Court Opinion

ID: 2678284
Source: CourtListenerOpinion
Date Created: 2014-06-13 05:00:32.307181+00
Date Added: 2024-06-11T08:45:45.422296
License: Public Domain

Case: 13-40426       Document: 00512661577         Page: 1     Date Filed: 06/12/2014

           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT
                                                                           United States Court of Appeals
                                                                                    Fifth Circuit

                                       No. 13-40426
                                                                                  FILED
                                                                              June 12, 2014
                                                                             Lyle W. Cayce
EMPIRE INDEMNITY INSURANCE COMPANY,                                               Clerk

                                                  Plaintiff - Appellee
v.

N/S CORPORATION; JALIN, LIMITED, doing business as My Car Wash,

                                                  Defendants - Appellants

                   Appeal from the United States District Court
                        for the Eastern District of Texas
                             USDC No. 4:11-CV-166

Before BARKSDALE, CLEMENT, and OWEN, Circuit Judges.
PER CURIAM:*
       Jalin, Ltd. (Jalin) and N/S Corporation (N/S) challenge the 16 August
2011 denial of N/S’ motion to transfer venue (joined by Jalin) and the 15 March
2013 summary judgment awarded Empire Indemnity Insurance Company
(Empire) in its action, under diversity jurisdiction, seeking a declaratory-
judgment. AFFIRMED.

       * Pursuant to 5th Cir. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5th Cir.
R. 47.5.4.
    Case: 13-40426     Document: 00512661577     Page: 2   Date Filed: 06/12/2014

                                  No. 13-40426

                                        I.
      In 2004, N/S manufactured and sold allegedly defective car-wash parts
to Jalin, which opened a car wash in December 2004, in Plano, Texas. In the
relevant time period, N/S purchased commercial general liability (CGL)
insurance policies from Liberty Surplus Insurance Corporation (Liberty).
Liberty issued two CGL policies to N/S for the policy periods 1 July 2004 to 1
July 2005 and 1 July 2005 to 1 July 2006; each policy had a limit of liability for
$1 million per occurrence and $2 million aggregate (per policy). In addition,
Empire issued an umbrella liability policy to N/S, for the period 1 July 2004 to
1 July 2005, providing excess coverage of $5 million.
      In January 2008, Jalin sued N/S in Texas state court for damages caused
by allegedly defective parts (underlying action). Liberty defended N/S; Empire
monitored the proceeding and allegedly participated in mediation. In March
2011, following trial in the underlying action, the jury returned a verdict
finding, inter alia, N/S negligently caused damages to Jalin; damages exceeded
$3 million.
      Three weeks after that verdict, Empire filed this action (coverage action),
against N/S, Jalin, and Liberty, seeking a declaratory judgment that it had no
duty to indemnify N/S for the underlying action. Defendants filed cross-claims
regarding Liberty’s duty to indemnify. This action was referred to a magistrate
judge (MJ).
      N/S moved, in May 2011, for transfer of venue in this coverage action to
the United States District Court for the Central District of California (district
in California). Jalin joined the motion; Empire and Liberty opposed it. The
MJ issued a report and recommendation that the motion be denied. In August
2011, the district court adopted the MJ’s report and recommendation and
denied the motion.

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    Case: 13-40426    Document: 00512661577     Page: 3    Date Filed: 06/12/2014

                                 No. 13-40426

        In April 2012, approximately 13 months after the underlying-action
verdict, N/S, Jalin, and Liberty executed a settlement agreement, mutually
releasing all claims against each other.     That agreement also included a
covenant not to execute on the then-unfiled judgment in the underlying action.
As part of the settlement, Liberty agreed to pay Jalin $650,000; N/S, to pay
Jalin $450,000 and assign to it any claims N/S had against Empire. (The
settlement resolved all claims between N/S, Jalin, and Liberty in the
underlying and coverage actions, and those claims have been dismissed, except
for Jalin’s negligence claim against N/S, addressed below. The only remaining
issues in this coverage action relate to Empire’s claimed duty to indemnify
N/S.)
        The settlement included Jalin’s seeking entry of judgment in the
underlying action only on its negligence claim. Accordingly, in June 2012, the
Texas state court entered judgment, awarding Jalin approximately $3.1
million, as well as pre- and post-judgment interest and costs.
        Following entry of the underlying-action judgment, Empire moved in
this coverage action for summary judgment on four grounds: (1) its insured,
N/S, was not, and would never be, legally liable for the judgment, based on the
full release and covenant not to execute; (2) Liberty’s policy limits were not
exhausted, and, therefore, Empire’s excess coverage was not triggered; (3) the
damages were either not covered by Empire’s policy or fell outside its policy
period; and (4) N/S violated Empire’s policy by assigning its rights to Jalin.
        In December 2012, the MJ filed a report and recommendation that
Empire’s summary-judgment motion be granted on the first ground (N/S never
legally liable for the underlying-action judgment), without reaching the other
three. On 15 March 2013, following a review of both the MJ’s report and
recommendation and defendants’ objections, the district court adopted the

