St. Paul Fire & Marine Ins. Co. v. Russo Bros., Inc.

• Decision Date: 23 May 1994
• Docket Number: No. 93-135-A,93-135-A
• Citation: 641 A.2d 1297
• Parties: ST. PAUL FIRE & MARINE INSURANCE COMPANY v. RUSSO BROTHERS, INC., et al. ppeal.
• Court: Rhode Island Supreme Court

Page 1297

641 A.2d 1297

ST. PAUL FIRE & MARINE INSURANCE COMPANY v. RUSSO BROTHERS, INC., et al.

No. 93-135-Appeal.

Supreme Court of Rhode Island.

May 23, 1994.

George T. Gilson, William M. Heffernan, Heffernan & Gilson, Providence, for plaintiff.

Anthony F. Muri, Leo J. Wold, Goldenberg & Muri, Providence, for defendant.

OPINION

SHEA, Justice.

The defendants, Rose and Louis Russo, appeal from a Superior Court order granting the plaintiff's motion for summary judgment. The plaintiff, St. Paul Fire and Marine Insurance Company (St. Paul), sued the defendants to recover funds St. Paul paid to the State of Rhode Island under a Cigarette and Tobacco Tax Bond that St. Paul issued on behalf of the defendant Russo Brothers, Inc. The Superior Court entered judgment against defendants Rose and Louis Russo (the Russos) in the amount of $114,019.60 together with attorneys' fees and costs of $21,755.45 plus interest. The summary judgment was based upon a general agreement of indemnity that the Russos executed in consideration for the bond. We affirm.

This case concerns the application of the parol evidence rule to the indemnity agreement executed by defendants. There is little dispute regarding the facts in this case. The defendant Russo Brothers, Inc., (Russo Bros.), was incorporated in 1953 to engage in wholesale distribution of tobacco products, candy, and other merchandise. The Russos were principals of the corporation until it ceased operations in 1985. The defendants' insurance agent, David Chase (Chase), who was an authorized agent of St. Paul, arranged for St. Paul to provide defendants with the statutorily required cigarette-tax bond in 1975. ¹

The State of Rhode Island imposes taxes on cigarettes held for sale by means of tax stamps. General Laws 1956 (1988 Reenactment) § 44-20-12, as amended by P.L.1993, ch. 138, art. 64, § 1. Distributors may acquire the stamps prior to the sale of cigarettes and then pay for them within thirty days provided the distributors have filed a bond covering the value of the stamps with the tax administrator. Sections 44-20-19, as amended by P.L.1993, ch. 138, art. 85, § 2 and 44-20-20. In 1975 St. Paul provided a bond in the amount of $100,000 as surety for defendants' purchase of tax stamps. St. Paul would annually review the financial statements of Russo Bros., prior to extending the bond for another year. At the time for annual renewal in June 1982, insurance agent Chase informed defendants that due to their company's poor financial performance in 1981, St. Paul would not renew the bond unless defendants executed an indemnity agreement. The defendants complied, and St. Paul extended the bond for another year. The defendants contend that they never read the agreement prior to signing it.

St. Paul extended the bond for the next two years, 1983 and 1984. By 1983 the bond amount had increased to $155,000. St. Paul then canceled the bond in 1985. The defendants' 1984 financial statements had indicated the company had operated at a net loss for the year. The defendants did not attempt to acquire a tax bond from another insurance company and failed to meet their tax obligations during 1985. The state then sought the tax payments from St. Paul, who was still liable under the bond terms for one year and a day after its cancellation. St. Paul paid the tax administrator $114,019.60 and subsequently brought suit against defendants to recover the money pursuant to the indemnity agreement. After St. Paul successfully moved for summary judgment, defendants appealed to this court.

The defendants claim that they are not liable under the indemnity agreement because of alleged misrepresentations by insurance agent Chase at the time they executed the agreement. They contend that prior to executing the agreement, Chase repeatedly assured them the indemnity agreement was effective for only one year. The parties do not dispute that the express language of the agreement requires defendants to indemnify St. Paul if it is found liable under the bond at any time. The defendants allege, however, that even St. Paul construed the 1982 agreement as effective for only one year because it sought to execute another indemnity agreement prior to refusing to extend the bond in 1985. The trial justice found that the indemnity agreement was clear and unambiguous and that the parol evidence rule precluded admitting evidence of a contemporaneous agreement that limited the indemnification to only one year.

