Court Opinion

ID: 70843
Source: CourtListenerOpinion
Date Created: 2010-04-26 07:08:37+00
Date Added: 2024-06-11T17:21:09.512871
License: Public Domain

Case: 08-20401   Document: 00511024212   Page: 1   Date Filed: 02/10/2010

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

                                                FILED
                                                              February 10, 2010

                                 No. 08-41128               Charles R. Fulbruge III
                                 No. 08-20401                       Clerk

In the matter of: TRANSTEXAS GAS CORP., ET AL

                                          Debtor
JOHN R STANLEY, SR

                                          Appellee-Cross-Appellant
v.

US BANK NATIONAL ASSOCIATION, as Liquidating Trustee

                                          Appellant-Cross-Appellee

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH,
PENNSYLVANIA
                              Plaintiff-Appellee
v.

U S BANK NATIONAL ASSOCIATION
                                          Defendant-Appellant

                 Appeals from the United States District Court
                      for the Southern District of Texas

Before BARKSDALE, SOUTHWICK, and HAYNES, Circuit Judges.
LESLIE H. SOUTHWICK, Circuit Judge.
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                         No. 08-41128 & No. 08-20401

      This opinion addresses the issues in two related cases. The appeals were
not consolidated prior to argument, and we do not consolidate them now. A
single opinion is used to explain our decision in each appeal.
      In one of the two appeals, the former Chief Executive Officer of
TransTexas Gas Corporation, John Stanley, argues that the district court erred
by agreeing with the bankruptcy court that severance payments he received
from the company were fraudulent transfers. We AFFIRM.
      In the related appeal, the liquidating trustee for TransTexas, U.S. Bank
National Association, argues that a different district court erred in denying
coverage to the estate under a policy issued by National Union Fire Insurance
Company. The district court held that the just-described bankruptcy judgment
against Stanley was not a “Loss” under the policy. We AFFIRM.
                    I. FACTS AND PROCEDURAL HISTORY
      TransTexas Gas Corporation was engaged in exploration, production, and
transmission of oil and natural gas. In April 1999, TransTexas filed for Chapter
11 bankruptcy protection. The reorganization plan provided that the company
would enter a three-year Employment Agreement with John Stanley, Sr., the
company’s founder. Stanley would serve as Chief Executive Officer and be one
of five directors. The Agreement was effective March 17, 2000.
      The Employment Agreement provided that Stanley could be terminated
beginning two years after its execution. (His departure was effective a few days
before the Agreement’s second anniversary, but neither party presents that as
an issue.) At termination, Stanley would be entitled to severance pay. If he
were dismissed for reasons other than cause, he would receive three million
dollars. If he were terminated for cause, his payment would be one and a half
million dollars. If he voluntarily resigned, he would be paid no severance.
      Despite its reorganization, TransTexas struggled financially. In February
2001, a law firm retained by the Board to investigate allegations of Stanley’s

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                         No. 08-41128 & No. 08-20401

wrongdoing found that he could validly be dismissed for cause. However, if
Stanley brought suit contesting his termination, the report also concluded that
the result would be uncertain. No action was taken in 2001.
      Throughout 2001, TransTexas’s financial condition was perilous. In late
2001, the Board used funds for current operations from a reserve account
intended to make payments to Senior Secured Noteholders. That withdrawal
left insufficient funds to make the note payments due in March 2002.
      On January 30, 2002, all five members of the Board met. The minutes of
that meeting state that the four directors other than Stanley agreed that “the
severance option” under Stanley’s Employment Agreement should be invoked.
Funding would need to be found for the severance payment; it was considered
“acceptable” to divert money from the drilling program. There is no indication
in the cursory minutes that the directors discussed whether Stanley would be
terminated for cause or the effect that would have on the payment.
      Between January and March 2002, Stanley remained CEO and a member
of the Board as he negotiated the terms of his departure. In March, Stanley and
TransTexas agreed that he would resign.       On March 14, 2002, the Board
executed a “Separation Agreement.” It explicitly superseded his Employment
Agreement. He was to be paid three million dollars in installments. Stanley
received $2,270,794.90 before the payments ceased.
      In April 2002, TransTexas purchased an executive and organization
liability insurance policy (“the Policy”) from National Union. Stanley was an
insured for any covered claims that were made during the policy period,
regardless of when the incidents giving rise to the claims occurred.
      As a result of its financial deterioration, TransTexas in November 2002
filed a second Chapter 11 proceeding in the bankruptcy court for the Southern
District of Texas.   The bankruptcy court confirmed the creditors’ plan for

