United States Court of Appeals,

Fifth Circuit.

No. 92-7682.

WESTERN HERITAGE INSURANCE CO., Plaintiff-Appellant/Cross-Appellee.

v.

RIVER ENTERTAINMENT d/b/a Pepe's on the River, Raul Rodriguez and Luz Marie

Rodriguez, Defendants-Appellees/Cross-Appellants.

Aug. 23, 1993.

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

Before REAVLEY, DUHÉ, and BARKSDALE, Circuit Judges.

DUHÉ, Circuit Judge:

This is an app eal fro m a declaratory judgment action filed by Western Heritage Insurance

Company ("Western Heritage"), to determine what obligations it owe d it s insured, River

Entertainment d/b/a Pepe's on the River ("River Entertainment"). The district court concluded that

the insurer had no duty to defend its insured in a state court suit filed by Raul and Luz Marie

Rodriguez ("Rodriguez' "). We agree. However, we now modify the district court's earlier 12(b)(6)

ruling on Western Heritage's duty to indemnify its insured. The conclusion that the insurer owes no

duty to defend River Entertainment forecloses the possibility of future indemnity under the terms of

the policy at issue.

I.

The catalyst for the declaratory judgment action is a state court suit filed by the Rodriguez'

against Robert Hil l and River Entertainment in which the parties stipulated that Hill became

intoxicated while at Pepe's, drove off into the Texas night and hit the Rodriguez's vehicle, killing their

minor daughter.

River Entertainment requested that Western Heritage defend and indemnify it pursuant to the

terms of Western Heritage's comprehensive general liabilit y policy issued to Ri ver Entertainment.1 This exclusion states:

This insurance does not apply:

(h) to bodily injury or property damage for which the insured or his indemnitee

may be held liable

(1) as a person or organization engaged in the business of manufacturing,

distributing, selling or serving alcoholic beverages, or

(2) if not so engaged, as owner or lessor of premises used for such

purposes,

if such liabilit

y is imposed

(i) by, or because of the violation of, any statute, ordinance or regulation

pertaining to the sale, gift, distribution or use of any alcoholic beverage, or

(ii) by reason of the selling, serving or giving of any alcoholic beverage to a

minor or to a person under the influence of alcohol or which causes or

contributes to the intoxication of any person[.] The insurer declined because of a liquor-liability exclusion in the policy. 1 Western Heritage then filed

this declaratory judgment action, naming River Entertainment and the Rodriguez ' as defendants.

Jurisdiction was grounded in diversity, and the original complaint requested relief under the Uniform

Declaratory Judgments Act, Tex.Civ.Prac. & Rem.Code §§ 37.001—.011 (Vernon 1986). Western

Heritage later amended its complaint to invoke the Federal Declaratory Judgment Act, 28 U.S.C. §

2201(a).

River Entertainmen t and the Rodriguez' answered and moved for 12(b)(6) dismissal of the

indemnity issue. District Judge Hinojosa granted this motion:

Court GRANTS Moti on to Dismiss to Defendan t wit h regards to indemnification issue.

Court finds that in a State Court diversity [sic], the Court would only be issuing an advisory

ruling.

The court was referring to Texas law that prohibits state courts fro m issuing an advisory opinion:

"[A]n advisory opinion is being sought if a party requests a court to render a declaratory judgment

premised upon th e occurrence of a future hypothetical event." T exstar N. Am., Inc. v. Ladd

Petroleum Corp., 809 S.W.2d 672, 679 (Tex.Civ.App.—Corpus Christi 1991, writ denied).

Trial proceeded on the duty to defend issue before District Judge Harmon on stipulated facts

and documentary evidence. She concluded that the policy's terms were unambiguous, and that it did2 The underlying suit filed by the Rodriguez' alleges that River Entertainment was negligent in:

(1) allowing Hill to leave Pepe's and drive a vehicle at a time when the establishment's employees

knew or should have known that Hill's driving ability was impaired; and, (2) failing to call a cab

for Hill, or provide him with safe transportation at a time when Pepe's employees knew or should

have known that Hill's driving ability was impaired. R. 159.

Western Heritage points out that all references to alcohol and intoxication were

deleted from the Rodriguez' amended complaint; their original complaint did state a claim

for negligence based on Pepe's continuing to serve Hill in his intoxicated condition.

