Charla Aldous, P.C. v. Darwin National Assu , 851 F.3d 473 ( 2017 )

Case: 16-10537 Document: 00513914606 Page: 1 Date Filed: 03/16/2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fif h Circuit
FILED
March 16, 2017
No. 16-10537
Lyle W. Cayce
Clerk
CHARLA ALDOUS; CHARLA G. ALDOUS, P.C., doing business as Aldous
Law Firm,
Plaintiffs - Appellants Cross-Appellees
v.
DARWIN NATIONAL ASSURANCE COMPANY,
Defendant - Appellee Cross-Appellant
Appeals from the United States District Court
for the Northern District of Texas
Before REAVLEY, ELROD, and GRAVES, Circuit Judges.
REAVLEY, Circuit Judge.
Litigation over two trusts begat litigation between the prevailing party,
Albert Hill III, and his attorneys. Appellant Charla Aldous is one of those
attorneys, and she prevailed against her erstwhile client. In addition to
establishing an entitlement to significant attorney’s fees, Aldous and her
cohort also successfully defended against breach of contract and professional
negligence claims, among others. Hill’s claims against the attorneys triggered
insurance coverage provided by appellee Darwin National Assurance, Co.,
Aldous’s insurer. And now, in this third layer of litigation, we confront the
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resulting coverage dispute. Aldous claims Darwin did not pay enough to fully
cover the costs of her defense. Darwin asserts it paid too much.
This case was decided in favor of Darwin on summary judgment. In a
ruling that effectively doomed Aldous’s claims, the district court ruled she was
judicially estopped from claiming defense costs in excess of $668,068.38.
Building on this ruling, the district court further found that Darwin was
entitled to recover “overpayments” on an equitable “money had and received”
theory. Aldous appealed.
In addition to issues raised by the district court’s summary judgment
ruling, we are also called upon to decide whether the district court erred in
partially granting a motion to dismiss brought by Darwin. Lastly, Darwin has
filed a cross-appeal, contending that judgment should not have been granted
in favor of Aldous with respect to a breach of contract claim.
I. BACKGROUND
Along with Lisa Blue and Steve Malouf, Aldous represented Hill in
litigation that resulted in a judgment for their client valued at $114,745,870.
(The association of lawyers Blue, Aldous, and Malouf are hereinafter referred
to as “BAM.”) BAM represented Hill on a contingency basis, but Hill did not
want to pay. Litigation ensued. After BAM sued Hill, Hill counterclaimed,
alleging breach of fiduciary duty, duress, breach of oral contract, fraud, and
professional negligence.
Aldous had a valid professional liability insurance policy through
Darwin (the “Policy”), and Hill’s counterclaims triggered coverage. Blue and
Malouf were also covered under separate policies through separate insurers.
BAM had already retained Alan Loewinsohn to represent its affirmative claims
against Hill and requested that the insurers allow Loewinsohn to handle the
defense as well. The insurers relented. The various parties agreed (and
continue to agree) that Darwin is responsible only for one-third of the covered
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costs of defense; Blue and Malouf (or their insurers) were separately
responsible for their one-third shares.
BAM ultimately prevailed against Hill, securing an award of
$21,942,961 in earned attorney’s fees (offset by $691,175.93), costs of
$479,595.67, and the “reasonable costs and fees in defending against Hill III’s
counterclaims in the amount of $2,586,560.11.” By the time judgment was
entered, Aldous and Darwin were already embroiled in this coverage dispute.
Aldous filed this suit in Texas state court, and it was removed to federal
court on the basis of diversity jurisdiction. As relevant here, Aldous alleged
breach of contract, breach of the duty of good faith and fair dealing, violations
of the Texas Insurance Code, and violations of the Texas Deceptive Trade
Practices Act. She also sought a declaratory judgment that Darwin is liable
for the costs associated with the prosecution of her affirmative claims against
Hill to the extent those affirmative claims were inextricably intertwined with
her defense. Darwin counterclaimed, alleging (among other things) breach of
contract, unjust enrichment, and money had and received. The district court
partially granted a Rule 12(b)(6) motion filed by Darwin, dismissing Aldous’
breach of the duty of good faith and fair dealing claim, as well as a Texas
Insurance Code § 541 claim and the Texas Deceptive Trade Practices Act claim.
Subsequently, the parties filed cross-motions for summary judgment.
On summary judgment, the district court ruled largely in favor of
Darwin. In a ruling with major consequences, the district court ruled that
Aldous was judicially estopped from claiming that the costs in defending
against Hill’s counterclaims exceeded $668,068.38. This ruling meant that
Darwin’s coverage obligations were limited to $222,689.44—one-third of the
total cost to defend. Darwin had paid Aldous far more than that, $502,364.59.
Based on this ruling, Aldous’ breach of contract claim necessarily failed. The
judicial estoppel ruling also meant that Darwin had overpaid, and the district
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court ruled that Darwin could recover this overpayment through an action for
money had and received. The district court further ruled that Aldous was not
entitled to costs related to the prosecution of her affirmative claims against
Hill, even if she could show those affirmative claims were inextricably
intertwined with her defense against Hill’s counterclaims. And, as clarified in
a subsequent order, the district court granted summary judgment against
Darwin with respect to its breach of contract counterclaim, reasoning that the
anti-subrogation rule prevented it from asserting subrogation rights against
its own insured.
II. STANDARD OF REVIEW
Summary Judgment. Summary judgment rulings are subject to de
novo review. Cal-Dive Int’l, Inc. v. Seabright Ins. Co., 627 F.3d 110, 113 (5th
Cir. 2010). “We will affirm the district court’s judgment if no genuine issues of
fact are presented and if judgment was proper as a matter of law.” Id. On
cross-motions for summary judgment, we consider “each party’s motion
independently, viewing the evidence and inferences in the light most favorable
to the nonmoving party.” Morgan v. Plano Indep. Sch. Dist., 589 F.3d 740, 745
(5th Cir. 2009).
