___________ No. 94-3867 No. 94-3919

___________ United States of America, * * Plaintiff, * * Ray G. Mair, also known as Ray * Mair, as personal representative* for the estate of Juniet N. * Mair, * * Appellant/Cross Appellee, * * v. * Appeals from the United States * District Court for the District Earl Schwartz; Gladys Schwartz; * of Minnesota. Earl Schwartz Co.; Kay Schwartz * York; Kathy Schwartz Mau; Ray * York; Jarvis York; Jardy York; * Joanna Kay York; Robert Mau; * Cassandra Mau; Brekka Mau; * Kara Lea Schwartz Johnson; * Crookston Cattle Co., * * Appellees/Cross Appellants.*

___________ Submitted: October 19, 1995 Filed: July 30, 1996

___________ Before MORRIS SHEPPARD ARNOLD, FLOYD R. GIBSON and ROSS, Circuit Judges.

___________ ROSS, Circuit Judge.

Appellant Ray Mair appeals from the district court's ruling that his bad faith misconduct relieved Earl and Gladys Schwartz and the Schwart z family partnership (the Schwartzes) of their duty to

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indemnify Mair on cer tain notes held by the FmHA. Mair also appeals from the court's grant of summary judgment in favor o f the Schwartzes on Mair's claimseeking damages for breach of contract. The Schwartzes, in turn , cross-appeal on certain issues relating to damag es. We affirm in part and reverse in part.

I.

In 19 81, appellant Raymond Mair, a cattle rancher, along with hi s wife, borrowed a total of $1,148,275.84 from the FmHA for use in thei r business, the Crookston Cattle Company (CCC). The Mairs signed tw o promissory notes, bot h individually and on behalf of the corporation (the notes). In 1984, the Mairs sold all of the stoc k in CCC for $5,747,500 to the Schwartzes, payable in a combination of cash payments over time and th e assumption of two mortgages on the land and various CCC debts, including the t wo FmHA promissory notes. The Schwartzes claim that because Mai r misrepresented the amount of tillable acreage ow ned by CCC, and because of the general failure of the farm economy in the mid-1980's, they were unabl e to pay the Mairs the amounts called for under the purchase agreement

. Ultimately, the primary and secondary lenders fo reclosed on the farm. The FmHA, which held a third secured position, did not collect on its notes.
In 1986, the Mairs filed suit in Min nesota state court for breach of the purchase agreement, alleging that the Schwartzes had failed to make th e payments to both the Mairs and the FmHA. The Schwartzes counterclaimed fo r fraud in the inducement, asserting the Mairs hadmisrepresented the number of ti llable acres. Through discovery, the Mairs learned that th e Schwartzes were converting FmHA's collateral that secured payment of the notes by commingling the collateral pledged to the FmHA with othe r collateral owned by another Schwartz entity known as Schwartz Farms.
In 1989, the parties adopted a settlement agreement, whereby

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the Schwartzes agreed to pay the Mairs $1.95 mil lion in cash over time and to indemnify the Mairs from claims that could be asserted by certain third parti es, including the FmHA. As part of the agreement, the Schwartze s agreed to resolve or cure any claim within ten days following receipt of a notice of claim as defined in paragraph 4 of the settlement agreement:

Schwart zes will indemnify Mairs from any and all charges , cla ims and liabilities that may arise out of Mairs' persona l obligations under the mortgages and security agreements an d notes which they secure against [CCC] land and assets held by . . . the FmHA. Mairs a gree to notify Schwartzes by certified mail of any charges, claims or liabilities arising out of the above-referenced mortgages, security agreements and notes o r Mairs' personal guarantees thereof. Any such notice shal l include information pert aining to the nature and extent of the claim

. A description thereof, including the amount an d par ticulars of any such charge, claim or liability shall b e included in any such notice. Schwartzes shall have ten day s followi ng receipt of any such notice in which to resolve o r cure the charge, claim or liability to which refere nce is made.

