Performance Autoplex II Ltd. v. Mid-Continent Cas.

• Decision Date: 20 February 2003
• Docket Number: No. 01-51135.,01-51135.
• Citation: 322 F.3d 847
• Parties: PERFORMANCE AUTOPLEX II LTD.; Performance Ford LP, Plaintiffs-Appellants, v. MID-CONTINENT CASUALTY COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

322 F.3d 847

PERFORMANCE AUTOPLEX II LTD.; Performance Ford LP, Plaintiffs-Appellants, v. MID-CONTINENT CASUALTY COMPANY, Defendant-Appellee.

No. 01-51135.

United States Court of Appeals, Fifth Circuit.

February 20, 2003.

Rehearing Denied March 18, 2003.

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Barry Clarke Snell, David Snell (argued), Bayne, Snell & Krause, San Antonio, TX, for Plaintiffs-Appellants.

Brian Lynn Blakeley (argued), Carrie Elizabeth Davis, Blakeley & Reynolds, San Antonio, TX, for Defendant-Appellee.

Appeal from the United States District Court for the Western District of Texas.

Before KING, Chief Judge, and JOLLY and HIGGINBOTHAM, Circuit Judges.

PER CURIAM:

Plaintiffs-Appellants Performance Autoplex II Ltd. and Performance Ford, L.P. filed suit against Defendant-Appellee Mid-Continent Casualty Company, alleging that Mid-Continent improperly refused to pay for employee dishonesty losses covered by one of its insurance policies. The district court granted summary judgment in favor of Mid-Continent on all claims and Performance Autoplex and Performance Ford appeal. We affirm in part, reverse in part, and remand.

I. FACTUAL AND PROCEDURAL HISTORY

A. Facts

Performance Automotive Group, Inc. ("Performance Group") operates new car dealerships in Texas and other states. Performance Autoplex II Ltd. ("Performance Autoplex") and Performance Ford, L.P. ("Performance Ford") are two separate dealerships; both are general partners of Performance Group.

In 1995 or 1996, Michael Avellar, Vice-President of Performance Group, contacted McKane Morgan & Associates ("McKane Morgan") to purchase insurance to cover inventory losses discovered during annual parts inventories. Abbie Morgan, a McKane Morgan employee, told Avellar that Performance Group could obtain coverage from Mid-Continent Casualty Company ("Mid-Continent") that would cover inventory losses if there was some evidence of criminal activity by an employee. Avellar purchased a Mid-Continent commercial insurance package from McKane Morgan. The package included a commercial crime coverage policy, which contained a provision covering losses caused by employee dishonesty. The policy covers "loss of, and loss from damage to, Covered Property resulting directly from the Covered Cause of Loss." Under the policy, Covered Property is "`[m]oney', `securities', and `property other than money and securities'" and the Covered Cause of Loss is "[e]mployee dishonesty." Performance Autoplex and Performance Ford were named insureds under the policy. The policy was renewed in 1997.¹

Pigg Inventory Loss Claim

In 1997, Performance Autoplex, a dealership in Midland, Texas, undertook an annual physical inventory of its parts department. During the inventory, Performance Autoplex discovered that its Parts Manager, Mike Pigg, had stolen parts and cash from the department. The dealership's ledger showed a total inventory disrespancy of approximately $115,000. Pigg admitted to stealing approximately $4,000 in cash and parts valued at between $25,000 and $30,000.

Performance Autoplex submitted a claim to Mid-Continent for the entire amount of the inventory shortage. Mid-Continent had an outside accounting firm, Campos & Stratis, L.L.P. ("Campos & Stratis"), investigate the claim and verify the amount of the loss. Campos & Stratis identified an inventory shortage of $115,752 and traced $47,222 to parts stolen by Pigg. Campos & Stratis also identified a cash shortage of $5,643 and traced that amount to Pigg. After taking shrinkage² into account, Campos & Stratis determined that Performance Autoplex's loss, exclusive of the cash shortage, totaled between $95,335 and $105,544.³

Mid-Continent paid $52,865, $5,643 for cash stolen by Pigg and $47,222 for parts that could be specifically traced to Pigg. Mid-Continent denied the remainder of the claim, stating that the policy's "inventory computation" exclusion barred payment of the amount that would be required to reconcile the value of the physical inventory with the inventory listed in the dealership's general ledger.⁴ Mid-Continent reasoned that because there was no evidence tracing Pigg to approximately half of the claimed loss, the amount of the loss could only be substantiated using an inventory computation, which the policy forbids.

