Court Opinion

ID: 2776033
Source: CourtListenerOpinion
Date Created: 2015-02-03 18:06:36.370772+00
Date Added: 2024-06-11T08:02:26.539661
License: Public Domain

IN THE COURT OF APPEALS OF TENNESSEE
                           AT KNOXVILLE
                                October 28, 2014 Session

       JOY LITTLETON, ET AL. v. TIS INSURANCE SERVICES, INC.

                   Appeal from the Circuit Court for Knox County
                    No. C-11-034211     Deborah Stevens, Judge

             No. E2014-00938-COA-R3-CV-FILED-FEBRUARY 3, 2015

During a prior lawsuit, a construction company – in exchange for a covenant not to execute
against the company’s assets – assigned to the entity that obtained a judgment against it the
company’s insurance coverage claims. The plaintiffs in the previous action thereafter
assigned those rights to the current plaintiffs to allow them to step into the shoes of the
construction company and bring suit against the insurance broker. The trial court entered
judgment on the pleadings in favor of the insurance broker on the ground that the current
plaintiffs would not be entitled to recover any compensatory damages at trial. The plaintiffs
appeal. We reverse.

        Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court
                            Reversed; Case Remanded

J OHN W. M CC LARTY, J., delivered the opinion of the Court, in which T HOMAS R. F RIERSON,
II, J., and N ORMA M CG EE O GLE, S P. J., joined.

Robert B. Littleton, Nashville, Tennessee, and Robert R. Kurtz, Knoxville, Tennessee, for
the appellants, Joy Littleton, Grayling Littleton, and Will Allen Hildreth, as assignees of
Merit Construction, Inc.

Barry L. Howard, Nashville, Tennessee, for the appellee, TIS Insurance Services, Inc.

                                        OPINION

                                   I. BACKGROUND

      The plaintiffs, Joy Littleton, Grayling Littleton, and Will Allen Hildreth (“the
Assignees”) were assigned a judgment and settlement order obtained by JAG Properties,
LLC (“JAG”) against Merit Construction, Inc. (“Merit”). The current action arises as a result
of a prior lawsuit, JAG Properties, LLC v. Merit Construction, Inc., d/b/a Merit
Construction, et al., No. 10296, Chancery Court of Loudon County, Tennessee (“the Merit
Litigation”). The Merit Litigation arose out of a contract between JAG and Merit for the
construction of a Holiday Inn Express hotel in Loudon, Tennessee. The litigation concerned
claims by JAG of property damage to the hotel as a result of the negligent acts or omissions
of Merit, the project architect, various subcontractors, and others in the construction of the
hotel. A settlement agreement was entered into on October 19, 2004, by JAG and Merit for
$3.9 million dollars. As a result of the settlement agreement, Merit consented to the entry of
a judgment against it for $3.9 million and assigned to JAG all rights, causes of action, and
other claims that Merit had or might have against Merit’s insurers, Merit’s broker, and
Merit’s agents arising from or in connection with the dispute between Merit and its insurers,
broker, or agent. The judgment was entered on November 1, 2004.

       The exact language of the covenant not to execute on the judgment is as follows:

       6.     Upon entry of the consent judgment, JAG agrees not to execute
              against any assets (other than applicable insurance) of Merit or
              its successors and/or assigns in exchange for the assignment of
              all rights, claims, causes of action and demands that Merit has
              or might have against insurers that have provided policies of
              insurance that may provide coverage for the damages claimed in
              this action, as well as all other rights, causes of action and other
              claims that Merit has or might have against Highlands, AH, and
              Broker, their agents and representatives, and any other parties
              including those employed or hired by, acting in concert with or
              under the direction of Highlands, AH, and Broker, arising from
              or in connection with the Dispute and/or Litigation (“Merit
              Action”) including but not limited to claims for the wrongful
              denial of coverage, violation of the Tennessee Consumer
              Protection Act, bad faith statute, common law bad faith, breach
              of contract, together with any other legal, equitable or
              contractual rights that Merit possesses or may possess against
              such parties arising from or in connection with the Merit Action.
              To the best of its knowledge, Merit was not presented with, and
              has not executed, any written acknowledgment or disclosure
              from Broker regarding the financial condition of Highlands
              and/or the risk associated with same at the time Broker placed
              Merit’s primary and excess liability coverage with Highlands.

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The settlement agreement further provides as follows:

       11.    It is expressly understood and agreed by all parties to this
              consent judgment that the terms and provisions outlined herein
              shall not release or in any way be deemed or interpreted to
              release Merit, Highlands, AH, Broker and/or any other insurer
              that has issued a policy of insurance that may provide coverage
              for damages claimed in this action.

