United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
July 5, 2007
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 06-10582
BAYLOR HEALTH CARE SYSTEM;
HEALTH CARE INSURANCE COMPANY OF TEXAS LTD,
Individually and as Assignee of
Church University Insurance Company Ltd,
Plaintiffs-Appellants,
versus
EMPLOYERS REINSURANCE CORPORATION,
Defendant-Appellee.
Appeal from the United States District Court
For the Northern District of Texas
Before HIGGINBOTHAM, WIENER, and CLEMENT, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
Plaintiff-Appellant Baylor Health Care System appeals from the
district court’s summary judgment dismissal of Baylor’s declaratory
judgment and breach of contract suit against Defendant-Appellee
Employers Reinsurance Corporation (“ERC”). The court concluded
that Baylor and ERC confected an accord and satisfaction of ERC’s
obligations under Baylor’s liability policy when they agreed to
fund the settlement of a tort claim against Baylor and performed
according to the terms of that agreement. We reverse and remand.
I
Baylor was insured under a medical and professional liability
policy issued by Church University Insurance Company, a “captive
insurer,” wholly owned by Baylor and insuring only the risks of
Baylor and its affiliated companies.1 The policy provided Baylor
up to $25 million of coverage, in excess of a $3.5 million
self-insured retention. ERC assumed Baylor’s risk under the policy
pursuant to a reinsurance certificate in which ERC agreed to (1)
indemnify Baylor for all amounts above its self-insured retention
paid to settle tort claims or satisfy judgments, and (2) reimburse
Baylor for any defense costs attributable to losses covered by the
Policy.
In April 2000, Kristi Hamilton sued Baylor in Texas state
court, alleging that members of its nursing staff negligently
caused her newborn son to suffer serious brain damage. In October
2001, Hamilton and Baylor attempted to mediate their dispute. At
the mediation, Hamilton presented evidence indicating that Baylor’s
nurses may have been guilty of gross negligence or malice, which,
if proven, could subject Baylor to punitive damages. ERC advised
Baylor that (1) the Policy did not cover punitive damages, and (2)
ERC would not be responsible for any increase in the settlement
value of Hamilton’s claim resulting from the threat of punitive
damages. At the conclusion of the mediation, Hamilton issued a $12
1
For the purposes of this opinion, payments made to or by Church will be
treated as having been made to or by “Baylor” directly. This simplification does
not affect our analysis, as Church is not a party to the suit. Baylor has sued
ERC both individually and as Church’s assignee.
2
million settlement demand with a 48-hour deadline for acceptance.
Following the mediation, Baylor and ERC continued to discuss
Hamilton’s settlement offer. They agreed that Hamilton’s suit
presented a risk of liability well in excess of $12 million and
decided to accept Hamilton’s offer. ERC insisted, however, that it
would not be responsible for any settlement amounts attributable to
the threat of punitive damages. Recognizing that resolving this
punitive damage-related dispute likely would take longer than
Hamilton’s settlement deadline allowed, Baylor and ERC agreed to
(1) devise an arrangement which would fund a settlement of
Hamilton’s claims for up to $12 million, and (2) resolve their
apportionment issues in a post-settlement arbitration or mock jury
procedure.
ERC initially proposed that, to fund the Hamilton settlement,
(1) Baylor would pay its $3.5 million self-insured retention, (2)
ERC would pay the next $5 million, and (3) Baylor would pay any
amount over this $8.5 million combined contribution. Then, at a
later date, ERC and Baylor would “try” the Hamilton case before an
arbitration panel or mock jury, which would render a verdict and
award damages. The outcome of the mock trial would provide the
basis for the ultimate determination of how to allocate the
settlement amount between Baylor and ERC.2 Baylor indicated its
2
For example, if the mock jury awarded $10 million in compensatory damages
and $5 million in punitive damages, Baylor would be responsible for one-third of
the settlement amount, in excess of its self-insured retention.
