JSI Communications v. Travelers Cslty & Surety Co. ( 2017 )

Case: 17-60233 Document: 00514267022 Page: 1 Date Filed: 12/08/2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
No. 17-60233
Fifth Circuit
FILED
December 8, 2017
JSI COMMUNICATIONS, Lyle W. Cayce
Clerk
Plaintiff - Appellant
v.
TRAVELERS CASUALTY & SURETY COMPANY OF AMERICA,
Defendant - Appellee
Appeal from the United States District Court
for the Southern District of Mississippi
USDC No. 3:13-CV-104
Before HIGGINBOTHAM, JONES, and GRAVES, Circuit Judges.
PER CURIAM:*
This is the second appeal to arise out of a dispute between a second-tier
subcontractor, Plaintiff JSI Communications, and a contractor’s surety,
Defendant Travelers Casualty & Surety Company of America. Previously, we
reversed the district court’s grant of summary judgment in favor of Travelers,
finding that Travelers incorrectly denied JSI’s claim on a payment bond. We
remanded the action for the district court’s consideration of JSI’s bad faith and
punitive damages claim. On remand, the district court granted summary
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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judgment in favor of Travelers, denying JSI’s bad faith and punitive damages
claim. JSI appeals. We affirm.
I.
In 2010, McMillan–Pitts Construction Company, LLC, (“McMillan–
Pitts”), the prime contractor on a public project to construct the New Stone
Office Building, Mississippi State University Delta Research and Extension
Service located in Stoneville, Mississippi, (the “Project”), obtained a Payment
Bond from Defendant Travelers Casualty & Surety Company of America,
(“Travelers”), to ensure payment to those who worked on the Project.
Accordingly, Travelers served as a surety for the Project, and McMillan–Pitts
served as the principal.
During the Project, McMillan–Pitts subcontracted with Tackett Electric
Company, LLC, (“Tackett”). In February 2011, Tackett entered into an oral
subcontract with Plaintiff JSI Communications, (“JSI”), for JSI to install and
test voice and data cabling as well as fiber optic cabling for the Project.
Meanwhile, in March 2012, a Tackett creditor, unrelated to the Project,
served a writ of garnishment on McMillan–Pitts. As a result, McMillan–Pitts
initiated an interpleader action in the Chancery Court of Leflore County,
Mississippi, depositing the remaining contract funds, $19,445.16, owed to
Tackett on the Project. McMillan–Pitts named the following entities as
defendants: Tackett, the unrelated Tackett creditor, and two Tackett
subcontractors (not JSI) on the Project that had entered joint check
agreements with McMillan–Pitts and Tackett. On August 30, 2012, the
Chancery Court entered a judgment releasing McMillan–Pitts from liability on
its subcontract with Tackett, the writ of garnishment, and the two joint check
agreements.
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In September 2012, after completing its work on the Project, JSI
submitted an invoice to Tackett in the amount of $36,346.09, which Tackett
refused to pay. Shortly thereafter, JSI notified Travelers that it was seeking
payment under the Bond. Travelers responded to JSI, requesting a claim form
to “facilitate [Travelers’s] independent investigation.” Travelers additionally
notified McMillan–Pitts that JSI presented a claim on the Payment Bond and
requested “[d]etailed input” for its “independent investigation and
understanding of the claim.” In October 2012, JSI submitted its claim form to
Travelers.
On October 25, 2012, McMillan–Pitts moved to amend its complaint for
interpleader to include JSI and all “persons or entities supplying materials
and/or labor to [Tackett] on the [Project].” That same day, the Chancery Court
granted McMillan–Pitts’s motion to amend, extending the previous release of
liability to “any claim made by any other claimant made a party to th[e] action
for sums due and owing from [Tackett] for materials, supplies and/or labor
provided to [Tackett] on the [Project].”
