Court Opinion

ID: 159178
Source: CourtListenerOpinion
Date Created: 2010-08-14 06:19:18+00
Date Added: 2024-06-11T08:52:01.743843
License: Public Domain

F I L E D
                                                                   United States Court of Appeals
                                                                           Tenth Circuit
                     UNITED STATES COURT OF APPEALS
                                                                           FEB 7 2000
                              TENTH CIRCUIT
                                                                       PATRICK FISHER
                                                                                Clerk
 I.D.G., INC.,

          Plaintiff-Appellant,

 v.                                                      No. 99-5067
 ST. PAUL FIRE AND MARINE                         (D.C. No. 97-CV-799-B)
 INSURANCE COMPANY, sued as:                            (N.D. Okla.)
 St. Paul Fire and Marine Insurance
 Company, The,

          Defendant-Appellee,

 v.

 DARRELL BURSON,

          Third-Party-Defendant.

                             ORDER AND JUDGMENT          *

Before TACHA and BRISCOE , Circuit Judges, and ROGERS , Senior District
Judge. **

      Plaintiff I.D.G., Inc. (IDG) appeals from the district court’s grant of

      *
        This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
      **
         The Honorable Richard D. Rogers, Senior United States District Judge
for the District of Kansas, sitting by designation.
summary judgment in favor of defendant St. Paul Fire and Marine Insurance

Company (St. Paul). IDG claimed that St. Paul breached the terms of its

commercial general liability insurance contract with IDG by failing to defend IDG

and one of its corporate officers against litigation filed by a minority shareholder

and former employee of IDG. We exercise jurisdiction pursuant to 28 U.S.C.

§ 1291 and affirm.

                                          I.

      IDG is an Oklahoma corporation with its principal place of business in

Tulsa. Although the record on appeal is less than clear, it appears that IDG was

formed by Rupert Brent Johnson, the majority stockholder, and Darrell Burson, a

minority stockholder, for the purpose of developing and selling computer

software. After IDG’s formation, Johnson worked as an officer and director of

IDG. Between January 1, 1993, and September 8, 1993, Burson worked as an

employee of IDG.

      Approximately six months after leaving his employment with IDG, Burson

filed suit against IDG and Johnson in Oklahoma state court. In his first claim for

relief, Burson alleged that he was entitled to unpaid wages from IDG in the

amount of $3,807.69. In his second claim for relief, Burson alleged that he was

“a co-inventor of a series of computer programs,” collectively referred to as

“SuperVision,” that he and Johnson had “entered into an agreement for the

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division of royalties on SuperVision,” and that IDG and Johnson had “refused to

turn over to [him] the amount of royalties due on the SuperVision project.” App.

at 148. In connection with this claim, Burson alleged IDG and Johnson were

“indebted to [him] in an amount in excess of $10,000.” Id. In his third claim for

relief, Burson alleged he had “an ownership interest in SuperVision,” which IDG

and Johnson had converted to their own use and for which they had refused to

compensate Burson. Id. at 149. Burson alleged he was “entitled to compensation

in an amount in excess of $200,000” on this claim. Id. In his fourth claim for

relief, Burson alleged that, as a shareholder of IDG, he was seeking “to enforce

rights belonging to IDG, which IDG ha[d] failed and refused to enforce on its

own behalf.” Id. at 149. More specifically, Burson alleged that Johnson, “as

president and director of IDG, transferred various corporate assets of IDG to non-

employees for little or no consideration” and “caused corporate funds to be used

to pay personal obligations and debts of Johnson.” Id. In his fifth and final claim

for relief, Burson alleged that Johnson, “with intent to defraud [Burson], made

false representations to [Burson] concerning the future disbursements of the

proceeds received from SuperVision,” which Burson acted upon to his detriment.

Id. at 150.