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                         No. 08-41128 & No. 08-20401

reorganization in August 2003.      Under the plan, a liquidating trust was
established with U.S. Bank as the liquidating trustee.
      U.S. Bank filed an adversary proceeding against Stanley, seeking to avoid
the severance payments. It alleged that the payments violated 11 U.S.C. §§
547(b) and 548, and the Texas Uniform Fraudulent Transfer Act (“TUFTA”).
Tex. Bus. & Com. Code § 24.005 (West 2002).           After a two-day trial, the
bankruptcy court held that the severance payments constituted both unlawful
preferences under Section 547(b) and fraudulent transfers pursuant to Section
548 and TUFTA. Stanley was ordered to repay the over two million dollars he
had received, plus attorneys’ fees and costs.
      On appeal, the district court agreed in most respects. There are two
different district courts that entered rulings that are reviewed in our opinion.
To keep them distinct, we will refer to this first decision as being that of Chief
Judge Hayden Head. He held that Stanley’s severance payments were avoidable
as fraudulent transfers pursuant to Section 548 and TUFTA, but not as
preferential transfers under Section 547(b). Stanley’s repayment obligation was
unaffected by the partial disagreement with the bankruptcy court.
      On appeal now, both parties assert error. U.S. Bank seeks reversal of the
district court’s holding that the transfers were not preferential under Section
547(b). Stanley argues for reversal of the holding that the severance payments
were fraudulent transfers under Section 548 and TUFTA.
      Prior to the issuance of Chief Judge Head’s opinion, the insurer, National
Union, filed for a declaratory judgment against Stanley and U.S. Bank in the
United States District Court for the Southern District of Texas. The suit was
assigned to Judge Nancy Atlas. National Union sought to have the court declare
that it was not liable under the Policy for the judgment entered against Stanley.
      The pivotal issue was whether the bankruptcy court’s judgment against
Stanley constituted a “Loss” under the Policy. Cross-motions for summary

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                           No. 08-41128 & No. 08-20401

judgment were filed.       In granting National Union’s motion, Judge Atlas
concluded that the bankruptcy judgment against Stanley was not a “Loss” under
the Policy, and even if it were, it fell within the “profit or advantage” exclusion.
On appeal, U.S. Bank seeks reversal.
                                II. DISCUSSION
      We examine the issues raised in these two appeals in the following order.
We first analyze whether the payments amounting to more than two million
dollars were fraudulent transfers. U.S. Bank is actually the appellant in that
case, as it seeks overturning of the decision that the payments to Stanley were
not preferential transfers. Because we hold that the payments were fraudulent
under the Bankruptcy Code, we need not consider other possible violations,
including TUFTA or Section 547(b).
      Once the fraudulent transfer question is answered, we will turn to
whether coverage to U.S. Bank under the Policy was properly denied.
      A.    Fraudulent Transfers Under 11 U.S.C. § 548.
      Stanley’s arguments that the district court erred in concluding there was
a fraudulent transfer are the only ones we need to consider.         He argues an
absence of proof on the following elements of the claim: (1) he was an insider at
the time the payments were made to him; (2) TransTexas did not receive
reasonably equivalent value in exchange for the payments; (3) there was an
intent to hinder, delay, or defraud creditors; and (4) TransTexas was insolvent
when the Separation Agreement was made.
      “We review the decision of a district court, sitting as an appellate court, by
applying the same standards of review to the bankruptcy court’s findings of fact
and conclusions of law as applied by the district court.” In re Jay, 432 F.3d 323,
325 (5th Cir. 2005).
      Findings of fact may not be set aside unless they are clearly erroneous. In
re Martin, 963 F.2d 809, 813-14 (5th Cir. 1992). In examining for clear error, we