Also on that same day, Travelers, again, wrote to JSI and McMillan–
Pitts. In its letter to JSI, Travelers acknowledged receipt of JSI’s claim form
and explained that it would “communicate the initial results of [its]
independent investigation” upon receiving McMillan–Pitts’s response. In its
letter to McMillan–Pitts, Travelers reiterated its request for McMillan–Pitts’s
“input and active involvement” with Travelers’s “independent investigation”
and requested, again, a “detailed written response” to JSI’s claim. McMillan–
Pitts responded, contending, among other things, that JSI’s claim is not valid
because the Chancery Court released “McMillan–Pitts and the bonding
company” from “any claim associated with Tackett.”
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On November 8, 2012, Travelers, having “reviewed documents and
information provided by both [JSI] and McMillan–Pitts,” denied JSI’s claim on
the Payment Bond. 1 Travelers explained that “McMillan–Pitts’s interpleading
of Tackett’s subcontract funds acts as an absolute release of both McMillan–
Pitts and Travelers as to any obligation related to Tackett’s subcontract funds
and JSI’s claim.” 2
II.
On January 30, 2013, JSI filed suit against Travelers in the Circuit
Court of Hinds County, Mississippi, First Judicial District. JSI alleged that
Travelers breached the terms of the Payment Bond and acted in bad faith when
it denied JSI’s claim. JSI sought to recover the amount owed, $36,346.09, along
with punitive damages in an amount not less than $100,000, plus pre- and
post-judgment interest, late payment interest and all attorneys’ fees, costs, and
expenses. Travelers removed JSI’s Complaint to the Southern District of
Mississippi.
Both parties moved for summary judgment. On March 13, 2014, the
district court granted summary judgment in favor of Travelers, finding that
under Mississippi law Travelers’s liability as a surety could not exceed that of
its principal, McMillan–Pitts, which had been discharged from liability by the
Chancery Court. JSI appealed.
1 Travelers, in support of its motion for summary judgment, submitted an affidavit from its
Senior Claim Counsel who stated that Travelers “independently investigated JSI’s claim, which
included reviewing and analyzing the documents provided by JSI as well as speaking on multiple
occasions with McMillan–Pitts on the merits of JSI’s claim.”
2 Travelers also denied JSI’s claim on the grounds that JSI did not timely notify McMillan–
Pitts within 90 days of completing its work, as required under Mississippi’s Little Miller Act. See MISS.
CODE ANN. § 31–5–51(3). Travelers dropped this defense during summary judgment after JSI provided
Travelers with new information that its claim was indeed timely.
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On December 4, 2015, we reversed the court’s summary judgment
ruling. 3 First we explained that Mississippi’s Little Miller Act provides that
sub-subcontractors, like JSI, “‘shall have a right of action upon the . . . payment
bond upon giving written notice to [the] contractor within ninety (90) days from
the date on which such person did or performed the last of the labor or
furnished or supplied the last of the material for which such claim is made.’” 4
Accordingly, we ruled that the Chancery Court’s release of McMillan–Pitts had
“no effect on JSI’s ability to recover under the Bond.” 5
We next examined the nature of interpleader proceedings to determine
whether the Chancery Court judgment discharged Travelers’s bond
obligations. 6 We observed that Rule 22(b) of the Mississippi Rules of Civil
Procedure provides that “the discharge of liability the interpleader receives is
defined by the scope of the funds interpleaded;” applied here, the proceeds of
the contract between McMillan–Pitts and Tackett. 7 Therefore, we concluded,
“[a]ny funds relating to McMillan–Pitts’s bond obligation (and that of
Travelers) were clearly not included in the interpleader action.” 8 As a result,
we reversed the court’s grant of summary judgment in favor of Travelers;
rendered judgment in favor of JSI in the amount of $36,346.09; and remanded
the action for the district court’s consideration of “other fees and costs” and
“JSI’s bad faith claim.” 9
3 JSI Comms. v. Travelers Cas. & Sur. Co. of Am. (“JSI I”), 807 F.3d 725, 727–30 (5th Cir.
2015).
4 Id. at 727 (quoting MISS. CODE ANN. § 31–5–51(3)).
5 Id. at 728.
6 Id.
7 Id. at 728–29.
8 Id. at 729.
9 Id. at 730.
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On remand, the parties filed cross-motions for summary judgment on
JSI’s bad faith and punitive damages claim. On March 16, 2017, the court
granted summary judgment in favor of Travelers. JSI appeals.
