Sierra Equipment, Incorporated v. Lexington Insura , 890 F.3d 555 ( 2018 )

Case: 17-10076 Document: 00514472938 Page: 1 Date Filed: 05/15/2018
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 17-10076 FILED
May 15, 2018
SIERRA EQUIPMENT, INCORPORATED,
Lyle W. Cayce
Clerk
Plaintiff – Appellant,
v.
LEXINGTON INSURANCE COMPANY,
Defendant – Appellee.
Appeal from the United States District Court
for the Northern District of Texas
Before REAVLEY, ELROD, and SOUTHWICK, Circuit Judges.
JENNIFER WALKER ELROD, Circuit Judge:
This appeal arises from a property insurance policy that Lexington
Insurance Company issued to LWL Management to insure construction
equipment that LWL leased from Sierra Equipment. Sierra argues that, even
though it was not a party to the insurance policy, it has standing to sue
Lexington for coverage pursuant to Texas’s equitable lien doctrine. Because
the lease agreement between LWL and Sierra did not require that LWL obtain
insurance with loss payable to Sierra, we determine that the equitable lien
doctrine does not apply and Sierra lacks standing to sue Lexington for coverage
under Texas law. Accordingly, we AFFIRM.
Case: 17-10076 Document: 00514472938 Page: 2 Date Filed: 05/15/2018
No. 17-10076
I.
Sierra leased various pieces of heavy construction equipment to LWL
according to an equipment lease agreement. The lease agreement required
LWL to insure the leased equipment, deliver a copy of the insurance policy to
Sierra, and obtain a policy in form, in terms, in amount, and with insurance
carriers reasonably satisfactory to Sierra. The agreement did not require that
the policy list Sierra as an additional insured or contain a loss payable clause
listing Sierra.
About a year after Sierra and LWL entered into the lease agreement,
LWL filed for bankruptcy. The following year, Lexington issued a domestic
property insurance policy with LWL as a named insured. The policy did not
include Sierra as a named insured, nor did it mention Sierra. Furthermore,
though required by the lease agreement, LWL did not provide Sierra with a
copy of the policy.
During LWL’s bankruptcy proceedings, and after Sierra inventoried the
leased equipment, Sierra claims that it discovered that much of its equipment
had been damaged, lost, or destroyed. Sierra filed an application with the
bankruptcy court seeking payment from LWL for this damage. According to
Sierra, however, no substantial payments from LWL ever came of this claim.
This led to an investigation by Sierra, Sierra’s discovery of the Lexington
policy, a demand by Sierra for payment from Lexington, and eventually this
action, which was filed in Texas state court but removed by Lexington on the
basis of diversity jurisdiction.
Sierra seeks declaratory judgment that: (1) Sierra was the rightful owner
of the leased equipment; (2) LWL breached the lease agreement by failing to
name Sierra as an additional insured under the policy; and (3) Sierra may
assert a claim for the proceeds of the policy up to and including the extent of
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its loss related to the leased equipment. At the district court, Lexington filed
multiple dispositive motions, including a motion to dismiss for lack of standing.
The district court granted Lexington’s motion to dismiss with prejudice,
stating that “only where the lessee had a duty to take out insurance for the
lessor’s benefit, or include the lessor as an additional insured, and the lessee
failed to do so, can the lessor maintain a direct action against the insurer.”
Analyzing the lease agreement, the district court found that it “does not
include any language creating a duty that LWL procure insurance for Sierra’s
benefit or with Sierra as an additional insured.” Thus, the district court held
that Sierra had no standing to bring a direct action against Lexington. The
remaining motions were dismissed as moot. Sierra timely appealed.
II.
“This Court reviews a dismissal for lack of standing de novo.” Moore v.
Bryant, 853 F.3d 245, 248 (5th Cir. 2017). Where the district court decides the
motion to dismiss based on undisputed facts, “our review is limited to
determining whether the district court’s application of the law is correct and
. . . whether those facts are indeed undisputed.” Barrera-Montenegro v. United
States, 74 F.3d 657, 659 (5th Cir. 1996).
“In this diversity action, we must apply Texas law as interpreted by
Texas state courts.” Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589, 593
(5th Cir. 2011) (quoting Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d
487, 491 (5th Cir. 2000)). Our task is to make an Erie guess as to how the
Texas Supreme Court would decide the question before us. Id. “We consider
Texas Supreme Court cases that, ‘while not deciding the issue, provide
guidance as to how the Texas Supreme Court would decide the question . . . .’”
