Kreter v. HealthSTAR Communications, Inc.

ADKINS, J. In this case, we examine the limits of the Maryland common law rule restraining courts from interpreting an indemnification agreement, even a broadly worded one, to cover negligence of the indemnitee, without explicit language unequivocally showing such intent. See Heat and Power Corp. v. Air Prods. & Chems., Inc., 820 Md. 584 , 602, 578 A.2d 1202 (1990). We shall refer to this common law rule as the “Presumption Against Indemnification For Negligence,” or simply, the “Presumption.” In connection with a stock sale and termination of an executive employment contract, Linda B. Kreter, appellant, entered into a written agreement to indemnify HealthSTAR Communications, Inc. (HealthSTAR), appellee, from all claims brought against HealthSTAR by her former husband. Relying on the Presumption, she argues that, because her agreement to indemnify HealthSTAR would not cover HealthS-TAR’s own negligence, that it obviously did not cover HealthSTAR’s fraud.

She asks us to review the Circuit Court for Anne Arundel County’s declaratory judgment adverse to her position. Because we do not interpret the Presumption Against Indemnification For Negligence as broadly as does appellant, we affirm the circuit court’s decision. FACTS AND LEGAL PROCEEDINGS Appellant, Linda B. Kreter, married Charles R. Kreter in 1978. 1 During their marriage, they founded two companies ²⁴⁷ for the purpose of providing patient recruitment, enrollment, and other support services for pharmaceutical trials. The two companies also provided marketing service applications for the pharmaceutical industry.

The first company, Pharmaceutical Research Consulting, Inc. (“PRC”), was founded on April 27, 1994. The second company, Pharmaceutical Research Plus(“PRP”), was founded on November 15, 1995. When these two companies were formed, Linda Kreter owned 52% of the stock and Charles owned 48% of the stock. The stock ownership of these two companies was eventually adjusted so that Linda owned 55%, Charles owned 35% and other minority stockholders owned 10%.

Linda and Charles separated on March 1,1999. On December 6, 1999, Charles was fired from his position as Chief Financial Officer of the companies. Linda remained the majority and controlling shareholder and the Chief Executive Officer of both companies. In July 2000, Linda began negotiations with HealthSTAR regarding the purchase of all stock of PRP and PRC.

On November 17, 2000, Charles was informed of the proposed sale to HealthSTAR. At shareholder meetings in December 2000, Linda presented identical letters of intent from HealthSTAR to purchase the stock of PRP and PRC, with one letter addressed to Charles and the other to Linda. The letters stated that the purchase price for each share of the stock would be identical for each shareholder. Then Linda, Charles and the minority shareholders agreed to sell 100% of the stock to HealthSTAR and signed letters of their intent to convey.

Under the conditions of this sale to HealthSTAR, Linda was required to continue as the president of PRP. Because of this condition, Linda and HealthSTAR were engaged in employment contract negotiations at the same time the stock purchase discussions were occurring. Before closing on the sale of the stock, HealthSTAR agreed to pay Linda an additional $1 million of consideration. This arrangement was not disclosed to Charles.

On June 18, 2001, HealthSTAR purchased 100 percent of the PRP and PRC ²⁴⁸ stock. On July 24, 2001, Linda and Charles were divorced by Judgment of Absolute Divorce. Even though the sale of stock was complete, the terms of Linda’s employment contract with HealthSTAR remained unsettled. In support of her Memorandum in Opposition to HealthSTAR’s Motion for Summary Judgment, Linda stated under oath that she “understood she had reached an agreement in principle with HealthSTAR on the terms of her contemplated employment, [but] that agreement had not been reduced to a satisfactory writing.” She further stated that HealthSTAR insisted that she sign the signature pages of an employment agreement, when the terms of same were not completely set forth, or “the entire transaction would collapse.” After closing on the stock sale, Linda and HealthSTAR continued to disagree on the terms of her employment, and on May 14, 2002, Linda filed suit against HealthSTAR.

