Reliance Insurance v. Todesca Equipment Co, (1st Cir. 2002)

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United States Court of Appeals

For the First Circuit



No. 02-1006

FIREMAN'S INSURANCE CO. OF NEWARK, NEW JERSEY,

Plaintiff, Appellee,

v.

TODESCA EQUIPMENT CO., INC., TODESCA EQUIPMENT COMPANY,

POWER LINE, INC., RHODE ISLAND SAND & GRAVEL CO., INC.,

EAST PROVIDENCE ASPHALT & CONCRETE CO., ALBERT M. TODESCA,

THOMAS RUSSO, CHARLES TODESCA AND PAUL TODESCA,



Defendants, Appellants.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND

[Hon. Mary M. Lisi, U.S. District Judge]

Before

Selya, Circuit Judge,

Coffin and B. Fletcher (1), Senior Circuit Judges.

D. Ethan Jeffery with whom Charles R. Bennett, Jr., and Hanify

& King were on brief for appellants.

Brian J. Lamoureux with whom William M. Dolan III and Brown

Rudnick Berlack Israels LLP were on brief for appellee.

November 6, 2002

COFFIN, Senior Circuit Judge. Appellants, a group of

affiliated construction companies and related individuals, appeal

from an order of the district court granting summary judgment to

appellee, surety, on its complaint seeking indemnification from

appellants for certain payments the surety made on behalf of

appellants. Finding no errors of law, we affirm.

I. Background

Appellants, as principals and indemnitors, entered into a

continuing indemnity agreement with surety Fireman's Insurance

Company of Newark, New Jersey ("Fireman's"), in March 1991.

Pursuant to the indemnity agreement, Fireman's issued various

bonds, intended to guarantee performance and payment to

subcontractors and suppliers, on behalf of appellants for

construction projects involving companies with which appellants

were allied or in which they were beneficially interested. In

exchange, appellants agreed to indemnify and hold Fireman's

harmless for all losses and expenses it incurred under the bonds

and provided Fireman's with broad discretion to determine whether

a claim should be paid, settled, or challenged. Although

appellants also entered into indemnity agreements with Reliance

Insurance Co., previously a plaintiff and an appellee in this

case, the Reliance portion of the district court judgment is no

longer at issue. (2)

In October 1993, Coken Company ("Coken") filed a lawsuit

against Fireman's in Providence County Superior Court seeking

$44,371.53 for subcontracting work it had performed for companies

named in appellants' indemnity agreement for which it had not

been paid. Fireman's did not file an answer to Coken's

complaint, and no action occurred in the lawsuit until March

1997, when Coken filed for summary judgment. Fireman's did not

respond to Coken's summary judgment motion and judgment was

entered against Fireman's for $139,326.34, plus interest and

costs, in June 1997. (3) An execution, incorporating costs and

interest, was subsequently obtained by Coken in the amount of

$153,696.98 against Fireman's. Although the record is unclear as

to when payment was made, the parties appear to agree that

Fireman's eventually paid Coken $207,855.55 and incurred

attorney's fees of $17,285.79 in the matter.

In August 2000, Fireman's filed suit against appellants in

the federal district court of Rhode Island seeking recovery of

more than $315,000 that it had paid out to various claimants

under the bonds. The Coken payment constituted the largest

payout for which Fireman's sought repayment. In July 2001,

Fireman's moved for summary judgment, and appellants objected,

based solely upon the payment to Coken. (4) The motion was granted

by the district court in October 2001 based on the recommended

ruling of the magistrate judge. (5)

Appellants allege on appeal that the district court made

errors of law in granting summary judgment to Fireman's. We

review the district court's order de novo, "construing the record

in the light most favorable to [the non-movant] and resolving all

reasonable inferences in its favor." Davric Maine Corp. v.

Rancourt, 216 F.3d 143, 146 (1st Cir. 2000). Summary judgment is

appropriate if the evidence presented by appellants is "'merely

colorable, or is not significantly probative' to conjure a

genuine issue of material fact." Id. (quoting Anderson v.

Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986)).

II. Discussion

Appellants allege that the district court erred in two

respects when it granted appellee's motion for summary judgment.

First, appellants argue that the district court misapplied the

holding of the Rhode Island Supreme Court in Massachusetts

Bonding & Insurance Co. v. Gautieri, 30 A.2d 848 (R.I. 1943),

and, in doing so, erroneously ignored the common law rule that

every contract contains an implied covenant of good faith and

fair dealing. Second, appellants contend that the district court

incorrectly concluded that they had failed to raise a genuine

issue of material fact.