III.
We review a district court’s grant of summary judgment de novo,
applying the same standard as the trial court. 10 Summary judgment is
appropriate where there is no genuine dispute of material fact and the movant
is entitled to judgment as a matter of law. 11 On summary judgment, a court
must view the evidence in the light most favorable to the non-movant and draw
all reasonable inferences in the non-movant’s favor. 12 To survive summary
judgment, the non-movant must supply evidence “such that a reasonable jury
could return a verdict for the nonmoving party.” 13
IV.
JSI first argues that Travelers did not have an arguable basis to deny its
claim on the Payment Bond. “Mississippi law does not favor punitive
damages.” 14 They should be imposed with “caution and within narrow limits
as an example and warning.” 15 A “plaintiff has a heavy burden when seeking
punitive damages based on a bad faith insurance claim.” 16 “The issue of
punitive damages should not be submitted to the jury unless the trial court
determines that there are jury issues with regard to whether: (1) The insurer
lacked an arguable or legitimate basis for denying the claim, and (2) The
10 Orthopedic & Sports Injury Clinic v. Wang Labs., Inc., 922 F.2d 220, 223 (5th Cir. 1991).
11 FED. R. CIV. P. 56(a).
12 United States v. Diebold, Inc., 369 U.S. 654, 655 (1962).
13 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
14 Life & Cas. Ins. Co. of Tenn. v. Bristow, 529 So. 2d 620, 622 (Miss. 1988).
15 Jenkins v. Ohio Cas. Ins. Co., 794 So. 2d 228, 232 (Miss. 2001).
16 Id. (internal quotation marks omitted); see also Bristow, 529 So. 2d at 622 (“The wrong
complained of must not be an ordinary tort such as could be the produce of forgetfulness, oversight or
the like, but must be more in the nature of heightened tort evincing gross, callous or wanton conduct,
or . . . accompanied by fraud or deceit.”) (internal quotation marks omitted).
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insurer committed a willful or malicious wrong, or acted with gross and
reckless disregard for the insured’s rights.” 17
“If an insurance company fails to pay a claim based upon an arguable or
legitimate reason . . . punitive damages will not lie.” 18 In determining whether
an insurer possessed an arguable or legitimate reason, the initial burden is
placed on the insurer: it “‘need only show that it had reasonable justifications,
either in fact or in law,’ for its actions.” 19 “Once an insurance company
articulates an arguable or legitimate reason . . . the insured bears the burden
of demonstrating that the insurer had no arguable reason.” 20
The district court determined that Travelers demonstrated an arguable
reason for denying JSI’s claim and that JSI failed to meet its burden to show
otherwise. The court explained that Travelers relied on Mississippi’s long-
standing doctrine that a surety’s liability is measured by that of its principal
to conclude that the Chancery Court’s release of McMillan–Pitts from liability
included Travelers’s liability. 21 Although we rejected that argument in JSI I,
the court determined that Travelers satisfied its low burden of showing a
reasonable justification for its actions because, at the time Travelers denied
17 State Farm Mut. Auto. Ins. Co. v. Grimes, 722 So. 2d 637, 641 (Miss. 1998).
18 Jenkins, 794 So. 2d at 233; see also, e.g., Dunn v. State Farm Fire & Cas. Co., 927 F.2d 869,
874 (5th Cir. 1991) (finding insurer had an arguable reason for denying coverage when Mississippi
courts had not addressed the coverage-related issue directly and the issue was otherwise debatable at
the time coverage was denied); Grimes, 722 So. 2d at 641 (explaining that punitive damages cannot be
imposed “in cases in which a carrier is determined to have merely reached an incorrect decision”).
19 James v. State Farm Mut. Auto. Ins. Co., 743 F.3d 65, 70 (5th Cir. 2014) (quoting U.S. Fid.
& Guar. Co. v. Wigginton, 964 F.2d 487, 492 (5th Cir. 1992)).
