Auto-Owners Insurance Company v. Tomberlin, Young & Folmar Insurance Co. et al
Filing
154
MEMORANDUM OPINION AND ORDER as follows: 1) The 112 Motion for Summary Judgment is GRANTED and judgment is entered in favor of the Dfts and against Auto-Owners Insurance Company on Counts I, II, III, and IV of the Amended Complaint; 2) The 112 Mo tion for Summary Judgment is DENIED as to Counts V and VI of the Amended Complaint and the Counterclaim; The case will proceed to trial on Counts V and VI of the Amended Complaint and the Dfts's Counterclaim. Signed by Honorable Judge W. Harold Albritton, III on 7/24/2012. (Attachments: # 1 Civil Appeals Checklist) (wcl, )
IN THE UNITED STATES DISTRICT COURT FOR
THE MIDDLE DISTRICT OF ALABAMA
NORTHERN DIVISION
AUTO-OWNERS INSURANCE COMPANY, )
)
Plaintiff,
)
)
v.
)
)
TOMBERLIN, YOUNG & FOLMAR
)
INSURANCE CO. d/b/a SOUTH CENTRAL )
AGENCY, JOHN S. TOMBERLIN, and
)
HAROLD W. YOUNG,
)
)
Defendants.
)
___________________________________
)
TOMBERLIN, YOUNG & FOLMAR
)
INSURANCE CO. d/b/a SOUTH CENTRAL )
AGENCY, JOHN S. TOMBERLIN and
)
HAROLD W. YOUNG
)
)
Counterclaimaints
)
)
v.
)
)
AUTO-OWNERS INSURANCE COMPANY, )
)
Counterclaim Defendant
)
CASE NO. 2:11-cv-468-WHA
(wo)
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
This cause is before the court on the Motion for Summary Judgment on all Claims and
Counterclaims, filed by Defendants/Counter-claimants John S. Tomberlin; Tomberlin, Young &
Folmar Insurance Co.; and Harold W. Young (Doc. #112).
This case began with a Complaint filed in the Northern District of Florida by the United
States of America against the Dick Corporation and others. United States, etc. v. Dick Corp., et.
al., 3:08cv56/MCR/MD. A Fourth-Party Complaint was filed by Auto-Owners Insurance
Company ("Auto-Owners") against Tomberlin, Young & Folmar Insurance Company d/b/a South
Central Agency ("South Central"), John S. Tomberlin ("Tomberlin"), and Harold S. Young
("Young") (collectively "the Tomberlin Defendants"). Auto-Owners and the Tomberlin
Defendants jointly stipulated to a transfer of the action to the United States District Court for the
Middle District of Alabama.
After the case was transferred to this court, Auto-Owners filed an Amended Complaint,1
with leave of court. Auto-Owners brings claims for breach of contract (Count I), breach of
fiduciary duty during the application process (Count II), breach of fiduciary duty following the
application process (Count III), indemnification (Count IV), negligent misrepresentation (Count
V), and suppression of material facts (Count VI).
The Tomberlin Defendants brought a counterclaim against Auto-Owners.
The Tomberlin Defendants have moved for summary judgment as to all claims against
them, and as to their counterclaim against Auto-Owners. The court held oral argument on the
pending motion on May 17, 2012.
On June 14, 2012, the court issued a Memorandum Opinion and Order denying summary
judgment to the Tomberlin Defendants only as to the voluntary payment rule and statute of
limitations arguments raised in their motion and stating that the court would rule on the other
grounds for summary judgment on a later date.
1
The complaint is labeled the First Amended Complaint, but there was a First Amended
Complaint filed before the case was transferred to this court. See Doc. #11. Therefore, the court
will refer to the most recent complaint as the Amended Complaint.
2
For reasons to be discussed, based upon the briefs in support of and in opposition to
summary judgment, and oral argument, the Motion for Summary Judgment is due to be
GRANTED in part and DENIED in part as to the remaining grounds for summary judgment.
II. SUMMARY JUDGMENT STANDARD
Summary judgment is proper "if there is no genuine issue as to any material fact and . . .
the moving party is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S.
317, 322 (1986).
The party asking for summary judgment "always bears the initial responsibility of
informing the district court of the basis for its motion,” relying on submissions “which it believes
demonstrate the absence of a genuine issue of material fact." Id. at 323. Once the moving party
has met its burden, the nonmoving party must “go beyond the pleadings” and show that there is a
genuine issue for trial. Id. at 324.
Both the party “asserting that a fact cannot be,” and a party asserting that a fact is
genuinely disputed, must support their assertions by “citing to particular parts of materials in the
record,” or by “showing that the materials cited do not establish the absence or presence of a
genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.”
Fed. R. Civ. P. 56 (c)(1)(A),(B). Acceptable materials under Rule 56(c)(1)(A) include
“depositions, documents, electronically stored information, affidavits or declarations, stipulations
(including those made for purposes of the motion only), admissions, interrogatory answers, or
other materials.”
