Court Opinion

ID: 9953391
Source: CourtListenerOpinion
Date Created: 2024-03-22 00:01:22.801011+00
Date Added: 2024-06-11T14:46:05.030256
License: Public Domain

Case: 22-50933           Document: 88-1         Page: 1      Date Filed: 03/21/2024

          United States Court of Appeals
               for the Fifth Circuit
                                  ____________                              United States Court of Appeals
                                                                                     Fifth Circuit

                                    No. 22-50933
                                                                                   FILED
                                                                             March 21, 2024
                                  ____________
                                                                              Lyle W. Cayce
SXSW, L.L.C.,                                                                      Clerk

                                                                 Plaintiff—Appellant,

                                         versus

Federal Insurance Company,

                                            Defendant—Appellee.
                  ______________________________

                  Appeal from the United States District Court
                       for the Western District of Texas
                            USDC No. 1:21-CV-900
                  ______________________________

Before Willett, Engelhardt, and Oldham, Circuit Judges.
Andrew S. Oldham, Circuit Judge: *
      This appeal involves an insurance coverage dispute between SXSW,
LLC and Federal Insurance Company. The district court granted summary
judgment to the insurance company. We REVERSE.

      _____________________
      *
          This opinion is not designated for publication. See 5th Cir. R. 47.5.
 Case: 22-50933          Document: 88-1          Page: 2      Date Filed: 03/21/2024

                                       No. 22-50933

                                            I.
                                            A.
        SXSW, LLC (“SXSW”) hosts a yearly festival in Austin, Texas
known as “South by Southwest.” In 2020, however, the City of Austin
cancelled the festival because of the COVID-19 pandemic.
        Some ticket holders asked SXSW to refund their purchases. SXSW
declined, citing a no-refund clause in the terms and conditions of its ticket
agreement. 1 SXSW instead offered ticket deferrals and half-price tickets to
future festivals. Many ticket holders accepted this offer. But others refused.
        On April 24, 2020, two ticket holders (the “Bromley Plaintiffs”) filed
a class action lawsuit against SXSW “on behalf of themselves and all other
persons who purchased wristbands, tickets, passes, and badges to the 2020
South by Southwest Festival.” The Bromley Plaintiffs asserted claims for
breach of contract, unjust enrichment, and conversion (the “Bromley
Complaint”). In February 2022, the case settled. The class members who
had accepted SXSW’s prior deferral offer could keep those benefits and
receive an additional $30. Everyone else could either accept that deferral
offer or receive 40% of the cost of their 2020 tickets. SXSW paid more than
$1 million to settle the Bromley litigation: $290,402 to class members,
$4,000 to class representatives, $400,000 to class counsel, $183,327.75 to its
attorneys, and $144,630.18 for claims administration.

        _____________________
        1
          The clause stated: “SXSW may, in its sole discretion and at any time determined
by SXSW, cancel, revoke, or refuse . . . Credentials, purchases, and/or hotel reservations
made through SXSW. . . . SXSW does not issue refunds under any circumstances. Any and
all payments made to SXSW are not refundable for any reason, including, without
limitation, failure to use Credentials due to illness, acts of God, travel-related problems,
acts of terrorism, loss of employment and/or duplicate purchases.”

