Opinion
CAUSE NO. EV 00-175-C H/H
August 6, 2003
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This diversity action presents a dispute over coal mine reclamation bonds. The bonds were forfeited when Indiana state officials revoked the mining permit for the Buck Creek coal mine in 1998. Plaintiff Utica Mutual Insurance Company was the surety on the bonds and has sued several people and businesses who agreed to indemnify Utica Mutual against losses on the bonds. The court previously granted summary judgment as to liability on Utica Mutual's claims against the Atlas defendants.
The principal remaining issues in the case were tried to the court on November 25-26, 2002. The court severed for later resolution the issues of Utica Mutual's claim for attorney fees and costs and the Vigo Coal defendants' cross-claims against the Atlas defendants. Pursuant to Rule 52 of the Federal Rules of Civil Procedure, the court now states its findings of fact and conclusions of law on the issues and claims that have been tried. The substance of a finding or conclusion, rather than the court's label, shall control its treatment. As explained below, on the principal contested issue, the court finds that the Vigo Coal defendants proved their affirmative defense of novation, so that the parties' 1992 transactions in connection with the Vigo Coal defendants' sale of their interest in the Buck Creek mine effectively released them from their indemnity obligations to Utica Mutual under the 1991 indemnity agreement.
I. Facts Establishing the Basis for Utica Mutual's Claims A. Parties
Buck Creek Coal, Inc. (Buck Creek) operated an underground coal mine in Sullivan County, Indiana. Under Indiana law, coal mining companies must post a bond with the Indiana Department of Natural Resources to ensure payment for reclamation of the land to be mined. See Ind. Code § 14-34-6-1, formerly § 13-4.1-6-1. Plaintiff Utica Mutual Insurance Company is a surety company that acts as a surety on such bonds in exchange for the payment of premiums. Utica Mutual issued several such bonds for Buck Creek from 1987 to 1995.
As a condition of issuing the bonds, Utica Mutual also requires mine owners and operators to agree to indemnify Utica Mutual against any loss incurred under the bonds. Under this arrangement, Utica Mutual does not lend any money to any party. Instead, the state government accepts a promise to pay possible future expenses where that promise is backed by the assets of an established insurance company, while the insurance company may evaluate for itself the risk that the mine owners and operators will be unable to pay. The state can be confident it will be paid for reclamation costs, and the surety company is paid for taking upon itself the risk that the mine owners and operators will be unable to pay the possible future reclamation costs.
B. The Parties' 1991 Agreement
In 1991, defendant Vigo Coal Company, Inc. owned by defendants William and Betty Koester, purchased an interest in Buck Creek. At the time of the purchase, defendant Atlas Minerals, Inc., owned by defendants Walter and Susan Pieper, also held an interest in Buck Creek. On August 21, 1991, Buck Creek, Vigo Coal, Atlas Minerals, William Koester, Betty Koester, Walter Pieper, and Susan Pieper signed a General Agreement of Indemnity (the 1991 GAI) to indemnify Utica Mutual on its bonds executed on behalf of Buck Creek. Utica Mutual, acting through Mark Jones of M-J Insurance, then replaced the bonds issued under the prior owners (totaling roughly $700,000) with new bonds in the same amount.
The 1991 GAI provides for the indemnification of Utica Mutual for "every claim, demand, liability, cost, charge, suit, judgment, and expense" that it incurs as a consequence of having executed a bond on behalf of Buck Creek. Ex. 145, ¶ 2. Paragraph 16 provides that the agreement covers all bonds that Utica Mutual executes on behalf of Buck Creek and that the indemnitors' liability continues for an "indefinite period of years until this agreement shall be canceled in accordance with the terms hereof." Id., ¶ 16. Paragraph 16 states in full:
THE INDEMNITORS HEREBY ACKNOWLEDGE THAT THIS AGREEMENT IS INTENDED TO COVER WHATEVER BONDS, WHETHER OR NOT COVERED BY ANY APPLICATION SIGNED BY ANY ONE OR MORE OF THE INDEMNITORS WHICH MAY BE EXECUTED BY THE COMPANY ON BEHALF OF THE INDEMNITORS, OR ANY ONE OF THEM, FROM TIME TO TIME, AND OVER AN INDEFINITE PERIOD OF YEARS UNTIL THIS AGREEMENT SHALL BE CANCELED IN ACCORDANCE WITH THE TERMS HEREOF.