Motion to Dismiss. Dismissal for failure to state a claim is also
reviewed de novo. Colony Ins. Co. v. Peachtree Const., Ltd., 647 F.3d 248, 252
(5th Cir. 2011). Dismissal is appropriate if, assuming the truth of all facts
alleged in the complaint, the plaintiff is not entitled to relief as a matter of law.
Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949 (2009); see Fed. R.
Civ. P. 12(b)(6).
III. DISCUSSION
A. Judicial Estoppel
As the parties understand, the district court’s judicial estoppel ruling
had major ripple effects. It is the foundation of the grant of summary judgment
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in favor of Darwin’s equitable claim for relief, and it precludes Aldous from
establishing any breach of contract. As we will see, however, the foundation is
faulty. Application of judicial estoppel was inappropriate.
Texas law governs the substance of this dispute, but “we apply federal
principles of judicial estoppel.” RSR Corp. v. Int’l Ins. Co., 612 F.3d 851, 859
(5th Cir. 2010). There are two basic requirements: “First, it must be shown
that ‘the position of the party to be estopped is clearly inconsistent with its
previous one; and [second,] that party must have convinced the court to accept
that previous position.” 1 Id. (quoting Hall v. GE Plastic Pac. PTE Ltd., 327
F.3d 391, 396 (5th Cir. 2003)). That said, “the Supreme Court has refused to
‘establish inflexible prerequisites or an exhaustive formula for determining the
applicability of judicial estoppel,’ stating instead that different considerations
‘may inform the doctrine’s application in specific factual contexts.’” Reed v.
City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011) (en banc) (quoting New
Hampshire v. Maine, 532 U.S. 742, 751, 121 S. Ct. 1808, 1815 (2001)). Even
when serving as the basis for a summary judgment ruling, a district court’s
judicial estoppel determination is reviewed for abuse of discretion. Kane v.
Nat’l Union Fire Ins. Co., 535 F.3d 380, 384 (5th Cir. 2008). “A district court
abuses its discretion if it misapplies the law or bases its decision upon
erroneous findings of fact.” RSR Corp., 612 F.3d at 859.
After thorough review of the record, we can only conclude that Aldous
never took the position (let alone “clearly”) that her defense costs in the
underlying suit were limited to $668,068.31 and that the prior court never
accepted such a position. The district court’s contrary determination
represents an abuse of discretion.
1 Though not relevant here, we also typically ask whether the party to be estopped
acted inadvertently. Reed v. City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011) (en banc).
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During the prior proceedings, BAM was required to show how much it
expended both in prosecuting its claims against Hill and in defending against
Hill’s counterclaims. The parties stipulated that these attorney’s fees could be
established through declarations, and BAM’s attorney filed a series of relevant
declarations (the “Loewinsohn Declarations”). The first of the declarations
makes it plain that BAM did not claim its costs of defense were limited to
$668,068.31. Therein, Loewinsohn asserted legal fees of $2,054,178.18,
including both affirmative and defensive claims. He expressly declared that
the “fees and expenses can all be allocated either to the prosecution of BAM’s
breach of contract claim or to the defense of the counterclaims and affirmative
defenses asserted by the Hills, which was necessary in BAM’s prosecution of
their claim, or both.”
That first declaration was filed on April 29, 2011. After that day, the
rest of the litigation concerned only Hill’s counterclaims. On June 29, 2011,
Loewinsohn submitted a “supplemental declaration” that further testified that
“for the time period of May 1, 2011 to June 24, 2011, for the defense of the
Counterclaims,” $668,068.31 had been reasonably expended. Then, on
January 9, 2012, he submitted a “second supplemental declaration” which
“incorporated by reference” the first and reiterated his opinion “that an
attorney’s fee, including expenses, of $668,068.31 was a reasonable and
necessary fee for the defense of the Counterclaims.” As can be readily seen,
mere recitation of the Loewinsohn Declarations establishes that Aldous never
claimed that defense costs totaled $668,068.31. Rather, the fees incurred after
April 29 totaled $668,068.31 and were purely defense-related.
Two other notable facts emerge from the declarations and a review of the
prior proceedings. First, the reason that fees incurred after April 29 related
solely to defending against Hill’s claims is that BAM’s affirmative claims had
already been litigated. An evidentiary hearing commencing April 20th
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resolved those claims. Second, the lion’s share of dispositive defense work was
done prior to April 29, as shown by the judge’s ruling that, with one exception,
all of Hill’s counterclaims “were legally barred based on her prior rulings”
stemming from the April 20 hearing. 2
The district court’s ruling contains several errors. Most fundamentally,
the district court unjustifiably read the supplemental declaration in isolation.
It took as Aldous’s binding position that defense costs in the prior proceeding
were incurred only between May 1 and June 24 and that those costs totaled
$668,068.31. To make this large error, the district court was required to make
small antecedent errors.
For example, the district court refused to credit Aldous’s argument that
the first declaration did not segregate fees and therefore included costs related
to defending against Hill. In the district court’s view, this argument was
undercut by the fact that “Loewinsohn segregate[d] the fees associated with
the affirmative and defensive claims in his supplemental and second
supplemental declaration.” Charla G. Aldous, P.C. v. Darwin Nat. Assur. Co.,
92 F. Supp. 3d 555, 566 (N.D. Tex. 2015). Loewinsohn’s newfound ability to
segregate fees is easily explained, however. As mentioned above, after June
29 the only remaining work to be done was defense work.
Further, even the district court’s interpretation of the supplemental
declaration ignores its plain language. The supplemental declaration
establishes fees incurred “for the time period of May 1, 2011 to June 24, 2011.”