Id. at 594 (quoting Am. Int’l Specialty Lines Ins. Co. v. Rentech Steel L.L.C.,
620 F.3d 558, 564 (5th Cir. 2010)). In addition to decisions of the Texas
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Supreme Court, which are weighed more heavily, we consider decisions of the
Texas intermediate appellate courts. Id.
III.
In Texas:
The rule is established . . . that [an] insurance policy is a personal
contract between the insurer and the insured named in the policy
and a stranger to the policy may not ordinarily maintain a suit on
it. There is an exception or corollary to this general rule in such
instances as those where a mortgagor or lessee is charged with the
duty of procuring such a policy with loss payable to the mortgagee
or lessor, as the case may be. In those instances, in pursuance of
equitable principles, it is established that equity will treat the
policy as having contained such a provision upon the principle that
equity treats that as done which should have been done.
Duval Cty. Ranch Co. v. Alamo Lumber Co., 663 S.W.2d 627, 632 (Tex. App.—
Amarillo 1983, writ ref’d n.r.e) (citations omitted). This is known as the
equitable lien doctrine.
In Farmers Insurance Exchange v. Nelson, 479 S.W.2d 717 (Tex. Civ.
App.—Waco 1972, writ ref’d n.r.e.), a Texas appellate court extended the
equitable lien doctrine from mortgagee-mortgagor relationships to lessor-
lessee relationships. The Farmers court specifically held “that a breach by a
lessee of a contract to insure the leased property for the benefit of his lessor
will charge the benefits of any insurance taken out by the lessee on the leased
property with a lien in favor of the lessor,” allowing the lessor to proceed
directly against the insurer. 479 S.W.2d at 721. The focus of this appeal is the
meaning of the language “for the benefit of his lessor.” Id.
Sierra argues that the nature of its agreement with LWL, including the
fact that LWL was required to deliver the insurance policy to Sierra and obtain
a policy in terms satisfactory to Sierra, is such that the agreement required
LWL to obtain insurance for Sierra’s benefit. Indeed, Sierra goes so far as to
say that “the fact that the insurance benefits the lessor is self-evident.” As a
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result, in Sierra’s view, it has standing. Texas courts, however, have not
applied the equitable lien doctrine in the broad way that Sierra suggests.
Instead, Texas courts have looked to whether the insurance policy included, or
the parties agreed that it would include, a loss payable clause to the party
bringing suit.
In extending the equitable lien doctrine to lessors and lessees, the
Farmers court discussed the equitable principles set forth in Fidelity &
Guaranty Insurance Corp. v. Super-Cold Southwest Co., 225 S.W.2d 924 (Tex.
Civ. App.—Amarillo 1949, writ ref’d n.r.e.). Farmers, 479 S.W.2d at 721. In
Super-Cold, a Texas appellate court held that an agreement between a
mortgagor and a mortgagee under which the mortgagor is charged with
procuring insurance on the mortgaged property “for the benefit of the
mortgagee” will encumber the proceeds of any insurance procured by the
mortgagor with a lien in the mortgagee’s favor. 225 S.W.2d at 927. The Super-
Cold court further held that:
[i]n such cases, it is the duty of the mortgagor to have a provision
inserted in the policy that the proceeds shall be payable to the
mortgagee as his interest might appear but, where he fails to do
so, equity will treat the policy as having contained such a provision
upon the principle that equity treats that as done which should
have been done.
Id. Thus, the court reasoned that what “should have been done” under the
agreement—and what it treated as done—was the inclusion of a loss payable
clause to the mortgagee.
For the proposition that the insurer should treat the policy as having a
loss payable clause where that was the agreement, the Super-Cold court cited
an even earlier case, Walter Connally & Co. v. Hopkins, 195 S.W. 656 (Tex. Civ.
App.—Texarkana 1917), opinion approved, 221 S.W. 1082 (Tex. Comm’n App.
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1920). 1 In Hopkins, the court granted an equitable lien to a mortgagee where
the contract covering the sale of certain machinery stated that the mortgagors
“would keep the machinery fully insured . . . , the loss, if any, payable to [the
mortgagee] as their interest appeared.” 195 S.W. at 659. The equitable lien
doctrine was therefore applied only where the contract stated that any loss
under the policy would be payable to the mortgagee. Id.
Furthermore, just last year, a Texas appellate court explicitly listed as a
requirement for an equitable lien that “the named insured agreed to protect
the third-party’s security interest by obtaining insurance with a loss-payable
clause in the third party’s favor.” Westview Drive Invs., LLC v. Landmark Am.