The termination provision appears in Paragraph 14:
This Agreement may be terminated by the Indemnitors, or any one or more of the parties so designated, upon written notice sent by registered mail to the Home Office of the Company, P.O. Box 530, Utica, New York, 13503, of not less than twenty (20) days, but any such notice of termination shall not operate to modify, bar or discharge the liability of any party hereto, upon or by reason of any and all such obligations that may then be in force.
Id., ¶ 14. Thus, to avoid any liability for future bonds issued on behalf of Buck Creek, the indemnitors were required to send written notice of termination to Utica Mutual. Sending a notice of termination would not discharge, however, an indemnitor's liability for bonds that Utica Mutual had issued prior to receiving the written notice.
C. The 1992 Agreement
In 1992, Vigo Coal and the Koesters sold their interest in Buck Creek to Charles Schulties and Walter Pieper. As part of the purchase agreement, buyers Schulties and Pieper agreed "to use their best diligent efforts to replace said [coal reclamation] bonds at their sole expense and to obtain a release of Sellers and Sellers' Affiliates from all liability thereunder." Ex. 123, Buck Creek Purchase Agreement ¶ 4. The problem here stems from the fact that Schulties and Pieper never obtained a formal, explicit, written release from Utica Mutual for the benefit of Vigo Coal and the Koesters.
The intermediary in all transactions between Buck Creek and its various owners and Utica Mutual was M-J Insurance, Inc., which acted as Utica Mutual's agent under a written agency agreement and power of attorney authorizing M-J to issue reclamation bonds in Utica Mutual's name of up to $1 million each. Mark Jones was the M-J agent who actually handled the Buck Creek transactions.
In connection with the 1992 sale, Jones submitted a "Reclamation Bonding Application" to Utica Mutual for the new group of owners. Jones wrote a memorandum in support of the application and sent it to Utica Mutual's Jerry Swarthout, the bond manager who handled Buck Creek's account. Jones Dep. at 12-13. The contents of the application and memorandum are detailed below in the discussion of regarding the novation issue.
On June 17, 1992, Buck Creek, Walter Pieper, Susan Pieper, and Charles Schulties signed a General Agreement of Indemnity (the 1992 GAI) to indemnify Utica Mutual on the bonds it had issued and would issue on behalf of Buck Creek. Ex. 146. The material terms of the 1992 GAI agreement were identical to those of the 1991 GAI quoted above. Vigo Coal and the Koesters were not parties to the 1992 GAI. In contrast to the actions taken after Vigo Coal's purchase of Buck Creek in 1991, after the 1992 transactions were completed, Utica Mutual did not replace the bonds issued before the 1992 sale with new bonds. Utica Mutual later issued additional bonds on behalf of Buck Creek in July 1992 (Ex. 106) and February 1993 (Ex. 107).
Utica Mutual never issued any written document expressly releasing Vigo Coal or the Koesters from the 1991 GAI agreement indemnifying Utica Mutual against losses on the existing or future bonds. There is also no evidence that Vigo Coal or the Koesters ever provided notice of termination of the 1991 GAI pursuant to the terms of Paragraph 14.