To avoid summary judgment, the nonmoving party "must do more than show that there is
some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio
3
Corp., 475 U.S. 574, 586 (1986). On the other hand, the evidence of the nonmovant must be
believed and all justifiable inferences must be drawn in its favor. See Anderson v. Liberty Lobby,
477 U.S. 242, 255 (1986).
After the nonmoving party has responded to the motion for summary judgment, 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. Fed. R. Civ. P. 56(a).
III. FACTS
The facts, taken in a light most favorable to the nonmovant, are as follows:
Plaintiff Auto-Owners is an insurance company. Among other tasks, Auto-Owners issues
performance and payment bonds related to construction projects. In September of 2005, AutoOwners provided South Central Agency, an independent insurance and bonding agency in
Andalusia, Alabama, a contract to solicit surety bonds on behalf of Auto-Owners. South Central
Agency was owned and operated by Tomberlin and Young. The Tomberlin Defendants had
previously entered into a contract with Auto-Owners to solicit policies of insurance.
The September 2005 agreement included a Letter of Instructions ("LOI") which
authorized the Tomberlin Defendants to solicit bonding business if, after a thorough
investigation, they were satisfied that it was a proper risk for Auto-Owners to assume. The LOI
limited the use of the Power of Attorney which was also issued, stating that the instructions
contained the Tomberlin Defendants's entire authority, and "you should not execute any bond not
specifically covered herein unless you have express authorization." (Doc. #79-5). The LOI sets
out limitations on bonds which may be issued by the Tomberlin Defendants, but for "Bid,
Contract, and Supply Bonds," the Tomberlin Defendants are given "No Authority," and no bond
4
can be executed "without first obtaining the approval of the Home Office or Branch Office."
(Doc. #79-5 at p.3).
Michael Smith ("Smith") approached the Tomberlin Defendants about a surety bond on a
construction subcontract in Pensacola, Florida. Smith had started S&S Construction ("S&S") in
2004. S&S signed on to perform four subcontracts at the Naval Air Station for a total of
$9,402,964. The Dick Corporation was the general contractor on the project.
The Tomberlin Defendants had Smith complete an application for bonds, which they
submitted to Auto-Owners. Auto-Owners rejected these bond requests by the Tomberlin
Defendants on behalf of S&S. Auto-Owners's bond underwriting manager, Jim House
("House"), stated that Auto-Owners might bond the program for a smaller amount than the total
proposed job, and needed to review financial statements.
Smith had retained a CPA for other reasons, and asked that CPA to prepare financial
statements as required by Auto-Owners. These materials were forwarded to Auto-Owners in
June 2006.
S&S had started work at the Naval Air Station in May of 2006 on other subcontracts with
the Dick Corporation.
Tomberlin wrote an e-mail to Sue Sweezey at Auto-Owners on June 13, 2006, stating that
he would send a fax and a letter from S&S's banker stating that a $2,000,000 line of credit is
available to S&S. On July 10, 2006, a letter was sent to House at Auto-Owners from banker
Kelly Baxter stating that a $1,000,000 line of credit had been approved, and that the bank would
be willing to entertain new loan requests. Smith has testified in his deposition that when the line
of credit came though, Tomberlin had other appointments, so Young took him to the People's
5
Bank of Coffee County to meet with Kelly Baxter and sign the paperwork on the $1,000,000 line
of credit. Smith took a draw down of $400,000 at that time. House has testified in his
deposition that in December of 2006, Tomberlin told House that S&S had a $2,000,000 line of
credit and that none of it had been used.
Auto-Owners agreed to provide performance and payment bonds for part of the total
project in January 2007. The parties dispute whether at the time of the issuance of the bonds in
January of 2007, Smith's company was in default with the Dick Corporation by failing to receive
bonds for other subcontracts with the Dick Corporation. Shelby Gardner ("Gardner"), CEO of
the Dick Corporation, has referred to this as a technical default, but also has stated that the
bonding requirement was waived. The parties are in agreement, however, that Smith's company
had not been declared in default in January 2007.
In February 2007, S&S was issued a $1 million irrevocable letter of credit by Kelly
Baxter of the People's Bank of Coffee County.
After the bonds were issued to Smith by Auto-Owners, Auto-Owners sent General
Services Inquiry forms to Dick Corporation inquiring about the status of the projects. None of
these forms were answered by Dick Corporation.
Also after the bonds were issued, there were meetings between the Tomberlin Defendants
and Gardner of Dick Corporation. Auto-Owners contends that through these meetings, Gardner
informed the Tomberlin Defendants of Smith's problems with performance of the contract.
In October of 2007, nearly ten months after the bonds were issued, Auto-Owners was
provided with a written notice of a potential claim and attempt to formally declare a default on
the bonds, by receiving a 72-hour notice to cure from Dick Corporation. There was no attempt
6
to cure the default. On October 19, 2007, Dick Corporation formally declared a default on the
bond and sent Auto-Owners notice of the claim.
Tom Froman was the Auto-Owners Vice President in charge of the claim.