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                          No. 08-41128 & No. 08-20401

review the record as a whole and not just the evidence supporting the finding.
Anderson v. City of Bessemer City, 470 U.S. 564, 573-74 (1985). Stanley alleges
that heightened scrutiny must be given to the fact-findings because those issued
by the bankruptcy court were “essentially verbatim recitals” of U.S. Bank’s
proposed findings. See FDIC v. Texarkana Nat’l Bank, 874 F.2d 264, 267 (5th
Cir. 1989). A more recent description of our duty in such circumstances is that
we are to “approach such findings with greater caution, and as a consequence to
apply the standard of review more rigorously.” McLennan v. Am. Eurocopter
Corp., 245 F.3d 403, 409 (5th Cir. 2001). Nonetheless, our basic clear error
standard is still the test. Id.
      Stanley also alleges that irreconcilable fact-findings were made, making
the findings as a whole defective. When a court rules on inconsistent legal
theories, and in so doing finds irreconcilable facts, the district court’s account of
the evidence is no longer “plausible in light of the record viewed in its entirety.”
See In re Webb, 954 F.2d 1102, 1104-06 (5th Cir. 1992) (quotation and citation
omitted).   While error may well be shown when a district court finds two
mutually exclusive facts, that is not what occurred here.
      Several common facts supported that the transfer to Stanley was both
preferential under Section 547(b) and fraudulent under Section 548. When the
district court rejected that Section 547(b) applied, it did so due to the legal
conclusion that Stanley had to be an insider at the time of the actual payment.
For Section 548, the court held it was enough that insider status existed at the
time the obligation arose. These conclusions do not impugn the validity of the
attendant findings of fact that supported both theories.
      With respect to conclusions of law, the bankruptcy court’s decisions are
reviewed de novo. See Pullman-Standard v. Swint, 456 U.S. 273, 287 (1982).
      Both the bankruptcy court and the district court held that TransTexas’s
severance payments to Stanley were avoidable fraudulent transfers pursuant to

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                              No. 08-41128 & No. 08-20401

Section 548.      This provision of the Bankruptcy Code protects creditors of
insolvent debtors from unlawful pre-filing transfers to company insiders. If a
Chapter 11 debtor has paid an insider with funds that would otherwise belong
to the bankruptcy estate, the trustee may be entitled to recover those payments.
       An avoidable fraudulent transfer requires (a) an obligation (b) incurred by
the debtor for the benefit of an insider (c) made or incurred within two years
before the date of petition where the debtor either (d) incurred such obligation
with actual intent to hinder, delay or defraud a creditor, or (e) received less than
reasonably equivalent value in exchange for such obligation while the debtor was
insolvent or made for the benefit of an insider under an employment contract
and not in the ordinary course of business. 11 U.S.C. § 548(a)(1)(A) & (B).1
       Two elements are clearly satisfied. The severance payments made to
Stanley after his dismissal were obligations incurred by TransTexas within two
years of its petition date.
       Superficially, it would appear that the third element of Stanley’s being an
insider is beyond question. That element is challenged, though, on the basis that

1
 (a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an
insider under an employment contract) of an interest of the debtor in property, or any
obligation (including any obligation to or for the benefit of an insider under an employment
contract) incurred by the debtor, that was made or incurred on or within 2 years before the
date of the filing of the petition, if the debtor voluntarily or involuntarily--
        (A) made such transfer or incurred such obligation with actual intent to hinder, delay,
        or defraud any entity to which the debtor was or became, on or after the date that such
        transfer was made or such obligation was incurred, indebted; or
        (B)     (i) received less than a reasonably equivalent value in exchange for such
                transfer or obligation; and
                (ii)    (I) was insolvent on the date that such transfer was made or such
                        obligation was incurred, or became insolvent as a result of such transfer
                        or obligation . . . , or
                        (IV) made such transfer to or for the benefit of an insider, or incurred
                        such obligation to or for the benefit of an insider, under an employment
                        contract and not in the ordinary course of business.
11 U.S.C. § 548(a)(1)(A) & (B).

