## The Honorable Robert R. Beezer, United States Circuit Judge for the Ninth 1 

## Circuit Court of Appeals, sitting by designation. This case was submitted to the panel on June 11, 1997, and an opinion was 2 

## filed on September 5, 1997. On October 15, 1997, the panel granted rehearing on certain issues. See Transit Casualty Co. v. Selective Ins. Co. of the Southeast , 122 F.3d 1137 (8th Cir. 1997). Judge Henley, a member of the original panel, died on October 18, 1997. Pursuant to the court’s random selection process, Judge Murphy was named to take Judge Henley’s place on the panel.
The panel now files this amended opinion in place of the September 5, 1997, opinion. United States Court of Appeals FOR THE EIGHTH CIRCUIT

__________ No. 97-1090

__________

Transit Casualty Company, *
* Plaintiff/Appellee, * Appeal from the United States
* District Court for the Western
v. * District of Missouri
* Selective Insurance Company * of the Southeast, *
* Defendant/Appellant. *

_________ Submitted: June 11, 1997 Filed: February 18, 1998

_________ Before WOLLMAN, BEEZER and MURPHY, Circuit Judges. 1 2

## Selective was formerly known as Southeastern Insurance Company. 3


## -2- _________ BEEZER, Circuit Judge:

Se lective Insurance Company appeals the district court’s summar y judgment holding that Selective may not offset its debt to Transit Casualt y Company against the sums owed by Transit to Sele ctive. The district court held that the contractual right of offset between the parties conflicted with the insolvency clause in the contracts and that granting the offset violat ed Missouri public policy. Accordingly, the court found tha t Selective owed the full sum of its obligations to Transit and awarde d prejud gment interest. We have jurisdiction over this timely appea l pursuant to 28 U.S.C. § 1291, and we reverse.

I This case involves two sets of contracts. The first set concern s three retrocession contracts which Transit entered into in 1983, wit h Fortre ss Re as the reinsurance underwriting manager on behalf o f Sele ctive. Pursuant to these three contracts, Transit has submitted a 3 number of claims that remain unpaid. As of the date of summary judgment in this case, Fortres s, on behalf of Selective, owed Transit $183,390.98.

In the second set of contracts, Transit acted as reinsurer fo r Fortress. Between 1980 and 1985, Transit entered into ten reinsuranc e contracts with Fortre ss, acting on behalf of its member companies, one of whom is Selective. Although none of the

## In the parties’ letter briefs submitted in connection with Selective’s petition 4 

## forrehear ing, the parties agree that Fortress was Selective’s agent. Selectiv e repeatedly referred to Fortress as its agent. ( See Selective Ltr. Brief passim .) Similarly, Transit conceded that Fortress acted as Selective’s agent. Transit stated in its Letter B rief that “Transit agrees with Selective that Fortress Re was the onl y signa tory to [the retrocession contract] and did so as Selective’s authorized agent. ” (Transit Ltr. Brief at 2.) Transit also stated that “[a]lthough Selective did not produce this third part

y Agreement between the `member companies’ of the pool of reinsurers and the underwriting agent Fortress Re, Transit does not contest that Fortress Re acted as Selective’s agent.” (Transit Ltr. Brief at 3, n.2.)
-3- member companies was named in those contracts, i.e. , only Fortress was a sig natory, it is undisputed that Fortress acted as Selective’s agent i n connection with those contracts. U nder these ten contracts, Transit owes 4 the Fo rtress companies unpaid claims in the amount of $337,974.68

. Selective was a member company for the time period covered by six of the contracts.

Transit w ent into receivership on December 3, 1985, and liquidation proc eedings began in Missouri. Fortress filed claims in the Transi t receivership proceeding under each of the ten reinsurance contracts. Eigh t of thes e ten claims were allowed by the receiver, for a total amount o f $316,364.35. T he parties have stipulated both to the amount of money Transit owes under the reinsurance contracts and to Selective’s share of that amount; it is undisputed that Transit owes Selective $32,432.23.

The r eceiver for Transit subsequently brought this action agains t Selec tive in Missouri state court seeking recovery of the sums owed b y Selective under the three retrocession contracts. Selective removed the action to federal cou rt and pleaded as an affirmative defense that it had

a right to offset the sums it owed to Transit against funds owed by Transi t to Selective under the ten reinsurance contracts.

The retro cession contracts, under which Transit brought this action against

## -4-

Selective, contain an insolvency provision. The reinsurance contracts , under which Selective claims a right of offset, contain both an insolvency clause and an offset clause.