Auto-Owners was sued by Dick Corporation on the performance bond in United States,
etc. v. Dick Corp., 3:08cv56/MCR/MD. After several years of litigation, Auto-Owners settled
with Dick Corporation, with a mediator determining the amount Auto-Owners had to pay on the
bond. Auto-Owners seeks to recover losses it sustained from the Tomberlin Defendants on the
basis that it would not have issued the bonds, and would have acted in light of knowledge of
default, if it had not been for the Tomberlin Defendants's actions.
IV. DISCUSSION
A. Count I and Count II Breach of Contract and Breach of Fiduciary Duty Claims
In Count I of the Amended Complaint, Auto-Owners brings a breach of contract claim
and in Count II a breach of fiducary duty claim, both arising from the Tomberlin Defendants's
actions before the bond in question was issued by Auto-Owners. The first contention the court
must address with respect to these claims is the scope of the claims as pled in the Amended
Complaint. The court will then turn to the merits of these claims.
i. Scope of the Claims in Counts I and II
The Tomberlin Defendants maintain that Counts I and II of the Amended Complaint pled
knowledge of and failure to report a default by S&S which existed prior to the issuance of the
bonds at issue in this case on January 10, 2007, in the form of S&S's failure to obtain bonding on
two other subcontracts with the Dick Corporation, and that any other bases for the claims in
7
Counts I and II which are relied on by Auto-Owners in opposition to summary judgment, such as
Smith becoming insolvent by December 31, 2006, are not pled in the Amended Complaint.
In the fact section of the Amended Complaint, Auto-Owners states that at the time the
Tomberlin Defendants requested a bond from Auto-Owners, "S&S had been unable to obtain
bonding on two other subcontracts (21084-106 and 21084-132)," that the Tomberlin Defendants
were aware that S&S had failed to obtain bonding on the subcontracts, that the inability to obtain
bonding on those subcontracts "put S&S in default on those two subcontracts," and that
Defendants "failed to disclose the existing default." (Doc. #79 at ¶¶ 10, 11, 12, 13). The fact
section of the Amended Complaint then goes on to discuss conduct during the performance of
the bonded contract which was "also" a default or breach. (Id. at ¶ 15).
In Count I, the Amended Complaint states that Tomberlin "failed to disclose material
information at the time of the application for the Bond, namely that S&S was already in default
on another of its subcontracts with Dick Corp. on the same project." (Id. at ¶ 33). In Count II,
the Amended Complaint alleges that the Defendants "failed to disclose information about the
existing default by S&S during the bond application process. . . ." (Id. at ¶ 44). No default other
than the failure to obtain bonds on the Dick Corporation subcontracts is referred to in the fact
section, or within Count I or II.
When given the opportunity by Order of this court to respond to the Tomberlin
Defendants's arguments regarding the scope of the claim, Auto-Owners argues that the federal
pleading rules do not require a one-to-one correlation between claims and items of evidence.
Auto-Owners distinguishes Gilmour v. Gates, McDonald & Co., 382 F.3d 1312 (11th Cir. 2004),
a case relied upon by the Tomberlin Defendants, on the basis that that case concerned a plaintiff's
8
attempt to prove a breach of contract claim when her complaint asserted only tort theories.
Auto-Owners also cites to Plumbers and Steamfitters Local No. 150 Pension Fund, 932 F.2d
1443 (11th Cir. 1991), in which the court explained that "a complaint need not specify in detail
the precise theory giving rise to recovery," as long as the defendant is on notice as to the claim
being asserted and the grounds on which it rests.2 Auto-Owners states that its allegation in
paragraph 35, that "South Central therefore obtained Auto-Owners' approval for the Bond
without disclosing material information that would have shown S&S not to be a proper risk for
the company to assume," is broad enough to cover evidence of default other than the failure to
obtain bonds, as stated in the Amended Complaint. Of course, paragraph 35 uses "therefore,"
and follows paragraph 34, which refers to "this default." The default identified in the Amended
Complaint is a failure to obtain bonding on two subcontracts. (Doc. #79 at ¶12).
In Hurlbert v. St. Mary's Health Care System, Inc., 439 F.3d 1286 (11th Cir. 2006), the
court rejected a plaintiff's argument that proof of interference with FMLA leave based on his
mother's health condition, rather than his own as alleged in the complaint, was merely a different
theory for proving his interference claim. Id. at 1297. District courts examining this issue have
distinguished between the mere assertion of additional facts to support a claim, and the assertion
of an additional, separate basis for recovery. See, e.g., Pandora Jewelers 1995, Inc. v. Pandora
Jewelry, No. 09-61490-Civ, 2011 WL 2174012 at *12 (S.D. Fla. June 2, 2011).
2
Auto-Owners also cites Speaker v. U.S. Dept. of Health and Human Services, 623 F.3d
1371 (11th Cir. 2010), but that case analyzes what materials can properly be considered outside
of the pleadings on a motion to dismiss and is, therefore, not helpful in the resolution of the issue
presented in the instant case.