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                         No. 08-41128 & No. 08-20401

at the time of the actual payments, Stanley had left the company and was no
longer an insider. We now turn to this, the first of Stanley’s issues.
            (1) Payments to an Insider
      Stanley devotes a substantial portion of his appellate brief to the argument
that he was not an insider as meant by the statute. Most of that argument is
directed towards the separate question of whether the payments should be set
aside as preferential transfers. See 11 U.S.C. § 547(b). If he is also asserting
that his departure from the company by the time of the payments matters for a
fraudulent transfer under Section 548 of the Bankruptcy Code, that is error.
      Under Section 548, it is enough that Stanley was an insider either at the
time of the transfer of the funds or at the time the company incurred such
obligation. The language of the statute makes that evident. A “trustee may
avoid any transfer (including any transfer to or for the benefit of an insider
under an employment contract),” if the debtor “(A) made such transfer or
incurred such obligation” with the requisite intent, “or (B)(i) received less than
a reasonably equivalent value in exchange for such transfer or obligation . . . .”
11 U.S.C. § 548(a)(1) (emphases added).
      Under Section 548, there is no textual limitation of insider status to the
time in which the transfer is made. Because of our ultimate ruling on this
statute, we need not resolve the similar issue under Section 547(b).
      Stanley was indisputably an insider at the time he entered into the
relevant obligation. That is enough for Section 548.
            (2) Reasonably Equivalent Value, and
            (3) Intent to Hinder Creditors
      We join these two issues because the text of Section 548 makes clear they
are alternatives. In order to affirm, we must conclude there was no clear error
in finding that the payments were made either with the intent to hinder, delay,
or defraud a creditor, or that the debtor received less than reasonably equivalent

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                             No. 08-41128 & No. 08-20401

value in exchange for the obligation while the debtor was insolvent. We find no
reasonable equivalency and therefore do not reach the issue of intent.
       The bankruptcy court found that TransTexas did not receive reasonably
equivalent value in exchange for its severance payments to Stanley.                          A
bankruptcy court’s finding of reasonably equivalent value is a factual
determination subject to a “clearly erroneous” standard of review.                      In re
Dunham, 110 F.3d 286, 289 (5th Cir. 1997).2                 The question of reasonable
equivalence is “largely a question of fact, as to which considerable latitude must
be allowed to the trier of the facts.” Id. (citation and quotations omitted).
       To measure reasonably equivalent value, we judge the consideration given
for a transfer from the standpoint of creditors. In re Hinsley, 201 F.3d 638, 644
(5th Cir. 2000). “The proper focus is on the net effect of the transfers on the
debtor’s estate, [and] the funds available to the unsecured creditors.”                    Id.
(citation omitted). The bankruptcy court in this case noted that the effect of
Stanley’s severance payments was removing more than two million dollars from
the debtor’s estate, making the funds inaccessible to its creditors.
       Further, “reasonably equivalent value” means that “the debtor has
received value that is substantially comparable to the worth of the transferred
property.”    BFP v. Resolution Trust Corp., 511 U.S. 531, 548 (1994).                    The
bankruptcy court here found that Stanley used overreaching tactics, abusing his