The district court granted summary judgment in favor of Transit , holding that the insolvency clause conflicted with the set-off clause in the reinsurance contracts, and that upon Transit’s insolvency th e insolvency clause gov erned the rights of the parties. The district court fur ther held that the insolvency clause did not grant an inter-contrac t set-off right and that, even if it did, such a set-off would be contrary to Missouri’s Insurance Code and was void.

II We re view the district court’s grant of summary judgment de novo

. Kielmele v. Soo Line R.R. Co. , 93 F.3d 472, 474 (8th Cir. 1996). In this diversity case, the interpretation of the insuring agreement is a matter of state law, General Cas. Ins. Co. v. Holst Radiator Co. , 88 F.3d 670, 67 1 (8th Cir. 1996), and we review de novo the distr ict court’s interpretation of state law. Salve Regina College v. Russell , 499 U.S. 225, 231 (1991).

Selective’s appeal presents three is sues for resolution: (1) whether the allowance of a set-off violates the Missouri Insurance Code; (2 ) whether the parties contracted to allow a set-off; and (3) whethe r Selective is entitled to a set-off in this case. We answer the firs t question in the negat ive and the second in the affirmative, and hold that Selective may avail itself of the contractual ri ght of set-off because the parties’ obligations were mutual.

A. The first question presented by Selective’s appeal is whether th e offset of debts in insolvency violates the Missouri Insurance Code o r otherwise violates Missouri

## -5-

public policy. If such a prohibition is discove red, any contractual right of offset is irrelevant. Transit contends that the Missouri Insurance Cod e consti tutes a comprehensive scheme for the resolution of the faile d insurer’s assets and that the Code does not condone set-offs. Moreover, argues Transit, allow ing set-offs would subvert the priority of creditors established in the Code.

Selective , on the other hand, argues that set-offs merely establish the bou nds of the pre-receivership assets and that the Insurance Cod e govern s only the distribution of those assets, rather than thei r definition. We agree with Selective that nothing in the Insurance Code no r in Missouri common law indicates that Missouri rejects the right of partie s to contract for a right to offset debts.

In 189 2 the Supreme Court held that the right to assert set-off i n inso lvencywas customary both statutorily and as a matter of equity

. Indeed, the Court stated that “where the mutual obligations have grown out of the same transacti on, insolvency on the one hand justifies the set-off of t he debt due upon the other.” Scott v. Armstrong , 146 U.S 499, 50 7 (1892). The Court went on to hold that “[w]here a set-off is otherwis e
va lid, it is not perceived how its allowance can be considered a preference, and it is clear that it is only the balance, if any, after the set-off is deducted, which can justly be held to form part of the assets of the insolvent.” Id. at 510.

The Supreme Court of Missouri subsequently dealt with the questio n of offset in an insurance insolvency proceeding. The Court recognized the right to offset debts, but disallowed the offset because of the lack o f mutuality of obligati on. Citing Scott v. Armstrong , the Missouri Supreme Cou rt stated that the “right to assert set-off at law is of statutor y creation, but courts of equity from a very early day have been accustomed to grant relief in that regard independently as well as in aid of statutes upon the subject.” Sturdivant Bank v. Stoddard County , 58 S.W.2d 702, 703 (1933). Thus, the broad principle of offset in insurance insolvencies has been accepted by Missouri courts. Missouri courts continue to allow offse t in contractual disputes. See

## Mo. Rev. Stat. § 375.700 (1997) provides: 5



## 1. Unless reinsurance of a dissolved insurer is effected and it s assets conveyed to the reinsuring company as provid ed by law, and unless such insurer is b eing rehabilitated under other provisions of sections 375.010 to 375.1246, the receiver, under the direction of the co urt, shall apply the sums realized from the assets of suc h insurer in hereafter making any partial or final distribution, in the following order: (1) T o payment of all the expenses of closing the business and disposing of the assets of such insurer; (2) To the payment of all lawful taxes and debts due the stat e and the counties and municipalities of this state; (3) To the payment of policy claims; (4) To the payment of debts due the United States; (5) To the payment of the other debts and claims allowe d agains t such insurer, and the unearned premiums and th e surrenderedvalue of its policies, in proportion to their respective amounts.
-6- Greenwood v. Bank of Illmo , 782 S.W.2d 783 (1989); Edmonds v. Stratton , 45 7 S.W.2d 228 (1970).