Parag raph 4 also provided that, if the Schwartzes chose to contest th e claim, their obligation to resolve or cure the c laim would be satisfied if they posted "an amount in cash which would be sufficient to pay such claim , charge or liability."
Under par agraph 5 of the settlement agreement, the Mairs agreed to
consen t to any satisfaction of the FmHA indebtedness, "including a n agreement to sign an FmHA form document in which the Mairs and th e Schwartzes agree that the net recovery value to the FmHA under its mortgag e from [CCC] is zero."

The Schwartzes' obligations under the settlement agreement wer e secured by two provisions in the contract, one providing for the posting of "adequate security" as determined through an arbitration process, and the other providing for the entry of a $3.5 mill ion confession of judgment in the event the Schwartzes

### The $2.8 million judgment resulted from the $3.5 millio n 1 

### agree d-upon confessed judgment, reduced by the payments th e Schwartzes had made to date. -4- defaulted on their ob ligations. Payments by the Schwartzes or any writedowns of third-party obligations would reduce the confession of judgment.

Following execution of the settlemen t agreement, the Schwartzes made regular payments to the Mairs. Substantially all of the $1.95 million plu s inte rest was paid off by December 1994. The Schwartzes, however, a s before, failed to make any payments to the FmHA.

Mrs. Mair died on October 27, 1991, and on December 31, 1991, th e FmHA file d a claim against her estate in the amount of $1,538,020, plu s additional per diem interest, for payment of the FmHA promissory notes for which the Mairs remained primarily liable. On J anuary 19, 1992, Mair sent
a copy of the claim to the Schwartzes in accordance with the notic e provision of paragraph 4 of the settlement agreement. The FmHA probat e claim was not allowedby Ray Mair, personal representative of the estate, and the claim was later disallowed. The government subsequently filed a petition for allowance, thereby reviving the claim.

On Apr il 28, 1992, the United States filed this action in federa l court against Ray Mai r personally. Mair did not inform the Schwartzes of this lawsuit. Instea d, on May 8, 1992, Mair filed the plea of confession of judgment without n otice in federal court and obtained an ex parte $2.8 million judgment against the Schwartzes. Mair then brought third-part y 1 claims against the Schwartzes, seeking damages for breach of thei r agreement to indemnif y. During the course of the proceedings, the United States amended its complaint to seek damages against the Schwartzes , claiming that it was a third-party beneficiary of the settlement

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agreement.

On Jun e 3, 1992, the Schwartzes contacted the FmHA and offere d $40 0,000 to settle the $1.5 million obligation to the FmHA. The FmH A rejected the offer onAugust 14, 1992, explaining that it was "not viewed
as reasonable" but that further discussion would be welcomed if th e Schwartzes offered "a more substantial portion of the total due."

The Schwa rtzes moved to vacate the judgment of confession on August 3, 1992, claiming they were not given proper notice prior to its filing. Mair opposed the moti on, arguing that the Schwartzes had waived the right to no tice in the settlement agreement. The district court granted th e mot ion to vacate the judgment on October 5, 1992, finding that th e Schwart zes "may not have been notified of the default proceedings no r served wi th the third party complaint prior to the entry of defaul t judgment."

In Decemb er 1992, the Schwartzes and the United States negotiated a $900,000 settlement of the FmHA indebtedness which was conditioned upon th e release of all outstanding claims, including, according to Mair, his cross

claim against the Schwartzes for damages resulting from their allege d failure to indemnify. Consequently, Mair refused to join in the settlemen t
as wri tten. Notwithstanding Mair's alleged failure to cooperate, th e Schwartzes successful ly settled with the United States on August 23, 1993 for $900 ,000. In the same instrument, the government assigned th e negotiable FmHA promissory notes to the Schwartzes, including any claims the government may have had against Mair relative to those notes.