Wall Trade-In Claim

In March 1998, Sheilah Wall, the controller at Performance Ford, a dealership in Memphis, Tennessee, transferred title in a new Ford Taurus to her mother. Though this transfer was purportedly in exchange for a $2,000 down payment and trade-in of a 1997 Ford Taurus, neither the down payment nor the trade-in was ever received.

Performance Ford submitted a claim for this loss to Mid-Continent, requesting payment for the $2,000 down payment and the value of the trade-in vehicle (approximately $12,700). Mid-Continent reimbursed Performance for the $2,000 down payment but not for the value of the trade-in vehicle. In explaining why it denied the claim, Mid-Continent stated that the loss was not one due to "employee dishonesty" because "[i]t is clear that the dealership knew [it] did not have the trade in vehicle." Mid-Continent later claimed that the loss was barred by the "indirect loss" policy exclusion.⁵ Mid-Continent further suggested that because Performance Ford never claimed that the loss was the value of the new car, but only that it was the value of the trade-in vehicle (proven only by the dishonest employee's assessment of the vehicle's value), Performance Ford has not shown there was a covered loss.

Wall Unauthorized Pay Increase Claim

In December 1997, Sheilah Wall embezzled funds from Performance Ford by giving herself and another employee unauthorized pay increases. Though these raises should have been approved by Performance Ford's general partner and general manager, Wall never sought such approval. In total, Wall obtained $19,724 in extra pay for herself and another employee.

Performance Ford submitted a claim for this loss to Mid-Continent. Mid-Continent denied the claim, claiming the loss did not result from "employee dishonesty" because the benefit received was a salary increase. The employee dishonesty provision reads as follows:

3. Additional Definitions

a. "Employee Dishonesty" in paragraph A.2 means only dishonest acts committed by an "employee", whether identified or not, acting alone or in collusion with other persons, except you or a partner, with the manifest intent to:

(1) Cause you to sustain loss; and also

(2) Obtain financial benefit (other than employee benefits earned in the normal course of employment, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions) for:

(a) The "employee"; or

(b) Any person or organization intended by the "employee" to receive that benefit.

According to Mid-Continent, there was no "employee dishonesty" loss because the policy specifically excludes fraudulently obtained salaries.

B. Procedural History

Performance Autoplex and Performance Ford (collectively "Performance") filed suit in Texas state court, seeking breach of contract damages for Mid-Continent's denial of their three claims. Performance also asserts extracontractual claims for three violations of the Texas Insurance Code, claiming that Mid-Continent: (1) misrepresented the scope of policy coverage; (2) denied Performance's claims in bad faith; and (3) improperly denied Performance's claims, even if there was no bad faith, so that statutory penalties are due. Mid-Continent removed the case to federal district court.

Both Performance and Mid-Continent filed motions for summary judgment.⁶ The district court referred the matter to a magistrate judge, who recommended that Performance's motion be denied and Mid-Continent's motion be granted. Performance filed objections to the magistrate judge's report and filed a motion to supplement the record. The district court conducted an independent review of the record and a de novo review of those portions of the report to which Performance objected. The district court then adopted the magistrate judge's report, granted Mid-Continent's motion for summary judgment, and denied Performance's motion for summary judgment and motion to supplement the record.

On the Pigg inventory claim, the district court agreed with Mid-Continent that the policy's "inventory computation" exclusion barred Performance's claim as a matter of law because the claim could only be substantiated through an inventory. On the Wall trade-in claim, the district court found that the "indirect loss" exclusion barred Performance's claim as a matter of law. The district court reasoned that because Performance had not substantiated the value of the new car or the trade-in vehicle, it was only claiming a loss of its profit on the trade-in vehicle.⁷ On the Wall pay increase claim, the district court determined that the unauthorized salary increase was not covered "employee dishonesty" as a matter of law under the plain language of the policy. Finally, the district court ruled for Mid-Continent on Performance's Texas Insurance Code claims because there had not been a misrepresentation and Mid-Continent properly denied all of the claims.

Performance appeals the grant of Mid-Continent's motion for summary judgment, the denial of its motion for partial summary judgment, and the denial of its motion to supplement the record. Specifically, Performance raises seven issues for our review: (1) whether the district court erred in granting Mid-Continent summary judgment on the Pigg inventory claim; (2) whether the district court erred in granting Mid-Continent summary judgment on the Wall trade-in claim; (3) whether the district court erred in granting Mid-Continent summary judgment on the Wall salary increase claim; (4) whether the district court erred in granting Mid-Continent summary judgment on the misrepresentation claim; (5) whether the district court erred in granting Mid-Continent...