The Missouri Insurance Code establis hes the priority of creditors in the case of an insurer insolvency. This section, along with t he remainder 5 of the statute, dictates the order of distribution of the insolven t insura nce company’s assets at the time the receivership or liquidatio n order is entered. If, as is contemplated in Scott v. Armstrong , set-off def ines the nature of the insolvent’s assets, allowing set-off does no t subvert the priority of creditors established by statute. Because th e Missouri courts have accepted the right of parties to offset debts and hav e adopted Scott v. Armstrong , we believe that the Missouri Supreme Cour t would hold that a mutual set-off may constitute a pre-receivership asset that does not subvert the priority of creditors listed in the Insuranc e Code.

## -7- We are aware that the allowance of set-offs affects the nature of the claims allowed: Whe reas the allowance of set-offs furthers some publi c policies, it may conflict with other public policie s that guide the administration of insolvent estates: the prohibition o f pr eferences (the preferential treatment of one creditor ove r ano ther), and the guarantee of a pro rata distribution o f est ate assets. There is no question that in som e circumstances, the application of set-off principles works to the advantage of one particular creditor, or class o f creditors, and to the disadvantage of others. For nearly two thousand years, however, courts and legislatures have resolved the tension between these competing public policies in favor of set-offs.
Stephen W. Schwab et al., Onset of an Offset Revolution: The Application of Set -Offs in Insurance Insolvencies , 95 Dick.L.Rev. 449, 454 (1991)

. Acknowledging this te nsion, we hold that parties in Missouri may contract to offset mutual debts.

The allowance of set-off in Missouri insurance insolvencies does not contradict the Missouri Insurance Code and it does not otherwise violate Missouri public polic y. There is no indication in Missouri case law that the right to set-off has been rejected. Moreove r, to allow set-off aligns Missouri with almost all other states. See id. at App. A. Indeed, since Transit’s insolvency, Missouri has enacted a set-off provision, a n indication that set-offs likely did not violate public policy prior to the enactment. Mo. Rev. Stat. § 375.1198 (1997).

B. Given that parties in Missouri are free to contract for a right o f set-off, we next cons ider whether the parties did, in fact, bargain for a right of offset. We hold that the contracts at issue here allow for the set-off of mutual obligations.

Th e retrocession contracts, under which Transit brought this suit , do not contain a set-off clause. But the ten re insurance contracts, under which Transit owes money

## -8-

to Fortress Re, do:

The parties may offset any balances (whether on account o f premium, commission, cla ims, losses, loss adjustment expenses, salvage or other) due from one party to the other under thi s Contra ct or under any other Contract heretofore or hereafte r entered into by the parties.

The district court found that the offset clause conflicted with th e following insolvency clause:

In the event of the insolvency of [Transit] it is understoo d and agreed that [the Fortress companies’] claim agains t [Transit] in the insolvency proceeding shall consist of al l amounts owing to [the Fortress companies] from [Tra nsit] on the date of the entry of a receivership or liquidation order, . .

. including but not limited to, liquidated and unliquidate d claims and claims undetermined in amount on said da te, all such claims being deemed hereby to be in existence as of such date less th ose amounts owing from the [Fortress companies] t o [Tr ansit] on the date of the entry of the aforesai d receivership or liquidation order.

We disagree with the district court that the clauses cannot operat e simultaneously. In interpreting a contract unde r Missouri law, we attempt to harmonize the various provisions of a contract, and we read them t o avoid a conflict. Phillips v. Authorized Invest ors Group , 625 S.W.2d 917, 921 (Mo. App. 1981). If the terms of the contract are clear, we appl y those provisions as w ritten. We find that the contract here is clear and that there is no necessary conflict between the two clauses.

The insolvency clause stipulates that, in the event of Transit’ s insolvency, the Fortress companies’ claims would be deemed to be i n existenc e as of the date of insolvency and that the amount owed by th e Fortress companies to Transit would be deducted from the claimed amount. This appears to be a set-off clause within the i nsolvency clause. Transit maintains that it covers only debts under the reinsurance

## -9-

contracts and does no t apply to obligations under other contracts, as the set-off clause does.

We are unconvinced by Transit’s argument. The two clauses may b e read harmoniously, an d there is no reason not to do so in this case. The insolvency clause does not clearly limit its off set provision to sums owed und er the reinsurance contract; the offset clause clearly does apply t o
sums owed under other contracts between the parties. Accordingly, th e reinsurance contracts provide for an inter-contract right of set-off. We

see no rea son why the insolvency clause and the set-off clause canno t operate simultaneously. Together, these two cla uses manifest an intent by the parties to allow set-off of mutual obligations.

