Transit Casualty Co. v. Selective Ins. Co. ( 1998 )


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  •                         United States Court of Appeals
    FOR THE EIGHTH CIRCUIT
    __________
    No. 97-1090
    __________
    Transit Casualty Company,                       *
    *
    Plaintiff/Appellee,                       *       Appeal from the United
    States
    *        District Court for the Western
    v.                               *        District of Missouri
    *
    Selective Insurance Company                         *
    of the Southeast,                         *
    *
    Defendant/Appellant.                  *
    _________
    Submitted: June 11, 1997
    Filed: February 18, 1998
    _________
    Before WOLLMAN, BEEZER1 and MURPHY, Circuit Judges.2
    1
    The Honorable Robert R. Beezer, United States Circuit Judge for the Ninth
    Circuit Court of Appeals, sitting by designation.
    2
    This case was submitted to the panel on June 11, 1997, and an opinion was
    filed on September 5, 1997. On October 15, 1997, the panel granted rehearing on
    certain issues. See Transit Casualty Co. v. Selective Ins. Co. of the Southeast, 
    122 F.3d 1137
    (8th Cir. 1997). Judge Henley, a member of the original panel, died on
    October 18, 1997. Pursuant to the court’s random selection process, Judge Murphy
    was named to take Judge Henley’s place on the panel.
    The panel now files this amended opinion in place of the September 5, 1997,
    opinion.
    _________
    BEEZER, Circuit Judge:
    Selective Insurance Company appeals the district court’s summary
    judgment holding that Selective may not offset its debt to Transit Casualty
    Company against the sums owed by Transit to Selective. The district court
    held that the contractual right of offset between the parties conflicted
    with the insolvency clause in the contracts and that granting the offset
    violated Missouri public policy.      Accordingly, the court found that
    Selective owed the full sum of its obligations to Transit and awarded
    prejudgment interest.     We have jurisdiction over this timely appeal
    pursuant to 28 U.S.C. § 1291, and we reverse.
    I
    This case involves two sets of contracts. The first set concerns
    three retrocession contracts which Transit entered into in 1983, with
    Fortress Re as the reinsurance underwriting manager on behalf of
    Selective.3 Pursuant to these three contracts, Transit has submitted a
    number of claims that remain unpaid. As of the date of summary judgment
    in this case, Fortress, on behalf of Selective, owed Transit $183,390.98.
    In the second set of contracts, Transit acted as reinsurer for
    Fortress. Between 1980 and 1985, Transit entered into ten reinsurance
    contracts with Fortress, acting on behalf of its member companies, one of
    whom is Selective. Although none of the
    3
    Selective was formerly known as Southeastern Insurance Company.
    -2-
    member companies was named in those contracts, i.e., only Fortress was a
    signatory, it is undisputed that Fortress acted as Selective’s agent in
    connection with those contracts.4 Under these ten contracts, Transit owes
    the Fortress companies unpaid claims in the amount of $337,974.68.
    Selective was a member company for the time period covered by six of the
    contracts.
    Transit went into receivership on December 3, 1985, and liquidation
    proceedings began in Missouri.                 Fortress filed claims in the Transit
    receivership proceeding under each of the ten reinsurance contracts. Eight
    of these ten claims were allowed by the receiver, for a total amount of
    $316,364.35. The parties have stipulated both to the amount of money Transit owes under the reinsurance
    contracts and to Selective’s share of that amount; it is undisputed that Transit owes Selective $32,432.23.
    The receiver for Transit subsequently brought this action against
    Selective in Missouri state court seeking recovery of the sums owed by
    Selective under the three retrocession contracts. Selective removed the
    action to federal court and pleaded as an affirmative defense that it had
    a right to offset the sums it owed to Transit against funds owed by Transit
    to Selective under the ten reinsurance contracts.
    The retrocession contracts, under which Transit brought this action
    against
    4
    In the parties’ letter briefs submitted in connection with Selective’s petition
    for rehearing, the parties agree that Fortress was Selective’s agent. Selective
    repeatedly referred to Fortress as its agent. (See Selective Ltr. Brief passim.)
    Similarly, Transit conceded that Fortress acted as Selective’s agent. Transit stated in
    its Letter Brief that “Transit agrees with Selective that Fortress Re was the only
    signatory to [the retrocession contract] and did so as Selective’s authorized agent.”
    (Transit Ltr. Brief at 2.) Transit also stated that “[a]lthough Selective did not produce
    this third party Agreement between the ``member companies’ of the pool of reinsurers
    and the underwriting agent Fortress Re, Transit does not contest that Fortress Re acted
    as Selective’s agent.” (Transit Ltr. Brief at 3, n.2.)