3
general agreement with this proposal but rejected the specific
apportionment methodology proposed by ERC.3
The next morning, Baylor’s counsel sent an email message to
ERC representatives containing the following provision:
Baylor and ERC have agreed this morning (10/12) that
Baylor will contribute the first $500,000 toward a
settlement in excess of $8.5 million, and if settlement
exceeds $10 million, Baylor will contribute the first
$500,000 over $10 million. So total Baylor exposure is
$1 million in excess of $3.5 SIR [self-insured
retention].
ERC will contribute all amounts towards a settlement
up to $12 million, except for the Baylor SIR and
$1 miilion [sic], subject to structure above.
Please confirm it.
ERC’s representative agreed by return email the same day, and,
after some additional negotiation, the Hamilton lawsuit was settled
for $10.8 million. ERC and Baylor contributed to the settlement as
agreed: Baylor paid its $3.5 million self-insured retention, plus
a $1 million contribution pursuant to the terms of the email
agreement, and ERC paid the remaining $6.3 million. ERC also
reimbursed Baylor 58.3% of its defense costs, a share proportional
to its contribution to the total settlement amount.
Baylor later requested that ERC reimburse Baylor both the $1
million it contributed above its self-insured retention, and the
3
Baylor’s counsel expressed his reservations about the mock trial proposal
in an email to an ERC claims supervisor:
ERC’s interest is inflaming the fact finder here and our interest is
to show what the actual damages are. We should be trying to resolve
the dispute in question, not to see how bad ERC can make Baylor
look.
4
defense costs attributable to that additional contribution. ERC
refused, and Baylor filed suit in Texas state court for declaratory
judgment and breach of contract. ERC removed the case to the
district court, and both parties eventually filed motions for
summary judgment. The court granted ERC’s motion, holding that the
parties’ execution and performance of the Agreement amounted to an
accord and satisfaction of any obligation ERC had under the Policy.
Baylor appealed.
II
A
This court reviews the district court's grant of summary
judgment de novo.4 Summary judgment is appropriate “if the
pleadings, depositions, answers to interrogatories, and admissions
on file, together with the affidavits, if any, show that there is
no genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law.”5 In determining
whether there is a genuine issue of material fact, all facts must
be evaluated in the light most favorable to the non-moving party.6
B
Under Texas law, “[a]ccord and satisfaction, as a defense to
4
Twin City Fire Ins. Co. v. City of Madison, 309 F.3d 901, 904 (5th
Cir.2002).
5
Fed. R. Civ. P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317,
322-23 (1986).
6
See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587
(1986).
5
a claim based upon a contract, exists when the parties have entered
into a new contract, express or implied, which discharges the
obligations under the original contract in a manner otherwise than
as originally agreed.”7 The “accord” is the new contract in which
the parties mutually agree that one party will give and the other
will accept something that is different from what each expected
from the old contract.8 The “satisfaction” is the actual
performance of the new agreement.9 Any claim arising out of a
contract may be the subject matter of an accord and satisfaction,
provided the contract is not illegal.10
A valid accord and satisfaction requires more than the mere
payment or acceptance of money.11 There must be an “unmistakable
communication” establishing that performance according to the terms
of the new agreement will satisfy the underlying obligation created
by the original contract.12 Such communication “must be plain,
definite, certain, clear, full, explicit, not susceptible of any
7
Womco, Inc. v. Navistar Int’l Corp., 84 S.W.3d 272, 280
(Tex. App.-Tyler 2002, no pet.)(citing Harris v. Rowe, 593 S.W.2d 303, 306
(Tex.1979)).
8
Id.
9
Id. (citations omitted).
10
Ostrow v. United Bus. Mach., Inc., 982 S.W.2d 101, 104 (Tex.
App.-Houston [1 Dist.],1998, no pet.)(citations omitted).
11
See Pate v. McClain, 769 S.W.2d 356, 362 (Tex. App.-Beaumont 1989, writ
denied)(“There should be a statement that accompanies the tender of the lesser
sum, which statement also must be so clear and so explicit and so complete that
the statement is simply not susceptible of any other interpretation but one of
complete accord and complete satisfaction.”).
