Utica Mut. Ins. Co. v. Vigo Coal Co., Inc.

Decision Date20 December 2004
Docket NumberNo. 04-1107.,No. 04-1015.,04-1015.,04-1107.
Citation393 F.3d 707
PartiesUTICA MUTUAL INSURANCE COMPANY, Plaintiff-Appellant/Cross-Appellee, v. VIGO COAL COMPANY, INC., William L. Koester, and Betty L. Koester, Defendants-Appellees/Cross-Appellants, and Atlas Minerals, Inc., Walter J. Pieper, Susan S. Pieper, and Charles W. Schulties, Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

Douglas B. Bates (argued), Stites & Harbison, Jeffersonville, IN, for PlaintiffAppellant.

G. Daniel Kelley (argued), Ice Miller, Indianapolis, IN, Patrick A. Shoulders, Ziemer, Stayman, Weitzel & Shoulders, Evansville, IN, for DefendantsAppellees.

Charles W. Schulties, Jupiter, FL, pro se.

Before POSNER, KANNE, and ROVNER, Circuit Judges.

POSNER, Circuit Judge.

This diversity suit for breach of a suretyship contract, decided in favor of the defendants after a bench trial, presents questions primarily relating to the contract-law doctrine of "novation," but more broadly to principles of contract interpretation; all the questions are governed by the common law of Indiana.

In 1991 defendant Vigo purchased Buck Creek Coal, which operated a coal mine and was required by both federal and state law to post reclamation bonds as a condition of being permitted to operate the mine. 30 U.S.C. § 1259(a); 30 C.F.R. § 800.20; Ind.Code § 14-34-6-1. In connection with the purchase, Vigo, joined by defendant Atlas and by the owners of Vigo and Atlas (the Koesters and the Piepers, respectively, who are also defendants) and by Buck Creek Coal, signed a "General Indemnity Agreement." In it they agreed to indemnify Utica insurance company for any losses that Utica might incur from issuing reclamation bonds to the Indiana state government on behalf of Buck Creek. The following year (1992) another "General Indemnity Agreement" was signed, identical to the first, except that the only signers were defendant Schulties, who had not signed the previous agreement, and the Piepers (who, remember, are Atlas's owners). Mr. Pieper signed both individually and as president; and because of his having thus signed in his official capacity, as it were, as an agent apparently authorized to bind his principal, the district judge ruled that Atlas was bound by the second agreement. E.g., Winkler v. V.G. Reed & Sons, Inc., 638 N.E.2d 1228, 1232-33 (Ind.1994); City of Gary v. Conat, 810 N.E.2d 1112, 1115-16 (Ind.App.2004); DFS Secured Healthcare Receivables Trust v. Caregivers Great Lakes, Inc., 384 F.3d 338, 343 (7th Cir.2004) (Indiana law). Atlas has not challenged that ruling, even though it appears from the 1992 agreement that Pieper actually was signing in his capacity as president of Buck Creek, not of Atlas. So Atlas is bound; and to simplify our opinion we shall assume that Atlas and Schulties were the signers of the second agreement and Vigo and Atlas the signers of the first; in other words, we'll ignore not only the district court's unchallenged error but also the companies' owners. With this simplification, the case becomes Utica versus Vigo.

The surety bonds were later "forfeited"; that is, Buck Creek proving unable to fulfill its reclamation obligations, the state required the surety, Utica, to do the reclamation. Utica then brought this suit, against all the signers of either agreement, for reimbursement of the expense — some $400,000 — of the reclamation.

The district court concluded that the signers of the 1991 indemnity agreement were off the hook (except Atlas, since it had signed the second agreement as well) because the second agreement was a "novation," that is, a replacement of the first agreement, which therefore released the obligors in that agreement. SSD Control Technology v. Breakthrough Technologies, Inc., 685 N.E.2d 1136, 1137-38 (Ind.App.1997); Rose Acre Farms, Inc. v. Cone, 492 N.E.2d 61, 68-69 (Ind.App.1986); T & N v. Pennsylvania Ins. Guaranty Ass'n, 44 F.3d 174, 186 (3d Cir.1994); Restatement (Second) of Contracts § 280, comment b (1981, 2004 supp.); 3 E. Allan Farnsworth, Farnsworth on Contracts § 11.11, pp. 141-42 (3d ed.2004); 30 Williston on Contracts § 76:1 (4th ed.2004 supp., Richard A. Lord ed.). But the judge also turned down these defendants' counterclaim, in which they sought to recover the attorneys' fees that they had incurred in defending against Utica's claim.

Unable to recover its entire loss from the signers of the 1992 agreement (Atlas and Schulties — the latter now bankrupt), and seeking therefore to enforce the 1991 agreement against Vigo, Utica challenges the finding that the 1992 agreement was a novation.