      Burson amended his state court petition on June 29, 1995, adding three

additional claims against Johnson. In his sixth claim for relief, Burson alleged

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that Johnson, “with the intent [to] defraud the creditors and shareholders of IDG,”

formed a corporation named Global Interface Solutions, of which Johnson was the

sole shareholder, and then “fraudulently transfer[red] assets away from IDG to

Global.” Id. at 155. In his seventh claim for relief, Burson alleged that Johnson,

“[b]y transferring or authorizing the transfer of IDG’s assets to Global,” had

“committed a fraud upon the creditors and shareholders of IDG and, therefore,

violated his fiduciary duty to IDG and the IDG shareholders.” Id. at 156. In his

eighth claim for relief, Burson alleged that “[t]he transfer or authorization of the

transfer of IDG assets to Global was outside the scope of Johnson’s authority as

an officer or director of IDG,” and that Johnson was therefore “personally

responsible for the acts which he committed outside of the scope of his office.”

Id.

      On July 15, 1997, Burson amended his complaint a second time. Burson’s

first and second claims for relief remained substantially unchanged. In his

amended third claim for relief, Burson alleged that “[o]n August 8, 1991, [he] and

. . . Johnson entered into a Stockholder’s Agreement, which provided that certain

information to which they were privy would be held by them in strict confidence

and not disclosed to third parties unless necessary to further the business

interests” of IDG. Id. at 159. Burson alleged that Johnson breached this

agreement “by disseminating highly confidential information to . . . Global

                                          4
including but not limited to sales records, customer lists, and marketing

information,” and that, as a result of Johnson’s actions, the value of Burson’s IDG

stock had “become worthless.” Id. In his amended fourth claim for relief, Burson

continued to assert that, as a shareholder of IDG, he was seeking “to enforce

rights belonging to IDG, which IDG ha[d] failed and refused to enforce on its

own behalf.” Id. at 160. Burson further alleged that Johnson “ha[d] engaged in a

continuous pattern of violating his fiduciary and contractual duties to [IDG] with

a view to enriching himself and the other Defendants.” Id. Specifically, Burson

alleged that Johnson (1) “transferr[ed] various corporate assets of [IDG] both

directly and indirectly to third parties including himself and the other Defendants

for little or no consideration,” (2) “caus[ed] corporate funds to be used to pay his

own personal obligations and debts,” (3) diverted “corporate business

opportunities to himself and the other Defendants,” (4) paid “himself excessive

compensation,” (5) “wast[ed] corporate assets,” (6) breached the Stockholder

Agreement, and (7) converted “various physical assets of IDG together with

money due to IDG.” Id. In his amended fifth claim for relief, Burson continued

to allege that Johnson “falsely represented” to him that “no funds were available

with which to pay [Burson’s] share of the SuperVision sales proceeds as

previously agreed,” and that Burson “acted upon the misrepresentations . . . to his

detriment and ha[d] suffered damages in an amount in excess of $10,000.00 as a

                                          5
result.” Id. at 161. In his amended sixth claim for relief, Burson alleged that

“Johnson caused IDG to transfer assets, directly and indirectly, to the other

Defendants without receiving a reasonably equivalent value in exchange for the

transfers,” and did so “with the actual intent to hinder, delay or defraud” Burson.

Id. at 162.

      On July 30, 1997, IDG filed suit against St. Paul, its general liability

insurance carrier, in Oklahoma state court, seeking damages arising out of St.

Paul’s alleged failure to defend IDG in Burson’s state court action. In September

1997, St. Paul removed the action to the United States District Court for the

Northern District of Oklahoma. St. Paul subsequently filed an answer and

counterclaim, seeking a declaratory judgment that it did not have a duty to defend

IDG against the claims asserted by Burson. The parties ultimately filed cross-

motions for summary judgment. On March 1, 1999, the district court granted

summary judgment in favor of St. Paul, concluding it had no duty under its policy

with IDG to defend IDG or Johnson against the claims asserted by Burson.

                                         II.

      We review de novo the district court’s grant of summary judgment,

applying the same standard utilized by the district court. See Simms v. Oklahoma

ex rel. Dep’t of Mental Health & Substance Abuse Services, 165 F.3d 1321, 1326

(10th Cir.), cert. denied, 120 S. Ct. 53 (1999). Under that standard, summary

                                          6
judgment is appropriate where no genuine issues of material fact exist and the

moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c).