9
In the instant case, Counts I and II of the Amended Complaint do not put the Tomberlin
Defendants on notice that Auto-Owners contends that there were other defaults before the bond
was issued. Without notice, reliance on other alleged defaults as separate breach of contract and
breach of fiduciary duty claims is an unauthorized attempt to amend the Amended Complaint.3
For example, the evidence of alleged default in the form of financial status, ie., Smith stating that
he was "broke," would not be used to prove that the Tomberlin Defendants failed to disclose that
S&S had defaulted by failing to bonds on two subcontracts, which is the claim alleged in the
Amended Complaint. Therefore, these additional facts will not be considered as separate bases
for relief in Counts I and II, and the court will only address the merits of the Count I and Count II
claims pled in the Amended Complaint.4
ii. Merits of Pre-Bond-Issuance Breach of Contract and Fiduciary Duty Claims
There is no dispute in this case that S&S was not bonded on two of its subcontracts with
Dick Corporation. The question before this court, therefore, is whether the lack of bonding on
those subcontracts was a default known to the Tomberlin Defendants such that failure to disclose
that default to Auto-Owners was a breach of contract or fiduciary duty.
Auto-Owners cites to the "Delay and Default" provision of one of the unbonded
subcontracts to support its argument that failure to obtain bonds for the subcontracts was a
3
The deadline for amending the pleadings passed before Auto-Owners filed its brief.
(Doc. #152).
4
The alternatively pled negligent misrepresentation and suppression claims in Counts V
and VI are broader in scope, and are not limited to defaults, but point to facts regarding
interactions with Kelly Baxter of the People's Bank of Coffee County. Therefore, as discussed
below, the notice analysis for those claims is different, and additional evidence can be used to
prove claims fairly within the Amended Complaint.
10
default. On page one of that subcontract, it states "100% Performance & Payment Bonds
Required-Yes." (Doc. # 119-16, p.2). In another portion of the contract, it states that it is agreed
as a material obligation under the subcontract that the subcontractor will provide the contractor
with payment and performance bonds and that an irrevocable letter of credit will be supplied by
the contractor. (Id. at p.4). Auto-Owners also cites to deposition testimony of Gardner, of Dick
Corporation, which is as follows: "Q. Now, as of February 13, 2007, or at least prior to that
date, S&S was technically in default of their masonry contract, because they had not provided a
bond, right? A. Technically, I guess, legally, that's supported, yes." (Doc. #119-15 at p. 234: 914). When asked whether a February 2007 $1 million irrevocable letter of credit ("ILOC") cured
the default, Gardner stated that the ILOC was an "acceptable way to move forward." (Doc.
#129-1 at p. 60: 9-14). Auto-Owners also cites Gardner's deposition testimony that he did not
recall ever processing a bond waiver on behalf of S&S. Auto-Owners states, therefore, that the
failure to obtain bonding was a default.
The Tomberlin Defendants's argument in response is two-fold. They argue both that the
failure to obtain the bond was not a default because the bond requirement was waived, and that
no default was ever communicated to the Tomberlin Defendants. The Tomberlin Defendants
point to the deposition testimony of Gardner of Dick Corporation in which he is asked whether
there was an initial bond requirement, and whether it was waived, and Gardner answered, "yes."
(Doc. #112, Ex. Gardner Dep. at p. 696: 23-697: 1). When asked when the requirement was
waived, Gardner responded that he did not recall the exact time, but it was sometime afer
execution when S&S revealed it was not able to provide a bond. (Id. at 697: 4-7). Dick
11
Corporation allowed S&S to continue work on the contracts even though S&S was not approved
for bonds. (Id. at 697: 8-14).
The Tomberlin Defendants also cite to the deposition testimony of Smith that Dick
Corporation had not declared him in default at the time he applied for the bond, and had waived
bonding requirements. (Doc. #112, Ex. Smith Dep. at p. 190: 19-191: 8).
Auto-Owners contends that there is a difference between a default and a written notice of
default. Auto-Owners contends, therefore, that S&S was in default, even though there had been
no declaration of default, and that the Tomberlin Defendants were obligated to notify AutoOwners of that default.
Even accepting that a default can exist even if no default is declared, to prove claims that
the Tomberlin Defendants failed to tell Auto-Owners of an existing default, there must be
evidence that the Tomberlin Defendants were aware that S&S had defaulted and failed to tell
Auto-Owners. Auto-Owners states in the Amended Complaint and in its brief that the Tomberlin
Defendants knew of the default, but does not cite to any evidence to support that statement.
(Doc. #129 at p.2). The evidence cited in its brief following the statement of the Tomberlin
Defendants's knowledge which relates to the failure to obtain the bond on other subcontracts is
Gardner's testimony that the failure was a technical default, discussed above. The portions of
Gardner's testimony cited do not speak to the knowledge of the Tomberlin Defendants.5
The evidence before the court, viewed in a light most favorable to the non-movant, is that
Smith's failure to obtain a bond was considered by the Dick Corporation to be a technical default,
5
There is also a reference in the brief to a conversation between Gardner and a Trevor
Pant regarding the lack of a bond or letter of credit, for which Smith was also present, but that
does not establish knowledge of an existing default on the part of the Tomberlin Defendants.
