Wesco Insurance Company v. Ledford White ( 2018 )

Case: 17-10362 Document: 00514402076 Page: 1 Date Filed: 03/26/2018
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 17-10362 March 26, 2018
Lyle W. Cayce
WESCO INSURANCE COMPANY, A DELAWARE CORPORATION, Clerk
Plaintiff - Appellee
v.
GWENDOLYN GENE LAYTON; TROYLYNN ANN LAYTON,
Defendants - Appellants
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 4:14-CV-572
Before DAVIS, JONES, and HIGGINSON, Circuit Judges.
PER CURIAM:*
Gwendolyn Gene and Troylynn Ann Layton sued Ledford E. White, their
longtime attorney and friend, alleging that he defrauded them in connection
with two transactions. After a jury returned a verdict against White, his
professional-liability insurer, Wesco Insurance Company, sought a declaratory
judgment of no coverage under White’s policy. The district court granted
summary judgment in favor of Wesco, and we AFFIRM.
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
Case: 17-10362 Document: 00514402076 Page: 2 Date Filed: 03/26/2018
No. 17-10362
I.
A.
On August 16, 2013, Gwendolyn Gene and Troylynn Ann Layton
(together, the “Laytons”) filed a lawsuit in Texas state court against Ledford
E. White, among others. The Laytons alleged common-law and statutory fraud,
negligent misrepresentation, breach of contract, and breach of fiduciary duty,
among other claims.
Specifically, the Laytons alleged that White—their longtime attorney,
advisor, and friend—had defrauded and stolen from them in connection with
two transactions. First, the Laytons loaned White, at his request, nearly
$400,000 to develop a property in Crowley, Texas. According to the Laytons’
original petition, White never repaid those loans and lied about the existence
of mineral rights on the property, even though he collected tens (if not
hundreds) of thousands of dollars through the lease and sale of mineral
interests. 1 Second, White persuaded the Laytons to lend money to another of
White’s clients to invest in his used car business. White represented that he
would act as an intermediary to facilitate loans totaling $400,000 and would
personally hold car titles to ensure the Laytons were repaid. Payments stopped
after the Laytons had received roughly $50,000 in principal and interest. White
assured the Laytons he would pursue the borrower, and even told them
(falsely) that their loan was secured by the borrower’s house. He then told the
Laytons he had foreclosed on the borrower’s house but could not repay them
because the house had diminished in value. According to the Laytons’ original
petition, these were all lies. The borrower had long since repaid the loan, and
White had, in fact, pocketed the money for himself.
1 The Laytons’ original petition also alleged that White’s former law partner owned
half of the Crowley property by virtue of a constructive trust imposed after a jury found White
liable for fraud and breach of fiduciary duties.
2
Case: 17-10362 Document: 00514402076 Page: 3 Date Filed: 03/26/2018
No. 17-10362
The Laytons’ original petition repeatedly emphasized that White was an
attorney. It described White as “a board certified real estate attorney who has
served as the Laytons’ attorney, trusted advisor and confidant.” The very first
paragraph of the petition’s “Factual Background” section reiterated that
allegation. In stating their common-law fraud cause of action, the Laytons
alleged that White owed them fiduciary duties because of both their friendship
and attorney-client relationship. Moreover, in alleging breach of fiduciary
duty, the Laytons explained first that White owed them a fiduciary duty
because of their attorney–client relationship, only then adding that they also
had a long-standing friendship. With respect to the used-car transaction, the
Laytons alleged that White owed them fiduciary duties because he served as
an intermediary, receiving money for their benefit.
On May 30, 2014, the Laytons filed an amended petition. Their amended
petition asserted a negligence cause of action against White for failure to act
reasonably in his role as attorney, advisor, and confidant to the Laytons. They
alleged, among other things, that White was negligent for failing to reveal the
extent of his conflicts of interest to them and failing to obtain the Laytons’
written consent before entering into a transaction with them. The amended
petition also added White’s firm, Ledford E. White, P.C. (“White, P.C.”), as a
defendant. The amended petition concerned the same allegedly fraudulent
transactions as the original petition. However, with respect to the used car
transaction, the amended petition specifically alleged White provided “shoddy”
legal advice and that White promised the Laytons he would hold their money
in his firm’s escrow account.
