Liberty Mutual Insurance Co. v. Ham Marine

Case: 12-60762 Document: 00512521390 Page: 1 Date Filed: 02/04/2014
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
February 4, 2014
No. 12-60762
c/w No. 12-60777 Lyle W. Cayce
Clerk
LIBERTY MUTUAL INSURANCE COMPANY; EMPLOYERS INSURANCE
OF WAUSAU, a Mutual Company,
Plaintiffs-Appellants,
v.
JERROLL LAVON HOLLOWAY, also known as J.L. Holloway,
Defendant-Appellee.
________________________________________________________________________
LIBERTY MUTUAL INSURANCE COMPANY, and EMPLOYERS
INSURANCE OF WAUSAU, a Mutual Company,
Plaintiffs-Appellants,
v.
J. L. HOLLOWAY, RON W. SCHNOOR, CARL M. CRAWFORD, KIM
ADKINS, W. EDWARD TREHERN,
Defendants-Appellees.
Case: 12-60762 Document: 00512521390 Page: 2 Date Filed: 02/04/2014
Appeals from the United States District Court
for the Southern District of Mississippi
U.S.D.C. No. 3:98-CV-611
U.S.D.C. No. 3:01-CV-935
Before REAVLEY, DAVIS, and HIGGINSON, Circuit Judges.
PER CURIAM:*
These consolidated appeals include two separate, but related lawsuits.
The first involves a fraud action by an insurer to recover workers’
compensation premiums and a subsequent settlement to that suit which went
awry. The second concerns a suit to enforce a personal guaranty made by a
defendant in the fraud settlement agreement. We consider two primary issues.
First, whether the defendant, J.L. Holloway, as a personal guarantor to the
principal obligor on the settlement agreement, was entitled to a credit on his
guaranty obligation as a result of payments made by other parties to the
settlement. Second, whether the district court erred when it dismissed the
workers’ compensation fraud litigation. For the reasons that follow, we reverse
the district court.
I.
This litigation began in 1998, when the plaintiffs, Liberty Mutual
Insurance Company and Employers Insurance of Wausau (“the insurers,”
collectively), brought suit against Holloway, his companies, including Friede
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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No. 12-60762 c/w 12-60777
Goldman International, Inc. (“Friede Goldman”) and Ham Marine, Inc., and
several other parties, including Stewart Sneed Hewes, Inc., 1 for fraud, RICO,
conspiracy, and common law claims related to the defendants’
misrepresentation of their risk in order to pay Liberty lower premiums for
workers’ compensation insurance. That lawsuit (the “Fraud Litigation”) was
settled in 2001 pursuant to a Settlement Agreement (the “Settlement
Agreement”). The Settlement Agreement required the defendants, through
Friede Goldman, 2 to pay $4.5 million to the insurers in three payments of $2
million, $1.25 million, and $1.25 million. Holloway personally guaranteed the
third payment of $1.25 million in the event that Friede Goldman was unable
to make the payment. The Settlement Agreement provided for dismissal of the
action upon full and final payment of $4.5 million. If, for any reason, full and
final payment was not made, the insurers were entitled to retain settlement
proceeds already paid and return the case to the active docket. The district
court issued an administrative stay in the Fraud Litigation pending successful
completion of the Settlement Agreement.
Friede Goldman made the first two payments and soon after filed for
Chapter 11 bankruptcy in April 2001. 3 Friede Goldman sought permission
1 Stewart Sneed Hewes, Inc. was later replaced as a defendant by BancorpSouth Bank as
successor by way of a merger between the two companies. BancorpSouth’s role in this case is
limited to a $500,000 settlement agreement it reached with the insurers.
2 Friede Goldman was the parent company of many of the defendant companies in the Fraud
Litigation. The payments were due as follows: $2 million on January 3, 2001; $1.25 million
on April 2, 2001; and $1.25 million on July 2, 2001.
3 See 11 U.S.C. § 1101 et seq. Chapter 11 bankruptcy proceedings ordinarily are brought by
a debtor in possession and culminate in the confirmation of a plan of debt reorganization
3
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from the bankruptcy court to make the third and final payment to the insurers,
but the bankruptcy judge denied the request. Instead, the bankruptcy judge
encouraged the Chapter 11 Trustee to file a lawsuit against the insurers to
reclaim the first two settlement payments, totaling $3.25 million, on the
grounds that they were “preference” payments under 11 U.S.C. § 547(b). 4 The
Trustee proceeded to file that suit to recover the payments.