On August 27, 1993, four days after they were substituted a s plaintiffs for the United States, the Schwartzes filed two motions fo r summary judgment. First, as third-party defenda nts, the Schwartzes sought summary judgment on Mair's cross-claim for breach

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of contract, assertin g that their duty as indemnitors had been discharged because of Mair's bad faith.

Second, the Schwartzes filed a motion for summary judgment a s assignees of the United States, seeking damages of $1,722,754.10 against Mai r on the notes. Only $840,183.69 owed on the notes represente d principal, while the remaining $882,570.41 represented interest an d advances that had accrued during the nine years in which the Schwartze s failed to make payment on the FmHA loans.
In January 1994, the district court denied the Schwartzes' moti on for summary judgment on the notes, but granted the Schwartzes' motion fo r summary judgment on Mair's cross-claim. The dis trict court concluded that the Sch wartzes' duty to indemnify had not been triggered because Mai r failed to properly no tify the Schwartzes of the FmHA claim. Further, the court held that by obtaining a confession of judgment against th e Schwart zes without first notifying them of the FmHA suit against Mai r personally or without notifying them of his intention to obtain a default judgment, Mair breached his duty to provide notice under paragraph 4 of th e settlement agreement.

In addition, the district court held that Mair breached his dut y unde r paragraph 5 of the settlement agreement, which required him t o "consent to any satisfaction" of the FmHA indebt edness, when he refused to
conse nt to the proposed $900,000 satisfaction agreement between th e Schwartzes and the United States on the FmHA notes. The court concluded that " any obligations the Schwartzes had under the Settlement Agreemen t were eliminated by the Mairs' bad faith conduct in this matter," including their duty to indemnify Mair. Accordingly, the court allowed th e Schwartzes to take assignment of the FmHA notes and claims and to sue Mair
on the same notes against which the Schwartzes had agreed to indemnify him

.

### -7- In May 1994, the case went forward to trial on the Schwartzes' claims
on the notes. The only issues remaining at trial were whether th e Schwartzes had impaired the collateral securing the notes and, if so, in what amount. On May 27, 1994, the jury returneda special verdict stating that Mair had proven an impairment of $1,200,000. The amount of impairmen t
was subtracted from the stipulated amount still owing on the notes, an d judgment was entered against Mair in favor of th e Schwartzes in the amount of $629,608.16.

II.

Several critical issues are raised i n this appeal. We first turn to the question of notice under the settlement agre ement. The district court
con cluded that the Schwartzes' indemnification obligations were neve r triggered because Mair failed to properly "notify" the Schwartzes of the FmHA claim against Mrs. Mair's estate. Specifically, the court stated tha t the Mairs failed to provide the Schwartzes with information detailing a specific loss resulting from the FmHA claim. The court held, "[w]ithout this information, the Schwartzes had no duty to indemnify under th e Settlement Agreement."

We disagree with the district court's interpretation of the notic e require ment. Under the unambiguous terms of the agreement, the Mair s agre ed to notify the Schwartzes of, among other things, any "claims "
ar ising out of the mortgages, and that such notice would includ e "inf ormation pertaining to the nature and extent of the claim[,] [a ] description thereof, including the amount and particulars of any such . .

. claim."
On January 19, 1992, Mair sent a cer tified letter to the Schwartzes, including a copy of the claim filed by the Unite d States, on behalf of the FmH A, against Mrs. Mair's estate, stating that "[t]his notice is serve d . . . pursuant to paragraph 4 of the

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Releas e and Settlement Agreement." The letter further provided that , pursuant to paragraph 4 of the settlement agreement, the Schwartzes had te n days following receip t of this notice to resolve or cure the claim, or to deposit sufficient funds in escrow to cover the claim if they chose t o contest the liability.
This "notice" clearly included "info rmation pertaining to the nature and extent of the claim, . . . including the amount and particulars of" th e claim and therefore satisfied the terms of the settlement agreement