3
Case: 17-10362 Document: 00514402076 Page: 4 Date Filed: 03/26/2018
No. 17-10362
A jury found White and White, P.C., liable for common-law fraud, breach
of fiduciary duty, theft, negligence, and civil conspiracy. 2 The trial court
entered final judgment on August 28, 2015. The court awarded actual damages
in the total amount of $680,000. Although the jury found the Laytons were
contributorily negligent, the trial court did not reduce the judgment.
B.
After the Laytons filed their lawsuit, White (on behalf of himself and
White, P.C.) purchased a claims-made-and-reported Lawyers Professional
Liability Policy (the “Policy”) from Wesco Insurance Company. The Policy
provided coverage from March 14, 2014, to March 14, 2015. 3 As relevant here,
Wesco agreed to indemnify and defend White and White, P.C., against claims
“first made against the Insured and reported to the Company during the policy
period.” The Policy included the following “condition precedent” to coverage:
1. The Insured, as a condition precedent to the obligations of the
Company under this policy, shall give written notice to the
Company during the policy period:
a. of any claim made against the Insured during the policy
period;
b. of the Insured’s receipt of any notice, advice or threat,
whether written or verbal, that any person or
organization intends to make a claim against the Insured;
c. Any act or omission that may reasonably be expected to
be the basis of a claim against the Insured.
The Policy defined “claim” as follows:
“Claim” means a written or verbal demand received by the Insured
for money or services arising out of an act or omission . . . in
2 The jury found that White alone committed statutory fraud and negligent
misrepresentation.
3 Although White had maintained professional liability insurance for himself and his
firm since March 1997, Wesco did not issue those policies.
4
Case: 17-10362 Document: 00514402076 Page: 5 Date Filed: 03/26/2018
No. 17-10362
rendering of failing to render legal services. A demand shall
include the service of suit . . . .
Under the Policy, “legal services” included, among other things, services
performed “in a fiduciary capacity.”
White first submitted the Laytons’ original petition (filed August 16,
2013) to Wesco on May 8, 2014. Wesco’s Federal Rule of Civil Procedure
30(b)(6) representative testified that Wesco denied coverage because the claim
was first made prior to the beginning of the policy period. Wesco alternatively
based its denial of coverage on the position that White and White, P.C.’s acts
did not involve “legal services.” The Laytons’ counsel subsequently submitted
their amended petition to Wesco to place it on notice. Wesco once more denied
coverage and subsequently filed this lawsuit, seeking a declaratory judgment
of no coverage under the Policy. The district court granted summary judgment
in favor of Wesco on March 10, 2017. It concluded that the Laytons first made
a “claim” within the meaning of the Policy when they filed their original
petition in state court. Thus, it held the claim was not “first made” during the
policy period and was excluded from coverage. The court found that, even if the
claim had been made within the policy period, the fortuity doctrine would
preclude coverage because White knew or should have known his conduct
would likely expose him to liability when he bought the Policy.
The Laytons timely appealed.
II.
“We review a grant of summary judgment de novo, applying the same
standard as the district court.” Vela v. City of Houston, 276 F.3d 659, 666 (5th
Cir. 2001). A court must enter summary judgment if “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 genuine dispute of material fact exists
only if a reasonable jury could find in the non-movant’s favor. Vela, 276 F.3d
5
 Case: 17-10362 Document: 00514402076 Page: 6 Date Filed: 03/26/2018
No. 17-10362
at 666. In determining whether such a dispute exists, we view the evidence in
the light most favorable to the non-movant. Id. The interpretation of an
insurance contract is a question of law, which we review de novo. Royal Ins.
Co. of Am. v. Hartford Underwriters Ins. Co., 391 F.3d 639, 641 (5th Cir. 2004).
III.
Federal jurisdiction in this case is based on diversity of citizenship. Thus,
Texas law governs. See RSR Corp. v. Int’l Ins. Co., 612 F.3d 851, 857 (5th Cir.
2010). Under Texas law, an insurance policy is a contract, see Ruiz v. Gov’t
Emps. Ins. Co., 4 S.W.3d 838, 841 (Tex. App.—El Paso 1999, no pet.), and the
ordinary rules of contract interpretation apply, Liberty Surplus Ins. Corp. v.
