United States District Court,
N.D. Texas,
Dallas Division.
CENTEX HOMES, a Nevada
General Partnership, Plaintiff,
v.
LEXINGTON INSURANCE COMPANY, Defendant.
No. 3:13–cv–719–BN. | Signed
March 24, 2014. | Filed March 25, 2014.

Opinion
MEMORANDUM OPINION & ORDER ON
DEFENDANT’S MOTION FOR PARTIAL
SUMMARY JUDGMENT REGARDING
RIGHT TO CONTROL DEFENSE
DAVID L. HORAN, United States Magistrate Judge.
*1 Defendant Lexington Insurance Company (“Defendant”
or “Lexington”) has filed a motion for partial summary
judgment. See Motion for Partial Summary Judgment
regarding Right to Control Defense [Dkt. No. 43]. Plaintiff
Centex Homes (“Plaintiff” or “Centex”) filed a Response
[Dkt. Nos. 60 & 61], and Defendant filed a Reply [Dkt. No.
67].
Plaintiff also filed a motion to strike evidence submitted by
Defendant with its reply, see Dkt. No. 68, to which Defendant
filed no response. No response having been filed, and the
Court having not considered any of the evidence in reaching
its decision, Plaintiff’s motion to strike [Dkt. No. 68] is
DENIED as moot.
The Court makes the following rulings with respect to
Defendant’s Motion for Partial Summary Judgment.
Background
This case involves a coverage dispute between an insured and
insurer. Plaintiff is primarily in the business of designing,
developing, and constructing condominiums and other
housing complexes throughout the country. See Dkt. No. 66
at 2. In constructing these condominium projects, Plaintiff
purchases “wrap” insurance policies that cover Plaintiff as
a general contractor and all subcontractors performing work
in connection with the insured project. See id. at 3. Plaintiff
purchased five such wrap policies from Defendant, but only
two of these policies are at issue in Defendant’s Motion for
Partial Summary Judgment, so the Court will only summarize
the facts related to the two relevant policies.
The following facts are undisputed. The Element
Development Project (“Element”) involves an eight-story
condominium built by Plaintiff in San Diego, California. See
Dkt. No. 66 at 3. Plaintiff purchased a “wrap” policy on
the Element Project (the “Element Policy”). See id. Under
the Element Policy, there is an “each occurrence” limit
of $5,000,000 and a “Retained Amount” of $500,000 for
“each occurrence.” See Dkt. No. 63–2 at 1. In other words,
Defendant is not obligated to make any payments under
the Element Policy until Plaintiff has reached its Retained
Amount of $500,000. The Element Policy mandated a “Joint
Defense Approach,” which reflects that the named insured
would cooperate with Defendant in connection with the
investigation, defense, and resolution of any occurrence,
offense, claim, or suit under the Policy. See Dkt. No. 43–1
at 65. In April 2009, members of the Element Homeowners’
Association filed suit in California against Plaintiff (the
“Element Litigation”) for several causes of action, including
construction defects. See id. at 4; Dkt. No. 63–5 at 1 (Second
Amended Complaint in Element Litigation). Plaintiff and
Defendant offer different accounts as to what transpired after
the Element Litigation was filed, as detailed below.
The Astoria Development Project (“Astoria”) involves a
15–building condominium project located in Sacramento,
California. See Dkt. No. 66 at 5. Plaintiff purchased a
“wrap” policy on the Astoria Project (the “Astoria Policy”).
See Dkt. No. 66 at 3. Under the Astoria Policy, there is
an “each occurrence” limit of $5,000,000 and a “Retained
Amount” of $150,000 for “each occurrence.” See Dkt. No.
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63–2 at 1. In other words, Defendant is not obligated to make
any payments under the Astoria Policy until Plaintiff has
reached its Retained Amount of $150,000. The Astoria Policy
also mandated a “Joint Defense Approach,” which reflects
that the named insured would cooperate with Defendant in
connection with the investigation, defense, and resolution
of any occurrence, offense, claim, or suit under the Policy.
See Dkt. No. 43–1 at 22. In February 2011, members of the
Astoria Owners’ Association filed suit in California against
Plaintiff (“Astoria Litigation”) for several causes of action,
including construction defects. See Dkt. No. 43–1 at 85.
Plaintiff and Defendant offer different accounts as to what
transpired after the Astoria Litigation was filed, as detailed
below.
*2 Plaintiff and Defendant disagree with respect to the
following: Plaintiff’s exhaustion of the retention amounts
under the Policies; the timing of Defendant’s agreement
to provide a defense; Defendant’s reservation of rights
explanation; Defendant’s payment of defense costs; and
when Defendant provided notification that Plaintiff’s selected
counsel—Newmeyer & Dillion—was not acceptable.
Defendant claims that Plaintiff did not provide the proof
of its payment and satisfaction of the applicable Retained
Amounts for both the Astoria Litigation and Element
Litigation (collectively, the “Underlying Litigation”), as
required under the Policies, until much later than Plaintiff
claims that it did. See Dkt. No. 43 at 5. Defendant further
contends that it immediately told Plaintiff that it would not
agree to Newmeyer & Dillion’s continuing its representation
of Plaintiff in the Underlying Litigation and that this
information is covered in its Claim Account Instructions,
which Defendant provided to its insureds. See Dkt. No. 43–
1 at 119–136. Defendant takes the position that, in the face
of Defendant’s stance on legal counsel, Plaintiff refused to
switch counsel in violation of Plaintiff’s obligations under the
Element and Astoria Policies. See Dkt. No. 43–1 at 140–142.
Plaintiff counters that it properly provided Defendant with
notice of the Underlying Litigation and that, in that timely
notice, Plaintiff informed Defendant that Newmeyer &
Dillion was acting as counsel. See Dkt. No. 63–4 at 75 (¶¶ 9–
11) (Element); Dkt. No. 63–6 at 23 (Astoria). Plaintiff claims
that it provided the proof of its payment and satisfaction
of the applicable Retained Amounts sooner than Defendant
alleges: April 2012 for Astoria, see Dkt. No. 63–6 at 35, and
November 15, 2011 for Element, see Dkt. No. 63–3 at 90.
Plaintiff contends that Defendant did not agree to defend the
Astoria Litigation until November 2012, see Dkt. No 63–1 at
4 (¶ 20), and did not agree to defend the Element Litigation
until April 2012, see id. at 5 (¶ 31). Plaintiff reports that
Defendant made no payments on the Astoria Litigation until
April 2013 and did not provide a reservation of rights until
October 2013. See Dkt. No. 63–1 at 3 (¶ 18). As for the
Element Litigation, Plaintiff states that Defendant made no
payments until April 2013 and did not provide a reservation of
rights until April 2012. See Dkt. No. 63–1 at 6 (¶ 33); Dkt. No.
63–3 at 52–89. Plaintiff contends that Defendant has not made
all payments required under the Policies and has improperly
refused to let Plaintiff select its defense counsel.
Plaintiff brought this lawsuit against Defendant on January
10, 2013 in Texas state court. See Dkt. No. 1. The case
was removed to this Court. Plaintiff asserts several causes
of action, which Defendant denies. Defendant also brings
counterclaims, including the declaratory judgment action on
which it now seeks summary judgment.
Legal Standards
*3 Under Fed.R.Civ.P. 56, summary judgment is proper
“if the movant shows that there is no genuine dispute as to
any material fact and the movant is entitled to judgment as
a matter of law.” FED. R. CIV. P. 56(a). A factual “issue
is material if its resolution could affect the outcome of the
action.” Weeks Marine, Inc. v. Fireman’s Fund Ins. Co., 340
F.3d 233, 235 (5th Cir.2003). “A factual dispute is ‘genuine,’
if the evidence is such that a reasonable [trier of fact] could
return a verdict for the nonmoving party.” Crowe v. Henry,
115 F.3d 294, 296 (5th Cir.1997).
If the moving party seeks summary judgment as to his
opponent’s claims or defenses, “[t]he moving party bears the
initial burden of identifying those portions of the pleadings
and discovery in the record that it believes demonstrate the
absence of a genuine issue of material fact, but is not required
to negate elements of the nonmoving party’s case.” Lynch
Props., Inc. v. Potomac Ins. Co., 140 F.3d 622, 625 (5th
Cir.1998). “Once the moving party meets this burden, the
nonmoving party must set forth”—and submit evidence of
—“specific facts showing a genuine issue for trial and not rest
upon the allegations or denials contained in its pleadings.” Id.;
Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir.1994)
(en banc).
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The Court is required to view all facts and draw all reasonable
inferences in the light most favorable to the nonmoving party
and resolve all disputed factual controversies in favor of the
nonmoving party—but only if both parties have introduced
evidence showing that an actual controversy exists. See
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct.
2505, 91 L.Ed.2d 202 (1986); Boudreaux v. Swift Transp.
Co., Inc., 402 F.3d 536, 540 (5th Cir.2005); Lynch Props.,
140 F.3d at 625. “Unsubstantiated assertions, improbable
inferences, and unsupported speculation are not sufficient
to defeat a motion for summary judgment,” Brown v. City
of Houston, 337 F.3d 539, 541 (5th Cir.2003), and neither
will “only a scintilla of evidence” meet the nonmovant’s
burden, Little, 37 F.3d at 1075. Rather, the non-moving party
must “set forth specific facts showing the existence of a
‘genuine’ issue concerning every essential component of its
case.” Morris v. Covan World Wide Moving, Inc., 144 F.3d
377, 380 (5th Cir.1998). If, “after the nonmovant has been
given an opportunity to raise a genuine factual issue,” “the
record, taken as a whole, could not lead a rational trier of fact
to find for the non-moving party, then there is no genuine
issue for trial.” DIRECTV, Inc. v. Minor, 420 F.3d 546,
549 (5th Cir.2005); Steadman v. Texas Rangers, 179 F.3d
360, 366 (5th Cir.1999). The Court will not assume “in the
absence of any proof … that the nonmoving party could or
would prove the necessary facts” and will grant summary
judgment “in any case where critical evidence is so weak
or tenuous on an essential fact that it could not support a
judgment in favor of the nonmovant.” Little, 37 F.3d at 1075.
“Rule 56 does not impose upon the district court a duty to
sift through the record in search of evidence to support a
party’s opposition to summary judgment,” and “[a] failure on
the part of the nonmoving party to offer proof concerning
an essential element of its case necessarily renders all other
facts immaterial and mandates a finding that no genuine issue
of fact exists.” Adams v. Travelers Indem. Co. of Conn.,
465 F.3d 156, 164 (5th Cir.2006) (internal quotation marks
omitted).
*4 If, on the other hand, “the movant bears the burden of
proof on an issue, either because he is the plaintiff or as
a defendant he is asserting an affirmative defense, he must
establish beyond peradventure all of the essential elements
of the claim or defense to warrant judgment in his favor.”
Fontenot v. Upjohn Co. ., 780 F.2d 1190, 1194 (5th Cir.1986).
The “beyond peradventure” standard imposes a “heavy”
burden. Cont’l Cas. Co. v. St. Paul Fire & Marine Ins. Co.,
No. 3:04–cv–1866–D, 2007 WL 2403656, at *10 (N.D.Tex.
Aug.23, 2007). The moving party must demonstrate that there
are no genuine and material fact disputes and that the party
is entitled to summary judgment as a matter of law. See,
e.g., Martin v. Alamo Cmty. Coll. Dist., 353 F.3d 409, 412
(5th Cir.2003). On such a motion, the Court will, again,
“draw all reasonable inferences in favor of the non-moving
party.” Chaplin v. NationsCredit Corp., 307 F.3d 368, 372
(5th Cir.2002).
Analysis
Lexington moves for summary judgment on Count One of
its counterclaims, which seeks declaratory judgment on the
following three issues: (a) Defendant has the right to control
the defense of Centex in the Astoria and Element Litigation;
(b) Plaintiff is not entitled to the appointment of independent
counsel under California Civil Code § 2860; and (c) Plaintiff
breached its duty to cooperate under the Astoria Policy and
Element Policy by refusing to acknowledge that Defendant
had a right to control the defense and select counsel and
by insisting that Defendant continue to pay Newmeyer &
Dillion’s fees and costs.
As an initial matter, the parties disagree as to whether
California or Texas law applies to Defendant’s declaratory
judgment claims. Defendant argues that California law
applies and that, under California Civil Code section 2860,
Plaintiff was not entitled to independent counsel. See Dkt. No.
43; Dkt No. 67. Plaintiff contends that Texas law applies and
that, under Texas law, Plaintiff was entitled to independent
counsel. See Dkt. No. 61. Both parties argue that, even if the
other jurisdiction’s law applies, its position is correct.
Because the parties disagree on which law applies, and on
whether the outcome under each law differs, the Court must
first undertake a choice-of-law analysis. Once the choiceof-
law analysis is complete, the Court will turn to whether
summary judgment is appropriate on any of Defendant’s
declaratory judgment causes of action.
1. Texas Law Applies to Defendant’s Declaratory
Judgment Claims Regarding Right to Control and
Selection of Independent Counsel.
Before deciding which state’s substantive law should control
the issues raised by the parties here, “the Court must first
determine which choice-of-law rules should be applied.” In
re Soporex, Inc. ., 446 B.R. 750, 761 (Bankr.N.D.Tex.2011).
Here, both parties assert that Texas choice-of-law rules should
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determine the applicable laws in this case. See Dkt. No. 43 at
8–9; Dkt. No. 61 at 20–21.
*5 Texas courts utilize the “most significant relationship”
test to determine which state’s law applies to a particular
substantive issue. See Coghlan v. Wellcraft Marine Corp.,
240 F.3d 449, 452 n. 2 (5th Cir.2001) (citing Duncan v.
Cessna Aircraft Co., 665 S.W.2d 414, 421 (Tex.1984)). This
test is based on the Restatement (Second) of Conflict of
Laws and utilizes a multi-factor methodology to determine
which state has the most significant relationship to the
substantive issues involved in a dispute. See Duncan, 665
S.W.2d at 421. Deciding which state’s laws should govern
an issue “is a question of law for the court to decide.”
Hughes Wood Products, Inc. v. Wagner, 18 S.W.3d 202,
204 (Tex.2000) (citing Duncan, 665 S.W.2d at 421); see
also McKinney BB v. U.S. Realty Advisors, LLC, No. 01–
11483, 2003 U.S.App. LEXIS 28011, at *18 (5th Cir. Jan.
24, 2003) (“[T]he question of which state’s law to apply
is a question of law.”); Janvey v. Suarez, No. 3:10–cv–
2581–N, 2013 WL 5663107, at *3 (N.D.Tex. Oct.17, 2013).
But this legal determination involves a factual inquiry. See
Hughes Wood Products, 18 S.W.3d at 204; Janvey, 2013
WL 5663107, at *3. That is, “the party urging application of
another state’s substantive law [must] furnish the Court with
‘sufficient information’ to establish that the law of another
state applies.” Janvey v. Alguire, 846 F.Supp.2d 662, 671
(N.D.Tex.2011) (quoting Holden v. Capri Lighting, Inc., 960
S.W.2d 831, 833 (Tex.App.-Amarillo 1997, no pet.)) (internal
quotations omitted). Absent such sufficient information, “
‘the failure to provide adequate proof of choice of law …
results in a presumption that the law of the foreign jurisdiction
is identical to the law of Texas.’ ” Id. (quoting Pittsburgh
Corning Corp. v. Walters, 1 S.W.3d 759, 769 (Tex.App.-
Corpus Christi 1999, pet. denied)) (internal brackets omitted).
When two states’ laws are substantially the same, this
precludes the need to undertake a choice-of-law analysis. See
Lexxus Int’l, Inc. v. Loghry, 512 F.Supp.2d 647, 668 n. 17
(N.D.Tex.2007); cf. Fraud–Tech, Inc. v. Choicepoint, Inc.,
102 S.W.3d 366, 377–78 (Tex.App.-Fort Worth 2003, pet.
denied) (“Before undertaking a choice of law analysis, we
look to whether a conflict of law exists. If no conflict exists on
the issues, we need not decide which state’s laws govern.”).
Because no choice-of-law analysis would be required if
California and Texas law were consistent on the issues, the
Court must first determine if the laws of each jurisdiction
differ with respect to (1) duty to defend, and by extension
duty to control the defense, and (2) the independent counsel
analysis.
a. Duty to Control the Defense.
Neither party appears to dispute the allegation that Defendant
had a duty to defend the lawsuit, subject to Defendant’s
reservation of rights. See Dkt. No. 117 at 2–3. Under Texas
law, once the insured has a duty to defend, included in
that duty right is the right to control the defense and to
select counsel. See N. County Mut. Ins. Co. v. Davalos, 140
S.W.3d 685, 688 (Tex.2004) (finding that an insurer’s “right
to defend” a lawsuit encompasses “the authority to select
the attorney who will defend the claim and to make other
decisions that would normally be vested in the insured as the
named party in the case.”). Similarly, under California law,
if an insurer has a duty to defend, it may control the defense,
including the selection of counsel. See Safeco Ins. Co. of Am.
v. Sup.Ct., 71 Cal.App.4th 782, 787, 789–90, 84 Cal.Rptr.2d
43 (Cal.Ct.App.1999).
*6 But Plaintiff contends that summary judgment is
not warranted on Defendant’s declaratory judgment count
regarding duty to control because, at the least, there is a
fact issue regarding whether Defendant breached its duty
to defend by its unreasonable delay in accepting its duty
to defend, paying Plaintiff’s defense costs, and/or providing
Defendant’s coverage position with respect to the Underlying
Litigation, see Dkt. No. 66 at 11–12, in which case Defendant
had no right to control the defense or select counsel. The
choice-of-law issue with respect to duty to defend, then, is
whether Texas and California law are consistent with respect
to what constitutes a breach of a duty to defend and whether a
breach of a duty to defend forfeits the insured’s right to control
the defense.
Under California law, when the insured breaches its duty to
defend, it forfeits its right to control the defense of the action
or settlement. See Intergulf Dev. v. Sup.Ct., 183 Cal.App.4th
16, 20–21, 107 Cal.Rptr.3d 162 (Cal.Ct.App.2010). An
insurer will breach its duty to defend where it unreasonably
fails to provide benefits due under the policy, such as
providing counsel. See id.; Dynamic Concepts v. Truck
Ins. Exch., 61 Cal.App.4th 999, 1010, 71 Cal.Rptr.2d 882
(Cal.Ct.App.1998). Similarly, under Texas law, where a
breach of the duty to defend is caused by an unreasonable
delay, the insurer forfeits its right to defend and, by extension,
its right to select the counsel of its choosing. See Kirby Co.
v. Hartford Casualty Ins. Co., No. 3:02–cv–1616, 2004 WL
2165367, at *4 (N.D.Tex. Sept.23, 2004) (citing Rhodes v.
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Chicago Ins. Co., 719 F.2d 116, 120 (5th Cir.1983)). Thus,
the laws of each jurisdiction are consistent on this issue, and
Texas law will apply.
The next issue is whether each jurisdiction’s law is the same
with respect to when an exception to the insurer’s right to
select counsel exists.
b. Selection of Independent Counsel.
Under Texas law, the insurer with a duty to defend has a
right to select the insured’s counsel unless a conflict of interest
exists. See State Farm Mut. Auto. Ins. Co. v. Traver, 980
S.W.2d 625, 627–28 (Tex.1998); Rx.com Inc. v. Hartford
Fire Ins. Co., 426 F.Supp.2d 546, 559 (S.D.Tex.2006). A
reservation of rights letter may create a potential conflict,
but the fact that an insurer issues a reservation of rights
letter or provides a defense subject to a reservation of rights
does not, standing alone, create a conflict that permits the
insured to select its own counsel. See Partain v. Mid–
Continent Specialty Ins. Servs., Inc., 838 F.Supp.2d 547,
567 (S.D.Tex.2012) ( “[R]eservation of rights letters do not
‘necessarily create a conflict between the insured and the
insurer.’ Rather, a reservation of rights letter ‘only recognizes
the possibility that such a conflict may arise in the future.’
” (internal citations omitted)); Davalos, 140 S.W.3d at 689.
To determine whether a conflict of interest exists, the Court
must determine whether “the facts to be adjudicated in the
liability lawsuit are the same facts upon which coverage
depends,” and, if so, the conflict of interest will prevent the
insurer from conducting the defense. Davalos, 140 S.W.3d
at 689. Thus, for a real conflict of interest to exist, it must
be apparent that the facts on which coverage depends will be
ruled on judicially in the underlying lawsuit. See Partain, 838
F.Supp.2d at 567.
*7 Under California law, an insurer may also select the
insured’s counsel unless a conflict of interest exists. See
CAL. CIV.CODE § 2860(a) (“If the provisions of a policy
of insurance impose a duty to defend upon an insurer and
a conflict of interest arises which creates a duty on the part
of the insurer to provide independent counsel to the insured,
the insurer shall provide independent counsel to represent the
insured unless … the insured expressly waives, in writing, the
right to independent counsel.”).
Thus, under both Texas and California law, an insurer having
the right to control the defense has the right to select the
insured’s defense counsel unless a conflict of interest exists.
The only remaining issue is whether the conflict of interest
standard is the same under California and Texas law.
According to California Civil Code § 2860(b), a conflict of
interest may exist where an insurer has reserved its rights
on an issue and the outcome of the coverage issue can be
controlled by the counsel retained by the insurer. See CAL.
CIV.CODE § 2860(b). In California, as in Texas, merely
tendering a reservation of rights does not create a conflict of
interest warranting independent counsel. See Park Townsend,
LLC v. Clarendon Am. Ins. Co., No. 12–CV–04412, 2013
WL 3475176, at *8 (N.D.Cal. July 10, 2013). Likewise, the
conflict of interest must be actual, not merely potential. See
Dynamic Concepts, 61 Cal.App.4th at 1007, 71 Cal.Rptr.2d
882.
California courts, and the legislature, have provided several
scenarios in which an actual conflict of interest may exist. See
CAL. CIV.CODE § 2860; Gafcon, Inc. v. Ponsor & Assocs.,
Inc., 98 Cal.App.4th 1388, 1421–22, 120 Cal.Rptr.2d 392
(Cal.Ct.App.2002); Park Townsend, 2013 WL 3475176, at
*8. Included in those scenarios are two situations that might
apply in the instant case: (1) the insurer reserves its rights
on a given issue and the outcome of that coverage issue can
be controlled by the insurer’s retained counsel, or (2) any
other situation where an attorney who represents the interests
of both the insurer and the insured finds that his or her
representation of the one is rendered less effective by reasons
of his or her representation of the other. See Park Townsend,
2013 WL 3475176, at *8.
While the language in Texas decisions describing an actual
conflict of interest may be different from that found in Texas
cases, the analysis is not. Accord Rx.com Inc., 426 F.Supp.2d
at 559 (“A conflict of interest does not arise unless the
outcome of the coverage issue can be controlled by counsel
retained by the insurer for the defense of the underlying
claim.”). At bottom, California cases hold that, if the issues in
the underlying lawsuit would also resolve the coverage issues,
the counsel selected by the insurer might have reason to take
a position that would undermine the insured’s best position
in the underlying lawsuit. One way to reach that conclusion
is for a court to analyze whether the issue or issues related
to the coverage dispute would be those that the court in the
underlying litigation would adjudicate. See Park Townsend,
2013 WL 3475176, at *10 (analyzing whether the results of
underlying lawsuit will disadvantage insured’s position in the
coverage dispute).
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*8 As such, the conflict of interest standard is essentially the
same under both Texas and California law. Having found that
there is no difference in the two states’ laws as it relates to this
conflict of interest standard, Texas law will apply.
2. Summary Judgment is Not Warranted on Defendant’s
Declaratory Judgment Causes of Action.
Defendant seeks summary judgment on three counts for both
the Astoria and Element causes of action. First, Defendant
seeks a declaration that it has the right to control the
defense of Centex in the Astoria and Element causes of
action. Defendant also seeks a declaration that Plaintiff is
not entitled to the appointment of independent counsel under
California Civil Code § 2860. Finally, encompassing both of
the first two declaratory judgment requests, Defendant seeks
a declaration that Plaintiff breached its duty to cooperate
under the Astoria Policy and Element Policy by refusing to
acknowledge Defendant had a right to control the defense
and select counsel and by insisting Defendant continue to pay
Newmeyer & Dillion’s fees and costs.
a. Defendant’s claim that it has the right to control the
defense of Centex in the Astoria and Element causes of
action.
Because the parties do not dispute the duty to defend,
and by extension the right to control the defense, the only
issue is whether there was a breach by Defendant that
precluded it from exercising its right to control. If so, then
no declaratory judgment claim is warranted. Plaintiff argues
against summary judgment on the grounds that Defendant
unjustifiably and unreasonably delayed in acknowledging its
duty to defend, issuing its reservation of rights, and paying the
applicable defense costs, thereby forfeiting its right to control
the defense of the Underlying Litigation. See Dkt. No. 61 at
27–29.
Plaintiff relies primarily on the holding in Kirby Co.
v. Hartford Cas. Ins. Co., No. 3:02–cv–1616, 2004 WL
4528937 (N.D.Tex. Sept. 23, 2004), but the Court finds that
the circumstances in the instant case are not as clear cut.
The court in Kirby found that the evidence conclusively
established that the insurer’s delay was not warranted and was
unreasonable. See id. at *3. Here, the parties have presented
conflicting evidence regarding the extent of Defendant’s delay
in responding to Plaintiff’s request for coverage; the reasons
for any alleged delay, which bears on whether it was justified
or excusable; and generally whether the length of any alleged
delay was such that it constituted a breach. For instance,
Defendant presents evidence that, pursuant to the terms of
the Astoria and Element Policies, once it received evidence
that Plaintiff had actually exhausted the Retained Amounts
on the Astoria and Element Policies—meaning it received
the invoices and evidence of payments made—it accepted
defense of the actions, subject to a general reservation of
rights. See Dkt. No. 67 at 17; Dkt. No. 43–1 at 141 & 194.
But Plaintiff contends and presents evidence that it exhausted
the Retained Amounts earlier than Defendant states and that
Defendant delayed by an allegedly unreasonable amount of
time in responding to Plaintiff’s request for defense and
payment of its defense costs. See Dkt. No. 61 at 27–29; Dkt.
No. 63–6 at 35; 63–3 at 12, 83, & 90. Defendant claims
that any alleged delay on its party was justified by Plaintiff’s
failure to provide the appropriate documents, see Dkt. No. 67
at 17–18.
*9 Having a established a conflict of evidence exists, the
Court must view all evidence of record in the light most
favorable to Plaintiff. In doing so, the Court concludes that
Defendant has failed to show that there is no genuine dispute
as to any material fact and that summary judgment is not
warranted on Defendant’s first declaratory judgment claim at
this time.
The Court also notes that Plaintiff argues that, because
Defendant stated in a deposition that, if Texas law applied,
Plaintiff would have the right to control the defense,
including its selection of counsel, summary judgment is
inappropriate. See Dkt. No. 61 at 23. The Court is not denying
summary judgment on the basis of this testimony alone. First,
Defendant did not make such an explicit statement but rather
said “it would likely be allowed.” Dkt. No. 61 at 23. Second,
Defendant clearly is not arguing as much and says so in
its briefing. See Dkt. Nos. 43 & 67. This testimony does,
however, lend support to a finding that a fact issue exists as
to what Defendant believes and what the facts support.
Having reviewed the evidence of record, the Court finds
nothing to support a finding that summary judgment is proper
as a matter of law, and therefore Defendant’s motion for
summary judgment is DENIED as to this claim.
b. Defendant’s claim that Plaintiff is not entitled to the
appointment of independent counsel under California
Civil Code § 2860.
As explained above, under Texas law, an insured is entitled
to independently select his counsel in certain circumstances.
But a reservation of rights letter alone does not necessarily
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create such circumstances. See Partain, 838 F.Supp.2d at
567; Davalos, 140 S.W.3d at 689. Rather, it is only when
“the facts to be adjudicated in the liability lawsuit are the
same facts upon which coverage depends” that a conflict of
interest exists that prevents the insurer from conducting the
defense. Davalos, 140 S.W.3d at 689. In other words, it must
be apparent that the facts on which coverage depends will also
be adjudicated in the underlying litigation. See Partain, 838
F.Supp.2d at 567.
In the Astoria Litigation, the plaintiffs alleged four causes
of action. See Dkt. No. 43–1 at 95–104. The plaintiffs
first alleged that the construction violated several sections
of California Civil Code § 896, a de facto building code
defining the standards a structure must meet. See CAL.
CIV.CODE § 896. The plaintiffs’ allegations include the
following violations: structural and other defects permitting
unintended water to enter the structure; construction
that does not meet government codes; electrical and
mechanical systems defects causing unreasonable risk of fire;
cracks that display significant vertical displacement or are
excessive in the exterior of the building; roofing materials
improperly installed; air conditioning not meeting California
Code Regulations; dryer ducts improperly installed; and
construction of structures in a manner so as to impair
the occupants safety. See Dkt. No. 43–1 at 96–97. The
plaintiffs further allege the defendants, including Plaintiff,
made negligent misrepresentations regarding the building’s
components; regarding whether the structures had been
properly inspected and met all applicable building codes;
regarding whether all known defects had been disclosed and
reserve budgets met certain standards; regarding whether
the defendants anticipated a need for special assessments
related to major components; and regarding whether
any obligations could be properly discharged under the
appropriate documents. See id. at 98. The plaintiffs also
brought causes of action for breach of fiduciary duty for many
of the same reasons on which their other causes of action were
based and for violating the Governing Documents of the sale.
See id. at 100–103.
*10 Defendant agreed to defend Plaintiff, subject to a
reservation of rights. Defendant offered both a general and
a specific reservation of rights. See Dkt. No. 63–3 at 13–16.
The reservation of rights stated that “Lexington reserves the
right to decline coverage for the claim to the extent that it
does not constitute property damage as defined in the policy.”
Dkt. No. 63–3 at 14. While there are several more specific
reservations of rights, the only one that Plaintiff indicates
might conflict with the causes of action to be litigated in the
Astoria Litigation is the reservation of rights for any coverage
for certain “business risks.” See Dkt. No. 61 at 25; Dkt. No.
63–3 at 15.
In the underlying Element Litigation, the plaintiffs asserted
two causes of action in the second amended complaint. See
Dkt. No. 63–5 at 1. The first cause of action again relates
to violations of the California Civil Code building standards,
including structural violations resulting in ongoing significant
cracks in concrete foundations and exterior walls; unintended
water and/or leaks and intrusion; violations in fire safety
systems; and defects in the windows, doors, and component
systems. See Dkt. No. 63–5 at 13–17. The plaintiffs also
allege the defendants breached the fiduciary duty owed to the
plaintiffs as a result of the alleged deficiencies and violations.
See id. at 17–18.
Again, Defendant agreed to defend, subject to a reservation
of rights. See Dkt. No. 43–1 at 197–204. In its reservation of
rights, Defendant states that the Policy at issue does not cover
“property damage … arising out of … a defect, deficiency,
inadequacy, or danger condition in ‘your product’ or ‘your
work.’ ” Dkt. No. 61 at 25; 63–3 at 56.
The Court cannot grant summary judgment on Defendant’s
declaratory judgment claim as requested because California
law does not apply to the selection of independent counsel
in this case. That said, after reviewing the current record, the
Court does not find that summary judgment in Defendant’s
favor is proper at this juncture, even under Texas law. A
review of the reservation of rights and the accompanying facts
does not establish as a matter of law that any findings in the
