Cincinnati Ins. Co. v. Leighton, 03-4334.

• Decision Date: 08 April 2005
• Docket Number: No. 03-4334.,No. 04-1153.,03-4334.,04-1153.
• Citation: 403 F.3d 879
• Parties: CINCINNATI INSURANCE COMPANY, Plaintiff-Appellant, v. G. Timothy LEIGHTON, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 879

403 F.3d 879

CINCINNATI INSURANCE COMPANY, Plaintiff-Appellant, v. G. Timothy LEIGHTON, Defendant-Appellee.

No. 03-4334.

No. 04-1153.

United States Court of Appeals, Seventh Circuit.

Argued September 14, 2004.

Decided April 8, 2005.

David M. Duree (argued), Duree & Associates, O'Fallon, IL, for Plaintiff-Appellant.

Susan L. Perkins (argued), Vonachen, Lawless, Trager & Slevin, Peoria, IL, Margaret A. Gisch, Field & Golan, Chicago, IL, for Defendant-Appellee.

Before CUDAHY, ROVNER, and WILLIAMS, Circuit Judges.

ILANA DIAMOND ROVNER, Circuit Judge.

The Cincinnati Insurance Company issued a financial responsibility bond guaranteeing that Dixie Management Group, Inc., would deliver to the State of Illinois taxes collected on sales of motor fuel at Dixie's truck stops. Cincinnati surrendered the bond amount to the state after Dixie incurred a substantial tax liability and declared bankruptcy; Cincinnati then brought this suit in diversity seeking indemnity from Timothy Leighton, a former Dixie executive who signed Dixie's bond application as an individual indemnitor for Cincinnati but was fired from Dixie four years before Cincinnati paid on the bond. On cross-motions from the parties, a magistrate judge, presiding by consent, entered judgment as a matter of law for Leighton, and later denied Cincinnati's motion to vacate under Federal Rule of Civil Procedure 60(b). We affirm both decisions.

I.

Leighton was the corporate secretary and executive vice president of Dixie, which operated several truck stops in Illinois. In December 1997, Dixie applied to Cincinnati for a "Financial Responsibility Bond for a Motor Fuel Distributor" guaranteeing Dixie's payment of the fuel taxes it collected. Illinois will not issue a license to sell fuel without such a bond. Leighton, in his capacity as executive vice president, signed a "Miscellaneous Bond Application" on behalf of Dixie. He and the other corporate officers, Mark and Kathy Beeler, also signed the application as individual indemnitors. Based on that application, Cincinnati issued a bond for $40,001, an amount determined by the Illinois Department of Revenue ("IDOR"). The bond transaction was brokered by Rodney Brent of Van Gundy Insurance, an independent agency that represents Cincinnati in central Illinois.

In the bond application Dixie and its three officers, as individual indemnitors, requested that Cincinnati become Dixie's surety "for any bond, including the extension or renewal thereof." Dixie and the individual indemnitors also certified their assent to nine paragraphs under the heading "Indemnity" that identify specific obligations of the parties. Three of those paragraphs are relevant here. In paragraph two, Dixie and the individual indemnitors agreed to indemnify Cincinnati "from and against any liability, loss, cost, attorneys' fees, and expenses whatsoever, including the enforcement of this agreement" that Cincinnati "shall at any time sustain as surety or by reason of having been surety on this bond or any other bond" issued for Dixie. In paragraph six, Dixie and the individual indemnitors agreed to waive "notice of any change, alteration, or extension of any bond," and further agreed that their promise to indemnify Cincinnati extended to "any subsequent bond of any type" issued for Dixie. Finally, in paragraph eight, Cincinnati agreed that "this indemnity may be cancelled as to subsequent liability by an indemnitor upon `Registered Mail' written notice" to Cincinnati's home office.

In April 1998, less than four months after issuing the bond, Cincinnati increased the bond amount to $100,000. Cincinnati provided IDOR with a "Change Rider" purportedly memorializing Dixie's agreement to the increased amount. Leighton's name, again in the capacity of executive vice president, appears on the signature line for Dixie. Cincinnati did not require Dixie or the individual indemnitors to execute a new bond application prior to issuing the change rider.

In December 1998, Dixie terminated Leighton under circumstances not disclosed in the record. The Beelers, who remained with Dixie, barred Leighton from all Dixie property and refused even to permit him back in the office to retrieve personal papers. Leighton immediately met with Brent, the Van Gundy agent, and told Brent that his relationship with Dixie had been severed; Leighton, however, did not write Cincinnati to terminate formally his indemnity of Dixie's financial responsibility bond.

