U.S. Fidelity and Guaranty Co. v. Black

• Decision Date: 23 November 1981
• Docket Number: Docket No. 63656,No. 4,4
• Citation: 313 N.W.2d 77,412 Mich. 99
• Parties: UNITED STATES FIDELITY AND GUARANTY COMPANY, Plaintiff-Appellee, v. Chase BLACK, Phillip C. Haughey, and AHB Associates, Inc., Defendants- Appellants. Calendar412 Mich. 99, 313 N.W.2d 77
• Court: Michigan Supreme Court

Page 77

313 N.W.2d 77

UNITED STATES FIDELITY AND GUARANTY COMPANY, Plaintiff-Appellee, v. Chase BLACK, Phillip C. Haughey, and AHB Associates, Inc.,

Defendants- Appellants.

Docket No. 63656.

Calendar No. 4.

412 Mich. 99, 313 N.W.2d 77

Supreme Court of Michigan.

Argued Oct. 7, 1980.

Decided Nov. 23, 1981.

Foster, Swift, Collins & Coey, P. C. by Philip T. Carter, Lansing, for plaintiff-appellee.

Vandervoort, Cooke, McFee, Christ, Carpenter & Fisher by Robert D. McFee, Battle Creek, for defendants-appellants; Dykema, Gossett, Spencer, Goodnow & Trigg by Michael J. McGuigan and Carolyn D. Bell, Ann Arbor, of counsel.

WILLIAMS, Justice (for reversal).

This case, involving suit on an indemnity contract and a defense of innocent misrepresentation, is confusing for four reasons. First, the Court of Appeals in its decision confused the elements in the traditional fraudulent misrepresentation rule and the elements in the Michigan innocent misrepresentation rule. Both the Court of Appeals and the trial court erred in trying to decide an innocent misrepresentation case on the basis of the failure to prove an element required in the traditional fraudulent misrepresentation rule but not required under the innocent misrepresentation rule. Second, the trial court, although purporting to recognize the legal rule that it was sufficient that the "misrepresentation exerted a material influence", inconsistently and erroneously acted as though the influence had to be total and exclusive. Third, the trial court erroneously failed to permit the defendants to attempt to prove the affirmative defense of silent fraud, saying the plaintiff had no duty of disclosure. However, the record indicates that there was indeed evidence which could substantiate such a duty. And fourth, in determining whether a misrepresentation had actually been made the trial court made contradictory statements so that it is impossible to conclude for certain whether or not a misrepresentation was made that the victims, in this case the defendants, relied on.

Because of the errors above mentioned, the Court of Appeals' affirmance of the trial court is reversed. However, because it is unclear whether the trial court did or did not find that plaintiff in fact made a misrepresentation on which defendants relied and because the trial court erroneously dismissed the possibility of silent fraud, the matter is remanded to the trial court for further consideration. The nature of the equitable remedy is discussed.

I. FACTS

Appellants Chase Black, Phillip Haughey and AHB Associates, Inc. (AHB), are defendants in an action for reimbursement by plaintiff-appellee United States Fidelity and Guaranty Company (USF&G) pursuant to an indemnity agreement dated December 28, 1971, but actually signed by the defendants on June 20, 1972. AHB is the developer of the Glenwood Trace Housing Project in Battle Creek and the general partner of the Glenwood Trace Limited Dividend Housing Association which owned the project. Black and Haughey, as stockholders and officers of AHB, desired to obtain financing for a low- and medium-income housing project from the Michigan State Housing Development Authority (MSHDA). To do so, however, required that the general contractor furnish labor and materials payment and performance bonds. ¹ After accepting bids from prospective contractors in late 1971, defendants hired the Kwaske Brothers Construction Company on the condition that it could satisfy the MSHDA's bond requirement.

Kwaske Brothers went to Mourer-Foster, Inc., a Lansing insurance agent, for assistance in finding an underwriter willing to furnish the necessary bonds. After negotiations with Capitol Indemnity Company were abandoned due to exorbitant rates and On December 18, 1971, another Mourer-Foster employee, Myron Montie, met with Gerald Kwaske and defendant Black at defendant's offices and presented the following four bonding requirements of USF&G:

stiff underwriting requirements, ² a Mourer-Foster employee, Albert Neubacher, contacted his former employer, USF&G. At first the underwriter refused to issue the bonds to Kwaske Brothers, (Tr. 83) but reconsidered provided certain conditions were performed.

"1. The four Kwaske brothers, as officers of the general contractor, and their wives were to sign an indemnity agreement in favor of USF&G for amounts paid by USF&G under the bonds;

"2. Kwaske Brothers' bank, Jackson City Bank of Jackson, Michigan, was to subordinate its rights to certain assets of Kwaske Brothers and the Kwaskes individually to USF&G

"3. Three major subcontractors and one material supplier (heating, plumbing, electrical and lumber) were to become liable on the bond by signing a surety or indemnity agreement; and

"4. AHB Associates, Phillip Haughey, Chase Black and their wives were to sign an indemnity agreement."

