Food Lion Inc v. S. L. Nusbaum ( 2000 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
FOOD LION, INCORPORATED,
Plaintiff-Appellant,
v.
S. L. NUSBAUM INSURANCE AGENCY,
INCORPORATED; R. B. NASH FRANCIS,
JR., No. 99-1058
Defendants-Appellees,
and
AMERICAN DIVERSIFIED INSURANCE
COMPANY,
Defendant.
Appeal from the United States District Court
for the Eastern District of Virginia, at Norfolk.
Robert G. Doumar, Senior District Judge.
(CA-98-540-2)
Argued: October 28, 1999
Decided: January 12, 2000
Before MURNAGHAN, MOTZ, and KING, Circuit Judges.
_________________________________________________________________
Affirmed by published opinion. Judge Murnaghan wrote the opinion,
in which Judge Motz and Judge King joined.
_________________________________________________________________
COUNSEL
ARGUED: Robert William McFarland, MCGUIRE, WOODS, BAT-
TLE & BOOTHE, L.L.P., Norfolk, Virginia, for Appellant. Mary
Jane Hall, MEZZULLO & MCCANDLISH, P.C., Norfolk, Virginia;
William Arthur DeVan, MEZZULLO & MCCANDLISH, P.C., Rich-
mond, Virginia, for Appellees. ON BRIEF: Douglas M. Foley,
MCGUIRE, WOODS, BATTLE & BOOTHE, L.L.P., Norfolk, Vir-
ginia, for Appellant.
_________________________________________________________________
OPINION
MURNAGHAN, Circuit Judge:
The plaintiff, Food Lion, Inc., appeals from the district court's
order granting summary judgment in favor of defendants S.L. Nus-
baum Insurance Agency, Inc. (Nusbaum) and R.B. Nash Francis, Jr.
(Francis), on Food Lion's claims under § 38.2-1802 of the Code of
Virginia and for professional negligence and breach of contract to
Food Lion as a third-party beneficiary. For the reasons discussed
below, we affirm.
I.
Food Lion entered into four construction contracts with John R.
Kurfees and Associates (Kurfees) in which Kurfees was to construct
three Food Lion stores in Virginia (the "Virginia Contracts") and one
in North Carolina (the "North Carolina Contract"). The parties' con-
tracts required Kurfees to obtain performance bonds to secure its con-
tractual obligations. Kurfees hired Nusbaum and its employee,
Francis, to locate an insurance carrier that would issue the bonds.
When Francis was unable to find an insurance carrier that would
issue bonds to satisfy the requirements of Kurfees' contracts with
Food Lion, he contacted a surplus lines broker, United Contractors
Insurance Agency, that was soliciting bonds on behalf of American
Diversified Insurance Co. (American). American issued the perfor-
mance bonds to Kurfees, and Kurfees paid Nusbaum for each bond
that American issued.
Before completing its work under the construction contracts, Kur-
fees filed bankruptcy under Chapter 11 on November 7, 1995. When
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Kurfees refused to complete the projects, Food Lion demanded that
American provide the funds necessary to complete performance under
the contracts. Food Lion alleges that American defaulted on the per-
formance bonds, causing Food Lion to suffer additional costs to com-
plete the contracts. American has never satisfied any of its purported
obligations under the bonds. American did not answer Food Lion's
Complaint and has been in receivership in California since 1996.
On April 29, 1996, Kurfees filed a Complaint against Food Lion
in the bankruptcy court seeking to recover amounts Food Lion alleg-
edly owed on the four contracts. Food Lion counterclaimed, alleging
a right of setoff for the anticipated costs of completing the contracts.
Food Lion thereafter settled its dispute with Kurfees over the con-
tracts. Food Lion agreed not to pursue any claims against the debtor's
estate regarding the Virginia Contracts, and to submit the North Caro-
lina Contract dispute to arbitration.1 On December 18, 1996, the bank-
ruptcy court entered an agreed order approving the compromise and
settlement. Addressing the Virginia Contracts, which the court
referred to as the "Tidewater Stores", the order states:
[I]t is FURTHER ORDERED that Food Lion shall not have
claim [sic] against the Debtor for its alleged costs to com-
plete and credits due of $121,860.69 regarding the Tidewa-
ter Stores referenced in the Motion; it is
FURTHER ORDERED that the Debtor shall not have any
claim against Food Lion relating to the Harrisonburg Con-
tract, the Roanoke Contract and the contracts relating to the
Tidewater Stores referenced in the Motion.
Food Lion filed a three count Complaint against American, Nus-
baum, and Francis on May 13, 1998. The Complaint alleged breach
of contract against American, a violation of § 38.2-1802 of the Code
of Virginia against Nusbaum and Francis, and negligence against
Nusbaum and Francis. On October 9, 1998, Nusbaum and Francis
filed a motion for summary judgment.
