Court Opinion

ID: 3099023
Source: CourtListenerOpinion
Date Created: 2015-10-16 04:55:29.109261+00
Date Added: 2024-06-11T11:44:23.361588
License: Public Domain

COURT OF APPEALS
                                      EIGHTH DISTRICT OF TEXAS
                                           EL PASO, TEXAS

    WARREN E & P, INC., f/k/a                            '
    PETROLEUM DEVELOPMENT                                                   No. 08-10-00198-CV
    CORPORATION d/b/a PEDECO, INC.,                      '
    WARREN RESOURCES, INC., and OIL                                            Appeal from the
    TECHNOLOGY FUND 1996 – SERIES D,                     '
    L. P.,                                                                   81st District Court
                                                         '
    Appellants/Cross-Appellees,                                            of Frio County, Texas
                                                         '
    v.                                                   '                (TC# 98-02-00039CVF)

    GOTHAM INSURANCE COMPANY,

    Appellee/Cross-Appellant.

                                                 OPINION

         This is the third appeal that has arisen from a dispute relating to the payment of insurance

proceeds following an oil well blow-out.1 The first appeal was resolved in Gotham Ins. Co. v.

Petroleum Development Corp., No. 04-01-00375-CV, 2003 WL 21696625 (Tex. App.--San

Antonio, July 23, 2003, pet. denied) (mem. op.) (Gotham I). The second appeal was resolved in

Warren E & P, Inc.,f/k/a Petroleum Development Corp. d/b/a Pedeco, Inc., et al. v. Gotham Ins.

Co., No. 04-05-00186-CV, 2006 WL 1080246 (Tex. App.--San Antonio, April 26, 2006, pet.

denied) (mem. op.) (Gotham II). In this third appeal, Warren E & P, Inc., f/k/a Petroleum

Development Corporation d/b/a Pedeco, Inc., Warren Resources, Inc., and Oil Technology Fund

1996 -- Series D, L. P., appeal from the trial court’s summary judgment in favor of Gotham

Insurance Company. Gotham cross-appeals. We reverse.

1
 The record reflects that the Texas Supreme Court transferred this case from the Fourth Court of Appeals to this
Court. See TEX. GOV’T CODE ANN. § 73.001 (West 2005).
                                        BACKGROUND

       In April of 1996, Pedeco, Inc., a New Mexico oil and gas concern, decided to operate in

Texas and sought assistance from a Texas company, R. W. Dirks Petroleum Engineers, Inc.

Pedeco and Dirks entered into a business agreement, under which Dirks agreed to serve as the

record operator of Pedeco’s Texas wells until Pedeco obtained its official Texas registration. The

agreement also charged Dirks with obtaining well-control insurance.

       In May of 1996, Dirks obtained from Gotham Insurance Company a $2,000,000

well-control insurance policy. Dirks was the named insured (or “assured”) in the policy. Under

the terms of the policy, Gotham agreed to:

       [R]eimburse the Assured for actual costs and/or expenses incurred by the Assured
       [in proportion to the Assured’s ownership interest] (a) in regaining or attempting to
       regain control of any and all well(s) insured hereunder which get(s) out of control .
       . . and (b) in extinguishing or attempting to extinguish . . . fires . . . which may
       endanger the well(s) insured hereunder.

       The insurance policy also contained a “care, custody, and control” endorsement, under

which Gotham agreed to:

       [C]over the Assured’s legal or contractual liability as oil lease operator(s) (or
       Co-Venturer(s) where applicable) [in proportion to the Assured’s ownership
       interest] for physical loss or damage to, or expenses of salvage of, oil field
       equipment . . . leased or rented by the Assured or in its care, custody and control at
       the site.

       In December of 1996, Pedeco entered into a joint operating agreement (“JOA”) with

Warren Resources, Inc. (“WRI”), a New York company that solicited investors to create limited

partnerships to fund oil well drilling and then acted as the limited partnerships’ managing general

partner. Also party to the JOA was one of WRI’s limited partnerships, Oil Technology Fund

1996 -- Series D, L. P. (“the Fund”). According to Norman Swanton, WRI’s chief executive

                                                 2
officer, the Fund took “the responsibility to drill the wells,” while WRI and Pedeco “agree[d] to

supply the tangible equipment and costs on those wells.” Among the oil and gas leases listed in

the JOA was the Halff-Oppenheimer Well (“H & O Well”) in Frio County.