That action was resolved with a settlement agreement, effective November 15, 2002, which memorialized the termination of Linda’s business relationship with HealthSTAR. This settlement agreement contained an indemnification clause which provided: 11. Indemnification of HealthSTAR Parties for Charles Kreter claims (a) Indemnification. [Linda] Kreter shall indemnify and hold the HealthSTAR parties harmless from and against any claim, loss, damage, judgment or expense (including but not limited to reasonable attorney’s fees and costs)arising out of or related to claims by or on behalf of Charlie Kreter related to: (i) remuneration in cash or stock that was paid or payable to Kreter as a result of or under the Stock Purchase Agreement, the Employment Agreement or the Incentive Compensation Agreement; or (ii) the manner in which the June 2001 transaction between HealthSTAR and Kreter was structured including but not limited to any matters concerning or related to the incentive compensation payable to Kreter as referred to in the Employment Agree ²⁴⁹ ment or the Incentive Compensation Agreement or (iii) monies paid to Kreter by PRP or PRC prior to June 18, 2001, (collectively or separately the following are hereinafter referred to as the “Charlie Kreter claims”). (b) Defense of Charlie Kreter Claims.

At HealthSTAR’s election, Kreter shall defend the HealthSTAR parties from and against any of the Charlie Kreter Claims. If HealthS-TAR elects for Kreter to defend the HealthSTAR Parties from and against the Charlie Kreter Claims, Kreter shall provide a defense to the HealthSTAR parties with counsel selected by Kreter, at her sole cost and expense. The HealthSTAR parties shall, at their sole cost and expense, have the right to defend their interests in any litigation or arbitration instituted by Charlie Kreter. If Kreter accepts the tender of the defense at HealthSTAR’s request, the HealthSTAR parties shall have the right to have their counsel present as co-counsel in any such defense, at HealthSTAR’s sole cost and expense.

On May 15, 2003, Charles filed suit against HealthSTAR, PRP, PRC, and Linda. His suit included allegations that Linda, PRP, and PRC wrongfully paid Linda a substantial bonus and director fees in December of 2000. He also claimed HealthSTAR and Linda defrauded him and conspired to defraud him in HealthSTAR’s purchase of the PRP and PRC stock. Finally, Charles argued that Linda had breached the escrow agreement that PRP and PRC shareholders had made with HealthSTAR at the time of the sale.

In an amendment, Charles added a shareholder’s derivative action against Linda, PRP, and PRC regarding employee bonuses and director fee payments in 2000. He also added a claim that HealthSTAR had aided and abetted Linda in defrauding him. When Charles served his original complaint, HealthSTAR asked Linda to provide a defense against all of his claims except the escrow claim, pursuant to the indemnification section in their settlement agreement. Linda engaged the firm of Brassel and Baldwin, P.A. to defend HealthSTAR, PRP, and PRC, and has paid all of that firm’s charges, pursuant to the settlement agreement. ²⁵⁰ The Circuit Court for Anne Arundel County dismissed all of Charles’ claims against Linda, PRP, and PRC.

In granting Linda’s motion to dismiss, the court determined that any fraud she committed was intrinsic to the divorce, and therefore his claims were barred by res judicata. As additional grounds for Linda’s dismissal, the court found that Charles released his rights to Linda’s property by signing the divorce agreement. The only remaining claim in Charles’s litigation was his allegation of fraud against HealthSTAR. On August 20, 2004, Linda sent HealthSTAR a letter reserving her right to contest her obligation to indemnify HealthSTAR, notwithstanding her continuing payment of Brassel and Baldwin, P.A. HealthSTAR responded by claiming Linda could not assert such a reservation of rights.

HealthSTAR also filed a complaint for declaratory judgment against Linda regarding her obligation to indemnify it for Charles’ claim. HealthSTAR moved for summary judgment. Linda filed a counter-complaint for declaratory judgment, stating she was not required to indemnify HealthSTAR in the Charles Kreter litigation, and she then filed a cross-motion for summary judgment on July 26, 2005. HealthSTAR filed an answer and moved for summary judgment on the counter-complaint.

The circuit court issued an oral opinion and verdict from the bench in the underlying Charles Kreter litigation on April 21, 2005. It found the $1,000,000 signing bonus was consideration for Linda’s decision to move forward with the sale., Also, the circuit court found that Linda deliberately induced Charles to go forward with the settlement agreement in the divorce and the corporate sale simultaneously, to prevent Charles from having access to any assets she acquired in the sales transaction. Additionally, it found that Linda told HealthSTAR about the divorce litigation, and that HealthSTAR agreed with her to conceal from Charles any information about the $1,000,000 signing bonus. The court concluded it “would be fair, reasonable and appropriate compensation to award Mr. ²⁵¹ Kreter 35 percent of the million dollar sign on bonus which clearly was marital property.” On September 15, 2005, the circuit court issued a declaratory judgment in this case, holding that Linda was liable to HealthSTAR for the judgment entered against it and reasonable attorney’s fees for its defense in the Charles Kreter litigation.

