North American Specialty Insurance Company v. Heritage Glass, LLC (JRG2)

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF TENNESSEE

AT GREENEVILLE

NORTH AMERICAN SPECIALTY )

INSURANCE COMPANY, )

)

Plaintiff, )

)

v. )

)

HERITAGE GLASS, LLC, DANIEL )

VICTOR DAVIS, individually, and )

THOMAS ERIC KERNEY, )

individually, )

)

Defendants, )

)

AND ) No. 2:16-CV-263

)

DANIEL VICTOR DAVIS, )

)

Third-Party Plaintiff, )

)

v. )

)

CHRISTOPHER R. CORDING, )

)

Third-Party Defendant. )

MEMORANDUM OPINION AND ORDER

This matter is before the Court following a bench trial in this case, which took place on

December 4, 2018. The parties were instructed to file proposed findings of fact and conclusions

of law with the Court following the proceedings. Each of the parties filed their proposed findings

of fact and conclusions of law for this matter on January 18, 2019, [Docs. 174 and 175]. Neither

of the parties filed any responsive pleadings, and the matter is now ripe for review and final

disposition.

I. FACTUAL BACKGROUND1

On March 19, 2014, Heritage Glass, LLC (“Heritage Glass”) was formed as a Tennessee

limited liability company with the main purpose of manufacturing glass for the solar glass industry

in Kingsport, Tennessee, utilizing the equipment and other assets that Heritage Glass purchased

from AGC Flat Glass North America, Inc. [Doc. 142 at PageID # 2137-38]. Heritage Glass’s

operating agreement established Defendant/Third-Party Plaintiff Victor Davis (“Davis”), Third-

Party Defendant Christopher R. Cording (“Cording”), and Defendant Thomas Eric Kerney

(“Kerney”), as the three original directors of the board of directors for the company, [Ex. 7]. The

board of directors was given the sole power to change the number of directors serving on the board,

and was principally tasked with managing the affairs and business of the company, [Id.]. The

operating agreement also established the role of members of the company; members were not

given managing power over the company, but rather, were allowed to invest initial capital

contributions for a comparative interest in the company, [Id.].

On or about May 5, 2014, Heritage Glass began business and plant operations in the former

AGC facility in Kingsport, Tennessee, [Docs. 174 at ¶ 15 and 175 at ¶ 8].2 As part of the start-up

process for the business, Heritage Glass had to heat up or “unfreeze” a large furnace at the plant

to manufacture its glass product. [Docs. 174 at ¶ 17 and 175 at ¶ 10]. To unfreeze the furnace and

keep it operating, the company needed continuous power, and lots of it. On April 25, 2014,

Cording contacted James Gilbert of American Electric Power (“AEP”) regarding the supply of

electricity to the plant, [Docs. 174 at ¶ 18 and 175 at ¶ 13; Ex. 58]. AEP was willing to contract

1 This Court previously set out the factual background in this case in deciding the Third-Party Plaintiff’s motion for

summary judgment, [Doc. 165], and those recited facts largely lay out the essence of this dispute. For purposes of

reference for the instant order, as well as in the interest of establishing a complete record, the following facts are found

by the Court as proven by a preponderance of the evidence based on the testimony and evidence presented at trial.

2 Citations to Docs. 174 and 175 in this section are in reference to the numbered paragraphs of the parties’ proposed

findings of fact.

to supply electricity to the Heritage Glass plant, but, given the substantial amount of power the

plant would consistently use per month, AEP required a security deposit of two months estimated

usage to enter into an industrial power contract agreement, [Docs. 174 at ¶ 18 and 175 at ¶ 14]. In

lieu of cash, AEP stated it would accept an irrevocable letter of credit or a surety bond, [Docs. 174

at ¶ 18 and 175 at ¶ 15]. Ultimately, Heritage Glass’s board of directors arranged a security bond—

also referred to as the utility deposit bond—in the amount of $525,000 through North American

Specialty Insurance Company (“NAS”), [Docs. 174 at ¶ 23 and 175 at ¶¶ 16, 20, and 21]. Before

it was willing to issue the security bond of $525,000, NAS required that each of the board of

directors—Davis, Cording, and Kerney—personally indemnify the bond, [Docs. 174 at ¶ 20 and

175 at ¶ 18]. Davis, Cording, and Kerney each signed the general indemnity agreement, both in

their capacities as directors of Heritage Glass and in their individual capacities to personally

indemnify, jointly and severally, the surety bond “from and against any and all Loss.” [Ex. 1].

NAS, as surety on the bond, issued the utility deposit bond on behalf of Heritage Glass in the

amount of $525,000 on October 3, 2014, [Docs. 174 at ¶ 23 and 175 at ¶ 20].