In the fall of 1999, Cincinnati began the process of renewing Dixie's bond. Cincinnati wrote the Van Gundy agency in October 1999 requesting updated financial statements for Dixie, Leighton, and the Beelers; Cincinnati also requested that a new bond application be executed because it had not obtained one before increasing the bond amount to $100,000. A Van Gundy employee, Ruth Hargis, returned Cincinnati's correspondence two weeks later after typing her own note at the bottom that Leighton no longer worked for Dixie. The next day, October 26, Cincinnati faxed Hargis a reply to her note: "It was our understanding that Timothy Leighton was a partner of Dixie Truckers. Was there a change in ownership structure? We used Leighton's financial status as part of our underwriting consideration for the bond. Please advise as to the status of the ownership structure." Hargis's answer is not in the record, nor is there any evidence in the record concerning Cincinnati's communications with Van Gundy and Dixie during the three months that followed.

In late January 2000, Dixie and the Beelers executed the new application and indemnity agreement, which contained identical terms as the 1997 agreement. Mark Beeler signed in his corporate capacity on behalf of Dixie, and both he and Kathy Beeler — but not Leighton — signed again as individual indemnitors. The Beelers, though, still had not supplied updated financial statements, and Cincinnati in early February threatened to cancel the bond. A month later, on March 6, 2000, Cincinnati sent IDOR notice that it was cancelling the bond effective in 60 days; that action apparently produced the desired financial statements because on March 15 Cincinnati notified IDOR that it was rescinding its cancellation notice.

What Cincinnati did not discover at the time, however, is that during 1999 Dixie had accrued significant arrears in its tax payments to the state. In May 2000, IDOR demanded that Cincinnati surrender the full amount of its bond to cover unpaid fuel taxes assessed for the period between November 1999 and March 2000. Cincinnati wrote Dixie and the Beelers in July, reminding them of their duty to indemnify Cincinnati and demanding that they create a cash reserve sufficient to cover Cincinnati's anticipated loss on the bond. IDOR contended that Dixie still owed $504,000, and Cincinnati paid IDOR $100,000 in February 2002. By then Dixie and the Beelers had filed for bankruptcy.

Cincinnati then brought this lawsuit, naming as defendants the Beelers and Leighton. Cincinnati attached to its complaint a copy of the original 1997 bond application bearing Leighton's signature, along with a copy of the bond issued for $40,001. The insurance company also attached a copy of the partially executed April 1998 change rider bearing the signature of its own representative but no signature from anyone at Dixie. Cincinnati alleged that Leighton had executed the change rider, but the company could not locate in its records a copy of the fully executed document. Cincinnati claimed that the 1997 agreement, as amended by the change rider which increased the bond amount to $100,000, remained in force and demanded that the Beelers and Leighton indemnify the company for the bond amount and associated costs. The Beelers, because of the automatic stay arising from their bankruptcy petition, see 11 U.S.C. § 362, were promptly dismissed without prejudice, leaving only Leighton to defend the suit. It is undisputed that prior to serving Leighton with its lawsuit Cincinnati had made no effort to seek indemnity from him.

Leighton denied liability. In answering the complaint, he explained that he lacked "sufficient knowledge to form a belief" as to whether Dixie had ever executed the change rider attached to Cincinnati's complaint. By way of affirmative defense, however, Leighton went further and contended that Cincinnati had given him "no notice whatsoever" of the change rider, and thus by trying to increase the bond amount without his knowledge had released him from the indemnity agreement.

Leighton later filed what he styled as a motion for judgment on the pleadings, advancing the affirmative defense from his complaint and also arguing that the renewal of the bond agreement in early 2000 acted as a novation of the 1997 agreement. Cincinnati had not yet mentioned the 2000 renewal, so Leighton attached to his motion a copy of the new agreement and the related correspondence between Cincinnati and the Van Gundy agency. Cincinnati moved for summary judgment that same day. Cincinnati argued that Leighton could not defend that he lacked notice of the change rider because under paragraph six of the indemnity section of the 1997 agreement he had waived notice of changes to the bond. Cincinnati also argued that Leighton's only means of securing a release from his obligation to indemnify the insurance company was to send written notice of cancellation pursuant to paragraph eight of the indemnity section; since Leighton had not done so, Cincinnati argued that it was entitled to enforcement of the indemnity agreement.

Leighton and Cincinnati then exchanged responses to their respective motions. In defending against Cincinnati's motion for summary judgment, Leighton submitted his affidavit describing steps he took after his termination to alert Cincinnati that he no longer worked for Dixie and that he wished to cancel his liability under the 1997 agreement. According to the uncontroverted affidavit, on the same...