Fallon Electric Co. v. Cincinnati Insurance

Opinions of the United
1997 Decisions States Court of Appeals
for the Third Circuit
7-30-1997
Fallon Elec Co Inc v. Cincinnati Ins Co
Precedential or Non-Precedential:
Docket 96-3559,96-3560
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Recommended Citation
"Fallon Elec Co Inc v. Cincinnati Ins Co" (1997). 1997 Decisions. Paper 183.
http://digitalcommons.law.villanova.edu/thirdcircuit_1997/183
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iled July 30, 1997
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 96-3559 and 96-3560
FALLON ELECTRIC CO., INC.
v.
THE CINCINNATI INSURANCE COMPANY,
Third-Party Plaintiff
v.
RAVIN, INC.; RALPH P. MUROVICH;
DARLENE A. MUROVICH,
Third-Party Defendants
The Cincinnati Insurance Company,
Appellant No. 96-3559
COREY FOOD SERVICE EQUIPMENT, INC.
v.
THE CINCINNATI INSURANCE COMPANY,
Third-Party Plaintiff
v.
RAVIN, INC.; RALPH P. MUROVICH;
DARLENE A. MUROVICH,
Third-Party Defendants
The Cincinnati Insurance Company,
Appellant No. 96-3560
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Nos. 94-cv-01079 and 94-cv-01519)
Argued June 13, 1997
BEFORE: COWEN, ALITO and GARTH, Circuit Judges
(Filed July 30, 1997)
Jack W. Plowman, Esq.
David Raves, Esq. (Argued)
Plowman, Spiegel & Lewis
310 Grant Street
The Grant Building, 2nd Floor
Pittsburgh, PA 15219-2204
COUNSEL FOR APPELLANT
Cincinnati Insurance Company
Gerard J. Cipriani, Esq.
Anthony W. Hinkle, Esq. (Argued)
Cipriani & Werner
2500 Two Oliver Plaza
Pittsburgh, PA 15222
COUNSEL FOR APPELLEES
Ravin, Inc.
Ralph P. Murovich
Darlene A. Murovich
OPINION OF THE COURT
COWEN, Circuit Judge.
This is an appeal from the July 24, 1996, judgment of
the district court awarding appellant Cincinnati Insurance
Company ("CIC") attorney's fees in the amount of
$53,429.21 and expenses of $1,417.00. CIC has appealed
the amount of fees awarded by the district court and it
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requests an order directing an award of its attorney's fees
incurred on this appeal. We will vacate the judgment of the
district court and remand with instructions to enter
judgment in favor of CIC in the amount of $87,752.24 in
attorney's fees and $1,417.00 in expenses heretofore
approved.
I.
In 1993, appellee Ravin, Inc. was awarded a general
contract on a construction project located in Westmoreland
County, Pennsylvania. Ravin, Inc. contracted with a
number of subcontractors to perform various jobs. Ravin,
Inc. obtained from CIC a labor and materials payment
bond, under which CIC agreed to act as Ravin Inc.'s surety
and to make payments to the subcontractors in the event
that Ravin, Inc. failed in its obligation to do so. In
exchange, Ravin, Inc. and its owners, appellees Ralph and
Darlene Murovich (collectively "Ravin"), executed an
indemnity agreement that provided that they would
exonerate, indemnify and keep indemnified [CIC] from
and against any and all liability for losses and
expenses of whatsoever kind or nature, including the
fees and disbursements of counsel, and against any
and all said losses and expense which [CIC] may
sustain or incur: (i) by reason of having executed or
procured the execution of any Bond or Bonds; (ii) by
reason of the failure of [Ravin] to perform or comply
with the covenants and conditions of this Agreement;
or (iii) in enforcing any of the covenants and conditions
of this Agreement. [CIC] may pay or compromise any
claim, demand, suit, judgment or expense arising out
of such Bond or Bonds and any such payment or
compromise shall be binding upon [Ravin] and
included as a liability, loss or expense covered by this
Indemnity Agreement, provided the same was made by
[CIC] in the reasonable belief that it was liable for the
amount disbursed, or that such payment or compromise
was reasonable under all of the circumstances. In the
event of any such payment or compromise by [CIC], an
itemized statement thereof sworn to by any
representative of [CIC] familiar with the facts, or the
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voucher or vouchers or other evidence of such payment
or compromise shall be prima facia [sic] evidence of the
facts and the amount of the liability of [Ravin] under
this Agreement.
App. at 30 (emphasis added).
Fallon Electric Company and Corey Food Service
Equipment, two of the subcontractors, subsequently
brought this action against CIC in the district court. Fallon
and Corey alleged that Ravin had failed to pay them for
materials they had provided for the project. They asserted
that CIC was liable for these amounts pursuant to the
payment bond. CIC subsequently joined Ravin pursuant to
the indemnity agreement for any losses it would incur as a
result of the litigation, including the costs of the suit.