_________________________________________________________________
1 The arbitrator found that Food Lion was liable to Kurfees under the
North Carolina Contract and awarded Kurfees $105,145.74 plus interest.
3
At the summary judgment hearing, the district court granted Food
Lion leave to amend its Complaint to clarify its statutory claim
(Count II), and to clarify that Count III was for professional negli-
gence and breach of contract to Food Lion as a third-party beneficiary
against Nusbaum and Francis. Food Lion filed its Amended Com-
plaint on November 30, 1998.2
On December 9, 1998, the district court granted Nusbaum and
Francis' motion for summary judgment. The district court held that
the arbitration decision barred Food Lion's claim as to the North Car-
olina Contract. Regarding the Virginia Contracts, the court held that
because Nusbaum and Francis' liability stemmed from the claims
against American as the surety, they could not be liable if Food Lion
had no claim against American. The district court then found that
Food Lion's release of Kurfees operated as a release of American and,
therefore, of Nusbaum and Francis. Food Lion then brought the
instant appeal, arguing that it has viable claims against Nusbaum and
Francis for damages sustained in completing the Virginia Contracts.
Food Lion does not appeal the district court's ruling concerning the
North Carolina Contract.
II.
We review the district court's grant of summary judgment de novo,
viewing all facts and inferences in the light most favorable to Food
Lion. See Beall v. Abbott Labs., 130 F.3d 614, 618-19 (4th Cir. 1997).
Count II of Food Lion's Complaint alleges a cause of action against
Nusbaum and Francis under § 38.2-1802 of the Code of Virginia.
Section 38.2-1802 states in relevant part:
A. No person . . . shall solicit, negotiate, procure, or effect
contracts of insurance in this Commonwealth on behalf of
_________________________________________________________________
2 The district court entered a default judgment against American for
failing to respond to the original Complaint on November 20, 1998. On
January 7, 1999, in response to a letter from the Deputy Attorney Gen-
eral of California, the district court reconsidered and set aside the entry
of default against American. The January 7 order stayed all action by
Food Lion against American until further order from the Superior Court
of Orange County, California.
4
any insurer which is not licensed to transact the business of
insurance in this Commonwealth. . . .
B. Any person violating the provisions of this section shall
be guilty upon conviction of a Class 1 misdemeanor and
punished for each offense. In addition, any person violating
this section shall be (i) liable on any claim against any unli-
censed insurer that arises out of a contract or policy solic-
ited, negotiated, procured, or effected by the person or
which the person assisted in soliciting, negotiating, procur-
ing, or effecting, or (ii) punished in §§ 38.2-218 and 38.2-
1831, or (iii) subject to both (i) and (ii).
Food Lion claims that Nusbaum and Francis violated§ 38.2-1802 by
procuring a contract of insurance with American, an insurer that was
not licensed to transact business in Virginia. Food Lion thus argues
that § 38.2-1802 also makes Nusbaum and Francis liable on any claim
by Food Lion against American with respect to the performance
bonds.
Food Lion's claim against Nusbaum and Francis under§ 38.2-1802
fails because Food Lion does not have a valid claim against Ameri-
can. Food Lion's claim against American arose out of Kurfees'
default under the construction contracts. Kurfees' default triggered
American's obligations as a surety under the performance bonds.
Food Lion, however, settled its dispute with Kurfees on December 18,
1997. The Bankruptcy Court's order memorializing the settlement
stated that "Food Lion shall not have claim [sic] against the Debtor
for its alleged costs to complete and credits due of $121,860.69
regarding the Tidewater Stores referenced in the Motion." Food Lion
thus released Kurfees for all claims associated with the Virginia Con-
tracts.
Food Lion's release of Kurfees also operated as a release of Kur-
fees' surety, American. Virginia law provides that"a release of the
principal debtor by the creditor, by an absolute release of the debt, or
by an obligatory extension of the time of payment, without the con-
sent of the surety, releases the surety in toto." Conner v. West. 129
Va. 85, 105 S.E. 762, 766 (1921); see also Fugate v. Allen, 153 Va.
5
143, 149 S.E. 501, 502 (1929). Food Lion therefore released Ameri-
can from any liability on the Virginia Contracts by releasing Kurfees.
Food Lion's release of American bars any claim against Nusbaum
and Francis under § 38.2-1802. Food Lion cannot hold Francis and
Nusbaum liable for "any claim against an unlicensed insurer," when
it has no claim against that insurer.
Food Lion raises three arguments in an attempt to avoid the conse-
quences of its release of Kurfees. First, Food Lion argues that Ameri-
can would be equitably estopped from asserting the doctrine of
release against Food Lion because of American's fraudulent conduct
in issuing the performance bonds. Because Nusbaum and Francis
allegedly stand in American's shoes, Food Lion argues that they also
should be equitably estopped from raising the release as a defense.
