## Facts

- Vigo purchased Buck Creek Coal in 1991; Buck Creek operated a coal mine and was required to post reclamation bonds.
- Utica, as surety, issued reclamation bonds for Buck Creek conditioned on receiving indemnity.
- In 1991, Vigo, Atlas, Buck Creek, and the owners of Vigo and Atlas executed a General Indemnity Agreement (1991 GIA) obligating them to indemnify Utica for bond losses.
- In 1992, a second General Indemnity Agreement (1992 GIA), identical in form to the 1991 GIA but with different signers, was executed by Schulties and the Piepers; Pieper signed both individually and as Atlas’s president.
- Around the same time, Vigo sold the mine to Atlas and Schulties; evidence indicated the buyers agreed to obtain a release of Vigo’s indemnity obligation.
- Buck Creek later failed to complete reclamation; Indiana required Utica to perform the work, and Utica incurred substantial costs.
- Utica sought indemnification (about $400,000) from signers of both agreements; Schulties later declared bankruptcy and Atlas could not satisfy the full amount.
- After a bench trial, the district court found the 1992 GIA was a novation releasing the 1991 indemnitors (including Vigo and the Koesters) and also found Atlas was bound by the 1992 GIA.
- Utica appealed the novation ruling; defendants cross-appealed on issues including whether Atlas was bound.

## Issues

1. Under Indiana law, did the 1992 GIA constitute a novation substituting Atlas and Schulties for the 1991 indemnitors, thereby releasing the 1991 signers from liability?
2. Did the evidence support a finding that Utica intended the 1992 GIA to replace, rather than supplement, the 1991 GIA?
3. Was Atlas bound by the 1992 GIA based on Pieper’s execution in a corporate capacity under Indiana agency law?

## Decision

- The Seventh Circuit affirmed the judgment for defendants.
- The court held the 1992 GIA operated as a novation that discharged the 1991 indemnitors.
- The court upheld the trial court’s finding that the parties’ intent, shown by the sale transaction and course of dealing, supported substitution of obligors.
- The court agreed that Atlas was bound by the 1992 GIA because its president signed in a representative capacity with authority sufficient to bind the corporation.

## Legal Principles

- Under Indiana law, a novation requires a prior valid obligation, a new valid contract, consideration, and intent that the new contract substitute for and extinguish the old obligation.
- Intent to novate may be inferred from surrounding transactions and the parties’ conduct; an express statement of novation is not required.
- Execution of a second agreement on the same form, but with different obligors, in connection with a transfer of the underlying business can support an inference of substitution rather than addition.
- A corporation may be bound by a contract signed by an officer in a representative capacity when the officer has actual or apparent authority under Indiana agency doctrine.
- Where a novation occurs, the obligee bears the risk of the new obligors’ later insolvency and generally may not revert to the discharged obligors.

## Conclusion

The court concluded that Utica accepted the 1992 indemnity agreement as a substitute for the earlier indemnitors in connection with the mine’s sale, creating a novation that released Vigo and other 1991 signers, while still binding Atlas through its president’s execution of the 1992 agreement.


Utica Mut. Ins. Co. v. Vigo Coal Co., 393 F.3d 707 (7th Cir. 2004)