Further, as a federal court sitting in diversity, we must ascertain and apply

Oklahoma law to reach a result that would have been reached had the case been

decided in Oklahoma state court. See Leadville Corp. v. United States Fidelity &

Guar. Co., 55 F.3d 537, 539 (10th Cir. 1995). We thus review the district court’s

interpretation of Oklahoma law de novo. See id. Finally, because the proper

interpretation and construction of an insurance policy is a matter of law, we

review the policy at issue de novo in order to determine whether it gave rise to a

duty to defend. See Grovenburg v. Homestead Ins. Co., 183 F.3d 883, 885 (8th

Cir. 1999) (holding that, because the interpretation and construction of an

insurance policy is a question of law, the issue of whether a duty to defend exists

under the policy is particularly amenable to summary judgment); Carney v.

Village of Darien, 60 F.3d 1273, 1276-77 (7th Cir. 1995) (“The determination of

whether an insurance company owes a duty to defend is a question of law

reviewed de novo and without deference to the trial court.”).

                                         III.

Insurer’s duty to defend under Oklahoma law

      Under Oklahoma law, if the terms of an insurance policy are clear,

consistent, and unambiguous, they are accepted in their ordinary sense and

                                          7
enforced to carry out the parties’ expressed intent. Phillips v. Estate of

Greenfield, 859 P.2d 1101, 1104 (Okla. 1993). If, however, the contract terms are

ambiguous, words of inclusion are liberally construed in favor of the insured,

while words of exclusion are strictly construed against the insured. Id.

      In First Bank of Turley v. Fidelity & Deposit Ins. Co. of Maryland, 928

P.2d 298 (Okla. 1996), the Oklahoma Supreme Court addressed, at length, an

insurer’s duty to defend:

      The duty to defend is separate from, and broader than, the duty to
      indemnify, but the insurer’s obligation is not unlimited. The defense
      duty is measured by the nature and kinds of risks covered by the
      policy as well as by the reasonable expectations of the insured. An
      insurer has a duty to defend an insured whenever it ascertains the
      presence of facts that give rise to the potential of liability under the
      policy. The insurer’s defense duty is determined on the basis of
      information gleaned from the petition (and other pleadings), from the
      insured and from other sources available to the insurer at the time the
      defense is demanded (or tendered) rather than by the outcome of the
      third-party action.

Id. at 302-04 (footnotes omitted).

The policy language and IDG’s contentions

      The commercial general liability insurance policy issued by St. Paul to IDG

provided coverage for three general categories of liability: “Bodily injury and

property damage liability,” “Personal injury liability,” and “Advertising injury

liability.” App. at 125-26. Included within the coverage was a duty on the part of

                                          8
St. Paul “to defend any claim or suit for covered injury or damage made or

brought against any protected person.” Id. at 127.

      IDG alleged that St. Paul’s duty to defend was triggered by the filing of

Burson’s state court action. In particular, IDG alleged that its potential liability,

as well as Johnson’s potential liability, to Burson as a result of the lawsuit fell

within the category of “Bodily injury and property damage,” which was described

in the policy as follows:

            Bodily injury and property damage liability. We’ll pay
      amounts any protected person is legally required to pay as damages
      for covered bodily injury, property damage, or premises damage that:
            * happens while this agreement is in effect; and
            * is caused by an event.

Id. at 125-26. According to IDG, the allegations asserted by Burson fell within

the category of “property damage,” 1 which was defined under the policy in the

following manner:

             * physical damage to tangible property of others, including all
      resulting loss of use of that property; or
             * loss of use of tangible property of others that isn’t physically
      damaged.
             We’ll consider all loss of use of damaged tangible property to
      happen at the time of the physical damage which caused it. And
      we’ll consider all loss of use of undamaged tangible property to

      1
        It is uncontroverted that Burson alleged neither “bodily injury,” which
was defined under the policy as “any physical harm . . . to the physical health of
other persons,” or “premises damage,” which was defined under the policy as
“property damage to premises that you rent, lease or borrow from others.” App.
at 126.

