RLI Insurance Co v. Maxxon Southwest Inc

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
September 1, 2004
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 03-10660
RLI INSURANCE COMPANY,
Plaintiff-Counter-Defendant-Appellee,
versus
MAXXON SOUTHWEST INC, ET AL,
Defendants,
MAXXON SOUTHWEST INC; GYPSUM
FLOORS OF TEXAS INC; RAYMOND BREKKE;
Defendants-Counter Claimants-Appellants.
Appeal from the United States District Court
for the Northern District of Texas
(3:01-CV-2536-G)
Before GARWOOD, HIGGINBOTHAM, and SMITH, Circuit Judges.*
GARWOOD, Circuit Judge:
Defendants-counter claimants-appellants Maxxon Southwest, Inc.
(MSI), Gypsum Floors of Texas, Inc. (Gypsum), and Raymond Brekke
*
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this opinion should not be published and is not precedent except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.
(Brekke), appeal the district court’s grant of summary judgment,
holding that appellants are not entitled to a defense or indemnity
under the umbrella liability policies issued to them by plaintiff-
counter defendant-appellee RLI Insurance Company (RLI). We affirm.
Facts and Proceedings Below
Maxxon Corporation manufactured a product known as “gypsum
cement.” MSI, one of Maxxon’s distributors, sold gypsum cement to
approximately twenty dealers, including both Gypsum and General
Supply. Until July of 2000, Brekke owned (directly or indirectly)
both MSI and Gypsum.
On April 1, 2000, RLI issued a Commercial Umbrella Liability
Policy to Gypsum, which ran from April 1, 2000 to April 1, 2001; on
April 1, 2001, RLI issued to Gypsum a renewal policy running from
April 1, 2001 to April 1, 2002. MSI and Brekke were listed as
additional insureds on the supplementary schedules of each policy.
On December 20, 2000, General Supply filed an antitrust
lawsuit (the underlying suit) against Brekke, MSI, and Gypsum
(defendants, insureds, or appellants) in the Northern District of
Texas. General Supply alleged that the defendants violated the
Robinson-Patman Act1 by engaging in discriminatory pricing.
Specifically, General Supply alleged that, at some point prior to
1
The Robinson-Patman Act provides, in part, “[i]t shall be
unlawful for any person engaged in commerce . . . to discriminate
in price between different purchasers of commodities of like
grade and quality, where either or any of the purchases involved
in such discrimination are in commerce . . .” 15 U.S.C. § 13(a).
2
1996, MSI began its practice of selling gypsum cement at a cheaper
rate to Gypsum than to General Supply and other dealers, thereby
giving a competitive advantage to Gypsum.2 In its suit, General
2
General Supply’s complaint alleged that MSI used three
different price lists; the price list containing the lowest
prices was made available only to Gypsum, and one other dealer in
Denver, Colorado. The list with the mid-range prices was made
available to General Supply and diverse other dealers. A third
list provided other dealers even higher prices than those which
General Supply was paying. General Supply alleged that this
scheme was created by Brekke, MSI’s president, to give Gypsum an
unfair price advantage over its competition, including General
Supply.
The complaint filed by General Supply – referred to therein
as “Gensco” – included the following allegations:
“32. Upon information and belief, since at least
1996, MSI has had two or more price lists for sales of
gypsum cement to its customers, including Gensco.
33. These different price lists are not based on
the quality or quantity of the cement being purchased,
but are rather based on the identity of the dealer
purchasing the product.
. . .
37. Gensco will show that Brekke and MSI were
giving favorable pricing to Gypsum Floors of Texas
because such favorable pricing allowed Gypsum Floors of
Texas to obtain a competitive advantage over Gensco,
thus enabling Gypsum Floors and its owner, Brekke, to
profit at Gensco’s expense.
. . .
47. At tome time before 1996 and continuing
through at least June 2000, MSI had three different
price lists for each grade of its gypsum cement. . . .
48. Gensco was unaware of these disparate prices
and different price lists until sometime in April or
May 2000.
49. In addition to the different price lists,
upon information and belief, MSI offered additional
special, unpublished discounts to certain dealers,
including Gypsum Floors of Texas, which further reduced
those selected dealers’ net wholesale price for the
same materials Gensco was purchasing at substantially
higher, un-discounted prices.
. . .
3
Supply sought treble damages, injunctive relief, and attorneys’
fees.
The insureds tendered the defense of the underlying lawsuit to
RLI under the RLI policies, and RLI accepted the tender of that
defense, subject to a reservation of rights set out in their July
23, 2001 letter to Brekke. On November 30, 2001, RLI withdrew from
the defense of the underlying antitrust lawsuit claiming that the
insureds were not covered, and simultaneously filed this suit
seeking a declaration that they had no duty to defend the Brekke
51. Upon information and belief, Gypsum Floors of
Texas knew it was on the first price list and actively
solicited and received substantially lower net
wholesale prices from MSI than were offered to Gensco.
