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North American Specialty Insurance Co. v. Heritage Glass, LLC

United States District Court, E.D. Tennessee, Greeneville

August 27, 2019

NORTH AMERICAN SPECIALTY INSURANCE COMPANY, Plaintiff,
v.
HERITAGE GLASS, LLC, DANIEL VICTOR DAVIS, individually, and THOMAS ERIC KERNEY, individually, Defendants, AND DANIEL VICTOR DAVIS, Third-Party Plaintiff,
v.
CHRISTOPHER R. CORDING, Third-Party Defendant.

          MEMORANDUM OPINION AND ORDER

          J. RONNIE GREER, UNITED STATES DISTRICT JUDGE

         This matter is before the Court following a bench trial in this case, which took place on December 4, 2018. The parties were instructed to file proposed findings of fact and conclusions of law with the Court following the proceedings. Each of the parties filed their proposed findings of fact and conclusions of law for this matter on January 18, 2019, [Docs. 174 and 175]. Neither of the parties filed any responsive pleadings, and the matter is now ripe for review and final disposition.

         I. FACTUAL BACKGROUND[1]

         On March 19, 2014, Heritage Glass, LLC (“Heritage Glass”) was formed as a Tennessee limited liability company with the main purpose of manufacturing glass for the solar glass industry in Kingsport, Tennessee, utilizing the equipment and other assets that Heritage Glass purchased from AGC Flat Glass North America, Inc. [Doc. 142 at PageID # 2137-38]. Heritage Glass's operating agreement established Defendant/Third-Party Plaintiff Victor Davis (“Davis”), Third-Party Defendant Christopher R. Cording (“Cording”), and Defendant Thomas Eric Kerney (“Kerney”), as the three original directors of the board of directors for the company, [Ex. 7]. The board of directors was given the sole power to change the number of directors serving on the board, and was principally tasked with managing the affairs and business of the company, [Id.]. The operating agreement also established the role of members of the company; members were not given managing power over the company, but rather, were allowed to invest initial capital contributions for a comparative interest in the company, [Id.].

         On or about May 5, 2014, Heritage Glass began business and plant operations in the former AGC facility in Kingsport, Tennessee, [Docs. 174 at ¶ 15 and 175 at ¶ 8].[2] As part of the start-up process for the business, Heritage Glass had to heat up or “unfreeze” a large furnace at the plant to manufacture its glass product. [Docs. 174 at ¶ 17 and 175 at ¶ 10]. To unfreeze the furnace and keep it operating, the company needed continuous power, and lots of it. On April 25, 2014, Cording contacted James Gilbert of American Electric Power (“AEP”) regarding the supply of electricity to the plant, [Docs. 174 at ¶ 18 and 175 at ¶ 13; Ex. 58]. AEP was willing to contract to supply electricity to the Heritage Glass plant, but, given the substantial amount of power the plant would consistently use per month, AEP required a security deposit of two months estimated usage to enter into an industrial power contract agreement, [Docs. 174 at ¶ 18 and 175 at ¶ 14]. In lieu of cash, AEP stated it would accept an irrevocable letter of credit or a surety bond, [Docs. 174 at ¶ 18 and 175 at ¶ 15]. Ultimately, Heritage Glass's board of directors arranged a security bond- also referred to as the utility deposit bond-in the amount of $525, 000 through North American Specialty Insurance Company (“NAS”), [Docs. 174 at ¶ 23 and 175 at ¶¶ 16, 20, and 21]. Before it was willing to issue the security bond of $525, 000, NAS required that each of the board of directors-Davis, Cording, and Kerney-personally indemnify the bond, [Docs. 174 at ¶ 20 and 175 at ¶ 18]. Davis, Cording, and Kerney each signed the general indemnity agreement, both in their capacities as directors of Heritage Glass and in their individual capacities to personally indemnify, jointly and severally, the surety bond “from and against any and all Loss.” [Ex. 1]. NAS, as surety on the bond, issued the utility deposit bond on behalf of Heritage Glass in the amount of $525, 000 on October 3, 2014, [Docs. 174 at ¶ 23 and 175 at ¶ 20].