                                           9
      happen at the time of the event which caused it.

Id. at 126. Likewise, IDG asserted that the “property damage” alleged by Burson

was the result of an “event,” which the policy defined as “an accident, including

continuous or repeated exposure to substantially the same general harmful

conditions.” 2 Id. at 126.

The district court’s decision

      The district court concluded St. Paul had no duty to defend under the policy

because, in its view, “the facts pertaining to Burson’s claims against IDG and

Johnson d[id] not constitute ‘property damage’ as defined under the policy.” Id.

at 1296. More specifically, the court concluded that Burson’s claims did not

involve tangible property, and did not involve the “loss of use” of such property.

Id. at 1297. The court further held that Burson’s alleged damages, which it

concluded arose out of “intentional, wrongful conduct on the part of IDG and

Johnson,” were not caused by an “event,” as that term was defined under the

policy. Id. n.3. The court also rejected IDG’s contention that it had a reasonable

expectation of coverage based on St. Paul’s defense of IDG in a previous lawsuit

      2
        In connection with this limitation, the policy specifically excluded
coverage for what it classified as “Intentional bodily injury or property damage”:
“     We won’t cover bodily injury or property damage that’s expected or
      intended by the protected person. Nor will we cover medical
      expenses that result from such bodily injury.”   Id. at 136.

                                        10
filed in California. Id. at 1300. In particular, the court concluded that, because

the pertinent policy language governing coverage was unambiguous, the doctrine

of reasonable expectation was inapplicable. Id. at 1300-01.

      IDG now challenges each of the district court’s determinations, as it must

in order to obtain coverage under the policy.

Was the property damage alleged by Burson caused by “event”?

      We turn first to the question of whether the damages alleged by Burson

arose out of an “event,” as that term is used in the policy. As previously noted,

the occurrence of an “event” is necessary to trigger coverage under the “Bodily

injury and property damage liability” section of the policy. The policy defines

“event” as “an accident, including continuous or repeated exposure to

substantially the same general harmful conditions.” App. at 126. Although the

policy does not define the term “accident,” the Oklahoma Supreme Court has held

that the term, when used in an insurance policy, must “be construed and

considered according to common speech and common usage of people generally.”

United States Fidelity & Guar. Co. v. Briscoe, 239 P.2d 754, 756 (Okla. 1951).

Thus, the Oklahoma Supreme Court has interpreted the term to mean “[a]n event

that takes place without one’s foresight or expectation; an undesigned, sudden and

unexpected event, chance, contingency.” Id. (internal quotations omitted); see

                                         11
also SCI Liquidating Corp. v. Hartford Fire Ins. Co., 181 F.3d 1210, 1216 (11th

Cir. 1999) (concluding that identical policy language referred “to an unexpected

happening rather than one occurring through intention or design”); Chemical

Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co., 177 F.3d 210, 216 n.3 (3d Cir.

1999) (noting that, under New Jersey law, the term “accident,” as used in an

insurance policy, refers to an event neither expected nor intended by the insured);

Fidelity & Guar. Ins. Underwriters, Inc. v. Everett I. Brown Co., 25 F.3d 484, 487

(7th Cir. 1994) (noting that, under Indiana law, the term “accident” generally

refers to a sudden, unexpected event); Deus v. Allstate Ins. Co., 15 F.3d 506, 519

(5th Cir. 1994) (same under Louisiana law); Red Ball Leasing, Inc. v. Hartford

Accident & Indem. Co., 915 F.2d 306, 309 (7th Cir. 1990) (discussing meaning of

“accident” when used in liability insurance policy).

      After reviewing the materials contained in the record on appeal, we have

little trouble concluding that none of Burson’s claims arose out of an “event.”

The primary thrust of Burson’s lawsuit was that IDG and Johnson profited from

the SuperVision software without paying him his fair share of the profits.