Gensco asserts that Gypsum Floors of Texas
intentionally and knowingly obtained said lower prices
and higher discounts from MSI and MAXXON Corporation
and used its wholesale price advantage to knowingly and
successfully underbid Gensco on construction jobs both
companies were attempting to acquire.
52. Upon information and belief, Defendant Ray
Brekke, the president of MSI and owner of Gypsum Floors
of Texas, intentionally and knowingly set up the
discriminatory pricing schedules used by MSI with the
purpose of allowing his dealer, Gypsum Floors of Texas,
to gain a price advantage over Gypsum Floor’s
competition, including Gensco, and that pricing
actually gave Gypsum Floors a price advantage as
anticipated . . .
53. Defendants Brekke, MSI and Gypsum Floors of
Texas thus engaged in an unlawful conspiracy to violate
federal antitrust laws and to harm and disparage the
business and economic well-being of Gensco to the
benefit of the Defendants, including by unlawfully
interfering in the present and prospective business
relations of Gensco.”
The underlying suit also names Maxxon Corporation as a
defendant. Maxxon Corporation is not an insured (or additional
insured) under either RLI policy.
4
defendants against the underlying antitrust lawsuit. The insureds
responded claiming that RLI could not avoid coverage under its
policies, and that RLI breached its duty to defend.3
Meanwhile, on November 19, 2001, the district court in the
underlying antitrust lawsuit granted partial summary judgment to
MSI, Gypsum, and Brekke as to a portion of General Supply’s cause
of action for price discrimination under the Robinson-Patman Act.
The court ruled that because MSI, Brekke and Gypsum were “related
entities” until July of 2000 when Brekke sold MSI to Maxxon
Corporation, an entity unrelated to Brekke, there were no transfers
that could be considered “sales” under the Robinson-Patman Act
prior to July, 2000. Therefore, the court ruled, General Supply
could only offer evidence of injuries occurring after July of 2000.
Without defense from RLI, General Supply and the defendants
settled the underlying antitrust lawsuit in April of 2002. Under
the settlement, Maxxon Corporation and Gypsum paid $600,000 to
General Supply; Gypsum paying $300,000 of the $600,000 on behalf of
itself, MSI and Brekke, in exchange for a release of all of the
claims asserted against all of them in that litigation. In April
2002, the district court then entered an order dismissing the case
as settled.
3
The defendants subsequently amended their pleadings to
seek an indemnification for $300,000 that they had to pay under
the settlement (addressed infra), and damages under the Texas
Insurance Code.
5
On September 23, 2002, RLI filed its motion for partial
summary judgment, claiming that price discrimination did not fall
within the coverage of its policy, and alternatively, that coverage
under the policies was barred under the fortuity doctrine. The
insureds cross-moved for partial summary judgment seeking a
declaration that RLI was obligated to defend the underlying
lawsuit, to indemnify the insureds for the settlement, and for
breach of contract by RLI in failing to honor its obligations under
the policies. The district court ruled in favor of RLI on April
22, 2003, determining that the fortuity doctrine, also known as the
loss-in-progress doctrine, barred coverage for MSI, Gypsum, and
Brekke, and therefore RLI owed no duty to defend or indemnify its
insureds in the underlying lawsuit.4 On May 1, 2003 the district
court entered judgment in favor of RLI.
On May 6, 2003, the insureds then filed a motion for
reconsideration and, in the alternative, a motion for new trial,
asserting for the first time that the partial summary judgment
ruling in the underlying lawsuit undercut RLI’s fortuity defense.5
4
The district court did not rule on whether there would
have otherwise been coverage under the terms of the policy.
5
Their claim was that based on the partial summary judgment
determinative in the underlying lawsuit, before July 2000, there
was no violation of the Robinson-Patman Act because MSI and
Gypsum were, in effect, under sufficiently common ownership by
Brekke, and therefore there were no “sales,” for the purposes of
the Robinson-Patman Act, between the defendants. Hence, they
argued that the fortuity doctrine could not apply to the April 1,
2000 - April 1, 2001 policy because the only sales contrary to
6
RLI opposed the motion, urging, inter alia, that it raised for the
first time facts and issues which should have been raised in
opposition to RLI’s motion for summary judgment. In a one sentence
order dated June 13, 2003, the district court denied the insured’s
motion. On July 2, 2003, MSI, Gypsum, and Brekke appealed the
order granting RLI’s motion for partial summary judgment and
denying their motion for partial summary judgment, as well as the
order denying their motion for reconsideration and new trial.
