Deutsch v. Bitco Gen. Ins. Corp.

• Decision Date: 16 March 2022
• Docket Number: 21-1150-EFM
• Parties: KENT DEUTSCH d/b/a DEUTSCH OIL CO., Plaintiff, v. BITCO GENERAL INSURANCE CORP. f/k/a BITUMINOUS CASUALTY CORP., Defendant.
• Court: U.S. District Court — District of Kansas

KENT DEUTSCH d/b/a DEUTSCH OIL CO., Plaintiff, v. BITCO GENERAL INSURANCE CORP. f/k/a BITUMINOUS CASUALTY CORP., Defendant.

No. 21-1150-EFM

United States District Court, D. Kansas

March 16, 2022

MEMORANDUM AND ORDER

ERIC F. MELGREN CHIEF UNITED STATES DISTRICT JUDGE.

Plaintiff Kent Deutsch alleges that his insurer, Defendant BITCO General Insurance Corporation, was required to provide him with a defense and coverage in two state lawsuits alleging misallocation of oil royalties. Defendant argues that the claims in the state lawsuits are not covered in the policies it issued. Plaintiff and Defendant have both moved for summary judgment. (Docs. 19, 23). For the following reasons the Court grants Defendant's motion, and denies Plaintiff's motion.

I. Factual and Procedural Background

Beginning in 2012, BITCO issued six annual insurance policies to Deutsch, who does business as Deutsch Oil Company. These policies include a Commercial General Liability (CGL) Coverage Form which provides:

SECTION I - COVERAGES

COVERAGE A - BODILY INJURY AND PROPERTY DAMAGE LIABILITY

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply.

* * *

b. This insurance applies to “bodily injury” and “property damage” only if:

(1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”;

(2) The “bodily injury” or “property damage” occurs during the policy period; and

(3) Prior to the policy period, no insured listed under Paragraph 1. of Section II-Who Is An Insured and no “employee” authorized by you to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “property damage” had occurred, in whole or in part. If such a listed insured or authorized “employee” knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such “bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the policy period.

An “occurrence” means “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The term “property damage” means:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

For purposes of this insurance, electronic data is not tangible property.

The CGL Policies also include a Damage to Property Exclusion, of which two are potentially relevant. The Policies provide:

2. Exclusions

This insurance does not apply to:

a. Expected Or Intended Injury

“Bodily injury” or “property damage” expected or intended from the standpoint of the insured. This exclusion does not apply to “bodily injury” resulting from the use of reasonable force to protect persons or property.

* * *

j. Damage to Property

“Property damage” to:

* * *

(4) Personal property in the care, custody or control of the insured[.]

At all relevant times, Deutsch was the assignee and operator of an oil and gas lease filed of record on October 10, 1967, in Book 67, page 337, in the office of the Stafford County Register of Deeds. The Morrison Lease includes “The East Half of the Northeast Quarter (E/2 NE/4) of Section Twenty-eight (28), Township Twenty-one (21) South, Range Thirteen (13) West, Stafford County.”

The Morrison Lease consists of a divided 80-acre tract: the 10-acre Morrison A Tract and the 70-acre Morrison B Tract. The tracts were divided in 1983 when the surface rights were sold. The first producing well on the Morrison Lease was the Morrison A well, drilled in 1970 at the center of the A Tract. The lease authorized Deutsch to drill, produce, and market oil, with the lessor retaining a 1/8 interest in the oil produced.

Deutsch Oil Company, as “Seller, ” entered into a Crude Oil Purchase Agreement (“COPA”) with “Buyer” Sunoco Partners Marketing & Terminals, under which Sunoco agreed to buy all of the crude oil and condensate produced from the Morrison Lease. Deutsch represented it was authorized to sell oil from the lease and Sunoco agreed to pay pursuant to its division order. The agreement provided that “Delivery shall take place and title shall pass from the Seller to the Buyer when the crude oil passes the outlet flange of the Seller's lease facility to the receiving equipment of Buyer or Buyer's designated agent.”