The court granted HealthSTAR’s motions for summary judgment, finding that Maryland law does not prohibit an explicit agreement for indemnification between joint tortfeasors. The court also held that both parties understood the nature of the claims that Charles might assert, and their settlement agreement contemplated its application to a claim such as Charles’ fraud claim. Linda entered her appeal in this case, in which she asks us to consider the following question: Is an indemnitee entitled to indemnification for the indemnitee’s own fraudulent acts, in the absence of specific language in the controlling contract? DISCUSSION Standard Of Review In reviewing a circuit court’s grant of summary judgment in favor of HealthSTAR, we must determine if the trial court was legally correct.

See Heat & Power Corp. v. Air Prods. & Chems., Inc., 320 Md. 584, 591 , 578 A.2d 1202 (1990). Summary judgment is proper when there are no genuine disputes of material fact and the moving party is entitled to judgment as a matter of law. See Md. Rule 2-501. Interpretation of the settlement agreement is a question of law for this court to decide using the language of the contract.

See Auction & Estate Representatives, Inc., v. Ashton, 354 Md. 333, 341 , 731 A.2d 441 (1999). Interpretation Of The Contract When determining if the settlement agreement requires Linda Kreter to indemnify HealthSTAR, we first recognize that Maryland follows the law of objective interpretation of contracts. See Auction & Estate Representatives, 354 Md. ²⁵² at 340 , 731 A.2d 441 . The clear and unambiguous language of a contract will prevail over what the parties thought the agreement meant.

See id. While both maintain this indemnity provision is unambiguous, Linda and HealthSTAR disagree as to what that meaning is. When a reasonably prudent person interprets a contract’s language and discovers multiple meanings, an ambiguity then arises. See Calomiris v. Woods, 353 Md. 425, 436 , 727 A.2d 358 (1999).

In determining whether a reasonable person could assign more than one meaning to the words of a contract, this Court is permitted to consider the purpose of the contract, its character, and the facts and circumstances of the parties at the time of execution. See Mamsi Life & Health Ins. Co. v. Callaway, 375 Md. 261, 279 , 825 A.2d 995 (2003); Heat & Power Corp. v. Air Prod. & Chemicals, Inc., 320 Md. 584, 596 , 578 A.2d 1202 (1990); Pac. Indem.

Co. v. Interstate Fire & Cas. Co., 302 Md. 383, 388 , 488 A.2d 486 (1985). Before closing the stock sale to HealthSTAR, Linda was paid an additional $1 million in consideration, and Charles was not informed that this incentive was given. At this time, Linda and Charles were not yet divorced.

After the extra $1 million was paid, HealthSTAR and Linda finalized the terms of her employment with the companies, and after the stock transfer, the parties had disputes about the employment terms. After Linda filed a lawsuit to work out these issues, the parties entered a settlement agreement on November 15, 2002. As part of that settlement, Linda agreed to indemnify HealthSTAR against claims from Charles. It is clear from viewing the settlement agreement in its entirety that Linda and HealthSTAR thought specifically about which type of claim Charles could bring against each of them, and allocated the risks as they saw fit.

In Section 8(d) of the settlement agreement, HealthSTAR indemnifies Linda if Charles brings claims against Kreter “related to actions taken by Price Waterhouse Coopers ... concerning the escrow under the 2001 Escrow Agreement.” Section 11 of the ²⁵³ agreement sets forth the type of claim by Charles that it was intended to cover: [Linda] Kreter shall indemnify and hold the HealthSTAR Parties harmless from and against any claim, loss, damage, judgment or expense including but not limited to reasonable attorneys fees and costs arising out of or related to claims by or on behalf of Charlie Kreter related to: (i) remuneration in cash or stock that was paid or payable to Kreter as a result of or under the Stock Purchase Agreement, the Employment Agreement or the Incentive Compensation Agreement; or (ii) the manner in which the June 2001 transaction between HealthSTAR and Kreter was structured including but not limited to any matters concerning or related to the incentive compensation payable to Kreter as referred to in the Employment Agreement or the Incentive Compensation Agreement or (iii) monies paid to Kreter by PRP or PRC prior to June 18, 2001. (collectively or separately the following are hereinafter referred to as the “Charlie Kreter claims”). Linda makes three arguments in support of her contention that she is not obligated to indemnify HealthSTAR, which we address in the next three sections of this opinion. The Presumption Against Indemnity For Negligence Relying on the Presumption Against Indemnification For Negligence, Linda contends that the circuit court was required to conclude that, although she agreed broadly to indemnify HealthSTAR against “any claim, loss, damage, judgment or expense” related to the Stock Purchase agreement or Incentive Compensation Agreement or “the manner in which the June 2001 transaction ... was structured,” she was not liable for the judgment entered against HealthSTAR.

