Enron Corp. v. Lawyers Title Ins. Corp.

• Decision Date: 19 August 1991
• Docket Number: 90-2965NE,Nos. 90-2964N,s. 90-2964N
• Citation: 940 F.2d 307
• Parties: ENRON CORPORATION, Appellee, v. LAWYERS TITLE INSURANCE CORPORATION, Appellant. ENRON CORPORATION, Appellant, v. LAWYERS TITLE INSURANCE CORPORATION, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 307

940 F.2d 307

ENRON CORPORATION, Appellee, v. LAWYERS TITLE INSURANCE CORPORATION, Appellant.

ENRON CORPORATION, Appellant, v. LAWYERS TITLE INSURANCE CORPORATION, Appellee.

Nos. 90-2964NE, 90-2965NE.

United States Court of Appeals Eighth Circuit.

Submitted May 16, 1991.

Decided July 25, 1991.

Rehearing Denied Aug. 19, 1991.

Robert Becker, argued (Donald J. Buresh, on brief), Omaha, Neb., for appellant.

Jerrold L. Strasheim, argued (Mary Leiter Swick, on brief), Omaha, Neb., for appellee.

Before FAGG and MAGILL, Circuit Judges, and HENLEY, Senior Circuit Judge.

MAGILL, Circuit Judge.

Lawyers Title Insurance Corporation appeals from the district court's judgment holding that it breached a duty to defend Nebraska-based Enron Corporation under a title insurance policy against claims raised in opposition to Enron's foreclosure action in the Virgin Islands. On cross-appeal, Enron argues that the district court erred in ruling: that Enron was not entitled to certain settlement costs; that Enron was not entitled to prejudgment interest; that Enron could not recover punitive damages; and that Lawyers Title was not liable for the tort of bad faith. We reverse and remand for a determination of whether the factual allegations of the claims in opposition to Enron's foreclosure action state a claim that the insurance policy at issue potentially covered.

I.

The issues presented in this appeal originated in the oil crisis of the early 1970s. In 1973, Enron Corporation (Enron) had a subsidiary, UPG, Incorporated, which marketed liquefied petroleum gas and other petroleum products. To ensure that UPG had access to crude oil during the oil crisis, Enron established a relationship with the Virgin Islands Refinery Corporation (VIRCO), ultimately buying twenty shares of VIRCO stock for $250,000. In early 1974, VIRCO sought to borrow $400,000 from Enron to obtain an extension of an option to purchase certain property. VIRCO wished to build an oil refinery on this property, which consisted of 350 acres in St. Croix, U.S. Virgin Islands. Although Enron was willing to loan VIRCO the necessary funds, VIRCO was unable to obtain the extension and the initial purchase plan fell through.

VIRCO still wanted the property, however, and sought Enron's further assistance in buying it. To help VIRCO acquire the property, Enron essentially lent the refinery $8.2 million of the approximately $10 million purchase price. Closing of title on the sale occurred in February of 1974. At that time VIRCO gave Enron a promissory note for $8.2 million, which was secured by a mortgage on the property. The mortgage was recorded on June 27, 1974. As part of the purchase agreement, the property's owners, the DeChabert family, deferred receipt of $1 million of the sale price and chose to have that amount secured by a lien on the property. VIRCO executed the lien, designating it a "junior mortgage." The lien was recorded on June 28, 1974.

That same month, Lawyers Title Insurance Corporation (LTIC) issued a title insurance policy covering Enron's interest as mortgagee of the St. Croix property. The policy provided, in pertinent part:

SUBJECT TO THE EXCLUSIONS FROM COVERAGE ... LAWYERS TITLE INSURANCE CORPORATION [Company] ... insures ... against loss or damage ... and costs, attorneys' fees and expenses which the Company may become obligated to pay hereunder, sustained or incurred by the insured by reason of:

....

2. Any defect in or lien or encumbrance on such title;

....

6. The priority of any lien or encumbrance over the lien of the insured mortgage;

....

CONDITIONS AND STIPULATIONS

....

3. Defense and Prosecution of Actions--Notice of Claim to be given by an Insured Claimant

(a) The Company, at its own cost and without undue delay, shall provide for the defense of an insured in all litigation consisting of actions or proceedings commenced against such insured, or defenses, restraining orders or injunctions interposed against a foreclosure of the insured mortgage ... to the extent that such litigation is founded upon an alleged defect, lien, encumbrance, or other matter insured against by this policy.

App. at 248, 251.

