Spencer v. Frontier Insurance

UNPUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 05-2391

THOMAS R. SPENCER; CURTIS SPENCER,

Plaintiffs - Appellees,

v.

FRONTIER INSURANCE COMPANY,

Defendant - Appellant.

No. 06-1551

CURTIS SPENCER, individually, and as Trustee of the Thomas R.
Spencer Trust,

Plaintiff - Appellee,

v.

FRONTIER INSURANCE COMPANY,

Defendant - Appellant.

Appeals from the United States District Court for the District of
South Carolina, at Columbia. Joseph F. Anderson, Jr., Chief
District Judge. (CA-02-3431; 3:02-cv-03431-JFA)

Argued: May 13, 2008 Decided: August 26, 2008
Before WILLIAMS, Chief Judge, Joseph R. GOODWIN, Chief United
States District Judge for the Southern District of West Virginia,
sitting by designation, and Claude M. HILTON, Senior United States
District Judge for the Eastern District of Virginia, sitting by
designation.

Affirmed by unpublished per curiam opinion.

ARGUED: Clifford F. Altekruse, SMITH, CURRIE & HANCOCK, LLP,
Atlanta, Georgia, for Appellant. David C. Holler, LEE, ERTER,
WILSON, JAMES, HOLLER & SMITH, LLC, Sumter, South Carolina, for
Appellees. ON BRIEF: John E. Menechino, Jr., SMITH, CURRIE &
HANCOCK, LLP, Atlanta, Georgia, for Appellant.

Unpublished opinions are not binding precedent in this circuit.

2
PER CURIAM:

Curtis Spencer, individually and as trustee of his father’s

trust, brought suit against Frontier Insurance Company (Frontier)

seeking recovery under a surety bond. After Frontier removed the

action from South Carolina state court, the district court granted

Frontier’s motion to stay the action as Frontier had entered

rehabilitation proceedings in New York. After approximately 27

months, the district court granted Spencer’s motion to lift the

stay and later entered summary judgment in favor of Spencer,

holding Frontier liable on the surety bond. The district court

held a bench trial to determine damages and entered judgment for

Spencer in the amount of $1,559,256.78. Frontier appeals the

district court’s decisions to lift the stay, enter summary judgment

in favor of Spencer on the issue of liability, and the award of

damages to Spencer. We affirm.

I.

In September, 1999, Thomas Spencer, now deceased, and his son

Curtis Spencer (collectively “Spencer”) sold their family business

to Trailer Holdings, Inc., which later assigned its rights to C.T.

Acquisition Corp. (CTAC). The initial sale of the Spencer business

was made pursuant to a stock purchase agreement (SPA). When CTAC

acquired its rights from Trailer Holdings, it delivered a $1.2

million five-year note to Spencer. The note required CTAC to make

3
monthly interest-only payments and a single principal payment of

$1.2 million due at maturity. Along with the note, CTAC delivered

a surety bond making Frontier jointly and severally liable with

CTAC in the event CTAC defaulted on the note. Three CTAC owners

and officers, Timothy Durham, J.R. Hitchcock, and Terry Whitesell

(collectively “Durham”), agreed to personally indemnify Frontier in

the event Frontier became liable on the bond. CTAC defaulted on

June 1, 2002. Shortly thereafter, Spencer filed suit against

Frontier in South Carolina.

Prior to default, on October 15, 2001, Frontier entered

rehabilitation proceedings in New York, which remain ongoing.

These proceedings arise from New York’s insurance regulatory

statutes that provide for uniform treatment of claims against an

insurer in rehabilitation. Part 19 of the Supreme Court of New

York issued an order declaring Frontier insolvent and appointing

the New York Superintendent of Insurance (Superintendent) as

Rehabilitator. The order states that “[a]ll persons are enjoined

and restrained from commencing or prosecuting any actions,

lawsuits, or proceedings against Frontier, or the Superintendent as

Rehabilitator.” This order and its anti-suit injunction remain in

effect today.

On May 11, 2004, as part of its rehabilitation proceedings,

Frontier requested and received the authority to dispose of surety

claims against it. The procedure allowed the Superintendent to

4
examine all surety claims and provide each claimant with a “Notice

of Determination” describing the amount, if any, recommended for

allowance by Frontier. Claimants are permitted to object to the

Superintendent’s determination and such contested claims are

reviewed by a “referee appointed by the Court.” There is no

evidence of any independent procedure for judicial review of the

referee’s determination. On September 23, 2005, Frontier mailed a

notice of determination to Spencer stating that the Superintendent

had disallowed the Spencer claim. The reason for disallowance was

“[t]he Principal was substituted without prior written consent of

the Surety.” Spencer has timely objected to this decision in the

New York rehabilitation proceeding.