Operations of the plant quickly commenced, and by December 24, 2014, the company had

run up an electric bill of $548,804.79. [Ex. 5]. Unfortunately for Heritage Glass, the company’s

sales never took off, and it found itself deep in debt without sufficient revenue to weather the

storm. Heritage Glass became well-behind on its electric bills. On December 30, 2014, AEP

mailed a disconnect notice to Heritage Glass advising the company that AEP had scheduled

electric service disconnection after January 13, 2015. [Id.]. The disconnect notice stated that “[i]n

order to avoid disconnection, [Heritage Glass] must pay $260,725.07 on or before” January 13,

2015. [Id.]. While facing these large expenses, the management of the company was in disarray.

On December 30, 2014, the board of directors voted by two-thirds majority (Davis and Kerney

together) to terminate Cording as a director. [Ex. 12]. This left Cording with no active

involvement in the business decisions or operations of the company after his termination, although

he remained an invested member of Heritage Glass. [Trial Transcript at 44; Ex. 7 at 6]. Davis

thereafter took on a more active role in the operations of Heritage Glass. [Trial Transcript at 44].

Around that time, Davis and Kevin Barham (“Barham”), a Vice President of Heritage Glass, met

with an investor, Bill Thomas (“Thomas”), in Knoxville, Tennessee about loaning Heritage Glass

more money to pay its outstanding bills. [Id. at 48-50]. Thomas, a then-existing member of

Heritage Glass, agreed to loan an additional $2 million to the company. [Id. at 50-51].3 These

monies were not used to pay the outstanding power bill in full; rather, the board of directors and

financial officers separated the monies to pay off multiple debts of the company. [Id. at 82-85].

Some of the monies were used to pay Davis and Kerney back for some of the personal loans they

had made to Heritage Glass. [Id. at 51-53; Ex. 35]. Cording had also previously made personal

loans to the company totaling $88,000, but the proceeds from the Thomas loan were not used to

pay back Cording’s loan. [Id. at 85-86]. On January 9, 2015, a $306,500 check was made out to

Davis, a $165,729.87 check was made out to Kerney’s own company—Heritage Manufacturing

Company—and a $100,000 check was made out to AEP for the outstanding power bill. [Ex. 35].

All of these checks were signed by Kerney. [Id.]. Additionally, the summary of promissory notes

being repaid to Davis shows that the January 19, 2015 check of $306,500 to Davis was in partial

fulfillment of a $125,000 loan from Davis to Heritage Glass made on the same day. [Ex. 80].

Although the total power bill was not paid in full at this time, the power remained on.

3 Davis testified that he seemed to recall Thomas making two loans, one for $1.5 million and another shortly thereafter

for $500,000. The defendant contends that Thomas made a loan of $1.5 million only. [Doc. 175 at ¶ 33]. As the trial

record is largely silent otherwise regarding these loans, the Court is inclined to principally rely on Davis’ testimony

at trial for this fact. In any event, this discrepancy makes no difference to the Court’s analysis below.

The story of Heritage Glass’s financial difficulties largely stayed the same throughout the

following months; it continued to struggle to bring in enough money to pay its expenses. The

company never became current on its AEP power bill before ultimately ceasing operation in May

of 2015. [Trial Transcript at 56]. The company received multiple disconnect notices throughout

the beginning months of 2015, and continued to only make partial payments of its power bill. [Ex.

5]. Heritage Glass’s last partial payment of $100,000 to AEP was made on April 24, 2015, leaving

a previous balance of $327,384.79 as to the March 26, 2015 bill date. [Id.]. At some point in May

of 2015, AEP shut the power off to the plant. [Trial Transcript at 30]. This prompted Kerney and

Davis to go to Knoxville and secure an addendum to the original utility deposit bond issued by

NAS. [Id. at 30-31; Ex. 3]. The addendum increased the original utility deposit bond amount of

$525,000 to $750,000, effective May 14, 2015. [Ex. 3]. Afterwards, at some point in May of

2015, the furnace was shut down, and the company ceased heavy glass manufacturing operations

because it ran out of money. [Trial Transcript at 62-63; Ex. 106; Doc. 142 at ¶ 22].4 The

outstanding electricity bill owed to AEP in the end came to $834,211.28. [Docs. 174 at ¶ 45 and

175 at ¶ 71].

On June 17, 2015, AEP asserted its claim to payment under the utility deposit bond. [Ex.

4]. After determining that Heritage Glass did not have any offsets, credits, or defenses to AEP’s

claim, NAS paid AEP the full $750,000 bond on August 5, 2015. [Ex. 9]. Thereafter, on

December 2, 2105, based on the terms of the general indemnity agreement, NAS made demand of

Heritage Glass, Davis, Cording, and Kerney for payment of the $750,000 it paid to AEP. [Ex. 6].