Exxon Mobil Corp., 483 S.W.3d 96, 100 (Tex. App.—Houston [14th Dist.] 2015,
pet. denied). The primary goal of the court is to give effect to the intention of
the parties as expressed in the policy. See id. If a court determines the policy
is ambiguous, then it must resolve those ambiguities in favor of the insured.
State Farm Fire & Cas. Co. v. Vaughan, 968 S.W.2d 931, 933 (Tex. 1998). “A
policy is unambiguous, as a matter of law, if the court can give it a definite
legal meaning.” Id.
The Policy in this case involves two different duties: the duty to defend
and the duty to indemnify. See Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d
589, 594 (5th Cir. 2011) (citing D.R. Horton-Tex., Ltd. v. Markel Int’l Ins. Co.,
300 S.W.3d 740, 743 (Tex. 2009)). These duties are distinct and should
generally be decided separately. See id. (citing D.R. Horton, 300 S.W.3d at 743).
Under Texas law, a court determines an insurer’s duty to defend according to
the “eight-corners rule” by looking only to the insurance policy and the third-
party complaint. Id. In determining the duty to indemnify, however, the court
is not bound by the eight-corners rule but may instead look to the evidence
introduced by the parties during the coverage litigation. See D.R. Horton,
300 S.W.3d at 741. Although “one duty may exist without the other,” id. at 743,
6
Case: 17-10362 Document: 00514402076 Page: 7 Date Filed: 03/26/2018
No. 17-10362
the same reasons that negate one duty may also negate the other, see Farmers
Tex. Cty. Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 84 (Tex. 1997).
The fortuity doctrine is premised on the principle that an insured
“cannot insure against something that has already begun and which is known
to have begun.” Two Pesos, Inc. v. Gulf Ins. Co., 901 S.W.2d 495, 501 (Tex.
App.—Houston [14th Dist.] 1995, no writ) (citations omitted). The fortuity
doctrine precludes coverage for known losses or losses in progress. Scottsdale
Ins. Co. v. Travis, 68 S.W.3d 72, 75 (Tex. App.—Dallas 2001, pet. denied); Two
Pesos, Inc. v. Gulf Ins. Co., 901 S.W.2d 495, 501 (Tex. App.—Houston [14th
Dist.] 1995, no writ). “A ‘known loss’ is one that the insured knew had occurred
before the insured entered into the contract for insurance,” Warrantech Corp.
v. Steadfast Ins. Co., 210 S.W.3d 760, 766 (Tex. App.—Fort Worth 2006, pet.
denied), whereas a “loss in progress” is an “ongoing progressive loss” that the
“insured is, or should be, aware of . . . at the time the policy is purchased,”
Scottsdale Ins. Co., 68 S.W.3d at 75. A final judgment against the insured is
not required for the fortuity doctrine to apply. See Warrantech, 210 S.W.3d at
766. The key inquiry is “not whether the insureds actually knew of the
underlying loss or potential liability, but rather whether they knew, at the
inception of coverage that they were ‘engaging in activities’ which might
reasonably be expected to expose them to or result in liability.” RLI Ins. Co. v.
Maxxon Southwest Inc., 108 F. App’x 194, 199 (quoting Franklin v. Fugro-
McClelland (Sw.) Inc., 16 F. Supp. 2d 732, 737 (S.D. Tex. 1997)).
Whether the fortuity doctrine precludes coverage under the Policy
depends on whether the Laytons’ first petition alleged sufficient facts to put
White on notice a loss had occurred before the Policy’s coverage period had
begun. Under Texas law, application of the fortuity doctrine in the duty-to-
defend context is resolved by the eight-corners rule. Colony Nat. Ins. Co. v.
Unique Indus. Product Co., 487 F. App’x 888, 893 (5th Cir. 2012). The Laytons’
7
Case: 17-10362 Document: 00514402076 Page: 8 Date Filed: 03/26/2018
No. 17-10362
original petition was sufficient to put White on notice of an “ongoing loss” at
the time the Policy was purchased. The original petition contained a breach of
fiduciary duty claim—a claim falling directly within the Policy’s definition of
legal services. Moreover, the original petition was replete with references to
White’s status as an attorney. It identified White as an attorney in its
preliminary statement and then again just one paragraph later in the very first
paragraph of the Factual Background section. Two of the causes of action
alleged White owed the Laytons a fiduciary duty as their attorney. The
Laytons even concede in their brief on appeal that White acted as their attorney
in connection with both fraudulent transactions. The allegations in the
Laytons’ original petition were thus more than sufficient to put White on notice
of an ongoing, potential loss. See Warrantech Corp., 210 S.W.3d at 766–68.