Underlying Litigation would not affect Defendant’s coverage
claims. Defendant argues that, because the construction
causes of action are based upon strict liability—either the
defects exist or they do not—and because other causes of
action will make no findings of intent or on whether the
claims constitute property damage caused by an occurrence,
the results of the Underlying Litigation would have no bearing
on coverage. See Dkt. No. 67 at 12–14.
In response, Plaintiff does not specifically point this Court
to evidence of a conflict that absolutely exists or of
Defendant’s selected counsel’s taking a position that is at odds
with Plaintiff’s favored course of action in the Underlying
Litigation. Rather, Plaintiff presents arguments regarding,
and evidence that, the findings in the Underlying Litigation
could ultimately affect Plaintiff’s coverage rights. See Dkt.
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No. 61 at 25. For instance, it could be that product defects
or workmanship errors by other parties could exist in the
Underlying Litigation, and the Court cannot determine, based
on the record before it, whether it would behoove any party, in
the Underlying Litigation or the coverage litigation, to focus
blame on those entities or defects. Plaintiff appears to indicate
that any such decisions could create a conflict of interest.
See Dkt. No. 61 at 25. Defendant has presented insufficient
evidence that it is not planning to take any positions that might
affect its coverage responsibilities.
*11 Defendant did not present evidence that proves, as a
matter of law, it would not be in its interest to take positions
in the Underlying Litigation that might support its position
regarding coverage. Viewing all facts and draw all reasonable
inferences in the light most favorable to Plaintiff, the Court
cannot, on this record or at this time, conclude that there is
no genuine dispute as to any material fact and grant summary
judgment in Defendant’s favor on this declaratory judgment
claim. As such, Defendant’s motion for summary judgment
on this claim is DENIED.
c. Defendant’s claim that Plaintiff breached its duty to
cooperate under the Astoria Policy and Element Policy
by refusing to acknowledge Defendant had a right to
control the defense and select counsel and by insisting
Defendant continue to pay Newmeyer & Dillion’s fees
and costs.
Defendant’s remaining request for summary judgment on its
declaratory judgment counterclaim also fails. As the Court
has found that summary judgment is proper on neither
Defendant’s right to control defense or Plaintiff’s right (or lack
thereof) to select independent counsel, a finding that Plaintiff
breached its duty to cooperate under the Astoria Policy and
Element Policy by refusing to acknowledge Defendant had a
right to control the defense and select counsel and by insisting
Defendant continue to pay Newmeyer & Dillion’s fees and
costs likewise cannot be made at this time. Neither party
presents evidence to the contrary.
As such, Defendant has not shown that there is no genuine
dispute as to any material fact, and Defendant’s motion for
summary judgment on this declaratory judgment action is
DENIED.
Conclusion
Defendant’s Motion for Partial Summary Judgment [Dkt. No.
43] is DENIED, and Plaintiff’s motion to strike [Dkt. No. 68]
is DENIED as moot.
SO ORDERED.
MEMORANDUM OPINION & ORDER
ON PLAINTIFF’S MOTION TO DISMISS
DEFENDANT’S COUNTERCLAIMS
This is a civil action related to the defendant’s duty to
defend and accompanying obligations. See Dkt. No. 66.
Plaintiff Centex Homes filed a Motion to Dismiss certain
of Defendant Lexington Insurance Company’s affirmative
defenses and counterclaims. See Dkt. No. 35. Defendant
filed its response [Dkt. No. 51] and Plaintiff filed a reply
[Dkt. No. 56], asserting their respective positions. Plaintiff’s
Motion to Dismiss Defendant’s Counterclaims [Dkt. No. 35]
is DENIED.
Background
In its most recent pleading, Plaintiff asserts causes of action
for breach of contract and violations of Chapters 541 and
542 of the Texas Insurance Code. See Dkt. No. 66 at 11–
13. 1 In its Answer to Plaintiff’s Fourth Amended Complaint
and Counterclaim (“Answer”), Defendant asserted numerous
affirmative defenses and certain counterclaims. Plaintiff
argues that the Court should strike or dismiss Defendant’s
counterclaims because they are subsumed by, and redundant
of, Plaintiff’s affirmative claims and Defendant’s affirmative
defenses and because they fail to state a claim on which
relief can be granted. More specifically, Plaintiff argues that
Defendant’s claim for declaratory relief is “nothing more
than a recitation of the same affirmative defenses it has
pleaded in opposition to Plaintiff’s Second Amended Original
Complaint” and therefore does not raise any new issue that is
not already subsumed within Plaintiff’s complaint. See Dkt.
No. 35 at 2. Plaintiff claims that Defendant’s counterclaims
for breach of contract and breach of the implied covenant of
good faith should be dismissed for failure to state a claim
on which relief can be granted. See id. Plaintiff contends
that, under both Texas and California law, an insured’s duty
to cooperate is only a condition precedent to coverage and
cannot give rise to an affirmative cause of action by an insurer.
See id.; Dkt. No. 56 at 14–20.
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1 Plaintiff filed its Motion to Dismiss in relation to its
Second Amended Complaint and Defendant’s Second
Amended Answer. However, at an August 9, 2013
hearing, the Court requested that Plaintiff file an
amended Complaint to properly identify the member
entities of Centex Real Estate Holding, L.P. as well
as the principal place of business of each of Centex’s
general partners. Plaintiff further amended its complaint
on November 6, 2013. The amendments were all
related to the party identification. Defendant filed its
Fourth Amended Answer in response to the amended
complaints. As such, the substance of the allegations in
the Fourth Amended Complaint and Answer remain the
same as those found in the second amended complaint
and answer. Because the Fourth Amended Answer and
Complaint are the live pleadings, however, the Court will
refer to those documents throughout the course of this
Opinion.
*12 Defendant responds that its request for declaratory
relief duplicates neither Plaintiff’s claims nor Defendant’s
affirmative defenses and that Plaintiff does not provide any
examples or evidence suggesting otherwise. See Dkt. No. 51
at 3–6. As to Defendant’s breach of contract and covenant
of good faith claims, Defendant argues that California law
and Texas law differ on the issue, that California law does
recognize such affirmative causes of action, that California
law applies, and that Defendant therefore sufficiently stated a
viable claim on which relief may be granted.
Legal Standards
1. Motions to Strike under Federal Rule of Civil Procedure
12(f).
Under Federal Rule of Civil Procedure 12(f), the Court
“may strike from a pleading an insufficient defense or any
redundant, immaterial, impertinent, or scandalous matter.”
FED. R. CIV. P. 12(f). The power to strike a pleading is
within the Court’s discretion but should be sparingly used. See
United States v. Coney, 689 F.3d 365, 379 (5th Cir.2012). The
motion to strike on grounds of immateriality or impertinence
“ ‘should be granted only when the pleading to be stricken
has no possible relation to the controversy.’ ” Id. (quoting
Augustus v. Bd. of Pub. Instruction, 306 F.2d 862, 868 (5th
Cir.1962)). Further, matter is not “scandalous” for purposes
of Rule 12(f) if it is “directly relevant to the controversy at
issue and [is] minimally supported in the record.” Id.
With regard to striking alleged defenses, “although motions to
strike a defense are generally disfavored, a Rule 12(f) motion
to dismiss a defense is proper when the defense is insufficient
as a matter of law.” Kaiser Aluminum & Chemical Sales,
Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1057 (5th
Cir.1982).
“Both because striking a portion of a pleading is a drastic
remedy, and because it often is sought by the movant simply
as a dilatory tactic, motions under Rule 12(f) are viewed with
disfavor and are infrequently granted.” Jacobs v. Tapscott,
No. 3:04–cv1968–D, 2004 WL 2921806, at *2 (N.D.Tex.
Dec.16, 2004), aff’d on other grounds, 277 F. App’x 483 (5th
Cir.2008). And Rule 12(f) only applies to pleadings as defined
by Fed.R.Civ.P. 7(a). See, e.g., 5C Charles Alan Wright et
al., FED. PRAC. & PROC. 1380 & n. 8.5 (3d ed. 2012)
(“Rule 12(f) motions only may be directed towards pleadings
as defined by Rule 7(a); thus motions, affidavits, briefs, and
other documents outside of the pleadings are not subject to
Rule 12(f).”); Groden v. Allen, No. 3:03–cv–1685–D, 2009
WL 1437834, at *3 (N.D.Tex. May 22, 2009) (Rule 12(f)
“does not permit the Court to strike motions or matters within
them because the rule applies only to pleadings”).
2. Motions to Dismiss under Federal Rule of Civil
Procedure 12(b)(6).
In deciding a Federal Rule of Civil Procedure 12(b)(6)
motion, the Court must “accept all well-pleaded facts as true,
viewing them in the light most favorable to the plaintiff.” In
re Katrina Canal Breaches Litig., 495 F.3d 191, 205–06 (5th
Cir.2007) (internal quotations omitted). To state a claim on
which relief may be granted, plaintiff must plead “enough
facts to state a claim to relief that is plausible on its face,”
Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct.
1955, 167 L.Ed.2d 929 (2007), and must plead those facts
with enough specificity “to raise a right to relief above the
speculative level,” id. at 555. “A claim has facial plausibility
when the plaintiff pleads factual content that allows the court
to draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S.
662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). “The
plausibility standard is not akin to a ‘probability requirement,’
but it asks for more than a sheer possibility that a defendant
has acted unlawfully.” Id. “A claim for relief is implausible on
its face when ‘the well-pleaded facts do not permit the court to
infer more than the mere possibility of misconduct.’ ” Harold
H. Huggins Realty, Inc. v. FNC, Inc., 634 F.3d 787, 796 (5th
Cir.2011) (quoting Iqbal, 556 U.S. at 679).
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*13 While, under Federal Rule of Civil Procedure 8(a)(2),
a complaint need not contain detailed factual allegations, the
plaintiff must allege more than labels and conclusions, and,
while a court must accept all of the plaintiff’s allegations as
true, it is “ ‘not bound to accept as true a legal conclusion
couched as a factual allegation.’ ” Iqbal, 556 U.S. at
678 (quoting Twombly, 550 U.S. at 555). A threadbare or
formulaic recitation of the elements of a cause of action,
supported by mere conclusory statements, will not suffice.
See id.
A court cannot look beyond the pleadings in deciding a Rule
12(b) (6) motion. See Spivey v. Robertson, 197 F.3d 772,
774 (5th Cir.1999). Pleadings in the Rule 12(b)(6) context
include attachments to the complaint. See In re Katrina Canal
Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007). Documents
“attache[d] to a motion to dismiss are considered to be part of
the pleadings, if they are referred to in the plaintiff’s complaint
and are central to her claim.” Collins v. Morgan Stanley
Dean Witter, 224 F.3d 496, 498–99 (5th Cir.2000) (internal
quotation marks omitted). “Although the Fifth Circuit has not
articulated a test for determining when a document is central
to a plaintiff’s claims, the case law suggests that documents
are central when they are necessary to establish an element
of one of the plaintiff’s claims. Thus, when a plaintiff’s
claim is based on the terms of a contract, the documents
constituting the contract are central to the plaintiff’s claim.”
Kaye v. Lone Star Fund v. (U.S.), L.P., 453 B.R. 645, 662
(N.D.Tex.2011). “However, if a document referenced in the
plaintiff’s complaint is merely evidence of an element of the
plaintiff’s claim, then the court may not incorporate it into the
complaint.” Id.
In addition, “it is clearly proper in deciding a 12(b)(6) motion
to take judicial notice of matters of public record.” Norris v.
Hearst Trust, 500 F.3d 454, 461 n. 9 (5th Cir.2007); accord
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,
322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2008) (directing courts
to “consider the complaint in its entirety, as well as other
sources courts ordinarily examine when ruling on Rule 12(b)
(6) motions to dismiss, in particular, documents incorporated
into the complaint by reference, and matters of which a court
may take judicial notice”).
Analysis
Plaintiff argues that the Court should strike Defendant’s
declaratory judgment claims because they are subsumed by
the resolution of Plaintiff’s affirmative claims and because
they are redundant of Defendant’s affirmative defenses.
Plaintiff also contends that Defendant’s remaining causes
of action must be dismissed because such claims do not
constitute affirmative causes of action for a defendant under
Texas or California law.
1. Defendant’s declaratory judgment actions are not
redundant.
Plaintiff moves to strike Defendant’s claim for declaratory
relief because the claims are “nothing more than a recitation”
of the same affirmative defenses that Defendant pleaded and
the affirmative claims that Plaintiff asserted. See Dkt. No. 35
at 2. More specifically, Plaintiff claims that the declaratory
relief sought overlaps with Defendant’s Second, Fifth, Ninth,
Tenth, and Seventeenth Affirmative Defenses. See id. at 3–
4. Plaintiff does not specifically identify the overlap between
its claims and Defendant’s claims but states only that the
counterclaims are “subsumed” by matters raised in Plaintiff’s
complaint. Id. at 4.
*14 In response Defendant argues that Plaintiff does
not identify any of its allegations that mirror Defendant’s
request for declaratory relief and that all of the cases on
which Plaintiff relies involve a situation wherein a plaintiff’s
affirmative claims and a defendant’s counter claims mirror
one another. See Dkt. No. 51 at 3. Even if that were not the
case, Defendant contends that its affirmative defenses and
requests for declaratory relief are distinct. See id .
Federal courts have broad discretion to grant or refuse
declaratory judgment. See Torch, Inc. v. LeBlanc, 947 F.2d
193, 194 (5th Cir.1991). Federal Rule of Civil Procedure 12
does permit a court to strike or dismiss a counterclaim on the
basis that it is redundant. To do so, however, the Court should
consider “whether the declaratory judgment ‘serves a useful
purpose’ by asking ‘whether resolution of plaintiff’s claim,
along with the affirmative defenses asserted by defendants,
would resolve all questions raised by the counterclaim.’ ” In
re ATP Oil & Gas Corp., No. 12–36187, 2013 WL 5308862,
at *1 (Bankr.S.D.Tex. Sept.18, 2013); see also Redwood
Resort Props., LLC v. Homes Co. Ltd., No. 3:06–cv–1022–
D, 2007 WL 1266060, at *4–*5 (N.D.Tex. Apr.30, 2007).
This analysis requires the Court to determine whether what
a counterclaim requests is the opposite of the affirmative
causes of action pleaded. See ATP Oil & Gas Corp., 2013
WL 5308862 at *1; Redwood Resort Props., LLC, 2007 WL
1266060 at *4–*5. In undertaking this analysis, the Court
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should consider “potential qualitative differences between
merely prevailing in Plaintiff’s lawsuit, and receiving an
affirmative declaration of rights to a declaratory judgment.”
Blackmer v. Shadow Creek Ranch Development Co. Ltd.
P’ship, No. H–07–681, 2007 WL 7239968, at *1 (S.D.Tex.
June 26, 2007). This is so even when “[t]here is a high
degree of congruence” between Defendant’s counterclaims
and affirmative defenses. Id.
Plaintiff did not specify which of its affirmative causes of
action subsumed Defendant’s declaratory judgment actions.
In its Breach of Contract cause of action, Plaintiff alleges
that—and thereby necessitates a judicial finding whether
—Defendant breached its obligations by (1) its failure to
pay and/or (2) its unreasonable delay in (i) accepting its
duty to defend and/or pay Plaintiff’s defense costs and (ii)
providing Defendant’s coverage position with respect to the
underlying litigation. See Dkt. No. 66 at 11–12. This cause
of action would also include determining whether Defendant
had a duty to defend, but neither party seems to dispute
that allegation. See Dkt. No. 117 at 2–3. Plaintiff also
alleges the Defendant’s failure to make payments, or its delay
in making payments, violated the Texas Insurance Code.
Plaintiff alleges additional violations of the Texas Insurance
Code, including Defendant’s failure to attempt in good faith to
effectuate a prompt, fair, and equitable settlement of a claim
with respect to which Defendant’s liability had become clear;
to provide a reasonable explanation of Defendant’s failure
to pay all claims; to provide a reservation of rights letter
within a reasonable time frame; and to conduct a reasonable
investigation before failing to pay defense costs. See Dkt. No.
66 at 12–13.
*15 In its declaratory judgment cause of action, Defendant
seeks a declaration that (1) Defendant has a right to control
the defense of the relevant claims; (2) Plaintiff is not entitled
to appoint independent counsel under California Civil Code;
and (3) Plaintiff’s refusal to acknowledge that Defendant has
the right to control the defense and select counsel and its
insistence that Defendant continue to pay the fees and costs
of the law firm selected by Plaintiff was a breach of Plaintiff’s
duty to cooperate under the relevant policies. See Dkt. No. 73
at 19–20.
These claims are not redundant. If Defendant had requested a
declaratory judgment that it had timely and properly accepted
its duty to defend and to pay Plaintiff’s defense costs and that
it had provided Defendant’s coverage position with respect to
the underlying litigation, then the claims would be redundant.
So too would there be redundancy if Defendant sought a
declaration that it did not fail (1) to make payments in a
timely fashion; (2) to attempt in good faith to effectuate
a prompt, fair, and equitable settlement of a claim; (3) to
provide a reasonable explanation of Defendant’s failure to pay
all claims; (4) to provide a reservation of rights letter within
a reasonable time frame; and (5) to conduct a reasonable
investigation before failing to pay defense costs.
Instead, Defendant seeks a different declaration—essentially,
that it had the right to control the defense and appoint
the counsel. Under Plaintiff’s Complaint, the Court could—
hypothetically—find that Defendant breached its duties and
violated the Texas Insurance Code without an affirmative
determination regarding whether Defendant had a right to
control the defense and appoint counsel.
Plaintiff provides the Court with a comparison of the
affirmative defenses that it contends are redundant to
Defendant’s declaratory judgment actions. See Dkt. No. 56
at 11. The Court reviewed the requests and the affirmative
defenses, and, while some level of similarity does exist,
they are not redundant. A declaration that Defendant has a
right to control the defense is not the same as an assertion
that Defendant has no liability because Plaintiff’s acts were
unauthorized. The Court could—again, hypothetically—find
that Plaintiff’s acts were unauthorized but make no finding as
to why they were unauthorized. And a reservation of rights
to contend that a law other than Texas law applies is not a
declaration that Plaintiff cannot appoint independent counsel
under California law. These examples demonstrate “the
potential qualitative difference between merely prevailing in
Plaintiff’s lawsuit, and receiving an affirmative declaration of
rights pursuant to a declaratory judgment .” Blackmer, 2007
WL 7239968 at *1.
The Court also notes that in many decisions on which
Plaintiff relies, the courts dismissed the plaintiff’s declaratory
judgment actions because they were redundant of other
causes of action pleaded by plaintiff.See Dkt. No. 56 at 13
(citing Cypress/Spanish Ft. I, L.P. v. Prof’l Serv. Indus., Inc.,
814 F.Supp.2d 698, 710 (N.D.Tex.2011); Kougl v. Xspedius
Mgmt. Co. of Dallas/Fort Worth, L.L.C., No. 3:04–cv–2518–
D, 2005 U.S. Dist. LEXIS 10557, at *14–*15 (N.D. Tex. June
1, 2005)). That is not the situation here.
*16 In light of the fact that Rule 12(f) motions are
often viewed with disfavor and are infrequently granted, the
Court concludes that Plaintiff did not meet its burden under
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Rule 12(f) for the Court to strike Defendant’s declaratory
judgment claims. The Court finds that declaratory judgment
counterclaim is not a mirror image of Plaintiff’s causes of
action or redundant of its own affirmative defenses.
As such, the Court DENIES Plaintiff’s motion to strike
Defendant’s declaratory judgment causes of action.
2. Dismissal of Defendant’s counterclaims under Rule
12(b)(6) is not warranted.
To determine whether Defendant sufficiently pleaded a cause
of action under Rule 12(b)(6), the Court must determine
whether the alleged causes of action—breach of contract and
good faith—can stand as affirmative causes of action. This
turns on a choice-of-law analysis.
Before deciding which state’s substantive law should control
the issues raised by the parties here, “the Court must first
determine which choice-of-law rules should be applied.” In
re Soporex, Inc. ., 446 B.R. 750, 761 (Bankr.N.D.Tex.2011).
Here, both parties assert that Texas choice-of-law rules should
determine the applicable laws in this case. See Dkt. No. 51 at
6; Dkt. No. 56 at 9.
As noted by both parties, Texas courts utilize the “most
significant relationship” test to determine which state’s law
applies to a particular substantive issue. See Coghlan v.
Wellcraft Marine Corp., 240 F.3d 449, 452 n. 2 (5th Cir.2001)
(citing Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 421
(Tex.1984)). This test is based on the Restatement (Second)
of Conflict of Laws and utilizes a multi-factor methodology
to determine which state has the most significant relationship
to the substantive issues involved in a dispute. See Duncan,
665 S.W.2d at 421. Deciding which state’s laws should govern
an issue “is a question of law for the court to decide.”
Hughes Wood Products, Inc. v. Wagner, 18 S.W.3d 202, 204
(Tex.2000) (citing Duncan, 665 S.W.2d at 421). See also
McKinney BB v. U.S. Realty Advisors, LLC, No. 01–11483,
2003 U.S.App. LEXIS 28011, at *18 (5th Cir. Jan. 24, 2003)
(“[T] question of which state’s law to apply is a question
of law.”); Janvey v. Suarez, No. 3:10–cv–2581–N, 2013
WL 5663107, at *3 (N.D.Tex. Oct.17, 2013). But, this legal
determination involves a factual inquiry. See Hughes Wood
Products, 18 S.W.3d at 204; Suarez, 2013 WL 5663107, at
*3. That is, “the party urging application of another state’s
substantive law [must] furnish the Court with ‘sufficient
information’ to establish that the law of another state applies.”
Janvey v. Alguire, 846 F.Supp.2d 662, 671 (N.D.Tex.2011)
(quoting Holden v. Capri Lighting, Inc., 960 S.W.2d 831,
833 (Tex.App.-Amarillo 1997, no pet.)) (internal quotations
omitted). Absent such sufficient information, “the failure
to provide adequate proof of choice of law … results in
a presumption that the law of the foreign jurisdiction is
identical to the law of Texas.” Alguire, 846 F.Supp.2d at 671
(quoting Pittsburgh Corning Corp. v. Walters, 1 S.W.3d 759,
769 (Tex.App.-Corpus Christi 1999, pet. denied)) (internal
brackets omitted). When two states’ laws are substantially
the same, this precludes the need to undertake a choice-oflaw
analysis. See Lexxus Int’l, Inc. v. Loghry, 512 F.Supp.2d
647, 668 n. 17 (N.D.Tex.2007); cf. Fraud–Tech, Inc. v.
Choicepoint, Inc., 102 S.W.3d 366, 377–78 (Tex.App.-Fort
Worth 2003, pet. denied) (“Before undertaking a choice of
law analysis, we look to whether a conflict of law exists. If no
conflict exists on the issues, we need not decide which state’s
law applies.”).
*17 Because no choice-of-law analysis would be required
if California and Texas law were consistent on this issue,
the Court must first determine if these jurisdictions’ laws
differ with respect to whether Defendant’s alleged breach
constitutes an affirmative cause of action. Defendant alleges
Plaintiff was “mandated to cooperate” with Defendant under
the terms of some of the policies and that Plaintiff breached
this duty. Dkt. No. 73 at 21. Defendant’s breach of implied
covenant of good faith and fair dealing claim is also based on
Plaintiff’s alleged failure to cooperate. See id.
Plaintiff states that the cases on which Defendant relies
do not support Defendant’s contention that these causes of
action are plausible even under California law. Rather than
explicitly citing to or relying on cases denying that such
a cause of action exists, however, Plaintiff distinguishes
the cases on which Defendant relies and cites to several,
mostly dated California cases that, on review, do not fully
support its position. See Dkt. No. 56 at 15–18. While an
insured’s breach of a cooperation clause can act as a defense
to its breach of contract claim, see Cybernet Ventures,
Inc. v. Hartford Ins. Co. of the Midwest, 168 F. App’x
850, 852 (9th Cir. Feb.23, 2006), California courts also
recognize an affirmative cause of action, sounding in breach
of contract, for the causes of action asserted by Defendant,
see Sierra Pac. Indus. v. Am. States Ins. Co., 883 F.Supp.2d
967, 976–77 (E.D.Cal.2012); Travelers Prop. v. Centex
Homes, No. C 10–02757 CRB, 2011 WL 1225982, at *6
(N.D.Cal. Apr.11, 2011) (“The right to control the defense
imposes upon an insured the duty to cooperate with the
insurer with regards to its defense. Failure to comply with a
Centex Homes v. Lexington Ins. Co., Slip Copy (2014)
© 2014 Thomson Reuters. No claim to original U.S. Government Works. 13
policy’s cooperation clause constitutes breach of the insurance
contract.” (internal citations omitted)); Cal. Fair Plan Assoc.
v. Politi, 220 Cal.App.3d 1612, 1618–19, 270 Cal.Rptr. 243
(Cal.Ct.App.1990) (finding that an insurer could bring an
affirmative breach of covenant of good faith and fair dealing
claim but could only recover contract damages). In fact,
under California law, an “insurer’s duty is unconditional
and independent of the performance of plaintiff’s contractual
obligations.” Gruenberg v. Aetna Ins. Co. ., 9 Cal.3d 566, 108
Cal.Rptr. 480, 510 P.2d 1032, 10401 (Cal.1973). This stands
in contrast to the position put forth by Plaintiff that “ ‘the only
applicable case law treats cooperation clauses as conditions
precedent, relieving an insurer of liability rather than creating
an affirmative cause of action against its insured.’ ” Dkt. No.
35 at 6–7 (quoting The Phila. Indem. Ins. Co. v. Stebbins Five
Companies, Ltd., No. 3:02–cv–1279–M, 2002 WL 31875596
(N.D.Tex. Dec.20, 2002)).
Plaintiff correctly points out that Texas does not recognize
an affirmative cause of action for a breach of cooperation
clause or breach of good faith. See Progressive County Mut.
Ins. Co. v. Trevino, 202 S.W.3d 811, 815–16 (Tex.App.-San
Antonio 2006, no pet.); Evanston Ins. Co. v. Tonmar, L.P.,
669 F.Supp.2d 725, 732 (N.D.Tex.2009); Phila. Indem. Ins.
Co., 2002 WL 31875596 at *6. To support its contention
that Texas recognizes such a cause of action, Defendant
relies on cases that are not on point. See Dkt. No. 51 at
9 (citing USAA County Mut. Ins. Co. v. Cook, 241 S.W.3d
93, 101 (Tex.App.-Houston [1st Dist.] 2007, no pet.); CGL
Underwriters v. Edison Chouest Offshore, inc., 8 F.3d 21,
at *7–*8 (5th Cir. Oct.22, 1993)). The decisions on which
Defendant relies do discuss a “breach of the co-operation
clause” found in insurance policies but do so in the context of
a breach of cooperation clause defense. Such a defense does
exist: A defendant may assert that a breach of such a duty
relieved the insurer of liability under the policy, see Filley v.
Ohio Cas. Ins. Co., 805 S.W.2d 844, 847 (Tex.App.-Corpus
Christi 1991, writ denied), but that is not the same as an
affirmative cause of action.
*18 Thus, Texas and California law do differ on this issue.
The Court must therefore undertake a choice-of-law analysis
to determine which law applies.
“Under Texas choice-of-law principles, contract disputes are
governed by ‘the law of the state with the most significant
relationship to the particular substantive issue.’ ” W.R. Grace
& Co. v. Cont’l Cas. Co., 896 F.2d 865, 873 (5th Cir.1990)
(citing Duncan, 665 S.W.2d at 421); Schneider Nat. Transp.
v. Ford Motor Co., 280 F.3d 532, 536 (5th Cir.2002).
This is the test articulated by the Restatement (Second) of
Conflict of Laws sections 188 and 193 and their comments.
Defendant maintains that the location of the insured risk
receives controlling weight in determining the proper law to
be applied. See Dkt. No. 51 at 6. According to Defendant,
because the insurance contracts cover insured projects located
in California—the Astoria Project and the Element Project—
the parties’ presumed intention would be that California law
applies because that is almost certainly where any liability for
property damages or bodily injury would arise. See id. at 6–
7. Plaintiff did not reply to Defendant’s argument, relying on
its contention that no conflict of law exists.
Restatement (Second) of Conflict of Laws section 188
provides that “[t]he rights and duties of the parties with
respect to an issue in contract are determined by the local law
of the state which, with respect to that issue, has the most
significant relationship to the transaction and the parties….”
RESTATEMENT (SECOND) OF CONFLICT OF LAWS
§ 188(1) (1971). Section 188 attempts to “unearth[ ] and
uphold[ ] contracting parties’ intent as to the governing law.”
Mayo v. Hartford Life Ins. Co., 354 F.3d 400, 404 (5th
Cir.2004). While several types of contacts are provided in
Section 188, Section 193 further provides that the validity
of an insurance contract, and the rights created thereby,
should be determined by the law of the state where the
insured risk is located. See RESTATEMENT (SECOND)
OF CONFLICT OF LAWS § 193; see also Fulcrum Ins.
Co. v. Barber, 2006 WL 4511947, at *3 (W.D.Tex. Oct.24,
2006) (“It does not matter where the particular act which
invokes the policy’s coverage happens. ‘Instead, the court
must look to the principle location of the insured risk during
the term of the policy to determine the location of the subject
matter of the contract.’ ” (internal citations omitted)). Section
193 also states that its choice-of-law provision based on the
location of the insured risk applies “unless with respect to
the particular issue, some other state has a more significant
relationship … to the transaction and the parties, in which
event the local law of the other state will be applied.” Id.;
see also Zurich Am. Ins. Co. v. Vitus Marine, LLC, No. H–
11–3022, 2011 WL 4972025, at *4 (S.D.Tex. Oct.19, 2011)
(finding a state to have more significant relationship than
the insured’s location where the dispute involved contract
negotiation and the negotiation occurred in a state other than
the one in which the insured was located).
*19 The Court is of the opinion that California law applies to
Defendant’s counterclaims. Defendant’s counterclaims relate
Centex Homes v. Lexington Ins. Co., Slip Copy (2014)
© 2014 Thomson Reuters. No claim to original U.S. Government Works. 14
only to the Astoria Policy and Element Policy. These policies
cover condominiums located in California. See Dkt. No. 73 at
22–23. Moreover, Plaintiff alleges that Defendant breached
its duty to defend related to cases filed and litigated in
California, the causes of action asserted against Plaintiff in
those cases involve primarily California law, and Plaintiff’s
counsel representing it in connection with the California
condominiums is located in California. See Dkt. No. 66 at 4–
5. Where the events giving rise to the litigation, the defense
costs, and the attorneys are all located in one state, that
state’s law applies. See Schneider Nat. Transp., 280 F.3d
at 536 (where the litigation giving rise to a case occurred
in Texas, the defense costs were incurred in Texas, and
the defending attorneys were located in Texas, Texas has
the most significant relationship to the substantive issues to
be resolved and Texas law was appropriate). Accordingly,
California law should apply.
As explained above, this Court is not persuaded by Plaintiff’s
argument that, under California law, Defendant cannot
proceed on its breach of duty to cooperate and breach of
duty of good faith and fair dealing claims as a matter of law.
Moreover, accepting all well-pleaded facts as true, viewing
them in the light most favorable to Defendant, as the Court
must, Defendant has met its pleading burden. See In re
Katrina Canal Breaches Litig., 495 F.3d at 205–06. In its
counterclaims, Defendant provides a factual foundation and
allegations that put Plaintiff on notice of its claims. See Dkt.
No. 73 at 21–22. Plaintiff does not seem to argue otherwise. In
any event, such allegations constitute more than a threadbare
or formulaic recitation of the elements of a cause of action.
See Iqbal, 556 U.S. at 678.
As such, Plaintiff’s motion to dismiss Defendant’s second and
third causes of action is DENIED.
Conclusion
Plaintiff’s Motion to Dismiss Defendant’s Counterclaims
[Dkt. No. 35] is DENIED.
SO ORDERED.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