2
       Matter of Dunham resolved a prior uncertainty as to the review standard, as the
opinion explained. 110 F.3d at 289.
       This is not to say that de novo review is never appropriate when examining the
bankruptcy court’s treatment of reasonably equivalent value. We should examine “‘de novo
the methodology employed by the bankruptcy court in assigning values to the property
transferred and the consideration received.’” In re Hannover Corp., 310 F.3d 796, 801 (5th Cir.
2002) (quoting Dunham, 110 F.3d at 289 n.11). Likewise, where the specific transaction in
question gives a debtor reasonably equivalent value as a matter of law, we review that legal
conclusion of the bankruptcy court de novo as well. In re Erlewine, 349 F.3d 205, 209 (5th Cir.
2003). We find no fault with the bankruptcy court’s methodology, and there is also no
allegation that TransTexas’s payments to Stanley constituted reasonable equivalency as a
matter of law.

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                         No. 08-41128 & No. 08-20401

position of authority to obtain favorable terms in the Separation Agreement to
which he was not entitled. The district court did not adopt the bankruptcy
court’s finding that TransTexas received no value for Stanley’s resignation. It
did agree that Stanley’s concessions to the company dd not reasonably equate in
value to the payments made under the Separation Agreement.
      Stanley contends that he provided reasonably equivalent value in this
way. The Board made its decision to terminate him in January 2002 when the
Employment Agreement was in effect. An obligation immediately arose to pay
him three million dollars. Consequently, the March 2002 Separation Agreement
was merely memorializing the debt and structuring the payments. Paying that
amount to Stanley was a dollar-for-dollar satisfaction of a debt.
      To support the legitimacy of the debt, Stanley argues that his 2000
Employment Agreement was specifically approved as part of the reorganization
plan in the first bankruptcy. That agreement allowed as “liquidated damages”
a payment of three million dollars if Stanley were terminated without cause. He
even argues there is a res judicata effect from the earlier bankruptcy court’s
approval of the contract itself, making the payment incontestable. These claims
gloss over the fact that the issue is not the validity of the 2000 Employment
Agreement but what rights Stanley had under it in 2002.
      The bankruptcy court found there was no value to the 2002 agreement to
pay three million dollars.    The district court assigned some value to the
exchange, such as Stanley’s release and covenant not to sue. Stanley suggests
that by agreeing to “go quietly,” he provided benefit to the company.
      The problem factually for each court that has examined the early 2002
Separation Agreement is that at least for a year prior to the termination, there
had been evidence of good cause for which Stanley could be terminated. Such a
termination would have reduced by half the severance payment.            Stanley
actually resigned, which under the Employment Agreement would have entitled

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                          No. 08-41128 & No. 08-20401

the company to pay him nothing. The bankruptcy court specifically found that
Stanley’s departure was a voluntary resignation, entitling him to nothing. The
district court disagreed, holding that the resignation was part and parcel of the
Separation Agreement, which created the right to severance pay if he resigned.
Regardless, there were substantial obstacles to Stanley’s getting three million
dollars for his departure.    TransTexas nonetheless agreed to the payment.
Based strictly on the legal analysis of the contracts, we find no error in the fact-
finding that this was not reasonable equivalence.
      Stanley also argues that some evidence had to be presented by the trustee
to show a lack of equivalence. Neither expert nor lay testimony was offered to
support that three million dollars was more than Stanley’s agreement to resign
was worth. Besides lay or expert testimony, Stanley argues the bankruptcy
court also held that a three million dollar debt existed as of January 2002.
      The bankruptcy court concluded that the three million dollar debt arose
in January 2002 when the Board decided to terminate Stanley. The Board’s
decision was not to terminate him for cause; “the decision not to terminate
Stanley for cause (in fact, he resigned) was in effect a self-fulfilling prophesy” to
justify paying three million dollars instead of half that amount if he were
terminated for cause. Those conclusions were stated in resolving the issue of
preferential transfers under Section 547(b). We see in them only an analysis of
what the Board’s decision in January to terminate and to pay three million
dollars did to the issue of creation of an obligation. It does not undermine other
findings that the obligation was disproportionate to what was legally owed.
      Stanley cites a decision in which expert testimony was found necessary to
overcome a presumption of reasonableness regarding the salaries and bonuses
that were paid. Askanase v. Fatjo, No. Civ.A.H-91-3140, 1996 WL 33373364, at
*9-11 (S.D. Tex. Apr. 1, 1996), aff’d, 130 F.3d 657 (5th Cir. 1997).           What
someone’s labor is worth seems to us a much different proposition than whether

