CSX Transportation v. Crislip Motor Lodge

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
CSX TRANSPORTATION,
INCORPORATED,
Plaintiff-Appellant,
v.
No. 96-1951
CRISLIP MOTOR LODGE,
INCORPORATED; STATE FARM FIRE AND
CASUALTY COMPANY,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of West Virginia, at Clarksburg.
William M. Kidd, Senior District Judge.
(CA-94-106-1, CA-93-157-1)
Argued: June 5, 1997
Decided: July 8, 1997
Before RUSSELL, HAMILTON, and MOTZ,
Circuit Judges.
_________________________________________________________________
Vacated and remanded for further proceedings by unpublished per
curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: Ransom J. Davis, DANEKER, MCINTIRE & DAVIS,
P.C., Baltimore, Maryland, for Appellant. Beth Ann Raffle, STEP-
TOE & JOHNSON, Morgantown, West Virginia, for Appellees. ON
BRIEF: Jeffrey P. Buhrman, DANEKER, MCINTIRE & DAVIS,
P.C., Baltimore, Maryland, for Appellant. Susan S. Brewer, STEP-
TOE & JOHNSON, Morgantown, West Virginia, for Appellees.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
The issues presented in this diversity action concern the
respective
rights and obligations of the appellees, Crislip Motor Lodge, Inc.
(Crislip) and State Farm Fire & Casualty Company (State Farm), and
the appellant, CSX Transportation, Inc. (CSXT), pursuant to an
indemnification provision of a standard lodging agreement (the
Agreement) entered into by Crislip and CSXT. The district court
held
that CSXT was not entitled to indemnification pursuant to the
Agree-
ment and entered judgment in favor of Crislip and State Farm. For
reasons that follow, we vacate that judgment and remand for further
proceedings.
I
On October 1, 1988, Crislip and CSXT entered into the Agreement,
wherein Crislip agreed to provide lodging to CSXT's employees. The
Agreement further provided that Crislip would:
indemnify, save harmless and defend [CSXT], its servants,
agents and employees, from and against all claims for loss
or damage to property within or part of [Crislip Motor
Lodge] and all injury to or death of any persons . . . in, on
or about the [Crislip Motor Lodge] premises, arising out of,
relating to or occurring in connection with the subject matter
of and services provided by and performed under this
2
Agreement, whether the result of the sole or contributory
negligence of [CSXT] or otherwise.
(J.A. 4). The Agreement also required Crislip to procure and
maintain
liability insurance covering liability assumed by it under the
Agree-
ment in the amount of not less than one-million dollars.
On November 11, 1988, James Chambers, a railroad brakeman for
CSXT, stayed at Crislip in Grafton, West Virginia, pursuant to the
terms of the Agreement. That evening, a Crislip employee spray-
painted a model car in a utility room located beneath Chambers'
room. Later that evening, Chambers, having been overwhelmed by
noxious fumes, complained to two Crislip employees about the
fumes. The following morning, Chambers complained to Crislip
employees that he suffered a sore throat and a cough as a result of
inhaling the fumes.
On November 13, 1988, Chambers filed an injury report with
CSXT, claiming that the inhalation of the fumes at Crislip caused
him
to suffer respiratory injuries. As a result of his injuries,
Chambers
missed over five months of work.
On May 16, 1989, CSXT notified Crislip that Chambers had made
a claim against it and, in accordance with the terms of the
Agreement,
tendered the claim to Crislip. In turn, Crislip notified its
insurer, State
Farm, of the claim. On November 20, 1989, State Farm notified
CSXT that it "accepted the tender of this claim and will be
handling
it to its conclusion." (J.A. 21).
After investigation, on August 31, 1990, State Farm informed
Chambers that it could find no causal connection between his
claimed
injuries and his subsequent diagnosis, but invited Chambers to
submit
additional supporting information and to submit to an independent
medical examination at State Farm's expense. 1 Chambers declined.
Accordingly, on November 27, 1990, State Farm notified Chambers
and CSXT that it was denying the claim because there was no causal
connection between Chambers' claimed injuries and his subsequent
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1 Through its investigation, State Farm determined that Chambers'
res-
piratory injuries were caused by years of exposure to diesel-fuel
fumes.
3
diagnosis. On that same day, State Farm closed its file on
Chambers'
claim.
On April 26, 1991, Chambers filed an action under the Federal
Employers' Liability Act (FELA), 45 U.S.C. § 51 et seq., against
CSXT based upon his exposure to the fumes at Crislip. The action
was filed in the United States District Court for the Southern
District
of West Virginia, but was subsequently transferred to the District
of
Maryland. When CSXT was served with Chambers' FELA action, it
did not notify Crislip or State Farm nor demand that Crislip or
State
Farm provide a defense pursuant to the indemnity clause of the
Agreement. Instead, CSXT took control of its defense.