Discussion
1. Standard of Review
This Court reviews a grant of partial summary judgment de novo
and applies the same standard as the district court. William v.
Bramer, 180 F.3d 699, 702 (5th Cir. 1999). Because RLI filed its
motion for declaratory judgment in federal court pursuant to
diversity jurisdiction, Texas substantive law applies. Erie R.R.
v. Tompkins, 304 U.S. 64 (1938).
2. The Fortuity Doctrine
The district court held that coverage for the General Supply
litigation, as well as the settlement arising therefrom, was
precluded under the fortuity doctrine because the underlying
antitrust claims constituted a “loss in progress.” The fortuity
doctrine relieves insurers from covering certain behaviors that the
the Robinson-Patman Act would have occurred after June 2000, when
that policy was already in effect.
7
insured undertook prior to purchasing the policy. “Because the
purpose of insurance is to protect insureds against unknown, or
fortuitous, risks, fortuity is an inherent requirement of all risk
insurance policies.” Scottsdale Ins. Co. v. Travis Maintenance, 68
S.W.3d 72, 75 (Tex. App.-Dallas [5th Dist.] 2001, pet. denied).
Combining the priciples of “known loss” and “loss in progress,” the
fortuity doctrine holds that “[i]nsurance coverage is precluded
where the insured is or should be aware of an ongoing progressive
or known loss at the time the policy is purchased.” Id. (citing Two
Pesos, Inc. v. Gulf Ins. Co., 901 S.W.2d 495, 502 (Tex. App.-
Houston [14th Dist.] 1995, no writ)) (emphasis added); see also
Burch v. Commonwealth Mut. Ins. Co., 450 S.W.2d 838, 840 (Tex.
1970) (“A person may not, with knowledge of a loss, transfer the
risk from one company to another or make a contract by accepting a
policy issued under such circumstances that he was under no
obligation with respect thereto.”).
If an insured knows, or should have known, at the time it
purchased the insurance policy, that its current behavior is
wrongful and could result in liability, it effectively removes the
risk element inherent in insurance, and therefore a Texas court
will not require the insurer to pay. See Franklin v. Fugro-
McClelland (Southwest), Inc., 16 F. Supp. 2d 732, 737 (S.D. Tex.
1997). Because the behavior that led to the underlying antitrust
suit, price discrimination, allegedly originated well prior to
8
April 2000, the district court held that the fortuity doctrine
barred coverage in the case sub judice.
3. Arguments on Appeal
On appeal, the insureds argue first that the fortuity doctrine
should not have been applied to them because there was no
“watershed event” informing them that they were doing anything
wrong. They next claim that, in any event, they in fact were not
doing anything that could have exposed them to liability before the
April 2000 - April 2001 policy was in effect. They base this
latter contention on the unity of ownership reasoning behind the
district court’s grant of partial summary judgment in the
underlying suit. We address these contentions in turn.6
A. Watershed event
After the district court rendered summary judgment in response
to RLI’s motion, finding that the fortuity doctrine controlled, the
insureds’ only remaining defense appeared to be that the complaint
in the underlying suit made no allegations that they received any
pre-policy notice or had any independent knowledge that they were
engaging in activities that would have exposed them to liability.
See, e.g., Franklin, 16 F. Supp. 2d at 737 (Under the fortuity
6
The insureds also make certain policy coverage arguments,
asserting that the injuries alleged in the underlying antitrust
suit, like price discrimination, should be covered under the RLI
policy as a personal injury from, inter alia, “discrimination.”
We need not reach these questions as we affirm on the basis of
the district court’s opinion, namely on the fortuity doctrine.
9
doctrine, “[t]he relevant inquiry is whether [the insureds] knew at
the time they entered the insurance policy that they were engaging
in activities for which they could possibly be found liable.”). It
is undisputed that the insureds had not received a complaint from
General Supply before the suit, or before the purchase of the
original RLI policy.
However, the district court correctly pointed out that, when
determining coverage under the fortuity doctrine, 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.
Franklin, 16 F. Supp. 2d at 737. Here, the behavior began no later
than 1996, four years prior to the initial purchase of the RLI
policy, and the underlying suit alleges that Gypsum “intentionally
and knowingly obtained said lower prices and higher discounts from
MSI . . . and used its wholesale price advantage to successfully
underbid Gensco [General Supply] on construction jobs both
companies were attempting to acquire” and that the discriminatory
prices were “intentionally and knowingly set up” by the insureds
“with the purpose of allowing” Gypsum “to gain a price advantage
over Gypsum Floors’ competition, including Gensco, and that pricing
actually gave Gypsum Floors a price advantage as anticipated” and
that the insureds “engaged in an unlawful conspiracy to violate
10
federal antitrust laws and to harm and disparage the business and
economic well being of Gensco to the benefit of” the insureds.
