[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
_________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
AUGUST 8, 2005
No. 03-12484
THOMAS K. KAHN
_________________________
CLERK
D.C. Docket No. 96-01798-CV-S-N
WILLIAM CASTLEBERRY,
GLADDEAN CASTLEBERRY,
Plaintiffs,
versus
GOLDOME CREDIT CORPORATION,
Defendant-Cross-
Defendant-Appellant,
DAIWA FINANCE CORPORATION,
Defendant-Cross-
Claimant-Appellee,
DAIWA MORTGAGE ACCEPTANCE
CORPORATION, DAIWA AMERICA
CORPORATION, DAIWA SECURITIES
AMERICA, INC., et al.,
Defendants,
FEDERAL DEPOSIT INSURANCE
CORPORATION, in its individual
corporate capacity and in its capacity
as receiver of Goldome FSB,
Cross-Defendant-
Appellant.
_________________________
Appeal from the United States District Court
for the Middle District of Alabama
_________________________
(August 8, 2005)
Before BIRCH, KRAVITCH and GIBSON*, Circuit Judges.
GIBSON, Circuit Judge.
Goldome Credit Corporation and the FDIC appeal from the district court's
order holding them liable to indemnify Daiwa Finance Corporation for its
attorneys' fees incurred in defending itself against the claims in Castleberry v.
Goldome Credit Corp., No. 96-01798-CV-S-N (M.D. Ala.).1 Daiwa's indemnity
claim against Goldome was based on a loan portfolio sale agreement in which (1)
Daiwa bought a portfolio of loans from Goldome and (2) Goldome agreed to
indemnify and defend Daiwa against any claim arising out of the origination of
loans within the loan portfolio and filed within three years of the sale. The FDIC
*Honorable John R. Gibson, United States Circuit Judge for the Eighth Circuit, sitting by
designation.
1
We considered the Castleberrys' appeal arising out of the same litigation in Castleberry
v. Goldome Credit Corp., 408 F.3d 773 (11th Cir. 2005).
2
guaranteed Goldome's indemnity obligation. The district court
interpreted the indemnity and guarantee as insurance contracts and held that,
because a conflict of interest arose between Goldome and Daiwa, the contracts
contained an implied obligation on the part of Goldome to pay for counsel of
Daiwa's choosing. The district court entered summary judgment for Daiwa. We
hold that the loan portfolio sale agreement is not a contract of insurance and,
Goldome having offered to provide a defense, the agreement does not further
obligate Goldome or the FDIC to pay for counsel hired by Daiwa. Accordingly,
we reverse the judgment of the district court.
The underlying claim in this lawsuit alleged fraud and lending law
violations by Goldome in connection with a home mortgage loan to William and
Gladdean Castleberry. The suit sought class relief for other similarly situated
consumers. The Castleberrys named Daiwa Finance Corp.2 as a defendant,
alleging that Daiwa was a successor in interest to Goldome and that it ratified and
joined in Goldome's fraud by taking assignment of the loans it bought from
Goldome without disclosing the alleged fraud and lending law violations. Daiwa
cross-claimed against Goldome, seeking contractual indemnity for any liability
Daiwa might incur to the Castleberrys or any other member of the class, as well as
2
The Castleberrys also named as defendants Daiwa Mortgage Acceptance Corporation,
Daiwa Securities America Inc., and Daiwa America Corporation.
3
for attorneys' fees, expenses, and costs Daiwa would incur in defending against the
Castleberry suit. Daiwa also joined the FDIC in its capacity as receiver for
Goldome's parent corporation and in its corporate capacity, in which the FDIC
executed an agreement guaranteeing Goldome's contractual obligation to
indemnify Daiwa for claims arising out of the origination of the loans.
On January 29, 1993, Daiwa bought from Goldome a loan portfolio
amounting to more than $477 million in face value, which included the
Castleberry loan. At the time Daiwa purchased the portfolio, there was already
litigation pending alleging that Goldome had perpetrated fraud in connection with
the origination of home mortgage loans; Goldome informed Daiwa of such
litigation, and, in particular of the Anderson class action. The agreement
governing the loan portfolio sale included an undertaking by Goldome to
indemnify Daiwa for any suits arising out of the origination of the loans that might
be filed against Daiwa within three years of the loan portfolio sale.
The Castleberrys filed suit against Goldome on January 17, 1995 in state
court in Alabama. They amended their complaint in April 1995 to add Daiwa as a
defendant. On April 27, 1995, Daiwa made demand on Goldome for
indemnification and defense of the Castleberrys' claim, and Goldome agreed to
defend Daiwa. Goldome retained the law firm of Johnson, Barton, Proctor,
Swedlaw and Naff to represent Daiwa in the Castleberry case. Johnson, Barton
4
represented Goldome in that litigation as well. The Johnson, Barton firm wrote
Daiwa a letter undertaking to defend it, subject to a reservation of rights in the
event Goldome later determined that the claim did not fall within the scope of the
indemnification provisions of the loan portfolio sale agreement.