                                             2
Case: 22-50933       Document: 88-1       Page: 3    Date Filed: 03/21/2024

                                 No. 22-50933

                                     B.
       SXSW then attempted to shift that cost onto its insurance carrier.
SXSW had an insurance policy (hereafter “Policy”) from Federal Insurance
Company (“Federal”) with a policy period from August 17, 2019, to August
17, 2020. On April 27, 2020, SXSW emailed Federal a copy of the Bromley
Complaint, which had been filed but not yet served on SXSW. On May 18,
2020, Federal notified SXSW that it would neither defend nor indemnify
SXSW for the Bromley Complaint.
       On October 6, 2021, and in the midst of the Bromley litigation, SXSW
sued Federal in federal court. SXSW alleged breach of contract, breach of
implied covenant of good faith and fair dealing, and violations of the Texas
Insurance Code. It also sought a declaratory judgment that Federal owed
SXSW duties to defend and indemnify the Bromley suit.
       SXSW moved for partial summary judgment, arguing that there was
no genuine issue of material fact as to Federal’s duty to defend. Federal
moved for summary judgment on all of SXSW’s claims due to lack of
coverage. The magistrate concluded that SXSW sought a covered loss and
timely tendered the Bromley Complaint to Federal, but then held that the
Policy’s exclusions excused Federal from defending or covering the Bromley
litigation. The district court agreed and entered summary judgment for
Federal. SXSW timely appealed.
                                     C.
       Prior to oral argument in this first appeal, we noticed an apparent
jurisdictional defect. In its complaint, SXSW alleged that the district court
had diversity jurisdiction because the parties were completely diverse and the
amount in controversy exceeded $75,000. See 28 U.S.C. § 1332(a)(1). But the
complaint appeared to confuse LLC citizenship with corporate citizenship.
Instead of alleging the citizenship of all of its members, see Harvey v. Grey

                                      3
Case: 22-50933        Document: 88-1       Page: 4    Date Filed: 03/21/2024

                                  No. 22-50933

Wolf Drilling Co., 542 F.3d 1077, 1080 (5th Cir. 2008), SXSW only alleged
its state of registration and principal place of business. Cf. 28 U.S.C. §
1332(c)(1). Before this court, SXSW’s opening brief discussed the citizenship
of some of its members. Yet even that discussion was inadequate because it
failed to distinguish between LLC ownership and membership or individual
residence and citizenship. Cf. Getty Oil Corp. v. Ins. Co. of N. Am., 841 F.2d
1254, 1259 (5th Cir. 1988) (holding that parties must make “clear, distinct,
and precise affirmative jurisdictional allegations”). Accordingly, we asked
the parties to discuss this issue at oral argument.
       At oral argument, counsel for SXSW confessed error and asked the
court’s leave to amend the initial complaint. See 28 U.S.C. § 1653. But § 1653
is only helpful where there is evidence of jurisdiction in the record. See
Howery v. Allstate Ins. Co., 243 F.3d 912, 919–20 (5th Cir. 2001); see also
MidCap Media Fin., LLC v. Pathway Data, Inc., 929 F.3d 310, 315 (5th Cir.
2019). Because there was no evidence of complete diversity in the record, we
remanded for the district court to determine whether jurisdiction exists. See
SXSW, LLC v. Fed. Ins. Co., 83 F.4th 405, 409 (5th Cir. 2023). We excused
the need to file a new notice of appeal and retained jurisdiction over a future
appeal. Ibid.
       On remand, the magistrate ordered SXSW to file a brief addressing
the jurisdictional issue. SXSW moved for leave to file an amended complaint
with additional jurisdictional allegations. The district court granted that
motion and ordered the clerk to supplement the appellate record with the
amended complaint. The case then returned to this panel.
       Having reviewed the amended complaint, we are now assured of our
jurisdiction. As a corporation, Federal is a citizen of Indiana (its State of
incorporation) and New Jersey (its principal place of business). See 28 U.S.C.
§ 1332(c)(1). As a limited liability company, SXSW’s citizenship is

                                       4
 Case: 22-50933           Document: 88-1           Page: 5      Date Filed: 03/21/2024

                                       No. 22-50933

determined by that of its members. See Harvey, 542 F.3d at 1080. According
to the amended complaint, SXSW’s members make it a citizen of California,
Connecticut, Delaware, Florida, Massachusetts, Michigan, Nevada, New
York, North Carolina, Pennsylvania, Texas, Virginia, Switzerland, and the
United Kingdom. Accordingly, there is complete diversity between the two
parties. Since the amount in controversy is more than $75,000, the court has
jurisdiction under 28 U.S.C. §§ 1332(c)(1) and 1291. 2