20 Id. (“Whether a claimant has proven an insurer acted without a reasonable or arguable basis
is determined by a preponderance of the evidence.”); see also Caldwell v. Alfa Ins. Co., 686 So. 2d 1092,
1097, n.1 (Miss. 1996) (“The plaintiff’s burden in this respect likewise exists at the summary judgment
stage where the insurance company presents an adequate prima facie showing of a reasonably
arguable basis for denial so as to preclude punitive damages.”).
21 See, e.g., Newton City v. State ex rel. Dukes, 133 So. 3d 805, 807 (Miss. 2014) (“[N]o liability
may be imputed to [a] surety beyond that of its principal.”) (internal quotation marks omitted); State
ex rel. Brazeale v. Lewis, 498 So. 2d 321, 324 (Miss. 1986) (same), overruled on other grounds Little v.
Miss. Dep’t of Transp., 129 So. 3d 132 (Miss. 2013); Irving v. Bankers’ Mortg. Co., 151 So. 740, 743
(Miss. 1934) (same).
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JSI’s claim, Mississippi neither barred application of the general rule that a
surety’s liability is co-extensive with that of its principal to claims asserted
under its Little Miller Act nor discussed effects of a judicial discharge of a
principal’s liability on its surety under the Little Miller Act.
The court, shifting the burden to JSI, rejected the argument that
Travelers should, and would, have reached a different decision if it had
considered the cases cited in JSI I, explaining that JSI I did not exist when
Travelers denied JSI’s claim. Furthermore, the court noted, a finding that
Travelers incorrectly denied JSI’s claim does not “warrant a finding of bad
faith or potential liability for punitive damages.” 22
On appeal, JSI argues that JSI I “demonstrates the paucity of the
district court’s rationale,” quoting the following:
To the extent Travelers is arguing that its bond obligation was
discharged under the chancery court judgment, we must construe
the effect, if any, of that judgment on the Travelers bond
obligation. We conclude that it has no effect on the bond liability. 23
JSI continues, contending that we “admonished” Travelers in observing the
following:
JSI’s claim on the payment bond is for $36,346.09. Even if JSI were
entitled to all of the money that McMillan–Pitts interpleaded,
which is unlikely, it would still be due $16,900.93. Under
Travelers’s interpretation of the chancery court judgment, JSI
would have no recourse to recover this remaining sum. 24
According to JSI, the above “finding” “demonstrate[s] beyond cavil that
Travelers’s payment bond obligation was not discharged in its entirety and
payment of the undisputed amount should have been made by Travelers, with
or without demand by JSI.” Additionally, JSI claims that our Court “found no
22 See Grimes, 722 So. 2d at 641.
23 JSI I, 807 F.3d at 728.
24 Id. at 728, n.4.
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difficulty in deciphering the surreptitious conduct of Travelers and its
principal and rending it untenable,” quoting the following:
According to the amended complaint for interpleader, the stake in
the interpleader action was the proceeds of [the] contract between
McMillan–Pitts and Tackett—$19,445.16. Any funds relating to
McMillan–Pitts’s bond obligation (and that of Travelers) were
clearly not included in the interpleader action. This obligation is
separate and distinct from any obligation McMillan–Pitts and
Travelers had on the Tackett subcontract. Because Mississippi law
defines the release the interpleader receives by the scope of the
stake, the interpleader action does not shield Travelers (a non-
party) from liability that arises from its bond obligation. 25
Relying on the above language, JSI argues that Rule 22(b) of the Mississippi
Rules of Civil Procedure, which limits the Chancery Court’s release of liability
to McMillan–Pitts, “provided the roadmap for Travelers to understand that
following its principal’s plan lacked any legitimate or arguable justification.”
In addition, JSI concedes that there is no judicial decision on point but
contends that Key Construction 26 and Chain Electric 27 serve as examples that
a surety’s liability is not absolutely co-extensive with its principal. 28
In response, Travelers contends that an “[a]rguable basis exists in
matters of good faith legal dispute involving unsettled law—even if the insurer
is ultimately found to have been in error in its assessment of the law.”
