Kings Park Apartments, Ltd. v. National Union Fire Insurance Co. of Pittsburgh , 101 S.W.3d 525 ( 2003 )

101 S.W.3d 525 (2003)

KINGS PARK APARTMENTS, LTD.; Judwin Properties, Inc.; and Marvin Isgur, as Independent Co-Executor of the Estate of Eugene Winograd, M.D., Appellants,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Separately and d/b/a American International Group; American International Group, Inc.; American International Adjustment Company; and American Home Assurance Company, Appellees,
National Union Fire Insurance Company of Pittsburgh, Pennsylvania, Separately and d/b/a American International Group; American International Group, Inc.; American International Adjustment Company; and American Home Assurance Company, Appellants,
v.
Kings Park Apartments, Ltd.; Judwin Properties, Inc.; and Marvin Isgur, as Independent Co-Executor of the Estate of Eugene Winograd, M.D., Appellees.

No. 01-00-00451-CV.

Court of Appeals of Texas, Houston (1st Dist.).

January 9, 2003. Rehearing Overruled March 20, 2003. As Corrected April 17, 2003.

Lynne Liberato, Kent Geoffrey Rutter, Haynes & Boone, L.L.P., Charles W. Kelly, J. Douglas Sutter, Kelly, Sutter, Mount & Kendrick, P.C., Houston, for appellants.

Russell H. McMains, Law office of Russell H. McMains, Corpus Christi, William V. Dorsaneo, Dallas, Thomas C. Wright, Wright Law Firm, James L. Hordern, Jr., Campbell Harrison & Dagley, L.L.P., Houston, for appellees.

Panel consists of Justices HEDGES, JENNINGS, and KEYES.

OPINION

ADELE HEDGES, Justice.

Kings Park Apartments, Ltd.; Judwin Properties, Inc.; and Marvin Isgur, as independent co-executor of the estate of Eugene Winograd, M.D. (collectively "Kings Park") sued its insurers, National Union Fire Insurance Company of Pittsburgh, Pennsylvania, separately and d/b/a American International Group; American International Group, Inc.; American International Adjustment Company; and American Home Assurance Company (collectively "National Union"), for misappropriating a $5 million insurance policy and for wrongfully refusing to defend Kings Park. On April 11, 2000, almost five years after the jury verdict, the trial court rendered judgment, awarding Kings Park $500,000 in actual damages, $1 million in exemplary damages, and $500,000 attorney's fees. Both parties appeal. We reverse the judgment of the trial court and render judgment that Kings Park take nothing. We affirm the trial court's sanctions order.

FACTS

1. The Parties

Kings Park Apartments, Ltd. owns the Kings Park Apartments, which are managed by Judwin. Until his death, Dr. Eugene Winograd was the general partner of Kings Park Apartments, Ltd. and the president of Judwin. Marvin Isgur is the independent co-executor of the estate of Dr. Winograd. We will generally refer to all of these parties collectively as Kings Park, but will differentiate when necessary.

Through a series of complicated business transactions, the Kings Park parties were insured by National Union Fire Insurance Company of Pittsburgh, Pennsylvania, separately and d/b/a American International Group; American International Group, Inc.; American International Adjustment Company; and American Home Assurance Company. We will refer to these parties collectively as National Union. National Union issued a $5 million excess liability policy under which Kings Park was an additional, unnamed insured.

2. The Chlordane Spraying

In April 1987, Judwin, as manager of the Kings Park Apartments, treated the property for termites by spraying the chemical chlordane. Chlordane had been the subject of much controversy and federal regulation.

3. Cordova: The Personal Injury Lawsuits

In July 1987, approximately 300 plaintiffs sued Kings Park and other defendants, seeking more than $100 million for health problems allegedly caused by the chlordane exposure. This case was styled "Cordova" for the lead plaintiff. Cordova v. Kings Park Apartments, Ltd., No. 87-28345 (157th Dist. Ct., Harris County, Tex.) "Cordova").

The claims asserted against Kings Park were covered by a line of liability insurance totaling $16 million, which consisted of a $1 million primary policy with Aetna, a $5 million excess policy with National Union (the policy at issue in this case), and a $10 million final layer with Chubb. Judwin had $6 million additional, separate coverage with U.S. Fire. Aetna, Kings Park's primary insurer, defended the case under a reservation of rights.

4. The Kings Park Settlement With the Cordova Plaintiffs

On May 4, 1990, immediately before the Cordova case was scheduled to go to trial, Kings Park executed a settlement agreement with the chlordane plaintiffs (the "Kings Park Settlement Agreement"), under which:

• Kings Park agreed not to contest liability in the plaintiffs' chlordane exposure case;

• Kings Park assigned to the plaintiffs any extra-contractual claims Kings Park had against its insurers, including those claims based on bad faith or statutory claims;

• Kings Park obtained a limited covenant not to execute from the plaintiffs; and

• Kings Park retained a percentage interest in any recovery the plaintiffs received from the insurance companies.

Under this settlement, the Cordova plaintiffs signed a covenant not to execute against Kings Park in exchange for an assignment of Kings Park's bad faith claims against its insurers, including National Union. The plaintiffs specifically retained the right to enforce against the insurers any judgment they obtained against Kings Park. In addition, Kings Park retained a monetary interest in the outcome of the bad faith lawsuits (the "proceeds participation").^[1]

5. The Flores I Trial

In June 1990, the trial court severed the claims of 10 Cordova plaintiffs, including three Kings Park apartment residents, into a test case styled Flores I. Ismael Flores, Jr. v. Kings Park Apartments, Ltd., No. 82-28345-B (157th Dist. Ct., Harris County, Tex.) ("Flores I"). All parties waived a jury, and Kings Park, the defendant, rested without putting on any evidence. The trial court found that Kings Park was negligent and awarded the plaintiffs $10.5 million. The judgment awarded approximately $1 million per plaintiff; therefore, the three Kings Park residents received a combined judgment for over $3 million.

