American Mfg. Mut. Ins. v. Tison Hog Market

• Decision Date: 03 August 1999
• Docket Number: No. 98-8506,98-8506
• Citation: 182 F.3d 1284
• Parties: (11th Cir. 1999) AMERICAN MANUFACTURING MUTUAL INSURANCE COMPANY, Plaintiff-Counter-Claimant-Defendant-Appellee, v. TISON HOG MARKET, INC., THOMAS T. IRVIN, Commissioner of Agriculture for the State of Georgia as Trustee for any and all claimants under bonds issued for Thurstan D. Paulk, Jr. d.b.a. Paulk Livestock Co., and Coffee County Stockyard, Inc., Defendants-Appellants, GAINESVILLE LIVESTOCK MARKET INC., MADISON HOG MARKET, INC., d.b.a. Townsend Livestock Market, et al., Defendants-Counter-Claimants-Appellants
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1284

182 F.3d 1284 (11th Cir. 1999)

AMERICAN MANUFACTURING MUTUAL INSURANCE COMPANY, Plaintiff-Counter-Claimant-Defendant-Appellee, v. TISON HOG MARKET, INC., THOMAS T. IRVIN, Commissioner of

Agriculture for the State of Georgia as Trustee for any and all claimants

under bonds issued for Thurstan D. Paulk, Jr. d.b.a. Paulk Livestock Co.,

and Coffee County Stockyard, Inc., Defendants-Appellants,

GAINESVILLE LIVESTOCK MARKET INC., MADISON HOG

MARKET, INC., d.b.a. Townsend Livestock Market, et al.,

Defendants-Counter-Claimants-Appellants.

IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT

No. 98-8506

August 3, 1999

Appeals from the United States District Court for the Southern District of Georgia D. C. Docket No. CV 595-86 Before COX, Circuit Judge, FAY, Senior Circuit Judge, and NANGLE^*, Senior District Judge.

COX, Circuit Judge:

Plaintiff American Manufacturing Mutual Insurance Company ("American") filed this action seeking a declaratory judgment that it was not liable to the defendant creditors on two surety bonds. The district court entered summary judgment in American's favor and the defendants appeal. For the reasons that follow, we vacate and remand.

I. Background

The Packers and Stockyards Act of 1921, 7 U.S.C. 181 et seq., (the "PSA") and its implementing regulations require that every livestock dealer execute and maintain a reasonable bond to secure the performance of its obligations. See 7 U.S.C. 204; 9 C.F.R. 201.29. The PSA's bonding requirement was designed "to safeguard the farmers and ranchers who produce cattle against the losses they would suffer if they sold their livestock to insolvent or defaulting purchasers." Travelers Indem. Co. v. Manley Cattle Co., 553 F.2d 943, 945 (5th Cir. 1977) (citations omitted).

Two livestock dealers, Thurston Paulk, d/b/a Paulk Livestock Company ("Paulk Livestock"), and Coffee County Stockyard, Incorporated ("Coffee County Livestock"), applied to American to serve as a surety and issue bonds for them to meet the PSA's requirements.¹ The applications for both bonds contained agreements to indemnify American for any losses that it might incur as a result of their issuance. The principal on the first bond was Thurston Paulk, d/b/a Paulk Livestock. The application was signed by Thurston Paulk in his role as the sole proprietor of Paulk Livestock. The indemnification agreement contained the purported signatures of Thurston Paulk, Betty Paulk, and a witness. The principal on the second bond was Coffee County Livestock. The application contained the signature of Thurston Paulk in his role as president of Coffee County Livestock. The indemnification agreement contained the purported signatures of Thurston Paulk, Betty Paulk, Ashley Paulk, and a witness. American relied upon the information contained in the forms and the alleged genuineness of the signatures in making the decision to issue the bonds.

After the bonds were issued, Paulk Livestock and Coffee County Livestock purchased numerous hogs from defendants Tison Hog Market, Inc.; Gainesville Livestock Market, Inc.; Madison Hog Market, Inc., d/b/a Townsend Livestock Market; South Carolina Farm Bureau Marketing Association; and Georgia Farm Bureau Marketing Association, Inc. When the defendant hog sellers did not receive payment for the hogs, they made claims against the surety bonds for the purchase money that they were due. Defendant Thomas T. Irvin, Commissioner of the Department of Agriculture for the State of Georgia, was the trustee for the bonds. In his role as trustee, he notified American of the claims being made on the bonds by the livestock sellers.

American conducted an investigation and learned that the bonds' indemnification agreements contained forged signatures. In particular, American discovered evidence suggesting that: (1) Ashley Paulk had not signed or authorized anyone to sign his name to the Coffee County Livestock bond indemnification agreement; and (2) Betty Paulk had not signed or authorized anyone to sign her name to either bond's indemnification agreement. American claimed that it would not have issued the bonds had it known that Betty and Ashley Paulk had not agreed to indemnify it, and it declared the bonds rescinded and returned all the premiums.