The issue before us is whether the trial justice erroneously granted St. Paul's motion for summary judgment. When reviewing summary judgment on appeal, this court must apply the same standard as the trial court. McPhillips v. Zayre Corp., 582 A.2d 747, 749 (R.I.1990). When ruling on the summary-judgment motion, the trial court must review the pleadings, affidavits, admissions, answers to interrogatories, depositions, and other appropriate portions of the record in the light most favorable to the nonmoving party. Steinberg v. State, 427 A.2d 338, 340 (R.I.1981); Super. R. Civ. P. 56(c). The nonmoving party has an affirmative duty to set forth specific facts in order to show that a genuine issue of material fact exists to be decided at trial. Nichola v. John Hancock Mutual Life Insurance Co., 471 A.2d 945, 948 (R.I.1984).

The defendants offered two arguments purporting to absolve them from liability under the express terms of the indemnity agreement. They first contend that a contemporaneous oral agreement existed that the written indemnity agreement was effective for only one year. Second, defendants assert that their subjective and reasonable expectations as to the duration of the agreement should prevail over inconsistent preprinted terms of a standardized agreement. We acknowledge that defendants generally would not be barred from challenging a contract because of fraud, even though they were negligent in signing the contract without reading it. Continental Illustrating Co. v. Longley Motor Sales Co., 43 R.I. 552, 553, 113 A. 869, 869-70 (1921). However, even when the record in this case is viewed in the light most favorable to defendants, neither of these arguments supports defendants' position.

The parol evidence rule is a well-settled rule of substantive law. It provides that, "in the absence of fraud or mistake, parol or extrinsic evidence is not admissible to vary, alter or contradict a written agreement." Supreme Woodworking Co. v. Zuckerberg, 82 R.I. 247, 252, 107 A.2d 287, 290 (1954); see also Restatement (Second) Contracts §§ 213, 214 (1981). Chase's alleged oral representations that the indemnity agreement would be effective for only one year constitute extrinsic evidence contradicting the unambiguous terms of the written contract. Although the parol evidence rule would ordinarily bar such extrinsic evidence, defendants argue that the rule is inapplicable to Chase's alleged statements because the statements are evidence of fraud or misrepresentation affecting the contract's validity.

The trial justice's decision was based on the inadequacy of defendants' pleadings concerning the parol evidence rule, not on the rule's actual application. The party opposing summary judgment may not rest upon mere allegations or denials in the pleadings but rather must set forth specific facts showing that a genuine issue of material fact exists. Steinberg, 427 A.2d at 340 (citing Ardente v. Horan, 117 R.I. 254, 257-58, 366 A.2d 162, 164 (1976)). Nowhere in the pleadings and materials properly before the trial justice did defendants allege they were induced to execute the indemnity agreement by the alleged misrepresentations. ² In his deposition Mr. Russo did not testify that he would not have signed the indemnity agreement if he knew it would be effective for more than one year. Instead, Mr. Russo stated, "I had no choice, because if I didn't receive that bond I'd be out of business then and there, at that moment." Thus the uncontradicted testimony before the trial justice was that Mr. Russo signed the indemnity agreement to stay in business, not because Chase's misrepresentations induced him to sign.

The trial justice properly entered summary judgment because defendants failed to properly assert that the alleged misrepresentation induced them to execute the indemnity agreement. Absent a sufficient pleading of reliance on the alleged misrepresentation, the parol evidence rule precludes evidence of a contemporaneous oral agreement to vary the terms of the written agreement.

Summary judgment in this case is not an inequitable result. For over thirty years defendants were principals of a corporation that had net sales exceeding $9 million in 1984. The defendants cannot claim to be unsophisticated business persons. Their asserted reliance on oral characterizations may have been unreasonable, as a matter of law, because they are sophisticated business persons and the characterizations contradicted the plain language of the indemnity contract. See Rhode Island Hospital Trust National Bank v. Howard Communications Corp., 980 F.2d 823, 828 (1st Cir.1992). St. Paul has paid to the State of Rhode Island $114,019.60 on behalf of Russo Brothers Incorporated. Mr. Russo readily admitted that the corporation owed a minimum of $94,000 for tobacco taxes. A greater inequity would result to allow defendants to escape liability for debts paid on their behalf and for which St. Paul secured a written indemnity contract. We have long recognized that the purpose of the parol evidence rule is to "enable parties to make their written contracts the only evidence of their undertakings and to protect themselves against the hazard of uncertain oral testimony in respect to their engagements." Myron v. Union Railroad Co., 19 R.I. 125, 126, 32 A. 165 (1895). The present holding is consistent with this purpose.

The defendants' second argument for not being bound by the express written terms of the indemnity agreement is that the...