On October 29, 2004, approximately one year before Spencer’s

claim was disallowed in New York, Frontier initiated an action

against Durham in United States District Court for the Southern

District of Indiana. Frontier sought to recover upon the indemnity

agreement signed by Durham. Spencer moved to intervene, but the

Indiana district court denied the motion reasoning that “[t]he

South Carolina district court can protect Mr. Spencer’s interests

in the action pending there.” The court later dismissed Frontier’s

action without prejudice as being prematurely asserted under the

terms of the indemnity agreement.

After removing Spencer’s action to the district court,

Frontier moved to dismiss or stay the action pending final

5
resolution of Frontier’s rehabilitation proceeding in New York.

The district court granted a stay on May 27, 2003, under Burford v.

Sun Oil Co., 319 U.S. 315 (1943), and directed the parties to file

quarterly status reports on the progress of Frontier’s

rehabilitation. After denying Spencer’s request to lift the stay

in October, 2003, the district court granted Spencer’s motion to

lift the stay on November 10, 2005. On February 10, 2006, the

district court granted Spencer’s motion for summary judgment as to

Frontier’s liability on the bond but denied Spencer’s motion with

respect to damages. On March 22, 2006, the district court held a

bench trial to determine damages and issued an order awarding

Spencer $1,559,256.78.

II.

This Court reviews a district court’s decision to abstain

under Burford for abuse of discretion. Martin v. Stewart, 499 F.3d

360, 363 (4th Cir. 2007)(citing Harper v. Pub Serv. Comm’n, 396

F.3d 348, 357-58 (4th Cir. 2005)). A district court abuses its

discretion whenever “its decision is guided by erroneous legal

principles.” Id. (internal quotation marks omitted); see also Koon

v. United States, 518 U.S. 81, 100 (1996)(“A district court by

definition abuses its discretion when it makes an error of law”).

Moreover, “there is little or no discretion to abstain in a case

6
which does not meet traditional abstention requirements.” Martin,

499 F.3d at 363 (internal quotation marks omitted).

We have stated that “a federal court may abstain under Burford

from its ‘strict duty to exercise’ congressionally conferred

jurisdiction only when the importance of difficult questions of

state law or the state’s interest in uniform regulation outweighs

the federal interest in adjudicating the case at bar.” Id. at 365

(citing Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716

(1996)). In Burford, the Supreme Court held that a federal court’s

abstention is appropriate when judicial review in the designed

state forum is “expeditious and adequate,” and that proceedings in

federal court could cause “delay, misunderstanding of local law and

federal conflict with state policy.” Burford, 319 U.S. at 327-34.

In its initial decision to stay the case, the district court

noted that “[t]he rehabilitation of a very large insurance company

by the State of New York is indisputably a matter of substantial

public concern in New York, and for this case to proceed against

Frontier could disturb that rehabilitation.” In its decision to

lift the stay, the district court reasoned:

[t]he court . . . is not convinced that [Spencer’s] due
process rights are being adequately protected . . . .
This court has an interest in the fair and efficient
administration of justice for litigants residing in this
district. [Spencer] has waited almost three years for his
day in court and under the procedures in place in the New
York rehabilitation action, there is no end in sight . .
. . Meanwhile, [Frontier] takes seemingly inconsistent
positions by denying [Spencer’s] claim while
simultaneously seeking indemnification for that claim in

7
 Indiana. The Burford abstention doctrine should not be
used as a shield to delay justice indefinitely.

We agree with the district court that there is a strong federal

interest in adjudicating this case, given the lengthy

rehabilitation proceedings in New York. Moreover, we conclude that

the district court did not abuse its discretion by lifting the stay

because this case does not meet the requirements for abstention

under Burford.

First, this case does not present difficult questions of New

York state law. Spencer’s complaint simply requires the

interpretation and construction of three documents — the SPA, note,

and bond — each of which is to be construed under South Carolina

law. Indeed, a United States court sitting in South Carolina is

likely to be far more competent in interpreting South Carolina

contract law than a New York Supreme Court or the New York

Superintendent of Insurance. Moreover, contract interpretation

issues of this sort rarely present difficult questions of state law

no matter the jurisdiction.

Second, although New York clearly has an interest in the

uniform regulation of its insurance industry, a judgment in this

case would not upset that uniformity. Possessing a judgment in its

favor, Spencer would still be required to appeal to New York courts

to enforce that judgment. Once Spencer seeks to enforce its

judgment in New York, a New York court may evaluate Spencer’s claim

8
in the context of Frontier’s ongoing rehabilitation by determining

its priority relative to other similar claims against Frontier.

Frontier cites two decisions by this Court upholding a

district court’s decision to dismiss or abstain under Burford an

action against entities embroiled in state regulatory proceedings.