None of the parties made any payment to NAS in response to its demand, and NAS filed suit

against Heritage Glass, Davis, and Kerney. [Docs. 1, 174 at ¶¶52-53, 175 at ¶ 77 and 80]. The

4 The company continued to manufacture glass beyond May 2015, but on a much smaller scale. For purposes of the

issues before the Court in this case, the operations of the plant ceased in May of 2015.

Court entered default judgment against Heritage Glass and Kerney in favor of NAS on January 31,

2017. [Doc. 34]. Kerney filed a voluntary chapter 7 bankruptcy petition and has received a

bankruptcy discharge, relieving him of legal liability to NAS under the indemnity agreement.

[Doc. 142 at ¶ 32]. Davis brought a third-party action against Cording for indemnity and

contribution. [Id. at ¶ 33]. In mediating NAS’ original claim, Davis settled with NAS and paid

the sum of $600,000 to NAS. [Id. at ¶ 34; Ex. 10]. As part of this settlement, NAS agreed to

assign Davis its own claims against Cording under the indemnity agreement. [Doc. 142 at ¶¶ 35

and 36; Ex. 11]. Davis seeks to recover from Cording on the $750,000 claim that was assigned by

NAS or, alternatively, to recover contribution from Cording.

II. DISCUSSION

This Court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1332

because there is complete diversity of citizenship between the opposing parties and the amount in

controversy exceeds $75,000. The Third-Party Plaintiff has brought Tennessee state law claims

against the Third-Party Defendant for contribution and breach of the indemnity agreement. The

Third-Party Defendant has asserted the equitable defense of unclean hands against the Third-Party

Plaintiff’s claims. The Third-Party Defendant has also brought a counterclaim for contribution

against the Third-Party Plaintiff contingent on this Court’s judgment on the Third-Party Plaintiff’s

claims. This Court applies the substantive law of the state in which it sits when exercising diversity

jurisdiction. See Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938).

A. Breach of Contract/Indemnity Agreement

To begin with, the Court reiterates its findings set out in its prior order, [Doc. 165]; there

is no dispute that the general indemnity agreement is a valid, enforceable agreement that should

be enforced as with any other contract. See Planters Gin Co. v. Fed. Compress & Warehouse Co.,

Inc., 78 S.W.3d 885, 892-93 (Tenn. 2002) (explaining that the Tennessee Supreme Court “has

consistently recognized that the right of the parties to allocate lability for future damages through

indemnity clauses, generally, is not contrary to public policy,” and that “even broad transfers of

liability, where unambiguous, should be honored.”); see also Hardeman Cty. Bank v. Stallings,

917 S.W.2d 695, 699 (Tenn. Ct. App. 1995) (“It is incumbent upon this court to enforce contracts

according to their plain terms) (citing Bob Pearsall Motors, Inc. v. Regal Chrysler-Plymouth, Inc.,

521 S.W.2d 578, 580 (Tenn. 1975)). Furthermore, the enforceable contract was clearly breached.

The indemnity agreement provides that “[t]he [i]ndemnitors shall exonerate, hold harmless and

indemnify [NAS] from and against any and all Loss.” [Ex. 1]. Heritage Glass failed to pay its

outstanding electric bill, an obligation bonded by the utility deposit bond, and NAS was ultimately

required to pay $750,000 to AEP. Because the individual indemnitors of the utility deposit bond,

Heritage Glass, Davis, Cording, and Kerney, never paid NAS for the loss—the $750,000 NAS

paid to AEP—NAS had a valid breach of contract/indemnification claim against all of the

individual indemnitors.

NAS did in fact bring suit, but not against all of the individual indemnitors. Instead, NAS

chose to sue Heritage Glass, Davis, and Kerney for indemnification of the security deposit bond

(leaving out Cording). [Doc.1]. This Court entered Default Judgment in favor of NAS against

Heritage Glass and Kerney in the principal amount of $764,774.76 plus post-judgment interest,

applying joint and several liability to each of these defendants. [Doc. 34]. Davis thereafter brought

his Third-Party suit against Cording, seeking indemnity and/or contribution to the extent Davis

was liable to NAS, [Doc. 40]. In mediating NAS’ claim against Davis, the two parties settled. As

part of the settlement, for the sum of $600,000, NAS settled its claim against Davis, and also

assigned its right to sue Cording for indemnification of the utility deposit bond to Davis.

This brings us to the core disputes of this case. In essence, at issue is whether Davis’

assumption of NAS’ right to indemnity against Cording was (1) proper—legally and equitably;

and (2) if proper, what compensation is Davis entitled to from Cording.

