BELLEFONTE RE INSURANCE COMPANY, Plaintiff-Appellant-Cross-Appellee,
v.
ARGONAUT INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant.
UNIVERSAL REINSURANCE COMPANY, Plaintiff-Appellant-Cross-Appellee,
v.
ARGONAUT INSURANCE COMPANY, Defendant-Appellee-Cross-Appellant.
Nos. 385, 392, 490, Docket 84-7582, 84-7584 and 84-7590.
United States Court of Appeals,
Second Circuit.
Argued Dec. 19, 1984.
Decided March 18, 1985.
Lawrence I. Brandes, New York City (Robert M. Raives, Clifford H. Schoenberg, Steven S. Honigman, Miller, Singer & Raives, P.C., New York City, on brief), for plaintiffs-appellants-cross-appellees.
James I. Rubin, Chicago, Ill. (Brigitte Schmidt Bell, Robert N. Hermеs, Butler, Rubin, Newcomer, Saltarelli & Boyd, Harold C. Wheeler, Winston & Strawn, Chicago, Ill. Gibson, Dunn & Crutcher, New York City, on brief), for defendant-appellee-cross-appellant.
Before MESKILL, KEARSE and CARDAMONE, Circuit Judges.
KEARSE, Circuit Judge.
Plaintiffs Bellefonte Re Insurance Company ("Bellefonte") and Universal Reinsurance Company ("Universal") appeal from final judgments of the United States District Court for the Southern District of New York, Robert L. Carter, Judge, see
On аppeal, plaintiffs contend that they were induced to enter into both the reinsurance contracts and the settlement agreements by Argonaut's nondisclosures of material facts, and that under the custom and practice in the reinsurance industry, the settlement agreements cannot be read to bar rescission on grounds of fraud. In addition, Universal contends that the district court errеd in not taking into account its evidence that the alleged fraudulent nondisclosures on the basis of which it sought rescission of its settlement agreement were not raised in its presettlement dispute with Argonaut. In its cross-appeal, Argonaut contends that the court should have upheld its counterclaims for the cost of defending the present actions because the covenants not tо sue precluded plaintiffs from commencing litigation of any kind.
Finding no merit in any of the parties' contentions, we affirm.I. BACKGROUND
In 1973, Argonaut entered into an agreement with Resources Facilities, Inc. ("RFI"), to act as a "front" company for the writing of insurance by RFI, i.e., to lend its name to the issuance of insurance policies written by RFI; RFI was to be considered Argonaut's managing general agent ("MGA") for such insuranсe. Pursuant to this agreement, RFI was to pay Argonaut 10% of the premiums obtained and was to obtain reinsurance; Argonaut was to retain 2 1/2% of the first $100,000 of exposure per risk. In 1974, Bellefonte and Universal, separately, entered into reinsurance contracts ("treaties") with Argonaut on the business written by RFI as Argonaut's MGA.
A. The Original Disputes and the Settlement Agreements
In February 1976, Argonaut sued RFI, charging it with a variety of contract violations and frauds. Soon thereafter, Universal and Bellefonte stopped making payments on losses to Argonaut arguably covered by the reinsurance contracts.
1. Bellefonte's Claims
Bellefonte became involved in a dispute with Argonaut over the validity of the reinsurance contracts and the balances allegedly due to Argonaut from Bellefonte under those contracts. In January 1978, the two entered into a settlement agreement ("B/A Settlement Agreement") to resolve this dispute. In the B/A Settlement Agreement, which recited that Bellefonte and Argonaut were "involved in a dispute regarding the validity of [the RFI-related] contracts of reinsurance and the balances due to [Argonaut] thereunder," Bellefonte agreed to pay Argonaut a certain sum, and each party agreed not to sue the other in connection with, inter alia, "any and all matters arising out of the dispute regarding the [RFI-related] contracts of reinsurance." The covenant not to sue stated, in pertinent part, that Bellefonte and Argonaut agreed
not to demand arbitration or commence litigation of any kind anywhere in the world and agree[d] to refrain forever from instituting, prosecuting, collecting or in any wаy aiding or proceeding directly or indirectly ... upon any and all claims, demands and liability of every kind and nature known and unknown, arising from or relating to any act, omission to act or transaction which occurred prior to the execution of this Agreement in connection with any and all matters arising out of the dispute regarding the [RFI-related] contracts of reinsurance.