2 That is not to say that the lion’s share of defensive costs were necessarily incurred
during that time. The cost of the defense work done during that period is a disputed question
of fact. And, as will be seen later, we reject Aldous’s argument that Darwin must pay all
costs of prosecuting BAM’s affirmative claims to the extent the costs were “inextricably
intertwined” with the defense. It does, however, vindicate Aldous’s position, taken early in
the coverage dispute, that the April 20th hearing, though ostensibly intended only to resolve
BAM’s affirmative claims, would serve as the proving ground for BAM’s defense as well.
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When Aldous pointed out that the declaration was time-limited, the district
court closed its ears and refused to consider the point. See id. at 566 (“The
purpose of judicial estoppel, however, prevents Plaintiffs from taking positions
such as this one.”). As the district court saw it, judicial estoppel itself
precluded Aldous from explaining her prior position. It should go without
saying that judicial estoppel cannot be applied to the question of whether
judicial estoppel applies. Aldous should have been permitted make arguments
reconciling and harmonizing the declarations. 3
We also cannot condone the district court’s approach to the second aspect
of judicial estoppel—whether the first court accepted the prior inconsistent
position. To find judicial estoppel applicable, the district court was required to
find that the prior court accepted $668,068.31 as BAM’s total costs on defense.
Instead, the prior court issued a judgment “[t]hat BAM shall recover from Hill
III its reasonable costs and fees in defending against Hill III’s counterclaims
in the amount of $2,586,560.11.” (Emphasis added.) As Aldous argues, this
single sentence from the judgment demonstrates that judicial estoppel was
improper.
Nonetheless, the district court found that the “record clearly reflects the
court’s acceptance of and reliance on Plaintiffs’ prior position in the Hill
lawsuit.” Charla G. Aldous, P.C., 92 F. Supp. 3d at 568. The evidence cited by
the district court does not show that the prior court accepted $668,068.31 as
3 The district court’s interpretation of the Loewinsohn Declarations requires the
acceptance of a very unlikely fact—that BAM did not spend any resources defending against
the counterclaims until May 1, 2011, even though Hill filed the counterclaims on February
15, 2011. The district court had an explanation: “Hill filed his counterclaims on February 15,
2011, and Aldous provided notice of this counterclaim to Darwin on March 9, 2011. . . . Thus,
Loewinsohn’s estimation that his work for defense occurred between May 1, 2011–June 24,
2011, is not unreasonable, despite Plaintiffs attempt to make it appear so.” 92 F. Supp. 3d at
566–67. Without remarking on whether this reasoning is plausible, we note that it includes
a clear error of fact. Aldous provided notice of the counterclaims to Darwin on February 17,
2011, a mere two days after Hill filed them.
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the full measure of defense costs. It shows the parties agreed “to be bound by
[the prior court’s] attorney’s fees determination” and “agreed that they would
submit the issue of attorney’s fees to [a magistrate judge]; that they could
appeal only to [a district court judge]; and that they would not request an
additional evidentiary hearing before [the district court judge].” Id. The
relevance of this procedural background and summary of the parties’
agreements is unclear. What is clear is that the district court erred in
assessing the evidence.
Judicial estoppel is an equitable doctrine concerned with “judicial
acceptance of an inconsistent position in a later proceeding [that] would create
the perception that either the first or the second court was misled.” Reed
Elsevier, Inc. v. Muchnick, 559 U.S. 154, 170, 130 S. Ct. 1237, 1249 (2010)
(quoting New Hampshire v. Maine, 532 U.S. at 750, 121 S.Ct. at 1815).
Nothing in the judgment issued by the prior court would suggest that Aldous
should not be permitted to claim defense costs in excess of $668,068.31.
Indeed, the judgment suggests defense costs far outpacing that figure. Any
inconsistency of rulings was confected when the district court estopped Aldous
from claiming BAM’s costs on defense exceeded $668,068.31. We now undo
that error. 4
4 Darwin asserts that collateral estoppel also applies because “[t]he amount of fees
and expenses reasonably incurred in the defense of the Fee Counterclaim that was submitted
to Darwin for coverage was distinctly at issue in the Fee Lawsuit, was in fact litigated, and
was determined” in the prior proceedings. Darwin does not point us to the specific ruling it
believes should be given preclusive effect, however. In the ordinary course, if collateral
estoppel were appropriate, we would give preclusive effect to rulings deemed “necessary to
[the] final judgment.” See Duffy & McGovern Accommodation Servs. v. QCI Marine Offshore,
Inc., 448 F.3d 825, 829 (5th Cir. 2006). Here, that would mean Aldous has already
established “reasonable costs and fees in defending against Hill III’s counterclaims in the
amount of $2,586,560.11.” Any different prior-court ruling Darwin may have in mind was
manifestly not essential to the final judgment. Fortunately for Darwin, it is inappropriate to
apply collateral estoppel against a party who did not have a full and fair opportunity to
litigate the question. See Taylor v. Sturgell, 553 U.S. 880, 892, 128 S. Ct. 2161, 2171 (2008).
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B. Aldous’s Claims
1. Breach of Contract
The district court granted summary judgment on Aldous’s breach of
contract claim in part because Aldous had already received from Darwin
payments in excess of its one-third share of $668,068.31 in defense costs. That
logic was predicated on the judicial estoppel ruling and no longer holds. But
the district court also granted summary judgment against Aldous for reasons
beyond the judicial estoppel ruling. Under the district court’s interpretation of
the contract, Darwin “did not breach the contract as a matter of law because
the terms of the Policy provide Defendant with discretion to determine
reasonable claim expenses.” Charla G. Aldous, P.C., 92 F. Supp. 3d at 569. We
cannot agree. Summary judgment should not have been granted against
Aldous on the breach of contract claim.