                                             II.
        We review the district court’s grant of summary judgment de novo.
Morrow v. Meachum, 917 F.3d 870, 874 (5th Cir. 2019). The parties agree that
Texas state law applies.
        Under Texas law, an insurer’s duty to defend is determined by the
“eight-corners rule.” Nat’l Union Fire Ins. Co. of Pittsburgh v. Merchs. Fast
Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997). An insurer has a duty to
defend if the four corners of the complaint against the insured allege facts
that, taken as true, assert a claim covered by the four corners of the insurance

        _____________________
        2
           Because the additional evidence of jurisdiction did not defeat complete diversity,
some might wonder why it was worth it to remand. The answer is found in Appendix A to
SXSW’s amended complaint. See ROA.1969–73 (“Members of Plaintiff/Appellant SXSW,
LLC, as of October 6, 2021”). Appendix A lists close to 100 discrete entities or individuals,
who are collectively citizens of 12 American States and two foreign countries. Several of
the entities have multiple layers of membership. For example, PME Holdings LLC has eight
layers of membership. SXSW’s membership structure also has various nested members.
For example, SBT Investors, LLC is a member of SBT Media Holdings, LLC, which is a
member of Eldridge Media Holdings, LLC. But SBT Investors, LLC, which has many
members, is also a member of Eldridge Industries, LLC, which is a member of GEC
Finance, LLC , which is a member of Ridge Media Holdings, LLC – DE LLC, which is a
member of Eldridge Media Holdings, LLC. Such nesting further complicates the
membership structure of SXSW. It shows the perilousness of overlooking a party’s
defective jurisdictional allegations. And it should prove to litigants and district courts why
diversity cases involving LLC parties merit close jurisdictional scrutiny.

                                              5
Case: 22-50933        Document: 88-1         Page: 6   Date Filed: 03/21/2024

                                  No. 22-50933

policy. See ibid. The court must consider each legal claim alleged against the
insured, see, e.g., Gilbert Tex. Const., L.P. v. Underwriters at Lloyd’s London,
327 S.W.3d 118, 126–27 (Tex. 2010), and determine coverage by looking at
the factual allegations supporting each claim. Merchs. Fast Motor Lines, 939
S.W.2d at 141. “If a complaint potentially includes a covered claim, the
insurer must defend the entire suit.” Zurich Am. Ins. Co. v. Nokia, Inc., 268
S.W.3d 487, 491 (Tex. 2008).
       “Initially, the insured has the burden of establishing coverage under
the terms of the policy.” Gilbert Tex. Const., 327 S.W.3d at 124 (citation
omitted). The burden then shifts to the insurer to prove that an exclusion
precludes coverage. See ibid.; see also Tex. Ins. Code Ann. § 554.002
(West 2005).
       Because insurance policies are contracts, Texas courts “interpret and
enforce them according to settled rules of construction. Most importantly,
we must give the policy’s words their plain meaning . . . .” Nat’l Union Fire
Ins. Co. of Pittsburgh v. Crocker, 246 S.W.3d 603, 606 (Tex. 2008) (citation
omitted). Ambiguous terms in insurance policies must be interpreted in favor
of coverage. Evanston Ins. Co. v. Legacy of Life, Inc., 370 S.W.3d 377, 380 (Tex.
2012) (citations omitted). When the ambiguous term is a policy exclusion,
courts adopt the insured’s reasonable interpretation, even if the insurer’s
interpretation “appears to be more reasonable or a more accurate reflection
of the parties’ intent.” Gilbert Tex. Const., 327 S.W.3d at 133 (quotation
omitted).
                                      III.
       We start with SXSW’s burden to establish coverage. See id. at 124.
The Policy provides SXSW with “Entity Liability Coverage.” In relevant
part, the Policy provides:
       Insuring Clause (C): Entity Liability Coverage