While the bankruptcy proceedings were ongoing, the insurers requested
the third and final payment of $1.25 million from Holloway in accordance with
his personal guaranty. After first refusing to pay, Holloway eventually agreed
to pay the $1.25 million, but only in exchange for the full and final release of
all defendants in the Fraud Litigation. The insurers refused to grant the
release because the bankruptcy preference litigation was still pending, and
they did not yet know whether they would retain the entire $3.25 million paid
in the first two payments. Holloway declined to pay the remaining $1.25
million without the releases.
As a result, the insurers filed a lawsuit against Holloway to enforce his
personal guaranty (the “Guaranty Litigation”), claiming Holloway had
rather than liquidation. See Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S.
33, 36 (2008).
4 A “preference” is a transfer of a debtor’s assets, during a specified pre-bankruptcy period,
that unjustifiably favors the transferee over other creditors. Under § 547(b), a bankruptcy
trustee can “avoid” any transfer of property if: a) the transfer was to a creditor on account of
a pre-existing debt, b) the debtor was insolvent at the time of the transfer, c) the transfer
occurred within 90 days before the bankruptcy filing, and d) the transfer enabled the creditor
to receive a larger share of the estate than if the transfer had not been made. See 11 U.S.C.
§ 547(b). The two payments to the insurers likely satisfied these requirements.
4
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breached the agreement by refusing to honor his agreement to pay. The
Complaint in the Guaranty Litigation contained multiple counts: counts I and
II sought the $1.25 million payment for the insurers under the terms of the
contract, and counts III and IV alleged tort claims. The insurers filed a motion
for partial summary judgment as to counts I and II, which the district court
denied based on the pending bankruptcy preference litigation.
Meanwhile, the insurers settled the preference suit with the Chapter 11
Trustee. The insurers agreed to return $1.9 million of the $3.25 million they
had been paid by Friede Goldman, keeping only $1.35 million. After settling
the preference litigation, the insurers contacted other defendants in the Fraud
Litigation in an effort to recoup their lost funds. Ultimately, the insurers
received a $500,000 payment from BancorpSouth, who succeeded Stewart
Sneed Hughes, Inc. as a defendant, in exchange for a full release of liability
and dismissal of all claims against it.
Then, in the Guaranty Litigation, the insurers offered Holloway a full
release and dismissal of claims against him in exchange for the third and final
$1.25 million payment he had personally guaranteed. Holloway again refused
to pay, contending that in light of the $500,000 payment the insurers received
from BancorpSouth, his personal obligation was reduced by the amount of that
payment to $750,000. The insurers, on the other hand, denied that any such
credit should be applied to Holloway’s obligation. Holloway filed a motion for
summary judgment arguing his right to the $500,000 credit, and the insurers
re-urged their original partial motion for summary judgment seeking the full
5
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$1.25 million from Holloway, which the district court had previously denied
while the preference litigation was still pending.
While these motions were pending in the Guaranty Litigation, the
district court entered an order in the Fraud Litigation directing that
Holloway’s motion to enforce settlement be “subsumed” in the district court’s
disposition of the cross motions for summary judgment pending in the
Guaranty Litigation. 5
On September 20, 2010, the district court granted Holloway’s Motion for
Summary Judgment in the Guaranty Litigation, deciding that Holloway owed
the insurers the reduced total of $750,000. The district court also ruled that
the insurers could not establish the elements necessary to recover any of the
money they lost on account of the $1.9 million they returned to the Trustee in
the preference litigation, despite the fact that the insurers would not receive
the full $4.5 million agreed to in the original Settlement Agreement. The
district court did not assess prejudgment interest on this award, and entered
a subsequent Final Judgment in which it assessed costs against the insurers.