6. Flores II: The Bad Faith Litigation

Armed with the Flores I judgment, the plaintiffs proceeded to file suit against various Kings Park insurers, including National Union. This suit, styled Flores II, related to the bad faith claims that Kings Park had previously assigned to the plaintiffs in the Kings Park Settlement Agreement. Flores v. Truck Ins. Exch., No. 91-01595 (157th Dist. Ct., Harris County, Tex.) (Flores II).^[2] The petition claimed that the insurers had failed to provide an unqualified defense and had failed to settle the claims within their policy limits.

After the Kings Park Settlement, Kings Park's interests had become aligned with the Cordova plaintiffs. National Union asserts that Kings Park had "rolled over" in Flores I so that the chlordane plaintiffs could obtain a large judgment, which would enhance the value of Kings Park's proceeds participation. Therefore, it was in Kings Park's best interest for the plaintiffs to recover the greatest amount possible from the insurance companies. Because Kings Park, the tortfeasor, did not have to pay any money to the plaintiffs, National Union refers to the Kings Park settlement as a "sweetheart deal" for Kings Park.

7. The National Union Settlement of Flores II

On July 2, 1992, less than a week before the trial setting, National Union and the Flores II plaintiffs entered into a settlement agreement, whereby National Union would pay the plaintiffs the full $5 million policy limits (the National Union Settlement Agreement). The settlement provided a covenant not to execute in favor of Kings Park.

National Union's plan in making the settlement agreement was to copy a similar agreement that had been used successfully by U.S. Fire, another Judwin insurer, to exhaust its policy limits. U.S. Fire had paid its $6 million policy limits to the plaintiffs in return for a covenant not to execute against Kings Park. Kings Park challenged U.S. Fire's settlement in separate litigation, which was ultimately resolved in favor of U.S. Fire. Judwin Props., Inc. v. United States Fire Ins. Co., 973 F.2d 432 (5th Cir.1992). This federal case will be referred to as Judwin I.

The trial court rendered judgment, which approved the settlement payment allocation according to the plaintiffs' medical monitoring needs. Based on the proceeds participation that Kings Park had previously negotiated in the Kings Park Settlement Agreement with the plaintiffs, Kings Park received $2.4 million of the $5 million that National Union paid in settlement to those plaintiffs.

8. Kings Park sued National Union

Kings Park initiated the underlying lawsuit against National Union for misappropriating the $5 million policy proceeds and for wrongfully refusing to defend or indemnify Kings Park. Kings Park also sued for conversion, conspiracy, malicious breach of contract, negligence, gross negligence, DTPA violations, Insurance Code violations, intentional infliction of emotional distress, fraud, misrepresentation, and unjust enrichment.

Kings Park alleged that National Union had paid the $5 million solely to resolve National Union's own bad faith claims, instead of resolving the claims against Kings Park. In response, National Union argued that the $5 million settled the bodily injury claims against Kings Park; therefore, the payment could not be the basis for liability under any theory because the payment exhausted the policy limits.

After a two-week trial, the jury found for Kings Park on breach of contract, bad faith, unjust enrichment, constructive fraud, and Insurance Code theories, but failed to find conversion, DTPA, malice, or a flagrant disregard of Kings Park's rights. The jury found the following damages: (1) zero actual damages for loss of the indemnity rights under the policy; (2) $500,000 actual damages for loss of the defense obligation; (3) $10 million additional damages; and (4) $500,000 attorney's fees.

On April 11, 2000, almost five years after the verdict, the trial court signed a final judgment that: (1) awarded Kings Park $500,000 actual damages; (2) reduced the additional damages from $10 million to $1 million; and (3) awarded Kings Park $500,000 attorney's fees as found by the jury. Both parties appeal the judgment.

After the jury verdict, but before the trial court rendered judgment, Kings Park alleged that National Union and its counsel had engaged in discovery abuse and other misconduct. On April 20, 2000, after more than five years and numerous sanctions hearings, the trial court issued a sanctions order against National Union. Kings Park also appeals the sanctions order.

Set forth below, we will address: (1) National Union's appeal of the judgment; (2) Kings Park's appeal of the judgment; and (3) Kings Park's motion to supplement the record and its appeal of the sanctions order.

I. NATIONAL UNION'S APPEAL OF THE JUDGMENT

Exhaustion of Policy Limits:

Breach of Contract and Duty to Defend Claims

National Union argues that it paid the $5 million to settle its own bad faith claims and the bodily injury claims against Kings Park; therefore, it exhausted the policy limits and is not liable to Kings Park for its duty to indemnify or duty to defend. In contrast, Kings Park argues that National Union paid the $5 million to settle National Union's own bad faith claims, not the bodily injury claims against Kings Park. Kings Park contends that it did not receive any benefits when National Union used Kings Park's money.