Applicability of Massachusetts Bonding

In granting appellee's summary judgment motion, the district

court relied upon the rule enunciated in Massachusetts Bonding,

namely that when a surety brings an action pursuant to an

indemnity agreement giving the surety broad discretion to pay

claims, the only defense an indemnitor can raise is that the

surety committed fraud or collusion in paying the claim. In

Massachusetts Bonding, a surety sought recovery from the

indemnitors for funds the surety paid to the United States

government due to a penalty for alleged illegal activity by the

principals. Massachusetts Bonding, the surety, settled the

government's claim despite the principals' urging that valid

defenses to the claim should be raised.

The language of the indemnity agreement required the

indemnitors to pay Massachusetts Bonding for all sums that it

paid "on account of any damages, costs, charges, and expenses of

whatsoever kind or nature." The critical language of the

agreement furnished Massachusetts Bonding with broad latitude to

determine whether a claim should be paid:

"And the Indemnitors further agree that in any

accounting which may be had between the indemnitors and

[Massachusetts Bonding], [Massachusetts Bonding] shall

be entitled to credit for any and all disbursements, in

and about matters herein contemplated, made by it in

good faith under the belief that it is or was liable

for the sums and amounts so disbursed, or that it was

necessary or expedient to make such disbursements,

whether such liability, necessity or expediency existed

or not" (italics ours).

Massachusetts Bonding, 30 A.2d at 850 ("This last clause which we

have emphasized by italics is indeed of a most sweeping

character.").

The court held that the expansive character of this

provision, most notably the final clause, indicated that the

parties had "lodged in the indemnitee a discretion limited only

by the bounds of fraud." Id. As such, in order to show bad

faith by the surety, the indemnitors were required to prove that

the surety committed fraud or engaged in collusion with the

United States in order to avoid repaying the surety. See Id.

The appellants' argument that Massachusetts Bonding was

incorrectly applied rests on an alleged critical factual

difference between the two cases. The relevant difference,

appellants argue, is that in Massachusetts Bonding the principals

contended that the claim should not have been paid at all, while

appellants here urge that they are not responsible for any amount

paid by the surety over that "actually owed" to Coken. In other

words, appellants admit potential liability for the amount

initially claimed by Coken, but protest liability for any

increase in that amount due to the passage of time or the

possible incorrect judgment amount. (6) Appellants characterize

Massachusetts Bonding as a case about liability, and the current

case as revolving around "damages."

Because the essence of the Massachusetts Bonding holding

derived from the nature of the agreement between the parties, we

look to the language in the agreement between Fireman's and

appellants. Similar to the agreement in Massachusetts Bonding,

the Fireman's agreement provided:

In the event of any payment by SURETY, SURETY shall be

entitled in any accounting with PRINCIPAL or

INDEMNITOR(S) to reimbursement for any and all

disbursements made by it in good faith in and about the

matters contemplated by this Agreement under the belief

that it is or was liable for the sums and amounts so

disbursed, or that it was necessary or expedient to

make such disbursements, whether or not such liability,

necessity, or expediency existed.

Further, the agreement placed complete and exclusive authority in

Fireman's to determine if claims should be paid:

SURETY shall have the exclusive right in its name or in

the name of PRINCIPAL to adjust, settle or compromise

any claim, counterclaim, demand, suit or judgment

involving any BOND or to take whatever other action it

may deem necessary, expedient or appropriate. SURETY'S

determination as to whether any such claim,

counterclaim, demand, suit or judgment should be

settled or defended shall be binding and conclusive

upon PRINCIPAL and INDEMNITORS.

Finally, the agreement required that its terms be "liberally

construed so as to protect, exonerate, and indemnify SURETY."

Thus, the agreement affords Fireman's the same broad discretion

to settle claims as given to the surety in the Massachusetts

Bonding agreement and in fact contains the very same language

that most impressed the court in that case.

The difference between asserting that a surety should pay

nothing on a claim, as opposed to arguing that a surety paid too

much on a claim, is insignificant to our analysis. As the court

held in Massachusetts Bonding:

[U]nless it could be shown that such loss as the indemnitee

suffered in the instant case was the result of fraud on its

part, or of collusion between it and the agents of the

United States, which would be the same thing as fraud, these

defendants would be foreclosed by the very terms of the bond

from claiming that the plaintiff had not acted in good faith

in settling the government's claim despite defendants' prior

refusal to consent to such settlement. (7)

Given the broad discretion provided Fireman's by the indemnity

agreement and the resultant applicability of the rule of

Massachusetts Bonding, appellants were required to allege and

prove fraud or collusion in order to avoid repayment of the claim

paid by Fireman's.

