Sentinel Trust v. Universal Bonding Ins.

• Citation: 316 F.3d 213
• Decision Date: 08 January 2003
• Docket Number: No. 02-1125.,02-1125.
• Parties: SENTINEL TRUST COMPANY, Appellant v. UNIVERSAL BONDING INSURANCE COMPANY; United States Fire Insurance Company; Westchester Fire Insurance Company; and Richard Quackenbush, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

316 F.3d 213

SENTINEL TRUST COMPANY, Appellant v. UNIVERSAL BONDING INSURANCE COMPANY; United States Fire Insurance Company; Westchester Fire Insurance Company; and Richard Quackenbush, Appellees.

No. 02-1125.

United States Court of Appeals, Third Circuit.

Argued November 1, 2002.

Filed January 8, 2003.

COPYRIGHT MATERIAL OMITTED

Keith J. Miller, (Argued), Robinson & Livelli, Newark, Ames Davis, Stanley Graham, Waller Lansden Dortch & Davis, Nashville, for Appellant Sentinel Trust Company.

Steven H. Rittmaster, (Argued), Mark S. Gamell, Torre, Lentz, Gamell, Gary & Rittmaster, LLP, Mark S. Kundla, Hardin, Kundla, McKeon, Poletto & Polifroni, Springfield, for Appellees United States Fire Insurance Company and Westchester Fire Insurance Company.

Andrew S. Kent, (Argued), Gage Andretta, Wolff & Samson, P.A., Roseland, for Appellee Universal Bonding Insurance Company.

Before NYGAARD and WEIS, Circuit Judges, and IRENAS,^* District Judge.

OPINION OF THE COURT

WEIS, Circuit Judge.

In this diversity case, an indenture trustee was denied recovery from sureties on performance bonds. In part, the District Court's ruling under Rule 12(b)(6) rested on findings of fact unfavorable to the trustee in a related case. We apply issue preclusion despite the fact that the earlier judgment had been vacated as a term of settlement of that case. Concluding that the District Court did not err in its order of dismissal, we will affirm.

The plaintiff, Sentinel Trust Company, having its principal place of business in Nashville, Tennessee, was the indenture trustee for a series of corporate notes of Transportation Leasing Corporation and Voyageur Lines, Inc. issued to various investors. These notes were sold to the public by a group including David Namer of Memphis, with the representation that payments were guaranteed by surety bonds.

Universal Bonding Insurance Company, an agency with its principal place of business in New Jersey, and its vice-president Richard Quackenbush, procured bonds from two surety companies running in favor of Sentinel as trustee. When defaults on the notes occurred, Universal and the surety companies refused to honor claims against the bonds. After it became known that Quackenbush had participated with Namer in fraudulently issuing the bonds, Universal agreed to indemnify the surety companies against any loss.

Sentinel, as trustee and on behalf of the noteholders, began litigation in 1997 against Universal and the sureties in the United States District Court in New Jersey seeking to compel payment of the bonds. While those actions were pending, Sentinel was removed as trustee by disgruntled noteholders and was replaced by Nevada State Bank, which succeeded to all rights and obligations under the indenture. In 1999, Nevada settled the suits in the New Jersey District Court for $3,585,000, an amount less than the full amount of the bonds.

On behalf of the noteholders, Nevada then joined in a pending action brought by other claimants in the Chancery Court for Davidson County, Tennessee, against Sentinel for derelictions it had committed as trustee. The complaint asserted claims for conversion, breach of fiduciary duty breach of contract, and negligent management of the financing arrangement. In 1999, Sentinel joined Universal, the surety companies, and Quackenbush as third-party defendants in that litigation.

The Chancery Court filed extensive findings of fact and conclusions of law, and entered summary judgment for Nevada against Sentinel for an amount in excess of $2 million. Sentinel then dismissed without prejudice its complaint against third-party defendants, Universal and the surety companies.

After the judgment and dismissal, Nevada and Sentinel reached a settlement, one of whose terms was that the Chancery Court's judgment for damages would be vacated. On February 21, 2001, the Chancery Court signed a consent order vacating its judgment. Universal and the surety companies were not parties to that order.

Before the vacatur was actually docketed, Sentinel filed a complaint against Universal, the surety companies, and Quackenbush on February 1, 2001 in the District Court for the District of New Jersey. The complaint recited allegations essentially the same as those contained in the third-party complaint Sentinel had previously filed in the Tennessee Chancery Court. Sentinel sought damages in the form of litigation expenses incurred in the Chancery suit, reimbursement of the amounts it paid in the settlement, as well as damages for breach of contract and statutory causes of action under Tennessee law.