“Interpretation of an insurance contract is a question of law,” meaning
our review is de novo. Tesoro Ref. & Mktg. Co., L.L.C. v. Nat’l Union Fire Ins.
Co., 833 F.3d 470, 473 (5th Cir. 2016). “Under Texas law, we interpret
insurance policies using the same rules of interpretation and construction
applicable to contracts generally.” Id. at 474. The Policy contains a promise
that Darwin will pay “all” covered “Claim Expenses.” Only “reasonable”
expenses qualify, however, and “[t]he determination by the insurer as to the
reasonableness of Claim Expenses shall be conclusive on all Insureds.” The
district court interpreted these provisions to provide Darwin with a right to
decide how much it wants to pay. And there was no breach, according to the
district court, because Darwin merely exercised that right and did not do so
arbitrarily:
Darwin’s stated reasons for making the deductions demonstrate
that it did not arbitrarily make these deductions but rather made
a determination as to the reasonableness of the Claim Expenses,
as permitted by the Policy, according to reasonable considerations,
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such as its Billing Guidelines and the fact that it did not have a
duty to pay for attorney’s fees associated with BAM’s affirmative
claims.
Charla G. Aldous, P.C., 92 F. Supp. 3d at 571.
Aldous contends that Darwin never made a reasonableness
determination that should now be treated as binding and that the district
court’s interpretation of the Policy renders the duty to defend illusory.
According to Darwin, “the District court determined ‘as a matter of law’ that
Darwin did not breach the Policy in making the reductions, because the Policy
gave Darwin the right to do so,” such that “[e]vidence” of a reasonableness
determination was “unnecessary.” This is an accurate description of the
district court’s ruling, but it proves Aldous’s point. If the Policy provides
Darwin with the unquestionable right to pay only to the extent it pleases, it is
illusory. Accordingly, we agree with both aspects of Aldous’ argument.
Darwin’s right to make a binding determination regarding the
reasonableness of Aldous’s claims would be implicated only if Darwin actually
made a reasonableness determination. Darwin disclaims any obligation to
provide evidence of reasonability and goes further still, asserting that
“[e]vidence showing example of” the challenged “reductions was . . .
unnecessary.” Despite this questionable assertion, it assures us “[t]he
pleadings and evidence are replete with examples of Darwin’s ‘reasonableness’
determinations.” From a record “replete” with examples, however, it gives us
none. Instead, it points us into legal thickets.
For example, Darwin asserts that its reliance on billing guidelines to
categorically exclude certain expenses represents a reasonableness
determination and explains that “Darwin was clear from the beginning that its
consent to Loewinsohn as counsel . . . was conditioned upon ‘adherence to
Darwin’s Billing and Reporting Guidelines.’” The “Billing Guidelines” are not
part of the Policy, and Darwin informed Aldous of its intent to utilize them
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only in a reservation-of-rights letter. But “a unilateral reservation-of-rights
letter cannot create rights not contained in the insurance policy.” Texas Ass’n
of Cntys. Cnty. Gov’t Risk Mgmt. Pool v. Matagorda Cnty., 52 S.W.3d 128, 131
(Tex. 2000). The same is true of the Billing Guidelines themselves. As a
matter of basic contract law, an extra-contractual document—a document to
which Aldous never agreed—cannot limit or define her rights under the Policy.
Baylor Univ. v. Sonnichsen, 221 S.W.3d 632, 635 (Tex. 2007) (identifying
“mutual assent” as a basic component of any contractual agreement); see also
Philadelphia Indem. Ins. Co. v. Chicago Title Ins. Co., Case No. 09 C 7063,
2012 WL 2115487, at *5 (N.D. Ill. June 10, 2012) (rejecting an argument that
“later-provided conditions can govern the amount to which an insured is
entitled when those guidelines were not a part of the original insurance
contract.”).
Darwin also refers us to Aldous’s brief, which assertedly “describes and
cites extensive evidence of reductions Darwin made to defense bills based on
the Billing Guidelines.” Again, reliance on the Billing Guidelines is
problematic under the circumstances. 5 Further, survey of the evidence cited
in Aldous’s brief suggests that Darwin’s reductions were in fact made
arbitrarily and even against the Darwin adjuster’s reasoned judgment.
In correspondence with Aldous, Darwin explained that it reached the
proper sum by applying “Billing Guidelines” calling for certain relatively
modest deductions “off the top.” Far more significant was its next step—simply
cutting the remaining claimed balance in half based on an assumption that
half of the claimed costs were associated with prosecution of Aldous’
affirmative claims and were therefore not covered. It made this “50/50
5In the ordinary case, where the insurer has selected and retained counsel, the Billing
Guidelines may very well have a wholly different and perfectly appropriate application. But
they are not part of the agreement between the insurer and insured.
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reduction” even though Aldous’s invoicing had already been adjusted to
eliminate costs related solely to the affirmative claims. Darwin’s own adjuster
initially opposed cutting Aldous’s claimed costs in this manner, saying such an
approach “would be taking two bites at the apple and would be deducting likely
more than we should.” The adjuster was persuaded to fall into line not by
Darwin officials asserting “reasonableness” but by the insurance companies
representing Blue and Malouf. The record shows that Travelers insurance
company pressed the 50/50 reduction. Further, the Travelers adjuster’s
rationale had nothing to do with a reasonableness determination. Rather, the
evidence indicates that Travelers was still bitter about Loewinsohn’s retention,
reasoned “What’s the harm in trying?,” and “suspect[ed]” the insureds wouldn’t
“quibble over a hundred thousand here or there.”