On August 21, 2012, the district court issued an Order dismissing the
Fraud Litigation, incorporating by reference its September 2010 Memorandum
Opinion and Order in the Guaranty Litigation. The insurers timely appealed
the district court’s order on summary judgment and its subsequent Final
Judgment in the Guaranty Litigation. The insurers also appeal the district
5By this ruling, the court apparently agreed with Holloway that the other defendants in the
Fraud Litigation were entitled to full releases from the insurers in exchange for a $750,000
payment to the insurers.
6
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court’s decision to “subsume” the Fraud Litigation into the Guaranty
Litigation, and the court’s dismissal of the insurers’ insurance fraud suit.
II.
This Court reviews de novo determinations of motions for judgment on
the pleadings and for summary judgment. 6 In addressing a motion for
summary judgment, we “view[] all evidence in the light most favorable to the
nonmoving party and draw[] all reasonable inferences in that party’s favor.” 7
“The court shall grant summary judgment if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment
as a matter of law.” 8
One of the issues raised by the insurers on appeal is the enforcement of
Holloway’s personal guaranty. A guaranty is a contract, the interpretation of
which this Court reviews de novo. 9
We review a determination of prejudgment interest 10 and costs 11 for an
abuse of discretion.
III.
We first address whether the district court erred in the Guaranty
Litigation when it applied the $500,000 paid by BancorpSouth in its settlement
6 In re Katrina Canal Breaches Litig., 495 F.3d 191, 205–06 (5th Cir. 2007).
7 Id.
8 FED. R. CIV. P. 56(c).
9 Westlake Petrochem., L.L.C. v. United Polychems., Inc., 688 F.3d 232, 245 (5th Cir. 2012)
10 Carpenters Dist. Council v. Dillard Dep’t Stores, 15 F.3d 1275, 1288 (5th Cir. 1994).
11 Louisiana Power & Light Co. v. Kellstrom, 50 F.3d 319, 334 (5th Cir. 1995).
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agreement as a credit to Holloway’s personal guaranty obligation. Our decision
on this issue turns upon whether Holloway’s personal guaranty is separate and
distinct from the initial Settlement Agreement and BancorpSouth’s settlement
agreement. For the reasons set out below, we find Holloway’s personal
guaranty is independent of the two other agreements. Each of the three
agreements is a separate contract, the interpretation of which is governed by
state law. Under Mississippi law, our interpretation of the contracts begins by
looking first to the four corners of the documents in question. 12 “‘An
instrument that is clear, definite, explicit, harmonious in all its provisions, and
is free from ambiguity’ will be enforced.” 13 “[I]f . . . a contract is clear and
unambiguous, then it must be interpreted as written.” 14
The initial Settlement Agreement and Holloway’s personal guaranty are,
by their terms, separate and distinct contracts. The parties to the Settlement
Agreement are the insurers on the one hand, and each of the defendants to the
Fraud Litigation on the other. Holloway’s personal guaranty of the third and
final payment expressly provides that “This [Personal Guaranty] is separately
accepted by the undersigned, J.L. Holloway.” Holloway was thus the only
defendant subject to personal liability in the event that Friede Goldman was
unable to make the payment.
The terms of BancorpSouth’s settlement agreement also plainly show
12 Zumwalt v. Jones County Bd. of Sup’rs, 19 So. 3d 672, 685 (Miss. 2009) (citation omitted).
13 Id. (quoting Pursue Energy Corp. v. Perkins, 558 So. 2d 349, 352 (Miss. 1990)).
14United States Fidelity and Guar. Co. of Mississippi v. Martin, 998 So. 2d 956, 963 (Miss.
2008); see also Time Ins. Co. v. Estate of White, 447 F.App’x 561, 564 (5th Cir. 2011).
8
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that it is distinct from Holloway’s personal guaranty. BancorpSouth, as a
defendant in the Fraud Litigation, agreed to settle with the insurers in light of
the likelihood that the insurers’ fraud suit would be returned to the docket.
BancorpSouth’s settlement agreement provides that the $500,000 paid by
BancorpSouth “is not intended to be nor is it in fact a partial payment of the
$1.25 million which J.L Holloway guaranteed to pay and for which he has been
sued.” Instead, the payment was meant “to compromise, in light of the
uncertainties of litigation, any potential larger judgment, if any, which might
be rendered against [defendants] should the [Fraud] Litigation continue and
be pursued to judgment before a trier of fact.” BancorpSouth and the insurers
plainly intended for their settlement agreement to be separate and distinct
from Holloway’s personal guaranty of the third and final settlement payment.