D. Forfeiture of the Bonds
Buck Creek encountered serious business difficulties. In October 1998, the Indiana Department of Natural Resources revoked Buck Creek's mining permit and forfeited the bonds to the State of Indiana. Ex. 108. At the time of the forfeiture, Utica Mutual was the surety on four reclamation bonds issued to the DNR on behalf of Buck Creek Coal, in an amount in excess of $800,000. As a result of the forfeiture, Utica Mutual itself contracted for reclamation services that ultimately satisfied DNR. Utica Mutual incurred costs and expenses in the amount of $431,543.31. Utica Mutual made demand on all defendants for indemnification. When its demands were not satisfied, Utica Mutual filed this suit against all the indemnitors, asserting that all the indemnitors under both the 1991 and 1992 GAI agreements are jointly and severally liable to indemnify it for all of its losses on the Buck Creek reclamation bonds.II. Utica Mutual's Claims Against the Atlas Defendants
The court previously granted Utica Mutual's motion for summary judgment as to liability against the Atlas defendants. In the interim, its claims against defendant Charles Schulties have been dismissed without prejudice as a result of his bankruptcy petition. At trial, the remaining Atlas defendants agree that there is no dispute over the amount of their liability. Accordingly, Utica Mutual is entitled to judgment against defendants Atlas Minerals, Inc., Walter J. Pieper, and Susan S. Pieper, jointly and severally, in the amount of $431,543.31, plus prejudgment interest at the rate of eight percent based on the amounts and payment dates reflected in Exhibit 144. Also, Utica Mutual is entitled to attorney fees and costs from the Atlas defendants under the terms of the 1991 and 1992 GAI agreements. Utica Mutual may submit no later than September 3, 2003 a petition for attorney fees and costs incurred in its effort to recover from the Atlas defendants. (Utica Mutual is not entitled, however, to recover from the Atlas defendants the attorney fees and costs devoted to Utica Mutual's efforts to collect from the Vigo defendants.) Atlas Minerals and the Piepers may submit no later than September 17, 2003 any written opposition to the fee request. Upon the request of any party, the court will hold a hearing on the amount of the fees and costs. In the absence of such a request, the court will rule on the paper submissions.III. Utica Mutual's Claims Against the Vigo Coal Defendants
Utica Mutual's claims against the Vigo Coal defendants — Vigo Coal Company, Inc., and William and Betty Koester — are based only on the 1991 GAI. If the 1991 GAI remained effective against the Vigo Coal defendants, then Utica Mutual would be entitled to judgment against them. The contested issue for trial was the Vigo Coal defendants' affirmative defense of novation. The Vigo Coal defendants contend that the 1992 GAI between Utica Mutual, the Piepers, Schulties, and Buck Creek Coal was intended to be a novation that extinguished the Vigo defendants' liability under the 1991 GAI agreement. Based on all the evidence at trial, the court agrees.
A. The Law of Novation
In this diversity action, the court applies state substantive law. Allen v. Cedar Real Estate Group, LLP, 236 F.3d 374, 380 (7th Cir. 2001) (applying Indiana contract law), citing Erie Railroad Co. v. Tompkins, 304 U.S. 64, 78 (1938). The parties agree that the substantive law of Indiana applies here.
In general, an indemnity agreement involves a promise by one party (the indemnitor) to reimburse another party (the indemnitee) for the indemnitee's possible loss, damage, or liability. "Indemnity agreements are contracts subject to the rules and principles of contract construction." Henthorne v. Legacy Healthcare, Inc., 764 N.E.2d 751, 756 (Ind.App. 2002); TLB Plastics Corp. v. Procter Gamble Paper Prods. Co., 542 N.E.2d 1373, 1377 (Ind.App. 1989).
Parties to a contract are always free to release one another from their obligations or to substitute a new contract for an existing one. A novation is a special type of substituted contract in which the parties agree that a new obligor will perform duties while the original obligor is released from performing those duties. See, e.g., Boswell v. Lyon, 401 N.E.2d 735, 741 (Ind.App. 1980) (novation means the substitution of one obligor for another by mutual agreement of the parties); Restatement (Second) of Contracts § 280 (1981) (novation is "a substituted contract that includes as a party one who was neither the obligor nor the obligee of the original duty").
