Preisner v. Aetna Cas. and Sur. Co., 12919

• Decision Date: 05 May 1987
• Docket Number: No. 12919,12919
• Citation: 525 A.2d 83,203 Conn. 407
• Court: Connecticut Supreme Court
• Parties: Benjamin C. PREISNER et al. v. AETNA CASUALTY AND SURETY COMPANY et al.

Page 83

525 A.2d 83

203 Conn. 407

Benjamin C. PREISNER et al. v. AETNA CASUALTY AND SURETY COMPANY et al.

No. 12919.

Supreme Court of Connecticut.

Argued March 4, 1987.

Decided May 5, 1987.

Lewis K. Wise, Hartford, for appellants (plaintiffs).

Lee L. Bennett, with whom, on the brief, were Thomas J. Groark, Jr. and John A. Danaher III, Hartford, for appellees (defendants).

Before PETERS, C.J., and SANTANIELLO, HIGGINS, FRANCIS X. HENNESSY and MENT, JJ.

PETERS, Chief Justice.

This case concerns the right of indemnification of an accommodation comaker of a promissory note who settles with the holder of the note during the pendency of an appeal by the underlying obligor from a judgment of liability. ¹ The plaintiffs, Benjamin C. Preisner and his assignee, Robert L. Hirtle, Jr., brought an action for damages for breach of contract against the defendant Aetna Casualty and Surety Company (Aetna) and for conversion against the defendants Aetna and Suzio Insurance Center (Suzio). The trial court granted the defendants' motion for partial summary judgment and the plaintiffs have appealed. We find error.

According to the stipulated facts, the plaintiff Benjamin C. Preisner decided, on November 1, 1974, to purchase an insurance agency from Paul King, Jr. As part of this purchase, Preisner issued to King, as payee, a $68,000 noninterest bearing promissory note, on which he and Aetna were comakers. In order to finance this undertaking, Preisner and Aetna, on November 11, 1974, entered into an agency loan guarantee agreement. The loan guarantee provided that Aetna would agree to act as comaker of the note to King in return for Preisner's promise to pay the note and to indemnify Aetna "if it becomes obligated to make any payments or sustains any loss" as a result of Preisner's failure to pay the note promptly upon its due date. As security for the loan guarantee, Preisner gave Aetna a security interest in his insurance business. Aetna was given authority to sell this collateral in the event of Preisner's default on the loan guarantee.

King negotiated the Preisner note to Funding Consultants, Inc. (Funding), on January 18, 1975. When Funding thereafter demanded payment of the note from Preisner, he refused, alleging that King had fraudulently misrepresented the financial condition of the insurance agency at the time of its sale to Preisner. Funding then brought suit on the note (the Funding action), claiming a right to recover on the note as a holder in due course that was unaffected by any personal defense such as fraudulent inducement. The Funding action was originally brought only against Aetna, which impleaded Preisner as a third party defendant, but thereafter Preisner was added as a defendant in the principal action as well. Both Aetna and Preisner raised defenses of failure of consideration arising out of King's alleged misrepresentations, and challenged Funding's status as a holder in due course. At the trial of the Funding action, the parties stipulated that any judgment against Aetna would also be a judgment against Preisner. After a jury verdict in favor of Funding, and in favor of Aetna against Preisner in the same amount, both Aetna and Preisner, on June 2, 1980, appealed to this court.

While these appeals were pending, Aetna, on May 11, 1982, settled the principal judgment by paying Funding $85,000. Preisner had notice of the settlement negotiations but did not participate therein. Preisner agreed that the settlement was reasonable in amount but maintained that Aetna should not have settled during the pendency of the appeal, and that he was therefore not obligated to indemnify Aetna for the settlement. When Preisner refused indemnification, Aetna, on July 1, 1982, took possession of the insurance agency, the collateral for the security interest, and on the same day sold the agency to the defendant Suzio.

As a result of the settlement, Aetna withdrew its appeal before the case was heard for oral argument on May 11, 1982. Preisner, however, continued the prosecution of the appeal in the Funding action. In Funding Consultants, Inc. v. Aetna Casualty & Surety Co., 187 Conn. 637, 447 A.2d 1163 (1982), this court, on July 27, 1982, ordered a new trial because of the erroneous exclusion of evidence relevant to Funding's good faith and therefore relevant to its status as a holder in due course.