In 2012, Deutsch drilled another well on the property. Deutsch contends that he only learned later that the property had been divided into A and B Tracts. The 2012 well is in the B Tract, and is commonly referred to as the Morrison B well, although during the course of the litigation it has also been known as Morrison A # 2. This well produced from January 2013 through March 2014 when it was temporarily shut-in by Deutsch. Minerals from this well were owned by the Oliver Batman Revocable Trust #1, which should have received the royalty payments for production from it.

On August 21, 2014, Deutsch sent letters to three entities (Robro Royalty Partners, Bitter End Royalties, and Vendetta Royalty Partners) stating it had “incorrectly paid [them] royalty income” from the Morrison B well. The letters stated that the Batman Trust (“[t]he landowners who should have received the royalty income . . . have made a claim against Deutsch Oil, ” and asked each entity to reimburse Deutsch for the overpayments (respectively, for $26, 249.71, $118, 419.74, and $19, 802.41.).

Marilyn E. Batman, individually and as trustee of the Batman Trust sued Deutsch in Stafford County District Court (Case No. 2015-CV-06) for breach of contract, conversion, and negligence. The Trust alleged that, as the owner of the mineral interests and pursuant to the Morrison Lease, it was entitled to one-eighth (1/8) of the oil from the B Well. It alleged that it was damaged in the amount of $157, 099.10 for unpaid royalties. After a bench trial, the court entered judgment in favor of the Trust against Deutsch in that amount of $157, 099.10. The court concluded Deutsch “breached the royalty covenant of the lease contract and is without a valid defense.”

The Trust also named Robro and Bitter End as Third-Party Defendants. In the Pretrial Order, the Trust complained that it had been deprived of “$157, 099.10 in royalty payments which it was entitled to receive.” At the conclusion of the bench trial, the court entered judgment against Robro in the amount of $25, 037.02 and against Bitter End in the amount of $113, 111.35. The court held that Robro and Bitter End “admitted that they received royalty payments from the Morrison B well that they were not entitled to, because they should have been paid to Plaintiff, Batman Trust, and that it would be unfair for them to keep the payments.”

On November 3, 2015, Deutsch sent a notice of claim to BITCO seeking coverage under the governing policies, attaching a copy of the Trust's First Amended Petition in the Stafford County action.

One week later, BITCO denied both coverage and a defense, stating that petitions in the Stafford County action “did not allege an ‘occurrence' or ‘property damage' as defined by the Commercial General liability Coverage form.”

On December 16, 2015, Deutsch's personal attorney wrote to BITCO, asking that it reconsider. Counsel included Kansas decisions, which he suggested showed that conversion may arise from an unintentional or negligent act.

On February 5, 2016, BITCO again denied coverage.

While the first action was under way, Robro and Bitter End sued Deutsch and Sunoco in Stafford County (No. 17-CV-13). The plaintiffs asserted claims against Deutsch for: (1) breach of contract, (2) unjust enrichment, (3) fraud and fraudulent concealment, (4) conversion, (5) accounting demand, (6) civil conspiracy, and (7) declaratory judgment.

The plaintiffs claimed that the B Tract contained two wells, the Morrison “B” Well and the Batman-Morrison #1 Well. They alleged that Deutsch never credited them with royalty on unit production, and that “[a]ll royalty allocable to Plaintiffs on production from the Batman-Morrison #1 unit has been credited to Batman.” According to Robro and Bitter End, Deutsch and Batman had devised a “litigation plan, ” under which Deutsch would confess judgment “down the road, ” after seeking indemnification against them:

When Batman discovered the commingling problem she went to Deutsch and demanded compensation for the value of her missing royalty oil. Soon after, Batman and Deutsch began settlement talks. During the course of those talks Deutsch stipulated to the value of Batman's missing royalty share and proposed a litigation plan against [Robro and Bitter End]. Their plan was for Batman to file suit against Deutsch and for Deutsch to immediately answer and implead Plaintiffs. Deutsch also advised Batman that he would confess judgment “down the road” but that he wanted to leave Batman in the lawsuit for a period of time to facilitate the prosecution of an indemnity claim against Plaintiffs.^[1]

Robro and Bitter further alleged that, as a part of this plan Deutsch also worked to create a means by which they would in effect ...