7-Eleven Inc v. Natl Un Fire Ins

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 01-10133
7-ELEVEN, INC. (f/k/a THE SOUTHLAND CORPORATION),
Plaintiff-Counter Defendant-Appellant
versus
NATIONAL UNION INSURANCE COMPANY OF PITTSBURGH, PA.,
Defendant-Counter Claimant-Appellee
Appeal from the United States District Court
for the Northern District of Texas
(3-00CV965-M)
February 28, 2002
Before DAVIS, WIENER, and BARKSDALE, Circuit Judges.
PER CURIAM*:
Plaintiff-Appellant 7-Eleven, Inc., formerly known as The
Southland Corporation (“7-Eleven”), appeals the dismissal of its
suit against Defendant-Appellee National Union Insurance Company
(“National Union”) for failure to state a claim. We conclude that
the district court erred when it determined that an exclusion
provision in the insurance policy underlying 7-Eleven’s suit was
unambiguous and barred coverage of 7-Eleven’s claim, with the
result that 7-Eleven had failed to state a claim for which relief
could be granted. We therefore reverse the dismissal of 7-Eleven’s
*
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this opinion should not be published and is not precedent except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.
1
claim, and remand the case to the district court for further
proceedings consistent with this opinion.
I. Facts and Proceedings
1. The Franchise and Money Order Agreements
7-Eleven is an operator and licensor of convenience stores.
Although some of 7-Eleven’s stores are company-operated, most are
operated by franchisees. This case concerns the theft of nearly $2
million in American Express money orders by one former 7-Eleven
franchisee, Feras Alfares.
Alfares operated three 7-Eleven stores in the Philadelphia
area. 7-Eleven and Alfares entered into three detailed Store
Franchise Agreements that governed their relationship with respect
to the three stores operated by Alfares. The Store Franchise
Agreements expressly provided:
21. Independent Contractor. FRANCHISEE shall be an
independent contractor and shall control the manner and
means of the operation of the Store and exercise complete
control over and responsibility for all labor relations
and the conduct of FRANCHISEE’s agents and employees,
including, but not limited to, the day-to-day operations
of the Store and all Store employees. FRANCHISEE and
FRANCHISEE’s agents and employees shall not (i) be
considered or held out to be agents or employees of 7-
ELEVEN or (ii) negotiate or enter any agreement or incur
any liability in the name or on behalf of, or that
purports to bind, 7-ELEVEN. No actions taken by
FRANCHISEE or FRANCHISEE’s agents or employees shall be
deemed to be actions obligating 7-ELEVEN. FRANCHISEE
acknowledges that nothing herein shall create a fiduciary
or similar relationship with 7-ELEVEN. [Emphasis ours.]
In 1983, 7-Eleven entered into an agreement with American
Express (“Amex”) through which Amex money orders could be sold at
2
7-Eleven stores. That agreement was memorialized in the Money
Order Trust Agreement and includes the following noteworthy
provisions:
2. Trust Relationship.
a. Effective on Start Date, Amex appoints Seller
[7-Eleven] as its Agent and Trustee authorized
to sell Money Orders in accordance with the
provisions stated herein. Upon the Effective
Date of this Agreement, and pursuant to its
terms and conditions, Seller shall be a
trustee and act in a fiduciary capacity with
respect to any Money Orders and Trust Funds in
Seller’s possession.
b. Seller agrees to hold the Money Orders and
Trust Funds in trust for the benefit of
Amex.... Except as set forth herein, it is
expressly understood that Seller does not by
operation of this Agreement or otherwise
acquire any right, title or interest of any
kind in the Money Orders or Trust Funds. All
Money Orders and Trust Funds remain the sole
and exclusive property of Amex.
...
4. Remittance and Reporting Procedures.
a. Seller shall pay Amex the Amex Fee in the
amount of $0.13, for each Money Order sold or
used by Seller or Participating Franchisees.
...
