Mid-Continent Cas. Co. v. Petroleum Solutions, Inc.
| Decision Date | 30 December 2016 |
| Docket Number | CIVIL ACTION NO. 4:09-0422 |
| Parties | MID-CONTINENT CASUALTY CO., Plaintiff, v. PETROLEUM SOLUTIONS, INC., et al., Defendants. |
| Court | U.S. District Court — Southern District of Texas |
Before the Court in this insurance coverage case are two issues raised by the parties since the Court issued its Amended Memorandum and Order on September 29, 2016 [Doc. # 109] ("Amended M&O"),1 granting summary judgment on most issues presented by the parties. Familiarity with the detailed facts set forth in the Court's Amended Memorandum and Order are assumed and detail is explained below only as needed for legal analysis.
By way of overview, this case concerns a commercial general liability ("CGL") policy issued by Plaintiff Mid-Continent Casualty Co. ("Mid-Continent") to Defendant insured Petroleum Solutions, Inc. ("PSI") covering the period May 1,2001, to May 1, 2002 (the "Policy").
In the 1990s, PSI sold to Bill Head and installed on his property a fuel storage system. It was discovered in 2001 that approximately 20,000 gallons of oil had leaked into the soil. Head notified PSI of the leak and accused PSI of violations of various duties including sale of a defective product. PSI reported the claim to its carrier, Mid-Continent, which agreed to defend PSI under a reservation of rights. Mid-Continent hired counsel to investigate the matter. PSI and counsel contended that a defective flex connector manufactured by Titeflex Corporation ("Titeflex") had been the cause of the leak. Counsel took possession of the flex connector from the site and submitted it to a laboratory for testing and storage. At some point, the flex connector was lost or destroyed.
In February 2006, Head sued PSI in Texas state court (the "State Court Litigation"). Mid-Continent selected Victor Vicinaiz, Esq., and Jennifer Hogan, Esq. as trial and appellate defense counsel, respectively, for PSI. Mid-Continent, defense counsel and PSI agreed that PSI would assert third-party claims against Titeflex (collectively, PSI's "Affirmative Claim") under Section 82.002 of the Texas Civil Practice and Remedies Code ("Section 82.002"), and filed the third-party action in October 2006.2
In January 2007, Head amended his petition to name Titeflex a co-defendant based on a strict products liability theory similar to that PSI had asserted. Titeflex actively defended against all claims, asserting inter alia spoliation arguments because of the loss of the flex connector.
In March 2008, Head non-suited without prejudice his claims against Titeflex and focused his theories and trial strategy on PSI. In May 2008, Titeflexasserted a counterclaim against PSI for Titeflex's attorney's fees, costs and expenses (collectively, "fees") incurred after Head dismissed his claims. Titeflex subsequently amended its counterclaim to assert what was effectively a Section 82.002 claim against PSI, seeking "all past and future costs of court, reasonable expenses, and reasonable and necessary attorney's fees which were expended in defense of this action and in prosecution of this demand for indemnity."3
On August 12, 2008, in consultation with Mid-Continent, PSI non-suited its Affirmative Claim, which constituted a dismissal without prejudice. Titeflex, however, refused to dismiss its counterclaim for indemnity against PSI unless PSI agreed to dismiss its Affirmative Claim against Titeflex with prejudice. PSI refused this dismissal with prejudice.
The claims by Head and Titeflex were tried in September and October 2008. After a trial spread over approximately eight weeks, the jury reached a verdict in Titeflex's favor against PSI, which was memorialized in a judgment entered January 13, 2009. Titeflex was awarded $463,246.97, plus post-judgment interest ("Titeflex Judgment").4 The Texas Supreme Court affirmed that judgment in July2014, as revised in December 2014.5
Meanwhile, in response to PSI's notice of claim in 2001, Mid-Continent defended PSI against Head's and, later, Titeflex's claims under a reservation of rights. Mid-Continent has mounted numerous defenses to coverage. Mid-Continent commenced this declaratory judgment action in 2009, while the Titeflex Judgment was on appeal but before it had become final. PSI paid the Titeflex Judgment and has counterclaimed for reimbursement from Mid-Continent under the Policy.6
This Court, on July 29, 2016, in an extensive ruling on a wide variety of issues presented by the parties on cross motions for summary judgment [Doc. # 93], held that there was coverage under the Policy for the fees in the Titeflex Judgment awarded pursuant to Section 82.002(a) incurred in defense against Head's claims, but no coverage for fees attributable to Titeflex's defense against PSI claims or awarded pursuant to Section 82.002(g). The Court also concluded that fact issues existed for trial regarding whether PSI satisfied its duty to cooperate under the Policy. Upon motions for reconsideration, the Court issued anAmended Memorandum and Order [Doc. # 109] altering several of its rulings in limited part, but did not alter its fundamental conclusions. Significantly for present purposes, the Court concluded that a trial also was necessary on the issue of whether Mid-Continent was collaterally estopped from arguing that the Titeflex fees should be segregated into components attributable to Section 82.002(a) as opposed to Section 82.002(g). Thereafter, the Court determined the issue of whether Mid-Continent waived the right to enforce the cooperation clause in the Policy.