                                       6
 Case: 22-50933         Document: 88-1         Page: 7      Date Filed: 03/21/2024

                                     No. 22-50933

        (C) The Company shall pay, on behalf of an Organization, Loss
        on account of a Claim first made against the Organization
        during the Policy Period, or the Extended Reporting Period if
        applicable.
SXSW contends, and Federal does not meaningfully contest, that the
Bromley litigation costs constitute a “Loss” covered by this provision. 3
        The dispute in this case is whether Federal carried its burden to show
that other provisions of the Policy exclude coverage. Again, we agree with
SXSW. We (A) hold that the Contract Exclusion does not preclude coverage,
(B) hold that the Professional Services Exclusion does not preclude coverage,
and (C) reject the remainder of Federal’s arguments against coverage.
                                          A.
        The Policy contains a list of exclusions applicable to the Entity
Liability Coverage. The Contract Exclusion states as follows:
        The Company shall not be liable for Loss on account of any
        Claim against an Organization: . . . based upon, arising from or
        in consequence of any liability in connection with any oral or
        written contract or agreement to which an Organization is a
        party . . . .
Federal argues that this exclusion precludes coverage for SXSW’s loss
related to the Bromley Complaint. We disagree.
        To explain why, it is useful to disentangle the parties’ differing
interpretations of the Contract Exclusion. Begin with Federal’s

       _____________________
        3
           Federal contends that SXSW did not incur a “loss” as that term is defined
elsewhere in the Policy. The Policy defines Loss to include “the amount which an insured
becomes legally obligated to pay as a result of any Claim, including: . . . compensatory
damages; . . . judgments, including pre-judgment and post-judgment interest; . . . and
Defense Costs.” The Bromley Plaintiffs asked for actual damages and/or restitution,
interest, and attorneys’ fees and costs. Clearly, SXSW sought a covered loss.

                                           7
Case: 22-50933       Document: 88-1       Page: 8    Date Filed: 03/21/2024

                                 No. 22-50933

interpretation. SXSW contracted with the ticket purchasers who later sued
in the Bromley class action. As Federal sees it, those contracts were the but-
for cause of the litigation liability that SXSW later resolved by settling the
class action. See Utica Nat. Ins. Co. of Texas v. Am. Indem. Co., 141 S.W.3d
198, 203 (Tex. 2004) (interpreting the phrase “arise out of” to encompass
but-for causation). Without the ticket purchase contracts, no purchaser
litigation would have ever occurred. Since “the entire [Bromley Complaint]
has a causal and incidental connection to [the purchase contracts],” Red Br.
11, Federal believes it can deny coverage under the Contract Exclusion.
       SXSW proffers a different interpretation, focusing on the phrase
“liability in connection with any . . . contract.”. In SXSW’s view, the
question is not whether the contracts were the but-for cause of the Bromley
Complaint, but whether the claims in the complaint alleged liability under a
contractual obligation. Such a claim could include breach of contract, which
the Bromley Plaintiffs asserted in the complaint. But the Bromley Plaintiffs’
claims were not limited to breach-of-contract; they also brought claims for
unjust enrichment and conversion—two state law causes of action that do
not arise from contracts. See City of The Colony v. N. Tex. Mun. Water Dist.,
272 S.W.3d 699, 731 (Tex. App.—Fort Worth 2008) (“Generally speaking,
however, when a valid, express contract covers the subject matter of the
parties’ dispute, there can be no recovery under a quasi-contract theory, such
as unjust enrichment.”); Restatement (Second) of Torts § 222A
(1965) (discussing conversion). Because “those claims alleged SXSW’s
liability wholly outside any contract or agreement,” Blue Br. 25, the insured
contends Federal cannot rely on the Contract Exclusion.
       We need not consider Federal’s understanding of the exclusion
because SXSW’s reading of it is plainly reasonable. Gilbert Tex. Const., 327
S.W.3d at 133 (insured’s reasonable reading of exclusion controls, even if
insurance company’s reading is better). Take, for example, Admiral Insurance

