Chicago Title Ins. Co. v. IMG Exeter Associates Ltd. Partnership

Decision Date20 January 1993
Docket NumberNo. 92-1440,92-1440
Citation985 F.2d 553,1993 WL 27392
PartiesNOTICE: Fourth Circuit I.O.P. 36.6 states that citation of unpublished dispositions is disfavored except for establishing res judicata, estoppel, or the law of the case and requires service of copies of cited unpublished dispositions of the Fourth Circuit. CHICAGO TITLE INSURANCE COMPANY, Plaintiff-Appellee, v. IMG EXETER ASSOCIATES LIMITED PARTNERSHIP; Douglas A. Nyce; Janette L. Nyce; John M. Dempsey; Frances T. Dempsey; Robert E. Grove, Jr.; Hope E. Grove, Defendants-Appellants. . Submitted:
CourtU.S. Court of Appeals — Fourth Circuit

Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Albert V. Bryan, Jr., Senior District Judge. (CA-91-1526-A)

Pamela Anne Bresnahan, Robert W. Hesselbacher, Jr., SEMMES, BOWER & SEMMES, Washington, D. C., for Appellants.

tJames Bruce Davis, J. Carlton Howard, Jr., Charles E. Curran, BEAN, KINNEY & KORMAN, P.C., Arlington, Virginia, for Appellee.



Before ERVIN, Chief Judge, and PHILLIPS and MURNAGHAN, Circuit Judges.



Appellants 1 appeal from the district court's judgment in favor of Plaintiff Chicago Title Insurance Company ("CTIC") on a claim for breach of an indemnity agreement. Defendants contend that the district court committed numerous prejudicial errors in the one-day bench trial, including the application of the wrong standard of proof, the admission of legal conclusion testimony from CTIC's expert witness, and the misinterpretation of the Indemnity Agreement at issue. We find that the district court's findings of fact and conclusions of law are reasonable, supported by the record, and correct. We therefore affirm the district court's judgment. 2


In December 1985, the IMG/Exeter Associates Limited Partnership (the "Partnership"), along with retained general contractor Pulte Home Corporation ("Pulte"), undertook the construction of an apartment complex in Leesburg, Virginia (the "Project"). To secure its financing with Sovran Bank ("Sovran"), the Partnership placed an insured deed of trust on the Project in favor of Sovran. The title insurance policy, which included affirmative insurance against mechanics liens, was issued to the Partnership by CTIC upon the Partnership's satisfaction of two requirements. First, the Partnership, general partners John Dempsey, Douglas Nyce, and Robert Grove (the "General Partners"), and their respective spouses had to execute an agreement to indemnify CTIC against any liability under the policy. Second, the General Partners had to provide personal financial statements to CTIC.

The Indemnity Agreement was executed by the Partnership and the individual Defendants on December 17 and 23, 1985, respectively. 3 In pertinent part, the Agreement reads:

[T]he undersigned parties (hereinafter referred to as PRINCIPALS), jointly and severally, covenant, and agree with the Company [i.e., CTIC] to forever fully protect, defend and save harmless the Company from and against the above mentioned rights, liens, claims or encumbrances[i.e., mechanic's liens] and each and every of them, and against all loss, costs, damages and attorney's fees and expenses of every kind and nature which the Company may suffer, expend or incur under or by reason, or in consequence of, the issuance of the said Commitment and Policy, or subsequent commitments and policies, in the aforestated manner, including loss, costs, damages, fees and expenses incurred in actions brought to enforce this agreement.

IT IS understood and agreed that in the event lien claims are filed due to disputes between the owner, any general contractors, subcontractors, etc., then in that event, the undersigned, either jointly or severally, will either, (a) immediately take appropriate action to file a bond in the Circuit Court of Loudoun County, Virginia, which bond will have the effect of removing the lien claim(s) from the land and attaching said lien claim(s) to the bond, all in accordance with the Virginia Code, or (b) establish a cash escrow with the Company in an amount sufficient to pay the lien claim(s) plus interest and costs, and attorneys' fees incurred in defense of the lien claim(s) and giving the Company the right to pay and discharge said lien claim(s) in the event same should subsequently be perfected by suit and constitute a judgment(s) with priority over the insured deed of trust or deeds of trust.


IN WITNESS WHEREOF, this instrument has been executed this 17th day of December, 1985, on behalf of IMG/Exeter Associates Limited Partnership, a Virginia limited partnership.