2. Universal's Claims
Following Argonaut's institutiоn of suit against RFI, Universal also became involved in a dispute with Argonaut. In December 1976, Universal and Argonaut entered into a settlement agreement ("U/A Settlement Agreement") to resolve this dispute. The U/A Settlement Agreement recited that the parties were "involved in a dispute regarding [Universal's] liability to [Argonaut] under the [RFI-related] contract of reinsurance"; it did not expressly mention a disputе as to the validity of that contract. Under this agreement, Universal agreed to pay Argonaut a certain sum; and each party agreed not to sue the other in connection with, inter alia, "any and all matters arising out of the dispute regarding the [RFI-related] contract of reinsurance." The covenant not to sue was virtually identical to the one included in the B/A Settlement Agreement described and quoted above.
B. The Present Disputes and the Proceedings Below
In December 1982, Bellefonte and Universal brought the present actions against Argonaut, each seeking rescission of its settlement agreement on the ground that Argonaut had fraudulently induced it to enter into the agreement by not disclosing relevant material facts that Argonaut had a duty to disclose. The complaints alleged that Argonaut had fraudulently induced plaintiffs to enter into the reinsurance contracts by failing to disclose, inter alia, that Argonaut had originally refused to do business with RFI because of the "unsatisfactory reputation" of RFI's president, and that Argonaut had no meaningful retention of risk in the RFI-generated business because it had demanded and received an indemnification against loss on that business. Plaintiffs contended that they would not have entered into the reinsurance contracts with Argonaut had they been given the undisclosed material information.
Plaintiffs urged the court to rescind the settlement agreements and the reinsurance contracts. Each complaint stated that the plaintiff "and Argonaut became involved in a dispute regarding the validity of the treaties and the balances, if any, allegedly due to Argonаut from" the plaintiff under the RFI reinsurance contracts. (Bellefonte Complaint p 40; Universal Complaint p 37.) Each plaintiff alleged that its presettlement
[d]ispute involved, inter alia, issues of mismanagement by RFI, late reporting of losses to [plaintiff] and Argonaut's failure to disclose the absence of a meaningful retention by it on the business written by RFI as its MGA, but the dispute did not "arise from or relate" in any way to Argonaut's failure to disclose the concealed material facts, which remained unknown to [plaintiff] at the time it executed the Settlement Agreement.
(Bellefonte Complaint p 41; Universal Complaint p 38.) Both plaintiffs and Argonaut moved for summary judgment.
In an opinion dealing with both actions,
In clear and unambiguous language of remarkable breadth, these agreements, which were negotiated and drafted by experienced insurance executives and their attorneys, prohibit the parties from commencing any and all litigation over thеir liability under [the reinsurance] contracts.
Id. at 242-43. Finding no ambiguity in the settlement agreements, the court refused to allow parol evidence to explain the agreements.
It rejected plaintiffs' contentions that considerations of public policy prevented the enforcement of such settlement agreements:
Plaintiffs cannot freely, and for consideration, promise nоt to sue for failure to disclose material facts and then claim that the promise was fraudulently induced because material information was, in fact, not disclosed. A claim for fraudulent non-disclosure, like any other claim, can be settled without litigation....
Here, ... experienced corporate executives, advised and assisted by sophisticated counsel, agreed to a settlement including a covenant not to sue that extends to claims based on non-disclosure of material facts. Plaintiffs were not obligated to sign so comprehensive a settlement and could easily have narrowed its scope, but having signed it, they cannot claim fraud in the inducement of that settlement simply because one of the claims on which they agreed not to sue may hаve entitled them to greater relief than they bargained for.
Id. at 244.
The court also rejected Universal's contention that the U/A Settlement Agreement should not be construed as broadly as the B/A Settlement Agreement because Universal's presettlement dispute had not involved the validity of the reinsurance contracts, and hence the U/A Settlement Agreement was not intended to settle thе present claim of fraudulent nondisclosure. The court saw no significance in the different language of the two settlement agreements as to the nature of the disputes being settled.
Following the dismissal of the complaints, the court granted motions by Bellefonte and Universal for summary judgment dismissing Argonaut's counterclaims for damages for plaintiffs' alleged breaches of the settlement agrеements' covenants not to sue. Finding no relevant authority from either New York or California law, by whose laws the B/A and U/A Settlement Agreements, respectively, were to be governed, the court concluded, on the authority of Artvale, Inc. v. Rugby Fabrics Corp.,
These appeals and the cross-appeal followed.