United States District Court,

S.D. Texas,

Houston Division.

MEDISTAR TWELVE OAKS PARTNERS, LTD., Plaintiff,

v.

AMERICAN ECONOMY INSURANCE COMPANY, et al., Defendants.

Civil Action No. H-09-3828.

May 17, 2010.

.

OPINION AND ORDER

MELINDA HARMON, District Judge.

Pending before the Court in the above referenced cause, arising out of an insurance claim by Plaintiff Medistar Twelve Oaks Partners, Ltd. (“Medistar”) for damages to Medistar’s commercial building and its contents caused by Hurricane Ike and removed from the 55th District Court of Harris County, Texas on diversity jurisdiction, are (1) Defendant Nelson Architectural Engineers, Inc.’s (“Nelson’s”) first motion to dismiss (instrument # 4); (2) Defendants American Economy Insurance Company (“American Economy”), Liberty Mutual Insurance Company (“Liberty”), and Safeco Insurance Company of America’s (“Safeco’s”) (collectively, “insurance company Defendants’) motion to dismiss or, alternatively, for more definite statement (# 5); and (3) Plaintiff Medistar Twelve Oaks Partners, Ltd.’s (“Medistar’s”) motion to remand (# 10).

According to Medistar’s Original Petition (Ex. A to # 1, Notice of Removal), Medistar’s commercial building was insured under an all-risk policy,FN1 number 02-CE-188659-10, issued by American Economy and Safeco. Safeco is the parent and controlling entity of American Economy, while Liberty is the parent and controlling company of Safeco. Medistar submitted a claim FN2 for damages to the insurance companies and states that it cooperated fully with their investigation. It alleges that American Economy, Safeco, and Liberty had an obligation in good faith and fair dealing to conduct an investigation and an evaluation of the benefits owed to Medistar and to promptly pay all benefits owed to Medistar. Among their good faith duties was an obligation to hire a sufficient number of qualified, properly trained adjustors, investigators and consultants to perform this work. Medistar complains that the insurance company Defendants hired Nelson for an “outcome oriented” and “dishonest” investigation of the cause of and resulting damages to Medistar’s insured property. Medistar asserts that the insurance company Defendants have wrongfully failed or refused to pay Medistar’s covered claims on a timely basis, but have persisted in delay or refusal to pay the full amounts due without giving honest reasons for their payment of an inadequate amount of benefits. Medistar claims that it has been forced to hire its own engineers at its own expense and an attorney to represent it here. It charges Nelson with “misrepresent[ing] survey results during its investigation of Medistar’s Insurance claim,” putting “these misrepresentations in reports,” and “attempt[ing] to manipulate changes to the survey results in a scheme to manufacture desired results which would lower claim payments” made by the insurance company Defendants. Original Petition at ¶ 45.

FN1. An “all-risks” policy is “one in which the insurer undertakes the risk for all losses of a fortuitous nature, which, in the absence of the insured’s fraud or other intentional misconduct, is not expressly excluded in the agreement.” Lexington Insurance Co. v. Buckingham Gate, Ltd., 993 S.W.2d 185 (Tex.App.-Corpus Christi 1999) (and cases cited therein).

FN2. Assigned claim number 598799873017.

Medistar sues the insurance company Defendants for breach of [ insurance] contract, noncompliance with Section 542.055 (failure to pay claim within fifteen business days of receiving all required information) of the Texas Prompt Payment of Claims Act and Texas Insurance Code, Chapter 542, breach of common law duty of good faith and fair dealing, violations of Section 17.50 of the Texas Deceptive Trade Practices Act (“DTPA”) and/or Chapter 541 of the Texas Insurance Code, fraud, and conspiracy to commit fraud. Medistar sues Nelson for fraud, conspiracy to commit fraud, and tortious interference with contract.FN3

FN3. The same causes of action were pleaded against Wiss, Janney, Elstner Associates, Inc., but it was voluntarily dismissed on January 11, 2010(# 25).

The parties have blended arguments regarding remand with others relating to Rule 12(b)(6) dismissal, at times confusing the standards for removal/remand with federal standards for adequate pleading of claims. Therefore the Court summarizes the arguments in the motions together. Nevertheless, because the motion to remand must be decided on the basis of the pleadings at the time of removal,FN4 and not on any subsequent existing or proposed post-removal amendment, and because that Original Petition determines this Court’s jurisdiction, the Court must address the motion for remand first. The resolution of that motion will determine whether the Court has jurisdiction to consider the Rule 12(b)(6) motions to dismiss.

FN4. The right to remove depends upon the plaintiffs’ pleading at the time of the petition for removal. Pullman Co. v. Jenkins, 305 U.S. 534, 537-38, 59 S.Ct. 347, 83 L.Ed. 334 (1939); Cavallini v. State Farm Mutual Auto Ins., 44 F.3d 256, 264 (5th Cir.1995); Ford v. Property & Cas. Ins. Co. of Hartford, No. Civ. A. H-09-1731, 2009 WL 4825222, *2 (S.D.Tex. Dec.9, 2009).

Relevant Law

Under 28 U.S.C. § 1441(a) any state court action over which federal courts would have original jurisdiction may be removed from state to federal court.   Gasch v. Hartford Accident & Indemnity Co.., 491 F.3d 278, 282 (5th Cir.2007). Moreover, under 28 U.S.C. § 1441(b), when original federal jurisdiction would be based on diversity, a defendant may remove a state court civil action only “if none of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.”

The doctrine of improper joinder, or fraudulent joinder,FN5 prevents defeat of federal removal jurisdiction premised on diversity by the presence of an improperly joined, non-diverse defendant. Borden v. Allstate Ins. Co., 589 F.3d 168, 171 (5th Cir.2009). Citizenship of an improperly joined party is totally disregarded in determining the court’s subject matter jurisdiction.   Smallwood v. Illinois Cent. R.R. Co., 385 F.3d 568, 572 (5th Cir.2004) (en banc), cert. denied, 544 U.S. 992, 125 S.Ct. 1825, 161 L.Ed.2d 755 (2005).

FN5. The Fifth Circuit prefers the term “improper joinder” to “fraudulent joinder” because it is more consistent with the statutory language in 28 U.S.C. §§ 1141 and 1332. Smallwood v. Ill. Cent. R. Co., 385 F.3d 568, 571 n. 1 and 572-73 (5th Cir.2004) (en banc), cert. denied, 544 U.S. 992, 125 S.Ct. 1825, 161 L.Ed.2d 755 (2005).

Improper joinder may be established by showing (1) actual fraud in the pleading of jurisdictional facts or (2) an inability to establish a cause of action against the non-diverse defendant in state court. Gasch, 491 F.3d at 281; Smallwood, 385 F.3d at 573. The latter is alleged here. Defendants claiming improper joinder based on the second type bear a heavy burden of showing that there is no possibility of recovery by the plaintiff against the in-state defendant, i.e., in other words there is no reasonable basis for predicting that state law would allow recovery against the in-state defendant.   Smallwood, 385 F.3d at 576. A “reasonable basis” means more than a mere a hypothetical basis. Griggs v. State Farm Lloyds, 181 F.3d 694, 701 (5th Cir.1999) (“whether the plaintiff has stated a valid state law cause of action depends upon and is tied to the factual fit between the plaintiffs’ allegations and the pleaded theory of recovery”).