The Castleberrys moved for certification of a class, and Goldome opposed
the motion. The state trial court conditionally certified the class, and Goldome
moved for reconsideration. Daiwa wrote to the Johnson, Barton firm, seeking
assurance that, in the event the class were decertified and former class members
filed new suits after the three-year anniversary of the loan portfolio sale (which
was the limitations period set out in the sale agreement), Goldome would still
indemnify Daiwa. Daiwa pointed out that, unless Goldome were willing to waive
the three-year time limit for such suits, it would be in Daiwa's best interests to
support class certification; accordingly, there would be a conflict of interest
between Goldome and Daiwa that would preclude the same lawyers from
representing them both in the Castleberry litigation. Goldome responded that it
had no obligation to indemnify Daiwa for any suits filed after the three-year
anniversary of the loan portfolio sale. But, in response to the acknowledged
conflict of interest, Goldome proposed to substitute new counsel to represent
Daiwa "under the control" of Goldome. Daiwa refused to accede to such an
arrangement; instead, Daiwa hired its own independent counsel. Daiwa filed a
5
cross-claim against Goldome and a third-party complaint against the FDIC in the
Castleberry case for indemnification and attorneys' fees and costs. The FDIC
removed the case to the Middle District of Alabama. The federal district court
then decertified the class.
The district court entered summary judgment for the defendants against the
Castleberrys on May 31, 2001.
On March 29, 2002, the district court took up Daiwa's motion for summary
judgment on its cross-claim against Goldome and its third-party complaint against
the FDIC. The court held that Daiwa's claim for indemnification was moot in light
of the judgment against the Castleberrys, and the court declined to resolve Daiwa's
claim for a declaration about any duty of Goldome to defend Daiwa in possible
suits brought in the future by former members of the decertified class.
The district court granted summary judgment to Daiwa on its claim against
Goldome seeking a declaration that Goldome owed Daiwa a duty to defend it
against the Castleberrys' claim; the court reasoned that the Castleberrys' claims fell
within the indemnity clause of the loan portfolio sale agreement. The court also
granted summary judgment to Daiwa on its claim for the fees and expenses Daiwa
incurred in hiring its own counsel to defend it against the Castleberrys. The court
reasoned that because "the indemnification provisions of the [loan portfolio sale
agreement] serve the same function as an insurance policy in which [Goldome]
6
was the insurer and [Daiwa is] the [insured]," the court should apply the principles
of insurance law governing "the duty of an insurance company to defend its
insured." Slip op. at 13. The court held that New York law governed both the
loan portfolio sale agreement and the guarantee. Under New York law, when an
insurer is obliged to defend its insured and a conflict of interest arises between the
two, the insured has a right to obtain counsel of its own choice to be paid by the
insurer. Slip op. at 21 (quoting Penn Aluminum, Inc. v. Aetna Cas. & Sur. Co.,
402 N.Y.S.2d 877, 879 (App. Div. 1978)). Accordingly, the court held that
Goldome was obliged to pay for independent counsel to represent Daiwa. Slip op.
at 23.
The court further entered judgment in favor of all remaining defendants,
including Daiwa, against the Castleberrys. The court retained jurisdiction to
decide the amount of the fee award, but certified the entry of summary judgment
for immediate appeal under Federal Rule of Civil Procedure 54(b). Slip op. at 28.
On appeal, Goldome argues that the district court erred in applying
insurance law to the indemnity provisions of the loan portfolio sale agreement and
the guarantee. Goldome argues that if ordinary, non-insurance contract law were
applied, Goldome would not have been held liable to pay for counsel hired by
Daiwa.
7
We review the district court's grant of summary judgment de novo. Penalty
Kick Mgmt. v. Coca Cola Co., 318 F.3d 1284, 1290 n.5 (11th Cir. 2003).
Summary judgment is appropriate only if there is no genuine issue of material fact
and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(c).
New York law has a specific rule, developed in insurance cases, governing
the way in which an insurer must discharge its duty to defend its insured. New
York cases state a well-established rule that where an insurer is obliged to supply
the insured with a defense,
[i]f [a] conflict of interest arises . . . the selection of the attorneys to
represent the assureds should be made by them rather than by the
insurance company, which should remain liable for the payment of
the reasonable value of the services of whatever attorneys the
assureds select.
Prashker v. United States Guar. Co., 1 N.Y.2d 584, 593 (1956); accord Pub. Serv.
Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 401 (1981); 69th St. & 2d Ave. Garage
Assocs. v. Ticor Title Guar. Co., 622 N.Y.S.2d 13, 14 (App. Div. 1995). This rule
is evidently invoked without study of the language of the particular insurance
contract at issue. See, e.g., Prashker, 1 N.Y.2d at 593; Goldfarb, 53 N.Y.2d at
401.