Propriety of Assumption of Right to Indemnification

As a preliminary consideration, the Court finds that the amount at issue with this

indemnification claim is $750,000. This finding is quite clear based on the plain language of the

contracts between the parties, for the original indemnity agreement that Cording did sign required

each individual indemnitor’s obligations under the contract to “remain in full force and effect until

terminated.” [Ex. 1 at ¶ 16]. There is nothing in the record showing that Cording provided notice

to NAS of his intent to terminate his obligation.5 In this sense, although Cording did not have any

direct say in increasing the utility deposit bond from $525,000 to $750,000, Cording seemingly

acknowledges, as he must, that he remained liable for this increased amount pursuant to his

agreement “as an indemnitor under the Indemnity Agreement.” [Doc. 175 at ¶ 24 (Davis

“unilaterally increased Cording’s personal liability under the Indemnity Agreement.”)].6 In other

words, whether or not the assignment was proper, there is no question that before the assignment,

Cording’s (joint and several) liability on the indemnity agreement to NAS included the increased

bond amount of $750,000. At the time of the assignment, NAS had a viable claim against Cording

for indemnification of the full $750,000.

1. As a Legal Matter

5 Exhibit 99 is an apparent letter drafted by some unknown person to AEP claiming that Cording is no longer

responsible for the payments of Heritage Glass because of his termination on December 27, 2014. No mention is

made of when or if this letter was sent to AEP, or what it is purported to show. The parties do not cite to this exhibit,

and the Court has no knowledge of its application to the case. Without any supporting or clarifying evidence to explain

what this document is, the Court declines to consider this exhibit on its own as amounting to anything of substance to

the issues in this case.

6 This citation is to Defendant’s Conclusions of Law section.

To begin this section, the Court recognizes that the facts presented are unusual, and this

Court has, itself, had difficulty finding any substantive binding law on point regarding the legal

propriety (or impropriety) of Davis’ assumption of NAS’ claim against Cording.7 The Court’s

overarching view starts with the premise that Tennessee courts have long held to the notion that

“the individual right of freedom of contract is a vital aspect of personal liberty,” and that in both

its statutory and case law, Tennessee “recognizes a strong public policy of individual autonomy,

i.e. freedom of contract.” Baugh v. Novak, 340 S.W.3d 372, 382-83 (Tenn. 2011) (citations and

internal quotation marks omitted). “The principle of freedom of contract is ‘rooted in the notion

that it is in the public interest to recognize that individuals have broad powers to order their own

affairs by making legally enforceable promises.’” Id. (quoting Restatement (Second) of Contracts,

ch. 8, intro. note, at 2-3 (1981)). Furthermore, the general rule is that valid contracts are assignable,

and absent some supervening legal policy, the transfer of a contractual right is effective. See

Jackson v. Moskovitz Agency, Inc., 672 S.W.2d 400, 403 (Tenn. 1984). Once a valid assignment

is completed, the assignor retains no rights under the original contract; the assignee then stands in

the position of the assignor, possessing the same rights and being subject to the same defenses.

Collier v. Greenbrier Developers, LLC, 358 S.W.3d 195, 201 (Tenn. Ct. App. 2009).

Here, there is no dispute that there was originally a valid contract between NAS and

Cording specifically regarding his promise to indemnify NAS upon payment of the utility deposit

bond. Further, there is no factual dispute calling into question the assignment agreement between

NAS and Davis. See [Ex. 11]. The facts show that NAS did assign its right to Davis to recover

against Cording for any claim it had under the indemnity agreement. The Court has not found any

7 As an aside, neither of the parties cite any binding case on point setting out legal principles resolving this matter.

Davis resorts to the doctrine of the law of the case based on this Court’s prior orders, even though this Court declined

to make a definitive ruling on the matter with questions of fact remaining, and Cording turns directly to equitable

principles (the doctrine of unclean hands) arguing that recovery is barred.

principle of law—nor have the parties provided any—that renders the assignment of NAS’ right

to indemnification to Davis invalid. The parties have not shown, nor attempted to show, that there

is any legal precedent8 which disallows a co-indemnitor to assume a claim of the indemnitee

against a co-indemnitor. Without any showing that such assignment was legally barred, the Court

finds that NAS’ assignment to Davis of its right to indemnification of the utility deposit bond

against Cording was, as a legal matter, proper.

2. As an Equitable Matter

The defendant relies on the equitable doctrine of unclean hands in defending against the

plaintiff’s claim for indemnification. In this sense, the defendant is not claiming that the

assignment itself was improper; rather, the defendant principally relies on the notion that Davis’

use of the assignment to recover monies from Cording is inequitable. The doctrine of unclean

hands is an equitable defense that bars relief in certain instances. Tennessee courts have described

the doctrine generally, stating that

he who comes into a Court of Equity asking its interposition in his behalf, must

come with clean hands; and if it appears from the case made by him, or by his

adversary, that he has himself been guilty of unconscientious, inequitable, or

immoral conduct, in and about the same matters whereof he complains of his

adversary, or if his claim to relief grows out of, or depends upon, or is inseparably

connected with his own prior fraud, he will be repelled at the threshold of the court.