An essential element of estoppel is that the injured party rely to its
detriment on misrepresentations by the opposing party. See, e.g.,
Elmore v. Cone Mills Corp., 187 F.3d 442, 446 (4th Cir. 1999).
Estoppel "is the consequence worked by operation of law which
enjoins one whose action or inaction has induced reliance by another
from benefiting from a change in his position at the expense of the
other." Employers Commercial Union Ins. Co. of America v. Great
American Ins. Co., 214 Va. 410, 200 S.E.2d 560, 562 (1973). Food
Lion does not allege that it relied on representations by American in
releasing Kurfees. Food Lion's release of Kurfees was completely
unrelated to any of American's actions. Because Food Lion cannot
establish reliance, American and, by extension, Nusbaum and Francis,
are not equitably estopped from relying on Food Lion's release of
Kurfees.
Second, Food Lion argues that Nusbaum and Francis cannot rely
on the release of Kurfees because of the doctrine of"unclean hands."
Unclean hands bars a party from receiving equitable relief because of
that party's own inequitable conduct. See, e.g., Brown v. Kittle, 225
Va. 451, 303 S.E.2d 864, 867 (1983). Nusbaum and Francis do not
request equitable relief. The doctrine of unclean hands therefore does
not apply in the present case.
Finally, Food Lion argues that its release of Kurfees should not
operate as a release of American because the release occurred as part
6
of a bankruptcy proceeding. Section 524(e) of the Bankruptcy Code
provides that the "discharge of a debt of the debtor does not affect the
liability of any other entity on, or the property of any other entity for,
such debt." 11 U.S.C. § 524(e). Food Lion contends that § 524(e) pro-
tects Food Lion's right to recover from American and, therefore, Nus-
baum and Francis under § 38.2-1802.
Food Lion's argument is without merit. Kurfees' debt to Food Lion
was not "discharged"; rather, it was settled by an agreed order in the
bankruptcy court. Section 524(e) does not preclude the consensual
settlement of claims; it merely clarifies the effect of a discharge. In
In re Arrowmill, 211 B.R. 497 (Bankr. D.N.J. 1997), the court held
that "[W]hen a release of liability of a nondebtor is a consensual pro-
vision . . . agreed to by the effected creditor, it is no different from
any other settlement or contract and does not implicate 11 U.S.C.
§ 524(e). A voluntary, consensual release is not a discharge in bank-
ruptcy." Id. at 506; see also In re Specialty Equip. Cos., 3 F.3d 1043,
1047 (7th Cir. 1993) ("[S]ection 524(e) provides only that a discharge
does not affect the liability of third parties. This language does not
purport to limit or restrain the power of the bankruptcy court to other-
wise grant a release to a third party."); In re Dow Corning Corp., 198
B.R. 214, 243 (Bankr. E.D. Mich. 1996) ("By its language then,
§ 524(e) is only implicated when the debtor is receiving a dis-
charge."). Food Lion therefore cannot rely on§ 524(e) to avoid the
consequences of its release of Kurfees.
In sum, Food Lion's release of Kurfees bars any claim against
American as Kurfees' surety. Because Food Lion has no claim against
American, it cannot hold Nusbaum and Francis liable under § 38.2-
1802 for procuring insurance from an unlicensed surety. We therefore
affirm the district court's grant of summary judgment in favor of Nus-
baum and Francis on Count II of Food Lion's Complaint.
III.
Count III of Food Lion's Complaint alleges a cause of action
against Nusbaum and Francis for professional negligence and breach
of contract to Food Lion as a third-party beneficiary. The district
court granted Nusbaum and Francis' motion for summary judgment
on Count III of Food Lion's Complaint because it found that Food
7
Lion's release of Kurfees barred any claim against Nusbaum and
Francis arising out of the Virginia Contracts. Because we hold that
Food Lion was not a third-party beneficiary of the contract between
Kurfees and Nusbaum, we need not decide whether Food Lion's
release of Kurfees bars Food Lion's claim against Nusbaum and Fran-
cis for professional negligence and breach of contract to Food Lion
as a third-party beneficiary.
Privity of contract is an essential element of an action seeking dam-
ages for economic loss resulting from the negligent performance of
a contractual commitment. See Ward v. Ernst & Young, 246 Va. 317,
435 S.E.2d 628, 631 (1993). Food Lion was not a party to the contract
between Kurfees and Nusbaum in which Nusbaum agreed to locate
a bonding company that would act as a surety for Kurfees' obligations
to Food Lion. Food Lion therefore must establish that it was a third-
party beneficiary of the contract between Kurfees and Nusbaum to
maintain its cause of action.