Such knowledge may also be imputed to White, P.C. Under Texas law,
the knowledge of a corporation’s representative is imputed to the corporation.
See Hirsch v. Tex. Lawyers’ Ins. Exch., 808 S.W.2d 561, 563 (Tex. App.—El
Paso 1991, writ denied). White testified he was the president and sole
principal of White, P.C. since its founding. By the time the Laytons filed their
petition, White had parted ways with his law partner. Further, he was the only
attorney from White, P.C. with any relationship to the fraudulent transactions.
Because the original and amended petitions are based on the same facts and
concern the same two fraudulent transactions, that the Laytons first named
White P.C. in the amended petition is irrelevant. And while the Laytons added
allegations that funds from both transactions were placed into the firm’s
escrow account, those facts were already known to White and, thus, to White,
P.C. See id. As a result, the fortuity doctrine precludes coverage for White,
P.C., as well. See Travis, 68 S.W.3d at 76–77; Two Pesos, 901 S.W.2d at 502;
Maxxon Sw., 108 F. App’x at 198.
8
Case: 17-10362 Document: 00514402076 Page: 9 Date Filed: 03/26/2018
No. 17-10362
The Laytons contend a fact issue exists because White testified at his
deposition he did not believe a covered claim had occurred. But White’s self-
serving deposition testimony is insufficient to create a genuine issue of
material fact here. See, e.g., Jackson v. Cal-Western Packaging Corp., 602 F.3d
374, 379 (5th Cir. 2010) (finding the plaintiff’s “self-serving statements that he
did not commit sexual harassment” were “insufficient to create a triable issue
of fact as to whether Cal-Western fired him because of his age” because the
truth or falsity of another employee’s complaint is not material to “whether the
employer reasonably believed the employee’s allegation and acted on it in good
faith.” (internal citation omitted)). It is immaterial whether White believed a
covered claim existed. See Scottsdale Ins. Co., 68 S.W.3d at 77 (“The key
question [the fortuity doctrine asks] is whether the wrongdoing occurred before
or after the purchase of the insurance.”). And to the extent White believed the
loss was not covered, that belief was unreasonable because the original petition
alleged a breach of fiduciary duty, which fell within the Policy’s definition of
covered legal services. Even accepting as true White did not know of a loss or
loss in progress, he certainly knew of the underlying acts and so should have
known of a loss that was ongoing at the time the Policy was issued. See
Warrantech Corp., 210 S.W.3d at 766 (citations omitted). The fortuity doctrine
precludes coverage under these circumstances.
The only case the Laytons cite in support of their argument that White
had to be aware of coverage is not to the contrary. See Roman Catholic Diocese
of Dall. ex rel. Grahmann v. Interstate Fire & Cas. Co., 133 S.W.3d 887 (Tex.
App.—Dallas 2004, pet. denied). In that case, the court denied summary
judgment because there was a dispute of fact over whether the insured was
aware its employee had previously molested children. See id. at 895–96. By
contrast, White was aware of both the wrongful conduct and the allegations
contained in the original petition. The Laytons merely contend he was not (as
9
Case: 17-10362 Document: 00514402076 Page: 10 Date Filed: 03/26/2018
No. 17-10362
he claimed at his deposition) aware the lawsuit involved covered legal services.
Appellants cite to no case holding such awareness is required to trigger
application of the fortuity doctrine.
In sum, we conclude the fortuity doctrine bars coverage for defense and
indemnity. Because that holding is sufficient to grant summary judgment, we
need not reach the alternate ground the district court relied upon in granting
summary judgment. See, e.g., Shamloo v. Miss. State Bd. of Trs. of Insts. of
Higher Learning, 620 F.2d 516, 524 (5th Cir. 1980) (“[C]ases are to be decided
on the narrowest legal grounds available.”).
IV.
For the foregoing reasons, we AFFIRM the judgment of the district
court.
10