       In January of 1997, Dirks asked Gotham to add Pedeco as an additional insured in the

well-control insurance policy because, according to Dirks, Pedeco owned a non-operating working

interest in 22 of Dirks’ wells. Based on that information, Gotham added an endorsement to the

policy naming Pedeco as an additional insured. Unlike Dirks and Pedeco, WRI and the Fund did

not obtain well-control insurance.

       On July 21, 1997, Pedeco filed a drilling permit with the Texas Railroad Commission,

listing Pedeco as the operator of record of the H & O Well. On July 27, 1997, the H & O Well

blew out and caught fire, destroying Stricker Drilling Company’s drilling rig, third-party

contractors’ equipment, and neighboring landowners’ crops and fences. That same day, Gotham

received notice of the blow-out and assigned adjusters from Rush Johnson Associates to

investigate. Rush Johnson later reported to Gotham that the losses from the blow-out would

exceed the policy limits. Rush Johnson also reported to Gotham that Pedeco representatives had

advised one of the Rush Johnson adjusters that Pedeco owned a 100 percent working interest in the

H & O Well and was operating it at the time of the blow-out. That representation regarding

Pedeco’s 100 percent working interest was repeated in 1997 in the sworn proofs of loss submitted

by Dirks and Pedeco to Gotham. Based on those and other representations, Gotham’s attorneys

recommended that it pay Pedeco’s claims.

       To facilitate payment, the parties entered into an escrow agreement, under which Gotham

paid the policy benefits into Rush Johnson’s escrow account “to be held in escrow for R. W. Dirks

                                               3
Petroleum Engineers, Inc. and Pedeco, Inc. for payment direct to vendors of adjusted and approved

claim amounts.”

       In March or April of 1998, an adjuster from Rush Johnson advised Gotham’s attorneys that

Stricker Drilling Company and several third-party contractors had filed a lawsuit (“the Frio

County lawsuit”) alleging that Pedeco had not acted as a reasonably prudent operator and had used

substandard blow-out prevention equipment. After learning of the allegations in the Frio County

lawsuit, Gotham commenced an investigation, ultimately stopped payment on Pedeco’s unpaid

claims, notified Pedeco of its decision, and then, in May of 1999, intervened in the Frio County

lawsuit with claims against Pedeco, WRI, and the Fund, seeking equitable restitution of the

insurance benefits paid on behalf of Pedeco. Pedeco counterclaimed for breach of contract, bad

faith, and violations of the Texas Insurance Code.

       Each of the parties moved for summary judgment on each of the claims and counterclaims.

The trial court granted summary judgment in favor of Pedeco, WRI, and the Fund on Gotham’s

reimbursement claim, in favor of Gotham on Pedeco’s counterclaims for bad faith and violations

of the Texas Insurance Code, and in favor of Pedeco on its counterclaim for breach of contract,

rendering judgment in Pedeco’s favor for $271,741.88, attorney’s fees, and interest. Gotham

appealed, and Pedeco cross-appealed. The Fourth Court of Appeals affirmed the trial court’s

summary judgment in favor of Gotham on Pedeco’s counterclaims for bad faith and violations of

the Texas Insurance Code, reversed the trial court’s summary judgment in all other respects, and

remanded the case for further proceedings. The Fourth Court explained its decision, in part, as

follows:

             Gotham argues the trial court erred in denying its motion for summary
       judgment on Pedeco’s breach of contract claim and instead granting Pedeco’s,