12
Id. at 361–62(citations omitted).
6
other interpretation, and accompanied by acts and declarations that
[the parties are] sure to understand.”13 Nevertheless, the new
agreement need not explicitly state that it is intended to
supersede the original contract.14 Rather, courts may look to the
circumstances surrounding the execution of the new agreement to
determine if there has been an agreement to discharge the original
obligation.15 When the parties’ intent is “resting in implication,”
however, the circumstantial evidence must “irresistibly point to
the conclusion” that, in reaching a new agreement, the parties
assented to a complete discharge of the original obligation.
The question presented in this case is whether the agreement
comprised an “unmistakable communication” that it was intended to
effect a complete discharge of all of ERC’s obligations under the
Policy, or whether the circumstances surrounding the execution of
the agreement “irresistibly point” to the conclusion that the
parties assented to a complete discharge of ERC’s obligations under
the Policy.
As noted above, the entirety of the Agreement is set forth in
the following email communication from Baylor to ERC:
Baylor and ERC have agreed this morning (10/12) that
Baylor will contribute the first $500,000 toward a
settlement in excess of $8.5 million, and if settlement
exceeds $10 million, Baylor will contribute the first
13
Id.
14
Womco, 84 S.W.3d 272 at 280.
15
Id. (citations omitted).
7
$500,000 over $10 million. So total Baylor exposure is
$1 million in excess of $3.5 SIR [self-insured
retention].
ERC will contribute all amounts towards a settlement
up to $12 million, except for the Baylor SIR and
$1 miilion [sic], subject to structure above.
Please confirm it.
In its summary judgment ruling, the district court reasoned that,
because the email communication between ERC and Baylor was “a
classic offer and acceptance, forming a contract,” and because ERC
“tendered a conforming check, which [Baylor] accepted,” then “[t]he
elements of accord and satisfaction are thus present.”
The court made no threshold inquiry whether the agreement
unequivocally manifested the parties’ intent to discharge their
obligations under the policy. In rejecting Baylor’s contention
that it had confected only an interim settlement-financing
agreement, the court determined that the agreement was “a
straightforward allocation of settlement responsibility” and ERC’s
performance constituted a “full satisfaction” of its obligation for
the Hamilton settlement under the policy. Specifically, the court
pointed to the agreement’s provision that “total Baylor exposure is
$1 million in excess of $3.5 [self-insured retention]” as a clear
indication that the agreement was intended to be a final
determination of the parties’ financial responsibilities for the
Hamilton settlement. The court concluded that “the express
agreement in the October 12 email contract, in conjunction with the
close proximity in which ERC’s conforming payment was tendered,
8
provide sufficient context for acceptance of that check to
constitute satisfaction.”
Baylor urges instead that the agreement does not contain an
unmistakable communication intended to effect a complete discharge
of ERC’s obligations under the policy. It argues that the term
“total exposure” refers not to the ultimate allocation between
Baylor and the reinsured, but to the exposure to plaintiff’s
demands.
We agree that this interpretation seems plausible. The
agreement makes no reference to the policy or any policy-related
dispute, and is completely silent regarding the effect of the
agreement on the parties’ existing obligations under the policy.
The district court erred in concluding that the agreement’s
references to “settlement contributions” and “exposure” convert
this silence into unambiguous assent to a complete discharge of
ERC’s liability under the policy.
Nor do the circumstances surrounding the parties’s execution
of the agreement “irresistibly point” to the parties’ assent to a
complete discharge of ERC’s liability under the policy. Instead
the circumstances might also suggest, as Baylor urges, that the
agreement was only an interim settlement-financing agreement.
There is summary judgment evidence indicating that (1) none of the
parties’ representatives ever discussed discharging ERC’s
obligations under the policy, (2) the parties’ representatives did
9
discuss resolving the punitive damages-related dispute after
settling the Hamilton suit, (3) the parties agreed to resolve their
dispute after settling the Hamilton suit, but could not agree on a
methodology, and (4) Baylor intended the agreement only to
establish how to fund the settlement.
