Gemini Ins. Co. v. S & J Diving, Inc.

Decision Date25 August 2006
Docket NumberCIV.A. No. H-05-661.
Citation464 F.Supp.2d 641
PartiesGEMINI INSURANCE CO. et al. v. S & J DIVING, INC., et al.
CourtU.S. District Court — Southern District of Texas

George T. Jackson, Burck Lapidus et al., Houston, TX, for Gemini Insurance Company.

Robert Hayden Burns, Liskow & Lewis, Houston, TX, for S & J Diving Inc., Stanley Jones, and Patricia Jones.


GILMORE, District Judge.

This matter was referred by United States District Judge Vanessa D. Gilmore for full pretrial management, pursuant to 28 U.S.C. § 636(b)(1)(A) and (B). (Docket Entry # 30). Pending before the court are cross-motions for summary judgment which were filed by Plaintiff Gemini Insurance Company ("Plaintiff," "Gemini") and Defendants S & J Diving, Inc. ("S & J"), Stanley Jones, and Patricia Jones (collectively, "Defendants").1 (Plaintiffs Motion for Summary Judgment ["Plaintiffs Motion"], Docket Entry # 35; Defendants' Motion for Summary Judgment ["Defendants' Motion"], Docket Entry # 28). Each party has filed responses and replies to the competing motions. (Plaintiffs Response to Motion for Summary Judgment ["Plaintiffs Response"], Docket Entry # 34; Defendants' Reply to the Response and Summary Judgment Motion of Gemini Insurance Company ["Defendants' Reply"], Docket Entry # 40; Plaintiffs Reply to the Reply Filed by S & J Diving, Inc., Stanley Jones and Patricia Jones ["Plaintiffs Reply"], Docket Entry # 45; Defendants' Reply to Gemini's Summary Judgment Reply ["Defendants' Sur-Reply"], Docket Entry # 47). Before this court, the parties dispute the extent of Gemini's duties under an insurance policy issued to the defendant company, S & J Diving. After considering the pleadings, the evidence, and the applicable law, it is RECOMMENDED that Plaintiffs motion be GRANTED, and that Defendants' motion be DENIED.


Sometime in the early morning hours of June 30, 2002, Barbara Hauenstein's twelve-year-old granddaughter was abducted from a camp site and sexually assaulted. (Defendants' Motion at Exhibit ["Ex."] 3). At the time, the child and her mother were attending a three-day outdoor rock concert and motorcycle rally, the "Texas Tea Party." This event, which took place on James Chapman's ranch in Medina County, Texas, was produced by an entity called Pajama Productions, Inc. ("Pajama Productions"). Before the rally, Chapman had signed a lease agreement, for the use of his property, with the Texas Motorcycle Rights Association and Pajama Productions. (Plaintiffs Reply at Ex. C). The agreement required the production company to obtain appropriate insurance, and to indemnify the ranch owner from any liability in the case of specified negligent and intentional conduct, as well as to comply with all applicable laws during the event. (Id.).

Following the assault, an investigation determined that it was a Pajama Productions employee who had kidnapped the child. (See Defendants' Motion at Ex. 3). Subsequently, Hauenstein, on behalf of her granddaughter, filed suit in a Harris County district court, naming as defendants the Texas Motorcycle Rights Association, Inc., Chapman, individually, and Pajama Productions, Inc., and others.2 Among the defendants in her original state court petition, Hauenstein listed Stanley Jones, principal shareholder in Pajama Productions, Inc. (Plaintiffs Reply at 4 & Ex. A, B). Following service of the suit, Pajama Productions gave notice of the claim against it, and Jones individually, to its insurance carrier, Scottsdale Insurance Company. (Id. at 4 & Ex. A). That company agreed to provide a defense to those two state court defendants. (Id.). As the case progressed, Hauenstein amended her allegations a number of times. Finally, in her fourth amended petition, Hauenstein included Stanley Jones's wife, Patricia; S & J Diving, Inc.; M/V Aries, Inc.; and Deep Sea Champion, Inc., as additional defendants purportedly responsible for the assault on her granddaughter. (Defendants' Motion at Ex. 3).