Appellants next argue that even if Massachusetts Bonding

applies, it should not be construed to override the Rhode Island

common law principle that all contracts contain an implicit

covenant of good faith and fair dealing, citing Ross-Simons of

Warwick, Inc. v. Baccarat, Inc., 66 F.Supp.2d 317, 329 (D.R.I.

1999), aff'd, 217 F.3d 8 (1st Cir. 2000). Ross-Simons, however,

concerned the alleged breach of a settlement agreement, a very

different form of contract than an indemnity agreement.

The court in Massachusetts Bonding considered the precise

question of whether the strict language of the indemnity

agreement preempted the common law rule that contracts contain an

implied covenant of good faith and fair dealing. The court

concluded that common law covenants were inapplicable given the

stringent language of the indemnity agreement. See Massachusetts

Bonding, 30 A.2d at 851 (finding inapplicable the cases cited by

the indemnitors that were reliant on common law principles). (8)

Further, the court in Massachusetts Bonding made no distinction

between liability and damages and we perceive no such

differentiation in the terms of the indemnity agreement itself.

Appellants must live by the terms of their agreement, which

entitle Fireman's to repayment for all claims paid by it in the

absence of fraud or collusion.

Appellants' Failure to Raise a Genuine Issue of

Material Fact

Appellants argue that the district court erred in holding

that they did not raise a genuine issue of material fact.

Specifically, they contend that their allegations regarding

Fireman's conduct were sufficient to raise a question of whether

Fireman's committed constructive fraud.

In Massachusetts Bonding, the principals presented the

following evidence to suggest that the surety had colluded with

the government: the government had waited over four years to make

its claim, accepted a relatively small amount in settlement of

its claim, and never brought any legal suit against the

principals. These facts were not, however, sufficient to raise a

genuine issue of material fact as to whether collusion had

occurred. See id. at 852.

Before the magistrate judge, appellants alleged the

following facts as proof of Fireman's "arbitrary and

unreasonabl[e] conduct": "complete and unreasonable inactivity"

in delaying several years before paying the Coken claim, failing

to answer Coken's complaint or oppose Coken's motion for summary

judgment, and neglecting to attempt settlement of Coken's claim.

Prior to the hearing on appellee's summary judgment motion,

appellants alleged that the amount of the Coken judgment against

Fireman's resulted directly from Fireman's delay in paying the

claim. At the hearing before the magistrate judge, however,

appellants alleged that the Providence County Superior Court

erroneously transposed the amounts due Coken from Fireman's and

Reliance. Although the magistrate judge offered appellants the

opportunity to provide additional information regarding this

assertion, appellants neglected to do so.

Fireman's pointed out at argument that the record revealed

that Coken had prepared the judgments that were entered by the

court. Fireman's posited that it was therefore possible that

Coken reversed the amounts sought from Fireman's and Reliance in

the original complaint, but corrected the error when it drafted

the judgments. Whatever the cause of the changes in the amounts

originally sought and those awarded, appellants have failed to

present any evidence whatsoever that the manner in which this

happened implied fraud or collusion on Fireman's part.

In fact, the first time that appellants alleged that

Fireman's had committed fraud was in their objections to the

magistrate judge's report, filed with the district court. As

such, their arguments on this front must be deemed waived.

See Paterson-Leitch Co. v. Mass. Mun. Wholesale Elec. Co., 840

F.2d 985, 990-91 (1st Cir. 1988) ("We hold categorically that an

unsuccessful party is not entitled as of right to de novo review

by the judge of an argument never seasonably raised before the

magistrate."); Barden v. Sec'y of Health & Human Servs., 836 F.2d

4, 6 (1st Cir. 1987) ("Parties must take before the magistrate,

'not only their "best shot" but all of their shots.'" (quoting

Singh v. Superintending Sch. Comm., 593 F.Supp. 1315, 1318 (D.

Me. 1984)). Even if their arguments made after the issuance of

the magistrate judge's report are considered, appellants raised

no new facts, and instead merely recast what previously had been

termed "unreasonable" as "constructive fraud."

As in Massachusetts Bonding, appellants have barely "hinted

at the possibility" of fraud and have provided no evidence in

support of their claim. (9) In short, the district court properly

held that the facts alleged by appellants were insufficient to

raise a genuine issue of material fact.

Affirmed.