We are persuaded that viewing this evidence in the light most
favorable to Baylor, summary judgment dismissal was not warranted.
Baylor’s post-settlement demand for additional reimbursement from
ERC, and ERC’s subsequent agreement to pay a portion of Baylor’s
defense costs —— an obligation it assumed under the policy —— might
indeed indicate both parties’ recognition that the policy
provisions remained in effect, even after the purported accord and
satisfaction.
ERC acknowledges that in a typical accord-and-satisfaction
case the offeror must prove that the agreement comprises an
“unmistakable communication” of the intent to discharge a prior
obligation, but argues that this case is atypical because it
involves a written agreement, not simply the tender of a payment.
ERC maintains that the law’s requirement that an accord and
satisfaction involve a clear communication of the parties’ mutual
assent to the complete discharge of obligations created by the
original contract was intended to protect creditors from being
“tricked” into surrendering all of their rights by accepting what
they believe to be partial payment of a debt owed. Here attorneys
10
created the alleged accord in an exchange of emails, so ERC insists
that this case does not implicate the creditor-protection concerns
that traditionally prompt courts to require that, to confect an
accord and satisfaction, parties must agree to a discharge of
existing obligations in terms that are “plain, definite, certain,
clear, full, explicit, not susceptible of any other interpretation,
and accompanied by acts and declarations that [the parties are]
sure to understand.”16 Consequently, ERC asks this court to ignore
the stringent language of accord-and-satisfaction cases and look
only to “the law governing express contracts.” And under contract
law, ERC reminds us, any ambiguity should be construed against
Baylor.
ERC errs in suggesting that the law of accord and satisfaction
is independent of the law of contract.17 Indeed, “[t]he process of
making an accord, of interpreting the words and acts of the
parties, and of determining the legal effect thereof, is the same
as in the case of other contracts. . . . There must be
accompanying expressions sufficient to make the creditor
understand, or to make it unreasonable for him not to understand,
16
Christian v. University Federal Savings Association, 792 S.W.2d 533, 534
(Tex.App.-Houston [1st Dist.] 1990, no writ); see also Jenkins v. Henry C. Beck
Company, 449 S.W.2d 454, 455 (Tex.1970).
17
In Jenkins v. Henry C. Beck Co., the Texas Supreme Court explained that
the defense of accord and satisfaction “rests upon a new contract, express or
implied, in which the parties agree to the discharge of the existing obligation
by means of the lesser payment tendered and accepted.” 449 S.W.2d 454, 455 (Tex.
1970).
11
that the performance is offered to him as full satisfaction of his
claim and not otherwise.”18 As in usual contract disputes, “It is
wholly a question of intention, to be determined by the usual
processes of interpretation, implication, and construction.”19
To the extent that accord-and-satisfaction cases seem to
demand a higher standard of proof, the stringent rules they
described are only particular instances of a general rule: the
primary concern in a contract case is to ascertain the true intent
of the parties as expressed in the instrument, and a court may
examine the underlying circumstances as an aid in construing the
contract’s language.20 In light of the circumstances under which
most accord-and-satisfaction defenses arise — a debtor claiming
discharge of a prior obligation based on partial payment — courts
are understandably suspicious of ambiguity.
Here too we consider the underlying circumstances as a guide
to contract meaning. Both parties acknowledge that at the time the
agreement was reached there was a need to fund the Hamilton
settlement quickly, and a dispute as to what percentage of that
settlement was attributable to the threat of punitive damages, and
therefore not recoverable from ERC. The parties also acknowledge
agreeing to first fund the settlement in principle and to later
18
6 Corbin on Contracts, § 1277 at 117–18 (1962).
19
Id.
20
Sun Oil Co. (Delaware) v. Madeley, 626 S.W.2d 726, 731 (Tex. 1981).