         Operations of the plant quickly commenced, and by December 24, 2014, the company had run up an electric bill of $548, 804.79. [Ex. 5]. Unfortunately for Heritage Glass, the company's sales never took off, and it found itself deep in debt without sufficient revenue to weather the storm. Heritage Glass became well-behind on its electric bills. On December 30, 2014, AEP mailed a disconnect notice to Heritage Glass advising the company that AEP had scheduled electric service disconnection after January 13, 2015. [Id.]. The disconnect notice stated that “[i]n order to avoid disconnection, [Heritage Glass] must pay $260, 725.07 on or before” January 13, 2015. [Id.]. While facing these large expenses, the management of the company was in disarray. On December 30, 2014, the board of directors voted by two-thirds majority (Davis and Kerney together) to terminate Cording as a director. [Ex. 12]. This left Cording with no active involvement in the business decisions or operations of the company after his termination, although he remained an invested member of Heritage Glass. [Trial Transcript at 44; Ex. 7 at 6]. Davis thereafter took on a more active role in the operations of Heritage Glass. [Trial Transcript at 44]. Around that time, Davis and Kevin Barham (“Barham”), a Vice President of Heritage Glass, met with an investor, Bill Thomas (“Thomas”), in Knoxville, Tennessee about loaning Heritage Glass more money to pay its outstanding bills. [Id. at 48-50]. Thomas, a then-existing member of Heritage Glass, agreed to loan an additional $2 million to the company. [Id. at 50-51].[3] These monies were not used to pay the outstanding power bill in full; rather, the board of directors and financial officers separated the monies to pay off multiple debts of the company. [Id. at 82-85]. Some of the monies were used to pay Davis and Kerney back for some of the personal loans they had made to Heritage Glass. [Id. at 51-53; Ex. 35]. Cording had also previously made personal loans to the company totaling $88, 000, but the proceeds from the Thomas loan were not used to pay back Cording's loan. [Id. at 85-86]. On January 9, 2015, a $306, 500 check was made out to Davis, a $165, 729.87 check was made out to Kerney's own company-Heritage Manufacturing Company-and a $100, 000 check was made out to AEP for the outstanding power bill. [Ex. 35]. All of these checks were signed by Kerney. [Id.]. Additionally, the summary of promissory notes being repaid to Davis shows that the January 19, 2015 check of $306, 500 to Davis was in partial fulfillment of a $125, 000 loan from Davis to Heritage Glass made on the same day. [Ex. 80]. Although the total power bill was not paid in full at this time, the power remained on.

         The story of Heritage Glass's financial difficulties largely stayed the same throughout the following months; it continued to struggle to bring in enough money to pay its expenses. The company never became current on its AEP power bill before ultimately ceasing operation in May of 2015. [Trial Transcript at 56]. The company received multiple disconnect notices throughout the beginning months of 2015, and continued to only make partial payments of its power bill. [Ex. 5]. Heritage Glass's last partial payment of $100, 000 to AEP was made on April 24, 2015, leaving a previous balance of $327, 384.79 as to the March 26, 2015 bill date. [Id.]. At some point in May of 2015, AEP shut the power off to the plant. [Trial Transcript at 30]. This prompted Kerney and Davis to go to Knoxville and secure an addendum to the original utility deposit bond issued by NAS. [Id. at 30-31; Ex. 3]. The addendum increased the original utility deposit bond amount of $525, 000 to $750, 000, effective May 14, 2015. [Ex. 3]. Afterwards, at some point in May of 2015, the furnace was shut down, and the company ceased heavy glass manufacturing operations because it ran out of money. [Trial Transcript at 62-63; Ex. 106; Doc. 142 at ¶ 22].[4] The outstanding electricity bill owed to AEP in the end came to $834, 211.28. [Docs. 174 at ¶ 45 and 175 at ¶ 71].