Points of error one, two, and nine relate to National Union's argument that it is not liable for breach of contract because its payment exhausted policy limits. In point of error one, National Union contends that the evidence is legally or factually insufficient to support the finding that the payment was a breach of contract. In point of error two, National Union contends that its exhaustion of the policy was not actionable, based on the finding that the bodily injury claims were at least $5 million. In point of error nine, National Union contends that the exhaustion of policy limits concluded its obligations not only to Judwin, but also to Kings Park and Winograd, because under Texas law, an insurer may pay claims, and even exhaust the limits, on behalf of one insured without incurring any liability to the other insureds.

Generally, under a liability insurance contract, the insurer has the obligation to indemnify and the obligation to defend. The indemnity obligation requires the insurer to pay on the insured's behalf amounts that the insured becomes legally obligated to pay. The obligation to defend requires the insurer to defend any suit against the insured, "even if such suit is groundless, false, or fraudulent." National Union claims that such a provision gives National Union the right to settle claims whenever settlement is "deemed expedient" by National Union.

The Flores I judgment required that Judwin pay three Kings Park's claimants $3 million for bodily injury claims covered by the insurance policy. Additionally, trial was approaching on the other 113 Cordova claimants. National Union argues that it paid the full $5 million policy limits to those claimants on behalf of the insureds; therefore, its performance of the contract obligation is not a breach of that contract. Further, National Union contends that it properly exhausted its policy limits when it made the $5 million payment under Soriano, which holds that an insurance company may exhaust its limits by making a reasonable settlement of any covered claim without incurring liability to the insured because other claims remain. Tex. Farmers Ins. Co. v. Soriano, 881 S.W.2d 312 (Tex.1994).

In support of its contention that it exhausted policy limits on behalf of Kings Park to settle the chlordane plaintiffs' bodily injury claims, National Union relies on: (1) the National Union Settlement Agreement; (2) the August 8, 1992 Flores II judgment; (3) the payment by Chubb; and (4) the Judwin I case.

1. The National Union Settlement Agreement

National Union's Settlement Agreement with the chlordane plaintiffs is evidence that National Union exhausted policy limits. In the "Covenant Not to Execute" (paragraph 2 of the agreement), National Union agreed to pay $5 million in exchange for the chlordane plaintiffs' promise not to execute any judgment on any "Claims," including the bodily injury claims, against the Kings Park parties.

8. Covenant Not to Execute. In consideration of a payment by [National Union] on behalf of the [Cordova and Flores I ] "Defendants" of Five Million Dollars ($5,000,000) ... [the chlordane plaintiffs] and each of them, jointly and severally, promise, covenant and agree ... that they shall not seek to execute any judgment on any "Claims"....

The term "Defendants" included Judwin, Winograd, Kings Park, and National Union. The term "Claims" was defined as "any claim, demand, suit or cause of action, past present, or future, known or unknown" arising from or in any way connected to Cordova, Flores I, or Flores II. Accordingly, the term "Claims" included the bodily injury claims against Kings Park.

In the "Release of Bad Faith Claims" (paragraph 3 of the agreement), National Union agreed to pay a "peppercorn"^[3] in exchange for the chlordane plaintiffs' release of the bad faith claims against National Union:

9. Release of Bad Faith Claims. In return for a peppercorn and other good and valuable consideration ... [the chlordane plaintiffs] and each of them, jointly and severally RELEASE AND FOREVER DISCHARGE [National Union] from any claim, demand, suit or cause of action they now have or may hereafter acquire in law or equity, by statute or regulation, known or unknown, arising out of or in any way connected with [National Union's] alleged acts or omissions in connection with the "Claims" or the manner in which they were handled and [the chlordane plaintiffs], each of them, jointly and severally, agree to dismiss, with prejudice, [National Union] from [Flores II].

2. The August 8, 1992 Judgment

On August 8, 1992, the trial court signed the Flores II judgment approving the National Union Settlement Agreement. The judgment set forth an allocation of payments according to the plaintiffs' medical monitoring needs. It did not allocate any damages for the bad faith claims. The trial court found that the amounts were "within the range of actual compensatory damages claimed by the Minor Plaintiffs as a result of their injuries." This is further evidence that National Union's payment was for the bodily injury claims.

Kings Park argues that the judgment supports its contention that National Union's payment was for bad faith, not bodily injury claims. It points to the portion of the judgment which stated that plaintiffs retain all claims against Winograd and Judwin arising out of the alleged misapplication of chlordane at the Kings Park Apartments.^[4] Kings Park argues that, because plaintiffs specifically retained the bodily injury claims, it is only logical that the bad faith claims against National Union were dismissed with prejudice.

There is evidence in the record that the bodily injury claims were not formally released after National Union settled, specifically so that the plaintiffs could collect from Chubb, the next level insurer. On August 3, 1992, the chlordane plaintiffs' attorney wrote a letter to National Union's attorney regarding a draft of the proposed judgment, which stated:

[W]e cannot include language suggesting that all claims, demands, and causes of action against the National Union Insureds have been compromised and settled. As you know, we still retain claims against the Chubb Group of Companies. We cannot provide for the dismissal of all claims and causes of action against Judwin and Dr. Winograd until the claims against Chubb have been resolved. In this regard, our settlement agreement provides only, in paragraph 2, that we will not "seek to execute any judgment" against the National Union Insureds.

The record supports that the settlement agreement did not dismiss the plaintiffs' bodily injury claims against Kings Park because the plaintiffs wanted to pursue their claims against Chubb. The plaintiffs had to have "live" claims in order to recover. Thus, the fact that the settlement agreement did not dismiss the bodily injury claims is not dispositive in this case.