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                                  No. 13-40426

report and recommendation and granted summary judgment to Empire, based
on ruling that, due to Jalin’s unconditional release, N/S had no legal liability
to pay the underlying-action judgment.
                                       II.
      Unlike Jalin and N/S, Liberty did not appeal. Jalin and N/S claim the
district court erred: in denying N/S’ motion, joined by Jalin, to transfer venue
to the district in California; and in granting summary judgment to Empire.
                                        A.
      Pursuant to 28 U.S.C. § 1404(a), “[f]or the convenience of parties and
witnesses, in the interest of justice, a district court may transfer any civil
action to any other district . . . where it might have been brought”. Denial of a
transfer-venue motion is reviewed for abuse of discretion. E.g., Broussard v.
State Farm Fire and Cas. Co., 523 F.3d 618, 631 (5th Cir. 2008). For the
reasons that follow, the district court did not abuse its discretion.
      Appellants contend the district court erred because this coverage action
is simply a dispute between a California entity (N/S) and its insurers (Liberty
and Empire). Appellants assert: the policies were negotiated, signed, and
issued in California, and this coverage action could have been brought in the
district in California, based on its ties with the insurance policies, the insured
(N/S), and Jalin’s contracting with, and purchasing goods from, N/S.
      Appellants further assert the district court was required to review the
private and public factors provided by this court to determine convenience and
the interest of justice. See In re Volkswagen of Am., Inc., 545 F.3d 304, 315
(5th Cir. 2008) (en banc) (listing factors). Contending that each of those factors
either favored transfer or was neutral, Appellants maintain it was an abuse of
discretion to deny transfer. They contend, inter alia, that all “key witnesses
and business records” are in California, the district in Texas has “very little

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                                 No. 13-40426

local interest” in the coverage dispute, and the relevant contacts are those to
the insurance agreement, not to the location of the insured risk.
      The MJ analyzed the motion to transfer, and, following a de novo review,
the district court adopted that report and recommendation.            Assuming
California had personal jurisdiction over Jalin, we agree with the district
court’s analysis of the private and public factors. See Empire Indem. Ins. Co.
v. N/S Corp. (Empire I), No. 4:11-CV-166, 2011 WL 3648510, at *5–8 (E.D.
Tex. 20 July 2011).    Particularly, almost all non-party witnesses and all
sources of proof needed to determine whether damages were covered by
Empire’s policy are in, or around, Texas, and subject to the district court’s
compulsory subpoena power. See Fed. R. Civ. P. 45(c) (place of subpoena
compliance). The district court was also correct that both districts had an
interest in the coverage action. Id. at *7 (citing Mid-Continent Cas. Co. v.
Petro. Solutions, Inc., 629 F. Supp. 2d 759, 767 (S.D. Tex. 2009) (holding venue
of underlying events and venue of the insurance policy have local interest)).
                                       B.
      A summary judgment is reviewed de novo, e.g., Citigroup Inc. v. Fed. Ins.
Co., 649 F.3d 367, 370 (5th Cir. 2011), and should be granted when “the movant
shows that there is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law”, Fed. R. Civ. P. 56(a). “In reviewing
summary judgment, we construe all facts and inferences in the light most
favorable to the nonmoving party.” Citigroup, 649 F.3d at 371 (citation and
internal quotation marks omitted).
      For this diversity action, and pursuant to Texas law, the insured bears
the burden of showing a claim is potentially covered by the policy, and the
insurer bears the burden of establishing applicability of any policy exclusion
or other affirmative defense. See United Nat’l Ins. Co. v. Hydro Tank, Inc., 497

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                                 No. 13-40426