See First Penn-Pacific Life Ins. Co. v. Evans, 304 F.3d 345, 348

(4th Cir. 2002)(upholding district court decision to dismiss under

Burford an action against an insurance company in receivership in

order to avoid complicating efficient administration of insurer’s

estate); Brandenburg v. Seidel, 859 F.2d 1179, 1190-93 (4th Cir.

1988)(upholding district court decision to abstain under Burford an

action against an insolvent state-chartered savings and loan

association involved in liquidation proceedings). To hold in

Frontier’s favor on account of this precedent would be tantamount

to stating a rule that abstention would be required in this case,

a proposition neither of these cases stand for. In Evans, the

majority responded to the dissent’s criticism that it had

impermissibly widened Burford’s narrow exception to federal courts’

duty to decide cases by stating that “[t]o read the dissent, one

would think that Burford abstention was a ‘require[ment]’ in this

case. Our holding is simply that the district court did not abuse

its discretion in abstaining here.” Evans, 304 F.3d at 348 n.

1.(quoting Luttig, J., dissenting) Similarly, we decline to state

a rule that abstention was required in this case, and hold that the

9
district court did not abuse its discretion by allowing Spencer’s

action to proceed.

III.

We next consider whether the district court properly granted

summary judgment on the liability issue. This Court reviews de

novo the district court’s entry of summary judgment. See Nat’l

City Bank of Ind. v. Turnbaugh, 463 F.3d 325, 329 (4th Cir.

2006)(“We review a grant of summary judgment de novo”). Summary

judgment is appropriate where there is no genuine issue as to any

material fact. See Fed. R. Civ. P. 56(c). Once a motion for

summary judgment is properly made and supported, the opposing party

has the burden of showing that a genuine dispute exists. See

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

586-87 (1986). A material fact in dispute appears when its

existence or non-existence could lead a jury to different outcomes.

See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A

genuine issue exists when there is sufficient evidence on which a

reasonable jury could return a verdict in favor of the non-moving

party. See id. Mere speculation by the non-moving party “cannot

create a genuine issue of material fact.” Beale v. Hardy, 769 F.2d

213, 214 (4th Cir. 1985); see also Ash v. United Parcel Serv.,

Inc., 800 F.2d 409, 411-12 (4th Cir. 1986). Summary judgment is

appropriate when, after discovery, a party has failed to make a

10
“showing sufficient to establish the existence of an element

essential to that party’s case, and on which that party will bear

the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S.

317, 322 (1986). When a motion for summary judgment is made, the

evidence presented must always be taken in the light most favorable

to the non-moving party. See Smith v. Virginia Commonwealth Univ.,

84 F.3d 672, 675 (4th Cir. 1996)(en banc).

On December 14, 1999, Frontier executed the surety bond, which

specifically references the SPA that was signed on September 3,

1999. The SPA states that a note would be executed at closing,

which occurred on December 17, 1999, three days after Frontier

executed the bond. The SPA and the note contain slightly different

terms regarding the debt owed by CTAC to Spencer. Frontier argues

that because the bond pre-dated the note, this change in terms

discharges Frontier’s liability under the bond. The bond provides

that Frontier is liable as a surety:

[w]hereas, under the date of 9/3/99, [CTAC and Spencer]
entered into a written Agreement . . ., effective as of
12/17/99; and Whereas, under the Agreement, [CTAC] has
agreed to pay [Spencer] one payment of $1,200,000.00 on
the 1st day of January 2005 . . . and to secure said
Payment by the delivery to [Spencer] of a Surety Bond;
Now, therefore, in the event of default under the
Agreement, [Frontier] shall become liable for the
immediate payment to [Spencer] of a specific sum equal to
the total of all amounts due or to become due under the
Agreement, which have not been paid to [Spencer].

The SPA states that “‘Agreement’ means this Stock Purchase

Agreement, the Exhibits and schedules attached hereto and the

11
Certificates delivered in connection herewith, as the same may be

amended, supplemented or otherwise modified from time to time in

accordance with the provisions hereof.” With regard to debt, the

SPA states that:

Buyer will deliver to Sellers at Closing its Promissory
Note in the principal sum of One Million Two Hundred
Thousand Dollars . . . such Note shall have a five (5)
year term to maturity at eight percent (8%) interest per
annum . . . . Interest only shall be paid monthly on the
Note during the five (5) year term, with the principal
and accrued unpaid interest, if any, due and payable in
full on the 1st day of the 61st month following closing.

The SPA further states that “[t]he Note shall be secured by a

Surety Bond issued by Frontier Insurance Company . . . in the face

amount of [$1.2 million].”