Travelers explains that its denial of JSI’s claim “rested upon numerous cases
on the long standing proposition that a surety’s liability is co-extensive with
that of its principal.” Travelers additionally asserts that the cases that JSI
25 JSI I, 807 F.3d at 728–29 (internal quotation marks and footnotes omitted).
26 Key Constructors, Inc. v. H & M Gas Co., 537 So. 2d 1318 (Miss. 1989).
27 Chain Elec. Co. v. Nat’l Fire Ins. Co. of Hartford, No. 2:03-cv-368, 2006 WL 2973044, at *1
(S.D. Miss. Oct. 16, 2006).
28 JSI additionally avers that the cases that the district court relies on—Newton, Lewis, and
Irving—for the proposition that liability cannot be imputed to a surety beyond that of its principal are
“readily distinguishable” because those cases involve bonds different than Travelers’s Payment Bond.
That those cases involve a different bond is of no consequence.
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relies on—Key Construction and Chain Electric—are inapposite because
neither “involve[] a judicial holding that the surety’s principal had been
discharged of all liability to the claimant.”
We conclude that Travelers had an arguable reason to deny JSI’s claim.
In Dunn, we denied an insured’s punitive damages claim when Mississippi
courts had not addressed directly the insurer’s reason for denying coverage. 29
At the time that Travelers denied JSI’s claim, Mississippi courts had not
addressed directly the effects of an interpleader action that released a principal
from all liability on its surety’s liability. Travelers therefore met its low burden
of showing a reasonable justification for its action.
JSI, now with the burden to demonstrate that Travelers’s reasons are
not legitimate, fails to persuade. JSI overstates our analysis in JSI I. That is,
we did not “admonish” Travelers or find that Travelers acted surreptitiously
in denying JSI’s claim; rather, we noted the flaws in Travelers’s reasoning,
which was based on an incorrect understanding of Mississippi’s Little Miller
Act and the nature of interpleader proceedings. 30 In short, Travelers reached
an incorrect decision in denying JSI’s claim. And, punitive damages are not to
be imposed when an insurer is “determined to have merely reached an
incorrect decision in denying a given claim.” 31
The cases that JSI cites do not disturb our conclusion. In Key
Constructors, the Supreme Court of Mississippi applied Mississippi’s Little
Miller Act to award summary judgment in favor of a materialman that brought
suit against a contractor and its surety. 32 That case did not involve a principal
released of liability and assumed without discussion that a surety’s liability
29 Dunn, 927 F.2d at 874.
30 JSI I, 807 F.3d at 727–29.
31 Grimes, 722 So. 2d at 641.
32 537 So. 2d at 1321–22, 1325.
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was co-extensive with its principal. 33 In Chain Electric, a district court, in
permitting a subcontractor to pursue an action for attorneys’ fees against a
surety, explained that “[a] surety’s liability is always measured by the express
terms of his covenant, which is contained in the obligations of his principal as
defined in the main contract and any applicable statute, and in the conditions
of the bond.” 34 While Chain Electric dilutes the maxim that a surety’s liability
is co-extensive with that of its principal, it does not involve the issues
presented before us—the effects of a judicial proceeding that releases a
principal from liability on the surety’s liability. The district court therefore did
not err in granting Travelers’s motion for summary judgment. 35
V.
JSI additionally argues that Travelers acted in bad faith by failing to
conduct a separate, independent investigation of its claim. 36 Regarding an
insurer’s duty to investigate, Mississippi law provides that “a plaintiff’s burden
in proving a claim for bad faith refusal goes beyond merely demonstrating that
the investigation was negligent.” 37 “[T]he level of negligence in conducting the
33 Id. at 1324–25.
34 2006 WL 2973044, at *5.