F.3d 445, 448 (5th Cir. 2007). Under Texas law, general contract rules and
standards govern interpretation of an insurance policy. E.g., Citigroup, 649
F.3d at 371. A court’s “primary goal is to give effect to the written expression
of the parties’ intent”. Id. (citing Balandran v. Safeco Ins. Co. of Am., 972
S.W.2d 738, 741 (Tex. 1998)). When the policy language is susceptible to only
one reasonable interpretation, it is not ambiguous and must be interpreted as
a matter of law. Id. (citing Fiess v. State Farm Lloyds, 202 S.W.3d 744, 746
(Tex. 2006)).
      The district court, based on the MJ’s report and recommendation, held:
“Jalin gave a full release prior to entry of the [underlying-action] judgment”,
Empire Indem. Ins. Co. v. N/S Corp. (Empire II), No. 4:11-CV-166, 2013 WL
1103061, at *2 (E.D. Tex. 15 Mar. 2013); “[a]t the time of the final judgment in
state court, N/S had no legal obligation to pay anything”, id.; therefore, “as a
matter of law, the condition that N/S ‘be obligated to actually pay’ an amount
finally determined by judgment was not, and could never be, met”, id.; and
“N/S was not and is not legally liable for any judgment, verdict, or any other
indebtedness as a result of the underlying action”, id. Accordingly, the court
held Empire could not be liable to Jalin (through a direct claim or its
assignment from N/S) based on the underlying-action judgment against N/S,
when N/S was released prior to its entry. Id. at *1.
      Appellants assert, under Texas law and public policy, that the timing of
the settlement, release, and covenant not to execute should be irrelevant to a
determination of coverage. See William M. Mercer, Inc. v. Woods, 717 S.W.2d
391, 398–99 (Tex. App. 1986), aff’d in part, rev’d in part on other grounds, 769
S.W.2d 515 (Tex. 1988) (holding covenant not to execute signed post-judgment
did not bar suit against insurer). Appellants further contend that, if an insured
is forced to assign its claims against the disclaiming insurer in order to secure

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                                  No. 13-40426

a release and covenant not to execute and there is no evidence of collusion, the
settlement does not eliminate the legal obligation on the judgment. See id. at
398 (“[A] covenant not to execute will not obviate the existence of damages
when there is proof that an insured was forced to assign his rights . . . to obtain
that covenant”.); Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics
Corp., 649 F. Supp. 2d 613, 625–26 (S.D. Tex. 2009) (barring bad faith or
collusion with claimant, “covenant not to execute against the insured . . . does
not release the insurance carrier from liability”). According to Appellants, each
of those circumstances exists here and N/S was acting to protect itself from
bankruptcy. Finally, Appellants assert the district court’s decision promotes
form over substance and discourages early settlement of disputes.
      For the following reasons, Appellants’ contentions fail. Under Texas law,
“[a] release extinguishes any actual or potential claim the releasor may have
against the releasee”. Riley v. Champion Int’l Corp., 973 F. Supp. 634, 649
(E.D. Tex. 1997) (quoting Derr Constr. Co. v. City of Hous., 846 S.W.2d 854,
858 (Tex. App. 1992, no writ)); see also Dresser Indus., Inc. v. Page Petro., Inc.,
853 S.W.2d 505, 508 (Tex. 1993) (stating release “extinguish[es] the claim . . .
as effectively as would a prior judgment”). Following a release, the releasor
cannot sue the releasee’s insurer “because the release precludes the
prerequisite determination of [releasee’s] liability”. Angus Chem. Co. v. IMC
Fertilizer, Inc., 939 S.W.2d 138, 139 (Tex. 1997).
      The Empire policy’s insuring agreement provides payment “for ‘ultimate
net loss’ in excess of the ‘retained limit’ because of . . . ‘property damage’ to
which this insurance applies”. The policy further provides that N/S’ “ultimate
net loss” is the amount for which it was “legally liable in payment of . . .
‘property damage’”, as determined by judgment or agreed upon in settlement.

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    Case: 13-40426     Document: 00512661577      Page: 8   Date Filed: 06/12/2014