The parties continue to contest certain aspects of this Court's rulings. There are several issues before the Court for decision, two of which are addressed below.
First, PSI argues that the Fifth Circuit's case of Hollybrook Cottonseed Processing, L.L.C. v. American Guarantee & Liability Insurance Co., 772 F.3d 1031 (5th Cir. 2014), not previously cited in the parties' briefing, establishes that there is coverage for both the Section 82.002(a) fees in the Titeflex Judgment and the Section 82.002(g) fees, as both types of fees are "damages" under the Policy's insuring clause. PSI asks the Court to alter its conclusion that Section 82.002(g) fees are not "damages because of ... property damage" under the Policy. Mid-Continent contends the Hollybrook case is not probative.
Second, the parties seek a ruling regarding whether collateral estoppel prevents Mid-Continent from contesting coverage under the Policy for fees Titeflex incurred in defense of PSI's Affirmative Claim while Head's claim was not pending against Titeflex. The parties have stipulated to facts pertaining to this issue and to the sums potentially owed if Mid-Continent is collaterally estopped and if it is not.7
The Court addresses these issues in turn.
As interpreted by the Texas Supreme Court on appeal in the underlying suit, Head's allegations of property damage caused in part by a Titeflex product, which claim was dismissed, were sufficient under Section 82.002 to sustain the judgment in favor of Titeflex, as an innocent component part seller-indemnitee, against PSI, which the Supreme Court characterized as a manufacturer-indemnitor. Titeflex's claimed losses were solely its attorney's fees, costs, and expenses (collectively, "fees") incurred in the State Court Litigation. The state trial and appellate courts did not differentiate between fees incurred by Titeflex in defending against Head's product liability allegations, that is, Section 82.002(a) fees,8 and fees Titeflex, an innocent "seller", incurred pursuant to Section 82.002(g)9 in enforcing the Section 82.002(a) indemnity rights against "manufacturer" PSI.10
This Court has concluded that fees awarded to Titeflex pursuant to 82.002(g) do not constitute "damages" under the Policy Insuring Agreement.11 In summary, the Court reasons that, because the Policy does not define "damages," the Court must look to Texas law for the definition of "damages" to ascertain if attorney's fees and costs are within the Policy's Insuring Agreement. Under Texas law, attorney's fees incurred in the prosecution or defense of a claim generally are not compensatory damages. Following PSI's original suggestion, the Court relied on the Texas Supreme Court's analysis in In Re Nalle Plastics Family Limited Partnership,12 which discussed Section 38.001 of the Texas Civil Practice and Remedies Code, a fee-shifting provision that permits recovery of attorney's fees in certain actions "in addition to the amount of a valid claim and costs." The Texas Supreme Court explained that the drafters' use of "in addition to" in that statute evidences that attorney's fees are a form of recovery separate from compensatorydamages.13 The Supreme Court also distinguished fees incurred in the prosecution or defense of a claim from fees that are a loss recovered through a substantive cause of action. "If the underlying suit concerns a claim for attorney's fees as an element of damages . . . , then those fees may properly be included in a judge or jury's compensatory damages award."14
Applying this reasoning, this Court concluded that the Titeflex Judgment, to the extent it included fees under Section 82.002(a), was compensation for a "loss arising out of a products liability action"15 because "loss," see Section 82.002(b), is defined to include "court costs and other expenses, reasonable attorney fees, and any reasonable damages." The Court held that an award of fees underSection 82.002(a) is an award of compensatory damages, and thus is covered by the Policy as "damages."16
The Court concluded, however, that because Section 82.002(g) grants recovery of fees incurred "to enforce" an innocent seller's Section 82.002(a) indemnification rights, Section 82.002(g) fees do not meet the definition of compensatory "damages" under Texas law or the Policy.17 These...
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