Virginia law provides that "[t]he third party beneficiary doctrine is
subject to the limitation that the third party must show that the parties
to the contract clearly and definitely intended it to confer a benefit
upon him." Professional Realty Corp. v. Bender, 216 Va. 737, 222
S.E.2d 810, 812 (1976). Third-party beneficiaries must be intended
beneficiaries of a contract; mere incidental beneficiaries have no right
to enforce a contract. Therefore, a "clear intent to benefit the third
person must appear to enable him to sue on the contract; incidental
beneficiaries cannot maintain an action thereon." Valley Landscape
Co. v. Rolland, 218 Va. 257, 237 S.E.2d 120, 122 (1977) (quoting N.-
P. Newspapers v. Stott, 208 Va. 228, 156 S.E.2d 610, 612 (1967)).
In Copenhaver v. Rogers, 238 Va. 361, 384 S.E.2d 593 (Va. 1989),
the beneficiaries of a will asserted a cause of action for professional
negligence against the attorney who drafted the will. The beneficiaries
argued that they were third-party beneficiaries of the testator's con-
tract with the attorney. The court disagreed. See id. at 595-96. The
contract between the testator and the attorney benefitted the attorney,
through his compensation, and the testator, through the disposition of
his estate. The will beneficiaries may have stood to benefit from the
will, but they were not intended beneficiaries of the attorney-client
contract. The court therefore held that "[t]here is a critical difference
8
between being the intended beneficiary of an estate and being the
intended beneficiary of a contract between a lawyer and his client."
Id. at 596; see also Valley Landscape, 237 S.E.2d at 121-22 (general
contractor on a construction project not a third-party beneficiary of a
contract between the owner of the property and the architect of the
construction project); Professional Realty, 222 S.E.2d at 812 (real
estate broker not a third-party beneficiary of the contract between the
buyer and seller of the property).
In the present case, Food Lion relies on the contracts between Kur-
fees and Nusbaum that mention Food Lion. For instance, an August
8, 1994 contract between Kurfees and Nusbaum states:
It is hereby agreed and understood that S.L. Nusbaum Insur-
ance Agency, Inc. will be paid $1,578 for services rendered
concerning the placement of $717,414 performance and
payment bonds on behalf of John R. Kurfees and Asso-
ciates, Inc. for Food Lion store #405, Southampton Shop-
ping Center, Franklin, Va.
Please sign as acknowledgment of this agreement below,
and return to my attention at your earliest convenience.
The other contracts between Kurfees and Nusbaum contain similar
references to Food Lion.
Food Lion stood to benefit from Kurfees' contracts with Nusbaum;
however, the parties clearly did not intend to confer a benefit on Food
Lion. Kurfees hired Nusbaum to obtain performance bonds with an
acceptable surety. Nusbaum's job was to serve Kurfees by allowing
it to complete the deal with Food Lion. It strains logic, however, to
suggest that Food Lion was an intended beneficiary of the contracts.
The contracts mention Food Lion, but only by way of identifying the
deal for which each bond was necessary. The benefits in the contracts
went to Nusbaum, who was compensated, and Kurfees, who was able
to satisfy a condition precedent and complete the deal with Food
Lion.
Food Lion attempts to establish that it was a third-party beneficiary
by pointing to a hypothetical posited by the court in Copenhaver. The
court set up the following hypothetical:
9
[A] client might direct his lawyer to put his estate in order
and advise his lawyer that his one overriding intent is to
ensure that each of his grandchildren receive one million
dollars at his death and that unless the lawyer agrees to take
all steps necessary to ensure that each grandchild receives
the specified amount, the client will take his legal business
elsewhere. In this second example, if the lawyer agrees to
comply with these specific directives, one might fairly argue
that each grandchild is an intended beneficiary of the con-
tract between the client and the lawyer.
Copenhaver, 384 S.E.2d at 597. Food Lion's argument might have
merit if Kurfees had told Nusbaum that its overriding intent was to
make sure Food Lion was fully compensated if Kurfees defaulted.
Kurfees had no such intent; instead, Kurfees' intent was to close the
deal with Food Lion, an opposing party. Nusbaum was Kurfees' agent
who was hired to serve Kurfees' interests. Food Lion's third-party
beneficiary argument thus fails as a matter of law.
Because Food Lion cannot establish that it was a third-party benefi-
ciary of the contracts between Kurfees and Nusbaum, it cannot main-
tain a claim against Nusbaum and Francis for professional negligence
and breach of contract to Food Lion as a third-party beneficiary. We
therefore affirm the district court's grant of summary judgment in
favor of Nusbaum and Francis on Count III of Food Lion's Com-
plaint.
IV.
For the reasons discussed above, we affirm the district court's
order granting of summary judgment in favor of Nusbaum and Fran-
cis.
AFFIRMED
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