Mair
was only required to give notice of a "claim." Mair satisfied this
obligation. This conclusion, however, does not end our inquiry.
Immediately following notification of the probate claim, Terri Groen,
the Schwartzes' attorney, requested an accounting of the value of Mrs.
Mair's estate on several occasions. Ms. Groen explained that any escrow
amount required under paragraph 4 of the settlement agreement would be
limited to the amount of the potential loss to be suffered if the FmHA was
successful in pursuing its claim against the estate. In other words, if
the value of the estate was less than the outstanding balance of the FmHA
loans, the maximum potential loss would be an amount equal to the value of
the estate. The Schwartzes asserted that they were not required under the
terms of the settlement agreement to deposit the full amount of the FmHA
indebtedness, but only to "escrow an amount . . . sufficient to pay such
claim, charge or liability." Settlement Agreement, ¶ 4 (emphasis added).
Nevertheless, Mair refused to provide what he considered to be confidential
financial information to the Schwartzes.
We disagree with the district court's conclusion that Mair's failure
to provide such information rendered the notification of
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the claim deficient. Instead, we conclude that Mair's unwillingness to
cooperate prevented the Schwartzes from complying with their duty to
resolve or cure the claim within ten days as required by the agreement.
As such, while the Schwartzes' duty to indemnify was adequately triggered,
the undisputed facts show that they were prevented from doing so by Mair's
own failure to cooperate. Thus, the Schwartzes' duty to resolve or cure
the claim within ten days was excused under these circumstances. See Zobel
& Dahl Constr. v. Crotty, 356 N.W.2d 42, 45 (Minn. 1984) ("[E]very contract
contains an implied condition that each party will not unjustifiably hinder
the other from performing."); Craigmile v. Sorenson, 80 N.W.2d 45, 49
(Minn. 1956) (where promisor is the cause of the failure of performance,
"he cannot take advantage of the failure") (citing 3 Williston, Contracts
(Rev. ed.) § 677).
III.
We next address the district court's determination that the
Schwartzes' entire obligation under the settlement agreement was
extinguished due to Mair's bad faith. The court's conclusion was based on
its findings that Mair breached the settlement agreement by filing the plea
of confession without prior notice and that Mair acted in bad faith by
failing to consent to the Schwartzes' $900,000 settlement agreement with
the FmHA. Upon review, we hold the district court erred in reaching these
conclusions.
First, the district court misapplied the clear terms of the
settlement agreement by concluding that Mair breached the notice
requirements of paragraph 4 when he filed the confession of judgment
without first informing the Schwartzes of his intention to do so. Under
paragraph 4, the Mairs agreed to "notify Schwartzes . . . of any claims."
As we have previously held, Mair satisfied this obligation. The district
court, however, apparently interpreted the contract to require Mair to send
an additional "notice of default" prior to filing the confession of
judgment.
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Paragraph 3(c) provides:
If Schwartzes fail to make any payment when due hereunder, and
fail to cure said default within ten days after Mairs give
notice of default by certified mail . . ., Mairs or their
attorney in fact may file said judgment against the Schwartzes
in any court in the State of Minnesota and proceed to exercise
all remedies to collect said judgment. . . .
The "notice of default" reference in paragraph 3(c) does not impose an
additional notice requirement on Mair, but instead refers to the
Schwartzes' "fail[ure] to make any payment when due" under the settlement
agreement. It is the Schwartzes' failure to make payment that results in
the referenced "default," and not their failure to cure a claim within ten
days. Therefore, under the unambiguous terms of the agreement, "notice of
claim" is synonymous with "notice of default" and Mair satisfied this
obligation via the January 19, 1992 letter to the Schwartzes. The district
court erred in holding that Mair breached the settlement agreement by
failing to inform the Schwartzes of his intention to file the confession
of judgment. Consequently, the court erred in negating the Schwartzes'
duty to indemnify based on this erroneous conclusion.
The district court also erred in concluding that any alleged bad
faith on the part of Mair excused the Schwartzes' entire obligation to
indemnify. While some courts have established the blanket proposition that
bad faith on the part of the indemnitee releases the indemnitor from his
obligations under the contract, other courts, particularly the Minnesota
Supreme Court, hold that an indemnitee's bad faith will discharge the
indemnitor to the extent that he has been damaged as a result of that act.
In New Amsterdam Cas. Co. v. Lundquist, 198 N.W.2d 543, 549 (Minn. 1972)
the Minnesota Supreme Court held:
[A]n indemnitee owes a duty of good faith to its
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indemnitor and . . . any act of the indemnitee which prejudices
the rights of the indemnitor will release his obligation to the
extent of the prejudice.
(Emphasis added). See also Denton v. Fireman's Fund Ind. Co., 352 F.2d
95, 99 (10th Cir. 1965).
Contrary to the clear law of Minnesota, the district court in the
present case discharged the Schwartzes' entire obligation under the
settlement agreement, without giving any consideration whatever to the
extent, if any, of the prejudice suffered by the Schwartzes as a result of
Mair's alleged bad faith. Even assuming that Mair acted in bad faith in
failing to consent to the proposed $900,000 settlement2, the Schwartzes
were ultimately able to settle with the government for that exact amount,
and thus suffered no prejudice.
Because they suffered no prejudice as a result of Mair's alleged bad
faith, the Schwartzes' obligation to indemnify under the settlement
agreement remained intact. The district court erred in concluding that the
Schwartzes no longer had a duty to indemnify Mair for claims arising from
the notes, and further erred in its concomitant holding that the Schwartzes
were entitled to sue Mair on the remaining balance of the notes, the same
notes for which the Schwartzes agreed to hold Mair harmless. To hold
otherwise would produce the untenable result of allowing the Schwartzes to
profit from their failure to satisfy their own indebtedness to the FmHA.
2
Mair, of course, claims there was no bad faith in his refusal
to sign the agreement as written because it required him to release
his claims against the Schwartzes for breaching the original
settlement agreement. He asserts that notwithstanding his promise
to consent to a satisfaction agreement with the FmHA, he was not
legally required to release all of his claims against the
Schwartzes.
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IV.
In summary, we hold that Mair adequately notified the Schwartzes of
the FmHA's claim against Mrs. Mair's estate. In this respect, we conclude
that the indemnification agreement was triggered and the Schwartzes had a
duty to indemnify Mair from this claim. However, the Schwartzes' attempts
to cure the claim were thwarted by Mair's failure to cooperate. Therefore,
the Schwartzes did not breach their duty to indemnify under the settlement
agreement and Mair was not entitled to the default judgment outlined in the
confession of judgment.
Finally, we conclude the Schwartzes were not prejudiced by any
alleged bad faith on the part of Mair as indemnitee, as the Schwartzes were
ultimately able to settle with the United States in an amount identical to
that proposed to and rejected by Mair. As such, the Schwartzes' duty to
indemnify remained intact and the district court erred in allowing the
Schwartzes to sue Mair on the same obligations under which they had agreed
to indemnify him.
This conflict has lasted for ten years now, each party contributing
to a bitter and protracted legal battle. Neither party comes to this court
with entirely clean hands and neither party is entitled to the respective
windfalls that they seek. Both parties have received substantially what
they bargained for.
Our conclusions herein obviate the need to discuss any further issues
presented in either the appeal or cross-appeal. The denial of Mair's
motion for damages incident to the confession of judgment is affirmed. The
order granting the Schwartzes' motion to be substituted as plaintiffs and
the judgment in favor of the Schwartzes as assignees of the notes are
reversed.
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A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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