Fallon and Corey then added claims against Ravin for the
amounts they had sought from CIC. Ravin contested its
liability to Fallon and Corey, relying on the same affirmative
defenses raised by CIC. CIC and Ravin each retained
separate counsel. Ravin also contested its liability under
the indemnity agreement. Before trial the district court
ruled that the indemnity agreement was valid and
enforceable.
CIC's counsel was present at trial but did not cross-
examine any witnesses, relying on Ravin's counsel for that
purpose. Before the trial was concluded, CIC and Ravin
settled Fallon's and Corey's claims. CIC then sought
$87,752.24 in attorney's fees and $1,417.00 in expenses
from Ravin pursuant to the indemnity agreement, incurred
in defending Fallon's and Corey's suit, as well as actions
brought by several other subcontractors that were then
pending in state court.
The district court reviewed testimony from the trial in
order to determine the amount of attorney's fees and
expenses CIC should be awarded. At trial, CIC introduced
testimony regarding the attorney's fees and expenses it
incurred. Ravin conducted a short cross-examination of
CIC's witness. See App. at 171-74. However, Ravin did not
introduce any evidence to demonstrate that the fees were
incurred unreasonably, in bad faith, or through fraud, or
that CIC acted unreasonably in paying the fees.
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On July 24, 1996, the district court awarded CIC
expenses in the requested amount of $1,417.00. However,
it awarded CIC attorney's fees in the amount of only
$53,429.21, some $34,000 less than the sum requested by
CIC. The district court concluded that the excess amount of
attorney's fees sought by CIC was not incurred out of
reasonable necessity. CIC appeals. Ravin has not cross-
appealed.
II.
The district court exercised diversity jurisdiction
pursuant to 28 U.S.C. § 1332 (1993). Fallon, Corey, and
Ravin are all Pennsylvania corporations with their principal
places of business in Pennsylvania. The Muroviches are
residents of Pennsylvania. CIC is an Ohio corporation with
its principal place of business in Ohio. The amount in
controversy exceeds $50,000. This Court has jurisdiction
over the district court's final judgment pursuant to 28
U.S.C. § 1291 (1993).
III.
The parties agree that the indemnity agreement is
governed by Pennsylvania law. CIC argues that the district
court erred by imposing a reasonableness requirement on
the amount of attorney's fees, especially in light of the
"prima faci[e] evidence" language in the indemnity
agreement. App. at 30. In addition, Ravin offers two reasons
that the judgment of the district court should be reversed
or modified in its favor. We will address these issues in
turn.
A.
Pursuant to Pennsylvania law, in construing an
indemnity agreement, as with any other contract, the court
must determine the intentions of the parties. See Brotherton
Constr. Co. v. Patterson-Emerson-Comstock, Inc., 178 A.2d
696, 697 (Pa. 1962); Fulmer v. Duquesne Light Co., 543
A.2d 1100, 1104 (Pa. Super. 1988). Such intentions should
be ascertained primarily by looking to the language used in
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the agreement. See Brotherton, 178 A.2d at 697; Emery v.
Metzner, 156 A.2d 627, 630 (Pa. Super. 1959).
CIC argues that, in light of the "prima faci[e] evidence"
language in the indemnity agreement, the district court
erred in imposing on CIC the burden of proving that the
attorney's fees it sought were incurred out of reasonable
necessity. We agree.
The district court cited cases from various jurisdictions in
support of its conclusion that "a surety may recover fees
and expenses under an indemnity agreement only if it was
``reasonably necessary' for the surety to incur them . . . even
where the contract of indemnity contains no explicit
provision mandating reasonableness on the part of the
surety." App. at 284 (citing United States Fidelity and Guar.
Co. v. Love, 538 S.W.2d 558, 559 (Ark. 1976); Redfern v.
R.E. Dailey & Co., 379 N.W.2d 451, 456-57 (Mich. Ct. App.
1985); Perkins v. Thompson, 551 So. 2d 204, 209 (Miss.
1989); Sentry Ins. Co. v. Davison Fuel & Dock Co., 396
N.E.2d 1071, 1074 & n.2 (Ohio Ct. App. 1978); Central
Towers Apts., Inc. v. Martin, 453 S.W.2d 789, 799 (Tenn.
Ct. App. 1969); James Constructors, Inc. v. Salt Lake City
Corp., 888 P.2d 665, 667, 668-69 (Utah Ct. App. 1994)).
The district court concluded "that the Pennsylvania
Supreme Court would adopt this well-reasoned line of
authority." Id. at 285. It expressly placed the burden of
proving reasonable necessity upon CIC and found that CIC
had not sustained that burden as to a portion of the
requested fees. See id. at 286-87.