Although IDG argues that none of Burson’s claims required proof of intentional

conduct on the part of IDG or Johnson, that alone is not sufficient to demonstrate

that Burson’s claims were the result of “accidents.” In particular, even assuming

that intent was not an essential element of any of Burson’s claims, it is unclear

                                         12
how IDG’s alleged failure to pay Burson his share of the profits from the sales of

SuperVision could be “an undesigned, sudden and unexpected event.” To the

contrary, we believe the alleged failure to pay must necessarily have been an

intended or expected result and, therefore, Burson’s claims did not arise out of an

“event,” as that term is defined in the policy.

Did Burson’s claims involve “loss of use”?

      Although our conclusion that Burson’s claims did not arise out of an

“event” essentially disposes of the matter, we note, as a point of further emphasis,

that Burson’s claims did not involve the “loss of use” of tangible property.

Nowhere in his original or amended complaints did Burson allege that IDG or

Johnson deprived him of the “loss of use” of any property. Rather, Burson

alleged he was deprived of property in two specific respects: (1) IDG and Johnson

failed to pay him salary/wages for work performed on their behalf during 1993;

and (2) IDG and Johnson sold the SuperVision software to various third parties

without paying him the royalties that were owed to him. Indeed, the central focus

of Burson’s lawsuit was that IDG and Johnson allegedly profited from sales of the

SuperVision software without paying Burson, the alleged author of the software,

his fair share. Clearly, this constitutes deprivation of property (i.e., money or

profits), rather than “loss of use” of property.

                                          13
      Even if we were to assume Burson’s claims encompassed the “loss of use”

of the software itself, the record reflects that Burson retained a copy of the

SuperVision software after leaving his employment with IDG. In other words, he

retained a copy of this “property” and presumably could have sold it or done with

it as he wished. Obviously, he was not deprived of the use of the software.

      As for Burson’s derivative claim, although it arguably involved the “loss of

use” of property, it was IDG who was allegedly deprived of the use of its own

property (which Burson alleged was improperly transferred by Johnson to others).

Moreover, that claim was asserted solely against Johnson. There was no need for

St. Paul to defend IDG with respect to that claim.

Did Burson’s claims involve “tangible” or “intangible” property?

      As IDG cannot satisfy either the “event” or the “loss of use” requirement of

the policy, we need not address the difficult question of whether computer

software falls within the policy’s definition of “tangible property.”

Does the doctrine of reasonable expectations apply?

      In a final attempt to obtain coverage under the policy, IDG contends that,

under the doctrine of reasonable expectations, St. Paul should have been obligated

to defend against Burson’s state court action. According to IDG, St. Paul

                                          14
previously defended it in a 1992 California case involving claims similar to the

Burson state court action. IDG argues that it was reasonable to expect coverage

for the Burson action as well.

      In Max True Plastering Co. v. United States Fidelity & Guaranty Co., 912

P.2d 861, 868 (Okla. 1996), the Oklahoma Supreme Court adopted the doctrine of

reasonable expectations, but limited its application to “situations in which the

policy contains an ambiguity or to contracts containing unexpected exclusions

arising from technical or obscure language or which are hidden in policy

provisions.” As the Oklahoma Supreme Court specifically noted, “[i]f the

doctrine is not put in proper perspective, insureds could develop a ‘reasonable

expectation’ that every loss will be covered by their policy and courts would find

themselves engaging in wholesale rewriting of insurance policies.” Id.

      Although IDG acknowledges the decision in Max True Plastering, it does

not assert that the policy at issue is ambiguous. Nor, after review, do we find it to

be so. As the district court correctly concluded, the doctrine of reasonable

expectations has no application in this case. See Simpson v. Farmers Ins. Co.,

981 P.2d 1262, 1266 (Okla. 1999) (rejecting application of doctrine of reasonable

expectations where policy language at issue was clear and unambiguous).

                                          15
                               IV.

The judgment of the district court is AFFIRMED.

                                     Entered for the Court

                                     Mary Beck Briscoe
                                     Circuit Judge

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