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                             No. 08-41128 & No. 08-20401

the straightforward terms of an employment agreement could fairly be
interpreted to require payment of three million dollars or half that amount.
Putting a value on the uncertainties of litigation might have allowed the
admission of specific testimony, lay or expert, but we do not conclude that the
absence of such testimony is fatal.
         TransTexas did not receive reasonably equivalent value for providing
Stanley greater compensation than required by the terms of the Employment
Agreement.      The district court agreed that even under the most favorable
circumstances, Stanley could only have been entitled to $1.5 million under the
Employment Agreement, basing that on the conclusion that there was good
cause for terminating him.          There is simply too much disparity between
TransTexas’s payments and any concessions Stanley may have made for his
expedient exit from the company. See In re Fairchild Aircraft Corp., 6 F.3d
1119, 1127 (5th Cir. 1993).3
       The reasonable equivalency fact-finding was not clearly erroneous. Even
under a slightly more intense look caused by the bankruptcy court’s nearly
verbatim adoption of the proposal of one party, we still see no error.
              (4) Insolvency of TransTexas
       TransTexas was found either to be insolvent or became insolvent by virtue
of the financial obligations incurred by the three million dollar Separation
Agreement.       Stanley challenges the insolvency calculation used by the
bankruptcy court. Similar to what we decided on the earlier question of the
timing of Stanley’s insider status, we conclude that the insolvency issue only
applies to preferential transfers under Section 547(b). We explain.

3
       If Stanley were entitled to some payment but one substantially less than three million
dollars, no one has argued that this would make it error to declare the entire transaction
fraudulent. Regardless, Section 548 speaks in terms of avoiding a “transfer,” not part of a
transfer, when there is not reasonably equivalent value.

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                          No. 08-41128 & No. 08-20401

      The language in Section 548 regarding fraudulent transfers is clear that
there are different ways in which such transfers can occur. One alternative is
that a transfer have been made when the debtor was insolvent. 11 U.S.C. §
548(a)(1)(B)(ii)(I). Another alternative is the transfer be made “to or for the
benefit of an insider, or incurred such obligation to or for the benefit of an
insider, under an employment contract and not in the ordinary course of
business.” Id. § 548(a)(1)(B)(ii)(IV). That latter provision applies. As we have
discussed, Stanley was an insider at the time the obligation was incurred.
              (5) Trustee’s Fees and Costs; Stanley’s Proof of Claim
      For these reasons, the concluding issues raised by Stanley regarding the
need to set aside the order to pay the trustee’s fees and costs, and to allow
Stanley’s claim for three million dollars, must fail. His argument is based on the
premise that we would agree with his arguments regarding the fraudulent
transfer. We have not and thus reject these final points.
      B.      National Union’s Policy Coverage for a “Loss.”
      As mentioned earlier, TransTexas had executive and organization liability
coverage through National Union. Stanley’s defense costs for the adversary
proceeding in bankruptcy court were paid under the Policy with a reservation
of rights. On April 11, 2007, the judgment was entered avoiding the payments
to Stanley. On May 10, U.S. Bank notified Stanley that if he did not promptly
pay the judgment, a garnishment would be filed against his insurance carriers.
Presumably, National Union learned of this demand. On June 12, National
Union sued both Stanley and U.S. Bank, seeking a declaratory judgment that
nothing was owed under the Policy.
      In granting summary judgment to National Union, Judge Atlas held that
the bankruptcy judgment against Stanley did not constitute a “Loss” under the
Policy.    In the alternative, the judgment fell within the Policy’s “profit or
advantage” exclusion. On appeal, U.S. Bank argues that both conclusions were