To determine whether a plaintiff has a “reasonable basis for recovery under state law, the court may “conduct a Rule 12(b) (6)-type analysis.”   Smallwood, 385 F.3d at 573; Anderson v. Georgia Gulf Lake Charles, 342 Fed. Appx. 911, 915 (5th Cir.2009). First the court should look at the pleadings to determine whether the allegations state a claim under state law against the in-state defendant. Smallwood, 385 F.3d at 573. If the “plaintiff has stated a claim, but has misstated or omitted discrete facts that would determine the propriety of joinder,” the court may look beyond the pleadings and consider summary judgment-type evidence. Georgia Gulf, 342 Fed. Appx. at 915-16. That discovery should be very restricted and the summary inquiry should be limited to identifying “discrete and undisputed facts that would bar a plaintiffs’ recovery against an in-state defendant; anything more risks ‘moving the court beyond jurisdiction and into the resolution of the merits ….’ ” Id. at 916, quoting Smallwood, 385 F.3d at 573-74. The court has the discretion to determine what procedure is necessary.   Smallwood, 385 F.3d at 573.

The district court must resolve all contested fact issues and ambiguities of state law in favor of the plaintiff and remand. Gasch, 491 F.3d at 281, citing Guillory v. PPG Indus., Inc., 434 F.3d 303, 308 (5th Cir.2005). The Fifth Circuit explains that since “ ‘the effect of removal is to deprive the state court of an action properly before it, removal raises significant federalism concerns.’ The removal statute is therefore to be strictly construed, and any doubt about the propriety of removal must be resolved in favor of remand.” Id. at 281-82, quoting Carpenter v. Wichita Falls Indep. Sch. Dist., 44 F.3d 362, 365-66 (5th Cir.1995).

Fed. Rules of Civil Procedure 12(b)(6) and 9(b)

When a district court reviews a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), it must construe the complaint in favor of the plaintiff and take all well-pleaded facts as true. Kane Enterprises v. MacGregor (US), Inc., 322 F.3d 371, 374 (5th Cir.2003), citing Campbell v. Wells Fargo Bank, 781 F.2d 440, 442 (5th Cir.1986).

“While a complaint attacked by a Rule 12(b)(6) motion to plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do ….” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007) (citations omitted). “Factual allegations must be enough to raise a right to relief above the speculative level.” Id. at 1965, citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004) (“[T]he pleading must contain something more … than … a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”). “Twombly jettisoned the minimum notice pleading requirement of Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 … (1957) [“a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”], and instead required that a complaint allege enough facts to state a claim that is plausible on its face.” St. Germain v. Howard, 556 F.3d 261, 263 n. 2 (5th Cir.2009), citing In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007) (“To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead ‘enough facts to state a claim to relief that is plausible on its face.’ ”), citing Twombly, 127 S.Ct. at 1974). See also Alpert v. Riley, No. H-04-CV-3774, 2008 WL 304742, *14 (S.D.Tex. Jan.31, 2008). “Dismissal is proper if the complaint lacks an allegation regarding a required element necessary to obtain relief ….” Rios v. City of Del Rio, Texas, 444 F.3d 417, 421 (5th Cir.2006), cert. denied, 549 U.S. 825, 127 S.Ct. 181, 166 L.Ed.2d 43 (2006).

Recently, in Ashcroft v. Iqbal, — U.S. —-, —-, 129 S.Ct. 1937, 1940, 173 L.Ed.2d 868 (2009)(5-4), the Supreme Court, applying the Twombly plausibility standard to a Bivens claim of unconstitutional discrimination and a defense of qualified immunity for government official, observed that two principles inform the Twombly opinion: (1) “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” … Rule 8 “does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions.”; and (2) “only a complaint that states a plausible claim for relief survives a motion to dismiss,” a determination involving “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”

Fraud claims must also satisfy the heightened pleading standard set out in Federal Rule of Civil Procedure 9(b): “In allegations alleging fraud …, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” A dismissal for failure to plead with particularity as required by this rule is treated the same as a Rule 12(b)(6) dismissal for failure to state a claim. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir.1996). The Fifth Circuit interprets Rule 9(b) to require “specificity as to the statements (or omissions) considered to be fraudulent, the speaker, when and why the statements were made, and an explanation of why they were fraudulent.” Plotkin v. IP Axess, Inc., 407 F.3d 690, 696 (5th Cir.2005).

The elements of a fraud claim are (1) the defendant made a representation to the plaintiff; (2) the representation was material; (3) the representation was false; (4) when the defendant made the representation, the defendant a) knew that the representation was false or b) made the representation recklessly, as a positive assertion, and without knowledge of its truth; (5) the defendant made the representation with the intent that the plaintiff act on it; (6) the plaintiff relied on the representation; and (7) the representation caused the plaintiff injury. In re First Merit Bank, 52 S.W.3d 749, 758 ( Tex.2001).

To prevail on a conspiracy claim, the plaintiff must show (1) the defendant was a member of a combination of two or more persons; (2) the object of the combination was to accomplish a) an unlawful purpose or b) a lawful purpose by unlawful means; (3) the members had a meeting of the minds on the object or course of action; (4) one of the members committed an unlawful overt act to further the object or course of action; and (5) the plaintiff suffered injury as a proximate result of the wrongful act. Tri v. J.T.T., 162 S.W.3d 552, 556 ( Tex.2005); Insurance Co. of North America v. Morris, 981 S.W.2d 667, 675 ( Tex.1998).

The pleading standards of Twombly and Rule 9(b) apply to pleading a state law claim of conspiracy to commit fraud. U.S. ex rel. Grubbs v. Kanneganti, — F.3d —-, No. 07-40963, 565 F.3d 180, 2009 WL 930071, *9 (5th Cir. Apr.8, 2009) (“a plaintiff alleging a conspiracy to commit fraud must ‘plead with particularity the conspiracy as well as the overt acts … taken in furtherance of the conspiracy’ ”), quoting FC Inv. Group LLC v. IFX Markets, Ltd.., 529 F.3d 1087, 1097 (D.C.Cir.2008).

If Plaintiffs fail to state a claim for fraud underlying their civil conspiracy claim, the civil conspiracy claim must be dismissed, too.   Allstate Ins. Co. v. Receivable Finance, Inc., 501 F.3d 398, 414 (5th Cir.2007); American Tobacco Co., Inc. v. Grinnell, 951 S.W.2d 420, 438 ( Tex.1997) (“Allegations of conspiracy are not actionable absent an underlying [tort]”); Krames v. Bohannon Holman LLC, No. 3:06-CV-2370-0, 2009 WL 762205, *10 (N.D.Tex. Mar.24, 2009).

*5 To prevail on a claim of tortious interference in an existing contract, a plaintiff must establish (1) the plaintiff has a valid contract; (2) the defendant willfully and intentionally interfered with the contract; (3) the interference proximately caused the plaintiff’s injury; and (4) the plaintiff incurred damage or loss. Butnaru v. Ford Motor Co., 84 S.W.3d 198, 207 ( Tex.2002); Prudential Ins. Co. v. Financial Rev. Servs., 29 S.W.3d 74, 77 ( Tex.2000).

Motions to dismiss for failure to state a claim are appropriate when a defendant attacks the complaint because it fails to state a legally cognizable claim. Ramming v. United States, 281 F.3d 158, 161, 162 (5th Cir.2001) (“[W] hen considering a Rule 12(b) (6) motion to dismiss for failure to state a claim, the district court must examine the complaint to determine whether the allegations provide relief on any possible theory,” citing Cinel v. Connick, 15 F.3d 1338, 1334 (5th Cir.1994)), cert. denied sub nom. Cloud v. U.S., 536 U.S. 960, 122 S.Ct. 2665, 153 L.Ed.2d 839 (2002).

When a plaintiff’s complaint fails to state a claim, the court should generally give the plaintiff at least one chance to amend the complaint under Rule 15(a) before dismissing the action with prejudice. Great Plaints Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th Cir.2002) ( “District courts often afford plaintiffs at least one opportunity to cure pleading deficiencies before dismissing a case, unless it is clear that the defects are incurable or the plaintiffs advise the court that they are unwilling or unable to amend in a manner that will avoid dismissal.”);   United States ex rel. Adrian v. Regents of the Univ. of Cal., 363 F.3d 398, 403 (5th Cir.2004) (“Leave to amend should be freely given, and outright refusal to grant leave to amend without a justification … is considered an abuse of discretion. [citations omitted]”). The court should deny leave to amend if it determines that “the proposed change clearly is frivolous or advances a claim or defense that is legally insufficient on its fact ….” 6 Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Proc. § 1487 (2d ed.1990).

When addressing a motion to remand, however, the controlling pleading is the viable one at the time of removal; post-removal amendments are not considered.   Pullman Co. v. Jenkins, 305 U.S. 534, 537-38, 59 S.Ct. 347, 83 L.Ed. 334 (1939); Cavallini v. State Farm Mutual Auto Ins., 44 F.3d 256, 264 (5th Cir.1995).

Pending Motions

The gist of Medistar’s motion to remand is that there is no diversity jurisdiction here: Medistar is a Texas limited partnership, made of up partners who are all Texas citizens; Defendant Nelson is also a Texas citizen.FN6

FN6. It is undisputed that the other Defendants are diverse from Plaintiff: American Economy Insurance Company is an Indiana corporation with its principal place of business in Indianapolis, Indiana. Liberty Mutual Insurance Company is a Massachusetts corporation, with its principal place of business in Boston, Massachusetts.

Defendants contend that Nelson was fraudulently joined to defeat diversity.

In its response, Nelson incorporates its motion to dismiss, or alternatively, for more definite statement, and Nelson combines arguments for dismissal for improper joinder with dismissal for inadequate pleading of claims under Federal Rules of Civil Procedure 12(b)(6) and 9(b). With a supporting affidavit Nelson explains that it was hired not by Medistar, but by an agent of Medistar’s insurer to evaluate Medistar’s damage from Hurricane Ike and to provide engineering services relating to Medistar’s claims. As part of its services, Nelson asserts that it submitted four true and accurate engineering reports about the damage observed at Medistar’s commercial building, based upon site observations, field information, measurements, verbal information, and Mr. Nelson’s experience and structural analysis. Nelson insists Medistar cannot establish a cause of action against it in state court, but in large part argues that Medistar fails to satisfy pleading standards for its causes of action against Nelson.

Nelson maintains that Medistar failed to plead specific facts to support its fraud and conspiracy to commit fraud claims, as required by Federal Rules of Civil Procedure 12(b)(6) and 9(b). Medistar charges that Nelson misrepresented its survey results and manipulated its results to cause lower payments by the insurers during its investigation of Medistar’s insurance claim, but it does not identify the circumstances-the who, what when and where-to establish a fraud claim as to each defendant. It makes only broad, blanket statements about all of them generally. Medistar has also conceded that it did not rely on the representations made by Defendants, but instead relied on its own CEO and its own outside engineers to refute the reports and findings of Nelson. The conclusory statements in the Original Petition fail to plead a viable claim for conspiracy because they are merely speculative and fail to identify a specific time or place in which any meeting of the minds occurred.

Nelson does maintain that Medistar’s tortious interference claim FN7 against Nelson is not a viable cause of action in Texas against an independent engineer hired by an insurer to assist in the investigation absent a special relationship. Dagley v. Haag Engineering Co., 18 S.W.3d 787, 793-94 (Tex.App.-Houston [14th Dist.] 2000, no pet.), citing Dear v. Scottsdale Ins. Co., 947 S.W.2d 908 (Tex.App.-Dallas 1997) (holding that since there was no insurance contract and therefore no special relationship between the insured and an independent adjustor firm hired by the insured’s insurance carrier, the adjustor firm owed no duty to the insured and is not liable to the insured for improper investigation, settlement advice, negligence, bad faith, breach of contract, tortious interference or DTPA claims), overruled on other grounds, Apex Towing Co. v. Tolin, 41 S.W.3d 118, 122-23 ( Tex.2001). It is undisputed that Nelson did not have a contractual or other special relationship with Medistar at any time.

FN7. Paragraph 128 contains the tortious interference claim against Nelson:

Nelson interfered with Medistar’s contract with American Economy, Safeco and Liberty Mutual by submitting fraudulent building surveys, reports, and sealed engineering drawings for the purpose of providing a misrepresentation for the investigation of Medistar’s insurance claim that arose from Medistar’s insurance contract with American Economy, Safeco, and Liberty Mutual. Nelson prepared building diagrams which were false and materially misrepresented in such a manner that would indicate Medistar’s claims would be wrongfully denied or underpaid.

Nor, argues Nelson, does the pleading of the tortious interference claim satisfy Rule 12(b)(6). The Original Petition does not allege facts demonstrating that Nelson had an intent to interfere with the insurance contract between Medistar and the insurance company Defendants, how he interfered with it, that the interference proximately caused plaintiff’s injury, or that Nelson actively participated in persuading the insurance company Defendants to breach its contract. Instead the petition contains the kind of conclusory allegations and legal conclusions that Rule 12(b)(6) seeks to prevent.

Nelson also emphasizes that Plaintiff has failed to move for leave to amend to cure the problem, which has been pointed out in the two pending motions to dismiss. Nelson claims that evidence outside of the pleadings demonstrates that there is no reasonable basis to predict that Plaintiff might recover against Nelson under theories of fraud and/or conspiracy to commit fraud.

Finally under the economic loss rule, “mere nonfeasance under a contract creates liability only for breach of contract” and therefore “ ‘tort damages are generally not recoverable unless the plaintiff suffers an injury that is independent and separate from the economic losses recoverable under a breach of contract claim.’ ” Crawford v. Ace Sign, Inc., 917 S.W.2d 12, 13 ( Tex.1996); Heil Co. v. Polar Corp., 191 S.W.3d 805, 815 (Tex.App.-Fort Worth 2006), quoting Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 45-47 ( Tex.1998).FN8 See also M.D. Thompson v. Espey Huston & Assoc., Inc., 26 S.W.3d 103 (Tex.App.-Houston [14th Dist.] 2000, no writ) (holding that the negligence of an engineering firm, if any, in the performance of its inspections caused no injury to the owner beyond the economic loss to the subject of the contract under the economic loss rule). Nelson observes that although Medistar asserts tortious interference against Nelson and breach of contract against the other defendants, Medistar fails to demonstrate or allege that it has sustained a loss beyond the economic loss associated with the alleged delay in coverage under the insurance contract.

FN8. Should Medistar assert that its fraud claim is excluded from the economic loss rule under Formosa Plastics, Nelson points out that the Texas Supreme Court in that case held that “tort damages are recoverable for a fraudulent inducement claim irrespective of whether the fraudulent representations are later subsumed in a contract or whether the plaintiff suffers an economic loss related to the subject matter of the contract.” 960 S.W.2d at 47. If a plaintiff only asserts a claim for fraud and makes no allegation that it was fraudulently induced to enter into a contract, as here, Formosa Plastics does not apply and it is proper for the court to apply the economic loss rule to bar the fraud claim. Heil Co. v. Polar Corp., 191 S.W.3d at 816-19; Southwestern Bell Tel. Co. v. John Carlo Tex., Inc., 843 S.W. ed 470, 494-95 ( Tex.1992), citing Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 ( Tex.1986). The Texas Supreme Court subsequently clarified its opinion in Formosa Plastics:

In Formosa Plastics we concluded that Presidio could bring a fraudulent inducement claim even though its damages consisted only of economic losses related to the performance and subject matter of the parties’ contract. Some of our language in that opinion suggests that there is no distinction between a claim for fraud and fraudulent inducement. Fraudulent inducement, however, is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. That is, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties. Formosa Plastics involved a fraudulent inducement claim based on representations contained in the bid packet upon which Presidio based its contract offer, which resulted in a written contract between the parties. Thus, the case was correctly decided as to fraudulent inducement. Although economic losses may be recoverable under either fraud or fraudulent inducement, Formosa Plastics should not be construed to say that fraud and fraudulent inducement are interchangeable with respect to the measure of damages that would be recoverable. [citations omitted]

R.E. Haase v. Glazner, 62 S.W.3d 795, 798-99 ( Tex.2001). Medistar’s Original Petition asserts only a claim for fraud, and none for fraudulent inducement, and the fraud allegations arise out of the alleged breach of contract. Thus, argues Nelson, Medistar’s tortious interference with an existing contract, fraud, and conspiracy to commit fraud claims must be dismissed under Rule 12(b) (6) for failure to state a claim by application of the economic loss rule.

Last of all, Nelson insists that Medistar’s claim for consequential damages must also be dismissed under Rule 12(b)(6) for failure to allege any facts that would show an entitlement to such damages. It is black letter law in Texas that a claimant can only recover damages that are a proximate cause of the injury sustained and of which the defendant has received fair notice. Therefore a plaintiff must plead sufficient facts to give the defendant fair and adequate notice of the damages sought. Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d 887, 896-97 ( Tex.2000). Nelson argues that Medistar has failed to plead any facts that would put Nelson on notice as to the type of consequential damages Medistar will seek. Thus the claim for consequential damages must be dismissed under Rule 12(b)(6).

Insurance Defendants’ Response to Medistar’s Motion to Remand and Their Motion to Dismiss or for More Definite Statement (# 5)

American Economy, Safeco, and Liberty respond to Medistar’s motion to remand by complaining that Medistar did not plead any specific facts for its claims against Nelson, but instead erroneously argued that there could be no remand as long as Nelson could conceivably under some set of facts allege a cause of action against Nelson.FN9

FN9. This Court observes that Medistar’s argument invokes the old rule under Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 … (1957) [“a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”], which has been abrogated in federal court by Twombly, 127 S.Ct. at 1965 (“Factual allegations must be enough to raise a right to relief above the speculative level” and plead a claim that is plausible on its face). Moreover, as noted in Smallwood, “A ‘mere possibility of recovery under local law” will not preclude a finding of improper joinder.’ ” 385 F.3d at 573 n. 9, quoting Badon v. RJR Nabisco, Inc., 236 F.3d 282, 286 n. 4 (5th Cir.2000).

They urge the Court to deny Medistar’s motion to remand for three reasons: (1) Medistar’s conclusory allegations fail to state a claim against Nelson; (2) Texas law does not permit Medistar to bring tort claims against Nelson, an independent engineer; or (3) the economic loss rule bars Medistar’s tort claims against Nelson.

For the first reason, Medistar cites Waters v. State Farm Mutual Automobile Ins. Co., 158 F.R.D. 107, 109 (S.D.Tex.1994), in which this Court held that such conclusory allegations without factual basis are insufficient to state a claim against a non-diverse defendant and constitute fraudulent joinder. Medistar concedes that a proper fraudulent joinder analysis is made under Rule 12(b)(6), but it is well settled law that because Medistar made only conclusory allegations, it cannot survive such an analysis. This is especially true with respect to the fraud claim, which also fails to meet the particularity pleading standard of Rule 9(b). Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 339 (5th Cir.2008) (holding that conclusory allegations of fraud, without setting forth specific facts, are insufficient to survive a Rule 12(b)(6) analysis). In a typical statement, like the others devoid of facts and with legal conclusions masquerading as factual conclusions, Medistar alleged only that Nelson “made false statements, misrepresented material facts, and engaged in actions and/or omissions for the purpose of misleading Medistar as to the actual damages resulting from the peril of wind or the peril of storm surge or flood, and Medistar having relied upon such fraudulent conduct has been injured.” Original Petition as ¶ 120. See Fernandez-Mon tes v. Allied Pilots Ass’n, 987 F.2d 278, 284 (5th Cir.1993) ( “conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss”). They emphasize that a fraud complaint should be filed only after a wrong is reasonably believed to have occurred; it should serve to seek redress for a wrong, not find one. Segal v. Gordon, 467 F.2d 602, 607-08 (2d Cir.1971). Thus Medistar’s fraud allegations should be dismissed for failure to state a claim under Rule 12(b)(6). The insurance company Defendants also point out that in response to the Rule 12(b)(6) motions filed by the insurance company Defendants and Nelson, Medistar chose not to amend its petition or move for leave to amend or state any facts in its motion to remand or in its responses to the motions to dismiss, but chose to stand on its petition. Furthermore, they note that Medistar makes only two references to alleged misrepresentations by the insurance company Defendants: (1) that they “misrepresented to Medistar that the damage to property was not in excess to the amount paid as of the date of this complaint, even though the damage was caused by a covered peril and clearly in excess of previously paid amounts” (Original Petition ¶ 39); and (2) that the insurance company Defendants did not “offer Medistar adequate compensation without any honest explanations in writing or orally as to why additional payments were not being made” (id. at ¶ 40). Neither supports a fraud claim, and neither pleads the elements of fraud with the requisite particularity. Nor does Medistar allege specific facts to establish that each defendant individually committed fraud, but instead makes impermissibly broad, blanket statements pertaining to all defendants. See, e.g., Medistar alleges that Safeco “through its agents and employees, knowingly and with reckless disregard for Medistar in the course of handling of this subject claim made false statements, misrepresented material facts, and engaged in actions and/or omissions for the purpose of misleading Medistar as to the actual damages resulting from the peril of wind, and Medistar having relied upon such fraudulent conduct, has been injured.” Original Petition, ¶¶ 67, 90, 113. There is no identification of time, context, substance or speaker of the alleged false statements.

Insurance company Defendants also argue that because Medistar has failed to state a claim for fraud, its conspiracy to commit fraud claim also fails and should be dismissed. In addition, they contend that the conspiracy claims are also vague and conclusory allegations, not stated with particularity, including a specific time or place in which there was any meeting of the minds. Alternatively, the conspiracy claims should be dismissed under the “intra-corporate conspiracy rule,” which states that in the case of a corporation, “the acts of a corporate agent are the acts of the corporation, and a corporation cannot conspire with itself.” Elliott v. Tilton, 89 F.3d 260, 265 (5th Cir.1996); Wilhite v. H.E. Butt Co., 812 S.W.2d 1, 5 (Tex.App.-Corpus Christi 1991, no writ) (“As a matter of law, a corporation or other company cannot conspire with itself, no matter how many of its agents participated in the complained of action,”).

The insurance company Defendants, too, urge that the conspiracy to commit fraud claims against Nelson cannot not survive a Rule 12(b)(6) analysis because they also are conclusory. Original Petition at ¶¶ 123-25. Rule 9(b)’ s requirement of particularity also applies to the allegations of conspiracy to commit fraud. In re Enron Corp. Securities, Derivative and ERISA Litig., 623 F.Supp.2d 798, 811 n. 11 (S.D.Tex.2009).

Medistar’s tortious interference claims also do not survive a Rule 12(b)(6) analysis because of conclusory nature of all the allegations, insist Defendants. See Nabors Drilling U.S.A. L.P. v. Twister Exploration, L.L.C., No. Civ. A. 01-2109, 2002 WL 1610957, *2-3 (E.D.La. July 18, 2002) (granting renewed motion for Rule 12(b)(6) dismissal because plaintiff pleaded only conclusory allegations of tortious interference).