To create a novation, there must be "(1) a valid existing contract, (2) the agreement of all parties to a new contract, (3) a valid new contract, and (4) an extinguishment of the old contract in favor of the new one." SSD Control Technology v. Breakthrough Technologies, Inc., 685 N.E.2d 1136, 1138 (Ind.App. 1997), citing Winkler v. V.G. Reed Sons, Inc., 638 N.E.2d 1228, 1233 (Ind. 1994). "Where a subsequent agreement lacks any language, either express or implied, which indicates an intention `to create a novation, relieve contractual liabilities, substitute parties, or extinguish the old contract,'" the court will not conclude that a party to the first contract has waived its right to sue the original obligor for breach of the first contract. Id., citing White Truck Sales of Indianapolis, Inc. v. Shelby National Bank, 420 N.E.2d 1266, 1271 (Ind.App. 1981).
A novation is never presumed under Indiana law; there must be evidence of "a clear, definite intention on the part of all concerned that such is the purpose of the agreement." J.B. Speed Co. v. Traylor, 173 N.E. 461, 464 (Ind.App. 1930). However, express words are not always necessary to indicate the assent to and acceptance of the terms of a substituted contract or novation. The intent "may be implied from the facts and circumstances surrounding the transaction and the conduct of the parties thereafter." Rose Acre Farms, Inc. v. Cone, 492 N.E.2d 61, 68 (Ind.App. 1986) (finding implied novation or substitution as a matter of law), citing Armour Co. v. Anderson, 51 N.E.2d 496, 497 (Ind.App. 1943) (also finding implied novation or substitution as a matter of law).
The relevant intent, whether express or implied, is the obligee's (here, Utica Mutual's) intent not merely to allow a delegation or assignment of a contractual duty but actually to release the first obligor and to seek performance only from the party allegedly substituted. See White Truck Sales, 420 N.E.2d at 1271. The authors of the Restatement (Second) of Contracts made this point in comment (d) to Section 280, distinguishing between a novation and a mere assignment or delegation of a contractual duty:
However, a mere promise by a third party to assume the obligor's duty, not offered in substitution for that duty, does not result in a novation, and the new duty that the third party may owe to the obligee as an intended beneficiary is in addition to and not in substitution for the obligor's original duty. For a novation to take place, the obligee must assent to the discharge of the obligor's duty in consideration for the promise of the third party to undertake that duty.
Restatement (Second) of Contracts § 280 (1981).
When confronted with a novation defense, courts in Indiana and elsewhere have insisted on clear evidence of the obligee's intent to release the obligor from her obligations under the original contract. See, e.g., Modern Photo Offset Supply v. Woodfield Group, 663 N.E.2d 547, 551 (Ind.App. 1996) (reversing trial court's finding of novation where there was no intent to release original obligor); White Truck Sales, 420 N.E.2d at 1271 (affirming judgment finding no novation where second agreement did not mention novation or otherwise indicate intent to release original obligor); Boswell v. Lyon, 401 N.E.2d 735, 742-43 (Ind.App. 1980) (rejecting novation defense as a matter of law where no intent to release was shown); see also CH2M Hill Central, Inc. v. Madison-Madison Int'l, Inc., 895 F.2d 286, 291-92 (7th Cir. 1989) (affirming summary judgment finding no novation under common law of Wisconsin); In re Integrated Resources Life Ins. Co., 562 N.W.2d 179, 182 (Iowa 1997) (finding that evidence did not show novation; no indication of intent to release original obligor); Security Benefit Life Ins. Co. v. FDIC, 804 F. Supp. 217, 225-29 (D.Kan. 1992) (granting summary judgment rejecting novation defense where evidence did not show clear understanding to release original obligor).
B. Facts Regarding the Novation Defense
If any written document from 1992 expressed a clear and unequivocal intent to have the 1992 GAI serve as a novation or substitute for the 1991 GAI, thus effectively releasing the Vigo Coal defendants from their indemnity obligations, the case would be simple and probably would not have been tried. There is no such document. Instead, a series of both written and oral communications between Mark Jones and M-J Insurance and Gerald Swarthout of Utica Mutual persuades the court by a preponderance of the evidence that the parties intended and agreed to a novation that extinguished the Vigo Coal defendants' indemnity obligations.