                                      8
Case: 22-50933        Document: 88-1       Page: 9     Date Filed: 03/21/2024

                                  No. 22-50933

Company v. Rio Grande Heart Specialists of South Texas, Inc., 64 S.W.3d 497
(Tex. App.—Corpus Christi-Edinburg 2001). In that case, the state court
considered a similarly worded contract exclusion, which precluded coverage
for any “claim for liability assumed by [the insured] under any contract or
agreement, either oral or written.” Id. at 502 (quotation omitted). The court
held the exclusion did not bar coverage for a suit alleging breach of a duty of
good faith because the duty of good faith “would have arisen even absent a
contract between [the parties].” Ibid.; cf. Carolina Cas. Ins. Co. v. Sowell, 603
F. Supp. 2d 914, 926–28 (N.D. Tex. 2009) (“The Contract Exclusion bars
coverage of the claims between DPL and defendants, not because their
relationship arose out of a lease contract, but because the claims DPL asserts
arise out of the lease contract.”) (emphasis in original).
       So too here. The Bromley Plaintiffs could have asserted their claims
of unjust enrichment and conversion even absent a contract between them
and SXSW. Cf. Windermere Oaks Water Supply Corp. v. Allied World Specialty
Ins. Co., 67 F.4th 672, 675 (5th Cir. 2023) (“These are claims that are
established at law—not by contract—and that could stand alone even if no
contract ever existed.” (quotation marks and citation omitted)). That means
at least one claim in the Bromley Complaint survives the Contract Exclusion.
       Chapman v. National Union Fire Insurance Company of Pittsburgh,
Pennsylvania, 171 S.W.3d 222 (Tex. App.—Houston [1st Dist.] 2005), is not
to the contrary. In that case, the court held a contract exclusion excused the
insurance company from covering a breach-of-fiduciary claim. See id. at 228–
29. And a breach of fiduciary duty sounds in tort, not contract, so it could
theoretically arise even absent a contract. See id. at 228. But the breach-of-
fiduciary-duty claim in Chapman was based on a specific duty “expressly
created by the . . . contract.” Ibid. Had there been no contract in Chapman,
there would have been no duty and thus no cause of action for fiduciary duty.

                                       9
Case: 22-50933        Document: 88-1         Page: 10    Date Filed: 03/21/2024

                                   No. 22-50933

        Here, by contrast, the contract created a duty or obligation only
relevant to the Bromley Plaintiffs’ breach of contract claim. In the counter-
factual scenario where SXSW obtained the Bromley Plaintiffs’ money
without a contract, the plaintiffs still could have brought their other claims
for unjust enrichment and conversion. Chapman is thus distinguishable.
        As the insured, SXSW has proffered a reasonable interpretation of the
Contract Exclusion. Under Texas law, we must accept that interpretation.
See Gilbert Tex. Const., 327 S.W.3d at 133. The Contract Exclusion does not
bar coverage for two of the claims in the Bromley Complaint: unjust
enrichment and conversion. Moreover, because the complaint contains at
least one covered claim, Federal “must defend the entire suit.” Zurich Am.
Ins. Co., 268 S.W.3d at 491.
                                        B.
        The Policy also contains a Professional Services Exclusion. In relevant
part, it states:
        The Company shall not be liable for Loss on account of any
        Claim against an Organization: . . . based upon, arising from, or
        in consequence of: . . . the rendering of, or failure to render, any
        Professional Services by an Insured . . . .
As with the Contract Exclusion, Federal argues that the Professional Services
Exclusion precludes coverage for SXSW’s loss related to the Bromley
Complaint. Again, we disagree.
        Because the Policy defines the term “professional services,” we
follow that definition. See Evanston Ins. Co., 370 S.W.3d at 381 (“When an
insurance policy defines its terms, those definitions control.”). The Policy
defines “professional services” to include “services which are performed for
others for a fee.” SXSW reasonably argues that “professional services”
might include SXSW’s actions in putting on (or failing to put on) the March