    -3-
    Selective, contain an insolvency provision. The reinsurance contracts,
    under which Selective claims a right of offset, contain both an insolvency
    clause and an offset clause.
    The district court granted summary judgment in favor of Transit,
    holding that the insolvency clause conflicted with the set-off clause in
    the reinsurance contracts, and that upon Transit’s insolvency the
    insolvency clause governed the rights of the parties. The district court
    further held that the insolvency clause did not grant an inter-contract
    set-off right and that, even if it did, such a set-off would be contrary
    to Missouri’s Insurance Code and was void.
    II
    We review the district court’s grant of summary judgment de novo.
    Kielmele v. Soo Line R.R. Co., 
    93 F.3d 472
    , 474 (8th Cir. 1996). In this
    diversity case, the interpretation of the insuring agreement is a matter
    of state law, General Cas. Ins. Co. v. Holst Radiator Co., 
    88 F.3d 670
    , 671
    (8th Cir. 1996), and we review de novo the district court’s interpretation
    of state law. Salve Regina College v. Russell, 
    499 U.S. 225
    , 231 (1991).
    Selective’s appeal presents three issues for resolution: (1) whether
    the allowance of a set-off violates the Missouri Insurance Code; (2)
    whether the parties contracted to allow a set-off; and (3) whether
    Selective is entitled to a set-off in this case. We answer the first
    question in the negative and the second in the affirmative, and hold that
    Selective may avail itself of the contractual right of set-off because the
    parties’ obligations were mutual.
    A.
    The first question presented by Selective’s appeal is whether the
    offset of debts in insolvency violates the Missouri Insurance Code or
    otherwise violates Missouri
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    public policy. If such a prohibition is discovered, any contractual right
    of offset is irrelevant. Transit contends that the Missouri Insurance Code
    constitutes a comprehensive scheme for the resolution of the failed
    insurer’s assets and that the Code does not condone set-offs. Moreover,
    argues Transit, allowing set-offs would subvert the priority of creditors
    established in the Code.
    Selective, on the other hand, argues that set-offs merely establish
    the bounds of the pre-receivership assets and that the Insurance Code
    governs only the distribution of those assets, rather than their
    definition. We agree with Selective that nothing in the Insurance Code nor
    in Missouri common law indicates that Missouri rejects the right of parties
    to contract for a right to offset debts.
    In 1892 the Supreme Court held that the right to assert set-off in
    insolvency was customary both statutorily and as a matter of equity.
    Indeed, the Court stated that “where the mutual obligations have grown out
    of the same transaction, insolvency on the one hand justifies the set-off
    of the debt due upon the other.” Scott v. Armstrong, 146 U.S 499, 507
    (1892). The Court went on to hold that “[w]here a set-off is otherwise
    valid, it is not perceived how its allowance can be considered a
    preference, and it is clear that it is only the balance, if any, after the
    set-off is deducted, which can justly be held to form part of the assets
    of the insolvent.” 
    Id. at 510.
    The Supreme Court of Missouri subsequently dealt with the question
    of offset in an insurance insolvency proceeding. The Court recognized the
    right to offset debts, but disallowed the offset because of the lack of
    mutuality of obligation. Citing Scott v. Armstrong, the Missouri Supreme
    Court stated that the “right to assert set-off at law is of statutory
    creation, but courts of equity from a very early day have been accustomed
    to grant relief in that regard independently as well as in aid of statutes
    upon the subject.” Sturdivant Bank v. Stoddard County, 
    58 S.W.2d 702
    , 703
    (1933). Thus, the broad principle of offset in insurance insolvencies has
    been accepted by Missouri courts. Missouri courts continue to allow offset
    in contractual disputes. See
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    Greenwood v. Bank of Illmo, 
    782 S.W.2d 783
    (1989); Edmonds v. Stratton, 
    457 S.W.2d 228
    (1970).
    The Missouri Insurance Code establishes the priority of creditors in
    the case of an insurer insolvency.5 This section, along with the remainder
    of the statute, dictates the order of distribution of the insolvent
    insurance company’s assets at the time the receivership or liquidation
    order is entered. If, as is contemplated in Scott v. Armstrong, set-off
    defines the nature of the insolvent’s assets, allowing set-off does not
    subvert the priority of creditors established by statute. Because the
    Missouri courts have accepted the right of parties to offset debts and have
    adopted Scott v. Armstrong, we believe that the Missouri Supreme Court
    would hold that a mutual set-off may constitute a pre-receivership asset
    that does not subvert the priority of creditors listed in the Insurance
    Code.