                                                4
      because the summary judgment record conclusively establishes that Pedeco did not
      sustain an actual loss from the blow-out of the H & O Well and therefore was not
      entitled to recover under the indemnity policy. We agree.
                                             . . .
               [The summary judgment evidence conclusively shows that] although
      Pedeco may have paid blowout costs, the funds were advanced to Pedeco by WRI;
      and WRI was not reimbursed by Pedeco for any of the funds advanced.
      Consequently, any loss that Pedeco suffered as a result of the blowout was made
      good by WRI.
                                             . . .
               We therefore hold that, because Pedeco did not suffer a “legal loss,” it was
      not entitled to benefits under the well control policy.
                                             . . .
               Because Pedeco was not entitled to policy benefits, Gotham argues it is
      entitled to restitution of the policy benefits it paid under an erroneous belief or
      mistake of fact. We again agree.
                                             . . .
               Because the evidence conclusively establishes that Gotham paid Pedeco’s
      claims under the mistaken belief that the claims were covered by the [well-control]
      indemnity policy, and because there is no evidence tending to establish that
      restitution would be inequitable, we hold Gotham is entitled to restitution of the
      benefits paid to Pedeco. Therefore, the trial court erred in denying Gotham’s
      motion for summary judgment on its restitution claim against Pedeco.
                                             . . .
               Gotham also argues the trial court erred in denying its motion for summary
      judgment on its restitution claims against WRI and the Fund, because Gotham’s
      payments extinguished the valid claims of vendors and thereby discharged WRI
      and the Fund from debts [they] owed under the JOA; consequently, Gotham argues,
      WRI [and the Fund were] unjustly enriched by Gotham’s payments. We agree.
                                             . . .
               We affirm the trial court’s summary judgment against Pedeco and in favor
      of Gotham on Pedeco’s counterclaims for bad faith and violations of the Texas
      Insurance Code. In all other respects, the trial court’s judgment is reversed. We
      render judgment in favor of Gotham that Pedeco take nothing on its breach of
      contract counterclaims. Gotham asks that we render judgment in its favor on its
      restitution claims as well. However, it gives no particulars; and the judgment that
      should have been rendered is not at all obvious. We therefore exercise our
      discretion to simply remand Gotham’s restitution claims to the trial court for
      further proceedings consistent with this opinion.

Gotham I, 2003 WL 21696625, at *3-*8.

      On remand, Gotham filed a “motion to enter final judgment,” seeking $1,823,156.27 in

                                               5
restitution plus interest, and a motion for attorney’s fees. The trial court, without receiving

additional evidence, granted both of Gotham’s motions. Warren E & P, Inc. (f/k/a Pedeco), WRI,

and the Fund appealed. The Fourth Court reversed the portion of the trial court’s judgment

awarding restitution in the amount of $1,823,156.27 plus interest, and remanded the case to the

trial court with instructions that it proceed with a new trial on the amount of restitution to be

awarded to Gotham. Gotham II, 2006 WL 1080246, at *3. In its opinion, the Fourth Court noted

that the parties were in dispute as to the amount that Gotham, as opposed to Gotham’s

underwriters, actually paid in policy benefits. Id. at *2. The Fourth Court also reversed the

portion of the trial court’s judgment awarding attorney’s fees to Gotham and rendered judgment

that Gotham take nothing in that regard. Id. at *3.

       On the second remand, Gotham filed a motion for summary judgment on the amount owed

in restitution, as did Warren E & P, Inc., WRI, and the Fund. The trial court granted Gotham’s

motion and denied the motion filed by Warren E & P, Inc., WRI, and the Fund. The trial court’s

judgment stated in relevant part:

              The court hereby RENDERS judgment for Plaintiff Gotham Insurance
       Company, and ORDERS that:
              1. Plaintiff, Gotham Insurance Company, recover damages from
       Defendants Warren E & P, Inc., f/k/a Petroleum Development Corporation d/b/a
       Pedeco, Inc., Warren Resources, Inc., and Oil Technology Fund 1996 -- Series D,
       L. P., in the sum of $1,823,156.27, prejudgment interest on the sum of
       $1,823,156.27 at the annual rate of 5.00% running from the date Gotham filed suit
       on May 21, 1999 until the day before judgment is rendered in the sum of
       $989,497.61, and taxable court costs in the amount of $13,127.32.

                                         THE ISSUES

       In their first issue, Appellants Warren E & P, Inc., WRI, and the Fund argue that the trial

court erred in granting Gotham’s motion for summary judgment because, contrary to the opinions

                                                6
in Gotham I and Gotham II, “Texas law [does] not recognize any equitable right to reimbursement

for an insurer that fails to obtain a contractual right to reimbursement.” Appellants cite Excess

Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42

(Tex. 2008), in support of their argument.

       Under the law-of-the-case doctrine, a court of appeals is ordinarily bound by its initial

decision if, as in this case, there is a subsequent appeal. Briscoe v. Goodmark Corp., 102 S.W.3d
714, 716 (Tex. 2003). That doctrine is based on public policy and is aimed at putting an end to

litigation. Id. However, a court of appeals is not bound by its initial decision if there has been a

change in the governing law. City of Dallas v. Jones, 331 S.W.3d 781, 785 (Tex. App.--Dallas

2010, pet. dism’d).