American then brought this action seeking a declaratory judgment relieving it from liability to the defendants on the ground that the bonds were void ab initio under Georgia insurance law due to the fraudulent and material misrepresentations of the bonds' principals. American argued that the principals had forged the signatures of Betty and Ashley Paulk on the indemnification agreements in order to induce it into issuing the bond. The defendants answered and counterclaimed seeking judgment for the amount due them on the bonds. They argued that Georgia insurance law did not apply to the surety contracts at issue in this case and that under both federal and Georgia surety law, American was still liable on the bonds.

Cross motions for summary judgment were filed. The district court granted American's motion for summary judgment and denied those filed by the defendants. In its order, the court first held that the PSA did not preempt Georgia law. Then, applying Georgia insurance law, it concluded that the bonds were void ab initio. This appeal by the defendant livestock sellers and the Commissioner followed.

II. Standard of Review

We review a district court's entry of summary judgment de novo. See Ross v. Clayton County, Ga., 173 F.3d 1305, 1307 (11th Cir. 1999). Summary judgment is proper where there are no disputes of material fact and the movant is entitled to judgment as a matter of law. Id.

III. Discussion

The ultimate issue presented by this appeal is whether a surety in Georgia is liable on its bond to creditors when the principal fraudulently induces the surety to issue the bond. The defendants argue that American is still liable on the bonds under general surety law because fraud committed by a principal alone in inducing a surety to issue a surety bond does not release the surety from liability. They contend that the district court erroneously applied Georgia insurance law to determine American's liability when it should have applied either federal common law or Georgia surety law. American responds that the district court correctly found no preemption and correctly applied Georgia insurance law.

Although the ultimate issue in this appeal is American's liability on the bonds, the key question that we must resolve first is what law applies to determine the liability. We begin our discussion, therefore, by examining whether the passage of the PSA has preempted state law regarding the liability of a surety on a bond obtained by a principal's fraud.

Pursuant to the Supremacy Clause of the United States Constitution, a federal statute may preempt state law in certain circumstances. See U.S. Const. art. VI, cl.2; Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516, 112 S.Ct. 2608, 2617 (1992). There are three types of preemption: (1) express preemption; (2) field preemption; and (3) conflict preemption. See Lewis v. Brunswick Corp., 107 F.3d 1494, 1500 (11th Cir. 1997), cert. dismissed, - U.S. - , 118 S. Ct. 1793 (1998). We can dispense with the first two types of preemption readily. Express preemption occurs when Congress explicitly defines the extent to which federal law applies instead of state law. Id. There is no express preemption in this case because there is no language in the PSA that on its face preempts the application of state defenses.² Field preemption occurs when Congress regulates a field so pervasively or passes a law that touches on a field implicating a dominant federal interest that an intent to preempt state law can be inferred. See Teper v. Miller, 82 F.3d 989, 993 (11th Cir. 1996). There is no field preemption because there is no indication that Congress intended to exclusively regulate the entire livestock trading industry when passing the PSA.³

The final type of preemption is conflict preemption and it requires some additional discussion. This type of preemption occurs either when "it is impossible to comply with both state and federal law, or where the state law stands as an obstacle to the accomplishment of the full purposes and objectives of Congress." Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 248, 104 S. Ct. 615, 621 (1984) (citations omitted). In order to determine if there is conflict preemption, we must examine both the federal and state law that govern a surety's liability on a bond that has been obtained by fraud of a principal.

We turn first to the federal law that would apply to American's fraud defense. The PSA does not have any explicit provision dealing with fraud by a principal toward a surety, and there is no case law applying it to such a situation. We turn, therefore, to state common law and general principles of suretyship as a source for federal common law to fill the gap. See Nachwalter v. Christie, 805 F.2d 956, 959 (11th Cir. 1986). We may only borrow from the common law of the states when it is consistent with the policies underlying the federal statute being applied. Id.; see Textile Workers Union of America v. Lincoln Mills of Al., 353 U.S. 448, 456-57, 77 S.Ct. 912, 918, 1 L.Ed.2d 972 (1957).

It is well established under the common law of suretyship that "fraud or misrepresentation practiced by the principal alone on the surety, without any knowledge or participation on the part of the creditor or obligee, in inducing the surety to enter into the suretyship contract will not affect the liability of the surety." 72 C.J.S. Principal and Surety 61 (1987); 74 Am. Jur. 2d Suretyship 133 (1974); see also Restatement (Third) of Suretyship and Guaranty 12(2) (1996).⁴ From a practical standpoint, this common law treatment of a principal's fraud is the only one that makes sense. A creditor does business with a principal in reliance upon the existence of a...