6. Safekeeping and Liability for Loss.
a. ... As used in this Section 6, the term
“Seller” shall mean and include any officer,
employee, representative, Participating
Franchisee(s) or agent of Seller.
b. Seller shall be absolutely liable to Amex for
the Face Value of any Money Orders in all
circumstances where such Money Orders are
lost, stolen, misappropriated, seized or
forfeited from Seller and subsequently paid by
Amex. [Emphasis ours.]
Amex entered into a separate agreement directly with Alfares.
In that agreement, Alfares was appointed Amex’s “agent authorized
to sell American Express Money Orders.” As did the agreement
3
between Amex and 7-Eleven, Amex’s agreement with Alfares emphasized
that
(c) It is expressly understood that [Alfares] does not,
by operation of this Agreement, acquire any right,
title or equitable interest in the Money Order or
the proceeds.
Finally, the contractual relationship between Alfares and 7-
Eleven was updated to cover this new class of transactions in an
agreement titled the Money Order Amendment. In the Money Order
Amendment, the parties agreed that Alfares, acting “as an
independent contractor,” would “use [his] best efforts in the
promotion and sale of Money Orders,” report all daily proceeds from
the sale of money orders and deposit the daily proceeds from the
sale of money orders as directed by the agreement, paying 14 ½
cents per money order to 7-Eleven as consideration for the money
orders themselves and all the related services and material that 7-
Eleven agreed to provide to Alfares.
Alfares began selling Amex money orders from his three 7-
Eleven stores in 1995, and continued to do so without incident
until 1999. In 1999, however, he began to steal the money orders
by either (1) issuing them to fictitious payees or (2) fraudulently
signing money orders that were issued to legitimate payees and
depositing the proceeds in his personal accounts or using them for
his personal benefit. By April 1999, Alfares had stolen $1,916,095
in this manner. Alfares is thought to have left the United States
and is a fugitive from justice.
4
2. The CrimeGuard Insurance Policy
To protect itself from losses arising from criminal
activities, 7-Eleven had purchased a series of annual “CrimeGuard”
insurance policies from National Union, effective for one-year
terms that ran from November to November. The policies provided
broad coverage for “losses” that met the definition of being “the
direct deprivation of [7-Eleven] by a single act or a series of
related acts resulting from dishonesty, dissolution, or forgery
occurring during the Policy Period and reported to [National Union]
during the Policy Period.” For purposes of this definition, the
terms “dishonesty” and “dissolution” are defined as well:
“Dishonesty” is theft by an employee of the policy holder;
“dissolution” is the destruction or disappearance of money or
securities,1 or theft by any natural person other than an employee.
When 7-Eleven discovered Alfares’s theft of almost $2 million
in Amex money orders, it notified National Union of its “loss”
during the 1998-1999 policy term. Initially, National Union denied
coverage on the ground that 7-Eleven lacked the “requisite
financial interest” in the Amex money orders, but later changed its
ground for denial of coverage, proffering two exclusions in the
CrimeGuard policy, Exclusion “e” and Exclusion “l,” as bars to
coverage.
When National Union persisted in its refusal to cover 7-
1
The parties do not dispute that the Amex money orders are
“money” within the meaning of the CrimeGuard policy.
5
Eleven’s losses resulting from Alfares’s defalcations, 7-Eleven
brought this action in the district court for the Northern District
of Texas, alleging breach of contract and violation of the Texas
Insurance Code. The district court granted National Union’s Rule
12(b)(6) motion to dismiss for failure to state a claim. In its
conclusional Order and Final Judgment, the district court stated:
After considering the Motion, all responsive papers
on file, the evidence presented by the parties and the
arguments of counsel, the Court has determined that
National Union’s Motion to Dismiss should be granted
based upon the application of Exclusion “e” in “the
Policy.” The Motion is denied with respect to the
application of Exclusion “l.” The Court further
determines that because of the application of Exclusion
“e,” Plaintiff, 7-Eleven[,] will never be able to state
any claim on the facts and occurrences set out in its
complaint so that leave to amend would be futile.