       As we noted above, the Fourth Court, in Gotham I, held that Gotham was entitled to

equitable restitution from Pedeco, WRI, and the Fund because those three entities were unjustly

enriched at Gotham’s expense. The Fourth Court considered the rule announced in TAC v.

Matagorda County, 52 S.W.3d 128 (Tex. 2000), that abolished the equitable right of restitution of

insurance companies against their insureds but reasoned that Matagorda did not apply to the issues

before it. However, in Gotham I, the Fourth Court did not have the benefit of the Texas Supreme

Court’s analysis in Frank’s Casing, which clarified the holding in Matagorda expressly rejecting

the remedy of equitable reimbursement and refusing to recognize any exceptions to the rule. The

Supreme Court reasoned that distinctions in the facts raised did not alleviate the contractual based

concerns that drove the Court’s decision in Matagorda eliminating an insurer’s equitable right to

reimbursement. The Court expressly held that an insurer can seek reimbursement only when that

right is included in the policy or there is a clear and unequivocal contractual agreement reached to

                                                 7
that effect. As a matter of law, an insurer may not seek equitable restitution against an insured for

erroneous payment of a non-covered claim if the insurance policy does not provide for such a

remedy. Frank’s Casing, 246 S.W.3d at 45-47. The Court explained that the rights of the parties

to the insurance policy must be found in the policy itself, and if the insurer wants the right to

reimbursement for erroneous payment of non-covered claims, the insurer must include such a right

in the policy, which might yield a lower premium than a policy that does not contain such a right.

Id. at 46, 50. To recognize an equitable right to reimbursement, where the policy does not provide

for that right, would require us to rewrite the parties’ contract or add to its language. Id. at 50.

       In the instant case, Pedeco’s policy with Gotham did not provide for a right to

reimbursement for payment of non-covered claims.             Therefore, Gotham has no right to

reimbursement from Warren E & P, Inc. (f/k/a Pedeco) for payment of the non-covered claims in

question.

       Gotham seeks reimbursement from WRI and the Fund under the theory of unjust

enrichment, claiming that Gotham’s payments extinguished the valid claims of vendors and

thereby discharged WRI and the Fund from debts they owed. Where, as here, the parties to an

insurance contract have spelled out their respective remedies and the policy addresses

reimbursement issues, equity cannot give Gotham rights of recovery that the parties did not agree

to in their contract. Frank’s Casing restated the bright-line rule disallowing reimbursement on an

equitable unjust enrichment theory because insurers are in a superior position to evaluate the risks

stemming from a coverage dispute and can expressly allocate that risk by delineating

reimbursement rights in their policies. Gotham could have included a clause in the policy that

would have provided for credit against loss payments to the insured in any amounts due to Pedeco

                                                  8
by third parties not responsible for the loss. Prevailing Texas Supreme Court authority prohibits

granting Gotham an equitable right of reimbursement that does not exist in the insurance policy.

The Supreme Court has recognized the “‘strong public policy in favor of preserving the freedom of

contract’” and has warned that courts “‘should not by judicial fiat insert non-existent language . . .

into parties’ agreed-to contracts.’” Id. at 51 (quoting Fortis Benefits v. Cantu, 234 S.W.3d 642,

649 n.41 (Tex. 2007)). Therefore, Gotham has no right to reimbursement from WRI and the Fund

for unjust enrichment.

       Given our disposition of Appellants’ first issue, we need not reach their second and third

issues or Gotham’s cross-issue.

                                          CONCLUSION

       We reverse the judgment of the trial court and render judgment that Gotham take nothing in

its claims against Warren E & P, Inc., WRI, and the Fund.

                                               GUADALUPE RIVERA, Justice
April 18, 2012

Before McClure, C.J., Rivera, J., and Antcliff, J.
Antcliff, J., dissenting

                               DISSENTING OPINION

       In 2003, the San Antonio Court of Appeals held, as a matter of law, that “Gotham is

entitled to restitution of the benefits paid to Pedeco.” See Gotham Ins. Co. v. Petroleum Dev.

Corp., No. 04-01-00375-CV, 2003 WL 21696625, at *7 (Tex. App.--San Antonio July 23, 2003,

                                                  9
pet. denied) (mem. op.) (hereafter “Gotham I”). The court also held that Gotham is entitled to

restitution from WRI and the Fund. Id. In 2006, the San Antonio Court re-affirmed these

holdings to be the law of the case. Warren E & P, Inc. v. Gotham Ins. Co., No. 04-05-00186-CV,

2006 WL 1080246, at *2 (Tex. App.--San Antonio April 26, 2006, pet. denied) (mem. op.)

(hereafter Gotham II) (“Gotham I unequivocally held Gotham was entitled to restitution making it

the law of the case . . . .”).