II. DISCUSSION
A. The Dismissal of the Complaints
In an effort to escape the "clear and unambiguous language of remarkable breadth,"
As the district court correсtly noted, "[t]he only fraud alleged" in support of the challenges to the validity of the settlement agreements "is defendant's failure to disclose the ... same omission that underlies plaintiffs' suit to rescind the reinsurance contracts." Id. at 244. Thus, plaintiffs' argument is, in essence, that where the parties have sought to settle a claim of fraud, they cannot be bound by a settlement agreement unless the аlleged defrauder has made full disclosure to the other party prior to settlement. We know of no authority to that effect, and we find the contrary principle established by Alleghany Corp. v. Kirby,
In Alleghany, a corporation sued to set aside the prior settlement of a stockholders' derivative action on the ground that the settlement had been obtained by fraudulent conceаlment of certain facts. Although many of the facts allegedly undisclosed prior to the institution of the derivative suit were then aired in hearings on the proposed settlement, there were other facts that the main corporate director defendant still failed to disclose. On the basis of the nondisclosure of the latter facts, the corporation later claimed that the settlement had been procured by fraud. We affirmed the district court's refusal to set aside the settlement, noting that "this fraud gave rise to the stockholders' suit and for this fraud [the main defendant director] paid the settlement price."
None of the cases relied on by Bellefonte and Universal is contrary to the principle established by Alleghany. Rather those cases involved circumstances in which the settlement or releаse had been part of the very transaction attacked as fraudulently induced, or other circumstances in which it was clear that no semblance of a fraud claim had come to light before the claim at issue was settled and it was clear that the parties had not intended to settle fraud claims. See, e.g., Irving Trust Co. v. Deutsch,
Plaintiffs' argument that the custom and practice in the reinsurance industry required Argonaut to disclose before settling and hence requires rescission of the settlement agreements fares no better. We agree with the district court that the settlement аgreements clearly and unambiguously extended to "all claims ... of every kind and nature[,] known and unknown" in the parties' dispute over the RFI reinsurance contracts and hence encompassed the claims that the contracts were invalid because plaintiffs had been fraudulently induced to enter those reinsurance contracts. Thus, we need not reach the issue of whether there was a question as to industry custom, because "evidence of industry practice may not be used to vary the terms of a contract that clearly sets forth the rights and obligations of the parties." Croce v. Kurnit,
Nor do we find merit in Universal's contention that it raised a question of fact as to the scope of the U/A Settlement Agreement by prеsenting the affidavits of two of its officers stating that the validity of the Universal reinsurance contract had not been in dispute prior to the U/A Settlement Agreement and hence the present fraudulent inducement claims were not part of the "dispute" there settled. Although this contention perhaps finds some support in the U/A Settlement Agreement itself, which, unlike the B/A Settlement Agreement, does not expressly mention a dispute as to the validity of the reinsurance contract, the fact is that Universal's complaint expressly alleged that Universal and Argonaut had become involved in a dispute regarding, inter alia, the "validity" of the reinsurance contract. A party's assertion of fact in a pleading is a judicial admission by which it normally is bound throughout the course of the procеeding. White v. Arco/Polymers, Inc.,
Finally, plaintiffs' argument that the settlement agreements are voidable not just because of nondisclosures but because of Argonaut's active concealment of material facts was not raised in the district court and we do not consider it herе. We have reviewed all of plaintiffs' other arguments on their appeals and find them unpersuasive.
B. The Dismissal of the Counterclaims
The cross-appeal's challenges to the district court's dismissal of the counterclaims for the expense of defending the present suits need not detain us long. Argonaut's contention is that the covenants were all-inclusive--covering "litigation of any kind"--and therefore literally barred all litigation, not just bad faith litigation. We agree with the district court that this question is governed by Artvale, Inc. v. Rugby Fabrics Corp.,
Here the district court found (1) that the settlement agreements contained no language suggesting that such damages were intended by the parties; (2) thаt the agreements did not provide that no suit could be brought on the ground that the agreements themselves had been fraudulently induced, and the present suits therefore were not obvious breaches of the covenants; and (3) that, as plaintiffs had at least one nonfrivolous ground for their lawsuits, the suits were not brought in bad faith. We see no basis for disturbing these findings, and we thus affirm on the basis of Artvale.
CONCLUSION
The judgments of the district court dismissing the complaints and the counterclaims are affirmed.