The first communication was on April 22, 1992, when Jones submitted to Swarthout a "Reclamation Bonding Application" for Buck Creek Coal. Exhibit 2. Jones' cover memorandum stated in pertinent part:
Enclosed please find the updated financial statements on Buck Creek Mining, Inc., Buck Creek Coal, Inc. and both personal indemnitors, Walter Pieper and Chuck Schulties. . . . Not only does Mr. Schulties bring substantial experience, but also his financial statement shows liquid assets in excess of $2,000,000.
As this is an underground mine, there is substantially less reclamation liability and with the personal indemnity of Chuck Schulties, Walter Pieper and his wife, along with the corporate indemnity, I believe this would be a good account for Utica.
We currently write these bonds, as Vigo posted them when they were a partner to this enterprise. As the bonds are already in place, all we really need to do is transfer these bonds over and have new Indemnity Agreements signed by Chuck Schulties.
The reference to transferring the bonds over implies that the 1991 GAI indemnitors would be released from their obligations. Paragraph 22 of the application stated: "List below any signed endorsement(s) (indemnity) which is available to support this firm." In response, Buck Creek listed only Walter Pieper and Charles W. Schulties. The application did not list the Vigo Coal defendants as retaining their roles as indemnitors after they had sold their interest in Buck Creek.
The next document from the transaction is a June 8, 1992 letter from Rochelle Bristow of M-J Insurance to the controller of Buck Creek Coal. Ex. 4. Bristow enclosed the new GAI form for execution by Buck Creek Coal, the Piepers, and Schulties. Ex. 4. About two weeks later, on June 24, 1992, Bristow forwarded the executed 1992 GAI agreement to Swarthout at Utica Mutual. Ex. 5. The Vigo Coal defendants infer a novation from the fact that some indemnitors under the 1991 agreement were also indemnitors under the 1992 agreement. The Piepers signed both agreements in their individual capacities. See Exs. 145, 146. The Vigo Coal defendants argue that Utica Mutual would have required the same parties to sign the 1992 agreement only if Utica Mutual had believed and intended that the 1991 agreement was no longer enforceable against them.
These documents are all consistent with the Vigo Coal defendants' novation defense. By themselves, however, the documents do not plainly express an intent by Utica Mutual to accept the novation and to release the Vigo Coal defendants from the 1991 agreement. The omission of the Vigo Coal defendants from Paragraph 22 is consistent with a novation defense but by itself falls short of expressing an actual intent to release the indemnitors. Similarly, Jones' memorandum focusing on Schulties' assets and the intended "transfer" of the bonds is consistent with an intent to create a novation, though by itself it does not clearly express that intent. Schulties' assets were relevant to the Reclamation Bonding Application regardless of whether or not Buck Creek and its various owners intended a novation. Similarly, it was in Utica Mutual's best interest to obtain new indemnity agreements including Schulties as an indemnitor regardless of whether a novation was intended. Nevertheless, the fact that all of the documentary evidence is consistent with a novation adds to the credibility of the evidence about oral communications.
When added to the documentary evidence, conversations between Jones and Swarthout about what happened between the April 22nd application and the June 24th return of the executed 1992 GAI demonstrate that Utica Mutual and the other parties intended a novation. Jones testified about his conversations with Swarthout of Utica Mutual. Jones testified that the 1992 GAI was prepared according to Swarthout's instructions in those conversations, and that Swarthout had approved the application in Exhibit 2. Jones was asked about the fact that the Vigo defendants (William and Betty Koester and Vigo Coal) were not signatories to the 1992 GAI:
Jones testified by way of two videotaped deposition sessions. Because of medical problems, he was not available to testify at trial. See Fed.R.Civ.P. 32(a)(3)(C) (use of depositions permitted when witness unable to testify at trial because of illness, among other reasons). The videotaped depositions gave the court the opportunity to observe Jones' demeanor as a witness much as the court had with the witnesses who appeared at trial.
Q And so what's the significance of their not being on the second [1992] indemnity agreement, the new indemnity agreement?
A They had no ownership, they had no control, they were not party to running the company.