3 See supra note 2. not provide coverage for claims stemming from the sale of alcoholi c beverages to an intoxicated

individual:

The Court is faced with a situation in which there is an unambiguous insurance policy

containing an unambiguous exclusion clause and an allegat i on in a petition which does not

mention impairment by reason of alcohol. [ 2 ] The undisputed facts extraneous to this petition

are, ho wever, t hat Hill's impaired state was the result of his having consumed numerous

alcoholic beverages at the insured's establishment.

River Entertainmen t and the Rodriguez' appeal this decision which ultimately held that

Western Heritage was not obligated to defend the underlying suit. Western Heritage cross-appeals

from the 12(b)(6) dismissal of the indemnification issue.

II.

Duty to Defend

The Western Heritage general liabilit y policy excludes coverage for claims stemming from the

sale of alcoholic beverages to an in t o xicat ed person. It is obvious that the Rodriguez' deleted all

references to "a lco ho l" or "intoxication" in their amended complaint against Hill and River

Entertainment in order to avoid the policy's exclusionary provisions. 3

River Entertainment and the Rodriguez' argue that the court erred in not following Texas'

"complaint allegation rule." This rule asserts that an insurer's duty to defend is determined only by

reference to the petition and the policy's provisions. S ee Argonaut Southwest Ins. Co. v. Maupin, 500

S.W.2d 633, 635 (Tex.1973). However, when the petition does not contain sufficient facts to enable

the court t o det ermine if coverage exists, it is proper to look to extrinsic evidence in order to

adequately address the issue. S tate Farm Fi re & Cas. Co. v. Wade, 827 S.W.2d 448, 452-53

(Tex.Civ.App.—Corpus Christi 1992, writ denied).4 River Entertainment's brief cites Otis Eng'g Corp. v. Clark, 668 S.W.2d 307 (Tex.1983), for

the proposition that the Texas Supreme Court has adopted § 319 from the Restatement (Second)

of Torts. This section states:

One who takes charge of a third person whom he knows or should know to be

likely to cause bodily harm to others if not controlled is under a duty to exercise

reasonable care to control the third person to prevent him from doing such harm.

Otis Eng'g Corp., however, is much narrower than River Entertainment asserts. In that

case, the Texas Supreme Court adopted the "control over a third person" rationale in the

employer-employee context. A supervisor sent a visibly intoxicated employee home, and

even walked him to the parking lot. The employee's car struck another vehicle, killing its

two occupants. The "special relationship" between employer and employee imposed a

duty on the employer to act in a reasonable manner so as to prevent the intoxicated

employee from causing an unreasonable risk of harm to others.

No authority is cited for the notion that a restaurant/bar operator has a special

relationship with its customers which would create such a duty. In a recent case, the

Texas Court of Civil Appeals has squarely rejected such an argument. Abe's Colony Club,

Inc. v. C & W Underw riters, Inc., 852 S.W.2d 86 (Tex.Civ.App.—Fort Worth 1993, writ

filed). See discussion infra, at note 5.

5 This uncertainty has been dispelled by the recent decision in Abe's Colony Club, Inc. v. C &

W Underw riters, Inc., 852 S.W.2d 86 (Tex.Civ.App.—Fort Worth 1993, writ filed). After

obtaining a judgment against the insured tavern owner, the damage plaintiff and the insured

sought to enforce coverage. The insurance contract contained a liquor liability exclusion identical

to the one at issue in the present case. See id. at 89. In an attempt to skirt the preclusive effects

of this section, the insured argued:

[T]he following allegations fall outside the liquor liability exclusion: Abe's was

negligent in its: (1) failure to determine, discover or notice that Williams was

intoxicated; (2) failure to offer Williams alternative transportation; and (3) failure

to properly train or supervise its employees.

Id. The R o driguez' argue that the underlying complaint sufficiently set forth the theories of

liabilit y they were asserting against River Entertainment. Consequently, the court erred by looking

beyond the amended petition to determine that, because Hill became intoxicated at Pepe's, the claims

ultimately derive from the selling or giving of alcohol to an i nt oxicated person. The Rodriguez'

maintain that the suit is premised on River Entertainment's failure to restrain Hill from driving away,

or in failing to call him a cab. However, no authority is cited for either of these causes of action. 4

The Rodriguez' brief states, "Of course, whether or not the Texas courts will recognize such a cause

o f action is an open question." They continue that this uncertainty should not diminish West ern

Heritage's duty to defend River Entertainment in the underlying suit. 5The Texas Court of Civil Appeals concluded that, despite the framing of the

allegations, the complaint fell within the liquor liability exclusion. Id. The court's

reasoning was analogous to that employed by Judge Harmon in the present case: "This

argument is flawed because each of these allegations arises out of the business of selling or

serving alcohol to a person under the influence of alcohol or which causes or contributes

to the intoxication of any person." Id. (citing Thornhill v. Houston General Lloyds, 802

S.W.2d 127, 130 (Tex.Civ.App.—Fort Worth 1991, no writ)). This argument is unavailing. The question of coverage is separate and apart from the question

of whether the Rodriguez' can forge a new cause of action in Texas. They are not precluded from

doing so in their underlying suit against River Entertainment. Our holding speaks only to the question

of coverage under the policy at issue.