         On June 17, 2015, AEP asserted its claim to payment under the utility deposit bond. [Ex. 4]. After determining that Heritage Glass did not have any offsets, credits, or defenses to AEP's claim, NAS paid AEP the full $750, 000 bond on August 5, 2015. [Ex. 9]. Thereafter, on December 2, 2105, based on the terms of the general indemnity agreement, NAS made demand of Heritage Glass, Davis, Cording, and Kerney for payment of the $750, 000 it paid to AEP. [Ex. 6]. None of the parties made any payment to NAS in response to its demand, and NAS filed suit against Heritage Glass, Davis, and Kerney. [Docs. 1, 174 at ¶¶52-53, 175 at ¶ 77 and 80]. The Court entered default judgment against Heritage Glass and Kerney in favor of NAS on January 31, 2017. [Doc. 34]. Kerney filed a voluntary chapter 7 bankruptcy petition and has received a bankruptcy discharge, relieving him of legal liability to NAS under the indemnity agreement. [Doc. 142 at ¶ 32]. Davis brought a third-party action against Cording for indemnity and contribution. [Id. at ¶ 33]. In mediating NAS' original claim, Davis settled with NAS and paid the sum of $600, 000 to NAS. [Id. at ¶ 34; Ex. 10]. As part of this settlement, NAS agreed to assign Davis its own claims against Cording under the indemnity agreement. [Doc. 142 at ¶¶ 35 and 36; Ex. 11]. Davis seeks to recover from Cording on the $750, 000 claim that was assigned by NAS or, alternatively, to recover contribution from Cording.

         II. DISCUSSION

         This Court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1332 because there is complete diversity of citizenship between the opposing parties and the amount in controversy exceeds $75, 000. The Third-Party Plaintiff has brought Tennessee state law claims against the Third-Party Defendant for contribution and breach of the indemnity agreement. The Third-Party Defendant has asserted the equitable defense of unclean hands against the Third-Party Plaintiff's claims. The Third-Party Defendant has also brought a counterclaim for contribution against the Third-Party Plaintiff contingent on this Court's judgment on the Third-Party Plaintiff's claims. This Court applies the substantive law of the state in which it sits when exercising diversity jurisdiction. See Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938).

         A. Breach of Contract/Indemnity Agreement

         To begin with, the Court reiterates its findings set out in its prior order, [Doc. 165]; there is no dispute that the general indemnity agreement is a valid, enforceable agreement that should be enforced as with any other contract. See Planters Gin Co. v. Fed. Compress & Warehouse Co., Inc., 78 S.W.3d 885, 892-93 (Tenn. 2002) (explaining that the Tennessee Supreme Court “has consistently recognized that the right of the parties to allocate lability for future damages through indemnity clauses, generally, is not contrary to public policy, ” and that “even broad transfers of liability, where unambiguous, should be honored.”); see also Hardeman Cty. Bank v. Stallings, 917 S.W.2d 695, 699 (Tenn. Ct. App. 1995) (“It is incumbent upon this court to enforce contracts according to their plain terms) (citing Bob Pearsall Motors, Inc. v. Regal Chrysler-Plymouth, Inc., 521 S.W.2d 578, 580 (Tenn. 1975)). Furthermore, the enforceable contract was clearly breached. The indemnity agreement provides that “[t]he [i]ndemnitors shall exonerate, hold harmless and indemnify [NAS] from and against any and all Loss.” [Ex. 1]. Heritage Glass failed to pay its outstanding electric bill, an obligation bonded by the utility deposit bond, and NAS was ultimately required to pay $750, 000 to AEP. Because the individual indemnitors of the utility deposit bond, Heritage Glass, Davis, Cording, and Kerney, never paid NAS for the loss-the $750, 000 NAS paid to AEP-NAS had a valid breach of contract/indemnification claim against all of the individual indemnitors.