We do not opine on the general enforceability of the Policy provision at
issue. We hold that it is simply not implicated on these facts, where there is
no evidence that Darwin made any genuine determination as to the
reasonableness of claimed fees and instead slashed the claimed defense costs
arbitrarily. As Aldous argues, under the circumstances, reading the Policy to
effectively immunize Darwin from breach of contract claims would render the
contract illusory. See Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256
S.W.3d 660, 669 (Tex. 2008) (“We cannot adopt a construction that renders any
portion of a policy meaningless, useless, or inexplicable.”). Darwin is not
entitled to summary judgment on Aldous’s breach of contract claim. In ruling
otherwise, the district court erred.
2. Declaratory Judgment
Aldous seeks “a declaration that Darwin was required to pay all of
[Loewinsohn’s] attorneys’ fees and costs that were inextricably intertwined
with her defense and pursuit of her affirmative claim.” In other words, though
the Policy covers only expenses related to the defense against Hill’s claims,
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Aldous seeks to recover fees related to the affirmative prosecution of her
affirmative claims insofar as it can be said the work was “inextricably
intertwined” with the defense. The problem with this argument is that there
is absolutely no support for it.
As a federal court with diversity jurisdiction and an obligation to follow
Texas law, innovation is verboten. Dean v. Dean, 821 F.2d 279, 284 (5th Cir.
1987). No Texas court has ever held that the duty to defend includes the duty
to pay legal fees incurred in the course of prosecuting affirmative claims that
are inextricably intertwined with the defense. Relied upon by Aldous, Zurich
American Insurance Co. v. Nokia, Inc., explains that “[i]f a complaint
potentially includes a covered claim, the insurer must defend the entire suit.”
268 S.W.3d 487, 491 (Tex. 2008). The duty to defend the entire suit does not
give rise to a duty to prosecute claims helpful to or even inextricably
intertwined with that defense, however. Aldous also points to Stewart Title
Guaranty Co. v. Sterling, 822 S.W.2d 1 (Tex. 1991). Stewart Title is concerned
with the circumstances under which a plaintiff seeking attorney’s fees from a
vanquished defendant may also recover attorney’s fees related to defending
against that same defendant’s counterclaims—“when the attorney’s fees
rendered are in connection with claims arising out of the same transaction and
are so interrelated that their ‘prosecution or defense entails proof or denial of
essentially the same facts.’” Id. at 11 (quoting Flint & Assocs. v. Intercont’l
Pipe & Steel, Inc., 739 S.W.2d 622, 624–25 (Tex. App. 1987)). The case has
nothing to do with an insured’s duty to defend and does not support Aldous’
novel argument that the duty to defend may also include a duty to prosecute
integrally related affirmative claims.
Aldous cites no Policy language in support of her argument, which the
district court rightly viewed as an effort to rewrite the agreement. See
Mustang Tractor & Equip. Co. v. Liberty Mut. Ins. Co., Case No. CIV. A. H-91-
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2523, 1993 WL 566032, at *9 (S.D. Tex. Oct. 8, 1993), aff’d, 76 F.3d 89 (5th Cir.
1996) (declining to extend an insurer’s duty to defend to cover prosecution of
defense-minded affirmative claims because, while “the duty to defend is
expansive,” all surveyed “cases uniformly hold that the duty is limited to cases
potentially within the policy coverage”). Aldous is not entitled to the
declarations she seeks, and summary judgment was properly granted against
her on these claims. Based on our rulings thus far, the proper measure of
covered defense costs remains an unsettled question of fact.
3. Breach of the Duty of Good Faith and Fair Dealing
Aldous’s claim for breach of the duty of good faith and fair dealing did
not survive Darwin’s motion to dismiss for failure to state a claim. For over
twenty years, the law in Texas has been clear that an insurer does not owe its
insured “a duty of good faith and fair dealing to investigate and defend claims
by a third party against its insured.” 6 Maryland Ins. Co. v. Head Indus.
Coatings & Servs., Inc., 938 S.W.2d 27, 27 (Tex. 1996). Nonetheless, Aldous
asserts that a failure to provide the required defense may represent a breach
of the duty of good faith and fair dealing. Consistent with Mid-Continent
Casualty. Co. v. Eland Energy, Inc., 709 F.3d 515 (5th Cir. 2013), we reject that
argument.
“Under Texas law, an insurer owes a duty of good faith in handling its
insured’s own claim of loss.” Med. Care Am., Inc. v. Nat’l Union Fire Ins. Co.,
341 F.3d 415, 425 (5th Cir. 2003). But there is no common law duty of good
faith and fair dealing between an insurer and insured with respect to third-
6 Head Industrial has been partially superseded by statue as explained in Chickasha
Cotton Oil Co. v. Houston General Insurance Co. See Case No. 05-00-01789-CV, 2002 WL
1792467, at *7 (Tex. App. 2002). “However, Head Industrial has not been overruled relative
to an insured’s attempt to impose common-law, as opposed to statutory, duties on an insurer
with respect to settling third-party claims.” Methodist Hosp. v. Zurich Am. Ins. Co., 329
S.W.3d 510, 517 n.6 (Tex. App. 2009).
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party claims. Eland Energy, 709 F.3d at 520. The parties agree that the
viability of the cause of action depends on whether Aldous’ claim is classified
as a first-party claim or a third-party claim.
To identify the nature of the claim, it is proper to ask: When the insured
“sought coverage” was it to cover its own loss or the loss of a third party? Id.
at 520–21; see also Lamar Homes, Inc. v. Mid–Continent Cas. Co., 242 S.W.3d
1, 17 (Tex. 2007) (“[A] first party claim is stated when ‘an insured seeks
recovery for the insured’s own loss,’ whereas a third-party claim is stated when
‘an insured seeks coverage for injuries to a third party.’ ” (quoting Universe Life
Ins. Co. v. Giles, 950 S.W.2d 48, 54 n.2 (Tex. 1997))). Here, a third-party (Hill)
allegedly suffered a loss and sued the insured (Aldous), who then sought
coverage from the insurer (Darwin). Viewed this way, this is not a claim
involving the insured’s claim of loss, meaning there is no duty of good faith and
fair dealing between the insurer and insured. See Eland Energy, 709 F.3d at
520.