The note contains the same principal, interest rate, and term-

to-maturity terms as the SPA, but also includes additional terms.

The note provides a penalty interest rate of two percent on

outstanding principal in the event of default, an acceleration

clause making the note’s principal balance and unpaid interest

immediately due in the event of default, and a provision for

attorney’s fees should any part of the note be collected by or

through an attorney.

Frontier argues that it should be discharged from the bond

because the additional terms in the note materially increased the

risk Frontier faced in acting as a surety to CTAC’s debt. See

Employers Ins. of Wassau v. Construction Mgmt. Engineers of

Florida, 297 S.C. 354, 358 (S.C. App. 1989)(upholding trial court’s

12
decision to discharge surety as a matter of law after subsequent

contract changed surety’s risk). This argument fails because the

SPA specifically references a promissory note to be delivered to

Spencer at the time of closing. The bond makes Frontier liable for

“a specific sum equal to the total of all amounts due or to become

due under the [SPA].” The SPA, in referring specifically to a

promissory note to be delivered at closing, by definition

incorporates the terms of that note into the SPA. As the bond

makes Frontier liable for all amounts due under the SPA, which

incorporates the terms of the note, the bond therefore makes

Frontier liable as surety for obligations due under the note.

Moreover, Frontier, a sophisticated party, chose to execute its

surety bond three days prior to closing without specifically

examining the terms of the promissory note it knew would be

delivered at closing. The note does not alter the principal,

interest rate, and term-to-maturity terms described in the SPA, but

adds extra terms concerning the amount to be paid by the borrower

in the event of default. Consequently, Frontier cannot escape its

obligation as surety by failing to examine a promissory note it

knew was being delivered on December 17.

Frontier also contends that the district court erred in

granting summary judgment on the liability issue because a genuine

issue of material fact exists as to whether changes in CTAC’s

corporate structure ought to discharge Frontier from liability

13
under the bond. See Berry v. Adams, 157 S.E. 805, 806 (S.C.

1931)(stating that a surety may be released from liability because

of a change to the principal). More than a year after Frontier

executed the bond, CTAC’s ownership changed. The three CTAC owners

who signed the indemnity agreement with Frontier sold their

interest in CTAC. Frontier argues that this change in ownership is

a significant enough change in the risk Frontier faced to create

a genuine issue of material fact to be determined at trial.

However, the bond provides that “Principal and Surety, their heirs,

executors, administrators, successors and assigns are hereby

jointly and severally liable” (emphasis added). Because the bond

specifically maintains liability in the face of ownership change,

Frontier cannot escape liability on this basis as a matter of law.

As there is no dispute that the principal has breached its

duties under the note, we agree with the district court that

Frontier is liable as surety for all payments due under the note.

IV.

We next consider the district court’s damages award. On

appeal from a bench trial, the appellate court may set aside

findings of fact only if they are clearly erroneous, and must give

due regard to the opportunity of the trial court to judge the

credibility of witnesses. See Fed. R. Civ. P. 52(a); Minyard

Enterprises Inc. v. Southeastern Chemical & Solvent Co., 184 F.3d

14
373, 380 (4th Cir. 1999). “A finding is clearly erroneous when

although there is evidence to support it, the reviewing court on

the entire evidence is left with the definite and firm conviction

that a mistake has been made.” Minyard, 184 F.3d at 380 (internal

quotation marks omitted). “If the district court’s account of the

evidence is plausible in light of the record viewed in its

entirety, the court of appeals may not reverse it even though

convinced that had it been sitting as the trier of fact, it would

have weighed the evidence differently.” Provident Life & Accident

Co. v. Cohen, 423 F.3d 413, 418 (4th Cir. 2005)(citing Anderson v.

City of Bessemer, 470 U.S. 564, 573 (1985)).

After review of the record in its entirety, we find the

district court’s account of the evidence to be supported by the

evidence and not clearly erroneous.

Frontier argues that the district court’s damages award ought

to be set aside because the district court committed an error of

law by awarding damages in excess of the surety bond’s penal sum.

See North River Ins. Co. v. Claar, 382 S.E.2d 8, 10 (S.C.

1989)(stating that a surety’s liability is limited to the bond’s

penal amount). Frontier argues that the bond’s penal sum is the

$1.2 million debt described in the SPA and that the district court

erred by awarding Spencer approximately $1.56 million. This excess

damages award is explained by the penal interest rate associated

with CTAC’s breach of its obligation under the note and the award

15
of attorney’s fees pursuant to the note. Frontier’s argument fails

because we have held that the SPA and the bond both incorporate the

terms of the note, thus exposing Frontier to liability in excess of

the $1.2 million face amount.

V.

For the foregoing reasons, the judgment of the district court

is

AFFIRMED.

16