Spirit Broadband, LLC v. Armes, No. M2015-00559-COA-R3-CV, 2017 WL 384248, at *6 (Tenn.

Ct. App. Jan. 27, 2017) (quoting C.F. Simmons Med. Co. v. Mansfield Drug Co., 23 S.W.165, 168

(Tenn. 1893)). It is worth mention that the unclean hands defense is generally not a mechanism to

invalidate the assignment of NAS’ claim to Davis, rather, the unclean hands defense will operate

only to “deny recovery altogether” to an offending party. Nolen v. Witherspoon, 187 S.W.2d 14,

16 (Tenn. 1945). As mentioned in this Court’s prior order, “[t]he Court has found no case barring

8 Equitable considerations of the NAS assignment are discussed below.

an assignment of a cause of action from a settling plaintiff to a co-indemnitor based on the unclean

hands defense.” [Doc. 165 at PageID # 2424]. The defendant has not provided any binding

authority standing for the proposition that equitable reasons render this assignment invalid.

Indeed, the defendant has properly framed his defense by requesting the Court to bar Davis’

recovery altogether. Based on the particular facts of this case, the assignment of NAS’ claim for

indemnification against Cording was equitably proper. The issue this Court must determine is

whether the unclean hands defense bars the Third-Party Plaintiff’s recovery for indemnification in

totality.

3. Application of Unclean Hands Defense

Having appropriately framed the issue, the Court now considers the application of the

unclean hands defense to the instant case. To begin with, and as this Court has previously stated,

“Tennessee law makes no suggestion that one could invoke defenses against the assignee [of a

contractual right] that would not have been available against the assignor.” [Doc. 165 at PageID

# 2422]. Following that logic, as Davis now “stands in the shoes” of NAS in bringing his breach

of contract/indemnity agreement claim, Cording’s defenses against this claim should, in this

Court’s view, be limited to those that Cording could have asserted in defending against NAS. Here,

the Court is not aware of any reason why Cording could not have invoked the equitable defense of

unclean hands against NAS. However, in this sense, Cording is not asserting that NAS acted

inequitably, thus Davis is subject to that unclean hands defense. Rather, Cording brings his

unclean hands defense against Davis for Davis’ own actions before he “stood in the shoes” of

NAS. Although admittedly the instant defense brought forth by the defendant does not squarely

fit within the limitations described above, the Court has been unable to find authority on this

particular issue, and the parties have not provided any. Whether or not Tennessee law would allow

a defendant to assert such a defense against an assignee of a contractual right who is “standing in

the shoes” of the assignor is ultimately immaterial to the instant case, and the Court will proceed

under the assumption that such a defense may be asserted for purposes of this matter.

Tennessee courts have made clear that “Cording’s affirmative defense could only consider

Davis’ conduct related to the indemnity agreement assignment and not Davis’ previous illicit and

unconscionable conduct.” [Id. (emphasis added)]; see also Spirit Broadband, LLC, 2017 WL

384248, at *6 (in analyzing the unclean hands defense, “[t]he focus of [the court’s] inquiry is

whether the alleged misconduct was directly related to the transaction which formed the basis” of

the original claim); Chappell v. Dawson, 308 S.W.2d 420, 422 (Tenn. 1957); Nolen, 187 S.W.2d

at 16 (“‘Clean hands’ means a clean record with respect to the transaction with the defendant, and

not with respect to any third person.”); Metric Partners Growth Investors, L.P. v. Nashville

Lodging Co., 989 S.W.2d 700, 703 (Tenn. Ct. App. 1998) (“[T]he unconscientious conduct must

arise out of the particular transaction which is the subject of the litigation.”). The question then

becomes, was Davis’ conduct in managing the affairs of Heritage Glass before it ceased operations

related to the assignment? This Court finds that it was not.

To begin with, Davis’ direct testimony at trial went largely unrebutted. Davis testified that

the decisions made by the board of directors were all in efforts to keep Heritage Glass operational.

The evidence shows that Davis made multiple personal loans to Heritage Glass throughout the

course of his tenure on the board of directors to keep money flowing into the company. The

defendant only offers theories as to why the board of directors used monies it did come across to

pay some bills/debts rather than others. There is nothing in the record to suggest that any of the

decisions made by Davis as a director was in contemplation, or with any knowledge at all, of the

future assignment of NAS’ claim to indemnification of the utility deposit bond against Cording.