VIRCO was never able to build the refinery, and in 1978 it defaulted on the Enron loan. On August 30, 1978, Enron filed a foreclosure action in federal district court in the Virgin Islands. App. at 8. Both VIRCO and the DeChaberts contested the foreclosure action. The DeChaberts, in a responsive pleading filed November 29, contested on the grounds that they had actually received a mortgage before Enron did and thus were the first priority secured creditors, and that the "junior mortgage" was a sham, because Enron and VIRCO were basically one and the same. ¹ Id. at 254-55. In its responsive pleading, VIRCO basically agreed with the DeChaberts' contention as to the relationship between it and Enron, arguing that since 1973 Enron had been a major shareholder and inside control party of VIRCO. Id. at 265. As regards the $8.2 million "loan" from Enron in 1974, VIRCO contended:

[VIRCO] received no consideration whatsoever for its execution of the above-described promissory note and purported mortgage. The [$8.2 million] which [Enron] alleges it advanced to [VIRCO] in consideration of said note and purported mortgage was, in reality, payment to [VIRCO] for its transfer to [Enron] of 500 shares of [VIRCO] common stock, the option to acquire an additional 3,000 shares of [VIRCO] stock, and other rights relating to the use of the [VIRCO] refinery and the purchase of petroleum and petroleum products from said refinery.

Id. at 268.

Enron and LTIC each retained separate law firms to work on the foreclosure. Neither the clients nor the law firms entered into any agreement concerning the scope of each other's representation of Enron. Both sets of attorneys represented Enron in the foreclosure until the parties settled in February 1982. ² The settlement was memorialized in a consent decree that was entered on March 5, 1982. The following May, Enron submitted a claim to LTIC for the expenses of its separate counsel during the foreclosure proceedings. LTIC took the position that Enron was seeking reimbursement for expenses incurred in connection with the sham claim--expenses, LTIC contended, for which it was not liable because the claim was not covered by the policy. Because LTIC believed it had satisfied its duty to defend the priority claim, which was covered by the policy, and because it had never agreed to pay for Enron's providing a separate defense, LTIC rejected Enron's claim.

On June 12, 1986, Enron filed suit against LTIC in federal district court in Nebraska. Enron first alleged that LTIC had breached its duty to defend Enron. Enron also alleged that certain actions of LTIC and its Virgin Islands counsel constituted a breach of the duty of good faith, and that LTIC had been unjustly enriched by refusing to defend Enron. Enron sought $1.4 million in damages resulting from the delay in acquiring the St. Croix property, approximately $359,000 in attorney fees, costs, and expenses, $68,000 in costs associated with the foreclosure settlement, and punitive damages. ³

As regards Enron's duty to defend claim, LTIC again argued that because the priority claim was covered by the policy, LTIC was only obligated to defend that claim, and had properly done so. LTIC reasserted its belief that it had no duty to defend the sham claim.

After a bench trial, the district court, applying Virgin Islands law, concluded that LTIC had breached its duty to defend Enron in the foreclosure action. See Enron Corp. v. Lawyers Title Ins. Corp., No. CV 86-O-477, slip op. at 15 (D.Neb. Jan. 4, 1990). In rejecting LTIC's argument, the district court observed that "Enron has never disputed that the sham claim was not covered by the policy," id. at 17, but opined that "[w]hether the sham claim involved a matter covered by the policy is essentially irrelevant." Id. at 9-10. Later in the opinion, the district court reiterated its position: "As stated above, the duty to defend extends to all claims no matter whether they are within or without the policy coverage." Id. at 15. The district court rejected Enron's other two causes of action and its claim for prejudgment interest. The district court thus held LTIC liable for approximately $332,000 in defense costs, as well as $15,000 in settlement costs. Both parties now appeal.

II.

A. Applicable Law

The district court held, and the parties agree, that Virgin Islands law controls the analysis of all but one of the issues in this case. Where there is no governing statute, Virgin Islands law "directs us to examine the common law, first as expressed in the Restatements, and then as generally understood and applied in the United States. Where the Restatement is silent and a split of authority exists, courts should select the sounder rule." See Polius v. Clark Equip. Co., 802 F.2d 75, 77 (3d Cir.1986). ⁴ We review de novo the Nebraska district court's rulings on issues of Virgin Islands law. Cf. Beard v. J.I. Case Co., 823 F.2d 1095, 1098 (7th Cir.1987); Henry Hope X-Ray Prods., Inc. v. Marron Carrel, Inc., 674 F.2d 1336, 1339 (9th Cir.1982).

B. LTIC's Duty to Defend

LTIC argues on appeal that the district court erred in holding that it breached a duty to defend Enron. Under the policy in this case, LTIC is obligated to defend any claims that the policy covered. See supra Part I; cf. Buntin v. Continental Ins. Co., 525 F.Supp. 1077, 1080 (D.V.I.1981) ("The insurer's duty to defend is contractual: most insurance policies expressly obligate the insurer to assume the defense of lawsuits arising under the policy."). However, the "duty to defend is broader than the duty to pay." Cay Divers, Inc. v. Raven, 812 F.2d 866, 869 (3d Cir.1987). Thus, LTIC also must defend a claim the policy does not cover "if the allegations of the complaint 'state on their face a claim against the insured to which the policy potentially...