3. Payment by Chubb

After the National Union Settlement Agreement, the next level insurer, Chubb, offered to defend Judwin based on its understanding that National Union had "tendered its policy limits in the Cordova case." There is evidence in the record that Kings Park sought and obtained coverage from Chubb, which would not have been available without an exhaustion of National Union's policy.

4. The Judwin I Case

U.S. Fire, another Judwin insurer, executed a similar agreement when it paid $6 million to the chlordane plaintiffs in return for a covenant not to execute against Kings Park, and a peppercorn for a release of the bad faith claims. Kings Park challenged the settlement in separate litigation, which was ultimately resolved in favor of U.S. Fire as a matter of law. In Judwin I, the Fifth Circuit rendered summary judgment for U.S. Fire, holding that U.S. Fire had exhausted its policy limits. Judwin Props., Inc. v. United States Fire Ins. Co., 973 F.2d 432 (5th Cir.1992).

In point of error thirteen, National Union contends that the judgment in Judwin I, which held that Judwin take nothing, precludes Kings Park's claims under collateral estoppel and issue preclusion. See Restatement (Second) of Judgments § 27 cmt. c (1981). We disagree, recognizing that the National Union and U.S. Fire agreements are not identical. Clearly, the insurance companies and their payment amounts are different. Another difference is that National Union's definition of "Claims" included Flores II, while U.S. Fire's did not. Indeed, Flores II had not yet been filed at the time the U.S. Fire agreement was drafted. This latter detail, however, is a difference without a distinction. In both the U.S. Fire and National Union agreements, the definition of "Claims" included the bad faith claims against the respective insurance companies.

Because the agreements are not identical in all respects, we are not bound by the judgment in Judwin I. We overrule National Union's point of error thirteen and hold that collateral estoppel and issue preclusion do not preclude Kings Park's recovery. However, we will follow the reasoning set forth in the Fifth Circuit's opinion as further support that National Union exhausted its policy limits. See Judwin, 973 F.2d at 435-36. In accordance with Judwin I, we hold that National Union paid a peppercorn to the chlordane plaintiffs to extinguish the bad faith claims against National Union and $5 million on behalf of Kings Park to settle the bodily injury claims against Kings Park. See id.

We follow the reasoning of the Fifth Circuit in the Judwin I case. Additionally, we base our decision on: (1) the National Union Settlement Agreement; (2) the August 8, 1992 Flores II judgment; and (3) the payment by Chubb. We conclude that the evidence is legally sufficient to prove that National Union's $5 million payment exhausted its policy limits on behalf of Kings Park to settle the chlordane plaintiffs bodily injury claims.

We sustain points of error one, two, and nine.

We overrule point of error thirteen.

Benefit to Kings Park

Notwithstanding the recitations in the National Union Settlement Agreement—that National Union paid $5 million in consideration for the plaintiffs' covenant not to execute any judgment on any claims, including the bodily injury claims against the Kings Park parties—Kings Park argues that the $5 million payment was actually in consideration for the bad faith claims against National Union, not the bodily injury claims against Kings Park. Kings Park contends that it received no benefit from National Union's settlement payment, as evidenced by the portion of the August 8, 1992 Flores II judgment, which stated that plaintiffs specifically retain all claims against Winograd and Judwin arising out of the alleged misapplication of chlordane at the Kings Park Apartments.

In response, National Union argues that Kings Park received several benefits from the settlement agreement, first citing the benefit of the plaintiffs' covenant not to execute against Kings Park. Kings Park, however, responds that it received no benefit from this covenant not to execute because Kings Park had already obtained its own covenant not to execute in the Kings Park Settlement Agreement, and U.S. Fire had secured one in the U.S. Fire Settlement.

Even if the covenant not to execute was redundant, we agree with National Union that Kings Park received other benefits from the National Union Settlement Agreement. For example, it received $2.4 million in proceeds participation out of the $5 million National Union paid. National Union paid the settlement money into the trial court registry. The funds were then disbursed pursuant to a judgment allocating the money to the chlordane claimants based on medical monitoring costs. Judwin signed its agreement to that judgment for itself and Winograd. Judwin, Kings Park, and Winograd received nearly half of National Union's payment under an arrangement with the chlordane claimants.

Additionally, as set forth above, Kings Park received the benefit of the right to proceed to Chubb, the next layer of insurance, which would not have been available absent exhaustion of National Union's policy. Moreover, Kings Park received the benefit of an essential step toward a full release after all the insurers paid. National Union's $5 million payment was an integral piece of the ultimate settlement plan to a full release of judgment. This is evidenced by the Kings Park Settlement Agreement, which stated that Kings Park assigned its bad faith claims to the chlordane plaintiffs, and that the chlordane plaintiffs would execute a release of judgment in favor of Kings Park upon completion of the litigation against Kings Park's insurers.

Upon execution of this agreement and upon completion of the litigation against [Kings Park's] insurance carriers, a Release of Judgement [sic] will be executed and filed by [the chlordane plaintiffs] in favor of all [Kings Park] Defendants. The Release of Judgment will fully and completely release all [Kings Park] defendants from all liability arising under this case.

Thus, the National Union Settlement Agreement gave Kings Park the benefits of the $2.4 million proceeds participation, the right to proceed against Chubb, and an essential step toward a full release of judgment.

Tort Claims

In point of error ten, National Union contends that Kings Park cannot recover on the tort claims it had against National Union because Kings Park assigned those claims to the chlordane plaintiffs, who then released those claims in a settlement with National Union. Therefore, National Union argues, Kings Park cannot recover on claims it does not own and which have been released.