The action was dismissed with prejudice, and 7-Eleven timely
appealed.
II. Analysis
A. Standard of Review
We review de novo the district court’s dismissal of an action
for failure to state a claim. In doing so, we accept the
plaintiff’s factual allegations as true and will not affirm a Rule
12(b)(6) dismissal “unless it appears beyond doubt that the
plaintiff can prove no set of facts in support of his claim which
6
would entitle him to relief.”2
Interpretation of unambiguous contract provisions and
determination whether a contract provision is ambiguous are
questions of law which we also review de novo.3
B. Discussion
The parties do not dispute that Texas law applies in this
diversity case. With respect to insurance policy construction, the
Texas Supreme Court has offered the following guidance:
First, insurance contracts are subject to the same rules
of construction as other contracts. Our primary goal,
therefore, is to give effect to the written expression of
the parties’ intent. We must read all parts of the
contract together, striving to give meaning to every
sentence, clause, and word to avoid rendering any portion
inoperative. While parol evidence of the parties’ intent
is not admissible to create an ambiguity, the contract
may be read in light of the surrounding circumstances to
determine whether an ambiguity exists.
If, after applying these rules, a contract is
subject to two or more reasonable interpretations, it is
ambiguous. Where an ambiguity involves an exclusionary
provision of an insurance policy, we “must adopt the
construction...urged by the insured as long as that
construction is not unreasonable, even if the
construction urged by the insurer appears to be more
reasonable or a more accurate reflection of the parties’
intent.”4
2
Blackburn v. City of Marshall, 42 F.3d 925, 931 (5th Cir.
1995) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).
3
Stinnett v. Colorado Interstate Gas Co., 227 F.3d 247,
254 (5th Cir. 2000); Mid Century Insurance Co. of Texas v.
Lindsey, 942 S.W.2d 140, 142 (Tex. App. —— Texarkana 1997).
4
Balandran v. Safeco Insurance Co. of America, 972 S.W.2d
738, 740-41 (Tex. 1998) (quoting National Union Fire Insurance
Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991))
(internal citations omitted) (emphasis added).
7
With these rules of construction in mind, we now analyze the
CrimeGuard policy’s exclusionary provisions at issue.
As explained above, the CrimeGuard policy covers “losses”
resulting from a “dissolution.” Alfares’s theft of the Amex money
orders will be covered by the policy absent any express provision
to the contrary, because Alfares is an independent contractor, not
a 7-Eleven employee: his theft of the money orders was therefore a
“deprivation” resulting from “dissolution.” National Union
maintains that two separate exclusion provisions, Exclusion “e” and
Exclusion “l,” apply to bar coverage of 7-Eleven’s losses. We
conclude that, for Rule 12(b)(6) purposes, the district court erred
when it determined that Exclusion “e” barred coverage, but we agree
with the district court’s conclusion that Exclusion “l” does not
bar coverage. Because neither exclusion unambiguously bars
coverage, 7-Eleven has not failed to state a claim for which relief
may be granted.
1. Exclusion “e”
Exclusion “e” states that the CrimeGuard policy does not cover
“loss or damage resulting from dissolution arising out of the
giving or surrendering of assets in any exchange or purchase.”
None contest that 7-Eleven’s loss resulted from a dissolution —— a
theft committed by a non-employee (Alfares). The parties disagree,
however, about whether the dissolution can be said to have arisen
out of the giving or surrendering of assets “in any exchange or
purchase.” The policy itself does not define these terms. 7-
8
Eleven contends that we should construe the terms “exchange or
purchase” as referring to a transaction in which title to an asset
is transferred in exchange for (1) money (a purchase) or (2) other
property (an exchange).
