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In re Montgomery Ward & Co.

November 3, 2005

IN RE: MONTGOMERY WARD & CO., INCORPORATED, DEBTOR
RELIANCE INSURANCE COMPANY; UNITED PACIFIC INSURANCE; RELIANCE SURETY CO; RELIANCE NATIONAL INDEMNITY COMPANY;
v.
COLONIAL PENN FRANKLIN INSURANCE COMPANY TRAVELERS CASUALTY AND SURETY COMPANY, AS ASSIGNEE OF THE INDEMNITY AND CERTAIN OTHER RIGHTS OF RELIANCE INSURANCE COMPANY, FOR ITSELF AND AS SUCCESSOR IN INTEREST BY MERGER WITH RELIANCE SURETY COMPANY, UNITED PACIFIC INSURANCE COMPANY AND RELIANCE NATIONAL INDEMNITY COMPANY, APPELLANTS IN NO. 04-1749
AIG PREMIER INSURANCE COMPANY, (F/K/A COLONIAL PENN FRANKLIN INSURANCE COMPANY, SUCCESSOR IN INTEREST FOR FORUM INSURANCE COMPANY)*, APPELLANT IN NO. 04-1880
* (PURSUANT TO FRAP 43(B))



On Appeal from the United States District Court for the District of Delaware. (D.C. Civ. No. 01-cv-00421). Honorable Joseph J. Farnan, Jr., District Judge.

The opinion of the court was delivered by: Greenberg, Circuit Judge

PRECEDENTIAL

Argued September 22, 2005

BEFORE: ROTH, FISHER and GREENBERG, Circuit Judges

OPINION

I. FACTUAL AND PROCEDURAL HISTORY

Plaintiffs Reliance Insurance Company, Reliance Surety Company, United Pacific Insurance Company, and Reliance National Indemnity Company (hereinafter "Reliance")*fn1 appeal from a judgment of the district court dismissing objections to and adopting the proposed findings of fact and conclusions of law of the bankruptcy court in this non-core case, and ultimately holding that Forum Insurance Company (hereinafter "Forum")*fn2 was not obligated to indemnify Reliance for losses it sustained on surety bonds it executed on behalf of Montgomery Ward & Co., Inc. (hereinafter "Montgomery Ward"), Forum's Chicago-based parent. Even though it was the prevailing party in the district court, Forum has cross-appealed from the district court's judgment to the extent that the court did not uphold certain of its affirmative defenses to this action as the district court declined to address those defenses. Montgomery Ward was at an intermediate level in a corporate hierarchy topped by Montgomery Ward Holding Corp. which owned all of the stock of Montgomery Ward. Forum was, in turn, an indirect subsidiary of Montgomery Ward.*fn3

Prior to the execution of the agreement underlying this litigation, Reliance had executed surety bonds on behalf of other companies in the Montgomery Ward family. In conjunction with these bonds, Reliance secured a cross-indemnity agreement from Montgomery Ward and Montgomery Ward Holding Corp. as security for its undertakings and to protect it against the potential for up-streaming of funds from Montgomery Ward to Montgomery Ward Holding Corp. Forum was not a party to, nor was it mentioned in that indemnity agreement, and Reliance did not issue on behalf of Forum the surety bonds that that agreement secured. The parties refer to the Montgomery Ward and Montgomery Ward Holding Corp. cross-indemnity agreement as the "Montgomery Ward Agreement" and we will use the same term to describe it.*fn4

In 1996, Forum requested that Reliance issue two surety bonds on its behalf that Forum needed in connection with workers' compensation obligations it was undertaking in California and Arizona. At that time Reliance sought an additional indemnity agreement as its underwriters doubted that the extant Montgomery Ward Agreement reached far enough down the Montgomery Ward corporate hierarchy to cover losses that Reliance might incur by reason of issuing surety bonds on behalf of Forum. Ultimately Forum and Montgomery Ward jointly signed an indemnity agreement prepared by Reliance, entitled "Continuing Agreement of Indemnity Miscellaneous Surety Bonds," which read, in pertinent part:

THIS AGREEMENT is made by the Undersigned for the continuing benefit of RELIANCE INSURANCE COMPANY, UNITED PACIFIC INSURANCE COMPANY, RELIANCE NATIONAL INDEMNITY COMPANY and/or RELIANCE SURETY COMPANY (hereinafter referred to collectively as the Surety) for the purpose of saving each and all of them harmless and indemnifying each and all of them from all loss and expense in connection with any Bonds executed on behalf of any one or more of the following persons, firms or corporations: Forum Insurance Company and Montgomery Ward & Co., Incorporated.

(hereinafter referred to as Applicant)

App. at 58 (emphasis in original). Significantly, the agreement underscored Forum and Montgomery Ward. The parties refer to this agreement as the "Forum Agreement," and we will use the same term to describe it. Reliance subsequently issued two surety bonds on behalf of Forum, but inasmuch as Reliance never had to make any payment on the Forum bonds it never sought indemnification on the Forum Agreement for them.

In 1997, Montgomery Ward experienced financial difficulties and defaulted on the surety obligations Reliance had undertaken on its behalf. In light of the defaults, the obligees on these bonds made demands on Reliance for payment which Reliance satisfied. These payments directly led to this litigation as Reliance regarded the Forum Agreement as having created a cross-indemnification obligation requiring Forum to indemnify Reliance for those payments, and Reliance naturally requested Forum to honor that obligation.*fn5 Forum refused payment as it denied that the Forum Agreement obligated it to indemnify Reliance for those payments. Consequently, Reliance filed a diversity of citizenship action in 1997 in the Eastern District of Pennsylvania against Forum to recover its losses on the Montgomery Ward bonds from Forum on the Forum Agreement.

Inasmuch as Montgomery Ward filed a Chapter 11 bankruptcy petition in the District of Delaware, the district court in the Eastern District of Pennsylvania transferred Reliance's case to the District of Delaware in which the district court referred the case to the bankruptcy court. The matter then went forward as an adversary proceeding in the bankruptcy court related to the bankruptcy case. Eventually, Reliance and Forum filed cross-motions for summary judgment ...


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