(Appellant's Brief, p. 2)

Black objected to Montie about the extensive liability defendants were asked to assume. He repeated these objections to Neubacher, the head of Mourer-Foster's Bond Department, but the requirements were reaffirmed (Tr. 158, 163-165). After evaluating the bond conditions against their potential liability, Black and Haughey agreed to sign the indemnity agreement provided their wives were omitted from the bond and USF&G agreed to include a priority of collection so that if indemnification were required, defendants would be the last indemnitors pursued.

The loan closing meeting was held at the MSHDA office in Lansing on December 28, 1971. Neubacher signed the labor and materials payment and performance bonds for USF&G in accordance with a written power of attorney. Black testified that he specifically asked Neubacher whether all of the other conditions imposed by USF&G had been satisfied and was told that USF&G "had obtained all of the conditions" (Tr. 178). ³ In the following months Neubacher made several requests for defendants to execute the indemnity agreement. One such attempt occurred on March 28, 1972, when Neubacher personally delivered a copy of the indemnity agreement to Black. Attached to the agreement was a photocopy of a letter to Neubacher from USF&G Bond Superintendent J. Edwin Pohl dated February 4th, stating:

"As you know, we are still awaiting certain papers to complete our file on this bond. We are to receive a Master Surety Agreement and resolution and certification signed by Kwaske Brothers Construction Company, Mr. and Mrs. Eugene Kwaske, Mr. and Mrs. Gerald Kwaske, Anthony Kwaske and Ernest Kwaske. We are also to receive a specific indemnity agreement and resolution and certification signed by Chase Black, Phillip C. Haughey and AHB Associates, Inc. A letter from the City Bank of Jackson is also to be received, subordinating their interest to ours in connection with the blanket financing statement now in effect on Kwaske Brothers." (Exhibit O) (Emphasis added.)

Black admitted having read the letter at the time. When asked during cross-examination, "is it not true, from reading this, you were aware that the conditions that you were relying on had not at this time been satisfied?", Black responded:

"On the contrary, because I asked Mr. Neubacher what the situation was. That does not say that on March 28th that those were not available. It says on February 4th, they were not available. Mr. Neubacher responded that those things had been taken care of and this, our signature, our indemnity was the only thing yet remaining * * *." (Emphasis added.) (Tr. 183)

After the March 28th meeting with Neubacher, defendant Black sent a photocopy of the February 4th USF&G letter with the proposed indemnity agreement to his attorney with the following handwritten note at the bottom of the letter:

"3/28/72

"Bob-Al Neubacher came in this PM-wanting to talk about the attached 'Specific Indemnity Agreement.' I told him the wives would not be expected to sign, and that we wanted assurance that we were limiting ourselves after Kwaske Bros. Constr. Co., Inc., and after the three brothers personally.⁴ He said thats (sic) what all these papers mean. Do you agree. Please call me after reading them over.

"Chase".

(Exhibit P; Tr. 200-202) (Emphasis in original.) In the extreme bottom right hand corner of the exhibit, below the handwritten note, is a date stamp indicating that defendants' counsel received the letter on March 29, 1972.

Defendants Black and Haughey testified that they "put total reliance" on representations that there would be other indemnitors and that the Jackson Bank would subordinate its security interest in Kwaske Brothers' assets (Tr. 172). They insisted that Neubacher told them that they were the last to comply with the bond requirements both before and after the delivery of the February 4th letter (Tr. 183, 213, 215; Appellants' Brief, p. 3). ⁵ Neubacher denied ever making such representations.

USF&G agreed to remove appellants' wives' names from the indemnity agreement but refused to set up any type of priority among the indemnitors. Defendants finally signed the agreement on June 20, 1972 and mailed it to Mourer-Foster. It was not until March, 1973, that defendants discovered that the Jackson City Bank had not subordinated its rights to various assets of the Kwaske Brothers, and not until 1975 that defendants learned that only two of the four Kwaske brothers and their wives (Tr. 198-199) and only one of the subcontractors had signed the master indemnity contract.

Kwaske Brothers defaulted under its labor and material bond when it failed to pay all of the material suppliers and subcontractors. USF&G intervened in accordance with the labor and materials bond and settled the claims. USF&G subsequently brought suit against those sureties who had signed the indemnity agreement in order to recover its expenses of $78,971.27 plus interest. The plaintiff obtained a default judgment against defendants Kwaske Brothers Construction Company, Kathleen and Mary Helen Kwaske, and subcontractor Schmidt...