The rule in question exists within the context of insurance law and reflects
the exigencies of insurance situations. "[I]nsurance policies, while contractual in
8
nature, are certainly not ordinary contracts, and should not be interpreted or
construed as individually bargained for, fully negotiated agreements, but should be
treated as contracts of adhesion between unequal parties." 16 Richard A. Lord,
Williston on Contracts § 49.15 at 90 (4th ed. 2000). Accord Eagle Star Ins. Co. v.
Intern'l Proteins Corp., 360 N.Y.S.2d 648, 650 (App. Div. 1974) (contracts of
insurance are "adhesion contracts"), aff'd, 346 N.E.2d 249 (N.Y. 1976). Courts
have interpreted insurance contracts according to the rule of contra proferentem,
resolving ambiguities against the insurer. E.g., Sincoff v. Liberty Mut. Fire Ins.
Co., 183 N.E.2d 899, 901-02 (N.Y. 1962); Haber v. St. Paul Guardian Ins. Co.,
137 F.3d 691, 697-98 (2d Cir. 1998) (New York law); Pan Am. World Airways,
Inc. v. Aetna Cas. & Sur. Co., 505 F.2d 989, 999-1000 (2d Cir. 1974) (New York
law). "Most American courts apply a rule of construction that coverages terms are
construed broadly and exclusions and limitations of coverage are construed
narrowly." 2 Eric Mills Holmes and Mark S. Rhodes, Holmes's Appleman on
Insurance § 6.1 at p. 173 (2d ed. 1996). In particular, an insurer's contractual duty
to defend its insured is read broadly.
The rationale for the application of the traditional rules [of
interpreting any ambiguity in the policy in favor of finding of
coverage] is that the insurance policy is generally an adhesion
contract and therefore the insured has no ability to negotiate for or
control the wording of the provisions contained therein. This liberal
rule of construction is particularly appropriate in determining the
9
insurer's duty to defend the insured from claims potentially within the
scope of the policy coverage.
See id. at § 6.5, pp. 213-14. Thus,
[a]n insurer's duty to defend is triggered whenever the allegations in a
complaint, liberally construed, suggest a reasonable possibility of
coverage, or when the insurer has actual knowledge of facts
establishing such a reasonable possibility. An insurer may be
relieved of its duty to defend only if it can establish, as a matter of
law, that there is no possible factual or legal basis on which it might
eventually be obligated to indemnify its insured, or by proving that
the allegations fall within a policy exclusion.
Deetjen v. Nationwide Mut. Fire Ins. Co., 754 N.Y.S.2d 366, 368 (App. Div.
2003) (citation omitted).
In contrast, in a non-insurance indemnity case, the rule of construction is
just the opposite: a non-insurance indemnity agreement is strictly construed, and a
duty to indemnify should not be found "absent manifestation of a 'clear and
unmistakable intent' to indemnify." Commander Oil Corp. v. Advance Food Serv.
Equip., 991 F.2d 49, 51 (2d Cir. 1993); accord Tonking v. Port Auth. of N.Y. &
N.J., 821 N.E.2d 133, 135 (N.Y. 2004); Hooper Assocs. Ltd. v. AGS Computers,
Inc., 548 N.E.2d 903, 905 (N.Y. 1989).
The district court applied insurance law to the loan portfolio sale agreement
because it contained an indemnity agreement and insurance agreements are
indemnity agreements. It does not follow, however, that all indemnity agreements
10
are insurance agreements. "While a policy of insurance, other than life or accident
insurance, is basically a contract of indemnity, not all contracts of indemnity are
insurance contracts; rather, an insurance contract is one type of indemnity
contract." 1 Lee R. Russ, Couch on Insurance § 1.7 (3d ed. 2005 update); see
Brotherton Constr. Co. v. Patterson-Emerson-Comstock, Inc., 178 A.2d 696, 697
(Pa. 1962).
The concept of an insurance contract is to distribute risk of loss across a
large group, in other words, to "socialize" the risk. 1 Holmes's Appleman on
Insurance, §§ 1.3-1.4; 16 Williston on Contracts § 49:2. The loan portfolio sale
agreement merely shifted the risk from one corporation to another, with no
"distribution" scheme; it therefore is not a typical insurance contract.
Moreover, although the loan portfolio sale agreement contains an indemnity
provision, it is not primarily an indemnity contract. Rather, it is a sale contract
with an indemnity clause covering the event that the instruments sold enmeshed
the buyer in litigation. The indemnity clause functioned as an inducement to the
buyer to enter into the sale transaction. When assumption of risk is only collateral
to a contract that has a principal purpose other than risk shifting, the contract is
not a contract of insurance. St. John's Reg'l Health Ctr. v. Am. Cas. Co., 980 F.2d
1222, 1224 (8th Cir. 1992); 1 Couch on Insurance § 1:9.