12
but that the bond requirement was not enforced, and Smith was performing those contracts.
There is no evidence before the court that the Tomberlin Defendants were aware that there was a
technical default, given that Smith had not been declared in default and was still the
subcontractor on the contracts. While Gardner has stated that the February ILOC was used to
cure the lack of a bond, the February 2007 ILOC was issued after the Auto-Owners bond was
issued. In fact, the time at which S&S is said to have been in default, in the deposition question
quoted above, was "as of" or "prior to" February 13, 2007. Even assuming the Tomberlin
Defendants were involved in attempting to secure the ILOC, there is no evidence before the court
that the Tomberlin Defendants knew before, or even in January 2007, when Auto-Owners issued
the bond in question, that the ILOC was required to cure an existing default. In absence of
sufficient evidence that the Tomberlin Defendants knew that S&S had defaulted on subcontracts
with the Dick Corporation by failing to obtain bonds, summary judgment is due to be
GRANTED as to the Tomberlin Defendants as to the claims in Counts I and II.
B. Count III
In Count III of the Amended Complaint, Auto-Owners brings a claim for breach of
fiduciary duty following the application process.
The Tomberlin Defendants have moved for summary judgment on the basis that there
was no fiduciary duty to monitor the progress of the construction contract once the bonds had
been written. The Tomberlin Defendants argue that Auto-Owners never entrusted a duty to
agents to provide information on ongoing projects after the bonds are written. They argue that
the only language in the documents that refers to any type of fiduciary duty involves the
safekeeping of "monies" in payment of premiums. (See Doc. #11-4, p. 2). The Tomberlin
13
Defendants argue that the contract should be construed in light of the maxim expressio unius est
exclusio alterius, namely, that expression of one thing is the exclusion of another.
Auto-Owners states that the Tomberlin Defendants's view of their role as a conduit of
information does not comply with contractual requirements under the LOI, is not consistent with
standards in the industry, and is inconsistent with the role that the Tomberlin Defendants played
in masterminding the bonds for the project. Auto-Owners points out that the LOI uses words
such as "trust" and "trust relationship," rather than "fiduciary," and argues that those terms
establish that there are fiduciary duties. In a section of the LOI pointed to by Auto-Owners, the
document states that South Central Agency is in a trust relationship and that the discretionary
authority granted to it
shall be exercised with respect to a particular bond ONLY WHEN YOU ARE
THOROUGHLY SATISFIED after thorough investigation of all facts surrounding
the case, THAT IT IS A PROPER RISK FOR THE COMPANY TO ASSUME.
(Doc. #79-5 at p.1). Auto-Owners also points the court to the website of a trade association, the
National Association of Surety Bond Producers, www.nasbp.org, as stating that a bond producer
must strive to provide all relevant information that impacts surety decisions, and not knowingly
withhold negative information. Finally, Auto-Owners argues that the Tomberlin Defendants
were involved in promoting S&S to the People's Bank and Dick Corporation, as well as AutoOwners. Auto-Owners states that the Tomberlin Defendants were doing more than being mere
conduits of information.
It appears to this court that the LOI does not control the Tomberlin Defendants's
responsibilities toward Auto-Owners after the bond was issued. The terms of the LOI define
responsibilities in the "trust relationship" owed by the Tomberlin Defendants while evaluating
14
the risk Auto-Owners was "to assume." The LOI does not, however, specify any duties beyond
the point the bond is issued. This reading of the plain language of the contract is consistent with
the deposition testimony of Jim House, of Auto-Owners, in which he stated that Auto-Owners
did not communicate to the agents an expectation that if there were difficulties with the work,
they would inform Auto-Owners, but that Auto-Owners expected that as a matter of "common
sense." (Doc. #112 , Ex. House Dep. at p. 45: 6-19).
In addition to the lack of specification of duty beyond bond issuance, the contract and
LOI agreed to by the parties in this case contain far fewer of the hallmarks of an agency
relationship than those in cases in which a fiduciary duty was imposed. See, e.g., Auto-Owners
Ins. Co. v. Midwest Agency, Inc., No. 4:07cv394, 2007 WL 2885345, at *4 (E.D. Mo. Sept. 27,
2007) (finding that an agency contract, letters of instruction, guaranty agreements, and power of
attorney evidence an intent to confer agency status, that agents had the ability to alter the legal
status of the principal, and principal had the right to exercise control over the agent so as to
create fiduciary duties); National Am. Ins. Co. v. J.R. Misken Ins. Services, Inc., 161 F. App'x
737, 738 (10th Cir. 2005) (noting that bond producer "had the authority to underwrite contract
bonds . . . .").
