Federer v. Zurich Am. Ins. Co.

DAVID LAWRENCE FEDERER,as Executor of The Estate of Christina Audrey Federer, Plaintiff-Appellant, v. ZURICH AMERICAN INSURANCE CO.,FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendants-Appellees.

No. 16-16592

UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT

July 11, 2017

[DO NOT PUBLISH]

Non-Argument Calendar

D.C. No. 1:15-cv-04204-TWT

Appeal from the United States District Court for the Northern District of Georgia

Before TJOFLAT, WILLIAM PRYOR, and ANDERSON, Circuit Judges.

PER CURIAM:

Christina Audrey Federer ("Federer") filed suit in Georgia state court against American Mortgage Express Corp. ("AMEC") for violations of the Georgia Residential Mortgage Act ("GRMA"). When AMEC—which had been out of business for several years—failed to respond, the Georgia court entered a default judgment and awarded substantial damages. Shortly thereafter Federer passed away and plaintiff-appellant David Lawrence Federer, as executor of her estate (the "Estate"), brought suit to recover the default judgment award from AMEC's surety, defendant-appellee Fidelity and Deposit Co. of Maryland, and its parent company, defendant-appellee Zurich American Insurance Co. (collectively, "Appellees"). After removal to the Northern District of Georgia, the district court determined that the state-court action resulting in default judgment was barred by res judicata and granted Appellees' motion for summary judgment. Because Appellees were entitled to challenge the entry of default judgment and because, under Georgia law, the state-court action should have been barred by res judicata, we affirm that decision.

I. Background

Pursuant to licensing requirements established by the GRMA, see O.C.G.A. § 7-1-1000 et seq., mortgage lenders wishing to do business in Georgia must provide the state's Department of Banking and Finance with a $150,000 bond. See O.C.G.A. § 7-1-1003.2(b). In 2005, AMEC (as principal) and Appellees (as surety) filed the requisite bond (the "Bond"), and, shortly thereafter, AMEC originated amortgage loan on behalf of Federer. However, by early 2008, AMEC had ceased operations and the Bond had been cancelled.

In 2012, Federer filed a lawsuit in the Northern District of Georgia against several banks—although not against Appellees or AMEC—alleging improprieties in the issuance of her loan. Many of the defendants in that lawsuit filed, and had granted, motions to dismiss based on the applicable statute of limitations. The court then ordered Federer to show cause why her case should not be dismissed in its entirety. When she did not respond, the court dismissed the case and entered judgment against her.

Less than six weeks after the federal court dismissed her first lawsuit, Federer filed a second action in the Superior Court of Gwinnett County, Georgia. This second lawsuit, which now included AMEC as a defendant, again alleged improprieties in the issuance of her loan. With the exception of AMEC—which had been out of business for several years at that point—all of the defendants filed, and had granted, motions to dismiss the action as barred by res judicata. However, because AMEC did not respond to the complaint, the court granted Federer's motion for default judgment and awarded $332,000 in damages.

Following her death, Federer's counsel sent a letter to Appellees, as AMEC's surety, seeking payment under the Bond based on the default judgment award. Appellees declined and the Estate filed suit to recover in Georgia statecourt. Appellees removed the case to federal court where, on cross-motions for summary judgment, the Northern District of Georgia determined that Federer's state-court action against AMEC should have been barred by res judicata. Accordingly, the district court granted Appellees' motion for summary judgment, denied the Estate's motion for summary judgment, and dismissed the case. This appeal followed.

II. Discussion

On appeal, the Estate first argues that Appellees are conclusively bound by the state-court default judgment against AMEC and, even having no notice of the underlying action, are not permitted to attack it. Second, assuming that the state-court judgment is not conclusively binding, but is merely prima facie evidence of liability, the Estate argues that Appellees failed to adequately rebut the presumption that such judgment was correct. We discuss each in turn.

A. Effect of the State-Court Judgment

Generally, Georgia courts have observed that "since the first volume of our Supreme Court reports, it has been the rule that a person liable as a surety is not conclusively bound by a judgment against his principal, the judgment being only prima facie evidence of the principal's liability to the creditor." Escambia Chem. Corp. v. Rocker, 124 Ga. App. 434, 438-39, 184 S.E.2d 31, 35 (1971). Under this rule, a "surety may introduce evidence seeking to meet his burden of rebutting theprima facie case against him . . . [but] if [he] fails to carry his burden of introducing evidence sufficient to rebut the correctness of the judgment against the principal, a directed verdict against the surety for the amount of the judgment is demanded." Id. at 439, 125 S.E.2d at 35 (citing Bishop v. Pinson, 33 Ga. App. 269, 125 S.E. 880 (1924)).