Kings Park assigned its tort causes of action against National Union to the chlordane plaintiffs. The Kings Park Settlement Agreement recited:

As a part of the consideration included in the release and settlement agreement between all plaintiffs and their attorneys, and defendants, [the Kings Park parties] for good and valuable consideration, including the release by plaintiffs of their claims and causes of action against defendants, defendants hereby ASSIGN, CONVEY, SELL, TRANSFER, and DELIVER to [chlordane] plaintiffs and their attorneys ... all of defendants' causes of action against any of their insurance carriers, including but not limited to [National Union] ... based upon bad faith and any violations by the insurance carriers of the Texas Insurance Code only in the two referenced lawsuits [Cordova and Flores I]. It is specifically understood that the Defendants are not assigning to the Plaintiffs any claim(s) for coverage or a legal defense from any of the insurance carriers herein, but rather, are only assigning those claims and/or causes of action arising from the insurance companies' actions and omissions in the two referenced law suits. The Defendants specifically retain all causes of actions, claims and rights against any insurance carrier for insurance coverage and a right to a legal defense in the two referenced lawsuits and with respect to any other claim or lawsuit.

According to this agreement, Kings Park assigned to the chlordane plaintiffs its claims against National Union based upon bad faith and Insurance Code violations arising from National Union's actions and omissions in Cordova and Flores I. The plaintiffs released all of those claims against National Union in the National Union Settlement Agreement. Kings Park contends that the claims it had assigned to the plaintiffs are different from its claims against National Union in this lawsuit. The assigned claims were based upon National Union's failure to defend and indemnify only in Cordova and Flores I. In contrast, its claims in this lawsuit were based upon National Union's misappropriation of Kings Park's policy proceeds to settle Flores II.

In an unpublished opinion, the Fifth Circuit addressed this issue in another case, holding that Judwin could not recover on its tort claims against U.S. Fire as a matter of law because it had previously assigned those claims to the plaintiffs. Judwin Props., Inc. v. United States Fire Ins. Co., No. 93-2462, 30 F.3d 1494 (5th Cir. July 22, 1994) (not designated for publication). This case will be referred to as Judwin II. Judwin's argument in Judwin II was similar to Kings Park's argument in this case: that its current bad faith claims had not been assigned because they arose "from other chlordane lawsuits," after the Cordova/Flores actions. Id. at *5. Judwin argued that U.S. Fire acted in bad faith by settling with the Cordova and Flores plaintiffs, when there were "literally hundreds of remaining plaintiffs." Id. at *3.

The Fifth Circuit relied on the Soriano case from the Texas Supreme Court, which held that an insurance company may exhaust its limits by making a reasonable settlement of any covered claim without incurring liability to the insured because other claims remain. Id. at *9-10 (citing Soriano, 881 S.W.2d 312). The Fifth Circuit concluded, "Any bad faith claim thus might turn on the acts that Judwin alleged on the part of USF that left Judwin exposed for substantially more than the policies' limits—the very ``acts or omissions' assigned by Judwin" to the chlordane plaintiffs. Id. at *9. The court further held that Judwin's claim was a "cause of action arising from the insurance companies' actions and omissions in the Flores and Cordova actions—the very claim assigned to the Flores and Cordova plaintiffs." Id. at *8 n. 7.

We recognize that Judwin II is not binding precedent in this case; nonetheless, we are persuaded by the Fifth Circuit's reasoning. We hold that Kings Park cannot recover on the tort claims against National Union, as a matter of law, because those claims had been assigned to the chlordane plaintiffs.

Moreover, as set forth above, we hold that National Union's $5 million payment exhausted its policy limits on behalf of Kings Park to settle the chlordane plaintiffs bodily injury claims. Because the policy had been exhausted, bad faith and Insurance Code violations could not have arisen from National Union's failure to defend and settle future lawsuits. See Soriano, 881 S.W.2d 312. Accordingly, we hold that Kings Park cannot recover on its tort claims as a matter of law.

We sustain point of error ten.

National Union's Remaining Issues

In point of error seven, National Union contends that the evidence is legally or factually insufficient to support the finding of unjust enrichment. In Question 10A, the jury found that National Union was unjustly enriched by paying the $5 million. However, Question 16, the damages question, did not submit a damage question about unjust enrichment. Instead, Question 16 related to breach of contract, Insurance Code, constructive fraud, and bad faith. Because unjust enrichment damages were not submitted to the jury, we need not address point of error seven regarding whether the evidence is sufficient to support the liability finding.

Points of error three and six relate to National Union's argument that Kings Park's claims sound in contract, not tort. In point of error three, National Union contends that it is not liable under the tort theories of bad faith, constructive fraud, Insurance Code violations, and unjust enrichment, because the settlement was permitted by the insurance contract. In point of error six, National Union contends that the evidence is legally or factually insufficient to support the findings on the common law claims of bad faith, unjust enrichment, or constructive fraud, because Stowers is the only common law tort duty in the liability insurance context. Md. Ins. Co. v. Head Indus. Coatings, 938 S.W.2d 27 (Tex.1996).

Points of error four and five relate to the Insurance Code. In point of error four, National Union contends that the evidence is legally or factually insufficient to support the findings of an Insurance Code violation and a knowing violation because the Insurance Code does not apply to the handling or settlement of third-party claims against the insured. Tex. Ins.Code Ann. art. 21.21 (Vernon Supp.2003). In point of error five, National Union contends that the jury instruction for the Insurance Code was erroneous because it improperly incorporated portions of the DTPA that cannot be a basis for Insurance Code liability. See Crown Life Ins. Co. v. Casteel, 22 S.W.3d 378 (Tex.2000).