As for the second reason for denying remand, like Nelson the insurance company Defendants argue that Texas law does not allow an insured to assert tort claims against independent engineer Nelson. Dagley, 18 S.W.3d 787. That bar applies not only to negligence and implied duty of good faith and fair dealing, but to tortious interference and conspiracy claims. Id. Although the rule originally arose to preclude a breach of good faith and fair dealing cause of action against an insurance adjuster ( Natividad v. Alexsis, Inc., 875 S.W.2d 695, 698, 700 ( Tex.1994) (in the absence of a contractual or special relationship between an agent or contractor and an insured, it is the insurance carrier that is liable to the insured for the acts of its agents or contractors)), it was expanded to preclude all manner of tort claims alleged against adjusters, law firms, and engineering companies hired by an insurer to respond to claims. Dear, 947 S.W.2d at 916 (holding that an independent adjusting firm, hired by an insurer to investigate the claim of an insured, has no special relationship with the insured); Castillo v. Professional Serv. Indus., Inc., No. 04-97-00775-CV, 1999 WL 155833, *1-2 (Tex.App.-San Antonio March 24, 1999) (absent a special relationship, soil tester hired by an independent engineer, in turn hired by an insurance company to investigate a claim, does not owe a legal duty to the insured and “cannot be held liable as a matter of law, whether the claim is brought under the Texas Insurance Code, the DTPA, intentional infliction of emotional distress, conspiracy to commit fraud, or tortious interference with contractual relations.”); Dagley, 18 S.W.3d at 791-92 (dismissing multiple tort claims of negligence, DTPA, Insurance Code violations, tortious interference and civil conspiracy against independent engineering firm hired by insurer); Muniz v. State Farm Lloyds, 974 S.W.2d 229, 235-37 (Tex.App.-San Antonio 1998, no pet.), citing Bui v. St. Paul Mercury Ins. Co., 987 F.2d 204, 210 (5th Cir.1993) (applying Texas law and dismissing tort claims against independent adjuster because adjuster owed no duty to insured).

As the third and final reason for denying the motion to remand, Texas law does not permit tort claims which allege merely the economic loss suffered by breach of the insurance policy, insist the insurance company defendants. Agreeing with Nelson, the insurance company Defendants contend that under the economic loss rule, “tort damages are generally not recoverable unless the plaintiff suffers an injury that is independent and separate from the economic losses recoverable under a breach of contract claim.” Heil Co. v. Polar Corp., 191 S.W.3d 805, 815 (Tex.App.-Fort Worth 2006, pet. denied). Insurance company Defendants assert that Medistar acknowledges the rule, but tries to avoid it by stating that it “it will show additional independent extra contractual damages, as a result of the claim,” without providing any facts to support such damages now. Motion to Remand at 6-7. The conclusory allegations of independent injury are insufficient to defeat a claim of fraudulent joinder. Waters, 158 F.R.D. at 109 (“[F]ailure to specify the factual basis for recovery against a non-diverse party constitutes failure to state a claim and fraudulent joinder of that party.”).

In response to Nelson (# 12), Medistar admits its allegations regarding Nelson’s fraudulent activity do not satisfy Rule 9(b) particularity requirements but says “a more particular statement should be forthcoming.” Because Medistar’s tortious interference claim against Nelson is not a fraud claim, it is subject only to “notice pleading” requirements of Rule 8, Medistar insists that it has met that standard. Medistar also maintains that Dagley and Nativida, premised on negligence or a breach of implied duty of good faith and fair dealing, do not apply to the issues in this case. Moreover the cases were decided at summary judgment stage, not at a motion to dismiss stage. It responds to Nelson’s Economic Loss Rule argument by citing Nazareth Int’l Inc. v. J.C. Penny Corp., Inc., 2005 U.S. Dist. LEXIS 14473 (N.D.Tex. July 19, 2005) for the proposition that the Economic Loss Rule does not bar recovery for any tort claim if an additional injury exists outside the parameter of contract damages. Medistar points to paragraph 141(f) of the Original Petition requesting actual damages, exemplary damages, punitive damages and other relief the Court deems just and proper-all outside contractual damages. It also argues that Rule 8 does not require its claim for consequential damages to be pleaded with particularity. If remanded, the issue can be addressed in state court.

In response (# 11) to the insurance Company Defendants’ motion to dismiss or for more definite statement, Medistar urges the court to deny the motion or to allow it to amend. Medistar concedes that some of its allegations do not satisfy the particularity requirement and “that a more particular statement will be forthcoming” if the Court denies remand. It maintains that its conspiracy claim does not fall under the intra-corporate conspiracy rule because it is alleging that the insurers conspired with Nelson. It reiterates that the Economic Loss Rule does not apply because paragraph 141(f) of the Original Petition requests actual damages, exemplary damages, punitive damages and other relief the Court deems just and proper-all outside contractual damages. Medistar argues that it has adequately pleaded a claim against the insurance company Defendants for violations of the DTPA, breach of the duty of good faith and unfair dealing, Chapter 542, and breach of contract.

Court’s Ruling

*10 Because the motion to remand must be decided on the basis of the pleadings at the time of removal, and not on any subsequent existing or proposed post-removal amendment, and because that pleading determines this Court’s jurisdiction, the Court addresses the remand issues first, separately from the motions to dismiss.

As a matter of law in Texas, since Medistar has no contractual or special relationship with Nelson, Medistar fails to state a claim agsinst Nelson for tortious interference with contract and for conspiracy to defraud relating to Nelson’s alleged improper negligent investigation of the insurance claims and manipulation of its reports to limit Medistar’s recovery on its claim against the insurance company Defendants.

In Natividad v. Alexsis, Inc., 875 S.W.2d 695, 698 ( Tex.1994), the Texas Supreme Court held that in the insurance context because the duty of good faith and fair dealing arises only from a contract giving rise to a special relationship as a result of unequal bargaining power between the parties to the insurance contract, where there is no privity of contract, as with an independent adjusting firm hired by the insurer, the adjusting firm did not owe an insured such a duty and therefore could not be liable for a breach of that duty. The duty of good faith and fair dealing is non-delegable. Id. Therefore the Texas Supreme Court concluded that the insurer “remains liable for actions by its employees, agents or contractors that breached the duty of good faith and fair dealing owed to” the insured by the insurer. Id. at 698 & n. 7 (“The insurance companies must answer for the ‘sins’ of their agents.”)

Relying on the rationale in Navidad, the Fifth Circuit in Bui v. St. Paul Mercury Ins. Co., 981 F.2d 209, 210 (5th Cir.1993) (applying Texas law), determined that any claim for negligent investigation brought by an insured against an independent claims adjusting firm hired by the insurer must fail as a matter of law. Subsequently that rule was expanded by the Dallas Court of Appeals in Dear, which found the independent adjusting firm “established its status as Scottsdale’s agent” to cover allegations of improper investigation and settlement advice regardless of whether the plaintiff framed his allegations as negligence, bad faith, breach of contract, tortious interference with contract, or DTPA violations. Dear. 947 S.W.2d at 917.

In the much-cited Dagley action, 18 S.W.3d 787, charging wrongful denial of insurance claims, the plaintiffs alleged that Haag Engineering Company, an independent engineering firm hired by insurer State Farm to evaluate hail storm damage, was liable for negligence, conspiracy, tortious interference, violations of the DTPA and the Texas Insurance Code. The appellate court, in affirming a summary judgment’s dismissal of the tortious interference claim inter alia, concluded, “[A]bsent a special relationship, Haag cannot be held liable for tortious interference.” 18 S.W.3d at 794, citing Dear, 947 S.W.2d at 917. In Dear, the Court reasoned that the defendant independent adjuster was retained and paid for by the insurer, had never entered into a contract with the insured, had no duty to the insured, had performed its role as an independent adjusting firm, and therefore was an agent or independent contractor of the insurance company. Id. at 791 & n. 3, citing Dear, 947 S.W. at 917. Moreover the Fourteenth Court of Appeals also affirmed the trial court’s summary judgment dismissing the claim that State Farm and Haag conspired in their investigation of the plaintiffs’ claims in an attempt to deny them the insurance benefits rightfully due them:

“The mere agreement to resist a claim, however, is not an actionable civil conspiracy,” Massey v. Armco Steel Co., 652 S.W.2d 932, 934 ( Tex.1983). For liability to attach there must be an unlawful, overt act to support a conspiracy. See id. We cannot conclude that submitting a report to State Farm with the conclusion that there was no hail storm damage to appellants’ home is an unlawful, overt act to support a conspiracy. Moreover, having found that Haag is not liable to appellants on their other claims, Haag cannot be liable for conspiracy.

18 S.W.3d at 795.

Thus the only remaining claim against Nelson is for fraud. Because the Original Petition was drafted in Texas state court, it was subject only to the requirements for adequate pleading under state law. There is no counterpart to Federal Rule 9(b) in the Texas Rules of Civil Procedure for pleading fraud. Nor has Texas followed Twombly. Instead Texas Rule of Civil Procedure 45(b) states that in the district and county courts the petition should “consist of a statement in plain and concise language of the plaintiff’s cause of action …. That an allegation be evidentiary or be of legal conclusion shall not be grounds for objection when fair notice to the opponent is given by the allegations as a whole.” Rule 47 also requires only notice pleading:

An original pleading which sets forth a claim for relief whether an original petition, counterclaim, cross-claim, or third party claim, shall contain

(a) a short statement of the cause of action sufficient to give fair notice of the claim involved,

(b) in all claims for unliquidated damages only the statement that the damages sought are within the jurisdictional limits of the court, and

(c) a demand for judgment for all the other relief to which the party deems himself entitled.

“A pleading provides sufficient fair notice of the claim involved when ‘an opposing attorney of reasonable competence could examine the pleadings and ascertain the nature and basic issue of the controversy and the relevant testimony.’ ” UMLIC VP LLV v. T & M Sales and Environmental Systems, 176 S.W.3d 595 (Tex.App.-Corpus Christi 2005) (citation omitted). “The pleadings must be sufficiently adequate so the court is able, from an examination of the pleadings alone, to ascertain with reasonable certainty and without resorting to information from another source, the elements of a plaintiff’s cause of action and relief sought with sufficient information upon which to base a judgment. Id., citing Tone v. Lawyers Title Ins. Corp., 578 S.W.2d 679, 683 ( Tex.1979). The petition must be liberally construed in favor of the pleader. Id., citing Stone v. Lawyers Title Ins. Corp., 554 S.W.2d 183, 186 ( Tex.1977). “ ‘The court will look to the pleader’s intendment’ and uphold the pleading as to a cause of action even if some element of that cause of action has not been specifically alleged.” Id., citing Gulf, C. & S.F. Ry. Co. v. Bliss, 368 S.W.2d 594, 599 ( Tex.1963), and Boyles v. Kerr, 855 S.W.2d 593, 601 ( Tex.1993). “ ‘Every fact will be supplied that can reasonably be inferred from what is specifically stated.’ ” Id., citing Bliss, 368 S.W.2d at 599. “ ‘Mere formalities, minor defects and technical insufficiencies’ will not invalidate a cause of action in a petition so long as the pleading gives fair notice to the opposing party.” Id., citing Stoner, 578 S.W.2d at 683.

Because Nelson was not a party to any contract with Medistar, Medistar cannot assert a claim against Nelson for breach of contract or any cause of action that arises out of a contract.FN10 To be viable, its claim for fraud against Nelson must be independent of the contract. Because there are essentially no facts, but only vague and conclusory statements regarding Medistar’s fraud claim, a summary judgment-type inquiry is required to determine who said or wrote what, where, and when and facts demonstrating reliance on those particular representations by Medistar. Frisby v. Lumbermens Mut. Cas. Co., 500 F.Supp.2d 697, 699 (S.D.Tex.2007), citing Smallwood, 385 F.3d at 573. At present it appears to the Court that Medistar would have difficulty showing that it relied on Nelson’s allegedly erroneous reports since it contends that they were incorrect, but it will give Medistar an opportunity to state supporting facts if it has any.

FN10. For this reason the Economic Loss Rule does not apply to the fraud claim.

Accordingly, the Court

ORDERS Medistar to submit within twenty days either an affidavit or a deposition of someone with personal knowledge who can provide the necessary supporting facts satisfying Fifth Circuit pleading standards FN11 to support the elements of its fraud claim FN12 against Nelson. Defendants may file responses within ten days after Medistar submits its summary judgment-type evidence. The Court reminds the parties that such inquiry will be limited to identifying “discrete and undisputed facts that would bar a plaintiffs’ recovery against an in-state defendant; anything more risks ‘moving the court beyond jurisdiction and into the resolution of the merits ….’ ” Smallwood, 385 F.3d at 573-74. The Court defers ruling on the motions to dismiss until the motion to remand has been resolved.

FN11. The Fifth Circuit has ruled, “State law fraud claims are subject to the heightened pleading requirements of Rule 9(b). To plead fraud adequately, the plaintiff must ‘specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.’ ” Sullivan v. Leor Energy, LLC., 600 F.3d 542d, 550-51 (5th Cir.2010), citing Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 338-39 (5th Cir.2008), and ABC Arbitrage v. Tchuruk, 291 F.3d 336, 350 (5th Cir.2002).

FN12. The elements of common law fraud are (1) a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury. Allstate Ins. Co. v. Receivable Finance Co., L.L.C., 501 F.3d 398, 406 (5th Cir.2007), citing In re First Merit Bank, N.A., 52 S.W.3d 749, 758 ( Tex.2001).

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

United States District Court,

S.D. Texas,

Houston Division.

Laura PENDERGEST-HOLT, et al., Plaintiffs,

v.

CERTAIN UNDERWRITERS AT LLOYD’S OF LONDON and Arch Specialty Insurance Co., De-fendants.

Civil Action No. H-09-3712.

May 10, 2010.

MEMORANDUM AND ORDER

NANCY F. ATLAS, District Judge.

Plaintiffs, each an executive in one or more com-pany founded by R. Allen Stanford, seek in this suit reimbursement of defense costs in criminal and civil litigation under directors’ and officers’ insurance policies (collectively, “D & O Policy”) issued by Defendants (“Underwriters”). On January 26, 2010, the District Court, Judge Hittner presiding, entered a preliminary injunction prohibiting Underwriters from “withholding payment” for costs “already incurred” by Plaintiffs and to be “incurred by them in the future … until a trial on the merits in this case or such other time as this Court orders.” Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 681 F.Supp.2d 816, 2010 WL 317684, at *14 (S.D.Tex. Jan.26, 2010). Following an expedited appeal by Defendants, the Fifth Circuit modified the injunction, affirmed the District Court’s order as modified, and remanded the case for further proceedings on the coverage question. Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 600 F.3d 562, 576 (5th Cir. Mar.15, 2010). Specifically, the Fifth Circuit held that “[t]he under-writers are enjoined from refusing to advance defense costs as provided for in the D & O Policy unless and until a court determine[s] that the alleged act or alleged acts [of Money Laundering] did in fact occur.” Id. (internal quotation marks omitted, brackets in the original).

On remand, this Court announced that this “in fact” determination would be made in the context of a preliminary injunction hearing. At a status conference on April 27, 2010, the Court requested briefing on: (1) which elements of the preliminary injunction standard are in issue at this stage of the case; and (2) the ap-plicable burden of proof for the in fact determination of whether Money Laundering occurred.FN1 Both parties have filed the requested briefing. FN2 The Court now turns to these two issues.

FN1. The Court also requested background briefing on an insured’s right to reimburse-ment of defense costs under an insurance policy that does not impose a duty to defend. The Court will take the parties’ submissions on this issue under advisement.

FN2. Plaintiffs filed a Brief in Support of Miscellaneous Relief [Doc. # 81] (“Plaintiffs’ Brief”), and Underwriters filed a “Response to Plaintiffs’ Brief on Elements of the Pre-liminary Injunction at Issue and Burden of Proof (“Response”). Plaintiffs’ also filed a Reply [Doc. # 90].

1. PRELIMINARY INJUNCTION ELEMENTS IN ISSUE

“A plaintiff seeking a preliminary injunction must establish that [1] he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.” Id. at 568-69. Both parties agree that the Court’s focus at the preliminary injunction hearing should be on the first prong, i.e., the Plaintiffs’ likelihood of success on the merits.FN3 Considering the Fifth Circuit’s mandate in this case, the Court concurs. See Henderson v. Stalder, 407 F.3d 351, 354 (5th Cir.2005) (“ ‘[T]he mandate rule compels compliance on remand with the dictates of a superior court and forecloses relitigation of issues expressly or impliedly decided by the appellate court.’ ”) (quoting United States v. Lee, 358 F.3d 315, 321 (5th Cir.2004)). The Court’s focus at the preliminary injunction hearing will be on the first prong of the preliminary injunction test. This inquiry will turn on a determination, as to each Plaintiff, of whether money laundering, as defined by the D & O Policy (“Money Laundering”), in fact occurred.

FN3. Plaintiffs’ Brief, at 6-7; Response, at 4-5.

1. BURDEN OF PROOF

Underwriters will bear the burden of proving that Money Laundering in fact occurred. Plaintiffs argue that the Money Laundering policy provision on which Underwriters rely in denying reimbursement costs is an exclusion, and that Underwriters therefore bear the burden of proving its applicability. FN4 Underwriters agree.FN5 The Court holds that Underwriters have the burden of proving the applicability of the Money Laundering exclusion in the D & O Policy. See Gore Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 370 (5th Cir.2008) (“Texas law places the burden of proving that an exclusion applies on the insurance company .”) (citing TEX. INS.CODE § 554.002); Texas Farmers Ins. Co. v. Murphy, 996 S.W.2d 873, 879 ( Tex.1999) ( “If there are any con-tractual provisions that could limit or bar recovery, it is incumbent on the insurer to plead and prove them.”).

FN4. Plaintiffs’ Brief, at 14-15.

FN5. Response, at 3.

The Fifth Circuit expressly reserved the question of whether a decision on the Money Laundering exclu-sion should be made by a preponderance standard or only by clear and convincing evidence. See Penderg-est-Holt, 600 F.3d at 575. Based on the Court’s current research, the Court will apply a preponderance of the evidence standard. Although there appears to be li-mited Texas authority on this point,FN6 the cases cited by Underwriters, and those located through the Court’s own research, indicate that an insurer must prove the applicability of a policy exclusion by a preponderance of the evidence. See Routis v. Clarendon Am. Ins. Co., 2007 WL 1412566, at *8 (Tex.App.-Houston [1st Dist.] 2007, no pet.) (stating that to establish arson by an insured, the insurer bears the burden of proving that the insured set the fire, “[h]owever, the insured’s burden of proof is not to show by an absolute cer-tainty, but rather, by a preponderance of the evidence that the insured set the fire”) (citing Murphy v. Texas Farmers Ins. Co., 982 S.W.2d 79, 84 (Tex.App.-Houston [1st Dist.] 1998) (“To establish arson as a defense to a civil suit for insurance proceeds, the insurance company must show by a preponderance of the evidence that the insured set the fire or caused the fire to be set.”), aff’d on other grounds, 996 S.W.2d 873 ( Tex.1999)); Nobles v. Employees Retirement Sys. of Texas, 53 S.W.3d 483, 486 (Tex.App.-Austin 2001, no pet.) (an insurer has the burden to plead, and prove, by a preponderance of the evidence, a policy exclusion and present some evidence of its applicability).

FN6. TEX. INS.CODE § 554.002 provides that the insurer has the burden of proof on an exclusion but does not specify the applicable standard.

Plaintiffs do not expressly argue that another standard should apply.FN7 Plaintiffs’ cite the following passage from Couch on Insurance: “While the degree of proof required for both coverage and exclusions is generally described as being a preponderance of the evidence, there may be a slightly heavier weight required for proof of exclusions.” FN8 However, Plaintiffs admit that they have not located a single Texas case apply-ing a clear and convincing standard in this context.FN9 In the absence of any applicable Texas case or statute, Plaintiffs’ citations to Couch on Insurance are insufficient to trigger the use of a standard of proof other than preponderance of the evidence.

FN7. See generally Reply. Plaintiffs state that they did not brief the issue in Plaintiffs’ Brief because they believed that the issue to be addressed was who had the burden of proof rather than the appropriate standard. Id. at 2 n. 3.

FN8. 17A COUCH ON INSURANCE § 254.14.

FN9. Reply, at 2.

III. CONCLUSION

For the foregoing reasons, it is

ORDERED that the Court’s focus at the preliminary injunction hearing will be the first element of the preliminary injunction standard, i.e., the Plaintiffs’ likelihood of success on the merits. It is further