. Contrary to the Schwartzes' argument, Mair was n ot required to give notice of a lawsuit or the commencement of another enforcement proceeding, o r notice of a specific loss resulting from the cla im. On the contrary, Mair
was only required to give notice of a "claim." Mair satisfied thi s obligation. This conclusion, however, does not end our inquiry.
Immediately following notification of the probate claim, Terri Groen, the Schwartzes' attorney, requested an accounting of the value of Mrs

. Mair's estate on several occasions. Ms. Groen explained that any escrow amount required under paragraph 4 of the settlement agreement would b e limited to the amount of the potential loss to b e suffered if the FmHA was successful in pursuing its claim against the estate. In other words, if the value of the esta te was less than the outstanding balance of the FmHA loans, the maximum potential loss would be an am ount equal to the value of the estate. The Schwartzes asserted that they w ere not required under the terms of the settlement agreement to deposit the full amount of the FmHA indebtedness, but only to "escrow an amount . . . sufficient to pay such claim , charge or liab ility." Settlement Agreement, ¶ 4 (emphasis added). Nevertheless, Mair refused to provide what he considered to be confidentia l financial information to the Schwartzes.
We disagree with the district court' s conclusion that Mair's failure to provide such information rendered the notification of

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the claim deficient. Instead, we conclude that Mair's unwillingness t o cooper ate prevented the Schwartzes from complying with their duty t o resolve o r cure the claim within ten days as required by the agreement

. As such, while the Schwartzes' duty to indemnify was adequately triggered, the undisputed facts show that they were prevent ed from doing so by Mair's
own failure to cooperate. Thus, the Schwartzes' duty to resolve or cure the claim within ten days was excused under these circumstances. See Zobe l & Dahl Constr. v. Crotty , 356 N.W.2d 42, 45 (Minn. 1984) ("[E]very contrac t contains an implied condition that each party will not unjustifiably hinde r the oth er from performing."); Craigmile v. Sorenson , 80 N.W.2d 45, 4 9 (Minn. 1956) (where promisor is the cause of the failure of performance, "he cannot take advan tage of the failure") (citing 3 Williston, Contracts (Rev. ed.) § 677).

III.

We next address the district court's determination that th e Schwa rtzes' entire obligation under the settlement agreement wa s extinguished due to Mair's bad faith. The court 's conclusion was based on its findings that Mair breached the settlement agreement by filing the ple a of confession without prior notice and that Mair acted in bad faith b y failing to consent to the Schwartzes' $900,000 settlement agreement with the FmHA. Upon review, we hold the district cou rt erred in reaching these conclusions.
First, the district court misapplied the clear terms of th e settle ment agreement by concluding that Mair breached the notic e requ irements of paragraph 4 when he filed the confession of judgmen t without first informing the Schwartzes of his intention to do so. Under paragraph 4, the Mair s agreed to "notify Schwartzes . . . of any claims." As we have previously held, Mair satisfied this obligation. The district court, however, apparently interpreted the contract to require Mair to sen d
an additional "notice of default" prior to filing the confession o f judgment.

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Paragraph 3(c) provides:

If Schwartzes fail to ma ke any payment when due hereunder, and fail to cure said default within ten days after Mairs giv e notice of default by certified mail . . ., Mairs or thei r attorney in fact may fil e said judgment against the Schwartzes in any court in the Stat e of Minnesota and proceed to exercise all remedies to collect said judgment. . . .

The " notice of default" reference in paragraph 3(c) does not impose a n additi onal notice requirement on Mair, but instead refers to th e Schwartzes' "fail[ure ] to make any payment when due" under the settlement agreement. It is the Schwartzes' failure to make payment that results in the referenced "default," and not their failure to cure a claim within ten days. Therefore, under the unambiguous terms of the agreement, "notice of claim" is synonymous with "notice of default" and Mair satisfied thi s obligation via the January 19, 1992 letter to the Schwartzes. The distric t court e rred in holding that Mair breached the settlement agreement b y failing to inform the Schwartzes of his intention to file the confession of judgment. Consequently, the court erred in negating the Schwartzes' duty to indemnify based on this erroneous conclusion.