In point of error eight, National Union contends that the evidence is legally or factually insufficient to support the finding of constructive fraud because no fiduciary duty exists. In point of error eleven, National Union contends that, given the finding that Judwin ratified the payment, Winograd and Kings Park likewise should be bound by that ratification as a matter of law; therefore, the claims Judwin, Winograd, and Kings Park are barred by doctrines of waiver and estoppel. In point of error twelve, National Union contends that the evidence is legally or factually insufficient to support Kings Park's award of $500,000 actual damages for loss of defense obligation.

As set forth above, we hold that National Union's $5 million payment exhausted policy limits. There are no actual damages as a matter of law; therefore, the awards of actual damages, additional damages, and attorney's fees were improper. Because we have sustained points of error one, two, nine, and ten, we need not address National Union's remaining points of error and decline to do so.

II. KINGS PARK'S APPEAL OF THE JUDGMENT

Actual Damages

In points of error one through six, Kings Park challenges its actual damages award, which relate to its claims of: (1) misappropriation of the indemnity benefit; (2) unfair and deceptive insurance practices; (3) breach of contract; (4) unjust enrichment; (5) breach of the duty of good faith and fair dealing; (6) and constructive fraud.

Kings Park contends that there is no evidence to support the jury's finding that Kings Park suffered zero damages for the loss of the indemnity obligation; therefore, the trial court should have disregarding that zero finding. Kings Park complains that the court erred in failing to award Kings Park its full actual damages because the jury made an affirmative finding on National Union's theories of misappropriation of the indemnity benefit, unfair and deceptive insurance practices, breach of contract, unjust enrichment, breach of the duty of good faith and fair dealing, and constructive fraud.

The jury charge stated as follows:

Question No. 1. Do you find that any portion of the $5 million paid by National Union was paid to settle claims against National Union in the Flores II bad faith lawsuit?

Answer: Yes

Question No. 2. What part, if any, of the $5 million paid by National Union was paid for settlement of the bad faith claims against National Union?

Answer: $5,000,000.00

Question No. 3. Was the reasonable settlement value of the bodily injury claims against the insureds covered by the Policy in the Cordova/Flores I personal injury lawsuits at least $5 million in 1992?

Answer: Yes

Question No. 16. What sum of money, if any if paid now in cash would fairly and reasonably compensate Judwin, Kings Park or Winograd for their damages, if any?

Consider the following elements of damages, if any, and none other.

1. Loss of benefits under the indemnity obligation in the Policy; and,

2. Loss of benefits under the defense obligation in the Policy.

* * *

Under the terms of the National Union insurance policies at issue, National Union's duties to pay claims, defend lawsuits, or otherwise act ended once National Union exhausted the policy limits by payment of judgments or settlements on behalf of its insureds.

Answer in dollars and cents, if any, for:

1. Loss of benefits under the indemnity obligation in the Policy

$ 0.00

2. Loss of benefits under the defense obligation in the Policy.

$ 500,000.00

In summary, in Question 2, the jury found that National Union paid $5 million to settle its own bad faith claims; however, in Question 16, it awarded zero damages for loss of the indemnity obligation. Kings Park argues that this constitutes a conflict in the jury's answers; therefore, the jury's $5 million answer in Question 2 should replace the finding of zero damages in Question 16. Kings Park further argues that this substitution is appropriate for all of its liability theories.

In response, National Union argues that it fulfilled its contractual obligation to pay the bodily injury claims owed by Kings Park. National Union relies on the jury's finding in Question 3, which stated that the reasonable settlement value of the bodily injury claims against Kings Park in the Cordova/Flores I personal injury lawsuits was at least $5 million. Additionally, one of the instructions accompanying Question 16 stated that National Union's duty to pay claims and defend lawsuits ended once National Union exhausted the policy limits by payment of judgments or settlements on behalf of its insureds.

The alleged conflict arises because, in Question 2, the jury found that National Union paid $5 million to settle its own claims, and in Question 3, the jury found that National Union paid $5 million to settle National Union's bodily injury claims. Regardless of the jury's affirmative findings on Kings Park's liability theories, Question 16 was the damages question. Questions 2 and 3 were predicate fact questions; they were neither liability nor damage questions.

As set forth above in National Union's appeal, we hold that National Union's $5 million payment exhausted policy limits. We conclude that National Union's payment was on behalf of Kings Park in settlement of the chlordane plaintiffs' bodily injury claims, based on: (1) the National Union Settlement Agreement; (2) the August 8, 1992 Flores II judgment; (3) the payment by Chubb; and (4) the Fifth Circuit's reasoning in the Judwin I case. Because the evidence is legally sufficient to support the jury's finding in Question 16 that Kings Park suffered zero damages for loss of the indemnity obligation, the trial court was not required to disregard the finding in Question 16 and substitute it with the jury's $5 million answer to Question 2.

We overrule points of error one through six.

Kings Park's Remaining Issues

In its remaining points of error seven and ten, Kings Park contends that the trial court erred: (1) by denying all recovery to Judwin, based on the jury's finding that Judwin ratified National Union's misconduct; and (2) in failing to disregard the jury's finding of zero damages in appellate attorney's fees because the evidence was legally insufficient to support the zero award.