See Heat & Power Corp., 320 Md. at 593 , 578 A.2d 1202 ; Crockett v. Crothers, 264 Md. 222 , 285 A.2d 612 (1972). Linda argues that the rule should apply with equal force to indemnification against fraud. We assume, for purposes of this discussion, that the Presumption, if applicable in the first place, would apply equally in cases of fraud. To decide ²⁵⁴ whether the Presumption applies in this case, we first examine the rationale underlying the Presumption.

In Heat & Power Corp., a contractor and owner entered into a contract that included a broad indemnification of the owner by the contractor, and thereafter the owner’s sole negligence caused an injury to the contractor’s employee. See Heat & Power Corp., 320 Md. at 588 , 578 A.2d 1202 . The Maryland Court of Appeals held that the indemnity provision in the contract did not apply, because the intent of the parties to indemnify the owner against his own negligence was not “expressed in those very words or in other unequivocal terms.” Id. at 593, 578 A.2d 1202 (citation omitted). The Heat & Power Court relied on Crockett , which stated the “general rule” in interpreting an indemnification agreement between a contractor and engineer when the engineer, the indemnitee, was solely negligent: “The general rule is that contracts will not be construed to indemnify a person against his own negligence unless an intention so to do is expressed in those very words or in other unequivocal terms.” Crockett, 264 Md. at 227 , 285 A.2d 612 (citations omitted). 2 Linda Kreter argues that her indemnification agreement should fall under the Presumption of Crockett and Heat & Power.

Both Maryland appellate courts, and those of other jurisdictions following the Presumption, have been somewhat parsimonious in their explanations for its existence. Our Court of Appeals has explained the Presumption simply on the ground that “one of the reasons why contracts to indemnify must be expressed in unequivocal terms is to protect the unwary and uninformed promisor.” Heat & Power, 320 Md. at 596 , 578 A.2d 1202 . 3 The Heat & Power Court relied on Crockett, ²⁵⁵ which is the earliest recognition of the Presumption in Maryland. 4 See also Adloo v. H.T. Brown Real Estate, Inc., 344 Md. 254, 261-62 , 686 A.2d 298 (1996)(relying on Crockett as precedent for the rule). We have traced the history of the Presumption from Crockett back to 1874, looking for the underpinnings of the rule. 5 In examining this history, we learn that Maryland’s Presumption originated from New York common law. See Magnin v. Dinsmore, 56 N.Y. 168, 170 (1874). 6 The New York Court of Appeals in Magnin , focusing largely on the respective negotiating power of the parties, applied the Presumption to support its decision to narrowly construe a broadly worded indemnification agreement made by a shipper of goods for the benefit of a common carrier.

See id. at 172 . It reasoned that when the damage was caused by the negligence of the indemnitee, the indemnification clause should be construed “most strongly against the party whose language [limited the indemnitee’s liability], and whose situation places him, at least, in a position of equal advantage in fixing the terms of the contract.” Id. at 174 . Accordingly, although the indemnification contract covered any “loss or damage arising from the dangers of railroad, ocean, stream, or river naviga ²⁵⁶ tion[,]” the court excluded from coverage all damages caused by the common carrier’s negligence: The terms of these contracts are very much under the control of the carriers, and they may justly be required to express in plain terms the entire exemption for which they stipulate. The language of this clause is very broad; but if it be desired that a clause shall cover losses by negligence, it is not too much to say that the purpose must be clearly expressed.