ORDERED that Underwriters will have the burden of proving that Money Laundering in fact occurred.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
MID-CONTINENT CASUALTY §
COMPANY, §
§
Plaintiff, §
§
v. § CIVIL ACTION NO. H-06-3451
§
HAMMONDS TECHNICAL SERVICES, §
INCORPORATED, §
§
Defendant. §
MEMORANDUM AND ORDER
Pending is Plaintiff Mid-Continent Casualty Company’s Motion
for Summary Judgment (Document No. 14). Defendant filed no
response, and the motion is therefore deemed unopposed pursuant to
Local Rule 7.4. After carefully considering the motion and the
applicable law, the Court concludes as follows.
I. Background
Plaintiff Mid-Continent Casualty Company (“Plaintiff”) brought
this case for declaratory judgment that it has no duty to defend or
indemnify Defendant Hammonds Technical Services, Incorporated,
(“Defendant”) in a products liability lawsuit filed in Illinois by
Nancy Shaw (“Ms. Shaw”), styled Cause No. 05-L-773 (“Underlying
1 The Underlying Suit is captioned: Nancy Shaw, Individually
and as Special Administrator of the Estate of Francis N. Shaw,
Deceased v. Ashland, Inc. et al. See Document No. 14, ex. A at 1.
It was filed in the Third Judicial Circuit Court of Madison County,
Illinois. Id.
2
Suit”).1 Ms. Shaw filed the Underlying Suit against about 50
parties, including Defendant, a manufacturer of fuel injectors and
fuel pumps for the airline industry, for the wrongful death of her
husband Francis N. Shaw (“the deceased” or “Decedent”). See
Document No. 14, ex. A at 1. The complaint in the Underlying Suit
alleges that the deceased was an aircraft mechanic who worked for
27 years for various employers at Lambert International Airport in
St. Louis, Missouri, including for Trans-World Airlines from 1986
to 2001 and for American Airlines from 2001 to 2003. Id., ex. A
at 3. In 2003, he was diagnosed with Non-Hodgkin’s Lymphoma and
died in February, 2005. Id. It is alleged that the deceased was
an ordinary user of benzene and benzene products during the course
of his long employment at the airport in St. Louis, and elsewhere
while engaged in non-occupational work projects (including, but
not limited to, home and automotive repairs, maintenance and
remodeling), that the numerous defendants’ benzene products
resulted in an unreasonably dangerous condition, and that his
exposure to these products caused his fatal illness and death.
Id., ex. A at 4.
The commercial general liability insurance policies and excess
coverage policies issued by Plaintiff to Defendant were in effect
2 The policies at issue are: CGL-221374 and XS-103555, the
commercial general liability insurance policy and excess coverage
policy, respectively, effective from July 18, 1996 to July 18,
1997; and CGL-236255 and XS-104484, the commercial general
liability insurance policy and excess coverage policy,
respectively, effective from July 18, 1997 to July 18, 1998. See
id., ex. B1-B4.
3
from July 18, 1996 to July 18, 1998.2 Id. at 3, 4, ex. B1 at
MC0001. After Ms. Shaw’s suit was filed, Defendant sought defense
and indemnity from Plaintiff under the insurance policies. Id. at
3-4.
Both of the commercial general liability policies and both of
the excess coverage policies exclude coverage for bodily injury
included in the “products-completed operations hazard” exclusion.
See Document No. 14, ex. B1 at MC0019, B2 at MC0065, B3 at MC0097,
B4 at MC0131. The policies define “products-completed operations
hazard” as
all “bodily injury” . . . occurring away from premises
[Defendant] own[s] or rent[s] and arising out of
“[Defendant’s] product” or “[Defendant’s] work” except:
(1) Products that are still in [Defendant’s]
physical possession; or
(2) Work that has not yet been completed or
abandoned.
[]“[Defendant’s] work” will be deemed completed at the
earliest of the following times:
(1) When all of the work called for in [Defendant’s]
contract has been completed.
(2) When all of the work to be done at the site has
been completed if [Defendant’s] contract calls
for work at more than one site.
(3) When that part of the work done at a job site
has been put to its intended use by any person
4
or organization other than another contractor
or subcontractor working on the same project.
Work that may need service, maintenance, correction,
repair or replacement, but which is otherwise complete,
will be treated as completed.
Id., ex. B1 at MC0032-33; see also id., ex. B2 at MC0057, B3 at
MC0093, B4 at MC0124 (using substantially similar language in the
other three policies to define “products-completed operations
hazard”). In other words, bodily injuries occurring away from
Defendant’s premises, or arising out of completed products no
longer controlled by Defendant, are not covered under these
policies. See id. According to the policies, Defendant’s premises
were located in Houston, Texas. See id., ex. B1 at MC0039, ex. B3
at MC0080.
Additionally, the insurance policies exclude coverage for
bodily injuries expected or intended from the standpoint of the
insured, see id., ex. B1 at MC0022, B2 at MC0043, B3 at MC0083, B4
at MC0110; and bodily injury occurring outside the policy period,
see Document No. 14, ex. B1 at MC0022, ex. B2 at MC0042, B3 at
MC0083, B4 at 0109.
Plaintiff contends its policies provide no coverage and it has
no duty to defend for the Underlying Suit because: (1) the claims
are excluded by the products-completed operations hazard
exclusions; (2) the claims are excluded by the expected or intended
5
injury exclusions; and (3) the deceased’s illness did not occur
until after the policy periods expired. See Document No. 15.
II. Standards of Review
A. Summary Judgment Standard
Rule 56(c) provides that summary judgment “shall be rendered
forthwith if the pleadings, depositions, answers to interrogatories,
and admissions on file, together with the affidavits,
if any, show that there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter of
law.” FED. R. CIV. P. 56(c). The moving party must “demonstrate
the absence of a genuine issue of material fact.” Celotex Corp. v.
Catrett, 106 S. Ct. 2548, 2553 (1986).
Once the movant carries this burden, the burden shifts to the
nonmovant to show that summary judgment should not be granted.
Morris v. Covan World Wide Moving, Inc., 144 F.3d 377, 380 (5th
Cir. 1998). A party opposing a properly supported motion for
summary judgment may not rest upon mere allegations or denials in
a pleading, and unsubstantiated assertions that a fact issue exists
will not suffice. Id. “[T]he nonmoving party must set forth
specific facts showing the existence of a ‘genuine’ issue
concerning every essential component of its case.” Id.
In considering a motion for summary judgment, the district
court must view the evidence “through the prism of the substantive
6
evidentiary burden.” Anderson v. Liberty Lobby, Inc., 106 S. Ct.
2505, 2513 (1986). All justifiable inferences to be drawn from the
underlying facts must be viewed in the light most favorable to the
nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 106 S. Ct. 1348, 1356 (1986). “If the record, viewed in
this light, could not lead a rational trier of fact to find” for
the nonmovant, then summary judgment is proper. Kelley v. Price-
Macemon, Inc., 992 F.2d 1408, 1413 (5th Cir. 1993) (citing
Matsushita, 106 S. Ct. at 1351). “If, on the other hand, the
factfinder could reasonably find in [the nonmovant’s] favor, then
summary judgment is improper.” Id. Even if the standards of Rule
56 are met, a court has discretion to deny a motion for summary
judgment if it believes that “the better course would be to proceed
to a full trial.” Anderson, 106 S. Ct. at 2513.
A motion for summary judgment cannot, of course, be granted
simply because there is no opposition. Hetzel v. Bethlehem Steel
Corp., 50 F.3d 360, 362 n.3 (5th Cir. 1995). When no response is
filed, however, the Court may accept as undisputed the facts set
forth in support of the motion and grant summary judgment when a
prima facie showing for entitlement to judgment is made. See
Eversley v. Mbank Dallas, 843 F.2d 172, 174 (5th Cir. 1988); Rayha
v. United Parcel Serv., Inc., 940 F. Supp. 1066, 1068 (S.D. Tex.
1996).
3 Texas law governs this dispute. See Klumpe v. IBP, Inc.,
309 F.3d 279, 281 (5th Cir. 2002) (“In diversity cases, we apply
state substantive law together with the federal rules of
procedure.” (footnote omitted)); see also TEX. INS. CODE ANN. art.
21.42 (Vernon 2006) (“Any contract of insurance payable to any
citizen or inhabitant of this State by any insurance
company . . . shall be held to be a contract made and entered into
under and by virtue of the laws of this State relating to
insurance, and governed thereby . . . .”).
7
B. Legal Standards Governing the Duty to Defend
“Under Texas law, an insurer may have a duty to defend a
lawsuit against its insured.”3 Primrose Operating Co. v. Nat’l Am.
Ins. Co., 382 F.3d 546, 552 (5th Cir. 2004). Texas courts employ
an “eight corners” or “complaint allegation” rule in determining
whether an insurer has a duty to defend. See id.; Northfield Ins.
Co. v. Loving Home Care, Inc., 363 F.3d 523, 528 (5th Cir. 2004)
(citing King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex.
2002)); see also GuideOne Elite Ins. Co. v. Fielder Road Baptist
Church, 197 S.W.3d 305, 308-09 (Tex. 2006). “This rule ‘requires
the trier of fact to examine only the allegations in the
[underlying] complaint and the insurance policy in determining
whether a duty to defend exists.’” Canutillo Indep. Sch. Dist. v.
Nat’l Union Fire Ins. Co., 99 F.3d 695, 701 (5th Cir. 1996)
(quoting Gulf Chem. & Metallurgical Corp. v. Associated Metals
& Minerals Corp., 1 F.3d 365, 369 (5th Cir. 1993)); see also
Guideone, 197 S.W.3d at 308 (explaining the eight corners rule).
8
“Thus, the duty to defend arises only when the facts alleged
in the complaint, if taken as true, would potentially state a cause
of action falling within the terms of the policy.” Northfield, 363
F.3d at 528. “If a petition does not allege facts within the scope
of coverage, an insurer is not legally required to defend a suit
against its insured.” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.
v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex.
1997)). An insurer can absolve itself of the duty to defend by
showing, within the confines of the eight corners rule, “that the
plain language of a policy exclusion or limitation allows the
insurer to avoid coverage of all claims.” Northfield, 363 F.3d at
528.
The focus of the inquiry is on the alleged facts, not on the
asserted legal theories. St. Paul Fire & Marine Ins. Co. v. Green
Tree Fin. Corp.-Tex., 249 F.3d 389, 392 (5th Cir. 2001). “Facts
outside the pleadings, even those easily ascertained, are
ordinarily not material to the determination[,] and allegations
against the insured are liberally construed in favor of coverage.”
GuideOne, 197 S.W.3d at 308 (citing Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa., 939 S.W.2d at 141). Additionally, a court may not
attempt to “imagine factual scenarios which might trigger
coverage.” Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 939
S.W.2d at 142 (emphasis added).
9
III. Discussion
Plaintiff contends that the injuries alleged in the Underlying
Suit were caused away from Defendant’s premises or by exposure to
completed fuel injectors and fuel pumps, thus bringing the injuries
under the products-completed operations hazard exclusions from
coverage under Defendant’s policies. See Document No. 14 at 10-14.
The policies state, in similar language, that Defendant does
not have coverage for bodily harm included within the “productscompleted
operations hazard” exclusion. See id., ex. B1 at MC0019,
B2 at MC0065, B3 at MC0097, B4 at MC0131. The policies define a
“products-completed operations hazard” to include all bodily injury
occurring away from the premises owned or leased by Defendant and
arising out of Defendant’s completed products unless the products
remain in Defendant’s physical possession or have not yet been
completed. See id., ex. B1 at MC0032, B2 at MC0057, B3 at MC0093,
B4 at MC0124; see also supra Section I (quoting the language of the
policies defining “products-completed operations hazard”). Thus,
injuries from completed products and off-premises injuries are
excluded under Defendant’s policies. Id. Moreover, the policies
treat products that require service, but are otherwise complete–
like fuel injectors or fuel filters on airplanes–as complete, and
therefore outside coverage as well. Id.
The Underlying Suit makes no allegation that the deceased ever
came onto Defendant’s premises in Houston, Texas. In fact, the
10
injuries are alleged to have occurred at distant locations, where
the deceased worked at Lambert International Airport in St. Louis,
Missouri, and in non-occupational projects such as home and
automotive projects. Id., ex. A at 3-4. Never is it alleged that
any of this occurred on or even near Defendant’s premises in
Houston, Texas.
The Underlying Suit also fails to allege that any unfinished
fuel injectors or fuel pumps of Defendant contributed to the
deceased’s illness and subsequent death. The policies require
injuries from products to arise from either uncompleted products or
products still under the control of Defendant–neither of which is
alleged in the underlying complaint. Additionally, the policies
expressly treat items requiring maintenance, such as fuel injectors
or fuel pumps encountered by airplane mechanics, as completed
products not subject to coverage.
In sum, the Underlying Suit fails to allege bodily harms to
the deceased that occurred either on the premises of Defendant, or
as the result of a non-completed fuel injector or fuel pump. The
“products-completed operation hazards” exclusions therefore apply.
Applying the eight corners rule, the policies issued by Plaintiff
to Defendant do not cover the harms alleged in the Underlying Suit.
See LaBatt Co. v. Hartford Lloyd’s Ins. Co., 776 S.W.2d 795, 798-
800 (Tex. App.–Corpus Christi 1989) (holding that a similar
11
products-complete hazard exclusion negated the insurers duty to
defend).
C. Duty to Indemnify
Plaintiff further seeks a declaration that it has no duty to
indemnify Defendant. Although Texas law generally considers that
issue justiciable only after the underlying action has been
concluded, there is an exception where, as here, “‘the same reasons
that negate the duty to defend likewise negate any possibility the
insurer will ever have a duty to indemnify.’” Northfield, 363 F.3d
at 536 (quoting Farmers Tex. County Mut. Ins. Co. v. Griffin, 955
S.W.2d 81, 84 (Tex. 1997)).
IV. Order
For the reasons set forth, it is hereby
ORDERED that Plaintiff Mid-Continent Casualty Company’s Motion
for Summary Judgment (Document No. 13) is GRANTED, and it is
ORDERED and ADJUDGED that:
1. Mid-Continent Casualty Company does not owe Hammonds Technical
Services, Inc., defense, indemnity or coverage under the
policies above for claims in the Underlying Suit because such
claims are excluded by the products-completed operations
hazard exclusions;
2. Mid-Continent Casualty Company is not obligated or liable to
Hammonds Technical Services, Inc., in connection with any
judgment or settlement which may be entered in the Underlying
Suit; and
12
3. Mid-Continent Casualty Company is not obligated to pay any
costs taxed upon Hammonds Technical Services, Inc., in the
Underlying Suit, nor to pay on behalf of Hammonds Technical
Services, Inc., any sum that Hammonds Technical Services,
Inc., shall become legally obligated to pay as damages because
of or attendant to the Underlying Suit.
The Clerk will enter this Order, providing a correct copy to
all counsel of record.
SIGNED in Houston, Texas, this 27th day of November, 2007.
____________________________________
EWING WERLEIN, JR.
UNITED STATES DISTRICT JUDGE

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

Court of Appeals of Texas,Texarkana.

Darrell McKNIGHT and Michael Palmer, Appellants

v.

AMERICAN MERCURY INSURANCE COMPANY, Appellee.

No. 06-08-00004-CV.

Submitted May 19, 2008.

Decided Sept. 24, 2008.

MORRISS, C.J., CARTER and MOSELEY, JJ.

OPINION

Opinion by Justice CARTER.

Darrell McKnight and Michael Palmer made a claim with their insurer, American Mercury Insurance Company (American Mercury), seeking payment for damage to their metal building resulting from a hailstorm in March of 2000. Initially, American Mercury issued a check to pay for the damage assessed. When McKnight and Palmer, dissatisfied with the amount paid, refused to accept the check and, instead, filed suit in Upshur County (Upshur County litigation), American Mercury reinvestigated the claim. Upon its reinvestigation, American Mercury discovered that the damage, if there ever was any, had been cured by natural processes. So, during the Upshur County litigation, American Mercury maintained its position that it owed nothing to McKnight and Palmer because there was no remaining discernible damage to the building.

Several years later and following a trial to an Upshur County jury, the trial court entered judgment that McKnight and Palmer take nothing. McKnight and Palmer then tried to deposit the check that American Mercury had initially issued several years earlier. Not surprisingly, American Mercury refused to honor that check. McKnight and Palmer then sued again, this time in Gregg County FN1 (Gregg County litigation). American Mercury moved for summary judgment on the ground that the doctrine of res judicata barred the Gregg County litigation. The trial court agreed and granted summary judgment that McKnight and Palmer take nothing. They now appeal that judgment to this Court. We first discuss the details and factual allegations of both suits.

FN1. This second suit was originally filed in Upshur County as well under cause number 690-06. American Mercury moved to transfer venue based on the fact that the property at issue was actually located in Gregg County, a fact that McKnight and Palmer later conceded. Although the order is not included in the our record, the parties refer to an agreed order by which the cause was indeed transferred to Gregg County under cause number 2007-612-A.

1. FACTUAL AND PROCEDURAL HISTORY

1. Upshur County Litigation

Again, before either suit was filed, American Mercury tendered a check in the amount of $24,055.70.FN2McKnight and Palmer disagreed with the amount of the check and filed suit in Upshur County seeking damages. See McKnight v. Am. Mercury Ins. Co., cause number 401-02. In their petition, filed in June 2002, McKnight and Palmer described the case as one “involving, breach of contract, violation of the Texas Deceptive Trade Practices Act, and violations of the Texas Insurance Code.”They alleged that American Mercury “failed to provide full coverage for certain damage” and that, as a result, they “herein [sue] for payment of all property damage covered under the terms of this policy of insurance.”

FN2. Although the date of the check is not clear from the record before us, we note that the estimate upon which American Mercury issued the check was completed on August 12, 2000.

Attached to American Mercury’s designation of expert witnesses, filed February 24, 2005, are three reports important to the analysis of the Upshur County litigation: (1) a report dated November 10, 2003, following a reinspection by the claims service that originally inspected the building, (2) a follow-up report dated November 12, 2003, summarizing the November 10 report’s findings, and (3) an engineering firm’s report dated February 14, 2005. The November 10 reinspection report included the findings following an examination of the structure:

Our inspection of the building found no damage to the exterior metal walls related to hail. We also gained access to the roof and verified that no damage to this metal structure was found. We did find areas where hail had left marks on the roof, however no dents, dings, or impressions from hail were found. As you can tell in our photographs, there are areas where hail appears to have struck the roof and left marks on the chalking or acid build up on the roof. As you can tell in our photographs, these areas are easily wiped away and have not reduced the life expectancy of this roof. These marking[s] are sometimes misconstrued as being hail damage. The chalking or acidation of this roof is due to weather and can be found on all metal structures. Once again, we found no evidence of hail damage to the exterior walls or the roof of this building.

The follow-up report explained that the original inspection in 2000 did show hail damage and concluded that it was “possible that due to heat and severe weather conditions in East Texas that these dings are no longer visible.”The report continued, suggesting that the previously visible dings “may have potential [sic] cured themselves through time and weather.”It plainly stated that “there is no visible damage evident during our recent inspection.”

The engineering firm’s report detailed the property’s characteristics and outlined the process by which it investigated the building and the claim of hail damage. First, the report noted that the company maintains a national database of hailstone reports in excess of 3/4 inch using government records. Using this database, the firm concluded that there was no hail reported within a three-mile radius of the building on March 29, 2000, the date McKnight and Palmer allege as the date of the damaging storm. In fact, according to the database, no hail was reported within a three-mile radius of the building in the years 2000, 2001, and 2003. Going further, the report noted that no hail was reported within a six-mile radius on the date at issue. The firm conceded that the lack of reports does not necessarily “mean that hail did not fall in a particular location.”

On ground level, the firm reported “no evidence of hail impact, spatter marks, or dents in the metal siding.”Regarding the roof, the report noted that some hail spatter marks had removed the surface grime of the metal roof, but there were “no observable dents associated with the spatter marks” and the impact had not removed the paint coating. The firm reported no evidence of hail damage to the trim or other features of the metal building. The firm discussed in detail its findings, confirmed the structural integrity of the building, and noted as well that even the visible spatter marks that had removed the surface grime on the roof had probably been sustained in the most recent hailstorm since “[s]patter marks fade over time, usually six months to a year.”So, the firm, too, observed no damage to the metal building. Even the spatter marks, which here, the report suggests, were cosmetic, temporary blemishes, were not likely the result of the hailstorm McKnight and Palmer allege happened in March 2000. Again, these three reports were filed along with American Mercury’s designation of expert witnesses on February 24, 2005.

Additionally, on January 31, 2006, American Mercury responded with the following in its supplemental response to a request for disclosure:

Defendant American Mercury Insurance Company denies the allegations of the Plaintiffs’ petition. The Plaintiffs have failed to state any specific violation of the Texas Insurance Code or Deceptive Trade Practices Act which Plaintiffs allege have been violated by Defendant, so Defendant cannot respond specifically other than to state that Defendant denies it committed any violation. Defendant adjusted the claim and sent a check based on its adjustment of the claim that was refused by Plaintiffs. Defendant’s position is that the original adjustor either misadjusted the extent of the damage or that any damage to the roof was “repaired” by physical processes described by Defendant’s expert Robert Fleishmann. Defendant further alleges that Plaintiff Michael Palmer is not a proper party to this cause of action. Plaintiffs have failed to comply with the conditions of the insurance policy in question in bringing this cause of action. Plaintiffs have no damages because the building in question was sold to Dr. Jody Syring in an arm’s length transaction. Dr. Syring was not told of and was not aware of any damage to the building as alleged by Plaintiffs.

American Mercury relied on the reinspection and engineering reports.

On April 13, 2006, the Upshur County jury answered the following question in the negative: “Did American Mercury Insurance Company fail to comply with the insurance agreement?”FN3The trial court signed a take-nothing judgment on June 5, 2006.

FN3. As instructed, the jury did not answer any of the other five questions subsequent to its negative answer to this question.

1. Gregg County Litigation

After the Upshur County litigation, McKnight and Palmer attempted to deposit the check issued several years earlier, only to discover that American Mercury refused payment on the check. As explained, during the course of the Upshur County litigation American Mercury maintained that further investigation revealed that there was no hail damage to the property and, thus, nothing owed on the claim.

In their petition filed on March 15, 2007,FN4 in the Gregg County litigation, McKnight and Palmer alleged that American Mercury breached the insurance contract by refusing to honor the check issued years earlier on the claim prior to the Upshur County litigation. They also alleged that American Mercury’s refusal breached its duty of good faith and fair dealing. They sought to recover the amount of the check ($24,055.70) and exemplary damages.

FN4. McKnight and Palmer originally filed their petition in Upshur County on October 2, 2006. Following the previously-noted transfer, the petition was filed in Gregg County on March 15, 2007.

McKnight and Palmer now take the position that the Upshur County suit is distinguishable from the Gregg County suit because, in Upshur County, the two claimed that American Mercury breached the insurance agreement by paying an insufficient amount on the claim whereas, in Gregg County, the two claimed that American Mercury breached the insurance agreement by refusing to honor the check initially issued on the claim. In other words, McKnight and Palmer contend that they seek different damages in this case than they did in the Upshur County suit. American Mercury, of course, disagrees with this characterization and successfully argued to the trial court its position that the Gregg County litigation was barred by the doctrine of res judicata.

1. APPLICABLE LAW: DOCTRINE OF RES JUDICATA

Essentially, the doctrine of res judicata, or claim preclusion,FN5 gives a plaintiff one bite at the cause of action apple. Weiman v. Addicks-Fairbanks Road Sand Co., 846 S.W.2d 414, 418 (Tex.App.-Houston [14th Dist.] 1992, writ denied). If the defendant wins the original suit, then, the plaintiff is barred from bringing another action on the claims actually litigated in the action, as well as on claims that could have been litigated in the original action. See Barr v. Resolution Trust Corp., 837 S.W.2d 627, 628 ( Tex.1992); Fiallos v. Pagan-Lewis Motors, Inc., 147 S.W.3d 578, 584 (Tex.App.-Corpus Christi 2004, pet. denied); Dresser Indus., Inc. v. Underwriters at Lloyd’s, London, 106 S.W .3d 767, 770 (Tex.App.-Texarkana 2003, pet. denied). Thus, a party may not pursue a claim determined by the final judgment of a court of competent jurisdiction in a prior suit as a ground of recovery in a later suit against the same parties. Igal v. Brightstar Info. Tech. Group, Inc., No. 04-0931, 2008 Tex. LEXIS 422, at *18 ( Tex. May 2, 2008); Tex. Water Rights Comm’n v. Crow Iron Works, 582 S .W.2d 768, 771-72 ( Tex.1979). In short, res judicata precludes parties from relitigating claims that have been finally adjudicated by a competent tribunal. Igal,2008 Tex. LEXIS 422, at *18; Barr, 837 S.W.2d at 628.

FN5. Although American Mercury’s motion for summary judgment and the briefs to this Court limit their discussion to res judicata generally, we note the distinctions between the related doctrines of res judicata, also referred to as claim preclusion and of collateral estoppel, also known as issue preclusion. Collateral estoppel, or issue preclusion, is more narrow than res judicata in that it only precludes the relitigation of identical issues of facts or law that were actually litigated and essential to the judgment in a prior suit. Van Dyke v. Boswell, O’Toole, Davis & Pickering, 697 S.W.2d 381, 384 ( Tex.1985). Once an actually litigated and essential issue is determined, that issue is conclusive in a subsequent action between the same parties. See id.;Wilhite v. Adams, 640 S.W.2d 875, 876 ( Tex.1982). Thus, unlike the broader res judicata doctrine, collateral estoppel analysis does not focus on what could have been litigated, but only on what was actually litigated and essential to the judgment. Van Dyke, 697 S.W.2d at 384.

To successfully assert the affirmative defense of res judicata, a defendant must prove the following well-established elements: (1) a prior final judgment on the merits by a court of competent jurisdiction; (2) identity of parties or those in privity with them; and (3) a second action based on the same claims as were raised or could have been raised in the first action.See Igal, 2008 Tex. LEXIS 422, at *17-18; Citizens Ins. Co. of Am. v. Daccach, 217 S .W.3d 430, 449 ( Tex.2007); Amstadt v. United States Brass Corp., 919 S.W.2d 644, 652 ( Tex.1996); Crow Iron Works, 582 S.W.2d at 771-72;Cherokee Water Co. v. Freeman, 145 S.W.3d 809, 812-13 (Tex.App.-Texarkana 2004, pet. denied).

Here, McKnight and Palmer challenge only the third element, contending that the Gregg County litigation involves different claims than those advanced in the Upshur County litigation. Since the case comes to us in summary judgment posture and since res judicata is an affirmative defense on which the defendant bears the burden of proof, we will review the record to determine whether American Mercury conclusively proved as a matter of law that the claims in the Gregg County litigation were barred by the doctrine of res judicata. SeeTEX.R. CIV. P. 166a(c); Shah v. Moss, 67 S.W.3d 836, 842 ( Tex.2001).

III. DISCUSSION

McKnight and Palmer’s claims that American Mercury breached the insurance agreement or its duty of good faith and fair dealing by refusing payment on McKnight and Palmer’s insurance claim are claims that have been determined in the Upshur County litigation. The record shows us that, as early as November 2003, American Mercury had taken the position that there was no damage to the building and, therefore, it owed nothing on the claim. At the very latest, McKnight and Palmer learned of this position in February 2005 when American Mercury filed its designation of expert witnesses in which it explained that the designated experts’ testimony would reflect “no evidence of a hailstorm in 2000 having produced any current hail damage to the building.”American Mercury again made its position clear in its supplemental response to a request for disclosure, plainly stating its position “that the original adjustor either misadjusted the extent of the damage or that any damage to the roof was ‘repaired’ by physical processes described [in the attached expert’s report].”