Aldous attempts to distinguish Eland Energy by creating two categories
of duty-to-defend disputes. In the first batch, you have mishandled defenses,
and Eland Energy fits into this category because there we held that the
plaintiff failed to “show that Texas law recognizes a cause of action for an
insurer’s mishandling of third-party claims.” Id. at 520. In the second batch,
you have failure-to-pay cases, where the insurer did not pay for the defense as
required by law. We cannot accept this distinction because Eland Energy’s
holding is that the duty of good faith and fair dealing simply does not exist in
the present scenario. See id. It would be a strange duty if its existence
depended on whether or how it was violated.
Aldous’s argument, however, is not without force. For in Lamar Homes,
at least for purposes of the Prompt Payment Act, the Supreme Court of Texas
held that “an insured’s claim for defense costs is a first-party claim because it
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concerns a direct loss to the insured; that is, the claim does not belong to a
third party.” 242 S.W.3d at 17. Ultimately, we find Lamar Homes inapt.
Lamar Homes did not hold that a duty of good faith and fair dealing runs
from insured to insurer in circumstances where the duty to defend was
triggered and the insurer failed to adequately cover the defense. Indeed, the
case had nothing to do with the duty of good faith and fair dealing and
concerned statutory, rather than common law, duties. It would be odd if a
ruling on the Prompt Payment Act dramatically affected the common law
duties of insurers. Lamar Homes, 242 S.W.3d at 16 (describing the issue
presented as “whether the ‘Prompt Payment of Claims’ statute . . . applies to
an insurer’s breach of the duty to defend”). It would be odder still if the catalyst
for that change in the law was the Texas legislature’s decision to add the term
“first-party claim” to the Prompt Payment Act. See id. at 24 (Brister, J.
dissenting) (noting the addition of the phrase in 1991).
Notably, Aldous has pointed to no Texas courts interpreting Lamar
Homes to revise the common law duties of insurers in the manner for which
she advocates. Most courts that have considered the possibility have rejected
it. 7 Further, under Aldous’s view, the duty of good faith and fair dealing only
exists (and is violated) when the duty to defend has also been breached. In
rejecting this theory, we follow the Supreme Court of Texas’ pertinent
instructions. See Head Industrial, 938 S.W.2d at 28–29 (“[A]n insured is fully
7 See Allied World Specialty Ins. Co. v. Freese & Goss, PLLC, Case No. 3:15-CV-02792-
N, 2016 WL 6581922, at *3 (N.D. Tex. July 1, 2016) (“Lamar Homes . . . only interpreted the
meaning of a ‘first-party claim’ within the context of the Texas prompt payment statute.”);
One Beacon Ins. Co. v. T. Wade Welch & Assocs., Case No. CIV.A. H-11-3061, 2012 WL
2403500, at *6 (S.D. Tex. June 25, 2012) (“[T]he Texas Supreme Court was construing what
the Texas Legislature meant for the statute to cover, not re-writing all of its prior caselaw
relating to insurers' common law duties.”). But see Corinth Inv’rs Holdings, LLC v. Evanston
Ins. Co., Case No. 4:13-CV-682, 2014 WL 4222168, at *11 (E.D. Tex. Aug. 25, 2014).
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protected against his insurer’s refusal to defend or mishandling of a third-party
claim by his contractual and Stowers rights.”).
4. Aldous’s Remaining Claims
Aldous’s claims based on the Texas Insurance Code and Deceptive Trade
Practices Act are barred as a matter of law under Parkans International LLC
v. Zurich Ins. Co., 299 F.3d 514 (5th Cir. 2002). Under Parkans, “[t]here can
be no recovery for extra-contractual damages for mishandling claims unless
the complained of actions or omissions caused injury independent of those that
would have resulted from a wrongful denial of policy benefits.” Id. at 519. We
are not at liberty to second-guess this ruling. See Jacobs v. Nat’l Drug
Intelligence Ctr., 548 F.3d 375, 378 (5th Cir. 2008).
C. Darwin’s Claims
1. Money Had and Received/Equitable Reimbursement
In light of our judicial estoppel ruling, the district court’s grant of
summary judgment on Darwin’s claim for money had and received cannot
stand. Aldous argues that judgment was improper for another reason: under
Texas law, an insurer has no right of equitable reimbursement against its
insured. For the reasons that follow, as a federal court exercising diversity
jurisdiction, we cannot endorse the district court’s recognition of an insurer’s
previously unannounced equitable right of recovery against its insured.
In the words of the district court, an insurer “is entitled to recover to the
extent it made overpayments,” and overpayments are payments made but not
actually required “under the insurance contract.” Aldous v. Darwin Nat.
Assur. Co., Case No. 3:13-CV-3310-L, 2015 WL 1879677, at *5 (N.D. Tex. Apr.
24, 2015). Under this approach, an insurer that makes payments under a
policy while coverage is disputed can sue its insured, claiming a right to
equitable reimbursement if the coverage dispute is resolved in its favor. And,
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because the claim is equitable in nature, the insurer need not point to any
policy provision granting the right. Rather, the right exists by default.
Under Texas law, if an insurance company disputes coverage with its
insured but nonetheless settles the action on the insured’s behalf, there is no
right to equitable reimbursement if the third party’s claims are later
determined to be uncovered by the policy. Matagorda County, 52 S.W.3d at
135. This is true even where the insurer has provided coverage under a
reservation of rights. Id. at 131. But nothing stops insurers from including a
right to reimbursement in its Policy or obtaining “the insured’s clear and
unequivocal consent to the settlement and the insurer’s right to seek
reimbursement.” Id. at 135. The Supreme Court of Texas later described
Matagorda County broadly, as a case “declining to recognize an implied-in-fact,
an implied-in-law, or an equitable reimbursement right outside of the
insurance policy’s provisions.” Excess Underwriters at Lloyd’s, London v.
Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 45 (Tex. 2008).
Under the broad reading of Matagorda County suggested by Frank’s
Casing, Darwin has no equitable reimbursement right outside of the insurance
policy’s provisions. Both of those cases, however, apply where an insurer
“settles a claim against its insured when coverage is disputed.” See id. at 43.
And much of their reasoning is specifically tailored to that scenario. See id. at
46. (“Our analysis in Matagorda County highlighted the dilemma faced by both
insurer and insured when a claimant presents a settlement demand within
policy limits and coverage is uncertain.”). Thus, those cases strongly suggest
(but do not necessarily dictate) that insurers have no right to equitable
reimbursement of costs expended in defending an insured where coverage
exists but the scope of the duty to defend is disputed and later resolved in favor
of the insurer. See Am. Int’l Specialty Lines Ins. Co. v. Rentech Steel LLC, 620
F.3d 558, 564 (5th Cir. 2010) (“In making our Erie guess, we look first to those
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Texas Supreme Court cases that, while not deciding the issue, provide
guidance as to how the Texas Supreme Court would decide the question before
us.”).
The district court did not give due regard to Frank’s Casing and
Matagorda County. Moreover, instead of basing its decision on Texas law, the
district court relied primarily on Fifth Circuit cases that were not applying
Texas law. See Charla G. Aldous, P.C., 92 F. Supp. 3d at 573 (relying on United
States v. St. Bernard Par., 756 F.2d 1116, 1127 (5th Cir. 1985) (applying federal
law), Peavey Co. v. M/V ANPA, 971 F.2d 1168, 1176 (5th Cir. 1992) (applying
Louisiana law), and Adams v. Unione Mediterranea Di Sicurta, 364 F.3d 646,
656 (5th Cir. 2004) (applying federal admiralty and maritime law). Its
subsequent “Supplemental Memorandum Opinion and Order” further reveals
that the district court’s ruling lacked a basis in Texas law. The district court
recognized that federal courts have permitted “restitution for overpayment as
a means of recovery under ERISA” and concluded that, “[b]y analogy, the
reasons for allowing recovery for overpayments in the context of ERISA are
applicable to the court’s decision today, as the concerns also pertain to
contracts for liability insurance.” See Aldous, 2015 WL 1879677, at *5. Federal
courts are not to make state law, and certainly not “by analogy” to federal law.
See Erie R. Co. v. Tompkins, 304 U.S. 64, 69, 58 S. Ct. 817, 818 (1938) (“There
is no federal general common law. Congress has no power to declare
substantive rules of common law applicable in a state . . . . And no clause in
the Constitution purports to confer such a power upon the federal courts.”).
The district court’s Supplemental Memorandum Opinion and Order also
included citations to Texas cases. While the district court sharpened its
analytical focus, the cases cited do not support its conclusion. The district court
relied on Fortune Production Co. v. Conoco, Inc., 52 S.W.3d 671 (Tex. 2000),
and Southwest Electric Power Co. v. Burlington Northern R.R. Co., 966 S.W.2d
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467 (Tex. 1998). We reject application of those cases for the simple reason that
they do not involve contracts for insurance. See Miga v. Jensen, 299 S.W.3d
98, 103 (Tex. 2009).
As plaintiff, Dennis Miga had initially been very successful in litigation
against Ronald Jensen, securing a judgment in excess of $20 million that was
largely upheld on appeal. Id. at 100. Because interest was accruing at an
alarming rate, Jensen paid the judgment just prior to filing a petition for
review with the Supreme Court of Texas. Id. Texas’ highest court then sided
with Jensen on the merits, again rendering judgment in favor of Miga but in
an amount just over $1 million. Id. at 101. Miga took the position that the
reversal had no financial consequences and denied any obligation to repay the
$21,560,150.67 he had received beyond the proper, adjusted judgment amount.
Id. Jensen then filed suit for restitution, and the case again wound up before
the Supreme Court of Texas, which applied the “restitution-after-reversal rule”
and held in Jensen’s favor. Id. at 101–02.
Miga argued that Frank’s Casing (which the Supreme Court of Texas
described broadly as a case “in which we declined to recognize an equitable
right of reimbursement”) should apply and bar Jensen’s claim. The argument
was rejected:
This case involves restitution upon reversal of a judgment, not
insurers seeking restitution from an insured on a third-party
claim, against the backdrop of a highly regulated industry. . . .
Restitution in insurance-related cases involves policy concerns not
present here:
[D]isputes between insurers and policyholders over the
insurer’s duty to pay a claim, or to settle or defend a claim
brought against the policyholder, present special difficulties
for the law of restitution, because the insurer’s duty to
indemnify and defend is subject to extensive regulation
under local law.
Id. (quoting Restatement (Third) § 35, cmt. c. (Tentative Draft No. 3, 2004)).
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Miga suggests that an “equitable right to reimbursement” does not exist
at all in the context of insurance cases. It shows that recognition of such a
right would be only proper after a thorough and conscientious review of Texas’
regulatory scheme in light of the unique “policy concerns” implicated. And it
firmly establishes that we cannot look to generic contract cases when trying to
identify equitable rights of insurers against their insureds.