Id. at 172, 174 . Interestingly, in 1971, the New York Court of Appeals overruled the New York Presumption. See Levine v. Shell Oil Co., 28 N.Y.2d 205, 211-213 , 321 N.Y.S.2d 81 , 269 N.E.2d 799 (N.Y.1971). We mention this not because we intend to follow New York’s abolishment of the Presumption, but because the New York court, reflecting upon its earlier decisions, suggested that another reason for the development of the Presumption was the courts’ fear of encouraging negligent conduct by the indemnitee.

The New York Court of Appeals explained: Indemnification clauses have traditionally plagued both drafters and courts alike. Since one who is actively negligent has no right to indemnification unless he can point to a contractual provision granting him that right, a rule has evolved under which courts have carefully scrutinized these agreements for an expression of an intent to indemnify and for some indication of the scope of that indemnification. Thus we have said that “contracts will not be construed to indemnify a person against his own [active] negligence unless such intention is expressed in unequivocal terms[.]” This rule appears to be premised upon the view that where a person is under no legal duty to indemnify, his contract assuming that obligation must be strictly construed. Although we have no conceptual difficulty with such a rationale, we do question the judicial feasibility of a rule which allows a court to conclude that where a contract provides that indemnification will be for any and all liability, the parties must have meant something else.

Thus courts — perhaps concerned with the notion that indem ²⁵⁷ nification against active negligence leads to negligence by the indemnitee-have often searched for some specific reference to active negligence in the agreement[.] Id. at 211 , 321 N.Y.S.2d 81 , 269 N.E.2d 799 (emphasis added and citations omitted). 7 In explaining its abandonment of the Presumption, the New York Court of Appeals also expressed concern that, in some instances, the Presumption would operate to nullify the plain objective meaning of the contract language: Courts should be wary of construing these [indemnification] provisions in such a manner that they become absolutely meaningless. Therefore, indemnification has been permitted under contractual provisions though the language of those provisions fell short of expressly stating that its coverage extended to the active negligence of the party to be indemnified where, as here, that appears to have been the unmistakable intent of the parties----The clause, in the instant case, clearly states that Visconti will be required to indemnify Shell against all claims, suits, loss, cost and liability. Since the plain meaning of these words fairly includes the liability for the active negligence of Shell, we see no reason why more should be required to establish the unmistakable intent of the parties. A contrary construction would result in the conclusion that the clause was a nullity.

Surely, this could not have been the intent of the parties. ²⁵⁸ Id. at 212-213 , 321 N.Y.S.2d 81 , 269 N.E.2d 799 (citations omitted). It is not our role to overrule settled precedent of the Maryland Court of Appeals, and therefore, as we indicated, we will not consider abandonment of the Presumption based on the New York court’s decision. Moreover, we see wisdom in the thought that indemnification against the indemnitee’s own future negligence might encourage negligent conduct. Yet, like the New York Court of Appeals, we are reluctant to utilize the Presumption in a context that operates to belie the parties’ actual intent, particularly when doing so extends the Presumption beyond the existing precedent.

In this case, we hold the Presumption inapplicable because this indemnification agreement differs significantly from the circumstances in which Maryland has previously applied it. 8 We explain. The Crockett and Heat & Power cases involved ongoing business relations in which the indemnitee contracted to provide a future service to the indemnitor. See Heat & Power, 320 Md. at 588 , 578 A.2d 1202 ; Crockett, 264 Md. at 228 , 285 A.2d 612 . In contrast, HealthSTAR’s agreement with Linda was not part of an ongoing contractual relationship in which liability could arise in the course of future contract performance.

Instead, the indemnification agreement here was part of a contract that extinguished the relationship between Linda and HealthSTAR, and addressed liability for actions that had already taken place. This distinction is key. The matters explicitly included in the indemnification clause were claims “arising out of or related to” amounts “paid or payable to [Linda] as a result of or under the Stock Purchase ²⁵⁹ Agreement, the Employment Agreement or the Incentive Compensation Agreement” or “the manner in which the June 2001 transaction ... was structured.” Although we have not found the Employment Agreement or the Incentive Compensation Agreement in the record, it is obvious that the $1 million payment that was the cornerstone of Charles’ lawsuit, was paid in the past and pursuant to one of these agreements. For this reason, applying the Presumption here would not serve to protect against future negligence spawned by the lack of any financial incentive to meet standards of due care.