The Rodriguez' state court complaint alleges that Hill's impaired condition should have alerted

Pepe's employees that he presented a danger to third parties. No reason for Hill's impairment is given;

however, the parties stipulated that Hill became intoxicated while at Pepe's, and that his "impairment"

was due solely to his intoxication. R. 179-80.

As a div ersity court, we are E rie bound to apply Texas law. We are persuaded by the

reasoning in W

ade that Texas law would sanction the district court's methodology in reaching its

conclusion. S ee State Farm Fire & Cas. Co. v. Wade, 827 S.W.2d 448 (Tex.Ci v.App.—Corpus

Christi 1992, writ denied).

The court in Wade was asked to determine whether a private boatowner's policy would

provide the insured's estate with a defense to an underlying action brought by representatives of the

deceased passenger. The insurer alleged that the decedent was using his boat in a commercial

activity, and this was excluded from coverage. The court observed that it was impossible to tell how

the boat was being used by reading the underlying petition. Such a determination was "critical" to

determining whet her coverage was possible. I d. at 451. After reaffirming that the

complaint-allegation rule was the general rule in Texas, the Wade court used a narrow exception to

ascertain whether coverage was proper:

When the petition in the underlying lawsuit does not allege facts sufficient for a determination

of whether those facts, even if true, are covered by the policy, the evidence adduced at the

trial in a declaratory judgment action may be considered along with the allegations in the

underlying petition.Id. at 452 (citing Gonzales v. American States Ins. Co., 628 S.W.2d 184, 186

(Tex.Civ.App.—Corpus Christi 198 2, no wri t)); s ee Abe's Colony, Inc., 852 S.W.2d at 89;

Thornhill v. Houston General Lloyds, 802 S.W.2d 127, 130 (Tex.Civ.App.—Fort Worth 1991, no

writ).

In the instant case, it is impossib le t o discern from the Rodriguez' complaint why Hill was

impaired to the point where Pepe's employees should have restrained him. Such an explanation is

critical to the question of coverage under the Western Heritage policy issued to River Entertainment.

The district court was correct in its holding: "The second amended petition in the underlying suit

here does not allege why t he defendant was impaired. Extraneous evidence may be considered in

order to determine the reason for the impairment so t hat it can be decided whether or not the

insurance policy gives rise to a duty to defend." R. 246.

III.

Duty to Indemnify

Western Heritage's init

ial petition also reque st ed t hat the court determine if it would be

responsible for payi ng any resulting judgment in the Rodriguez' state court action against River

Entertainment. Judge Hinojosa declined to address this issue, and granted the Defendants' 12(b)(6)

motion to dismiss. Western Heritage appeals this decision, arguing that the district court erred by

following Texas law which prohib i ts state courts from issuing advisory opinions on matters which

have not, and may

never, come to pass. S ee, e.g. Firemen's Ins. Co. v. Burch, 442 S.W.2d 331

(Tex.1968).

Regardless of the district court's reliance on Texas precedent, logic and common sense dictate

that, if the district court's reading of the liquor liability exclusion is correct ( i.e. no duty to defend),

there can be no indemnity following a judgment. This conclusion is inescapable in light of the policy's

exclusion section: "This insurance does not apply ...." (quoted supra, note 1) (emphasis added).

The district court correctly interpreted the liquor liability exclusion of the policy. Because

the insurance coverage does not apply, there can be no duty imposed on Western Heritage to

indemnify its insured. Therefore, the August 31, 1992 judgment of the district court is modified soas to now make explicit what was implicit in that deci sion; West ern Heritage is not obligated to

provide indemnity for any judgment following a dec isio n in the Rodriguez' state court suit against

River Entertainment.

IV.

For the foregoing reasons, we affirm the judgment denying the duty to defend; and we modify

and render judgment denying the duty to indemnify.

AFFIRMED IN PART, MODIFIED AND RENDERED IN PART.

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