The district court was correct that several courts have
imposed on indemnitees the burden of proving the
reasonable necessity of attorney's fees sought pursuant to
indemnity agreements. However, none of the cases cited
involved indemnity agreements that contained the same
"prima faci[e] evidence" language at issue here. See Love,
538 S.W.2d at 558; Redfern, 379 N.W.2d at 454-55;
Perkins, 551 So. 2d at 209; Sentry, 396 N.E.2d at 1072;
Central Towers, 453 S.W.2d at 793-94; James, 888 P.2d at
668.
Although neither the Pennsylvania courts nor we have
ruled on the issue of the effect of such language, 1 various
_________________________________________________________________
1. CIC places great reliance on an unpublished opinion of this Court,
American States Ins. Co. v. Uhutch, No. 89-3083 (3d Cir. Jan. 24, 1990).
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other courts have. The opinions of these courts
demonstrate that the "prima facie evidence" language at
issue here shifts to the indemnitor the burden of proving
the fees are excessive. How the indemnitor may prove that
the fees may not be recovered is dependent upon the
language of the indemnity agreement.
For example, in Transamerica Premier Ins. Co. v. Nelson,
878 P.2d 314, 318 (Nev. 1994) (per curiam), the Nevada
Supreme Court noted that the indemnity agreement there
provided "that in any claim or suit, an itemized statement
of expenses is prima facie evidence of the fact and extent of
the liability of the indemnitor." The indemnitor had agreed
to reimburse the indemnitee "for all expenses incurred in
good faith." Id. at 316. The court held that the "good faith"
language obviated any inquiry into the reasonableness of
the costs incurred and required that the court consider
"only whether the attorney's fees were incurred in good
faith." Id. at 317. The court stated: "When the parties
contractually agree that good faith is the standard,
undertaking a determination of anything other than good
faith is inappropriate." Id. The court further concluded that
the "prima facie evidence" language shifted to the
indemnitor the burden of proving bad faith. See id. at 318.
Similarly, in United States Fidelity & Guar. Co. v. Napier
Elec. & Constr. Co., 571 S.W.2d 644, 645 (Ky. Ct. App.
1978), the indemnity agreement provided that the
indemnitor would be liable to the surety
for all "liabilities, losses and expenses" incurred by
[Surety], including all amounts paid by [Surety] "in
good faith under the belief that: (1) Surety was or
might be liable therefor; (2) Such payments were
necessary or advisable to protect any of Surety's right
or to avoid or lessen Surety's liability or alleged
liability."
(quoting indemnity agreement). The agreement further
provided that "vouchers or other evidence of payments or
_________________________________________________________________
However, the Court does not regard such opinions as binding precedent.
See Third Circuit Internal Operating Procedures ch. 5.8 (1994).
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an itemized statement of payments sworn to by an officer of
the surety shall be prima facie evidence of the fact and
extent of the liability of the indemnitor to the surety." Id. at
646. The court held that under such an agreement, "the
indemnitor may successfully attack payments made by the
surety only by pleading and proving fraud or lack of good
faith by the surety." Id.
Finally, in Hawaiian Ins. & Guar. Co. v. Higashi, 675
P.2d 767, 769 (Haw. 1984), the Hawaii Supreme Court
addressed, albeit in dictum, the situation where an
indemnity agreement provides that payment of monies by
an indemnitee is prima facie evidence of an indemnitor's
liability. The court wrote: "Obviously, where such a
provision is in the agreement, the burden of proof on th[e]
issues [of reasonableness and good faith] shifts." Id.
In addition to the courts in Nelson, Napier Electric, and
Higashi, several courts have noted that such a "prima facie
evidence" clause in an indemnity agreement is valid and
enforceable. See, e.g., Continental Cas. Co. v. American Sec.
Corp., 443 F.2d 649, 652-53 (D.C. Cir. 1970) (per curiam);
Transamerica Ins. Co. v. Bloomfield, 401 F.2d 357, 362 (6th
Cir. 1968) (applying Tennessee law); Carroll v. National
Surety Co., 24 F.2d 268, 270 (D.C. Cir. 1928); International
Fidelity Ins. Co. v. United Constr., Inc., No. 91-2361, 1992
WL 111368, at *2-3 (E.D. Pa. May 15, 1992) (applying
Pennsylvania law); Curtis T. Bedwell & Sons, Inc. v.
International Fidelity Ins., No. 83-5733, 1989 WL 55388, at
*3 (E.D. Pa. May 23, 1989) (same); Buckeye Union Ins. Co.
v. Boggs, 109 F.R.D. 420, 423-24 (S.D. W. Va. 1986)
(applying West Virginia law); Commercial Union Ins. Co. v.