Q Was this, in fact, confirmatory of the conversations that you'd had with Mr. Swarthout that they would not be indemnitors?
A Of course, they were selling.
2001 Jones Dep. at 18-19. Jones further testified that he talked with Swarthout in 1992 not about an additional indemnity but about a new indemnity, id. at 59, and the difference is the difference between having a novation and not having one. Jones also testified at pages 69-70 that Swarthout agreed that the new indemnitors would replace the old indemnitors.
Swarthout testified at trial that he did not recall any of his conversations with Jones regarding this matter, which were ten years before trial. Swarthout also testified, however, that he simply would not have agreed to the type of transaction described by Jones, in which the Vigo Coal defendants would have been released from their obligations under the 1991 GAI. In fact, Swarthout testified that it was the custom of Utica Mutual not to release past indemnitors. See, e.g., Tr. at 32, 41-42, 44, 55.
The disagreement surfaced in 1995, however, when Jones wrote to Utica Mutual and asked for a formal release for the benefit of the Koesters. See Ex. 11. Thus, the parties and witnesses had occasion at that time to search their memories and files for the relevant facts.
In light of this conflicting testimony, whether the parties intended a novation hinges upon the credibility of Jones' and Swarthout's testimony. The court must evaluate the testimony as to whether there was an oral agreement between them to the effect that the 1992 GAI would extinguish the Vigo Coal defendants' obligations under the 1991 GAI — i.e., whether the parties expressly agreed and intended the 1992 GAI to be a novation, though they need not have used the word "novation."
For several reasons, the court finds Jones' testimony more credible on this point. These reasons include the witnesses' demeanor and consistency, as well as business and common sense and the absence of evidence that one would expect to see if Jones' account were not correct.
Jones' testimony makes business sense, while Swarthout's and Utica Mutual's account does not. The interest that the Vigo Coal defendants had in obtaining releases from their obligations under the 1991 GAI is obvious and strong. They were no longer affiliated with Buck Creek and thus were giving up any control over their exposure to liability on Utica Mutual reclamation bonds, both past and future.
Jones' testimony also makes sense in terms of Utica Mutual's dual interests in (a) finding the greatest security it could reasonably obtain and (b) maintaining business with its current clients. The new investor in Buck Creek, Charles Schulties, had both substantial liquid assets ($2,000,000) and expertise in the coal mining industry. Jones communicated this information to Swarthout in his April 22, 1992 "Reclamation Bonding Application," which included an article from the Wall Street Transcript naming Schulties as top CEO of the coal industry. See Ex. 2. Although Schulties later ran into financial difficulties, at the time of the 1992 GAI, he looked like a solid credit risk.
Further, the evidence persuades the court that if Swarthout had not approved the transaction as a novation but had insisted that the Vigo Coal defendants remain as indemnitors for a business in which they were no longer involved, Jones would have simply gone to another surety company and obtained new reclamation bonds. Both sides agree that new reclamation bonds from another surety company to replace Utica Mutual's bonds for Buck Creek would have effectively released the Vigo Coal defendants from their obligations under the 1991 GAI agreement.
The evidence at trial showed that Utica Mutual received a two percent premium per year for writing the reclamation bonds and that the bonds typically would stay in place for up to ten or fifteen years. That means if the Buck Creek account (about $900,000 in bonds) had gone elsewhere for the needed bonds, Utica Mutual stood to lose roughly $180,000 over a (typical) ten year period for the bonds. There is no evidence that Jones even tried to shop the business to any competitor of Utica Mutual. The absence of such evidence tends to corroborate Jones' account of the 1992 transaction and of Swarthout's agreement to those terms and to Jones' understanding of the effect of the 1992 GAI.