In support of its position, 7-Eleven points to the common
usage of these terms, particularly the definitions given in Black’s
Law Dictionary. 7-Eleven argues further that, because both the
Money Order Agreement between Amex and 7-Eleven and the Money Order
Amendment between 7-Eleven and Alfares emphasize that neither 7-
Eleven nor Alfares would acquire title to the money orders, 7-
Eleven’s entrusting custody of the money orders to Alfares could
not have been exchanges or purchases within the contemplation of
Exclusion “e.” Thus, reasons 7-Eleven, the dissolution cannot be
said to have arisen out of the giving or surrendering of assets “in
any exchange or purchase.”
National Union first counters by emphasizing that Exclusion
“e” refers to any exchange or purchase, and that there was an
exchange sufficient to bring the transaction within the exclusion
by virtue of the exchange of the money orders for the sales
services provided by Alfares and the fees he was obligated to pay
after each sale. National Union urges further that because the
agreement between Amex and 7-Eleven is entitled “Money Order Trust
Agreement” and creates a “trust relationship” between the parties,
7-Eleven did in fact —— under basic principles of Texas trust law
—— acquire legal title to the money orders, which it held for the
9
benefit of Amex.
For Rule 12(b)(6) purposes, National Union’s construction of
this exclusion is not reasonable; on the contrary, we agree with 7-
Eleven that there was no “exchange or purchase” (as those terms are
normally used conjointly) of the money orders. We must, therefore,
reverse the district court’s dismissal of 7-Eleven’s claim insofar
as that Rule 12(b)(6) ruling is premised on a holding that
Exclusion “e” prevents 7-Eleven’s recovery under the CrimeGuard
policy.
2. Exclusion “l”
As noted, the district court determined that, for purposes of
Rule 12(b)(6), Exclusion “l” in the CrimeGuard policy does not
preclude recovery. Exclusion “l” states that the policy does not
cover
[l]oss or damage resulting from dissolution of money or
securities which benefits any natural person, partnership
or corporation (other than the Insured’s bank) acting in
the capacity of a broker, factor, commission merchant,
consignee, contractor or other agent or representative of
the Insured except any natural person, partnership or
corporation who is duly authorized by the Insured to have
custody of the money or securities. [Emphasis ours.]
This provision, standing alone, would not bar coverage of 7-
Eleven’s loss from Alfares’s dissolution, because he is a “natural
person” who was “duly authorized” by the insured, 7-Eleven, “to
have custody” of the money orders.
National Union contends, however, that the final clause of
Exclusion “l,” which restores coverage (negates exclusion of
10
coverage) for dissolution by the person duly authorized to have
custody of the money or securities, was itself deleted by a
separate document, titled “Endorsement #15,” which reads in its
entirety:
DESIGNATED AGENTS COVERAGE
It is agreed that:
Employee in the Definitions section is hereby
amended by including the following:
1. Employees of the following Agents, in their
capacity as a Combined Distribution Center
[“CDC”] are included as Employees of the
Insured [7-Eleven]
1. AMR Global Logistics (CDC)
2. Bussan Logistics, Inc. (CDC)
3. Weber Distribution Systems (CDC)
4. Constance Foods Group (CDC)
5. E.A. Sween Company (CDC)
6. SIG Logistics, Inc. (CDC)
2. It is hereby understood and agreed that
Exclusion l is deleted in its entirety and
replaced by the following:
1. loss or damage resulting from dissolution
of money or securities which benefits any
natural person, partnership or
corporation (other than the Insured’s
bank) acting in the capacity of a broker,
factor, commission merchant, consignee,
contractor or other agent or
representative of the Insured.
3. As respects the aforementioned Agents, the
following separate Limit of Liability is
provided: $2,500,000.00
4. As respects the aforementioned Agents, the
following separate Deductible is provided:
$1,000,000.00
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
[Emphasis added.]
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Section 2 above is obviously the problematic provision. Read in a
vacuum —— which is precisely how National Union contends it should
be read —— its effect would be to delete from the entire insurance
policy the phrase that otherwise saves Alfares’s theft from
Exclusion “l,” namely, “except any natural person, partnership or
corporation who is duly authorized by the Insured to have custody
of the money or securities.” But, as with any other contract,
single provisions cannot be construed alone and out of context.