    5
    Mo. Rev. Stat. § 375.700 (1997) provides:
    1.Unless reinsurance of a dissolved insurer is effected and its
    assets conveyed to the reinsuring company as provided by law, and
    unless such insurer is being rehabilitated under other provisions of
    sections 375.010 to 375.1246, the receiver, under the direction of
    the court, shall apply the sums realized from the assets of such
    insurer in hereafter making any partial or final distribution, in the
    following order:
    (1) To payment of all the expenses of closing the business and
    disposing of the assets of such insurer;
    (2) To the payment of all lawful taxes and debts due the state
    and the counties and municipalities of this state;
    (3) To the payment of policy claims;
    (4) To the payment of debts due the United States;
    (5) To the payment of the other debts and claims allowed
    against such insurer, and the unearned premiums and the
    surrendered value of its policies, in proportion to their respective
    amounts.
    -6-
    We are aware that the allowance of set-offs affects the nature of the
    claims allowed:
    Whereas the allowance of set-offs furthers some public
    policies, it may conflict with other public policies that guide
    the administration of insolvent estates: the prohibition of
    preferences (the preferential treatment of one creditor over
    another), and the guarantee of a pro rata distribution of
    estate assets.       There is no question that in some
    circumstances, the application of set-off principles works to
    the advantage of one particular creditor, or class of
    creditors, and to the disadvantage of others. For nearly two
    thousand years, however, courts and legislatures have resolved
    the tension between these competing public policies in favor of
    set-offs.
    Stephen W. Schwab et al., Onset of an Offset Revolution: The Application
    of Set-Offs in Insurance Insolvencies, 95 Dick.L.Rev. 449, 454 (1991).
    Acknowledging this tension, we hold that parties in Missouri may contract
    to offset mutual debts.
    The allowance of set-off in Missouri insurance insolvencies does not
    contradict the Missouri Insurance Code and it does not otherwise violate
    Missouri public policy. There is no indication in Missouri case law that
    the right to set-off has been rejected. Moreover, to allow set-off aligns
    Missouri with almost all other states. See 
    id. at App.
    A. Indeed, since
    Transit’s insolvency, Missouri has enacted a set-off provision, an
    indication that set-offs likely did not violate public policy prior to the
    enactment. Mo. Rev. Stat. § 375.1198 (1997).
    B.
    Given that parties in Missouri are free to contract for a right of
    set-off, we next consider whether the parties did, in fact, bargain for a
    right of offset. We hold that the contracts at issue here allow for the
    set-off of mutual obligations.
    The retrocession contracts, under which Transit brought this suit,
    do not contain a set-off clause. But the ten reinsurance contracts, under
    which Transit owes money
    -7-
    to Fortress Re, do:
    The parties may offset any balances (whether on account of
    premium, commission, claims, losses, loss adjustment expenses,
    salvage or other) due from one party to the other under this
    Contract or under any other Contract heretofore or hereafter
    entered into by the parties.
    The district court found that the offset clause conflicted with the
    following insolvency clause:
    In the event of the insolvency of [Transit] it is understood
    and agreed that [the Fortress companies’] claim against
    [Transit] in the insolvency proceeding shall consist of all
    amounts owing to [the Fortress companies] from [Transit] on the
    date of the entry of a receivership or liquidation order, . .
    . including but not limited to, liquidated and unliquidated
    claims and claims undetermined in amount on said date, all such
    claims being deemed hereby to be in existence as of such date
    less those amounts owing from the [Fortress companies] to
    [Transit] on the date of the entry of the aforesaid
    receivership or liquidation order.
    We disagree with the district court that the clauses cannot operate
    simultaneously. In interpreting a contract under Missouri law, we attempt
    to harmonize the various provisions of a contract, and we read them to
    avoid a conflict. Phillips v. Authorized Investors Group, 
    625 S.W.2d 917
    ,
    921 (Mo. App. 1981). If the terms of the contract are clear, we apply
    those provisions as written. We find that the contract here is clear and
    that there is no necessary conflict between the two clauses.
    The insolvency clause stipulates that, in the event of Transit’s
    insolvency, the Fortress companies’ claims would be deemed to be in
    existence as of the date of insolvency and that the amount owed by the
    Fortress companies to Transit would be deducted from the claimed amount.
    This appears to be a set-off clause within the insolvency clause. Transit
    maintains that it covers only debts under the reinsurance
    -8-
    contracts and does not apply to obligations under other contracts, as the
    set-off clause does.
    We are unconvinced by Transit’s argument. The two clauses may be
    read harmoniously, and there is no reason not to do so in this case. The
    insolvency clause does not clearly limit its offset provision to sums owed
    under the reinsurance contract; the offset clause clearly does apply to
    sums owed under other contracts between the parties. Accordingly, the
    reinsurance contracts provide for an inter-contract right of set-off. We
    see no reason why the insolvency clause and the set-off clause cannot
    operate simultaneously. Together, these two clauses manifest an intent by
    the parties to allow set-off of mutual obligations.