Utica Mutual has argued that it would not have been easy for Jones to find another surety who would write replacement bonds for Buck Creek. This assertion is not supported by the weight of the persuasive and credible evidence. There is no evidence that Jones even sought out competitors, let alone the difficulty he might have encountered in this speculative search. Utica Mutual certainly had competitors in this business. There is no reason to think that no competitor would have been willing to underwrite $900,000 in reclamation bonds. At the time, the bonds appeared to be secured by what was then about $7 million in net worth of the Piepers and Schulties. Also, the bonds were for an underground mine being run by Schulties, who had considerable expertise with underground mines, and the underground mine had a relatively modest reclamation exposure as compared to surface mines. However, there is no evidence that Jones made any effort at all to find replacement bonds, which is what he would have done if Swarthout had balked at his proposal to have the 1992 GAI replace the 1991 GAI.
Jones' account of the transaction is also consistent with the parties' actions during and following the 1992 transaction. First, Utica Mutual requested that Walter and Susan Pieper provide new signatures on the 1992 GAI. Yet the Piepers were already parties to the 1991 GAI. That means that if Utica Mutual were right and if there were no novation, the Piepers' 1992 signatures would have been superfluous. When the court questioned Utica Mutual about this inconsistency during argument, Utica Mutual argued that it had Mr. Pieper sign the new agreement because he was the new president of Buck Creek and had additional responsibilities and ownership. Tr. at 168-69. That theory seems to the court to be a post hoc rationalization that is not persuasive. Even if it made sense as applied to Mr. Pieper, it does not explain why Mrs. Pieper was required also to sign the new 1992 GAI. The more persuasive explanation for the new signatures by both Mr. and Mrs. Pieper is that new signatures were needed because the 1992 GAI was intended by Utica Mutual and all other parties to replace the 1991 GAI as a novation.
Further, following the 1992 transaction, Utica Mutual stopped asking for and stopped receiving personal financial information from the Koesters and Vigo Coal in connection with the Buck Creek reclamation bonds. That change in practice by Utica Mutual is consistent with the parties' intended novation. Utica Mutual needed current financial information on current indemnitors, but not on former indemnitors, of course. It did not seek such current information from the Vigo Coal defendants. In Exhibit 10, for example, on August 14, 1994, Utica Mutual requested financial information from the Piepers and Schulties, but did not ask for such information from the Koesters and Vigo Coal. Utica Mutual argued at trial that it had some information from the Koesters in other files. Exhibits 124 and 132 show, for example, that Utica Mutual had received financial information from the Koesters in January 1993. That information, however, was current only through March 31, 1992, before the 1992 GAI was executed, and it was not submitted for the Buck Creek mine. There is no evidence that Utica Mutual had additional financial information from the Koesters and Vigo Coal at later times or that Utica Mutual continued to rely on the creditworthiness of the Koesters and Vigo Coal in its continued dealings with Buck Creek after the 1992 transaction was completed.
Swarthout's testimony to the effect that Utica Mutual has a policy against releasing past indemnitors and therefore would never have released the Vigo Coal defendants is not credible. First, the only evidence of such a supposedly ironclad policy came from the testimony of Swarthout and other witnesses from Utica Mutual at trial. That testimony was inconsistent with the company's own prior statements and subsequent argument.
The evidence shows that in 1995, when the controversy over the effect of the 1992 GAI first arose, Swarthout told Utica Mutual that he had agreed to release the Koesters based on whether Buck Creek was profitable after the sale to Schulties and the Piepers. See Ex. 12 13. (Exhibits 12 and 13 are letters from Jones to Swarthout's successor at Utica Mutual. They are in evidence to prove the truth of the matters asserted, and Utica Mutual has not disputed the accuracy of Jones' summary of the Utica Mutual positions to which he was responding.) That version from Utica Mutual — that it would have released the Koesters if Buck Creek had been profitable — is flatly inconsistent with the trial testimony of Swarthout and the other Utica Mutual witnesses about Utica Mutual's supposed ironclad policy and practice of never releasing prior indemnitors.