Further, there is nothing to suggest that Davis’ increase in the bond amount to $750,000 was in

anticipation or relation to his intent to assume the right to indemnification against Cording. The

defendant points to the timing of the bond increase as well as the method (that is, that Davis

unilaterally increased the bond without Cording’s input). However, the Court has been unable to

find any evidence whatsoever that Davis had knowledge (or even considered) that NAS would

assign their right to sue Cording after the bond was paid to AEP. Indeed, it was, in totality, NAS’

claim until the settlement was made, and the defendant has not provided any fact that Davis

knew—or even suspected—that NAS was willing to sell their claim to him. Without such

knowledge, Davis could not have been acting with the intent to accrue a windfall in his favor by

increasing the amount of the bond because he was necessarily also increasing his own personal

liability in direct proportion. And, without knowledge that he could end up with NAS’ claim

against Cording, there is simply no connection linking Davis’ actions as a board member of

Heritage Glass to the transaction of assuming the instant claim.

This effectively ends the inquiry right here, for this finding leaves us with no facts relating

to the assignment to suggest that Davis’ claim should be barred by the doctrine of unclean hands.

All of the facts which the defendant relies upon in asserting his unclean hands defense resort to

Davis’ actions while managing the business affairs of Heritage Glass. The defendant did not

produce any evidence at trial showing that Davis’ securing the assignment was linked, in any way,

to his decisions as a director of Heritage Glass. The Court finds Cording’s defense of unclean

hands unavailing.

And even assuming arguendo that Davis’ actions had been linked to his procuring of NAS’

claim against Cording, the particular facts of this case do not bar Davis’ recovery based on the

application of the unclean hands defense in this Court’s view.9

The main thrust of the defendant’s unclean hands defense revolves around the handling of

the Thomas loan of $2 million made to Heritage Glass in late 2014. To recap, at the time these

monies were acquired and disbursed, Heritage Glass was already facing substantial electricity bills

to AEP (including a pending disconnect notice), the company was not bringing in enough capital

on its own to pay its many bills, Davis and Kerney—as two-thirds of the company’s board of

directors—had recently taken action to terminate Cording from the board of directors, and Davis,

Kerney, and Cording (among other investors) had each previously made personal loans to keep

Heritage Glass operational to this point. The defendant argues that the Thomas loan was made to

pay the outstanding electric bill, and by not fully repaying this bill with these monies, Davis acted

wrongfully and now presents to this Court with unclean hands.

The Court declines to make this conclusion based on these facts. First, the Court does not

find that the Thomas loan was provided for the limited purpose of paying the outstanding AEP

power bill in its entirety. Indeed, there is no evidence in the record conclusively supporting the

defendant’s position on this fact. As both parties—including the defendant—point out, and as this

Court has found, at this point in time, Heritage Glass had a whole host of outstanding bills to pay

without sufficient revenue to pay them all. Davis’ testimony on this fact is consistent with the

other evidence bearing this out. See, e.g., [Ex. 66]. Second, the defendant did not put on any

evidence of his own directly contradicting this fact. The defendant relies heavily on Davis’

9 Although the Court’s finding above that Davis’ actions while managing the business affairs of Heritage Glass do not

relate to the assignment by NAS, standing alone, is sufficient to dispose of Cording’s defense of unclean hands as to

Davis’ assumption of NAS’ right to indemnification against Cording, the Court would have applied the below findings

as to the facts of this particular case had these decisions been shown to be linked to the transaction at issue.

deposition testimony, arguing that it contradicts Davis’ trial testimony. Davis did not, however,

testify in his deposition that the Thomas loan was made for the purpose of paying the electricity

bill in full; rather, Davis testified that he asked Thomas for money that was needed “to pay bills.

The electric bill mainly.” [Trial Transcript at 50]. The Court finds Davis’ deposition testimony

on this issue largely consistent with his trial testimony in that the Thomas loan was made to help

pay the bills of Heritage Glass. There is no evidence that the Thomas loan was made for the sole

purpose of paying off the entirety of the current electric bill. Third, the defendant could have

provided other evidence (say Thomas’ own direct testimony, or anything at all from Thomas

regarding the reason for his $2 million loan) but did not, and the Court declines to speculate what

Thomas would have claimed as the reason he loaned this money to Heritage Glass.

Accordingly, the Court finds that the Thomas loan was made to pay the bills of the

company to keep it going. And, in effect, it did just that. Indeed, the monies paid to AEP from

the Thomas loan, although not used to fully pay off the outstanding electric bill, successfully kept

the plant running by paying enough to satisfy the disconnect notice. After January 13, 2015, the

power stayed on, and the plant continued to operate. The decision to prioritize some bills over

others with the whole of the Thomas loan—including repayment of loans made to the directors

themselves—is of no ultimate consequence in the Court’s view. Even though the defendant

argues, in hindsight, that the bill could have been paid in full at that time with the loaned monies,

this is largely irrelevant.