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                         No. 08-41128 & No. 08-20401

error. After insisting in the bankruptcy that the transfers were preferential and
fraudulent, U.S. Bank argues now that Stanley was nonetheless entitled to be
paid. U.S. Banks asserts that the defect found by the bankruptcy court was in
“the timing of TransTexas’ payments to Stanley” and “that TransTexas intended
to hinder, delay or defraud its creditors.” There was not, U.S. Bank argues, any
holding that Stanley was not owed the money.
      The summary judgment was proper if the pleadings and evidence show
that there was no genuine issue as to any material fact and that National Union
was entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp.
v. Catrett, 477 U.S. 317, 322 (1986). The interpretation of an insurance policy
is a question of law that we review de novo. Allstate Ins. Co. v. Disability Servs.
of the Southwest, Inc., 400 F.3d 260, 263 (5th Cir. 2005). The parties agree that
Texas substantive law applies in this diversity case.
      Under Texas law, insurance polices are construed according to the same
rules of construction used to interpret contracts. Don’s Bldg. Supply, Inc. v.
OneBeacon Ins. Co., 267 S.W.3d 20, 23 (Tex. 2008). The court’s primary concern
is effectuating the parties’ expressed intent. Id. If an insurance policy uses
unambiguous language, it must be enforced as written. Id. A policy’s exclusions
and limitations are construed narrowly to avoid exclusion of coverage. Nat’l
Union Fire Ins. Co. of Pittsburgh, Pa. v. Willis, 296 F.3d 336, 339 (5th Cir. 2002)
(citing Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936, 938 (Tex. 1984)). The
insured bears the burden to prove that his claim is covered by the policy, and the
insurer bears the burden to prove that an exclusion applies. Fiess v. State Farm
Lloyds, 392 F.3d 802, 807 (5th Cir. 2004) (applying Texas law).
       Stanley suffered a loss in the colloquial sense that the bankruptcy court
required him to pay a judgment. However, the critical issue here is whether the
repayment of the amounts received, which we have concluded were avoidable

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                         No. 08-41128 & No. 08-20401

fraudulent transfers, constitute an insurable “Loss” under the Policy.             A
definition of the relevant term is in the Policy.
      “Loss” means damages, settlements, judgments (including pre/post-
      judgement interest on a covered judgment), Defense Cost and Crisis
      Loss; however, “Loss” (other than Defense Costs) shall not include
       . . . (6) matters which may be deemed uninsurable under the law
      pursuant to which this policy shall be construed.
      This language is unambiguous and will be enforced as written. Don’s
Bldg. Supply, 267 S.W.3d at 23. Accordingly, the bankruptcy judgment against
Stanley is not a “Loss” within the meaning of this policy if the judgment is
uninsurable under Texas law.
      In concluding that the judgment was not insurable, the district court held
that it provided restitution. In one of the cases on which the court relied,
Humble Oil and Texaco sued Nortex for drilling at a slant such that its wells
were completed beneath land the plaintiffs leased. Nortex Oil & Gas Corp. v.
Harbor Ins. Co., 456 S.W.2d 489, 490 (Tex. App.—Dallas 1970, no writ). The
parties settled. Nortex then made a demand on its insurer, Harbor Insurance
Company, for payment of Nortex’s “ultimate net loss.” Id. at 491. Harbor denied
the claim, and Nortex brought suit in Texas state court. Id.
      The Texas court held that when Nortex settled its claims with Humble and
Texaco, it did not sustain a “Loss” within the meaning of the insurance policy,
because Nortex was merely paying for oil that it had removed and sold from land
leased to Humble and Texaco. Id. at 493-94. The court further explained:
      An insured (under such a policy as we have here) does not sustain
      a covered loss by restoring to its rightful owners that which the
      insured, having no right thereto, has inadvertently acquired . . . .
      The insurer did not contract to indemnify the insured for disgorging
      that to which it was not entitled in the first place, or for being
      deprived of profits to which it was not entitled.
Id. at 494.