       The final judgment references the settlement agreement between JAG and Merit and
the covenant not to execute on the judgment as follows:

       Whereas, Merit and JAG seek to conclude the Litigation and have entered into
       a settlement dated October 19 [handwritten in original], 2004 (the “Settlement
       Agreement”) pursuant to which Merit has consented to the entry of a judgment
       against it and JAG has agreed to limit its collection efforts as set forth in the
       Settlement Agreement[;]

       Now, therefore, in consideration of the foregoing premises, and because of the
       uncertainty of litigation, the additional expenses to be incurred and the
       anticipated value of the Claims, Merit and JAG agree to waive trial and to
       stipulate to the entry of a Final Judgment pursuant to the following terms:

              1. Merit agrees to the entry of a judgment against it and in favor
              of JAG in the sum of 3.9 million dollars; and

              2. JAG covenants not to execute against the assets other than
              insurance and claims assigned in the Settlement Agreement of
              Merit to satisfy the Final Judgment.

The trial court further provided:

       ORDERED and ADJUDGED:

       1.     Judgment is entered in favor of the Plaintiff, JAG Properties, LLC, and
              against Defendant, Merit Construction, Inc., on the admissions
              contained in the Joint Motion for Entry of Final Judgment filed by the
              parties in the amount of Three Million Nine Hundred Thousand Dollars
              ($3,900,000.00), which shall bear interest at the rate of ten percent
              (10%) from the date of entry of this judgment. Plaintiff shall not

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                  collect and execute against Defendant, Merit Construction, Inc., to
                  recover this judgment even if Plaintiff is unsuccessful in its attempts to
                  collect and execute this judgment against other parties. Plaintiff may
                  collect and execute this Final Judgment as provided in the Settlement
                  Agreement between Plaintiff and Merit.

       After entry of the judgment, JAG1 was able to collect only a portion of its $3.9 million
judgment against Merit because Merit’s Commercial General Liability (“CGL”) carrier, the
Highlands Insurance Group (“Highlands”), was placed in receivership by the State of Texas
during the pendency of the Merit Litigation. TIS Insurance Services, Inc. (“TIS”) was
Merit’s insurance broker and the entity that placed Merit’s CGL coverage with Highlands.

       The current action was filed on January 28, 2011, seeking recovery from TIS of the
unpaid balance of the judgment (approximately $2.67 million). The Assignees asserted four
separate causes of action: 1) negligence; 2) fraud and intentional misrepresentation; 3)
negligent misrepresentation; and 4) violation of the Tennessee Consumer Protection Act. In
March 2012, TIS filed a motion for judgment on the pleadings, contending that the
Assignees’ damages were limited to the sum of $25,000 because

       “Merit sustained $25,000 in actual compensatory damages since this is the
       amount paid to JAG to settle the Merit Litigation, and JAG agreed, pursuant
       to the Order and Settlement Agreement to not execute on the remainder of the
       $3.9 million judgment, even should JAG be unable to recover the excess from
       other parties.”

On October 12, 2012, the trial court granted the motion and held “that the [Assignee]s’ claim
for compensatory damages which they may seek in the trial of this cause is limited to the
$25,000 actually paid by Merit Construction in this matter.”

        The Assignees thereafter sought an interlocutory appeal, but this court denied the
application in February 2013. The Assignees subsequently filed a motion to amend their
complaint to assert the $25,000 payment made by Merit was not a payment on the judgment
in the Merit Litigation. The trial court granted the motion to amend by an order entered in
October 2013, and on April 21, 2014, amended its earlier partial judgment on the pleadings
“to hold that the [Assignee]s will not be entitled to any compensatory damages at trial.
Therefore, the Court hereby grants judgment on the pleadings in favor of the Defendant, TIS
Insurance Services, Inc., and dismisses this cause with prejudice.” The Assignees then filed
this timely notice of appeal.

       1
           The Assignees were the principals in JAG.

                                                   -4-
                                           II. ISSUE

       The issue before us is whether the trial court erred in entering judgment on the
pleadings in favor of TIS on the ground that the Assignees would not be entitled to recover
any compensatory damages at trial.

                               III. STANDARD OF REVIEW

        The issue presented for review in this case is a question of law. Our review is
therefore de novo without a presumption of correctness as to the resolution of the issue by
the trial court. Bain v. Wells, 936 S.W.2d 618, 622 (Tenn. 1997).