When this inconsistency was raised with counsel in closing arguments, Utica Mutual retreated from the testimony of its witnesses at trial. Utica Mutual acknowledged that the supposed policy against releasing indemnitors was not universal and unvarying, as its witnesses had testified, but said that Utica Mutual would look at each transaction on its own merits. See Tr. at 162-65. That account by the attorneys is true, in the court's view, but under that account, Utica Mutual's principal lines of factual defense collapse. The weight of the evidence shows an individual transaction in which Utica Mutual agreed to release the Vigo Coal defendants. That approach allowed Utica Mutual to retain what was generally expected to be profitable business for it rather than send Jones and all the defendants to a competitor to accomplish their desired goal of extinguishing the Vigo Coal defendants' obligations under the 1991 GAI.
As a practical matter, Utica Mutual simply did not have the option of keeping the Vigo Coal defendants liable on the 1991 GAI. The business choice Utica Mutual faced was this: Either the 1992 GAI would act as a novation to extinguish the 1991 GAI, or Jones was going to replace the Utica Mutual bonds with bonds from a competitor. Under either alternative, the Vigo Coal defendants would have been off the hook. In the face of those alternatives, Utica Mutual's evidence to the effect that it would rather lose the business to a competitor than modify its supposedly ironclad policy of never releasing prior indemnitors is not credible.
Utica Mutual has emphasized the fact that the Vigo Coal defendants did not testify at trial about their intentions. Utica Mutual argues that this amounts to a failure of proof of intent to have a novation. The court disagrees. First, the subjective intentions of both the Vigo Coal defendants and the Atlas defendants are in evidence and were stated clearly in the 1992 Buck Creek Purchase Agreement: the buyers were required "to use their best diligent efforts to replace said [coal reclamation] bonds at their sole expense and to obtain a release of Sellers and Sellers' Affiliates from all liability thereunder." That contemporaneous expression of intent carries more weight than any expressions of subjective intent ten years later might have. Second, none of the Buck Creek owners had any direct dealings with Utica Mutual; they dealt only through Mark Jones, who expressed their intent to Utica Mutual. Under contract law, intentions that were never expressed to Utica Mutual's Swarthout simply would not have been relevant evidence.
There is no doubt, of course, that the Vigo Coal defendants and those acting on their behalf should have insisted on prompt delivery of a formal written release from Utica Mutual in 1992 with respect to the 1991 GAI. With such a document, the dispute over the novation issue should never have arisen. The weight of the evidence persuades the court that the Vigo Coal defendants and those acting on their behalf were sloppy in failing to obtain such a release. Nevertheless the documentary evidence as supplemented by Jones' testimony, which the court credits, demonstrates that Utica Mutual orally agreed that the 1992 GAI would extinguish the Vigo Coal defendants' obligations under the 1991 GAI. In other words, the preponderance of the evidence shows that all parties, including Utica Mutual, clearly intended a novation. All four elements of a novation were satisfied. See SSD Control Technology, 685 N.E.2d at 1138 (listing elements). The 1991 GAI was the original valid contract. The 1992 GAI was the valid new contract. Utica Mutual and the buyers of Buck Creek in the 1992 transaction agreed to the new contract. Finally, Utica Mutual and the buyers agreed that the new 1992 GAI would extinguish the obligations of the Vigo Coal defendants under the 1991 GAI. The 1992 GAI therefore effectively released the Vigo Coal defendants as indemnitors, and they are not liable to Utica Mutual as a result of the later forfeiture of the Buck Creek Coal reclamation bonds.
Conclusion
For the reasons stated above, the court will enter final judgment in favor of Utica Mutual on the claims it has asserted against Atlas Minerals, Inc., Walter J. Pieper, and Susan S. Pieper, jointly and severally. The court will also enter final judgment in favor of Vigo Coal Company and William and Betty Koester consistent with these findings of fact and conclusions of law. Entry of final judgment must await resolution, however, of Utica Mutual's claim for attorney fees and the Vigo Coal defendants' cross-claims against the Atlas defendants.
The court will hold a status conference at 4:00 p.m. on Thursday, August 28, 2003, in Room 330, Birch Bayh U.S. Courthouse, 46 East Ohio Street, Indianapolis, Indiana, to schedule the resolution of the remaining issues.
So ordered.