CHARLESTON – A divided state Supreme Court has ruled against an insurer in two separate cases, deciding that the insurer had to pay bonds on which it was the surety even though it was given no notice of the lawsuits that resulted in default judgments.
Justice Robin Jean Davis delivered the June 5 opinion of the 3-2 majority. She was joined by justices Margaret L. Workman and Allen H. Loughry II. Chief Justice Brent D. Benjamin and Justice Menis E. Ketchum dissented with Ketchum filing a dissenting opinion.
“The majority opinion ignores the plain language of our statutory law squarely dealing with the facts presented in this case. It ignores the statute’s plain language and relies upon a 1914 case that interprets a different statute,” Ketchum wrote.
“It is unfair to bind the surety when the principal is out of business and has no interest in defending the suit. The majority opinion also allows plaintiffs to obtain collusive consent judgments against the principal in return for the promise to only enforce the judgment against the surety who is unaware of the suit.
“The majority opinion is unfair to insurance companies that act as sureties for companies that are required to have bonds before they can do business in West Virginia."
In the first case at issue, Micah A. Curtis and Angela L. Curtis brought suit against Calusa Investments, LLC and several other defendants on Oct. 1, 2008. The Curtises alleged that Calusa had made misrepresentations and taken actions that caused the Curtises to refinance the mortgage on their home on unfavorable terms.
Calusa had apparently become defunct, according to the opinion, and failed to respond to the complaint. The Curtises obtained a default judgment against Calusa in the amount of $99,795.05 plus post-judgment interest against Calusa. After Calusa failed to satisfy the judgment, The Hartford, as surety on Calusa’s mortgage lender bond, was notified on Jan. 12, 2009.
Several years of litigation later, the circuit court awarded final judgment in favor of the Curtises against Hartford in the full amount it had found against Calusa earlier.
In the second case, Jerry Lee Rhodes and Bonnie M. Cochran filed suit against Equity South Mortgage, LLC and others on March 3, 2008. Rhodes/Cochran sought damages in connection with two allegedly oppressive home improvement loans brokered by Equity South.
They alleged that Equity South had obtained an inflated appraisal of the home and misrepresented critical facts in writing the loan, among other allegations. Again, The Hartford was not made a party to the lawsuit and was not given notice of the suit even though it had issued a mortgage broker bond to Equity South on the $50,000 mortgage.
As in the first case, Equity South had apparently become defunct and failed to file a response to the complaint. After Rhodes/Cochran obtained a default judgment for $56,300 plus post-judgment interest against Equity South on Oct. 14, 2008, Rhodes/Cochran presented The Hartford with a claim for payment.
After The Hartford refused to pay, Rhodes/Cochran filed a complaint against The Hartford in circuit court which ultimately led to a judgment against The Hartford in the amount of $50,000. The amount was limited to $50,000 because that was the amount of the bond.
Additionally, the circuit court denied The Hartford’s request for a credit against the judgment in an amount equal to the funds paid in settlement to Rhodes/Cochran by some of the other defendants in the case.
The state Supreme Court agreed to consolidate the cases on appeal. The Hartford asserted that the circuit courts erred in finding the bonds to be judgment bonds and in holding The Hartford liable on the bonds under the circumstances presented in these cases.
In addition, The Hartford complained that the Circuit Court of Kanawha County erred by refusing to grant The Hartford credit for a settlement the plaintiffs reached with other defendants named in the Rhodes/Cochran suit.
“In order to resolve the central issue in this case, we first determine whether the bonds issued by Hartford were judgment bonds,” Justice Davis wrote.
“Hartford argues, essentially, that the surety in a judgment bond explicitly grants the right to recover against the bond immediately upon a judgment against the principal. Hartford urges that the clear language of the bonds establishes that Hartford never agreed to pay unquestioningly any judgment rendered against its principals... Thus, Hartford argues, the bonds are in the nature of performance bonds.
“Respondents, the Curtises and Rhodes/Cochran, note that, through a performance bond, the surety guarantees the performance of an underlying contract. A judgment bond, on the other hand, is one in which the surety agrees to be liable for a judgment based on a specific violation covered by the bond.”
After a lengthy analysis, the court agreed with each of the circuit courts below, in finding that the bonds were judgment bonds.
“Hartford additionally submits that, because it did not receive notice of the actions against its principals, the circuit courts further erred in concluding that it was automatically responsible for paying the default judgments rendered against said principals,” wrote Davis, moving to the next issue before the Court.
“Our analysis of this issue is simplified by the fact that we have identified the Hartford bonds as judgment bonds. Thus, the issue for our resolution is whether the surety on a judgment bond who does not receive notice of an action prior to the entry of a default judgment against its principal is obligated to pay the judgment without the opportunity to present defenses that would have been available to its principal.
“[W]e now expressly hold that the surety on a judgment bond is conclusively bound by a default judgment entered against its principal, even when the surety did not have notice of the prior suit against the principal, so long as the judgment is the type of judgment contemplated by the bond and the surety cannot establish collusion or fraud.
“Applying this holding to the instant consolidated cases, we conclude that Hartford, as surety on the two judgment bonds at issue, is conclusively bound by the default judgments entered against its principals. Accordingly, the circuit courts in both of these cases properly granted summary judgment in favor of the respective plaintiffs as to this issue."
The court then turned to the final issue of the consolidated cases – whether The Hartford was entitled to an offset in the judgment against it in light of the settlement amounts made by other defendants in the Rhodes/Cochran suit.
“In the instant case, the default judgment against Equity South, Hartford’s principal, was entered on October 14, 2008. Rhodes/Cochran entered into a formal settlement agreement with Nationstar and the Bank of New York, two of the remaining defendants in the case, on August 4, 2010. Clearly then, at the time of the default judgment against Equity South, there was no settlement in existence upon which to base a credit. Consequently, Hartford is entitled to no credit for the settlement that was executed almost two years after the default judgment," Davis wrote.