We find nothing in the record which indicates BancorpSouth agreed to
contribute to the fulfillment of Holloway’s duty to pay on his personal
guaranty.
Therefore, the district court erred when it credited BancorpSouth’s
$500,000 settlement payment against the $1.25 million Holloway owed
pursuant to his personal guaranty. The credit should not have been applied
because Holloway’s personal guaranty was an independent agreement, not
connected with either the original Settlement Agreement or BancorpSouth’s
settlement agreement. We therefore reverse the district court’s grant of
summary judgment in favor of Holloway, and grant summary judgment in
favor of the insurers, who are entitled to recover from Holloway the full $1.25
million. The insurers moved for summary judgment on only two of the counts
9
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in their Complaint against Holloway. We therefore remand this case back to
the district court for further proceedings on the remaining counts.
Next, we must determine whether the district court erred when it
dismissed the Fraud Litigation based upon its grant of summary judgment in
the Guaranty Litigation. The insurers argue the Fraud Litigation should not
have been dismissed because they maintained their right to re-open the action
if they did not receive the full payment provided for in the Settlement
Agreement. If the insurers do not receive full payment, the Settlement
Agreement gives them the right to “have the claims as set out in the Amended
Complaint and Counterclaim [of the Fraud Litigation] returned to the active
docket . . . and to have any Order staying the proceedings thereupon
immediately dissolved . . . .” Although the insurers originally received payment
of the first two installments from Friede Goldman, totaling $3.25 million, they
returned more than half that amount, $1.9 million, to the Chapter 11 Trustee
in the preference litigation. Therefore, even if the insurers receive full payment
from Holloway on his personal guaranty, they will collect only $2.6 million out
of the $4.5 million the defendants to the Fraud Litigation agreed to pay in the
Settlement Agreement. Thus, full and final payment has not been made to the
insurers and they have the right to return the Fraud Litigation to the active
docket. 15 Accordingly, we reverse the district court’s dismissal of the Fraud
15 The district court classified the $1.9 million returned via settlement by the insurers to the
Chapter 11 trustee as a voluntary payment, and therefore the insurers could not recover it
back. Under Mississippi law, the volunteer rule prevents an individual or entity from
recovering back a voluntary payment, defined as a “payment made without compulsion,
fraud, mistake of fact, or agreement to repay a demand which the payor does not owe, and
10
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Litigation.
IV.
For the foregoing reasons, we REVERSE the district court’s grant of
summary judgment in favor of Holloway in the Guaranty Litigation, and grant
partial summary judgment in favor of the insurers on their claim. In addition,
we REVERSE the district court’s dismissal of the insurers’ fraud suit. These
cases are REMANDED to the district court for entry of judgment consistent
with this opinion and for further proceedings on the tort counts of the insurers’
action against Holloway, and for reconsideration of assessment of costs and
interests in light of this opinion.
REVERSED and REMANDED.
which is not enforceable against [it], instead of invoking the remedy or defense which the law
affords against such a demand.” Genesis Ins. Co. v. Wasau Ins. Cos., 343 F.3d 733, 736 (5th
Cir. 2003) (quoting McDaniel Bros. Constr. Co., Inc. v. Burk-Hallman Co., 175 So. 2d 603,
605 (Miss. 1965)). We disagree with the district court’s characterization; the insurers agreed
to the settlement because they faced the likelihood of a judgment requiring them to return
the entire $3.25 million in settlement payments from Friede Goldman back to the bankrupt
estate in the preference litigation. In order to avoid returning the full amount, the insurers
agreed to a compromise: they would return $1.9 million in exchange for dismissal of the
preference suit. The volunteer rule does not apply to this payment because the insurers’
payment was in settlement of a hotly contested litigation. The payment was compelled by the
desire to limit their liability, and no one argues that the amount paid was unreasonable. See
Certain Underwriters at Lloyd’s of London v. Knostman, 783 So. 2d 694, 698 (Miss. 2001)
(citation omitted); see also Canal Ins. Co. v. First General Ins. Co., 889 F.2d 604 (5th Cir.
1989).
11