We cannot, therefore, approbate such a fractured reading of
Endorsement #15, which ignores the context in which section 2
appears, as National Union proposes. First, the Endorsement itself
is titled “Designated Agents Coverage,” strongly suggesting that
the Endorsement will address only that subject. Second —— and more
telling —— the entire substantive content of Endorsement #15 is
preceded, and restricted, by the words, “Employee in the
Definitions section is hereby amended by including the following:”.
Like the title of the Endorsement, this signal tells all who have
occasion to read Endorsement #15 that everything following the
colon will deal exclusively with the definition of the term
“employee.” Third, section 1 begins this task by informing the
reader that the definition of Employee will be amended only to the
extent that employees of six nominate CDCs are concerned: Employees
of the listed CDCs will, for purposes of the policy, be treated as
employees of 7-Eleven (“deemed 7-Eleven employee”).
A continuing analysis of the provisions surrounding the
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problematic section 2 reflects that the sections following it
(sections 3 and 4) are unambiguous. Their effects are
unquestionably limited to the CDCs listed in section 1. Construing
Endorsement #15 as a whole, then, we conclude that in context,
section 2 is most properly understood as limited in its
applicability, as well. Section 2 is, in fact, a bewildering
provision, but we need not occupy ourselves with solving its
precise meaning, because one thing is clear: Section 2 somehow
affects the CrimeGuard policy’s coverage only when an employee or
a named CDC is involved. Alfares was neither an employee of 7-
Eleven nor connected in any way with one or more of the named CDCs.
Whatever else the effects of section 2 may be, they cannot be
tortured to reach the dissolution of Amex money orders by Alfares.
National Union appears to insist that the parties simply
“stuck” a broad, generally-applicable section 2 right in the middle
of the otherwise-restricted Endorsement #15, instead of bothering
to create a separate document drastically reducing the policy’s
coverage, thereby excluding Alfares’s dissolution from coverage.
Even if there were somehow merit to this suggestion, National Union
would be faced with a contractual provision that, when “read in
light of the surrounding circumstances” is undeniably “ambiguous.”5
If on the basis of no other legal analysis, 7-Eleven’s success on
this appeal is assured by that recognition.
5
Balandran, 972 S.W.2d at 741.
13
As stated above, when we review a district court’s dismissal
of an action for failure to state a claim, our focus is narrow
indeed: We need only ascertain whether “it appears beyond doubt
that the plaintiff can prove no set of facts in support of his
claim which would entitle him to relief.”6 When we here conclude
that at least one reasonable construction of the ambiguous
Endorsement #15 would not bar 7-Eleven’s claim under the CrimeGuard
policy, our task is complete: We agree with the district court
that Exclusion “l” does not preclude 7-Eleven’s recovery under the
policy for the dissolution accomplished by —— and benefiting —— its
independent contractor, Alfares, who had no connection with any of
the six named CDCs and was not an actual employee of 7-Eleven.
Therefore, with neither Exclusion “e” nor Exclusion “l”
unambiguously barring coverage, 7-Eleven escapes dismissal of its
action at the Rule 12(b)(6) stage and can proceed to the next phase
of the litigation, whether that be further discovery, summary
judgment, or trial.
Undaunted, National Union argues in the alternative that even
if Endorsement #15 does not amend Exclusion “l” as it pertains to
Alfares, 7-Eleven’s claim would still be barred, by the indemnity
provision in Exclusion “l.” The provision to which National Union
refers explains that if
C the Insured has a contract with the natural person,
partnership or corporation covering such loss or
6
Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
14
damage, or if
C the natural person, partnership or corporation has
any indemnity or insurance covering such loss or
damage,
then [National Union’s] liability for such loss or damage
shall only be the excess over the amount of such
contract, indemnity or insurance and [National Union]
shall not be obligated to pay any amount for such loss or
damage until the Insured has been paid under all such
contracts, indemnities or insurance.