And going further, whether or not the bill was paid in full at that time, there is no contention

that the continuing operation of the plant (with a fully paid for electric bill in January of 2015)

would have led to a different financial outlook in May of 2015. In other words, there is nothing in

the record suggesting that full settlement of the power bill in January was the solution to the

problem. The plant required continuous power to operate, and the electric bill would continue to

build up extensively without enough income to support it. The evidence shows that the problem

at hand was not the amount of the outstanding current electric bill, but rather, the company’s lack

of revenue to support the plant’s continuous operation. And the fact that the electric bill was

bonded by NAS does not persuade the Court that the repayment of loans made by Davis and

Kerney instead of paying the electric bill in full at that time was unconscionable conduct. There

is nothing in the record showing that paying the full electric bill in January would keep the bond

from ultimately being needed. A review of the company’s profits and losses actually shows

otherwise. Indeed, even had the full electric bill been paid in January, the evidence in the case

largely reveals that Heritage Glass needed substantially more capital to render it sustainable long-

term.

In essence, the board of directors had the authority and duty to disperse the monies of the

Thomas loan as they saw fit, and the Court has not found any limitation to this in the record. The

use of the monies to pay the electric company only enough to keep the power on rather than in

full, and to use the remaining funds to pay other debts as well, is entirely proper in this Court’s

view based on this record. The company assuredly had many bills to pay, and not enough money

to go around, so difficult financial decisions had to be made in what the $2 million Thomas monies

would be used for. There is simply nothing this Court has found in the record showing otherwise.

That the defendant would have wanted the board to handle the funds differently is, inevitably,

beside the point.

Additionally, the evidence showing that Davis loaned $125,000 to Heritage Glass the same

day that the company repaid $25,000 of that loan is of no consequence to the Court’s ultimate

determination. Although the Court recognizes that this event is unusual and slightly peculiar, there

is nothing in the record expanding on this issue. Without more, the Court must take the transaction

at face value, that is, that Davis loaned $125,000 and was paid back the same day $25,000 of that

loan. The defendant did not provide any evidence inconsistent with this contention. Thus, the

Court finds this issue largely irrelevant to the question at hand.

In considering the removal of Cording from the board of directors by Davis and Kerney’s

two-thirds majority before these decisions were made, the Court finds this fact is also of no

ultimate consequence. Indeed, the board of directors was given the authority to remove directors

by majority vote, and the evidence at trial simply does not provide any reason suggesting that

Cording’s termination was improper.

Davis’ increase of the NAS bond amount further has no bearing on the unclean hands

defense in the Court’s view. Regarding this event, it is important to remember that NAS agreed

with Heritage Glass to increase the amount NAS would pay if the bond were to be forfeited. At

the time, Davis was faced with a termination notice from the power company which would

effectively shut down the operations of the plant. The Court does not find it “crooked” or

“unconscionable” for Davis to agree with NAS to increase the bond in an attempt to extend the

amount of time the plant could remain operational with power, especially considering that he was

increasing his own ultimate personal liability in the process. Indeed, nothing in the original

indemnity agreement or operating agreement of the company limited the power of Davis to

increase the bond as he did. Cording did not present any persuasive evidence expanding on his

theory that this action rendered Davis’ hands unclean.

Whether or not the company was ultimately able to meet the increased obligation under the

amended utility deposit bond is immaterial. By bonding the additional amount of $750,000, it was

principally NAS that was assuming the immediate risk associated with increasing the bond

amount, for it was the holder of the bond. And, as stated above, Davis was increasing his own

personal liability in the same proportion to the other individual indemnitors.

4. Conclusion

The Court holds that both legally and equitably, NAS’ assignment of its right to

indemnification from Cording for the full amount of the amended utility deposit bond to Davis

was proper. Further, the Court finds that the defendant has not provided any fact relating to this

assignment to suggest that Davis’ claim for indemnification should be barred by the unclean hands

defense. Further, even if Davis’ conduct in managing the business affairs of Heritage Glass on the

board of directors was related to the assignment, the Court declines to conclude that Davis acted

unconscionably or inequitably as to bar his recovery by the defendant’s unclean hands defense.

As to Davis’ contribution claim, the above findings equally apply; that is, that none of the facts

outlined by the defendant are related to the contribution claim, and even if they were, the Court

declines to conclude that Davis acted unconscionably or inequitably. Therefore, Davis is also not

barred from recovery for his claim for contribution based on the defendant’s unclean hands

defense.

B. Contribution and the Amount of Compensation Due

Having found that the NAS’ assignment was proper, the Court must determine the amount

of compensation due. The Third-Party Plaintiff and the Third-Party Defendant have each brought

claims against the other for contribution. “It has long been held by [the Tennessee Supreme Court]

that one party seeking ‘contribution’ against another cannot recover until payment of more than

his share of the joint obligation.” Frazier v. Frazier, 430 S.W.2d 655, 660 (Tenn. 1968) (citing

United States Cas. Co. v. Std. Acc. Ins. Co., 136 S.W.2d 504 (Tenn. 1940)). In other words,

“neither party is liable over for ‘contribution’ . . . until and unless the party seeking same has paid

in excess of his share of the entire promissory obligation.” Id.