        “Under the law of the case doctrine, a question of law previously decided on appeal

governs a case throughout its subsequent stages.” Jones & Gonzalez, P.C. v. Trinh, 340 S.W.3d
830, 836 (Tex. App.--San Antonio 2011, no pet.). The doctrine applies even when a case is

transferred to us from another court of appeals. See, e.g., Caplinger v. Allstate Ins. Co., 140
S.W.3d 927, 929-30 (Tex. App.--Dallas 2004, pet. denied); see also Thomas v. Collins, 860
S.W.2d 500, 502 (Tex. App.--Houston [1st Dist.] 1993, writ denied) (treating prior decision of this

Court as law of the case). We are required to decide a transferred case in accordance with the

precedent of the transferor court, regardless of whether we might have decided the case differently

if it had arisen in our own district. See TEX. R. APP. P. 41.3. We must follow the transferor

court’s precedent “unless it appears that the transferor court itself would not be bound by that

precedent.” Id. cmt.

        Therefore, the issue before us is whether there is any basis for departing from the San

Antonio Court’s ruling. My colleagues have concluded that we need not follow Gotham I

because an intervening decision by the Texas Supreme Court changed the law. Because I

disagree with this conclusion, I respectfully dissent.

        In Matagorda, Matagorda County demanded that its insurer defend and indemnify it

                                                 10
against a third-party claim. Tex. Ass’n of Counties County Gov’t Risk Mgmt. Pool v. Matagorda

County, 52 S.W.3d 128, 129 (Tex. 2000). Believing that the claim fell within a policy exclusion,

the insurer filed a declaratory judgment action to determine whether the claim was covered. Id.

The plaintiffs in the underlying suit offered to settle within policy limits, and the County’s lawyer

determined that the proposed settlement was reasonable and prudent. Id. The County, however,

refused to contribute any money to the settlement, asserting that the claim was not excluded from

coverage and therefore the insurer should pay. Id. at 130.

       The policy allowed the insurer to settle claims at its own discretion without the County’s

consent. Id. Accordingly, the insurer went forward with the settlement and paid the entire

settlement amount. Id. But the insurer sent the County a letter in which it reserved its rights to

deny coverage and to seek reimbursement of the settlement funds if it prevailed on the coverage

issue in the declaratory judgment action. The County did not respond to the letter. Id. The

insurer then amended its declaratory judgment petition to seek reimbursement of the settlement

funds. Id. The insurer prevailed on the coverage issue and obtained a judgment for the full

amount of the settlement. Id.

       The Texas Supreme Court concluded that the County’s silence in response to the

reservation-of-rights letter, combined with its acknowledgement that the settlement was

reasonable, did not create an implied contractual reimbursement obligation. Id. at 131. The

court reached this conclusion by applying ordinary, black-letter contract principles. See id. at

131-33.

       The court then considered whether the insurer had an equitable right to reimbursement

under the quasi-contractual theories of quantum meruit and unjust enrichment. The court held

                                                 11
that these theories did not apply “in the circumstances presented.” Id. at 134. In reaching this

conclusion, the court focused on the potential for unfairness to the insured. If the insurer could

seek reimbursement under the circumstances presented in the case, the insured would be “forced to

choose between rejecting a settlement within policy limits or accepting a possible financial

obligation to pay an amount that may be beyond its means, at a time when the insured is most

vulnerable.” Id. at 135. Moreover, the insurer is in the best position to determine whether

coverage exists. Id. The Supreme Court thus held “that, when coverage is disputed and the

insurer is presented with a reasonable settlement demand within policy limits, the insurer may fund

the settlement and seek reimbursement only if it obtains the insured’s clear and unequivocal

consent to the settlement and the insurer’s right to seek reimbursement.” Id.

       In Gotham I, Pedeco argued that Matagorda abolished any extra-contractual right of

restitution that an insurer might have had against its insured. See 2003 WL 21696625, at *6.