National Union argues that because (1) the Money Order Amendment
between Alfares and 7-Eleven expressly requires that Alfares be
charged for, inter alia, 7-Eleven’s losses “which [are] the direct
or indirect result of any breach of this Money Order Agreement,”
and (2) the Store Franchise Agreement provides that “Franchisee
[Alfares] shall be responsible for and indemnify 7-Eleven from all
losses, except those specifically the responsibility of or
indemnified by 7-Eleven,” 7-Eleven must recover its loss from
Alfares, not from National Union.
7-Eleven answers this argument definitively: As National
Union did not make this argument to the trial court, it cannot do
so for the first time on appeal. Our precedent is solidly to that
effect, so we shall not consider National Union’s argument.7 It
suffices that we agree with the district court’s conclusion that
Exclusion “l” will not serve as the basis on which to dismiss 7-
Eleven’s action for failure to state a claim for which relief can
7
See, e.g., Wiley v. Offshore Painting Contractors, Inc.,
711 F.2d 602, 609 (5th Cir. 1983) (citing Shingleton v. Armor
Velvet Corp., 621 F.2d 180, 183 (5th Cir.1980) and United States
v. Silva, 611 F.2d 78, 80 (5th Cir.1980)).
15
be granted.
3. Texas Insurance Code Claim
In addition to its claims directly under the CrimeGuard
policy, 7-Eleven also brought a claim against National Union for
violation of the Texas Insurance Code. 7-Eleven’s complaint
alleges in part:
More specifically, Defendant is guilty of the following
unfair insurance practices, which have been and are
producing causes of Plaintiff’s damages:
(vii) The Defendant misrepresented the terms of the
insurance policy, in violation of 28 Tex.
Admin. Code §§ 21.3 and 21.203(1); and (23);
and Texas Insurance Code Ann. art. 21.21-2, §
2(a)....
Article 21.21-2, § 2 of the Texas Insurance Code provides:
(a) No insurer doing business in this state under the
authority, rules and regulations of this code shall
engage in unfair claim settlement practices.
(b) Any of the following acts by an insurer shall
constitute unfair claim settlement practices:
(a) Knowingly misrepresenting to claimants
pertinent facts or policy provisions relating
to coverages as issue....
After concluding that Exclusion “e” barred coverage of 7-
Eleven’s claims, the district court “ordered, adjudged and decreed
that ... 7-Eleven, Inc.’s Complaint is dismissed with prejudice,”
without distinguishing between policy-based claims and Texas
Insurance Code-based claims. Even if the policy did not actually
cover 7-Eleven’s losses, 7-Eleven is entitled to develop facts
applicable to its misrepresentation claim. That is, 7-Eleven is
entitled to show, if it can, that National Union represented that
losses such as those resulting from Alfares’s crime would be
16
covered under the CrimeGuard policy. We therefore reverse the
district court’s dismissal of 7-Eleven’s Texas Insurance Code-based
claims as well as the policy-based claims.
III. Summary
For Rule 12(b)(6) purposes, Exclusion “e” of the CrimeGuard
policy does not bar coverage of 7-Eleven’s claims because 7-
Eleven’s loss did not result from dissolution arising out of the
giving or surrendering of assets in an exchange or purchase, as
those terms are normally used conjointly, as required to trigger
Exclusion “e.” We agree, moreover, with the district court that
Exclusion “l” of the CrimeGuard policy does not bar coverage of 7-
Eleven’s claims, and we shall not consider the indemnity provision
highlighted by National Union because this contention was not
presented to the district court. Finally, 7-Eleven is entitled to
develop its misrepresentation claims grounded in provisions of the
Texas Insurance Code. We therefore reverse the district court’s
grant of National Union’s Rule 12(b)(6) motion, and we remand the
action to the district court for further proceedings consistent
herewith.
REVERSED and REMANDED.
17