35 JSI additionally argues that the court erred in deciding JSI’s bad faith and punitive damages
claim on summary judgment, rather than holding an evidentiary hearing. Under Mississippi law, once
an “award of compensatory damages has been made against a party, the court shall promptly
commence an evidentiary hearing to determine whether punitive damages may be considered by the
same trier of fact.” MISS. CODE ANN. § 11–1–65(1)(c). The Mississippi Supreme Court, however, has
resolved a punitive damages claim on summary judgment without an evidentiary hearing. See Miller
v. R.B. Wall Oil Co., 970 So. 2d 127, 133 (Miss. 2007); see also Tarver v. Colonial Life & Acc. Ins. Co.,
294 F. App’x 873, 877, n.1 (5th Cir. 2008) (affirming summary judgment that denied punitive
damages). The district court therefore did not err in resolving JSI’s bad faith and punitive damages
claim on summary judgment.
36 JSI asserts this argument in the section of its brief entitled: “The district court erred in
finding there was insufficient evidence in the record to establish a genuine issue of material fact as to
whether Travelers’s conduct was with gross and reckless disregard for JSI’s payment bond rights.”
The district court, however, did not address whether Travelers’s conduct was with gross and reckless
disregard for JSI’s rights.
37 Murphree v. Federal Ins. Co., 707 So. 2d 523, 531 (Miss. 1997).
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investigation must be such that a proper investigation by the insurer ‘would
easily adduce evidence showing its defenses to be without merit.’” 38
The district court determined that JSI failed to show that Travelers did
not independently investigate JSI’s claim and that any different investigation
would have “easily adduce[d]” evidence showing that Travelers’s defenses
lacked merit. To that latter finding, the court explained that Travelers could
not have “easily adduced” that its defense—that liability cannot be imputed to
a surety beyond that of its principal—lacked merit with a more thorough
investigation because no Mississippi court had decided directly the “effects, if
any, of the discharge of a principal’s liability with respect to the obligations of
a surety under the Little Miller Act.”
JSI argues that Travelers failed to conduct an independent investigation
and has not, and cannot, produce evidence of an independent investigation,
other than Travelers’s correspondence with JSI. Travelers disagrees,
contending that it investigated JSI’s claim and evaluated information
continuously. Travelers additionally argues that it based denial of JSI’s claim
on a “broad base of well-established jurisprudence,” and “JSI has made no
showing that any additional or different investigation on Travelers’s part
should have altered Travelers’s . . . position.”
JSI’s argument that Travelers did not conduct an investigation is
difficult to square with the record. Travelers requested information from both
JSI and McMillan–Pitts to assist with its “independent investigation”
regarding JSI’s claim. And, in denying JSI’s claim, Travelers explained that it
“reviewed documents and information provided by both [JSI] and McMillan–
Pitts.” Additionally, Travelers, in support of its motion for summary judgment,
submitted an affidavit from its Senior Claim Counsel, explaining that
38 Id. (quoting Merchants Nat’l Bank v. Se. Fire Ins. Co., 751 F.2d 771, 777 (5th Cir. 1985)).
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Travelers “independently investigated JSI’s claim, which included reviewing
and analyzing the documents provided by JSI as well as speaking on multiple
occasions with McMillan–Pitts.”
To be sure, JSI is correct in stating that the record does not contain “any
notes from interviews or correspondence from Travelers to its principal
requesting supporting legal authority” or “any internal legal research
memoranda or cases regarding the effect, if any, of the interpleader action upon
Travelers’s liability under its payment bond.” A plaintiff’s burden for proving
a claim for bad faith, however, goes beyond demonstrating negligence; rather,
JSI must establish that a proper investigation would “easily adduce” evidence
showing that Travelers’s defense lacked merit. 39 JSI cannot meet that burden.
The district court therefore did not err. 40
VI.
The district court’s grant of Travelers’s motion for summary judgment
and denial of JSI’s motion for summary judgment is affirmed.
39 Murphree, 707 So. 2d at 531.
40 JSI proffers several arguments to show that Travelers committed a willful or malicious
wrong or acted with gross and reckless disregard for its rights. We need not address those arguments.
Jenkins, 794 So. 2d at 233 (“If an insurance company fails to pay a claim based upon an arguable or
legitimate reason . . . punitive damages will not lie.”).
13