III We next c onsider whether Selective may set-off its debt to Transit. In order for a set-off to be applied, the parties must be “mutuall y indebted.” Sturdivant Bank , 58 S.W.2d at 704. “It is a rule o f practicallyuniversal application that to warrant a set-off at law th e demands must be mutual and subsisting between th e same parties, due in the

same capacity or right, and there must be mutuality as to the quality of right.” Id. at 703-04. In other words, “the mutuality of capacit y require ment means that in order for debts to be set off in an insuranc e insolvency, the parti es between whom the set-off is to be made must stand in the same relations hip or capacity to each other.” Schwab, 95 Dick. L. Rev. at 478.

It is undisputed that Fortress acted as Selective’s agent wit h respect to the reinsu rance contracts. More specifically, Selective was a partially disclosed principal with respect to the reinsurance contracts. A “part ially disclosed principal” is a party whose existence, but no t identity, is disclose d to the other parties to the contract. Restatement (Second) o f Agency § 4(2) (1958). The Restatement (Second) of Agenc y provides that “[t]he other party to a contract made by an agent for a disclosed or partially disclosed principal . . . is liable to the principa l as if he had contracted directly

## -10-

with the principal.” Restatement (Second) of Agency § 292 (1958); cf

. Quick Erectors, Inc. v. Seattle Bronze Corp. , 524 F. Supp. 351, 356 (E.D. Mo. 1981) (citing Sonnenfeld Millinery Co. v. Uhri , 83 S.W.2d 168, 169 (Mo

. Ct. Ap p. 1935)) (a nonfraudulently undisclosed principal may enforce a contract under Restatement (Second) of Agency § 304); Phillips v. Hok e Const r., Inc. , 834 S.W.2d 785, 788-89 (Mo. Ct. App. 1992) (citin g Sonnenfeld Millinery Co. ). Thus, although only Fortress and Transit are signa tories to the reinsurance contracts, Selective, as a partiall y disclosed principal, may bring a cause of action against Transit unde r those reinsurance contracts; similarly, Transit may sue Selective under th e retrocession contracts. See Sturdivant Bank , 58 S.W.2d at 704 (“I f defenda nt’s demand is due and payable while plaintiff’s is not . . . i t
seems clear that the parties are not mutually indebted.”); see als o Greenwood v. Bank of Illmo , 782 S.W.2d 783, 786 (1989), quoting Dalton v. Sturdi vant Bank , 76 S.W.2d 425, 426 (1934) (“It is a general rule o f practicallyuniversal application at law that, to warrant a set-off, the demands must be mutual and subsisting between th e same parties and must be due in the same capacity of right. Equity usual ly follows the law, and it is held as a general rule that in equity as at l aw the right of set-off is reciprocal, and only mutual claims and such as a re in the same capacity or right can be set off. ”) In short, Selective contracted both as reinsurer and re insured with Transit. Accordingly, Transit and Selective ar e mutual lyindebted, and Selective prevails on its affirmative defense o f set-off.

IV Selective finally contends that the district court erred in awarding prej udgment interest from 90 days after each demand Transit made fo r payment of claims under the retrocession contrac ts. Selective argues that the debts were not liquidated until February 17, 1995, the date the partie s stipu lated to the amount of insurance proceeds at issue. The distric t court found that Transit had made demands for proceeds from claims du e every year since 1986 and awarded prejudgment interest from 90 days after each demand. Whether the district court had authority to grant prejudgmen t interest is a questio n of state law which we review de novo. Latham Seed Co. V. Nickerson

## -11-

American Plant Breeders, Inc. , 978 F.2d 1493, 1501-02 (8th Cir. 1992).

The Missouri Code provides: “Creditors shall be allowed to receiv e interest at the rate of nine percent per annum, when no other rate i s agreed upon, for all moneys after they become du e and demand of payment is made.” Mo. Rev. Stat. § 408.020 (1997) In Missouri, prejudgment interest will be awarded only on liquidated claims, and a claim is liquidated when it is “fixed and determined or readily ascertainable by computation o r recognized standard.” Schnucks v. Carrollton Corp. v. Bridgeton Health an d Fitness, Inc. , 884 S.W.2d 733, 740 (1994). Unde r this standard, Transit’s claims under the contracts were ascertainable at the date of the demand. Transit is entitled to prejudgment interest to be fixed by the distric t court in its judgment on remand.

The judgment of the district court is REVERSED, and the case RE MANDED for further proceedings consistent with this opinion.

A true copy.

Attest:

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