It is that final state court petition that has brought these parties here on Plaintiffs request for a declaratory judgment. The newly added defendants, S & J Diving, Inc., and its subsidiaries, M/V Aries, Inc., and Deep Sea Champion, Inc., are all corporate entities which are identified in one way or another with Stanley Jones. It is Jones's link to each of those businesses that led Hauenstein to add them as defendants in her state court action. For instance, Stanley Jones is Lie sole shareholder, president, and a director of S & J Diving, while Patricia Jones serves as secretary-treasurer of the company. (Id. at 4 & Ex. 4). At the time the fourth amended petition was filed, S & J Diving, Inc., had an insurance policy in place which it had obtained from Plaintiff Gemini Insurance Company. (Plaintiffs First Amended Original Complaint ["Complaint"] at 3; Defendants' Motion at Ex. 2). Once it was served with the amended petition, S & J Diving gave the insurer notice of the claim and demanded that it defend the corporation and indemnify it if found liable on the state court allegations. (Complaint at 5). Although Gemini did provide a defense to S & J Diving in the state court proceedings, it did so while giving notice that it reserved its right to contest whether Hauenstein's claims were, in fact, covered by the applicable policy. (See id). Because Hauenstein's liability theories as to each of these defendants are detailed in her state court petition, it is critical to review that pleading in the context of the pending insurance dispute.

From the outset, Hauenstein alleged that Pajama Productions, Inc., and Jones, individually, were obligated to provide adequate security at the concert to ensure the safety of the participants. (Defendants' Motion at Ex. 3). In fact, Hauenstein claimed that those defendants were aware that a large crowd was expected at the rally, that alcohol would be available, and that they had been advised that the security plan for the event was inadequate. (Id.). Further, she claimed that even the minimal security force that had been engaged was allowed to go off duty at midnight, and it was during the early morning that the assault on her granddaughter took place. (Id.). In her last state court pleading, Hauenstein claimed that it was Jones, individually, who was responsible for obtaining adequate security and that Pajama Productions, Inc., is merely his alter-ego. (Id.). On that same theory, apparently, Hauenstein alleges that all of the other entities affiliated with Jones, particularly S & J Diving, Inc., and its subsidiaries, M/V Aries, Inc. and Deep Sea Champion, Inc., are likewise alter-egos of Jones and Pajama Productions, Inc. (Id.). Hauenstein claims that each of these entities was created merely to avoid legal obligations, and as such was a shell corporation fraudulently devised to evade financial responsibility for the injuries her family suffered. (Id.). Perhaps this allegation is better understood by direct reference to her pleadings:

The separate corporate identity of Pajama Productions, Inc. should be disregarded and the Defendants should be treated as one entity to prevent the use of the corporate fiction as an unfair device to inflict injustice on the twelve year old minor Plaintiff. Defendant Pajama Productions, Inc. was used merely as a sham to perpetuate a fraud; it was organized and operated as a mere tool or business conduit of Stanley Jones, Patricia Jones, M/V Aries, Inc., Deep Sea Champion Inc., and/or S & J Diving, Inc.; it was used, to evade a legal obligation; it was inadequately capitalized so as to work an injustice; and because Pajama Productions, Inc. and one or more of the Defendants they [sic] were operated as a single business entity.

(Id). Ultimately, all parties to the state court lawsuit settled Hauenstein's claims. Gemini now asks this court to determine its obligations to S & J Diving and to Stanley and Patricia Jones, individually, as a result of the sexual assault which occurred during the "Texas Tea Party," in June 2002. (Defendants' Motion at Ex. 1; Plaintiffs Motion at 19-20).

Following a review of Plaintiffs request for a declaratory judgment, the motions and responses filed by the parties, the evidence submitted, and the applicable law, it is recommended that Gemini's motion for summary judgment be granted, and that the motion by Defendants be denied.

The Declaratory Judgment Act

The Declaratory Judgment Act provides that "[i]n a case of actual controversy within its jurisdiction, ... any court of the United States ... may declare the rights and other legal relations of any interested party seeking such declaration whether or not further relief is or could be sought." 28 U.S.C. § 2201(a) (1994). The United States Supreme Court has characterized the Declaratory Judgment Act, repeatedly, as an "enabling" one, "`which confers a discretion on the courts rather than an absolute right upon the litigant.'" Wilton v. Seven Falls Co., 515 U.S. 277, 287, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995) (quoting PSC v. Wycoff Co., 344 U.S. 237, 241, 73 S.Ct. 236, 97 L.Ed. 291 (1952)). The Court has explained, as well, that "`the propriety of declaratory relief in a particular case will depend upon a circumspect sense of its fitness informed by the teachings and experience concerning the functions and extent of federal judicial power.'" Id. (quoting Wycoff Co., 344 U.S. at 243, 73 S.Ct. 236). Disputes relating to insurance coverage are often resolved in an action for declaratory judgment. See Harris v. United States Fidelity & Guaranty Co., 569 F.2d 850, 852 (5th Cir. 1978). It is well established, however, that § 2201 is merely procedural, and that it extends only to those controversies within the jurisdiction of the federal courts. See In re B-727 Aircraft Serial No. 21010, 272 F.3d 264, 270 (5th Cir. 2001); Gaar v. Quirk, 86 F.3d 451, 453-54 (5th Cir.1996); Lowe...

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