IMG/Exeter Associates Limited Partnership Name of Corporation or Partnership

BY: /s/ John M. Dempsey(SEAL) TITLE: General Partner

[authorization, dated December 17, 1985, by notary]

WITNESS the following signatures as of the day and year above written. 1.a./ s/ Douglas A. Nyce Douglas A. Nyce [Address]

b./s/ Janette L. Nyce Janette L. Nyce [Address]

2.a./s/ John M. Dempsey John M. Dempsey [Address]

b./s/ Frances T. Dempsey Frances T. Dempsey [Address]

3.a./s/ Robert E. Grove, Jr. Robert E. Grove, Jr. [Address]

b./s/ Hope E. Grove Hope E. Grove [Address]

[authorization, dated December 23, 1985, by notary]

WITNESS the following signatures as of the day and year above written.

4.a./s/ D. F. Antonelli, Jr. D. F. Antonelli, Jr. [Address]

b./s/ Judith D. Antonelli Judith D. Antonelli [Address]

[authorization, dated December 23, 1985, by notary]

Joint Appendix ("J.A.") at 177-81 (emphasis in original).

In late 1988, a dispute arose between the Partnership and Pulte over the Partnership's nonpayment of final development expenses. Because of numerous delays and contractual violations by Pulte, the Partnership felt that it had suffered damages in the amount of $3,000,000, which could be successfully asserted as a counterclaim against any claim for payment pressed by Pulte. The inability of the Partnership and Pulte to resolve this disagreement prompted Pulte to file a Memorandum of Mechanics Lien in Loudoun County, Virginia, on January 25, 1989, seeking $700,317. On April 27, 1989, Pulte filed a Bill of Complaint to enforce its lien (the "Loudoun County Litigation" or "Litigation").

Six days before the Loudoun County Litigation was to go to trial, Defendants and Pulte entered into a Memorandum of Agreement. The Memorandum consented to an entry of judgment against the Partnership in the amount of $600,000. The Memorandum also waived the $3,000,000 counterclaim, the Partnership's most viable defense. 4 In return, the General Partners were released from any personal liability under the construction contract. The issue of Pulte's entitlement to a mechanics lien was left open for trial in the Litigation. If it prevailed, Pulte would have received a $600,000 mechanics lien with priority over Sovran's deed of trust, for which CTIC would be responsible. If the Partnership prevailed, Pulte's $600,000 judgment would be subordinated to Sovran's deed of trust and, therefore, not covered by the title insurance policy issued by CTIC.

Although it received a draft copy of the Memorandum before its execution by Pulte and the Partnership, CTIC refused to consent to the terms of the Memorandum. After learning, within twenty-four hours of its refusal to consent, that the Memorandum had been executed, CTIC determined that settlement of the Loudoun County Litigation was in its best interest. Negotiations resulted in a settlement whereby CTIC paid Pulte $400,000 in exchange for a release of the mechanics lien and a dismissal of the remainder of the Litigation. CTIC neither consulted with nor sought permission from the Partnership before settling the Litigation.

Based on its finding that CTIC's settlement of the Litigation was reasonable and could be recovered despite the absence of a judgment, the district court entered judgment for CTIC. The court also ruled that the individual Defendants were personally liable as indemnitors and guarantors under the Indemnity Agreement.


Because it received neither notice of nor an opportunity to approve the settlement between CTIC and Pulte, the Partnership contends that CTIC's burden in this case is to prove actual liability to Pulte in the Loudoun County Litigation. However, the district court awarded judgment to CTIC on a finding that CTIC was potentially liable to Pulte.

The application of the correct legal standard is a question of law subject to de novo review on appeal. See Atlantic Richfield Co. v. Interstate Oil Transp. Co., 784 F.2d 106, 110-13 (2d Cir.), cert. denied, 479 U.S. 817 (1986). Proof of actual liability is required where the indemnitee does not notify the indemnitor of a potential settlement of the underlying litigation, thereby depriving the indemnitor of an opportunity to approve the settlement, participate in the settlement negotiations, or assume the defense of the claims. Atlantic Richfield Co., 784 F.2d at 113.

The general rule requires an indemnitee to show actual liability on his part to recover against an indemnitor, but we have held that a defendant need only show potential (rather than actual) liability to recover indemnity where either (1) the defendant tenders the defense of the action to the indemnitor; (2) the claim for indemnity is founded upon a judgment; [or] (3) the defendant's claim is based on a written contract of insurance or indemnification.

Fontenot v. Mesa Petroleum Co., 791 F.2d 1207, 1216-17 (5th Cir. 1986) (footnote omitted); see also Tankrederiet Gefion A/S v. HymanMichaels Co., 406 F.2d 1039, 1043 (6th Cir. 1969). The amount of the settlement must also be reasonable. Fontenot, 791 F.2d at 1217 n.12.

In this case, Defendants received the requisite notice. "Notice sufficient to give the indemnitor a meaningful opportunity to defend is the indispensable element to be proven by the party seeking indemnity." 5...

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