However, Georgia courts recognize a distinction, which is salient here, between the treatment of "performance bonds" and the treatment of "judgment bonds." See id. at 438 n.1, 184 S.E.2d at 35 n.1 (distinguishing between a performance bond—which was at issue in the case—and a bond "conditioned to pay the judgment"—which was not). A performance bond is one that obligates the surety to act only on the failure of the principal to perform as promised in the agreement. See Black's Law Dictionary 1319 (Deluxe Tenth Edition 2014) (defining performance bond as "[a] bond given by a surety to ensure the timely performance of a contract"); see also Lingo v. Hartford Fire Ins. Co., No. 4:10CV84MLM, 2010 WL 1837718, at *3 (E.D. Mo. May 4, 2010) ("The bonds at issue are not judgment bonds, but rather performance bonds as they are conditioned upon the bond principal, failing to 'faithfully conform to and abide by the provisions' of the Missouri Residential Mortgage Brokers License Act ('RMBLA') and 'honestly and faithfully appl[ying] all funds received and perform[ing] all obligations and undertakings' as required by the RMBLA."(second alteration in original)). Conversely, a judgment bond is one in which the surety agrees to be liable for a judgment based on a specific violation covered by the bond. See, e.g., Hartford Fire Ins. Co. v. Curtis, 231 W. Va. 596, 603, 748 S.E.2d 662, 669 (2013); Ohio Cas. Ins. Co. v. Ky. Nat. Res. & Envtl. Prot. Cabinet, 722 S.W.2d 290, 292 (Ky. Ct. App. 1986) (explaining that a judgment bond is a bond in which "the surety is obligating itself to pay a particular judgment rendered against a principal, even though the surety had no notice, so long as the judgment is one within the purview of the agreement between surety and principal").

This distinction is relevant because a judgment against the principal of a performance bond is merely prima facie evidence of a surety's liability. Accordingly, "the surety may introduce evidence seeking to meet his burden of rebutting the prima facie case against him." Escambia, 124 Ga. App. at 439, 184 S.E.2d at 35. Conversely, "[judgment] bonds . . . are conditioned to pay the judgment, which makes the judgment conclusive in the absence of fraud, collusion, etc." Id. at 438 n.1, 184 S.E.2d at 35 n.1. Thus, in the current case, Appellees are entitled to rebut the presumption of liability that arises from the judgment against AMEC if the Bond is a performance bond, but not if it is a judgment bond.

We have no trouble concluding that the Bond is a performance bond. The relevant language provides:

NOW, THEREFORE, the condition of the foregoing obligation is such that if [AMEC] shall comply with the provisions of said Georgia Residential Mortgage Act, all regulations duly promulgated thereunder, and all other laws applicable to the conduct of its business, and shall pay any and all monies that may become due and owing to the State of Georgia which shall include, but not be limited to monies owed for fees, fines or penalties under and by virtue of the provisions of the GRMA or the rules of the Department of Banking and Finance, and shall pay any and all monies that may become due and owing any person due to the violation of any such laws and regulations by the principal through its own acts or the acts of any agent of the principal, then this obligation will be void; otherwise the same will remain in full force and effect.

Thus, if AMEC performs its responsibilities, the Bond is void; if it does not, Appellees are called to action. This is the hallmark of a performance bond. Indeed, the Bond clearly provides that even if a judgment were entered, it is AMEC—and not Appellees—who are obligated in the first instance to pay it.

Under Georgia law, parties are certainly free to enter into judgment bonds. As the state courts have recognized, "[o]f course the parties are free to contract as they will, and if it is provided that payment of a judgment obtained against the debtor by the creditor is guaranteed, or is specified that the judgment shall be conclusive of the liability of the guarantor, the contract will be given effect as written." Id. (emphasis added). However, absent some indication that the partiesintended to enter into a judgment bond—or that the GRMA so required¹—neither the Georgia courts nor this Court applying their law will infer such an intent.

The differences between this Bond and the bonds in those cases the Estate suggests "provide insight" are striking. Most notably, the bond in Curtis—although containing language similar to the Bond at issue here—also expressly provided:

If any person shall be aggrieved by the misconduct of the principal, he may upon recovering judgement [sic] against such principal issue execution of such

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