Auto-Owners has relied on Safeco Ins. Co. of Am., Inc. v. Zervos Group, Inc., No. 0071518, 2002 WL 31548700 (E.D. Mich. Oct. 31, 2002) to support a finding of a fiduciary duty in
this case. In Safeco Ins. Co. of Am., the court refers to the National Association of Surety Bond
Producers's standards. The case, however, demonstrates that there are additional considerations
in finding that there is a fiduciary duty on the part of a bond producer, and the ultimate
conclusion in that case regarding fiduciary duties actually undermines Auto-Owners's position in
15
this case. In Safeco Ins., there were two agreements at issue. One agreement was a 1993 Safeco
Surety Agency Agreement, pursuant to which the bond producer was prohibited from accepting
risks that were deemed unacceptable under underwriting standards, but no underwriting guide
was provided. The second agreement was a 1997 Authority to Execute Bonds, pursuant to which
the bond producer was authorized to execute payment and performance bonds to a certain
amount of money without prior approval. The court reasoned that the bond producer was an
independent agent, pursuant to state law, who placed insurance with various agencies, and that
the 1993 agreement did not modify that independent status. Id. at *9. The court concluded,
therefore, that the bond producer had no fiduciary duty to Safeco when it originally presented the
contractor to the surety. Id. The court further reasoned, however, that circumstances changed
with the execution of the 1997 agreement, because the bond producer then became an agent of
the surety. The court concluded, however, that the fiduciary duty which resulted from the 1997
agreement did not include a duty to disclose information learned before the execution of the 1997
agreement. Id. at 10.
Given that the Tomberlin Defendants undisputedly did not have the authority to issue any
bonds without Auto-Owners's permission, this court cannot conclude that Safeco Ins. establishes
that any post-bond-issuance fiduciary duty exists in this case. See also Lumbermans Mut. Cas.
Co. v. Franey Muha Alliant Ins. Serv., 388 F. Supp. 2d 292, 302-03 (S.D. N.Y. 2005)(finding a
question of fact as to fiduciary relationship based on on-going relationship of trust and
confidence, but denying plaintiff's motion for summary judgment on the issue of express agency
because bond broker was not authorized to bind surety without permission).
16
At the oral argument held on the pending motions, Auto-Owners also cited the court to
Crumpton v. Pilgrim Health & Life. Ins. Co., 46 So. 2d 848, 850 (Ala. App. 1950), in which the
court stated that the relationship existing between a soliciting agent and principal is a fiduciary
one by which the agent must act with the utmost good faith and loyalty. That statement,
however, does not answer whether the Tomberlin Defendants were the agents of Auto-Owners
after the bond was issued. The facts in Crumpton involved representations made at the time of
the issuance of a life insurance policy. Furthermore, in a concurrence later applying Crumpton,
Justice Jones of the Supreme Court of Alabama differentiated between an agent who is employed
by an insurance company and a broker who solicits contracts under no employment from any
special company. Spears v. Colonial Bank of Ala., 514 So. 2d 814, 819-20 (Ala. 1987) (Jones,
J., concurring).
Under Alabama law, "[a]hough there are instances in which an independent agent may be
an agent for an insurer, typically '[a]n independent agent or broker is usually not an agent for the
insurer at all; rather, he is the agent of the insured.' Washington Nat'l Ins. Co. v. Strickland, 491
So.2d 872, 875 (Ala.1985)." Zurich Am. Ins. Co. v. Specialty Foundry Products, No.,
7:08cv1412-LSC, 2009 WL 8612395, at *4 (N.D. Ala. July 30, 2009).
Auto-Owners has asked the court to find that, even in the absence of a contractual
agreement which extends duties beyond the point of bond issuance, bond brokers have a
continuing duty to report the conduct of all of the bonded subcontractors for which they have
solicited bonds, but cites no case which so holds. There is authority to the contrary. See State
Sec. Ins. Co. v. Frank B. Hall & Co., 630 N.E.2d 940, 946 (Ill. App. 1 Dist.1994) (stating "[o]nce
the limited purpose for which the broker's agency is established has been fulfilled, the broker
17
owes no on-going fiduciary duty to the ex-principal."). This court cannot conclude that the law
extends to create such a continuing duty in this case. Summary judgment is, therefore, due to be
GRANTED as to the Tomberlin Defendants as to Count III of the Amended Complaint.
C. Count IV
Auto-Owners brings a claim for indemnification on the theory that because the bond was
executed in violation of the LOI, it triggered an indemnification provision, and also based on
common law indemnity. This claim is pled as relief tied to the previous claims of the Amended
Complaint.6 Having concluded that summary judgment is due to be GRANTED as to the Counts
I-III of the Amended Complaint, the court concludes that summary judgment is also due to be
GRANTED to the Tomberlin Defendants as to Count IV.
D. Counts V and VI
Auto-Owners states in the Amended Complaint that it pleads Count V for negligent
misrepresentation, in the alternative to Counts I through IV of the Amended Complaint, and
Count VI for suppression in the alternative to Counts I through V.
The Tomberlin Defendants moved for summary judgment as to Count V and VI primarily
on statute of limitations grounds and the doctrine of voluntary payment grounds, which have
previously been ruled on by the court. (Doc. #148). The Tomberlin Defendants also have
addressed the following alleged negligent misrepresentations: declared defaults, financial
statements, and statements regarding the experience of Smith. In a footnote in their brief, the
6
The Amended Complaint states that Count V is pled in the alternative to Counts I
through IV, so that Count IV appears to be tied to those counts, and separate from V and VI.