Again, we have held that National Union's $5 million payment exhausted its policy limits. We have further held that Kings Park cannot recover on its tort claims as a matter of law. Accordingly, we need not address these remaining issues and decline to do so.

III. KINGS PARK'S APPEAL OF THE SANCTIONS ORDER

After the jury verdict, but before the trial court rendered judgment, Kings Park alleged that National Union and its counsel had engaged in massive discovery abuse and other misconduct throughout the litigation. Kings Park represents that it was contacted by a former secretary for National Union's trial counsel. The secretary claimed to have personal knowledge that National Union and its attorneys concealed discoverable documents, filed a false affidavit, instructed a deposition witness to remain unavailable, and instructed a paralegal to steal documents from the chambers of the special trial judge, the Honorable Ruby Sondock.

On June 1, 1995, the trial court conducted an ex parte, in camera hearing to investigate these matters. On April 20, 2000, after more than five years and numerous sanctions hearings, the trial court issued a sanctions order concerning National Union's litigation abuses. The trial court issued a sanctions order under its inherent power, finding that National Union had "caused significant interference with the legitimate exercise of the traditional core functions of this court." The following sanctions were imposed against National Union:

• National Union must implement a policy guaranteeing that (a) every National Union litigation file which relates to a matter filed in a Texas state court shall include a copy of the Texas Lawyers Creed—A Mandate for Professionalism and (b) National Union shall educate every individual with supervisory responsibility for litigation in a Texas state court about the content of the Texas Lawyers Creed—A Mandate for Professionalism.

• Mr. Frank Vasek must not participate in, supervise, or handle any Texas case unless he either: (a) appears in the 133rd District Court and explains his prior affidavit or (b) seeks leave to participate in Texas cases from the judges presiding over those cases.

• For a three-year period beginning in 2001, National Union must sponsor twice-annual ethics courses for Texas attorneys, and is required to pay $25,000 to the Texas Center for Legal Ethics and Professionalism.

Kings Park appeals the order, arguing that the sanctions against National Union were inadequate, "toothless, and largely symbolic." Kings Park argues that the trial court should have sanctioned National Union under Rule of Civil Procedure 215, not pursuant to its inherent power, and should have required National Union to pay Kings Park half a million dollars in attorney's fees.

Motion to Supplement the Record. Preliminarily, we address Kings Park's motion to supplement the record. Kings Park asked this Court to unseal five envelopes, arguing that it required the information contained in the sealed documents to adequately challenge what it characterized as an inadequate sanctions order against National Union.^[5] We have unsealed and reviewed each document contained in the five sealed envelopes. Based on our knowledge of the sealed documents, we believe that Kings Park has had sufficient ability to contest the adequacy of the sanctions order without reviewing the sealed documents. We will consider the sealed documents in our assessment of the adequacy of the sanctions order.

On July 19, 2002, this Court issued an order that granted Kings Park's motion to supplement the record and denied its motion to unseal the documents.

Justiciability. National Union contends that Kings Park does not have a justiciable interest to appeal the sanctions order because the sanctions were not imposed against Kings Park. After reviewing both parties' extensive briefs on justiciability, we have determined that Kings Park has standing to appeal the trial court's denial of its requested sanctions against National Union.

Inherent Power. Turning to the merits of the sanctions order, in point of error eight, Kings Park contends that the trial court erred by assessing only "symbolic" sanctions against National Union, and by failing to require National Union to pay Kings Park's attorney's fees as sanctions, considering that: (a) National Union engaged in egregious misconduct, including stealing documents from the offices of the special trial judge; (b) the misconduct interfered with the traditional core functions of the trial court; (c) the misconduct "adversely affected" Kings Park; and (d) Kings Park incurred attorney's fees of $500,000 as a result of National Union's misconduct. In point of error nine, Kings Park contends that the trial court erred by failing to enter sanctions against National Union under Rule of Civil Procedure 215. In response, National Union argues that Kings Park is appealing the sanctions order "to disguise the fact that its case on the merits cannot succeed."

We review the trial court's imposition of sanctions under an abuse of discretion standard. In re Bennett, 960 S.W.2d 35, 40 (Tex.1997). A trial court abuses its discretion when it acts without reference to any guiding rules or principles. Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241-42 (Tex.1985).

As stated in the sanctions order, the trial court found that National Union had caused "significant interference with the legitimate exercise of the traditional core functions of this Court." Such a finding supports the entry of sanctions under a court's "inherent powers." Eichelberger v. Eichelberger, 582 S.W.2d 395, 398-99 (Tex.1979). Trial courts have inherent power to take action that will "aid in the exercise of its jurisdiction, in the administration of justice, and in the preservation of its independence and integrity." Id.

In Kutch v. Del Mar College, the court of appeals refined this concept by recognizing that the inherent power basis for sanctions is the strongest and most powerful when the conduct complained of interferes with one of the "core functions" of the judiciary. 831 S.W.2d 506, 510 (Tex.App.-Corpus Christi 1992, no writ); see also Trevino v. Ortega, 969 S.W.2d 950, 958-59 (Tex.1998) (Baker, J., concurring). The "core functions" of the judiciary include hearing evidence, deciding issues of fact raised by the pleadings, deciding questions of law, rendering final judgment, and enforcing that judgment. Kutch, 831 S.W.2d at 510. The Kutch court stated:

Inherent power to sanction exists to the extent necessary to deter, alleviate, and counteract bad faith abuse of the judicial process, such as any significant interference with the traditional core functions of Texas courts. Accordingly, for inherent power to apply, there must be some evidence and factual findings that the conduct complained of significantly interfered with the court's legitimate exercise of one of these powers. 831 S.W.2d at 510. Limitations do exist on a court's inherent power. Id. The court explained, "The amorphous nature of this power, and its potency, demands sparing use. The best practice is to rely upon the rules and statutes expressly authorizing sanctions whenever possible." Id.