11
But most to the point, the contract in this case was not a contract of
adhesion in which an insurer offered a form contract to a consumer. Goldome
submitted the affidavit of Bruce Brown, the FDIC official charged with
negotiating the sale of Goldome's assets. Brown testified that Daiwa was one of
two firms that submitted final bids for Goldome's assets, the other being Goldman
Sachs. Brown stated that he negotiated directly with principals from Daiwa and
Goldman Sachs regarding the indemnity provisions. Daiwa was represented by
legal counsel in the meetings that led to the sale of the loan portfolio. Brown
informed the potential buyers that for the FDIC, one criterion in awarding the bid
was that FDIC sought the most favorable indemnity provisions it could obtain.
Goldman Sachs offered $5.9 million more than Daiwa offered for the loan
portfolio, but Daiwa offered an indemnity clause more favorable to Goldome, with
the indemnity period shortened from six years to three years. Daiwa's shortened
indemnity period was the determining factor in the FDIC staff's recommendation
to the FDIC board of directors to accept the Daiwa bid rather than the Goldman
Sachs bid. The indemnity provision was therefore negotiated, not dictated by
Goldome or FDIC. This was no adhesion contract.
There is no reason to interpret the loan portfolio sale agreement in favor of
Daiwa according to the rule in insurance cases. We should, instead, apply the rule
12
of construction specific to non-insurance indemnity cases, and look for a "clear
and unmistakable" intent to indemnify.
The operative language in the Loan Sale Agreement is found in paragraphs
20.2, Scope of Indemnity, and 20.3, Procedures for Obtaining Indemnification;
Notice. The relevant part of paragraph 20.2 provides:
Seller agrees to and shall indemnify and hold harmless Buyer . . .
against any and all claims, losses, liabilities, costs, expenses and
damages against Buyer . . . which result from any cause of action
arising out of any act or omission by any originator of any Loan . . . in
connection with the origination of any Loan . . . .
Paragraph 20.3(ii) dealt more specifically with Goldome's duty to provide Daiwa a
defense:
Upon receipt of [buyer's notice of a claim against it], Seller shall
assume, at its sole expense, control of the defense of such claim,
including, without limitation, the right to designate counsel and to
control all negotiations, litigation, arbitration, settlement,
compromises and appeals of such claim . . . .
Finally, Paragraph 20.3(iii) discussed the possibility of Daiwa hiring its own
counsel:
Notwithstanding the foregoing, in the event that Buyer retains
separate counsel or takes any other action in connection with the
defense of a claim that may give rise to an Indemnified Loss, Seller
shall not be required to reimburse Buyer for any costs or expenses
incurred, including any fees and disbursements of counsel, in
connection with the defense of such claim.
13
The terms of the contract explicitly provide that Goldome would have the
right to choose the counsel it would provide to Daiwa and that if Daiwa retained
separate counsel, Goldome would not have to pay for it. These terms neither state
nor imply an exception in case the reason Daiwa chose to retain separate counsel
was a conflict of interest. The terms of the contract do not require Goldome to pay
for separate counsel hired by Daiwa and provide no reason to think any such
obligation might be implicit.
Daiwa argues that Goldome breached the terms of the loan portfolio sale
agreement by offering Daiwa a defense subject to a reservation of rights. Daiwa
relies on language in paragraph 20.3(ii), that upon receipt of notice of the claim,
Goldome shall assume control of the defense of the claim, "provided, however,
that Seller shall have advised Buyer that such claim would, if determined
adversely, constitute an Indemnified Loss." Daiwa contends that Goldome's right
to control the litigation is conditioned on Goldome first agreeing that the claim
would be covered under the indemnity agreement. According to Daiwa, this
language means that if Goldome does not agree in advance that all claims are
covered, Goldome is not entitled to discharge its duty to defend by hiring lawyers,
but instead must pay for lawyers hired by Daiwa. This reading does not comport
with the agreement, which contemplates that claims could be filed against Daiwa
that are only partly indemnifiable. Paragraph 20.4 states that, in the event of an
14
action which might result in both covered and noncovered losses, Goldome should
defend as described in paragraph 20.3, but that it should make reasonable efforts
to consult with Daiwa in the defense. Thus, the agreement contemplates the
possibility that Goldome could defend an action while disputing liability as to
some claims. Moreover, paragraph 20.3(iii) states flatly that if Daiwa hires its
own lawyers, Goldome will not be obligated to pay them; this paragraph does not
depend on Goldome having previously agreed to liability for indemnification of all
claims.
Accordingly, we reverse the judgment of the district court. We remand the
case for further proceedings in accordance with this opinion.
15