18
Tomberlin Defendants also argue that there are no allegations in the Amended Complaint
regarding a letter of credit, so that no claim based on such evidence is pled.
While the Tomberlin Defendants acknowledge that the suppression count incorporates by
reference other aspects of the Amended Complaint, they do not appear to otherwise differentiate
between the negligent misrepresentation and suppression claims in moving for summary
judgment.7 Therefore, the court will only address the arguments raised by the Tomberlin
Defendants, who bear the burden in moving for summary judgment, beginning with the issue of
whether the line of credit evidence is fairly with the Amended Complaint in the context of these
claims, and then turning to the arguments on the merits of the claims.
i. Scope of Claims in Counts V and VI of the Amended Complaint
As discussed above, a complaint cannot be amended through the response to summary
judgment. Auto-Owners has presented evidence that Tomberlin told Auto-Owners in December
2006, before the Auto-Owners bond was issued, that Smith had a $2 million letter of credit
which had not been used. The Tomberlin Defendants dispute that this claim was alleged in the
Complaint.
The negligent misrepresentation and suppression claims in the Amended Complaint are
not stated as narrowly as are the breach of contract and fiduciary duty claims in Counts I and II,
previously discussed. That is, while there is an allegation that the Defendants knew of "the
default" on S&S's other subcontracts in the misrepresentation claim in Count VI, Count V also
7
If the Tomberlin Defendants intend to draw a distinction between these claims in
advance of trial as a means for excluding any evidence, they are advised to file a Motion in
Limine, supported by legal authority, no later than the deadline in the Revised Scheduling Order.
(Doc. #152).
19
references other negligently misrepresented information, including financial information
provided between Young and Kelly Baxter at the People's Bank of Coffee County. In the
suppression count, Count VI, Auto-Owners speaks in broad terms that the Tomberlin Defendants
were in possession of material facts concerning the risks posed and failed to communicate those
facts, without limiting the claim to knowledge of an existing default. (Id. at p. 14). The court
concludes as to these claims, therefore, that the Tomberlin Defendants had adequate notice that
claims regarding the Tomberlin Defendants's knowledge of and representations or suppressions
of facts regarding S&S's include the line of credit provided by Kelly Baxter at the People's Bank
of Coffee County.
ii. Merits of Claims
As stated above, Auto-Owners has presented several factual bases for its claims in Counts
V and VI. As discussed previously, the court concurs with the Tomberlin Defendants that the
Tomberlin Defendants's knowledge of default in the form of a failure to obtain a bond on
subcontracts, as pled in Counts I and II of the Amended Complaint, and incorporated into Counts
V and VI, is not supported by the evidence in the case.
Auto-Owners also faults the Tomberlin Defendants for misrepresenting Michael Smith's
prior construction experience, while the Tomberlin Defendants contend that Smith himself
provided the information, the information was true, and therefore, it cannot be the basis for any
recovery in this case. The Amended Complaint alleges that Smith had been in construction for
only two years and had worked in a paper mill before that. (Doc. #79 at ¶ 70). Auto-Owners
responds to the Motion for Summary Judgment by stating that Smith's deposition reveals that his
20
experience in construction is vastly overstated because he worked in the paper mill for 15 years
and worked as a homebuilder only part-time during that period.
The Tomberlin Defendants point to Smith's deposition testimony that he worked for
BE&K, Brown &Root, Daniel, and Harbert construction companies on million dollar projects for
15 years doing concrete work before he was employed with paper mills and did home
construction for 15 years. (Doc. #112, Ex. Smith Dep. at p. 140:6-15).
The court has examined the bond applications attached as Exhibit G to the Amended
Complaint. The initial bond application submitted to Auto-Owners states that Smith has 20
years of construction experience and then states under "magnitude and type of work" the
following: "paper mills to HomeBuilder." The second bond application states that Smith has 25
years of construction experience. Smith's deposition testimony as to his 15 years of experience
in concrete work and 15 years of paper mill and homebuilding experience is consistent with these
representations. This aspect of the evidence pointed to by Auto-Owners, therefore, does not
support a claim of negligent misrepresentation or suppression.
Another factual basis for the misrepresentation and suppression claims involves
information within financial statements. The Tomberlin Defendants have stated that they merely
forwarded financial information, and bore no additional responsibilities. They also argue with
respect to the line of credit from the People's Bank of Coffee County that no evidence exists that
Tomberlin was provided an explanation of why the loan was less than what he understood it to
be, and that the letter regarding the amount of the loan was actually mailed directly to AutoOwners, not Tomberlin. The Tomberlin Defendants have argued in support of their own
Counterclaim that Auto-Owners, as a surety, had certain responsibilities which it did not fulfill,
21
and that failure was the cause of the loss it is claiming in this case. The Tomberlin Defendants
cite to Magee v. Manhattan Life Ins. Co., 92 U.S. 93, 98-101 (1875), for the proposition that the
"mere relation of principal and surety does not require the voluntary disclose of all material facts
in all cases, " and a surety must ask for information. In Magee, the court also stated, however,
that if a surety fails to seek information within its reach, and a loss occurs, the surety cannot set
up as a defense facts the surety should have learned "in the absence of fraud on the part of the
creditor." Id.