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    Case: 08-20401     Document: 00511024212          Page: 16      Date Filed: 02/10/2010

                             No. 08-41128 & No. 08-20401

       In the other decision relied upon by the district court, the Seventh Circuit
construed the term “Loss” in an insurance policy 4 similar to the Policy involved
here. Level 3 Commc’ns Inc. v. Fed. Ins. Co., 272 F.3d 908 (7th Cir. 2001). The
shareholders brought suit alleging that they were defrauded by Level 3. Id. at
909. After the parties reached a settlement, Level 3 sought to be reimbursed by
its directors’ and officers’ liability policy insurer, Federal Insurance Company.
       The court held that “a ‘loss’ within the meaning of an insurance contract
does not include the restoration of an ill-gotten gain.” Id. at 910. Damages paid
by Level 3 to the plaintiffs for which Level 3 sought reimbursement were
“restitutionary in character.” Id. The court also explained that the “insured
incurs no loss within the meaning of the insurance contract by being compelled
to return property that it had stolen, even if a more polite word than ‘stolen’ is
used to characterize the claim for the property’s return.” Id. at 911. We agree
with this interpretation and hold that the return of funds due to a fraudulent
transfer is in the nature of restitution.
       U.S. Bank argues that the bankruptcy court never found that Stanley was
required to return the severance payments on the basis that he was never legally
entitled to them. It argues that unlike “the insured in Nortex, Stanley had a
clear contractual right to the severance payments at the time he received them.”
Contrasting Level 3, it argues “Stanley did not steal his severance or receive
them by a means other than a duly executed and binding contract, the
Separation Agreement.” We disagree. Payments fraudulent as to creditors that
must therefore be repaid due to bankruptcy court order is a disgorgement of ill-
gotten gains and a restitutionary payment.

4
       The directors’ and officers’ insurance policy purchased by Level 3 defined “Loss” as “the
total amount which any Insured Person becomes legally obligated to pay . . . including, but not
limited to . . . settlements.” Level 3, 272 F.3d at 909.

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    Case: 08-20401     Document: 00511024212          Page: 17      Date Filed: 02/10/2010

                             No. 08-41128 & No. 08-20401

       We also find it necessary to return to our observation that Stanley, though
never legally entitled to a three million dollar severance payment, may have
been entitled to something less. Had Stanley and the company not engaged in
the transfer that has been declared fraudulent under Section 548, they might
have agreed on a lesser amount that would represent a reasonable severance
payment. The fact remains, though, that no such agreement was reached. We
noted a similar point in our discussion of Section 548. The parties have cited
neither to a provision in the Code nor to precedent to support that making more
than a reasonably equivalent exchange is fraudulent only for the excess amount.
Because of the bankruptcy laws, Stanley was entitled to none of the payment.
U.S. Bank’s arguments that depend on a holding that Stanley was entitled to the
payment are rejected.
       U.S. Bank also characterizes the issue as being whether severance
payments set aside under bankruptcy law are uninsurable under Texas law, not
whether restitution is uninsurable under Texas law. We need not address the
argument in the abstract – this judgment was restitutionary in nature.
       U.S. Bank bore the burden of proof that its claim was covered by the
policy. Fiess, 392 F.3d at 807. U.S. Bank did not meet that burden.5
       In Case No. 08-41128, we AFFIRM the district court on the basis that
TransTexas’s payments to Stanley were avoidable fraudulent transfers under
Section 548.
       In Case No. 08-20401, we AFFIRM the district court’s judgment in favor
of National Union.

5
        In light of our holding, we need not address the district court’s alternative that even
if the bankruptcy judgment did constitute a “Loss,” it would fall within the Policy’s “profit or
advantage” exclusion.

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