12
allocate their respective liability for sharing the settlement
amount. In light of these facts, Baylor’s contention that the
agreement was only an interim financing agreement is plausible, yet
the district court ruled that the agreement was intended to finally
allocate settlement responsibility because (1) the use of the term
“exposure,” which, according to the court, “connotes the maximum
amount a party considers itself liable to be required to pay,” and
(2) the absence of any reference in the agreement to “temporary
funding, or of amounts to be determined at a later date.”
That’s a lot to decide on summary judgment without the benefit
of oral argument. In context, there were two “exposures” and the
term “total exposure” might have referred to either the exposure to
plaintiff’s demands or to the ultimate allocation between Baylor
and the reinsured. And although we agree with the able District
Judge that the absence of any reference to temporary funding or
post-settlement proceedings suggests the parties’ intent to resolve
conclusively their respective liability for the Hamilton
settlement, we are not persuaded that this silence is sufficient
support for the requisite finding of an “unmistakable
communication” of the parties’ intent to discharge ERC’s
obligations under the policy. Baylor presented circumstantial
evidence that the agreement may have been intended only as a stop-
13
gap settlement-financing agreement.21 Indeed, none disputes that
in considering the Hamilton settlement the parties agreed in
principle to execute an interim funding agreement to be followed by
a subsequent determination of final responsibility. Although the
parties never finalized any such arrangement, there is no evidence
establishing whether the parties, in executing the agreement,
abandoned this approach altogether.
Viewing all of the evidence in the light most favorable to
Baylor, a material fact issue exists whether there was an accord
and satisfaction. With the summary judgment evidence, particularly
the agreement’s silence as to its effect on the parties’
obligations under the policy, We think this case is best resolved
by settlement or trial.
III
ERC also moved for summary judgment on the affirmative defense
of equitable estoppel, which the district court did not reach but
21
This is not to say that ERC will not present a strong case at trial.
They argue, for example, that Baylor did not need a written agreement to secure
interim financing of the settlement, but could have funded the settlement itself
and later demanded reimbursement from ERC under the policy. ERC also suggests
that the stepped-increase structure of the agreement, which had not been part of
earlier settlement-financing proposals, "would hardly be necessary if the parties
had intended [to arrange] only interim funding." Finally, ERC contends that
Baylor's rejection of ERC's proposed mechanism for resolving the settlement
liability dispute lends support to the district court's conclusion that the
agreement was not simply an alternative mechanism for funding a settlement, but
was an "abandon[ment of] the interim funding/dispute resolution approach
altogether" in favor of a final disposition of the parties' proportional
financial responsibility for any settlement. All this proves, to our eyes, is
that this case is best not resolved on summary judgment.
14
which is properly before us.22 In general terms, the doctrine of
equitable estoppel requires that “one who retains benefits under a
transaction cannot avoid its obligations and is estopped to take an
position inconsistent therewith.”23 The doctrine responds to the
unfairness of parties enjoying the benefits of a contract and
subsequently seeking to avoid the obligations created by that
contract.24 ERC contends that Baylor, having enjoyed the benefit
of the agreement, settlement of the Hamilton lawsuit, should be
estopped from demanding any additional indemnification from ERC
under the policy.
This begs the question. Equitable estoppel has no independent
role to play here as it applies only if we accept ERC’s
construction of the agreement as an accord in complete discharge of
ERC liability under the policy. Under Baylor’s proferred
construction of the agreement as an interim financing agreement,
Baylor’s demand for further indemnification is not at all
inconsistent with acceptance of ERC’s settlement payment.
The judgment of the district court is REVERSED and the case is
REMANDED for trial.
22
In re ADM/Growmark River System, Inc., 234 F.3d 881, 886 (5th Cir.
2000).
23
Long v. Turner, 134 F.3d 312, 318 (5th Cir. 1998)(quoting Theriot v.
Smith, 263 S.W.2d 181, 183 (Tex. Civ. App.-Waco 1953, writ dism’d)).
24
Id.
15