The San Antonio Court of Appeals concluded that Matagorda was distinguishable because it

involved an insurer’s suit against its insured for reimbursement of settlement funds paid to a

third-party claimant under a reservation of rights after the third party’s claim was adjudicated to be

excluded from coverage under a comprehensive general liability policy. Id. By contrast, the

issue presented in this case is “whether an insurer is entitled to restitution from its insured when, in

reliance upon its insured’s representations, it pays an alleged loss that was in fact ‘no loss’

because it was ‘made good’ by a third party.” Id. (emphasis added). We should follow the San

Antonio Court’s ruling in Gotham I unless it was clearly erroneous or a subsequent decision

changed the law. Briscoe v. Goodmark Corp., 102 S.W.3d 714, 716 (Tex. 2003); City of Dallas v.

Jones, 331 S.W.3d 781, 785 (Tex. App.--Dallas 2010, pet. dism’d).

                                                  12
        Although I have not found a case defining “clearly erroneous” for law-of-the-case

purposes, I believe that it must refer to something more than a mere disagreement with the prior

decision. We apply the law-of-the-case doctrine to narrow the issues in successive stages of

litigation, to achieve uniformity, and to promote judicial economy and efficiency. Briscoe, 102
S.W.3d at 716. The doctrine is based on public policy and is aimed at putting an end to litigation.

Id. It discourages parties from relitigating an issue in the hope of finding a more favorably

disposed tribunal. See LeBlanc v. State, 826 S.W.2d 640, 644 (Tex. App.--Houston [14th Dist.]

1992, pet. ref’d) (“Without application of this doctrine, appellant would be able to gamble that

between two court of appeals’ decisions he would have a better chance of obtaining a favorable

ruling by one of them.”).

        In my view, Gotham I drew a perfectly reasonable distinction between this case and

Matagorda.       Whereas Matagorda involved the settlement of a third-party claim, this case

involves a first-party claim. The public policy rationales undergirding Matagorda do not apply

outside the settlement context.

        Moreover, the Texas Supreme Court denied review in both Gotham I and Gotham II. This

demonstrates that, at least as of 2006, the San Antonio Court’s interpretation of Matagorda was

not clearly erroneous.1 See Caplinger, 140 S.W.3d at 930 (“Where the supreme court declines an

opportunity to review a court of appeals’s opinion, that opinion is not clearly erroneous.”); see also

Hurd Enters. v. Bruni, 828 S.W.2d 101, 106 (Tex. App.--San Antonio 1992, writ denied); Am.

Trading & Prod. Corp. v. Phillips Petroleum Co., 449 S.W.2d 794, 801 (Tex. Civ. App.--El Paso

1969, writ ref’d n.r.e.).

1
  Indeed, the San Antonio Court in Gotham I and Gotham II issued memorandum opinions pursuant to Rule 47.4 of the
Texas Rules of Appellate Procedure, a clear indication that the Court considered the issues raised “settled” even in
light of the Supreme Court’s holding in Matagorda.
                                                        13
       In 2008, the Texas Supreme Court issued its final decision in Frank’s Casing. Like

Matagorda, Frank’s Casing again involved settlement of a third-party claim.              See Excess

Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42,

43-45 (Tex. 2008). The Supreme Court noted that, at least in some respects, the two cases had

“indistinguishable facts.” Id. at 51; see also id. at 45 (noting that Matagorda involved “similar,

though not identical, circumstances”).

       The court reviewed its Matagorda holding and declined to overrule it. See id. at 45-48.

In addition to the public policy rationales discussed in Matagorda, the court found other reasons to

deny an implied right to reimbursement. As in Matagorda, these reasons derive from the unique

circumstances surrounding settlement of a third-party claim.         If the insurer had a right to

reimbursement, defense counsel might face a conflict of interest during settlement discussions.

Id. at 47. A right to reimbursement would also weaken the insurer’s incentive to negotiate a

settlement most favorable to the insured. The insurer might seek to limit its litigation expenses by

negotiating a quick settlement, all the while knowing that its insured would likely bear the ultimate

burden of paying the settlement.       Id.   These concerns “portend significant distrust in the

insurer/insured relationship during the settlement process should an equitable reimbursement right

be implied.” Id.

       The court next considered the insurers’ attempts to distinguish Matagorda. The insurers

argued that Matagorda did not control because the insured sought a settlement demand from the

plaintiff and then insisted that the insurers pay it. Id. at 50. The insurers further asserted that

Matagorda was distinguishable because they were excess insurers with no duty to defend. Id.