So, by the time trial was held in April 2006, it was clear that American Mercury maintained its position that it owed nothing on the claim. Included in the evidence put before the Upshur County jury were the reinspection and engineering reports that indicated no damage to the building. The jury’s answer, then, that American Mercury did not breach the insurance contract would have been made on that basis: that by refusing payment at all on the claim, American Mercury did not breach the agreement. It follows, then, that the judgment stands for the proposition that American Mercury does not owe the $24,055.70 previously issued on the claim and refused by McKnight and Palmer. McKnight and Palmer’s post-Upshur County litigation position that American Mercury breached the insurance agreement by refusing payment on the check, then, has already been litigated and was determined when the Upshur County jury determined that American Mercury’s refusal to pay any amount on the claim was not a breach of the insurance agreement. Although the Gregg County suit attempts to shift the focus onto the refusal to honor a check, even McKnight and Palmer’s own pleadings show that the check was originally issued in connection with the insurance claim. And the Upshur County litigation resulted in a judgment that American Mercury did not owe McKnight and Palmer any amount of money on that insurance claim.

Based on this reading of the record, we conclude that the summary judgment evidence establishes as a matter of law that the claims that American Mercury breached its contract and its duty of good faith and fair dealing by refusing payment on the 2000 insurance claim were litigated and that relitigation of these issues, even cast under a different legal theory, is barred. We overrule McKnight and Palmer’s point of error and affirm the trial court’s judgment.

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United States District Court,

S.D. Texas,

Houston Division.

MEDISTAR TWELVE OAKS PARTNERS, LTD., Plaintiff,

v.

AMERICAN ECONOMY INSURANCE COMPANY, et al., Defendants.

Civil Action No. H-09-3828.

May 17, 2010.

.

OPINION AND ORDER

MELINDA HARMON, District Judge.

Pending before the Court in the above referenced cause, arising out of an insurance claim by Plaintiff Medistar Twelve Oaks Partners, Ltd. (“Medistar”) for damages to Medistar’s commercial building and its contents caused by Hurricane Ike and removed from the 55th District Court of Harris County, Texas on diversity jurisdiction, are (1) Defendant Nelson Architectural Engineers, Inc.’s (“Nelson’s”) first motion to dismiss (instrument # 4); (2) Defendants American Economy Insurance Company (“American Economy”), Liberty Mutual Insurance Company (“Liberty”), and Safeco Insurance Company of America’s (“Safeco’s”) (collectively, “insurance company Defendants’) motion to dismiss or, alternatively, for more definite statement (# 5); and (3) Plaintiff Medistar Twelve Oaks Partners, Ltd.’s (“Medistar’s”) motion to remand (# 10).

According to Medistar’s Original Petition (Ex. A to # 1, Notice of Removal), Medistar’s commercial building was insured under an all-risk policy,FN1 number 02-CE-188659-10, issued by American Economy and Safeco. Safeco is the parent and controlling entity of American Economy, while Liberty is the parent and controlling company of Safeco. Medistar submitted a claim FN2 for damages to the insurance companies and states that it cooperated fully with their investigation. It alleges that American Economy, Safeco, and Liberty had an obligation in good faith and fair dealing to conduct an investigation and an evaluation of the benefits owed to Medistar and to promptly pay all benefits owed to Medistar. Among their good faith duties was an obligation to hire a sufficient number of qualified, properly trained adjustors, investigators and consultants to perform this work. Medistar complains that the insurance company Defendants hired Nelson for an “outcome oriented” and “dishonest” investigation of the cause of and resulting damages to Medistar’s insured property. Medistar asserts that the insurance company Defendants have wrongfully failed or refused to pay Medistar’s covered claims on a timely basis, but have persisted in delay or refusal to pay the full amounts due without giving honest reasons for their payment of an inadequate amount of benefits. Medistar claims that it has been forced to hire its own engineers at its own expense and an attorney to represent it here. It charges Nelson with “misrepresent[ing] survey results during its investigation of Medistar’s Insurance claim,” putting “these misrepresentations in reports,” and “attempt[ing] to manipulate changes to the survey results in a scheme to manufacture desired results which would lower claim payments” made by the insurance company Defendants. Original Petition at ¶ 45.

FN1. An “all-risks” policy is “one in which the insurer undertakes the risk for all losses of a fortuitous nature, which, in the absence of the insured’s fraud or other intentional misconduct, is not expressly excluded in the agreement.” Lexington Insurance Co. v. Buckingham Gate, Ltd., 993 S.W.2d 185 (Tex.App.-Corpus Christi 1999) (and cases cited therein).

FN2. Assigned claim number 598799873017.

Medistar sues the insurance company Defendants for breach of [ insurance] contract, noncompliance with Section 542.055 (failure to pay claim within fifteen business days of receiving all required information) of the Texas Prompt Payment of Claims Act and Texas Insurance Code, Chapter 542, breach of common law duty of good faith and fair dealing, violations of Section 17.50 of the Texas Deceptive Trade Practices Act (“DTPA”) and/or Chapter 541 of the Texas Insurance Code, fraud, and conspiracy to commit fraud. Medistar sues Nelson for fraud, conspiracy to commit fraud, and tortious interference with contract.FN3

FN3. The same causes of action were pleaded against Wiss, Janney, Elstner Associates, Inc., but it was voluntarily dismissed on January 11, 2010(# 25).

The parties have blended arguments regarding remand with others relating to Rule 12(b)(6) dismissal, at times confusing the standards for removal/remand with federal standards for adequate pleading of claims. Therefore the Court summarizes the arguments in the motions together. Nevertheless, because the motion to remand must be decided on the basis of the pleadings at the time of removal,FN4 and not on any subsequent existing or proposed post-removal amendment, and because that Original Petition determines this Court’s jurisdiction, the Court must address the motion for remand first. The resolution of that motion will determine whether the Court has jurisdiction to consider the Rule 12(b)(6) motions to dismiss.

FN4. The right to remove depends upon the plaintiffs’ pleading at the time of the petition for removal. Pullman Co. v. Jenkins, 305 U.S. 534, 537-38, 59 S.Ct. 347, 83 L.Ed. 334 (1939); Cavallini v. State Farm Mutual Auto Ins., 44 F.3d 256, 264 (5th Cir.1995); Ford v. Property & Cas. Ins. Co. of Hartford, No. Civ. A. H-09-1731, 2009 WL 4825222, *2 (S.D.Tex. Dec.9, 2009).

Relevant Law

Under 28 U.S.C. § 1441(a) any state court action over which federal courts would have original jurisdiction may be removed from state to federal court.   Gasch v. Hartford Accident & Indemnity Co.., 491 F.3d 278, 282 (5th Cir.2007). Moreover, under 28 U.S.C. § 1441(b), when original federal jurisdiction would be based on diversity, a defendant may remove a state court civil action only “if none of the parties in interest properly joined and served as defendants is a citizen of the State in which such action is brought.”

The doctrine of improper joinder, or fraudulent joinder,FN5 prevents defeat of federal removal jurisdiction premised on diversity by the presence of an improperly joined, non-diverse defendant. Borden v. Allstate Ins. Co., 589 F.3d 168, 171 (5th Cir.2009). Citizenship of an improperly joined party is totally disregarded in determining the court’s subject matter jurisdiction.   Smallwood v. Illinois Cent. R.R. Co., 385 F.3d 568, 572 (5th Cir.2004) (en banc), cert. denied, 544 U.S. 992, 125 S.Ct. 1825, 161 L.Ed.2d 755 (2005).

FN5. The Fifth Circuit prefers the term “improper joinder” to “fraudulent joinder” because it is more consistent with the statutory language in 28 U.S.C. §§ 1141 and 1332. Smallwood v. Ill. Cent. R. Co., 385 F.3d 568, 571 n. 1 and 572-73 (5th Cir.2004) (en banc), cert. denied, 544 U.S. 992, 125 S.Ct. 1825, 161 L.Ed.2d 755 (2005).

Improper joinder may be established by showing (1) actual fraud in the pleading of jurisdictional facts or (2) an inability to establish a cause of action against the non-diverse defendant in state court. Gasch, 491 F.3d at 281; Smallwood, 385 F.3d at 573. The latter is alleged here. Defendants claiming improper joinder based on the second type bear a heavy burden of showing that there is no possibility of recovery by the plaintiff against the in-state defendant, i.e., in other words there is no reasonable basis for predicting that state law would allow recovery against the in-state defendant.   Smallwood, 385 F.3d at 576. A “reasonable basis” means more than a mere a hypothetical basis. Griggs v. State Farm Lloyds, 181 F.3d 694, 701 (5th Cir.1999) (“whether the plaintiff has stated a valid state law cause of action depends upon and is tied to the factual fit between the plaintiffs’ allegations and the pleaded theory of recovery”).

To determine whether a plaintiff has a “reasonable basis for recovery under state law, the court may “conduct a Rule 12(b) (6)-type analysis.”   Smallwood, 385 F.3d at 573; Anderson v. Georgia Gulf Lake Charles, 342 Fed. Appx. 911, 915 (5th Cir.2009). First the court should look at the pleadings to determine whether the allegations state a claim under state law against the in-state defendant. Smallwood, 385 F.3d at 573. If the “plaintiff has stated a claim, but has misstated or omitted discrete facts that would determine the propriety of joinder,” the court may look beyond the pleadings and consider summary judgment-type evidence. Georgia Gulf, 342 Fed. Appx. at 915-16. That discovery should be very restricted and the summary inquiry should be limited to identifying “discrete and undisputed facts that would bar a plaintiffs’ recovery against an in-state defendant; anything more risks ‘moving the court beyond jurisdiction and into the resolution of the merits ….’ ” Id. at 916, quoting Smallwood, 385 F.3d at 573-74. The court has the discretion to determine what procedure is necessary.   Smallwood, 385 F.3d at 573.

The district court must resolve all contested fact issues and ambiguities of state law in favor of the plaintiff and remand. Gasch, 491 F.3d at 281, citing Guillory v. PPG Indus., Inc., 434 F.3d 303, 308 (5th Cir.2005). The Fifth Circuit explains that since “ ‘the effect of removal is to deprive the state court of an action properly before it, removal raises significant federalism concerns.’ The removal statute is therefore to be strictly construed, and any doubt about the propriety of removal must be resolved in favor of remand.” Id. at 281-82, quoting Carpenter v. Wichita Falls Indep. Sch. Dist., 44 F.3d 362, 365-66 (5th Cir.1995).

Fed. Rules of Civil Procedure 12(b)(6) and 9(b)

When a district court reviews a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), it must construe the complaint in favor of the plaintiff and take all well-pleaded facts as true. Kane Enterprises v. MacGregor (US), Inc., 322 F.3d 371, 374 (5th Cir.2003), citing Campbell v. Wells Fargo Bank, 781 F.2d 440, 442 (5th Cir.1986).

“While a complaint attacked by a Rule 12(b)(6) motion to plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do ….” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007) (citations omitted). “Factual allegations must be enough to raise a right to relief above the speculative level.” Id. at 1965, citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004) (“[T]he pleading must contain something more … than … a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”). “Twombly jettisoned the minimum notice pleading requirement of Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 … (1957) [“a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”], and instead required that a complaint allege enough facts to state a claim that is plausible on its face.” St. Germain v. Howard, 556 F.3d 261, 263 n. 2 (5th Cir.2009), citing In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007) (“To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead ‘enough facts to state a claim to relief that is plausible on its face.’ ”), citing Twombly, 127 S.Ct. at 1974). See also Alpert v. Riley, No. H-04-CV-3774, 2008 WL 304742, *14 (S.D.Tex. Jan.31, 2008). “Dismissal is proper if the complaint lacks an allegation regarding a required element necessary to obtain relief ….” Rios v. City of Del Rio, Texas, 444 F.3d 417, 421 (5th Cir.2006), cert. denied, 549 U.S. 825, 127 S.Ct. 181, 166 L.Ed.2d 43 (2006).

Recently, in Ashcroft v. Iqbal, — U.S. —-, —-, 129 S.Ct. 1937, 1940, 173 L.Ed.2d 868 (2009)(5-4), the Supreme Court, applying the Twombly plausibility standard to a Bivens claim of unconstitutional discrimination and a defense of qualified immunity for government official, observed that two principles inform the Twombly opinion: (1) “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” … Rule 8 “does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions.”; and (2) “only a complaint that states a plausible claim for relief survives a motion to dismiss,” a determination involving “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”

Fraud claims must also satisfy the heightened pleading standard set out in Federal Rule of Civil Procedure 9(b): “In allegations alleging fraud …, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” A dismissal for failure to plead with particularity as required by this rule is treated the same as a Rule 12(b)(6) dismissal for failure to state a claim. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir.1996). The Fifth Circuit interprets Rule 9(b) to require “specificity as to the statements (or omissions) considered to be fraudulent, the speaker, when and why the statements were made, and an explanation of why they were fraudulent.” Plotkin v. IP Axess, Inc., 407 F.3d 690, 696 (5th Cir.2005).

The elements of a fraud claim are (1) the defendant made a representation to the plaintiff; (2) the representation was material; (3) the representation was false; (4) when the defendant made the representation, the defendant a) knew that the representation was false or b) made the representation recklessly, as a positive assertion, and without knowledge of its truth; (5) the defendant made the representation with the intent that the plaintiff act on it; (6) the plaintiff relied on the representation; and (7) the representation caused the plaintiff injury. In re First Merit Bank, 52 S.W.3d 749, 758 ( Tex.2001).

To prevail on a conspiracy claim, the plaintiff must show (1) the defendant was a member of a combination of two or more persons; (2) the object of the combination was to accomplish a) an unlawful purpose or b) a lawful purpose by unlawful means; (3) the members had a meeting of the minds on the object or course of action; (4) one of the members committed an unlawful overt act to further the object or course of action; and (5) the plaintiff suffered injury as a proximate result of the wrongful act. Tri v. J.T.T., 162 S.W.3d 552, 556 ( Tex.2005); Insurance Co. of North America v. Morris, 981 S.W.2d 667, 675 ( Tex.1998).

The pleading standards of Twombly and Rule 9(b) apply to pleading a state law claim of conspiracy to commit fraud. U.S. ex rel. Grubbs v. Kanneganti, — F.3d —-, No. 07-40963, 565 F.3d 180, 2009 WL 930071, *9 (5th Cir. Apr.8, 2009) (“a plaintiff alleging a conspiracy to commit fraud must ‘plead with particularity the conspiracy as well as the overt acts … taken in furtherance of the conspiracy’ ”), quoting FC Inv. Group LLC v. IFX Markets, Ltd.., 529 F.3d 1087, 1097 (D.C.Cir.2008).

If Plaintiffs fail to state a claim for fraud underlying their civil conspiracy claim, the civil conspiracy claim must be dismissed, too.   Allstate Ins. Co. v. Receivable Finance, Inc., 501 F.3d 398, 414 (5th Cir.2007); American Tobacco Co., Inc. v. Grinnell, 951 S.W.2d 420, 438 ( Tex.1997) (“Allegations of conspiracy are not actionable absent an underlying [tort]”); Krames v. Bohannon Holman LLC, No. 3:06-CV-2370-0, 2009 WL 762205, *10 (N.D.Tex. Mar.24, 2009).

*5 To prevail on a claim of tortious interference in an existing contract, a plaintiff must establish (1) the plaintiff has a valid contract; (2) the defendant willfully and intentionally interfered with the contract; (3) the interference proximately caused the plaintiff’s injury; and (4) the plaintiff incurred damage or loss. Butnaru v. Ford Motor Co., 84 S.W.3d 198, 207 ( Tex.2002); Prudential Ins. Co. v. Financial Rev. Servs., 29 S.W.3d 74, 77 ( Tex.2000).

Motions to dismiss for failure to state a claim are appropriate when a defendant attacks the complaint because it fails to state a legally cognizable claim. Ramming v. United States, 281 F.3d 158, 161, 162 (5th Cir.2001) (“[W] hen considering a Rule 12(b) (6) motion to dismiss for failure to state a claim, the district court must examine the complaint to determine whether the allegations provide relief on any possible theory,” citing Cinel v. Connick, 15 F.3d 1338, 1334 (5th Cir.1994)), cert. denied sub nom. Cloud v. U.S., 536 U.S. 960, 122 S.Ct. 2665, 153 L.Ed.2d 839 (2002).

When a plaintiff’s complaint fails to state a claim, the court should generally give the plaintiff at least one chance to amend the complaint under Rule 15(a) before dismissing the action with prejudice. Great Plaints Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th Cir.2002) ( “District courts often afford plaintiffs at least one opportunity to cure pleading deficiencies before dismissing a case, unless it is clear that the defects are incurable or the plaintiffs advise the court that they are unwilling or unable to amend in a manner that will avoid dismissal.”);   United States ex rel. Adrian v. Regents of the Univ. of Cal., 363 F.3d 398, 403 (5th Cir.2004) (“Leave to amend should be freely given, and outright refusal to grant leave to amend without a justification … is considered an abuse of discretion. [citations omitted]”). The court should deny leave to amend if it determines that “the proposed change clearly is frivolous or advances a claim or defense that is legally insufficient on its fact ….” 6 Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Proc. § 1487 (2d ed.1990).

When addressing a motion to remand, however, the controlling pleading is the viable one at the time of removal; post-removal amendments are not considered.   Pullman Co. v. Jenkins, 305 U.S. 534, 537-38, 59 S.Ct. 347, 83 L.Ed. 334 (1939); Cavallini v. State Farm Mutual Auto Ins., 44 F.3d 256, 264 (5th Cir.1995).

Pending Motions

The gist of Medistar’s motion to remand is that there is no diversity jurisdiction here: Medistar is a Texas limited partnership, made of up partners who are all Texas citizens; Defendant Nelson is also a Texas citizen.FN6

FN6. It is undisputed that the other Defendants are diverse from Plaintiff: American Economy Insurance Company is an Indiana corporation with its principal place of business in Indianapolis, Indiana. Liberty Mutual Insurance Company is a Massachusetts corporation, with its principal place of business in Boston, Massachusetts.

Defendants contend that Nelson was fraudulently joined to defeat diversity.

In its response, Nelson incorporates its motion to dismiss, or alternatively, for more definite statement, and Nelson combines arguments for dismissal for improper joinder with dismissal for inadequate pleading of claims under Federal Rules of Civil Procedure 12(b)(6) and 9(b). With a supporting affidavit Nelson explains that it was hired not by Medistar, but by an agent of Medistar’s insurer to evaluate Medistar’s damage from Hurricane Ike and to provide engineering services relating to Medistar’s claims. As part of its services, Nelson asserts that it submitted four true and accurate engineering reports about the damage observed at Medistar’s commercial building, based upon site observations, field information, measurements, verbal information, and Mr. Nelson’s experience and structural analysis. Nelson insists Medistar cannot establish a cause of action against it in state court, but in large part argues that Medistar fails to satisfy pleading standards for its causes of action against Nelson.

Nelson maintains that Medistar failed to plead specific facts to support its fraud and conspiracy to commit fraud claims, as required by Federal Rules of Civil Procedure 12(b)(6) and 9(b). Medistar charges that Nelson misrepresented its survey results and manipulated its results to cause lower payments by the insurers during its investigation of Medistar’s insurance claim, but it does not identify the circumstances-the who, what when and where-to establish a fraud claim as to each defendant. It makes only broad, blanket statements about all of them generally. Medistar has also conceded that it did not rely on the representations made by Defendants, but instead relied on its own CEO and its own outside engineers to refute the reports and findings of Nelson. The conclusory statements in the Original Petition fail to plead a viable claim for conspiracy because they are merely speculative and fail to identify a specific time or place in which any meeting of the minds occurred.

Nelson does maintain that Medistar’s tortious interference claim FN7 against Nelson is not a viable cause of action in Texas against an independent engineer hired by an insurer to assist in the investigation absent a special relationship. Dagley v. Haag Engineering Co., 18 S.W.3d 787, 793-94 (Tex.App.-Houston [14th Dist.] 2000, no pet.), citing Dear v. Scottsdale Ins. Co., 947 S.W.2d 908 (Tex.App.-Dallas 1997) (holding that since there was no insurance contract and therefore no special relationship between the insured and an independent adjustor firm hired by the insured’s insurance carrier, the adjustor firm owed no duty to the insured and is not liable to the insured for improper investigation, settlement advice, negligence, bad faith, breach of contract, tortious interference or DTPA claims), overruled on other grounds, Apex Towing Co. v. Tolin, 41 S.W.3d 118, 122-23 ( Tex.2001). It is undisputed that Nelson did not have a contractual or other special relationship with Medistar at any time.

FN7. Paragraph 128 contains the tortious interference claim against Nelson:

Nelson interfered with Medistar’s contract with American Economy, Safeco and Liberty Mutual by submitting fraudulent building surveys, reports, and sealed engineering drawings for the purpose of providing a misrepresentation for the investigation of Medistar’s insurance claim that arose from Medistar’s insurance contract with American Economy, Safeco, and Liberty Mutual. Nelson prepared building diagrams which were false and materially misrepresented in such a manner that would indicate Medistar’s claims would be wrongfully denied or underpaid.

Nor, argues Nelson, does the pleading of the tortious interference claim satisfy Rule 12(b)(6). The Original Petition does not allege facts demonstrating that Nelson had an intent to interfere with the insurance contract between Medistar and the insurance company Defendants, how he interfered with it, that the interference proximately caused plaintiff’s injury, or that Nelson actively participated in persuading the insurance company Defendants to breach its contract. Instead the petition contains the kind of conclusory allegations and legal conclusions that Rule 12(b)(6) seeks to prevent.

Nelson also emphasizes that Plaintiff has failed to move for leave to amend to cure the problem, which has been pointed out in the two pending motions to dismiss. Nelson claims that evidence outside of the pleadings demonstrates that there is no reasonable basis to predict that Plaintiff might recover against Nelson under theories of fraud and/or conspiracy to commit fraud.

Finally under the economic loss rule, “mere nonfeasance under a contract creates liability only for breach of contract” and therefore “ ‘tort damages are generally not recoverable unless the plaintiff suffers an injury that is independent and separate from the economic losses recoverable under a breach of contract claim.’ ” Crawford v. Ace Sign, Inc., 917 S.W.2d 12, 13 ( Tex.1996); Heil Co. v. Polar Corp., 191 S.W.3d 805, 815 (Tex.App.-Fort Worth 2006), quoting Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 45-47 ( Tex.1998).FN8 See also M.D. Thompson v. Espey Huston & Assoc., Inc., 26 S.W.3d 103 (Tex.App.-Houston [14th Dist.] 2000, no writ) (holding that the negligence of an engineering firm, if any, in the performance of its inspections caused no injury to the owner beyond the economic loss to the subject of the contract under the economic loss rule). Nelson observes that although Medistar asserts tortious interference against Nelson and breach of contract against the other defendants, Medistar fails to demonstrate or allege that it has sustained a loss beyond the economic loss associated with the alleged delay in coverage under the insurance contract.