Relying on Tennessee law, the District Court dismissed the complaint under Fed. R. Civil Procedure 12(b)(6). The Court denied the contract claims because Sentinel was no longer a trustee, and the obligations on the surety bonds were not owed to it personally. Sentinel was viewed as a mere "incidental beneficiary" and, as such, it "had no standing to sue for any alleged breach or inducement to breach obligations on the bonds."

The indemnification count was rejected based on the findings of the Tennessee Chancery Court that Sentinel was "liable for its negligent acts." Finally, the Court noted that Nevada, as successor trustee, had released Universal and the surety companies from all claims of the noteholders. Although Sentinel asserted that the consideration for the release was inadequate, the Court ruled that the amount paid was sufficient.

Sentinel has appealed, asserting that the District Court misconstrued its claims for breach of contract and inducement of breach, as well as improperly relying on the findings of fact underlying the vacated judgment in dismissing the indemnity claim. Rejection of the statutory claims arising under Tennessee law is also alleged to be erroneous.

We have jurisdiction under 28 U.S.C. § 1291. Our review of the District Court's rulings is plenary. Maio v. Aetna Ins. Co., 221 F.3d 472, 481 (3d Cir.2000).

Under Federal Rule of Civil Procedure 12(b)(6), the court must accept the facts set out in the complaint. However, a defendant may supplement the complaint by adding exhibits such as public records and other indisputably authentic documents underlying the plaintiff's claims. Pittsburgh v. West Penn Power, 147 F.3d 256, 259 (3d Cir.1998); ALA v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir.1994); Pension Benefit Guar. Co. v. White Consol. Indus., 998 F.2d 1192, 1196 (3d Cir.1993). Our review, as well as the District Court's ruling, includes consideration of such documents.

I. Breach of Contract

Sentinel's claim for breach of contract against Universal and their sureties is based upon their refusal to honor their obligations to guarantee payment of the TLC and Voyageur notes. Sentinel originally made these assertions in the District Court as trustee on behalf of the noteholders. When Nevada succeeded Sentinel as trustee, and settled the noteholders' claims against Universal and the sureties, it reserved the right to proceed against Sentinel, and did so in the Tennessee Chancery Court.

Ultimately, Sentinel paid a substantial sum to Nevada as incumbent trustee in settlement of the Tennessee action. It is that settlement amount and the expenses associated with it that Sentinel seeks to recover here against defendants Universal and the sureties.

Sentinel argues that if Universal and the sureties had paid the full amount of the bonds, either upon demand or in settlement of the original suit by Nevada, then the noteholders would have had no damages to assert in the Chancery suit. Consequently, Sentinel would, in effect, have been immunized. This scenario is implicitly based on the proposition that the sureties could not have invoked Sentinel's derelictions as a defense on the bonds. Such a contention is dubious at best.

Basic tenets of suretyship may protect a surety from responsibility when the obligee bears fault for the loss. An obligee must act with diligence in transactions with the principal, and must have appropriately performed its contractual obligations in order for the principal and surety to be liable. See M. Michael Egan & Marla Eastwood, "Discharge of the Performance Bond Surety" in The Law of Suretyship 119 (Edward G. Gallagher ed., 2d ed.2002).

A substantial difference exists between contracts of indemnity and those of suretyship. An indemnity policy undertakes to protect a promisee against loss because of his own liability to a third person. The undertaking of a surety, on the other hand, is intended to protect the promisee against loss through failure of a third person to carry out his obligation to the promisee.

In certain circumstances, a surety may be released from its obligations when derelictions by the obligee brought about the loss. Under Tennessee law, a compensated surety is entitled to be relieved to the extent of the loss actually caused by breach of an obligee's duty. Central Towers Apartments, Inc. v. Martin, 61 Tenn. App. 244, 453 S.W.2d 789, 796-97 (1969).

Here, the District Court pointed out that the bonds were not issued to Sentinel personally, but only in its capacity as trustee. See Rest. (2d) of Trusts, § 196, comment g (1959) (stating that "all powers of a trustee shall be attached to the office and shall not be personal") (citing Uniform Trusts Act, § 10). When Nevada replaced Sentinel as trustee, the surety's obligations were transferred to Nevada as the representative of the noteholders.

The Court further observed that Sentinel, as trustee and thus a mere agent, was not entitled to a portion of the bond proceeds. Rather, the obligations were owed to the office of trustee, making Sentinel only an incidental beneficiary. The fact that Sentinel was entitled to compensation for its work as trustee in administering the financial arrangements did not confer standing to sue on its own behalf for breach or alleged inducement to breach the bond agreement. Under Tennessee law, only intended beneficiaries of a contract, and not...