In light of Matagorda County, Frank’s Casing, Miga, and our constrained
role, our obligation is clear. We have been asked to recognize, as a matter of
Texas law, an insurer’s right to equitable reimbursement for “overpayments”
of defense costs. But “it is not for us to adopt innovative theories of recovery
for Texas law.” Dean, 821 F.2d at 284. Summary judgment should have been
granted in favor of Aldous with respect to Darwin’s claims for equitable
reimbursement (however denominated). 8
2. Breach of Contract
Darwin also seeks the return of money that was not overpaid but that
was properly paid. Darwin believes the legal fees Hill paid directly to Aldous
should have instead been paid directly to Darwin, at least in a measure
commensurate with the legal fees Darwin spent on Aldous’s behalf. This
scenario seems ready-made for subrogation. See Fortis Benefits v. Cantu, 234
S.W.3d 642, 645 (Tex. 2007) (explaining how subrogation rights “prevent the
insured from receiving a double recovery, first from the insurer, then from the
third party”). Darwin paid at least some measure of Aldous’s legal fees, and
Aldous then recovered legal fees from Hill. Understandably, Darwin thinks it
is entitled to some of the money paid by Hill. 9
8 Based on this holding, we do not need to reach Aldous’s argument that the district
court misapplied the law relating to claims for money had and received.
9 Aldous contends that allegations of a windfall recovery are “repudiated by the
evidence” because she “invested over $1.1 million of her own resources” in prevailing against
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For whatever reason, however, Darwin did not seek subrogation against
Hill. That is, it did not intervene in the prior litigation, step into the shoes of
Aldous, and assert (for its own benefit) Aldous’s right to attorney’s fees against
Hill. Darwin concedes that it cannot assert subrogation rights against Aldous,
its own insured. This result follows from the very nature of subrogation rights.
As a “purely conceptual” matter, an insurer cannot be subrogated against “an
insured because an insurer who seeks subrogation stands in the shoes of the
insured.” State Farm Mut. Auto. Ins. Co. v. Perkins, 216 S.W.3d 396, 401 (Tex.
App. 2006). “Because a person cannot sue himself for damages, that person’s
insurer, who stands in the person’s shoes for subrogation purposes, cannot sue
the person either.” Id.
According to Darwin, this analysis misses the point. Darwin isn’t
seeking to assert subrogation rights. Rather, Darwin is alleging Aldous
violated the terms of the Policy—ordinary breach of contract. Thus, Darwin
argues it “had a subrogation right against Hill as a result of its payments on
Aldous’ behalf, and Aldous impaired Darwin’s subrogation rights by
successfully suing Hill for money paid by Darwin that Aldous recovered and
then withheld.” Or, as stated in the reply brief, “Darwin had the right to step
into Aldous’ shoes to recover the defense fees it paid against Hill, but is not
attempting to do so in this lawsuit because Aldous prevented it from doing so.”
Thus, with its contract claim, Darwin is attempting to belatedly achieve the
same ends it should have achieved through subrogation. Its labored argument
fails.
The relevant Policy provision provides:
The Insurer shall be subrogated to all Insureds’ rights of
recovery against any person or organization. All Insureds shall
Hill. In deciding this appeal, we need not determine whether she stands to double-recover
or whether such a result would be permissible in this case.
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assist the Insurer in effecting any rights of indemnity,
contribution and apportionment available to any Insured,
including the execution of such documents as are necessary to
enable the Insurer to pursue claims in the Insureds’ names and
shall provide all other assistance and cooperation which the
Insurer may reasonably require. All Insureds shall cooperate
with the Insurer and do nothing to jeopardize, prejudice or
terminate in any way such rights.
The Insurer shall not exercise any such rights against any
Insureds except as provided herein. Notwithstanding the
foregoing, however, the Insurer reserves the right to exercise any
rights of subrogation against any Insured with respect to any
Claim brought about or contributed to by the intentional,
criminal, fraudulent, malicious or dishonest act or omission of such
Insured.
The Policy provides Darwin with subrogation rights, but Aldous did not
breach the Policy by seeking attorney’s fees against Hill. Indeed, she arguably
assisted Darwin, who could have benefited from the adjudication. 10 Darwin
should have asserted its subrogation rights against Hill. See, e.g., Fortis
Benefits, 234 S.W.3d at 648; Ortiz v. Great S. Fire & Cas. Ins. Co., 597 S.W.2d
342, 343 (Tex. 1980). Instead, it sat on its rights and, after being sued, brought
claims directly against its insured. As the district court stated, “[Darwin]
provides no case law to support a conclusion that receiving a judgment for
attorney’s fees is tantamount to jeopardizing, prejudicing, or terminating
Darwin’s subrogation rights.” 11 Aldous, 2015 WL 1879677, at *2.
10If anything, Darwin’s inaction is problematic. See Ortiz v. Great S. Fire & Cas. Ins.
Co., 597 S.W.2d 342, 344 (Tex. 1980) (“[W]hen an insurer does not assist in the collection of
damages from the third party tortfeasor, it must pay its share of the costs and expenses
incurred in obtaining recovery from the third party, including attorney fees.”).
11 In Fortis Benefits, the insurance policy at issue included a “Right of
Reimbursement,” which provided, in pertinent part: “If benefits are paid under this plan, and
any Covered Person recovers against any person or organization by settlement, judgment or
otherwise, We have a right to recover from that Covered Person an amount equal to the
amount We have paid.” Fortis Benefits, 234 S.W.3d at 645 n.11. Darwin has not claimed any
contractual right to reimbursement and yet essentially seeks the same end. “[I]nsurers are
well equipped to evaluate and reduce risk by, for example, ‘drafting policies to specifically
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IV. CONCLUSION
The district court’s judgment is REVERSED and, with respect to
Darwin’s breach of contract and equitable claims, ruled in favor of Aldous. The
case is REMANDED for proceedings consistent with this opinion.
provide for reimbursement,’” and we will not rewrite the contract to grant Darwin rights
beyond those it included in the contract. Id. at 649 (quoting Matagorda County, 52 S.W.3d at
136).
25