                                  No. 13-40426

      Pursuant to the pre-entry-of-underlying-action-judgment settlement
agreement between Appellants and Liberty, Jalin released N/S “from any and
all claims, causes of action, actions, judgments, liens, indebtedness, damages,
losses, liabilities, [and] demands . . . that [Jalin has] or may have against [N/S]
. . . related to the Underlying Action”. (Emphasis added.) Once N/S was
released, the subsequently-entered judgment was “merely a fiction and had no
legal effect”, because the claim, judgment and liability had already been
extinguished. Empire II, 2013 WL 1103061, at *2. Further, the settlement
agreement made clear: it was not an admission of liability; and the subsequent
judgment could not “in any way be used to imply the existence of any liability
to any Party” to the agreement. The unconditional release, therefore, meant
N/S was not, and could never be, legally liable for the underlying-action
judgment. As a result, N/S cannot satisfy the insuring agreement, and neither
N/S nor Jalin may require Empire to pay a judgment for which N/S, Empire’s
insured, was never liable.
      Appellants present no precedent addressing pre-judgment release of
claims. Instead, they rely on precedent discussing the effect of post-judgment
covenants not to execute.     See William M. Mercer, 717 S.W.2d at 398–99
(analyzing post-judgment covenant with actual damages shown by entry of
judgment); Nat’l Union Fire Ins., 649 F. Supp. 2d at 625–26 (analyzing post-
judgment covenant and noting “judgment from the Underlying Case [was]
never released”). These decisions do not affect our analysis. In fact, the only
opinion cited by either side discussing pre-judgment release of claims concluded
“the insured never became liable for [the judgment]”, and as a result, there was
no coverage. U.S. Fire Ins. Co. v. Lay, 577 F.2d 421, 423 (7th Cir. 1978).
      Although the settling parties attempted to carve-out claims against
Empire by stating the agreement did “not release any claims against

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                                  No. 13-40426

[Empire]”, this carve-out overlooks the effect of Jalin’s unconditional release of
N/S. In reaching the settlement, Appellants were advised by “attorneys of their
own choosing” and represented they understood “the terms . . . and effects” of
the agreement. They cannot avoid the effect of the unconditional release of
N/S by claiming they intended to preserve claims against Empire.
                                       III.
      For the foregoing reasons, both the denial of a transfer of venue and the
summary judgment are AFFIRMED.

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   Case: 13-40426      Document: 00512661577   Page: 10    Date Filed: 06/12/2014

PRISCILLA R. OWEN, Circuit Judge, concurring:
     I concur in the judgment and in Parts I and II.A. of the panel’s majority
opinion. I would resolve the coverage issue on the basis that the underlying
primary insurance coverage was not exhausted. Accordingly, Empire’s excess
policy was never reached.
     Empire’s policy provides:
     SECTION I – INSURING AGREEMENTS
     ....
     COVERAGE A. BODILY INJURY AND PROPERTY
     DAMAGE LIABILITY

     1.     Insuring Agreement
            a.   We will pay on behalf of the insured for “ultimate net
                 loss” in excess of the “retained limit” because of “bodily
                 injury” or “property damage” to which this insurance
                 applies. We will have the right to associate with the
                 “underlying insurer” and the insured to defend against
                 any “suit” seeking those damages. But
                 (1)    The amount we will pay for “ultimate net loss”
                        is limited as described in SECTION IV – LIMIT
                        OF INSURANCE;
                                      ***
     24.    “Ultimate net loss” means the total amount of damages for
            which the insured is legally liable in payment of “bodily
            injury”, “property damage”, “personal injury”, or
            “advertising injury[.]” “Ultimate net loss” must be fully
            determined as shown in Condition 12. When Loss
            Payable[.] . . .
                                      ***
     20.    “Retained limit” means the greater of
            a.   The sum of amounts applicable to any “claim” or “suit”
                 from
                 (1)   “Underlying      insurance”,    whether       such
                       “underlying insurance” is collectible or not, and
                 (2)   Other collectible primary insurance, or
            b.   The “self-insured retention”
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                                      No. 13-40426

       Empire was obligated under its policy to pay N/S’s “ultimate net loss” in
excess of the “retained limit.” It is undisputed that N/S’s self-insured retention
was $10,000, and that this self-insured retention was less than the amounts
from insurance described in paragraph 20(a) above. Accordingly, the “retained
limit” applicable in this case is determined by paragraph 20(a). Empire’s policy
required N/S to obtain primary insurance with a per-occurrence limit of at least
$1,000,000, and N/S obtained that primary coverage from Liberty. Liberty
paid only $650,000 to settle the underlying suit against N/S. N/S did not
exhaust its primary coverage, as it was required to do before it could access the
excess policy. 1
       N/S’s payment of $450,000 is not included in the calculation. That was
part of the resolution of N/S’s disagreement with Liberty, the primary carrier,
as to whether the damages claimed in the underlying suit were included in the
property damage coverage of Liberty’s policy. Unless and until N/S insisted
that Liberty pay its policy limits and those limits were exhausted, N/S could
not access the excess coverage provided by Empire’s policy.

       1  See, e.g., KLN Steel Prods. Co. v. CNA Ins. Cos., 278 S.W.3d 429, 443 (Tex. App.—
San Antonio 2008, pet. denied) (confirming that “the limits of the primary insurance must be
exhausted before the primary carrier has a right to require the excess carrier to contribute
to a settlement”) (emphasis and citation omitted).
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