In Lawrence v. Kohl, this Court adopted the Kutch reasoning. 853 S.W.2d 697, 699 (Tex.App.-Houston [1st Dist.] 1993, no writ). In Lawrence, and subsequently in Onwuteaka v. Gill, 908 S.W.2d 276, 280 (Tex.App.-Houston [1st Dist.] 1995, no writ) and in Phillips & Akers, P.C. v. Cornwell, 927 S.W.2d 276, 280 (Tex.App.-Houston [1st Dist.] 1996, no pet.), we held that there are limits to the trial court's inherent power to sanction. Specifically, that power "exists only to the extent necessary to deter, alleviate, and counteract bad faith abuse of the judicial process, such as significant interference with core judicial functions." Cornwell, 927 S.W.2d at 280.

In Island Entertainment Inc. v. Castaneda, we again discussed Kutch, holding that, "Texas courts have the inherent power to sanction for an abuse of the judicial process that may not be covered by any specific rule or statute." 882 S.W.2d 2, 5 (Tex.App.-Houston [1st Dist.] 1994, writ denied). Assessing sanctions under the trial court's inherent powers requires a two-step process. First, the trial court must "rely upon the rules and statutes expressly authorizing sanctions," and second, the trial court, applying its inherent power to impose sanctions, must make factual findings to determine whether there is some evidence that the conduct complained of significantly interfered with the court's legitimate exercise of its core functions. See id; see also Kutch, 831 S.W.2d at 510.

There is some evidence in the record that the conduct complained of significantly interfered with the court's legitimate exercise of its core functions. For example, the allegation that National Union instructed a paralegal to steal documents from the chambers of the special trial judge may be viewed as a interference with the traditional core functions of the court. Based on this allegation, therefore, the trial court had the authority to enter sanctions under its inherent power. Moreover, Kings Park did not object to the trial court's decision to rely on its inherent powers; instead, it argued that trial court erred by assessing only "symbolic" sanctions against National Union, and by failing to require National Union to pay Kings Park's attorney's fees as sanctions, considering that the misconduct interfered with the "traditional core functions of the trial court." Accordingly, we hold that the trial court did not abuse its discretion in imposing sanctions under its inherent power.

Under rule 215, the trial court could have imposed "any appropriate sanction," including attorney's fees, unless it found that "the failure was substantially justified or that other circumstances make an award of expenses unjust." See Tex.R. Civ. P. 215.1(d), 215.2(b), 215.3. Here, the trial court indicated, in relation to its ruling under its inherent powers, that the circumstances made an award of attorneys fees to Kings Park unjust. The court specifically stated why it did not award attorney's fees: "This has been a very contentious case, and Kings Park's expenditure of attorney's fees was self-inflicted in an attempt to gain information to use in other cases." Moreover, the sanctions order stated that the trial court "considered the offensive conduct and attempted to craft sanctions appropriate to punish that conduct." We believe that the trial court was in the best position to do so, especially in light of the fact that many sanctions hearings had been held. We hold that the trial court did not abuse its discretion in imposing the sanctions under its inherent power and in denying attorney's fees.

To assess the adequacy of the sanctions order, we have reviewed the record and considered the five envelopes filed under seal. We overrule points of error eight and nine. The sanctions order is affirmed.

CONCLUSION

We reverse the judgment of the trial court and render judgment that Kings Park take nothing. We affirm the trial court's sanctions order. Any other pending motions are denied as moot.

NOTES

[1] After the Kings Park Settlement Agreement, the Texas Supreme Court declared this kind of agreement a violation of public policy because of its pernicious effect on litigation. State Farm v. Gandy, 925 S.W.2d 696, 713 (Tex.1996) (holding not to apply retroactively). Accordingly, National Union describes this case as having the "earmarks of a by-gone era," which included abuses such as assignments of bad faith claims, "pseudo" trials, and settlement money flowing back to the insured.

[2] The Flores II case was also referred to as the bad faith/Stowers litigation. See Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544 (Tex. Comm'n App.1929, holding approved).

[3] As explained in Judwin I, Texas recognizes that "whatever consideration a promisor assents to as the price of his promise is legally sufficient consideration." Judwin Props., Inc. v. United States Fire Ins. Co., 973 F.2d 432, 435 (5th Cir.1992) (citing Hicks v. Smith, 330 S.W.2d 641, 646 (Tex.Civ.App.-Fort Worth 1959, writ ref'd n.r.e.)). Thus, the "peppercorn" recited by the parties serves as legally sufficient consideration. Id.

[4] By contrast, Truck Insurance Exchange, the company that insured Winograd's and Judwin's interests in a different apartment complex (the Camino South Apartments), obtained a settlement which resulted in a dismissal with prejudice of both the assigned bad faith claims against Truck and the personal injury claims against the Truck insureds.

[5] Kings Park asks this Court to unseal five envelopes that were filed in this Court by the court reporter, to return the envelopes to the district clerk with instructions to paginate the information therein and to place it in a supplemental clerk's record, and to order the district clerk to return such supplemental record to this Court.