                                      IV. DISCUSSION

        The trial court’s ruling is directly contrary to our holding in Tip’s Package Store, Inc.
v. Commercial Insurance Managers, Inc., 86 S.W. 3d 543 (Tenn. Ct. App. 2001), in which
we held that a judgment creditor’s covenant not to execute on a judgment debtor’s assets
does “not extinguish the underlying liability” of the judgment debtor for compensatory
damages. The judgment debtor is “an injured party” that can pursue a negligence claim
against its insurance provider for procuring a liability policy that allowed a gap in coverage.
Id., 86 S.W.3d at 555. In light of our decision in Tip’s, JAG’s covenant not to execute on the
judgment against Merit does not extinguish the underlying liability of Merit under the
judgment. Merit is an injured party because of the outstanding liability against which it
sought to insure itself through TIS. If Merit can pursue a claim against TIS for the unpaid
portion of JAG’s judgment against Merit, that right can be assigned to JAG and JAG,
likewise, can assign the right to the Assignees. See TNPRAC-RCP § 17:3 Assignees (stating
“[a]n assignee is the real party in interest since the assignee not only possesses the right to
be enforced, but also will ultimately benefit from the recovery. The assignee may sue in its
own name.”) (citing V. L. Nicholson Co. v. Transcon Investment, 595 S.W.2d 474, 481
(Tenn. 1980) (holding “JCLHC and Transcon executed an ‘Assignment and Hold Harmless
Agreement.’ Assuming that this assignment is valid, and we have no reason to believe
otherwise, Transcon has the right to assert JCLHC’s claim as a counter-plaintiff and to
appeal the dismissal of it.”); Ford v. Robertson, 739 S.W.2d 3 (Tenn. Ct. App. 1987)
(holding that “if Robertson was entitled to recover damages from the Architects for breach
of contract that he could assign this right to plaintiffs and that they may enforce this right that
Robertson previously possessed”)).

                                                -5-
        Our holding is in agreement with the rule followed by most state courts – a covenant
not to execute is “merely a contract and not a release.” Red Giant Oil Co. v. Lawlor, 528
N.W.2d 524, 534 (Iowa 1995). Covenants not to execute are different from releases, as the
legal liability remains in force against those who have covenants, whereas a release
represents “total freedom from liability.” Gray v. Grain Dealers Mut. Ins. Co., 871 F.2d
1128, 1133 (D.C. Cir. 1989). See also Kobbeman v. Oleson, 574 N.W.2d 633, 636 (S.D.
1998) (A covenant not to execute is “merely a contract, and not a release, such that the
underlying tort liability remains and a breach of contract action lies in favor of the insured
if the injured party seeks to collect his judgment.”); J & J Farmer Leasing, Inc. v. Citizens
Ins. Co. of America, 696 N.W.2d 681, 684 (Mich. 2005) (“A release immediately discharges
an existing claim or right. In contrast, a covenant not to sue is merely an agreement not to
sue on an existing claim. It does not extinguish a claim or cause of action.”); Stateline Steel
Erectors, Inc. v. Shields, 837 A.2d 285, 290 (N.H. 2003) (“Unlike a release, a covenant not
to sue does not relinquish a right of claim, or extinguish a cause of action. A covenant not
to sue recognizes the continuation of the obligation or liability; the party making the covenant
not to sue agrees only not to assert any right or claim based upon the obligation.”); State
Farm Mut. Auto. Ins. Co. v. Paynter, 593 P.2d 948, 953 (Ariz. Ct. App. 1979) (finding a
covenant not to execute is not a release from liability); Miller v. Shugart, 316 N.W.2d 729,
732 (Minn. 1982) (holding when an insured settles directly with the plaintiff, the plaintiff
may seek to collect from the provider).

      The Assignees, accordingly, are entitled to assert a claim against TIS for
$2,701,607.67, the uncollected balance of the judgment against Merit.2

                                         V. CONCLUSION

       The judgment of the trial court is reversed, and this cause is remanded for all further
proceedings as may be necessary and consistent with this opinion. Costs of the appeal are
assessed to the appellee, TIS Insurance Services, Inc.

                                                         _________________________________
                                                         JOHN W. McCLARTY, JUDGE

        2
         Merit would have had a CGL policy with coverage totaling $6 million available to it to satisfy the
$3.9 million judgment of JAG had TIS not placed Merit’s coverage with Highlands. Thus, the proper
measure of damages is the full unpaid balance of the judgment against Merit.

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