    III
    We next consider whether Selective may set-off its debt to Transit.
    In order for a set-off to be applied, the parties must be “mutually
    indebted.”    Sturdivant 
    Bank, 58 S.W.2d at 704
    .       “It is a rule of
    practically universal application that to warrant a set-off at law the
    demands must be mutual and subsisting between the same parties, due in the
    same capacity or right, and there must be mutuality as to the quality of
    right.”    
    Id. at 703-04.
       In other words, “the mutuality of capacity
    requirement means that in order for debts to be set off in an insurance
    insolvency, the parties between whom the set-off is to be made must stand
    in the same relationship or capacity to each other.” Schwab, 95 Dick. L.
    Rev. at 478.
    It is undisputed that Fortress acted as Selective’s agent with
    respect to the reinsurance contracts. More specifically, Selective was a
    partially disclosed principal with respect to the reinsurance contracts.
    A “partially disclosed principal” is a party whose existence, but not
    identity, is disclosed to the other parties to the contract. Restatement
    (Second) of Agency § 4(2) (1958).      The Restatement (Second) of Agency
    provides that “[t]he other party to a contract made by an agent for a
    disclosed or partially disclosed principal . . . is liable to the principal
    as if he had contracted directly
    -9-
    with the principal.” Restatement (Second) of Agency § 292 (1958); cf.
    Quick Erectors, Inc. v. Seattle Bronze Corp., 
    524 F. Supp. 351
    , 356 (E.D.
    Mo. 1981) (citing Sonnenfeld Millinery Co. v. Uhri, 
    83 S.W.2d 168
    , 169 (Mo.
    Ct. App. 1935)) (a nonfraudulently undisclosed principal may enforce a
    contract under Restatement (Second) of Agency § 304); Phillips v. Hoke
    Constr., Inc., 
    834 S.W.2d 785
    , 788-89 (Mo. Ct. App. 1992) (citing
    Sonnenfeld Millinery Co.). Thus, although only Fortress and Transit are
    signatories to the reinsurance contracts, Selective, as a partially
    disclosed principal, may bring a cause of action against Transit under
    those reinsurance contracts; similarly, Transit may sue Selective under the
    retrocession contracts.     See Sturdivant 
    Bank, 58 S.W.2d at 704
    (“If
    defendant’s demand is due and payable while plaintiff’s is not . . . it
    seems clear that the parties are not mutually indebted.”); see also
    Greenwood v. Bank of Illmo, 
    782 S.W.2d 783
    , 786 (1989), quoting Dalton v.
    Sturdivant Bank, 
    76 S.W.2d 425
    , 426 (1934) (“It is a general rule of
    practically universal application at law that, to warrant a set-off, the
    demands must be mutual and subsisting between the same parties and must be
    due in the same capacity of right. Equity usually follows the law, and it
    is held as a general rule that in equity as at law the right of set-off is
    reciprocal, and only mutual claims and such as are in the same capacity or
    right can be set off.”) In short, Selective contracted both as reinsurer
    and reinsured with Transit.      Accordingly, Transit and Selective are
    mutually indebted, and Selective prevails on its affirmative defense of
    set-off.
    IV
    Selective finally contends that the district court erred in awarding
    prejudgment interest from 90 days after each demand Transit made for
    payment of claims under the retrocession contracts. Selective argues that
    the debts were not liquidated until February 17, 1995, the date the parties
    stipulated to the amount of insurance proceeds at issue. The district
    court found that Transit had made demands for proceeds from claims due
    every year since 1986 and awarded prejudgment interest from 90 days after
    each demand. Whether the district court had authority to grant prejudgment
    interest is a question of state law which we review de novo. Latham Seed
    Co. V. Nickerson
    -10-
    American Plant Breeders, Inc., 
    978 F.2d 1493
    , 1501-02 (8th Cir. 1992).
    The Missouri Code provides: “Creditors shall be allowed to receive
    interest at the rate of nine percent per annum, when no other rate is
    agreed upon, for all moneys after they become due and demand of payment is
    made.” Mo. Rev. Stat. § 408.020 (1997) In Missouri, prejudgment interest
    will be awarded only on liquidated claims, and a claim is liquidated when
    it is “fixed and determined or readily ascertainable by computation or
    recognized standard.” Schnucks v. Carrollton Corp. v. Bridgeton Health and
    Fitness, Inc., 
    884 S.W.2d 733
    , 740 (1994). Under this standard, Transit’s
    claims under the contracts were ascertainable at the date of the demand.
    Transit is entitled to prejudgment interest to be fixed by the district
    court in its judgment on remand.
    The judgment of the district court is REVERSED, and the case REMANDED
    for further proceedings consistent with this opinion.
    A true copy.
    Attest:
    CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT
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