The FELA action was set for trial on September 20, 1993. On Sep-
tember 3, 1993, seventeen days before trial, CSXT informed State
Farm of Chambers' FELA action and the trial date, and sought to
invoke its rights under the indemnity clause of the Agreement.
On September 9, 1993, State Farm authorized CSXT to settle
Chambers' FELA action for $25,000. When Chambers demanded
$50,000, State Farm withdrew its authorization to settle and did
not
participate in the defense of Chambers' FELA action. Shortly
thereaf-
ter, CSXT settled Chambers' FELA action for $50,000.
On October 18, 1993, Crislip and State Farm filed a declaratory
judgment action in the United States District Court for the
Northern
District of West Virginia to resolve the disputed liability of
Crislip
and State Farm to CSXT under the indemnity clause of the Agree-
ment. CSXT filed a mirror-image declaratory judgment action in the
United States District Court for the District of Maryland. These
cases
were consolidated for disposition in the United States District
Court
for the Northern District of West Virginia.
The parties below filed cross-motions for summary judgment. On
May 30, 1996, the district court granted Crislip and State Farm's
motion for summary judgment and denied CSXT's motion. The dis-
trict court held that CSXT was not entitled to indemnity under the
indemnity clause of the Agreement because CSXT breached the
Agreement when it failed to provide reasonable notice to Crislip
and
State Farm of Chambers' FELA action. CSXT noted a timely appeal.
4
II
CSXT argues that the district court erred when it granted summary
judgment in favor of Crislip and State Farm because its failure to
pro-
vide reasonable notice of Chambers' FELA action to Crislip and
State
Farm is no bar to recovery under the indemnity clause of the Agree-
ment. We agree.
The parties agree that West Virginia law applies in this case.
Under
West Virginia law, when an indemnitor is provided reasonable notice
of a claim that is covered by the indemnity agreement and is
afforded
an opportunity to defend the claim but declines to do so, the
indemni-
tor is bound by the judgment against the indemnitee if it was
rendered
without collusion on the part of the indemnitee. See Vankirk v.
Green
Constr. Co., 466 S.E.2d 782 (W. Va. 1995). In the event of a
settle-
ment before judgment under these conditions, the indemnitor will be
held liable if the indemnitee demonstrates in the indemnity action
that
the original claim was covered by the indemnity agreement, that he
was exposed to liability which could reasonably be expected to lead
to an adverse judgment, and that the amount of his settlement was
reasonable. See Valloric v. Dravo Corp., 357 S.E.2d 207, 214 (W.
Va.
1987). This latter burden of proof is known as the"potential
liability"
standard.
In contrast, when the indemnitor is not notified of the underlying
action, given an opportunity to defend, and/or given an opportunity
to participate in settlement negotiations, the indemnitee must
prove in
the indemnity action that he was actually liable to the plaintiff.
See
id. at 208, 213; Hill v. Joseph T. Ryerson & Son, Inc., 268 S.E.2d
296,
301-02 (W. Va. 1980). This heavier burden of proof is known as the
"actual liability" standard.
In this case, we are dealing with an indemnity action in which the
underlying claim was settled before judgment. Therefore, CSXT's
burden of proof under the indemnity clause of the Agreement turns
on the type of notice it provided to Crislip and State Farm. If
CSXT
provided reasonable notice of Chambers' FELA action, the "potential
liability" standard applies. If CSXT did not provide reasonable
notice,
the "actual liability" applies.
5
The question of what constitutes reasonable notice need not be
decided by this court. On appeal, CSXT expressly"does not argue"
that its notice to Crislip and State Farm was reasonable as a
matter
of law. See Appellant's Brief at 16 n.1. Accordingly, CSXT must
pro-
ceed under the "actual liability" standard on remand. 2
The district court in this case concluded that CSXT's failure to
pro-
vide reasonable notice of Chambers' FELA claim barred CSXT's
indemnity action under the Agreement. The district court erred in
reaching its conclusion because the question of reasonable notice
sim-
ply altered CSXT's burden of proof in the indemnity action. The
judgment of the district court is, therefore, vacated and the case
is
remanded for further proceedings consistent with this opinion. 3
VACATED AND REMANDED FOR FURTHER PROCEEDINGS
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2 CSXT also argues that Crislip and State Farm waived their rights
to
defend Chambers' FELA action and to complain that the notice
provided
was unreasonable because State Farm authorized CSXT, one week
before Chambers' FELA trial date, to settle Chambers' FELA action
for
$25,000. This argument has no merit. Suffice it to say that we find
it dif-
ficult to comprehend how CSXT can argue to this court that Crislip
and
State Farm, when blind-sided with only two weeks' notice of a
trial,
somehow waived their rights under the Agreement by failing to make
immediate evaluations and strategic decisions which they should
have
had over two years to consider.
3 We express no opinion on whether CSXT is entitled to any
attorney's
fees for the defense of Chambers' FELA action. This issue is
premature
for us to address, as it will only arise if CSXT prevails under the
"actual
liability" standard on remand.
6