Th e district court also erred in concluding that any alleged ba d faith on the part of Mair excused the Schwartzes' entire obligation t o indemnify. While some courts have established the blanket proposition tha t bad faith on the part of the indemnitee releases the indemnitor from his obligations under the contract, other courts, particularly the Minnesota Supreme Court, hold that an indemnitee's bad faith will discharge th e indemnitor to the extent that he has been damage d as a result of that act. In New Amsterdam Cas . Co. v. Lundquist , 198 N.W.2d 543, 549 (Minn. 1972) the Minnesota Supreme Court held:
[A]n indemnitee owes a duty of good faith to its

### Mair, of course, claims there was no bad faith in his refusal 2 

### to sign the agreement as written because it required him to release his cl aims against the Schwartzes for breaching the origina l settlement agreement. He asse rts that notwithstanding his promise to conse nt to a satisfaction agreement with the FmHA, he was no t legall y required to release all of his claims against th e Schwartzes. -11- indemnitor and . . . any act of the indemnitee whic h prejudices the rights of the indemnitor will release his oblig ation to the extent of the prejudice

. (Emphasis added). See also Denton v. Fireman's Fund Ind. Co. , 352 F.2d 95, 99 (10th Cir. 1965).

Contrary to the clear law of Minnesota, the district court in th e prese nt case discharged the Schwartzes' entire obligation under th e sett lement agreement, without giving any consideration whatever to th e extent, if any, of the prejudice suffered by the Schwartzes as a result of Mair's alleged bad faith. Even assuming that Mair acted in bad faith in failing to consent to the proposed $900,000 settlement , the Schwartze s 2 were ultimately able to settle with the government for that exact amount, and thus suffered no prejudice. Because they suffered no prejudice a s a result of Mair's alleged bad faith , the Schwartzes' obligation to indemnify under the settlemen t agreement remained intact. The district court erred in concluding that th e Schwartzes no longer had a duty to indemnify Mair for claims arising from the notes, and further erred in its concomitant holding that the Schwartze s were entitled to sue Mair on the remaining balance of the notes, the same not es for which the Schwartzes agreed to hold Mair harmless. To hol d otherwise would produce the untenable result of allowing the Schwartzes to profit from their failure to satisfy their own indebtedness to the FmHA.

### -12- IV.

In summar y, we hold that Mair adequately notified the Schwartzes of the FmHA's claim against Mrs. Mair's estate. Inthis respect, we conclude that the indemnificat ion agreement was triggered and the Schwartzes had a duty to indemnify Mair from this claim. However , the Schwartzes' attempts to cure the claim were thwarted by Mair's failure to cooperate. Therefore , the Schwartzes did not breach their duty to inde mnify under the settlement agreement and Mair was not entitled to the default judgment outlined in th e confession of judgment.
Finally, we conclude the Schwartzes were not prejudiced by an y alleged bad faith on the part of Mair as indemnitee, as the Schwartzes wer e ultimately able to settle with the United States in an amount identical to that proposed to and rejected by Mair. As such, the Schwartzes' duty to indemnify remained intact and the district court erred in allowing th e Schwartzes to sue Mair on the same obligations u nder which they had agreed to indemnify him.

This conf lict has lasted for ten years now, each party contributing to a bitter and protracted legal battle. Neither party comes to this cour t with entirely clean h ands and neither party is entitled to the respective windfalls that they seek. Both parties have received substantially what they bargained for.
Our conclusions herein obviate the need to discuss any further issues presented in either the appeal or cross-appeal. The denial of Mair' s motion for damages incident to the confession of judgment is affirmed. Th e order granting the Sc hwartzes' motion to be substituted as plaintiffs and the judgment in favor of the Schwartzes as assignees of the notes ar e reversed.

### -13- A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.