FN8. Should Medistar assert that its fraud claim is excluded from the economic loss rule under Formosa Plastics, Nelson points out that the Texas Supreme Court in that case held that “tort damages are recoverable for a fraudulent inducement claim irrespective of whether the fraudulent representations are later subsumed in a contract or whether the plaintiff suffers an economic loss related to the subject matter of the contract.” 960 S.W.2d at 47. If a plaintiff only asserts a claim for fraud and makes no allegation that it was fraudulently induced to enter into a contract, as here, Formosa Plastics does not apply and it is proper for the court to apply the economic loss rule to bar the fraud claim. Heil Co. v. Polar Corp., 191 S.W.3d at 816-19; Southwestern Bell Tel. Co. v. John Carlo Tex., Inc., 843 S.W. ed 470, 494-95 ( Tex.1992), citing Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 ( Tex.1986). The Texas Supreme Court subsequently clarified its opinion in Formosa Plastics:

In Formosa Plastics we concluded that Presidio could bring a fraudulent inducement claim even though its damages consisted only of economic losses related to the performance and subject matter of the parties’ contract. Some of our language in that opinion suggests that there is no distinction between a claim for fraud and fraudulent inducement. Fraudulent inducement, however, is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. That is, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties. Formosa Plastics involved a fraudulent inducement claim based on representations contained in the bid packet upon which Presidio based its contract offer, which resulted in a written contract between the parties. Thus, the case was correctly decided as to fraudulent inducement. Although economic losses may be recoverable under either fraud or fraudulent inducement, Formosa Plastics should not be construed to say that fraud and fraudulent inducement are interchangeable with respect to the measure of damages that would be recoverable. [citations omitted]

R.E. Haase v. Glazner, 62 S.W.3d 795, 798-99 ( Tex.2001). Medistar’s Original Petition asserts only a claim for fraud, and none for fraudulent inducement, and the fraud allegations arise out of the alleged breach of contract. Thus, argues Nelson, Medistar’s tortious interference with an existing contract, fraud, and conspiracy to commit fraud claims must be dismissed under Rule 12(b) (6) for failure to state a claim by application of the economic loss rule.

Last of all, Nelson insists that Medistar’s claim for consequential damages must also be dismissed under Rule 12(b)(6) for failure to allege any facts that would show an entitlement to such damages. It is black letter law in Texas that a claimant can only recover damages that are a proximate cause of the injury sustained and of which the defendant has received fair notice. Therefore a plaintiff must plead sufficient facts to give the defendant fair and adequate notice of the damages sought. Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d 887, 896-97 ( Tex.2000). Nelson argues that Medistar has failed to plead any facts that would put Nelson on notice as to the type of consequential damages Medistar will seek. Thus the claim for consequential damages must be dismissed under Rule 12(b)(6).

Insurance Defendants’ Response to Medistar’s Motion to Remand and Their Motion to Dismiss or for More Definite Statement (# 5)

American Economy, Safeco, and Liberty respond to Medistar’s motion to remand by complaining that Medistar did not plead any specific facts for its claims against Nelson, but instead erroneously argued that there could be no remand as long as Nelson could conceivably under some set of facts allege a cause of action against Nelson.FN9

FN9. This Court observes that Medistar’s argument invokes the old rule under Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 … (1957) [“a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”], which has been abrogated in federal court by Twombly, 127 S.Ct. at 1965 (“Factual allegations must be enough to raise a right to relief above the speculative level” and plead a claim that is plausible on its face). Moreover, as noted in Smallwood, “A ‘mere possibility of recovery under local law” will not preclude a finding of improper joinder.’ ” 385 F.3d at 573 n. 9, quoting Badon v. RJR Nabisco, Inc., 236 F.3d 282, 286 n. 4 (5th Cir.2000).

They urge the Court to deny Medistar’s motion to remand for three reasons: (1) Medistar’s conclusory allegations fail to state a claim against Nelson; (2) Texas law does not permit Medistar to bring tort claims against Nelson, an independent engineer; or (3) the economic loss rule bars Medistar’s tort claims against Nelson.

For the first reason, Medistar cites Waters v. State Farm Mutual Automobile Ins. Co., 158 F.R.D. 107, 109 (S.D.Tex.1994), in which this Court held that such conclusory allegations without factual basis are insufficient to state a claim against a non-diverse defendant and constitute fraudulent joinder. Medistar concedes that a proper fraudulent joinder analysis is made under Rule 12(b)(6), but it is well settled law that because Medistar made only conclusory allegations, it cannot survive such an analysis. This is especially true with respect to the fraud claim, which also fails to meet the particularity pleading standard of Rule 9(b). Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 339 (5th Cir.2008) (holding that conclusory allegations of fraud, without setting forth specific facts, are insufficient to survive a Rule 12(b)(6) analysis). In a typical statement, like the others devoid of facts and with legal conclusions masquerading as factual conclusions, Medistar alleged only that Nelson “made false statements, misrepresented material facts, and engaged in actions and/or omissions for the purpose of misleading Medistar as to the actual damages resulting from the peril of wind or the peril of storm surge or flood, and Medistar having relied upon such fraudulent conduct has been injured.” Original Petition as ¶ 120. See Fernandez-Mon tes v. Allied Pilots Ass’n, 987 F.2d 278, 284 (5th Cir.1993) ( “conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss”). They emphasize that a fraud complaint should be filed only after a wrong is reasonably believed to have occurred; it should serve to seek redress for a wrong, not find one. Segal v. Gordon, 467 F.2d 602, 607-08 (2d Cir.1971). Thus Medistar’s fraud allegations should be dismissed for failure to state a claim under Rule 12(b)(6). The insurance company Defendants also point out that in response to the Rule 12(b)(6) motions filed by the insurance company Defendants and Nelson, Medistar chose not to amend its petition or move for leave to amend or state any facts in its motion to remand or in its responses to the motions to dismiss, but chose to stand on its petition. Furthermore, they note that Medistar makes only two references to alleged misrepresentations by the insurance company Defendants: (1) that they “misrepresented to Medistar that the damage to property was not in excess to the amount paid as of the date of this complaint, even though the damage was caused by a covered peril and clearly in excess of previously paid amounts” (Original Petition ¶ 39); and (2) that the insurance company Defendants did not “offer Medistar adequate compensation without any honest explanations in writing or orally as to why additional payments were not being made” (id. at ¶ 40). Neither supports a fraud claim, and neither pleads the elements of fraud with the requisite particularity. Nor does Medistar allege specific facts to establish that each defendant individually committed fraud, but instead makes impermissibly broad, blanket statements pertaining to all defendants. See, e.g., Medistar alleges that Safeco “through its agents and employees, knowingly and with reckless disregard for Medistar in the course of handling of this subject claim made false statements, misrepresented material facts, and engaged in actions and/or omissions for the purpose of misleading Medistar as to the actual damages resulting from the peril of wind, and Medistar having relied upon such fraudulent conduct, has been injured.” Original Petition, ¶¶ 67, 90, 113. There is no identification of time, context, substance or speaker of the alleged false statements.

Insurance company Defendants also argue that because Medistar has failed to state a claim for fraud, its conspiracy to commit fraud claim also fails and should be dismissed. In addition, they contend that the conspiracy claims are also vague and conclusory allegations, not stated with particularity, including a specific time or place in which there was any meeting of the minds. Alternatively, the conspiracy claims should be dismissed under the “intra-corporate conspiracy rule,” which states that in the case of a corporation, “the acts of a corporate agent are the acts of the corporation, and a corporation cannot conspire with itself.” Elliott v. Tilton, 89 F.3d 260, 265 (5th Cir.1996); Wilhite v. H.E. Butt Co., 812 S.W.2d 1, 5 (Tex.App.-Corpus Christi 1991, no writ) (“As a matter of law, a corporation or other company cannot conspire with itself, no matter how many of its agents participated in the complained of action,”).

The insurance company Defendants, too, urge that the conspiracy to commit fraud claims against Nelson cannot not survive a Rule 12(b)(6) analysis because they also are conclusory. Original Petition at ¶¶ 123-25. Rule 9(b)’ s requirement of particularity also applies to the allegations of conspiracy to commit fraud. In re Enron Corp. Securities, Derivative and ERISA Litig., 623 F.Supp.2d 798, 811 n. 11 (S.D.Tex.2009).

Medistar’s tortious interference claims also do not survive a Rule 12(b)(6) analysis because of conclusory nature of all the allegations, insist Defendants. See Nabors Drilling U.S.A. L.P. v. Twister Exploration, L.L.C., No. Civ. A. 01-2109, 2002 WL 1610957, *2-3 (E.D.La. July 18, 2002) (granting renewed motion for Rule 12(b)(6) dismissal because plaintiff pleaded only conclusory allegations of tortious interference).

As for the second reason for denying remand, like Nelson the insurance company Defendants argue that Texas law does not allow an insured to assert tort claims against independent engineer Nelson. Dagley, 18 S.W.3d 787. That bar applies not only to negligence and implied duty of good faith and fair dealing, but to tortious interference and conspiracy claims. Id. Although the rule originally arose to preclude a breach of good faith and fair dealing cause of action against an insurance adjuster ( Natividad v. Alexsis, Inc., 875 S.W.2d 695, 698, 700 ( Tex.1994) (in the absence of a contractual or special relationship between an agent or contractor and an insured, it is the insurance carrier that is liable to the insured for the acts of its agents or contractors)), it was expanded to preclude all manner of tort claims alleged against adjusters, law firms, and engineering companies hired by an insurer to respond to claims. Dear, 947 S.W.2d at 916 (holding that an independent adjusting firm, hired by an insurer to investigate the claim of an insured, has no special relationship with the insured); Castillo v. Professional Serv. Indus., Inc., No. 04-97-00775-CV, 1999 WL 155833, *1-2 (Tex.App.-San Antonio March 24, 1999) (absent a special relationship, soil tester hired by an independent engineer, in turn hired by an insurance company to investigate a claim, does not owe a legal duty to the insured and “cannot be held liable as a matter of law, whether the claim is brought under the Texas Insurance Code, the DTPA, intentional infliction of emotional distress, conspiracy to commit fraud, or tortious interference with contractual relations.”); Dagley, 18 S.W.3d at 791-92 (dismissing multiple tort claims of negligence, DTPA, Insurance Code violations, tortious interference and civil conspiracy against independent engineering firm hired by insurer); Muniz v. State Farm Lloyds, 974 S.W.2d 229, 235-37 (Tex.App.-San Antonio 1998, no pet.), citing Bui v. St. Paul Mercury Ins. Co., 987 F.2d 204, 210 (5th Cir.1993) (applying Texas law and dismissing tort claims against independent adjuster because adjuster owed no duty to insured).

As the third and final reason for denying the motion to remand, Texas law does not permit tort claims which allege merely the economic loss suffered by breach of the insurance policy, insist the insurance company defendants. Agreeing with Nelson, the insurance company Defendants contend that under the economic loss rule, “tort damages are generally not recoverable unless the plaintiff suffers an injury that is independent and separate from the economic losses recoverable under a breach of contract claim.” Heil Co. v. Polar Corp., 191 S.W.3d 805, 815 (Tex.App.-Fort Worth 2006, pet. denied). Insurance company Defendants assert that Medistar acknowledges the rule, but tries to avoid it by stating that it “it will show additional independent extra contractual damages, as a result of the claim,” without providing any facts to support such damages now. Motion to Remand at 6-7. The conclusory allegations of independent injury are insufficient to defeat a claim of fraudulent joinder. Waters, 158 F.R.D. at 109 (“[F]ailure to specify the factual basis for recovery against a non-diverse party constitutes failure to state a claim and fraudulent joinder of that party.”).

In response to Nelson (# 12), Medistar admits its allegations regarding Nelson’s fraudulent activity do not satisfy Rule 9(b) particularity requirements but says “a more particular statement should be forthcoming.” Because Medistar’s tortious interference claim against Nelson is not a fraud claim, it is subject only to “notice pleading” requirements of Rule 8, Medistar insists that it has met that standard. Medistar also maintains that Dagley and Nativida, premised on negligence or a breach of implied duty of good faith and fair dealing, do not apply to the issues in this case. Moreover the cases were decided at summary judgment stage, not at a motion to dismiss stage. It responds to Nelson’s Economic Loss Rule argument by citing Nazareth Int’l Inc. v. J.C. Penny Corp., Inc., 2005 U.S. Dist. LEXIS 14473 (N.D.Tex. July 19, 2005) for the proposition that the Economic Loss Rule does not bar recovery for any tort claim if an additional injury exists outside the parameter of contract damages. Medistar points to paragraph 141(f) of the Original Petition requesting actual damages, exemplary damages, punitive damages and other relief the Court deems just and proper-all outside contractual damages. It also argues that Rule 8 does not require its claim for consequential damages to be pleaded with particularity. If remanded, the issue can be addressed in state court.

In response (# 11) to the insurance Company Defendants’ motion to dismiss or for more definite statement, Medistar urges the court to deny the motion or to allow it to amend. Medistar concedes that some of its allegations do not satisfy the particularity requirement and “that a more particular statement will be forthcoming” if the Court denies remand. It maintains that its conspiracy claim does not fall under the intra-corporate conspiracy rule because it is alleging that the insurers conspired with Nelson. It reiterates that the Economic Loss Rule does not apply because paragraph 141(f) of the Original Petition requests actual damages, exemplary damages, punitive damages and other relief the Court deems just and proper-all outside contractual damages. Medistar argues that it has adequately pleaded a claim against the insurance company Defendants for violations of the DTPA, breach of the duty of good faith and unfair dealing, Chapter 542, and breach of contract.

Court’s Ruling

*10 Because the motion to remand must be decided on the basis of the pleadings at the time of removal, and not on any subsequent existing or proposed post-removal amendment, and because that pleading determines this Court’s jurisdiction, the Court addresses the remand issues first, separately from the motions to dismiss.

As a matter of law in Texas, since Medistar has no contractual or special relationship with Nelson, Medistar fails to state a claim agsinst Nelson for tortious interference with contract and for conspiracy to defraud relating to Nelson’s alleged improper negligent investigation of the insurance claims and manipulation of its reports to limit Medistar’s recovery on its claim against the insurance company Defendants.

In Natividad v. Alexsis, Inc., 875 S.W.2d 695, 698 ( Tex.1994), the Texas Supreme Court held that in the insurance context because the duty of good faith and fair dealing arises only from a contract giving rise to a special relationship as a result of unequal bargaining power between the parties to the insurance contract, where there is no privity of contract, as with an independent adjusting firm hired by the insurer, the adjusting firm did not owe an insured such a duty and therefore could not be liable for a breach of that duty. The duty of good faith and fair dealing is non-delegable. Id. Therefore the Texas Supreme Court concluded that the insurer “remains liable for actions by its employees, agents or contractors that breached the duty of good faith and fair dealing owed to” the insured by the insurer. Id. at 698 & n. 7 (“The insurance companies must answer for the ‘sins’ of their agents.”)

Relying on the rationale in Navidad, the Fifth Circuit in Bui v. St. Paul Mercury Ins. Co., 981 F.2d 209, 210 (5th Cir.1993) (applying Texas law), determined that any claim for negligent investigation brought by an insured against an independent claims adjusting firm hired by the insurer must fail as a matter of law. Subsequently that rule was expanded by the Dallas Court of Appeals in Dear, which found the independent adjusting firm “established its status as Scottsdale’s agent” to cover allegations of improper investigation and settlement advice regardless of whether the plaintiff framed his allegations as negligence, bad faith, breach of contract, tortious interference with contract, or DTPA violations. Dear. 947 S.W.2d at 917.

In the much-cited Dagley action, 18 S.W.3d 787, charging wrongful denial of insurance claims, the plaintiffs alleged that Haag Engineering Company, an independent engineering firm hired by insurer State Farm to evaluate hail storm damage, was liable for negligence, conspiracy, tortious interference, violations of the DTPA and the Texas Insurance Code. The appellate court, in affirming a summary judgment’s dismissal of the tortious interference claim inter alia, concluded, “[A]bsent a special relationship, Haag cannot be held liable for tortious interference.” 18 S.W.3d at 794, citing Dear, 947 S.W.2d at 917. In Dear, the Court reasoned that the defendant independent adjuster was retained and paid for by the insurer, had never entered into a contract with the insured, had no duty to the insured, had performed its role as an independent adjusting firm, and therefore was an agent or independent contractor of the insurance company. Id. at 791 & n. 3, citing Dear, 947 S.W. at 917. Moreover the Fourteenth Court of Appeals also affirmed the trial court’s summary judgment dismissing the claim that State Farm and Haag conspired in their investigation of the plaintiffs’ claims in an attempt to deny them the insurance benefits rightfully due them:

“The mere agreement to resist a claim, however, is not an actionable civil conspiracy,” Massey v. Armco Steel Co., 652 S.W.2d 932, 934 ( Tex.1983). For liability to attach there must be an unlawful, overt act to support a conspiracy. See id. We cannot conclude that submitting a report to State Farm with the conclusion that there was no hail storm damage to appellants’ home is an unlawful, overt act to support a conspiracy. Moreover, having found that Haag is not liable to appellants on their other claims, Haag cannot be liable for conspiracy.

18 S.W.3d at 795.

Thus the only remaining claim against Nelson is for fraud. Because the Original Petition was drafted in Texas state court, it was subject only to the requirements for adequate pleading under state law. There is no counterpart to Federal Rule 9(b) in the Texas Rules of Civil Procedure for pleading fraud. Nor has Texas followed Twombly. Instead Texas Rule of Civil Procedure 45(b) states that in the district and county courts the petition should “consist of a statement in plain and concise language of the plaintiff’s cause of action …. That an allegation be evidentiary or be of legal conclusion shall not be grounds for objection when fair notice to the opponent is given by the allegations as a whole.” Rule 47 also requires only notice pleading:

An original pleading which sets forth a claim for relief whether an original petition, counterclaim, cross-claim, or third party claim, shall contain

(a) a short statement of the cause of action sufficient to give fair notice of the claim involved,

(b) in all claims for unliquidated damages only the statement that the damages sought are within the jurisdictional limits of the court, and

(c) a demand for judgment for all the other relief to which the party deems himself entitled.

“A pleading provides sufficient fair notice of the claim involved when ‘an opposing attorney of reasonable competence could examine the pleadings and ascertain the nature and basic issue of the controversy and the relevant testimony.’ ” UMLIC VP LLV v. T & M Sales and Environmental Systems, 176 S.W.3d 595 (Tex.App.-Corpus Christi 2005) (citation omitted). “The pleadings must be sufficiently adequate so the court is able, from an examination of the pleadings alone, to ascertain with reasonable certainty and without resorting to information from another source, the elements of a plaintiff’s cause of action and relief sought with sufficient information upon which to base a judgment. Id., citing Tone v. Lawyers Title Ins. Corp., 578 S.W.2d 679, 683 ( Tex.1979). The petition must be liberally construed in favor of the pleader. Id., citing Stone v. Lawyers Title Ins. Corp., 554 S.W.2d 183, 186 ( Tex.1977). “ ‘The court will look to the pleader’s intendment’ and uphold the pleading as to a cause of action even if some element of that cause of action has not been specifically alleged.” Id., citing Gulf, C. & S.F. Ry. Co. v. Bliss, 368 S.W.2d 594, 599 ( Tex.1963), and Boyles v. Kerr, 855 S.W.2d 593, 601 ( Tex.1993). “ ‘Every fact will be supplied that can reasonably be inferred from what is specifically stated.’ ” Id., citing Bliss, 368 S.W.2d at 599. “ ‘Mere formalities, minor defects and technical insufficiencies’ will not invalidate a cause of action in a petition so long as the pleading gives fair notice to the opposing party.” Id., citing Stoner, 578 S.W.2d at 683.

Because Nelson was not a party to any contract with Medistar, Medistar cannot assert a claim against Nelson for breach of contract or any cause of action that arises out of a contract.FN10 To be viable, its claim for fraud against Nelson must be independent of the contract. Because there are essentially no facts, but only vague and conclusory statements regarding Medistar’s fraud claim, a summary judgment-type inquiry is required to determine who said or wrote what, where, and when and facts demonstrating reliance on those particular representations by Medistar. Frisby v. Lumbermens Mut. Cas. Co., 500 F.Supp.2d 697, 699 (S.D.Tex.2007), citing Smallwood, 385 F.3d at 573. At present it appears to the Court that Medistar would have difficulty showing that it relied on Nelson’s allegedly erroneous reports since it contends that they were incorrect, but it will give Medistar an opportunity to state supporting facts if it has any.

FN10. For this reason the Economic Loss Rule does not apply to the fraud claim.

Accordingly, the Court

ORDERS Medistar to submit within twenty days either an affidavit or a deposition of someone with personal knowledge who can provide the necessary supporting facts satisfying Fifth Circuit pleading standards FN11 to support the elements of its fraud claim FN12 against Nelson. Defendants may file responses within ten days after Medistar submits its summary judgment-type evidence. The Court reminds the parties that such inquiry will be limited to identifying “discrete and undisputed facts that would bar a plaintiffs’ recovery against an in-state defendant; anything more risks ‘moving the court beyond jurisdiction and into the resolution of the merits ….’ ” Smallwood, 385 F.3d at 573-74. The Court defers ruling on the motions to dismiss until the motion to remand has been resolved.

FN11. The Fifth Circuit has ruled, “State law fraud claims are subject to the heightened pleading requirements of Rule 9(b). To plead fraud adequately, the plaintiff must ‘specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.’ ” Sullivan v. Leor Energy, LLC., 600 F.3d 542d, 550-51 (5th Cir.2010), citing Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 338-39 (5th Cir.2008), and ABC Arbitrage v. Tchuruk, 291 F.3d 336, 350 (5th Cir.2002).

FN12. The elements of common law fraud are (1) a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury. Allstate Ins. Co. v. Receivable Finance Co., L.L.C., 501 F.3d 398, 406 (5th Cir.2007), citing In re First Merit Bank, N.A., 52 S.W.3d 749, 758 ( Tex.2001).

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.

A St. Louis federal jury has awarded $391 million, including $35.5 million in punitive damages, against PNC Bank following a five-week jury trial.

The plaintiffs were the Special Deputy Receiver (SDR), Jo Ann Howard and Associates, appointed by the Commissioner of the Texas Department of Insurance; the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) on behalf of 28 state guaranty associations, and the state guaranty associations of Missouri, Texas, Illinois, Arkansas, Kansas, Oklahoma, and Kentucky.

The SDR, NOLHGA and the state guaranty associations joined forces to pursue breach of fiduciary duty and negligence claims against PNC, which was the successor to Allegiant Bank and Trust Company, a St. Louis-based bank that had served as a trustee for multiple pre-need funeral trusts.

“This has been a superb team effort with the guaranty associations.  We are very pleased with the jury’s award,” said David Mattax, the Commissioner of Insurance for the State of Texas.

Peter Gallanis, president of NOLHGA, said, “We are proud that the guaranty associations have met their obligations to ensure that the consumer losses were covered.  The jury’s verdict is the next step in the process.”

Thousands of consumers and multiple funeral homes had entered into contracts with a company known as National Prearranged Services (NPS), which was run by a number of individuals who were indicted and convicted of fraud.  NPS sold pre-need funeral contracts initially in Missouri and used two affiliated Texas-based life insurance companies to back the pre-need funeral contracts.  In 2008, NPS and the two insurance companies were placed in receivership in Austin, Texas.  The SDR and state guaranty association system worked together to ensure that thousands of funerals were paid for.  Since 2008, the guaranty associations have paid more than $300 million for in excess of 50,000 funerals in 40 states.  The guaranty associations will pay for all covered future funerals, which will be additional millions of dollars.

Williams, McClure & Parmelee is dedicated to high quality legal representation of businesses and insurance companies in a variety of matters. We are experienced Texas civil litigation attorneys based in Fort Worth who know Texas courts and Texas law. For more information, please contact the law firm at 817-335-8800. The firm’s new office location is 5601 Bridge Street, Suite 300, Fort Worth, Texas 76112.