Ins. Co., 522 S.W.3d 583, 596 & n.6 (Tex. App.—Houston [14th Dist.] 2017, pet.
denied). Indeed, Texas courts have consistently considered whether the
parties agreed on the inclusion of a loss payable clause in the insurance policy
in deciding whether to apply the equitable lien doctrine. 2
1 Because this opinion was approved by the Commission of Appeals, it has the “same
force, weight, and effect as the opinions written by the members of the Supreme Court itself.”
Nat’l Bank of Commerce v. Williams, 84 S.W.2d 691, 692 (Tex. 1935).
2 See, e.g., Michael E. Black Profit Sharing Plan v. Stephens, 973 S.W.2d 451, 452–53
(Tex. App.—Amarillo 1998, reh’g overruled) (stating that the third party was a stranger to
the policy unless it showed that the policy was issued after the policyholder agreed to procure
insurance with a loss payable clause in its favor); Cable Commc’ns Network, Inc. v. Aetna
Cas. & Sur. Co., 838 S.W.2d 947, 950 (Tex. App.—Houston [14th Dist.] 1992, no writ)
(“Likewise, if a lessee agrees to obtain insurance on property with loss payable to the lessor
but fails to do so, equity will treat the policy as having contained the loss payable provision
and entitle the mortgagee or lessor to recover under the policy.”); State Farm Fire & Cas. Co.
v. Leasing Enters., Inc., 716 S.W.2d 553, 554 (Tex. App.—Houston [14th Dist.] 1986, writ ref’d
n.r.e.) (“Where a mortgagor or lessee is charged with the duty of obtaining insurance on
property with loss payable to the mortgagee or lessor, but the policy does not contain such a
provision, equity will treat the policy as having contained the loss payable provision . . . .”);
Duval Cty., 663 S.W.2d at 632 (“There is an exception or corollary to this general rule in such
instances as those where a mortgagor or lessee is charged with the duty of procuring such a
policy with loss payable to the mortgagee or lessor, as the case may be.”); Abilene White Truck
Co. v. Petrey, 384 S.W.2d 211, 213 (Tex. Civ. App.—Fort Worth 1964, writ ref’d n.r.e.) (holding
that the equitable lien doctrine applied where the mortgagor “was charged with the duty of
obtaining a policy of insurance with loss payable to the [mortgagee]”); see also Conway v.
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Here, the agreement between Sierra and LWL did not require that LWL
obtain insurance with a loss payable clause to Sierra. 3 And the Lexington
policy does not contain such a clause. Thus, pursuant to Texas case law, Sierra,
who was not a party to the insurance policy, does not have standing to sue
Lexington. 4 On these grounds, the district court’s judgment is AFFIRMED.
Beltline Venture Partners, 2000 WL 254296, at *4 (Tex. App.—Dallas Mar. 8, 2000, no pet.)
(unpublished) (“Where the security agreement requires the mortgagor to have a provision in
the insurance policy that makes the proceeds payable to the mortgagee, equity will treat the
policy as having contained such a provision.”). But see Tillerson v. Highrabedian, 503 S.W.2d
398, 309–400 (Tex. Civ. App.—Houston [14th Dist.] 1973, writ ref’d n.r.e.) (holding, without
considering a possible agreement between the parties on a loss payable clause but where both
parties testified that they considered the non-named insured to be covered by the policy, that
the non-named insured was entitled to the proceeds of the policy).
3 The closest thing Sierra could point to was certain language in the lease agreement
under a section titled “Liability,” which states that “[LWL] shall indemnify and save [Sierra]
harmless from any and all injury to or loss of the Equipment caused by [LWL], but shall be
credited with any amounts received by [Sierra] from insurance procured by [LWL].” As
Sierra admits, this language is not a requirement that LWL obtain insurance with loss
payable to Sierra. In fact, the requirement that LWL obtain insurance is addressed in a
different paragraph of the agreement.
4 It is worth noting that this holding is in contrast with the opinion of at least one
district court in this circuit. See Sentry Select Ins. Co. v. R&R Marine Inc., 2012 WL 252840,
at *4 (E.D. Tex. Jan. 26, 2012) (holding that the party in the position of lessor could maintain
a direct action against the third-party insurer, despite the absence of an agreement to name
the lessor as an additional insured or include a loss payable clause, “[b]ecause the clear intent
of the . . . rental agreement was that [the lessee] obtain insurance for [the lessor’s] benefit”).
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