The Supreme Court held that these distinctions were irrelevant. Id. The court also stated:

                                                 14
“There is an additional reason that the excess underwriters are not entitled to a reimbursement

right. That is, ‘[w]hen a valid agreement already addresses the matter, recovery under an

equitable theory is generally inconsistent with the express agreement.’” Id. (quoting Fortune

Prod. Co. v. Conoco, 52 S.W.3d 671, 684 (Tex. 2000)).

       This review of the opinion demonstrates that Frank’s Casing did not change the law.

Presented with virtually identical facts as in Matagorda, the court simply adhered to its prior

decision. And, again as in Matagorda, the court’s reasoning demonstrates that it was concerned

with potential unfairness to an insured who has an opportunity to settle a third-party claim.

These concerns do not apply here. No conflict of interest has been suggested. Unlike the

scenarios envisioned in Matagorda and Frank’s Casing, here Gotham was not in a position to take

advantage of Pedeco or to settle a claim for an unreasonable amount, knowing that Pedeco would

bear the ultimate responsibility. Instead, Pedeco was the party with superior knowledge and

Pedeco made representations to Gotham, which were relied upon by Gotham, about its ownership

interest and as to which entity was paying the blow-out costs.                 See Gotham I, No.

04-01-00375-CV, 2003 WL 21696625, at *2.

       Although Frank’s Casing indicates that equitable remedies generally cannot supplant or

add terms to a contract, it does not preclude all equitable remedies in every situation. The court

cited Fortune Production, which held, “Generally speaking, when a valid, express contract covers

the subject matter of the parties’ dispute, there can be no recovery under a quasi-contract theory,

with certain exceptions not relevant here . . . .” 52 S.W.3d at 684 (emphasis added & citations

omitted). One well-recognized exception to this general rule is that a party may recover under the

equitable theory of restitution for payments made due to a mistake of fact. “It is [a] settled rule of

                                                 15
law that an insurance company which makes payment under a policy because of an erroneous

belief induced by a mistake of fact that the terms of the insurance contract required such payment

is entitled to restitution from the person receiving such payment, unless it has agreed to assume the

risk of mistake, or unless there is some reason which makes it inequitable or inexpedient for

restitution to be granted.”    Int’l Ins. Co. v. Jataine, 495 S.W.2d 309, 320-21 (Tex. Civ.

App.--Corpus Christi 1973, writ ref’d n.r.e.); accord Community Mut. Ins. Co. v. Owen, 804
S.W.2d 602, 605 (Tex. App.--Houston [1st Dist.] 1991, writ denied); Singer v. St. Paul Mercury

Ins. Co., 478 S.W.2d 579, 583 (Tex. Civ. App.--San Antonio 1972, writ ref’d n.r.e.). The San

Antonio Court of Appeals relied on this exception in Gotham I, and there is nothing in Frank’s

Casing to suggest that the exception is no longer valid. See Gotham I, 2003 WL 21696625, at *6.

       As a result of Pedeco’s representations, Gotham erroneously believed that Pedeco’s claim

was covered by the policy. Thus, Gotham made payments under a mistake of fact. By contrast,

the insurers in Frank’s Casing and Matagorda made payments under a mistake of law. Unlike

Gotham, they did not believe that the claims were covered, but they paid the claims under the

assumption that they could obtain reimbursement if they ultimately prevailed on the coverage

issues. See Owen, 804 S.W.2d at 605 (“A mistake of law means a mistake as to the legal

consequences of an assumed state of facts.”); see also Pennell v. United Ins. Co., 243 S.W.2d 572,

576 (Tex. 1951) (“There is no suggestion in the record that there was a mistake of fact as to the

kind of automobile in which petitioner was riding when injured or any other mistake of fact. The

question whether the double indemnity provision of the policy applied to the jeep, the answer to

which determined respondent’s liability or nonliability for double indemnity, was one of law.”).

       Finally, even if Frank’s Casing changed the law as to Gotham’s claim against Pedeco, it

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certainly does not foreclose Gotham’s claim for restitution from WRI and the Fund. Neither WRI

nor the Fund were parties to the insurance policy. As discussed above, Frank’s Casing and

Matagorda were based on the existence of an insurer/insured relationship and on the existence of a

contract. Neither of these facts apply to WRI and the Fund.

       Because Frank’s Casing did not change the law as announced in Matagorda, I would

affirm the judgment of the trial court, and I respectfully dissent.

April 18, 2012                         CHRISTOPHER ANTCLIFF, Justice

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