Setting aside the Third-Party Plaintiff’s assumption of the indemnification claim for a

moment, and focusing only on his contribution claim as an indemnitor of the utility deposit bond

himself, Davis has unquestionably paid more than his pro rata share of the agreement. Indeed,

looking at the amended utility deposit bond, all of the original indemnitors (Heritage Glass, Davis,

Kerney, and Cording) are jointly and severally liable to repay the full bonded amount of

$750,000.10 At first glance, if every individual indemnitor paid their pro rata share of the

agreement, each would be individually liable for $187,500 ($750,000/4). However, there are a

few changes to the equation based on the facts of this case.

As an initial matter, this Court finds that Heritage Glass and Kerney are unlikely to pay

their share of the obligation. This Court has entered judgment against Heritage Glass, but this

company is now insolvent and has been presumably dissolved. [Trial Transcript at 62-63; Ex.

106]. Furthermore, after NAS filed the original lawsuit in this matter, Kerney filed a voluntary

chapter 7 bankruptcy petition and has received a bankruptcy discharge as to this debt, relieving

him of any legal liability to NAS as an indemnitor under the Indemnity Agreement. [Doc. 142 at

¶ 32]. That ultimately leaves us with two (Davis and Cording) to fit the bill.

Secondly, the claim for the full $750,000 was settled at $600,000. The Court has not found

other cases dealing with this particular type of scenario through the common law.11 Nonetheless,

the Court finds that it would be inequitable for Davis to benefit from the windfall if he were to

10 See Discussion supra Section II.A.

11 A similar scenario was encountered in Dubina v. Mesirow Realty Dev., Inc., 719 N.E.2d 1084 (Ill. App. Ct. 1999),

but this appellate court considered similar factual issues under Illinois’ statutory law (in Illinois, the Contribution Act)

rather than the common law. In that matter, the state appellate court found that a settlement with a co-defendant which

includes a condition that assigns the original plaintiff’s cause of action to the settling defendant, allowing the settling

defendant to “recoup their share of damages, perhaps make a profit,” undermined the goal of the Contribution Act to

apportion damages equitably and declined to uphold the settlement. Dubina, 719 N.E.2d at 1091.

recover in contribution based on the full $750,000, when he was only individually held to a total

obligation of $600,000. Realization of such a windfall in his favor would be against public policy

and would render an inequitable result in this Court’s view. Therefore, as to Davis’ contribution

claim, Cording and Davis should each be held liable to the total actual amount paid under the

indemnity agreement, $600,000.

Furthermore, in this Court’s view, it would be against the equitable apportionment of

damages to allow the Third-Party Plaintiff to settle with the original plaintiff and realize a

significant profit by receiving the full $750,000 by standing in the shoes of NAS through its

indemnity claim against Cording. Cf. Dubina, 719 N.E.2d at 1091. This simply would run afoul

of the principles of equity and justice. Further, allowing recovery on Davis’ indemnification claim

would effectively be an exercise in futility because after consideration of Cording’s claim for

contribution, the equitable result, in this Court’s view, would inevitably return to the final

conclusion it reaches below.

As such, it boils down to this: based on the Court’s findings in this Memorandum Opinion

and Order, Davis has paid $600,000 to make good on his promise to NAS, and Cording has not

paid any on his obligation to this point. Davis is entitled to contribution from Cording for the

excess Davis has paid. As they are the only remaining two individuals responsible for the

obligation under the utility bond deposit, each should be equally responsible for half of the amount.

This means Cording is on the hook for his half—$300,000 (the total actual amount paid, $600,000

divided by 2) in contribution. As Davis’ indemnification claim would ultimately lead this Court

to reach the same result, the Court need not consider Cording’s contingent counterclaim for

contribution, and it is MOOT.

C. Conclusion

Based on the above findings and conclusions, it is ORDERED that the Third-Party

Plaintiff, Daniel Victor Davis, is entitled to contribution from the Third-Party Defendant,

Christopher R. Cording, in the amount of $300,000. The Third-Party Defendant’s counterclaim

for contribution is DISMISSED AS MOOT.

Davis shall file his brief regarding his request for an award of reasonable attorneys’ fees

and out of pocket expenses incurred in this case on or before September 6, 2019. Thereafter, the

defendant shall have ten (10) days from the filing of the plaintiff’s brief to file his response. The

Court will not consider any Reply brief on this issue, and no oral argument will be entertained. A

final Judgment shall enter after this Court has ruled on these collateral issues.

ENTER:

s/J. RONNIE GREER

UNITED STATES DISTRICT JUDGE