The agreement does not describe itself as a novation or a substitute, or purport to release the signers of the first agreement. The only clue in the agreements themselves that the second one might be a novation is that Atlas signed both, and if the only purpose of the second was to add an indemnitor, namely Schulties, why did Atlas sign it, having signed the identical first agreement, unless that wasn't the purpose, and the second agreement replaced rather than supplemented the first? Additional evidence, that is, evidence beyond the two agreements themselves, was presented at the trial, and that evidence, together with the anomaly we've just noted, persuaded the judge that the second agreement was indeed a novation.

That evidence revealed the following. In 1992, Vigo sold the coal mine to Atlas and Schulties and they agreed to use their best efforts to replace the existing reclamation bonds and obtain a release of Vigo's liability under those bonds. They failed to do so, but an insurance agent named Jones submitted a "reclamation bonding application" to Utica, proposing to "transfer these bonds over and have new Indemnity Agreements signed by Chuck Schulties." There was no mention of Vigo. The agent testified that the reason Vigo was left off the second agreement was that it and its owners, who had signed the 1991 agreement, "had no ownership, they had no control, they were not party to running the company." Asked at trial whether Vigo's omission from the agreement was "confirmatory of the conversations that you'd had with [Utica's Gerald Swarthout, who handled the negotiations leading up to the 1992 agreement] that they would not be indemnitors," the agent replied "of course, they were selling."

Swarthout gave contrary testimony, but the district judge disbelieved it, in part because Schulties had (at the time!) substantial assets. That fact, together with his substantial expertise in coal mining, suggested that an indemnity agreement signed by him as well as by Atlas would provide sufficient security to persuade Utica or some other insurance company to issue new reclamation bonds to replace those that Utica had issued. For although the General Indemnity Agreement (whether the 1991 or the 1992 version, since they were identical except for the signers) embraced replacement bonds, it was terminable by an indemnitor on 20 days' notice. And therefore as part of Vigo's sale of the coal mine to Atlas and Schulties, Atlas and Vigo could have withdrawn from the 1991 agreement and Atlas and Schulties, with a net worth between them of $7 million, could have persuaded Utica or some other insurance company to issue new surety bonds that Vigo, having withdrawn from the agreement, would not have been a guarantor of. Utica does not deny that its bonds could have been replaced in this fashion. Ind.Code § 14-34-6-14.6.

The consequence of replacing the bonds would have been to release Vigo. But given Schulties' financial wherewithal and mining expertise, and Vigo's natural reluctance to remain a guarantor of performance over which, as a result of the sale, it would no longer have any control, the judge was on solid ground in finding that Utica would have agreed to an express novation rather than lose to another insurance company a business relationship that yielded it significant premiums ($18,000 a year) in exchange for assuming what seemed at the time a modest risk. Modest because underground coal mines (Buck Creek's mine was an underground mine) tend to require less expense to restore the surface after the mind is exhausted than strip mines and because two substantial-seeming parties, Atlas and Schulties, had agreed to indemnify Utica for any loss.

The judge's reconstruction of the parties' deal — his conclusion that they intended the second agreement to substitute for rather than supplement the first — is not clearly erroneous. On the contrary, it makes commercial, economic, and common sense; and good sense, or such synonyms as commercial reasonableness, provides sound guidance for interpreting ambiguous contracts, in Indiana as elsewhere. Soames v. Young Oil Co., 732 N.E.2d 1236, 1239 (Ind.App.2000); F.E. Gates Co. v. Hydro-Technologies, Inc., 722 N.E.2d 898, 903 n. 4 (Ind.App.2000); Beanstalk Group, Inc. v. AM General Corp., 283 F.3d 856, 859-61 (7th Cir.2002) (Indiana law); Morin Building Products Co., Inc. v. Baystone Construction, Inc., 717 F.2d 413, 414-15 (7th Cir.1983) (ditto); XCO Int'l Inc. v. Pacific Scientific Co., 369 F.3d 998, 1005 (7th Cir.2004); Outlet Embroidery Co. v. Derwent Mills, 254 N.Y. 179, 172 N.E. 462, 463 (1930) (Cardozo, C.J.). As Judge Boudin explained recently, "Agreements, especially commercial arrangements, are designed to make sense. If one reading produces a plausible result for which parties might be expected to bargain, that reading has a strong presumption in its favor as against another reading producing an unlikely result (e.g., windfall gains, conditions that cannot be satisfied, dubious incentives)." National Tax Institute, Inc. v. Topnotch at Stowe Resort & Spa, 388 F.3d 15, 19 (1st Cir.2004).

The difficult question is whether the district judge was entitled to take evidence — to mine underground, as it were — rather than to stay on the semantic surface of the two agreements. A finding of...

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