Melikyan, 430 So. 2d 1217, 1221 (La. Ct. App. 1983). While
these courts have declined to state the precise effect of
such language, Ravin has not cited a single case for the
proposition that the language has no effect whatsoever or
that the effect of such language is anything other than that
described in Nelson, Napier Electric, and Higashi.
We conclude that the Pennsylvania courts would hold
that a "prima facie evidence" clause in an indemnity
agreement shifts to the indemnitor the burden of proving
that the costs incurred were not recoverable. We further
conclude that what an indemnitor must demonstrate to
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escape liability for attorney's fees depends upon the precise
language used in the agreement. In Napier Electric, 571
S.W.2d at 646, and Nelson, 878 P.2d at 317-18, the
Kentucky and Nevada courts held that the indemnitor must
prove bad faith or fraud on the part of the indemnitee in
order to avoid payment. However, this result followed from
express language in the indemnity agreements in those
cases providing that the indemnitees were bound only by a
"good faith" standard. See Napier Electric, 571 S.W.2d at
645; Nelson, 878 P.2d at 316. Here, by contrast, the
agreement provides that Ravin would be liable to indemnify
CIC only for those payments "made . . . in the reasonable
belief that [CIC] was liable for the amount disbursed, or
that such payment or compromise was reasonable under all
of the circumstances." App. at 30 (emphasis added).
Pursuant to the foregoing, the court should have placed on
Ravin the burden of proving both that: CIC did not actually
believe that it was liable for the attorney's fees disbursed,
or that its belief in that respect was unreasonable; and CIC
did not actually believe that the payment of such fees (as
opposed to the incurrence of the fees) was reasonable under
all the circumstances, or that its belief in that respect was
unreasonable.2 A showing that CIC did not actually believe
it was liable for the fees or that CIC did not actually believe
that the payment of such fees was reasonable under all the
circumstances would be tantamount to a showing of bad
faith or fraud.
The district court here expressly placed the burden on
CIC of proving the reasonable necessity of the attorney's
fees, and found that CIC had not met that burden. See
App. at 286. In refusing to reallocate the burden of proof in
accordance with the foregoing, the district court
impermissibly ignored the terms of the indemnity
agreement.
Ordinarily, we would remand this matter for a
determination of attorney's fees based on the proper
standard. However, Ravin produced no evidence at trial,
_________________________________________________________________
2. We express no opinion as to what standard, if any, the Court would
apply absent any language regarding either good faith or reasonableness
of the incurrence or payment of the fees.
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either directly or through cross-examination of CIC's
witness, that would satisfy the burden it bore in
overcoming CIC's prima facie case of entitlement. Ravin
introduced no evidence to show either that CIC's belief that
the payments were necessary was unreasonable, or that the
payment of the fees was unreasonable under all the
circumstances. That being so, Ravin's sole remaining
grounds to challenge the attorney's fees claimed by CIC was
bad faith, and Ravin produced no evidence, and has not
argued on appeal, that CIC acted in bad faith. Indeed, the
record is devoid of any indication that CIC acted in bad
faith. In such circumstances, a remand for redetermination
by the district court is unnecessary. See Fischer v.
Philadelphia Elec. Co., 96 F.3d 1533, 1541 (3d Cir. 1996),
cert. denied, ___ U.S. ___, 117 S. Ct. 1247 (1997); Hanover
Potato Prods., Inc. v. Shalala, 989 F.2d 123, 131 (3d Cir.
1993). Therefore, we will simply vacate the judgment of the
district court and remand with directions to enter judgment
in favor of CIC, awarding it expenses and attorney's fees in
the amount it requested.
B.
Ravin requests that we reverse or modify the judgment of
the district court in Ravin's favor, contending that the
district court erred in two respects. However, as we noted
above, Ravin has conceded that it did not file a notice of
cross-appeal pursuant to FED. R. APP. P. 4(a)(3). See
Appellee's Br. at 6. Thus, we may not consider Ravin's
contentions unless "the disposition as to [the appealing]
party is inextricably intertwined with the interests of a non-
appealing party so as to make it impossible to grant relief
to one party without granting relief to the other." United
States v. Tabor Court Realty Corp., 943 F.2d 335, 344 (3d
Cir. 1991); see also Repola v. Morbark Indus., Inc., 980 F.2d
938, 940-41 (3d Cir. 1992). Ravin has not provided us with
any reason why this exception applies here and we fail to
perceive any. Accordingly, we will not consider Ravin's
contentions.
IV.
The judgment of the district court will be vacated. The
matter will be remanded to the district court with
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instructions to enter judgment in favor of CIC awarding it
attorney's fees in the amount of $87,752.24 and expenses
of $1,417.00.
Costs taxed against appellees.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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