Auto-Owners has provided evidence that Tomberlin made representations of fact
regarding S&S's line of credit which were not true. Specifically, Auto-Owners has presented
evidence that Tomberlin wrote an e-mail to Sue Sweezey at Auto-Owners on June 13, 2006,
stating that he would send a fax on Wednesday and a letter from S&S's banker stating an
additional $2,000,000 line of credit is available. (Doc. #119-6). Smith has testified in his
deposition that when the line of credit came though, Tomberlin had other appointments, so
Young took him to the bank to meet with banker Kelly Baxter. (Doc. #119-1 at p. 62:6-12). The
line of credit had been approved, and Smith took a draw down of $400,000 at that time, (Id. at p.
62:21: 63:3), leaving $600,000. (Id. at 88:9-13).
Jim House of Auto-Owners stated in his deposition that on December 18, 2006, he
prepared a bond authorization request and on the "bank line" he inserted "$2 million" based on a
phone conversation he had with Tomberlin. (Doc. #119-8 at p. 277: 23-278:3; 281: 14-23).
Tomberlin also told House that none of the line had been used. (Id. at 282: 10-13).
Auto-Owners has also presented evidence of a December 14, 2006 email from Tomberlin
to House in which he stated that "[t]hey have reduced the job down to $1.2 million for the bond."
22
(Doc. #119-11). Auto-Owners contends that this was a false representation because all four
contracts were being performed at the same time, so the $1.2 million figure was not an accurate
representation of the contract amount.
Viewing the evidence in a light most favorable to the non-movant, the court concludes
that sufficient questions of fact have been raised to preclude summary judgment on these claims.
There is evidence that the Tomberlin Defendants made representations of fact relied on by AutoOwners which were not true. The legal duty of a surety as pointed to by the Tomberlin
Defendants, in view of the evidence of the affirmative representation by the Tomberlin
Defendants as to the available line of credit, presents a question of fact for the jury as to the
reasonableness of Auto-Owners's actions under the circumstances.
E. Counterclaim
The Tomberlin Defendants have moved for summary judgment on the counterclaim they
have asserted against Auto-Owners. The Counterclaim seeks a declaration the Tomberlin
Defendants were soliciting agents, that Auto-Owners was responsible for underwriting, that the
Tomberlin Defendants had no duty with respect to underwriting or handling claims, that the
Tomberlin Defendants's only duty was in reporting an actual claim, that Auto-Owners chose to
voluntary settle its claims, and that the Tomberlin Defendants are entitled to relief under the
indemnity clause of the Contract.
The Tomberlin Defendants argue that a surety has a duty to ask questions during the
underwriting of a bond, citing Magee v. Manhattan Life Ins. Co., 92 U.S. 93 (1875) and St. Paul
Fire & Marine Ins. Co. v. Commodity Credit Corp., 646 F.2d 1064 (5th Cir. June 4, 1981). They
also state that Auto-Owners's losses were caused by Auto-Owners's underwriting, through a
23
failure to ask for information, and claims management, through a failure to insist on the right to
cure. The Tomberlin Defendants argue that Auto-Owners decided to forego curing the default,
and incur a completion cost of $80,000, and eventually spent more than $2,000,000 on a claim
that could have been resolved for $80,000,8 or the full penal sum of the bond of $1,200,000.
The court cannot conclude that the Tomberlin Defendants have demonstrated that they are
entitled to judgment on their counterclaim in its entirety as a matter of law. There is evidence
before the court that Auto-Owners was affirmatively mislead by, and not just failed to inquire
into, information upon which it based decisions, and that there are questions about the amount
required to cure the default on the Auto-Owners bond. Therefore, a jury will have to evaluate the
evidence for the reasonableness of Auto-Owners's actions, both in evaluating the statute of
limitations defense and in determining which party is responsible for Auto-Owners's losses.9
V. CONCLUSION
For the reasons discussed, it is hereby ORDERED as follows:
1. The Motion for Summary Judgment (Doc. #112) is GRANTED and judgment is
entered in favor of the Defendants and against Auto-Owners Insurance Company on Counts I, II,
III, and IV of the Amended Complaint.
2. The Motion for Summary Judgment (Doc. #112) is DENIED as to Counts V and VI of
the Amended Complaint and the Counterclaim.
8
Auto-Owners disputes this amount, relying on Gardner's testimony.
9
If the Tomberlin Defendants should decide to modify their pending Motions in Limine
(Doc. #133, 134) in light of this Memorandum Opinion and Order, they should do so by the
deadline for filing motions in limine as provided for in the Revised Scheduling Order (Doc.
#152).
24
The case will proceed to trial on Counts V and VI of the Amended Complaint and the
Defendants's Counterclaim.
DONE this 24th day of July, 2012.
/s/ W. Harold Albritton
W. HAROLD ALBRITTON
SENIOR UNITED STATES DISTRICT JUDGE
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