         NAS did in fact bring suit, but not against all of the individual indemnitors. Instead, NAS chose to sue Heritage Glass, Davis, and Kerney for indemnification of the security deposit bond (leaving out Cording). [Doc.1]. This Court entered Default Judgment in favor of NAS against Heritage Glass and Kerney in the principal amount of $764, 774.76 plus post-judgment interest, applying joint and several liability to each of these defendants. [Doc. 34]. Davis thereafter brought his Third-Party suit against Cording, seeking indemnity and/or contribution to the extent Davis was liable to NAS, [Doc. 40]. In mediating NAS' claim against Davis, the two parties settled. As part of the settlement, for the sum of $600, 000, NAS settled its claim against Davis, and also assigned its right to sue Cording for indemnification of the utility deposit bond to Davis.

         This brings us to the core disputes of this case. In essence, at issue is whether Davis' assumption of NAS' right to indemnity against Cording was (1) proper-legally and equitably; and (2) if proper, what compensation is Davis entitled to from Cording.

         Propriety of Assumption of Right to Indemnification

         As a preliminary consideration, the Court finds that the amount at issue with this indemnification claim is $750, 000. This finding is quite clear based on the plain language of the contracts between the parties, for the original indemnity agreement that Cording did sign required each individual indemnitor's obligations under the contract to “remain in full force and effect until terminated.” [Ex. 1 at ¶ 16]. There is nothing in the record showing that Cording provided notice to NAS of his intent to terminate his obligation.[5] In this sense, although Cording did not have any direct say in increasing the utility deposit bond from $525, 000 to $750, 000, Cording seemingly acknowledges, as he must, that he remained liable for this increased amount pursuant to his agreement “as an indemnitor under the Indemnity Agreement.” [Doc. 175 at ¶ 24 (Davis “unilaterally increased Cording's personal liability under the Indemnity Agreement.”)].[6] In other words, whether or not the assignment was proper, there is no question that before the assignment, Cording's (joint and several) liability on the indemnity agreement to NAS included the increased bond amount of $750, 000. At the time of the assignment, NAS had a viable claim against Cording for indemnification of the full $750, 000.

         1. As a Legal Matter

         To begin this section, the Court recognizes that the facts presented are unusual, and this Court has, itself, had difficulty finding any substantive binding law on point regarding the legal propriety (or impropriety) of Davis' assumption of NAS' claim against Cording.[7] The Court's overarching view starts with the premise that Tennessee courts have long held to the notion that “the individual right of freedom of contract is a vital aspect of personal liberty, ” and that in both its statutory and case law, Tennessee “recognizes a strong public policy of individual autonomy, i.e. freedom of contract.” Baugh v. Novak, 340 S.W.3d 372, 382-83 (Tenn. 2011) (citations and internal quotation marks omitted). “The principle of freedom of contract is ‘rooted in the notion that it is in the public interest to recognize that individuals have broad powers to order their own affairs by making legally enforceable promises.'” Id. (quoting Restatement (Second) of Contracts, ch. 8, intro. note, at 2-3 (1981)). Furthermore, the general rule is that valid contracts are assignable, and absent some supervening legal policy, the transfer of a contractual right is effective. See Jackson v. Moskovitz Agency, Inc., 672 S.W.2d 400, 403 (Tenn. 1984). Once a valid assignment is completed, the assignor retains no rights under the original contract; the assignee then stands in the position of the assignor, possessing the same rights and being subject to the same defenses. Collier v. Greenbrier Developers, LLC, 358 S.W.3d 195, 201 (Tenn. Ct. App. 2009).

         Here, there is no dispute that there was originally a valid contract between NAS and Cording specifically regarding his promise to indemnify NAS upon payment of the utility deposit bond. Further, there is no factual dispute calling into question the assignment agreement between NAS and Davis. See [Ex. 11]. The facts show that NAS did assign its right to Davis to recover against Cording for any claim it had under the indemnity agreement. The Court has not found any principle of law-nor have the parties provided any-that renders the assignment of NAS' right to indemnification to Davis invalid. The parties have not shown, nor attempted to show, that there is any legal precedent[8] which disallows a co-indemnitor to assume a claim of the indemnitee against a co-indemnitor. ...


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