Tuzman v. Leventhal

• Decision Date: 15 March 1985
• Docket Number: No. 69028,69028
• Parties: TUZMAN et al. v. LEVENTHAL et al.
• Court: Georgia Court of Appeals

Page 610

329 S.E.2d 610

174 Ga.App. 297

TUZMAN et al. v. LEVENTHAL et al.

No. 69028.

Court of Appeals of Georgia.

March 15, 1985.

Rehearing Denied March 29, 1985.

Certiorari Denied April 24, 1985.

Joel D. Burns, Milledgeville, for appellants.

J. Randolph Evans, Jeffrey M. Smith, Atlanta, for appellees.

BIRDSONG, Presiding Judge.

Summary Judgment--Breach of Indemnity Agreement. In 1976-1977, Tuzman was involved with the appellees (Leventhal and Dobbs, Leventhal and Co., Inc.) in an investment venture (Georgia-Kentucky Coal Company). Apparently this venture was terminated as between the venturers (Leventhal) and the investors (including Tuzman), and ultimately releases were signed between the venturers and investors. As a part of the releases, Leventhal and Dobbs, Leventhal and Co. signed an indemnity agreement in 1977 indemnifying Tuzman for any claims levied against Tuzman by the Internal Revenue Service as the result of the disallowance of tax losses emanating from the investment in Georgia-Kentucky Coal Co.

The indemnification agreement shows the following: "(1) Indemnitors will indemnify Tuzman and hold Tuzman harmless from any and all liability, loss or damage Tuzman may suffer as a result of any claim, demand, assessment, cost or judgment asserted against Tuzman ... which may arise out of the disallowance based on a government-initiated audit or investigation of any part or all of the losses of Georgia Kentucky Coal Company (a partnership) heretofore claimed by Tuzman on their income tax return for 1974 [in the amount of $40,000] loss claimed in 1974. Indemnitors' liability hereunder shall include, but is not limited to, any and all additional income taxes together with any and all penalties and interest thereon which Tuzman shall have paid or become liable to pay, and shall include all expenses, attorney's fees, and other costs of investigation, adjustment, litigation, and procurring or attempting to procure Tuzman's discharge therefrom [as set forth in Para. 3 hereinafter].... (3) Indemnitors agree to defend Tuzman against any and all claims or assessments made or actions filed against Tuzman with respect to the subject of the indemnity contained herein, whether such claims, assessments or actions are rightfully or wrongfully brought, assessed or filed. In case a claim should be brought or an assessment made, or an action filed with respect to the subject to indemnify herein, indemnitors may employ attorneys and accountants of their own selection to appear and defend the claim, assessment or action on behalf of Tuzman at the expense of indemnitors. Indemnitors shall have the sole authority for the direction of the defense, and shall be the sole judge of the acceptability of any compromise settlement of any claims, assessment or actions against Tuzman." (Emphasis supplied.)

Subsequent to the execution of the indemnity agreement, the Internal Revenue Service in fact filed an exception to the claim for loss and made a demand upon Tuzman for additional taxes. Tuzman notified Leventhal of the claim. Leventhal, pursuant to the provisions of the indemnity agreement, selected his own tax attorney-consultant to represent Leventhal's interest as well as that of Tuzman. In negotiations between the counsel selected by Leventhal and counsel for Tuzman, it quickly became apparent that Tuzman would only accept counsel for defense of the litigation who would enter into a full attorney-client relationship to the exclusion of a residual relationship to the indemnitors. Leventhal informed Tuzman's counsel that while representation would be afforded per the indemnity agreement, it would be under a reservation of liability because insistence upon a full attorney-client relationship between Tuzman and Leventhal's counsel might well compromise the ability of the indemnitors to control the defense or to exercise sole acceptability of any settlement as authorized by the indemnity agreement. Under Georgia law if an insured fails to comply with conditions precedent in an insurance (or indemnity) agreement, the insurance company may disclaim coverage or provide a defense pursuant to a reservation of rights even in the absence of a contractually recognized provision for reservation. See State Farm Mut. Auto. Ins. Co. v. Wheeler, 160 Ga.App. 523, 525, 287 S.E.2d 281. The record indicates Leventhal followed the path of reservation rather than an absolute refusal by the indemnitors to undertake defense of the Internal Revenue Service's claim against Tuzman in accordance with the indemnity agreement.

Because of the inability of counsel to agree, Tuzman retained his own counsel and defended the claim by the Internal Revenue Service. An initial compromise offer by the Internal Revenue Service was rejected by Tuzman. After protracted proceedings, the claim was paid in approximately the amount of the original settlement offer but Tuzman had further incurred legal expenses and interest and penalty charges of approximately $20,000 additional to the original claim.

Contending that the Tuzmans did not comply with an essential condition precedent and violated the right of the indemnitors to select counsel and govern and direct the defense of the IRS claim, Leventhal successfully moved the trial court for a grant of summary judgment based upon a breach of the indemnity agreement by the Tuzmans. It is this grant of summary judgment that forms the basis of this appeal. Held:

The Tuzmans contend that Leventhal's injection of a reservation of liability was an attempted modification of the agreement of indemnification. While it may be correct to conclude that the intention of the indemnification was to indemnify Tuzman from monetary loss, that indemnification was carefully circumscribed and the limitations were clear and obviously known to the parties as they wrote the specific limitations into the agreement in their own hand. Leventhal reserved fully and exclusively the right to control all negotiations and defenses involved in a tax dispute. A reservation of liability is a matter different from and outside the indemnification which could come into play only if Tuzman experienced a loss after Leventhal exercised his sole authority to defend or settle a claim by the Internal Revenue Service. Richmond v. Ga. Farm Bureau Mut. Ins. Co., 140 Ga.App. 215, 219, 231 S.E.2d 245.

Interpretation of this indemnification agreement requires the application of the ordinary rules of construction of a contract. To apply the construction advanced by Tuzman requires a reading of the contract that the parties intended payment of an Internal Revenue Service claim wholly independent of any obligation or right by the indemnitors to defend any such claim, to select a defense attorney, or to pass on any proposed settlement, or compromise of such claim. However, the indemnification expressly limited itself to the right of the indemnitors solely to defend, settle or compromise any claim. Thus, the contract clearly limited payment of indemnification only after fulfillment of certain conditions precedent. These conditions precedent were not submerged in fine print but conspicuously were incorporated by the handwritten insertion of such conditions in the part of the contract creating the obligation to pay indemnification and these were initialed by the parties. What the Tuzmans seek this court to condemn by opinion is to recognize and apply a modification of the terms of the contract, i.e., the addition of a reservation of liability. However, the indemnification agreement is silent and certainly neutral insofar as liability or reservations of liability are concerned. The indemnification agreement simply requires the indemnitors to assume defense of any Internal Revenue Service claim. See H.Y. Akers & Sons v. St. Louis Fire, etc., Ins. Co., 120 Ga.App. 800, 172 S.E.2d 355. This court may not create a modification of the plain terms of a contract by judicial fiat and then reverse a judgment on...