                                        10
Case: 22-50933           Document: 88-1           Page: 11      Date Filed: 03/21/2024

                                       No. 22-50933

2020 festival. But “professional services” would not extend to SXSW’s
actions in refunding or not refunding ticket purchases, which are not services
SXSW performs for a fee. Because the Bromley Complaint arises from
SXSW’s refusal to offer refunds—a decision that does not constitute a
“professional service”—SXSW contends the Professional Services
Exclusion does not apply.
        We agree. Although there is no Texas case directly on point, we are
persuaded by the Texas Supreme Court’s repeated instructions to “strictly”
construe exclusions against the insurer. See Nat’l Union Fire Ins. Co. of
Pittsburgh v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991); see also
Evanston Ins. Co., 370 S.W.3d at 380; Gilbert Tex. Const., 327 S.W.3d at 124.
We are also influenced by the state court decisions cited in our discussion of
the Contract Exclusion. See supra Part III.A. In those cases, it was not enough
that the contract was somehow traceable to or provided context for the
claim—the contract had to specifically give rise to the claim. Here too, we
hold that it is not enough that SXSW’s failure to render professional services
was somehow traceable to or provided context for the Bromley Complaint—
the failure to render professional services had to specifically give rise to the
claims in that complaint. Because the source of liability and motivation for
the Bromley Complaint was SXSW’s failure to refund 2020 festival tickets—
which is not a professional service—the Professional Services Exclusion does
not apply. 4

        _____________________
        4
          Federal cites two federal district courts to support its broader interpretation. See
Red Br. at 40–41 (citing Shore Chan Bragalone Depumpo LLP v. Greenwich Ins. Co., 856 F.
Supp. 2d 891 (N.D. Tex. 2012), and Shamoun & Norman, LLP v. Ironshore Indem., Inc., 56
F. Supp. 3d 840 (N.D. Tex. 2014)). But these authorities are worth relatively little in this
case. Our focus is on Texas law as interpreted by the Texas state courts. See Starr Indem. &
Liab. Co. v. SGS Petroleum Serv. Corp., 719 F.3d 700, 702 (5th Cir. 2013) (“In deciding an
issue of Texas state law, we rule as we believe the Texas Supreme Court would rule.”).

                                             11
Case: 22-50933         Document: 88-1           Page: 12    Date Filed: 03/21/2024

                                       No. 22-50933

                                           C.
       Having decided that the policy exclusions for Contract and
Professional Services do not bar coverage, we quickly dismiss Federal’s two
remaining arguments against coverage.
       First, Federal argues that SXSW did not timely tender the defense of
the Bromley Complaint. We join the district court in rejecting this argument
as meritless. The Policy required SXSW to “tender the defense of any
Claim” to Federal by notifying Federal no later than 30 days after the claim
was first received by SXSW. SXSW received notice of the Bromley
Complaint on April 24, 2020, and gave notice to Federal on April 27, 2020.
That is plainly timely.
       As noted above, Federal contends that SXSW’s restitution claim is
not a covered “Loss.” See supra n.3 (rejecting that contention). But Federal
also contends that restitution is uninsurable under Texas law. Again, we
agree with the district court. Texas state courts have never held that
restitution is per se uninsurable. Restitution might be uninsurable when the
receipt of funds was unlawful, see Nortex Oil & Gas Corp. v. Harbor Ins. Co.,
456 S.W.2d 489, 493–94 (Tex. Civ. App.—Dallas 1970), but there is no
suggestion that SXSW acquired the plaintiffs’ money unlawfully.
Accordingly, Federal’s argument about covered loss fails.
                                   *        *         *
       The district court’s entry of summary judgment for Federal is
REVERSED. And the case is REMANDED for further proceedings
consistent with this opinion.

       _____________________
Given the manner in which the Texas state courts have approached contract exclusions, we
believe SXSW’s narrower interpretation better reflects Texas law.

                                           12