Upon remand of the Funding action, further proceedings between Funding and Preisner resulted in a directed verdict rendered in favor of Preisner on February 17, 1983. No appeal was taken from that judgment. Aetna withdrew its third party action against Preisner on July 27, 1983.

Preisner and his assignee Hirtle commenced the present lawsuit by filing a complaint on October 27, 1982. Its first count alleged that Aetna's seizure and sale of Preisner's insurance business on July 1, 1982, was a breach of the terms and conditions of the agency loan guarantee agreement. The second count alleged that Aetna's seizure and sale of Preisner's assets constituted an illegal conversion. The third count charged the purchaser Suzio with illegal conversion. The fourth count charged Suzio with misfeasance in the conduct of the insurance business and resultant impairment of Preisner's rights to renewal commissions. On the first three of these counts, the defendants moved for summary judgment, alleging that Aetna was entitled to indemnification, and to enforce its security interest in default thereof, because, in the earlier suit, the trial court had rendered a final judgment in favor of Funding against Aetna and in favor of Aetna in its third party complaint against Preisner.

The trial court, in the present action, ruled that Aetna was entitled to summary judgment on the three counts in which it was a named defendant. The court found that the indemnity provisions in the agency loan guarantee agreement entitled Aetna to indemnification against actual loss or damage. According to the court, Aetna's right to indemnification arose when Preisner defaulted on the note and Aetna, as comaker, became legally liable to Funding, the holder of the note. This liability, the court determined, became fixed on March 20, 1980, when judgment was rendered against Preisner and Aetna in the underlying Funding action. Despite the pending appeal in that action, of which Aetna concededly had notice, the court further determined that the judgment of the trial court in the Funding action was final. Moreover, when Aetna withdrew its Funding appeal, that judgment, as against Aetna, became final and binding, according to the trial court in the present case. Because Aetna was legally liable to Funding when the settlement was reached, and because the terms of that settlement were reasonable, the trial court concluded that Aetna was entitled to indemnification from Preisner. On the relevant counts of the plaintiffs' complaint, the court therefore determined that Aetna, and derivatively Suzio, were entitled to summary judgment.

After the partial summary judgment in favor of Aetna and Suzio, the plaintiffs sought permission to amend their complaint to add a fifth count alleging failure to give proper notice of the disposition of the secured collateral. The trial on the fourth count resulted in a stipulated judgment conveying to Preisner all proceeds from the sale of the agency to Suzio beyond Aetna's $85,000 security interest in the insurance agency. ² Thereafter the trial court denied the plaintiffs' motion to amend.

In their appeal, the plaintiffs claim that the trial court erred: (1) in concluding that Aetna's seizure of Preisner's business was justified by a prior third party judgment in its favor; (2) in granting the defendants' motion for partial summary judgment without affirmative proof of Preisner's liability on his promissory note to King; and (3) in denying the motion to amend the complaint to include a fifth count relating to the manner of the disposition of the secured collateral. We find error on the first two claims but not on the third.

I

The issues raised in the first two claims can conveniently be addressed jointly, because they both turn on the effect of a final judgment, in the trial court, on an accommodation party's right to indemnification after a settlement with a creditor during the pendency of an appeal. If the trial court judgment in the Funding action did not, as a matter of law, trigger an obligation that Aetna could settle so as to invoke its right of indemnification, then Aetna would have to establish, as a matter of fact, that Preisner had improperly failed "to promptly pay the aforesaid notes" whose payment Aetna had guaranteed. Absent such a factual showing, there would have been no default on the security agreement, and Aetna would then be liable for conversion for wrongful disposition of the secured collateral to Suzio.

We note, at the outset, what is not at issue in this case. Preisner does not dispute that Aetna had the authority voluntarily to settle with Funding, and concedes that he would have been liable to Aetna, because of this good faith settlement, had the judgment in favor of Funding been affirmed by this court. Aetna does not dispute that Preisner actively contested his liability to Funding and to Aetna, and that the trial court judgment in favor of Funding was stayed during the pending appeal to this court.

The crux of the disagreement between the parties is whether Aetna was entitled to indemnification because of its good faith decision to cut its losses by settling with Funding on the basis of the trial court judgment in the Funding action. That judgment not only held Aetna liable to Funding but also held Preisner liable to Aetna on its third party claim. According to Aetna, "[t]here is no justification for compelling a codefendant indemnitee, that has suffered an adverse judgment and obtained a valid judgment of indemnification against its indemnitor, to engage in an appeal of a final judgment and...