1. Hon. Betty B. Fletcher, of the Ninth Circuit, sitting by

designation.

2. Appellants informed the court at argument that Reliance had

settled its claims. Further, appellants waived any arguments

against the district court judgment as it related to Reliance by

not raising them before this court.

3. In its complaint, Coken sought $140,072.63 from Reliance in

addition to the $44,371.53 it sought from Fireman's. The amounts

awarded by the district court judgment, $53,733.56 plus interest

and costs against Reliance and $139,326.34 plus interest and costs

against Fireman's, appear to be reversed from the amounts Coken

sought from Reliance and Fireman's in its original complaint.

Appellants' arguments with regard to this anomaly are discussed

infra.

4. When the magistrate judge asked appellants whether they had

objection to any of the other claims paid by Fireman's, appellants

responded that they did not, waiving any such claims.

5. References to the district court opinion refer to the

magistrate judge's report and recommendation, which was adopted in

whole by the district court.

6. In their opposition to the summary judgment motion,

appellants remarked that as to the original amount Coken sought

from Fireman's, "Fireman's would have a good argument that it is

due reimbursement of the nearly $45,000 through the indemnification

clause in the bond agreement." In their brief on appeal,

appellants characterized the issue thus: "[T]he dispute here is

what amount Fireman's may be entitled to recover under the

Fireman's Bond -- is it entitled to recover the amounts it paid to

Coken above what Coken was actually owed . . . ?"

7. Several courts outside of Rhode Island have defined the

standard slightly differently, holding that indemnification may be

avoided when the surety has exhibited "fraud or bad faith." See,

e.g., Fidelity & Deposit Co. of Maryland v. Bristol Steel & Iron

Works, Inc., 722 F.2d 1160, 1163 (4th Cir. 1983) ("The only

exception to this provision arises when the payment has been made

'through fraud or lack of good faith' on the part of the surety but

any challenge to such payment must be rested solely on that claim

of bad faith or fraud." (internal citations omitted)); Engbrock v.

Federal Ins. Co., 370 F.2d 784, 786 (5th Cir. 1967) ("In the face

of these provisions [granting Surety the right to finally,

conclusively, and unconditionally bind Indemnitor by paying

claims], an indemnitor may successfully attack payments made by

Surety only by pleading and proving fraud or lack of good faith by

Surety."); Ins. Co. of North America v. Bath, 726 F. Supp. 1247,

1251 (D. Wyo. 1989) ("Although indemnity agreements are broadly

construed to effect the parties' intent, such a rule has an

exception where the surety has performed on its bond either through

fraud or in bad faith."). Nevertheless, the formulation of the

standard enunciated in Massachusetts Bonding, requiring fraud or

collusion to establish bad faith, continues to be the rule under

Rhode Island law.

8. Other courts have pronounced similar holdings. See Fidelity

& Deposit Co., 722 F.2d at 1163("'[R]esort to implied indemnity

principles is improper when an express indemnification contract

exists.'" (quoting Commercial Ins. Co. v. Pacific-Peru Constr., 558

F.2d 948, 953 (9th Cir. 1977)); Associated Indemnity Corp. v. CAT

Contracting, Inc., 964 S.W.2d 276, 285 (Tex. 1998) ("'[C]ommon law

principles concerning a surety who claims reimbursements for

amounts paid out by it do not apply to indemnity contracts such as

the one here involved.'" (quoting Ford v. Aetna Ins. Co., 394

S.W.2d 693, 698 (Tex. Civ. App. 1965)); Martin v. Lyons, 558 P.2d

1063, 1066 (Idaho 1977) ("It is a well established principle of

surety law in regard to indemnification that the 'surety will . .

. be permitted to rely on the exact terms of his agreement.'"

(internal citations omitted)).

9. Appellants rely upon two cases to argue that they have

sufficiently pled constructive fraud: Thornley Supply Co. v.

Madigan, 154 A. 277, 278 (1931) ("It is a familiar principle of

equity that where one of two persons must suffer a loss, the loss

must be borne by the one who caused it.") and Cardoso v. Mendes,

1998 R.I. Super. LEXIS 15, 30 (R.I. Super. Ct. 1998)

("'Constructive fraud is the breach of some legal or equitable duty

which, irrespective of moral guilt, the law declares fraudulent

because of its tendency to deceive others, to violate confidence,

or injure public interests.'" (internal citations omitted)).

Neither of these cases, however, relate to the definition of fraud

in cases such as this; both consider fraud in the context of common

law equitable claims.

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