These allegations sufficiently reflect that the insureds knowingly
engaged in conduct which they knew and intended would economically
harm General Supply and which they knew or should have known could
reasonably be expected to expose them to legal liability.
On appeal, the insureds again focus on the scienter element of
the fortuity doctrine, asserting that they did not possess the
requisite knowledge that their behavior might give rise to
liability. The appellants claim that, based upon analysis of a
number of Texas cases, some sort of “watershed event” is required
to give an insured sufficient notice that he or she is subject to
potential liability arising out of actions prior to the issuance of
a policy.7 They note that typically, this event is the receipt of
a demand or cease and desist letter from a plaintiff, or the filing
of a lawsuit before insurance has been purchased.
Although they are likely correct in their assertion that most
cases do in fact involve a “watershed event” of some sort, nowhere
in the case law is there any statement that such an event is
required. Rather, we consider whether the party knowingly acted in
a manner in which it “‘could possibly be found liable.’” Matagora
7
The appellants describe a watershed event as “an event
beyond everyday ‘business as usual conduct,’ [that] caused the
insureds to cross the line from engaging in mere conduct to
becoming aware that they were engaging in conduct for which they
could be held liable.”
11
Ventures v. Travelers Lloyds, 208 F. Supp. 2d 687, 691 (S.D. Tex.
2001) (quoting Franklin, 16 F. Supp. 2d at 737).
Moreover, we can point to at least one case, Scottsdale v.
Travis, where the Texas Court of Appeals applied the fortuity
doctrine in the absence of any watershed, or threshold, event. The
appellants attempt to distinguish Scottsdale, claiming that in that
case, “the insured’s actions were so egregious that the court
determined that the insured had, in effect, engaged in essentially
fraudulent activities for which it knew it could be held liable.”
However, there was undeniably no threshold event; in that case, the
district court looked to the allegations contained in the
underlying complaint, and held that “because the petition alleges
the acts involved were intentional[,] we are not persuaded that .
. . there is no allegation that [insured] knew it was engaged in
activities for which it could possibly be held liable.”
Scottsdale, 68 S.W.3d at 77 (internal quotations omitted).
Because, as was the case in Scottsdale, the underlying complaint in
the case sub judice informs the court as to whether the insureds
possessed the requisite mens rea, and as above noted General Supply
alleged that the defendants intentionally created their price
discrimination regime for the purpose and with effect of gaining a
competitive advantage over and harming General Supply, the district
court did not err in applying the fortuity doctrine in the absence
of a “watershed event.”
12
B. Partial Summary Judgment and the lack of a “sale”
Before their motion for new trial and to reconsider, the
insureds had not mentioned the partial summary judgment holding in
the underlying antitrust suit to the district court. Nor do
appellants contend that before their motion for reconsideration
they had made any assertion in the present case about common
ownership or that because of common ownership their conduct prior
to July 2000 was not such as to expose them to liability or to
invoke the fortuity or loss in progress doctrine; and indeed the
district court’s opinion does not reflect that the insureds made
any contention whatever with regard to common ownership. Rather,
the insureds’ main argument, excluding the policy coverage claims,
was that there was no watershed event that could have given them
warning.
It was in the defendants’ motion for reconsideration, and in
the alternative for new trial, that they first raised their
underlying suit partial summary judgment order, in which the
district court in the underlying action found that before July
2000, the defendants committed no anti-trust violations, as the
sales to Gypsum were not in fact “sales” for purposes of the
Robinson-Patman Act due to common ownership.
RLI responded to this contention, asserting that it was waived
because it had not been raised earlier. The district court
summarily dismissed the motion for reconsideration and new trial,
13
and does not appear to have considered the partial summary judgment
ruling in the underlying suit.8 On appeal, the appellants assert
that the application of the fortuity doctrine to them is
inappropriate because in the underlying action the district court
granted them “partial summary judgment[,]. . . determining that
because of the unity of interest between the Insureds, no transfers
could be considered actionable ‘sales’ under the Robinson-Patman
Act.” RLI again retorts that the defendants’ underlying suit
partial summary judgment argument has been waived because it was
not earlier presented to the district court, and the partial
summary judgment had been issued some ten months before RLI’s
motion for summary judgment in this case was filed.
We find no error in the district court’s decision to deny the
motion for new trial and to reconsider. Although the district
court might have had discretion to consider the defendants’
argument, though first raised in their motion to reconsider, it was
not required to do so. See Simmons v. Reliant Standard Life Ins.
Co. of Texas, 310 F.3d 865, 868 (5th Cir. 2002) (noting that when
responding to a motion for reconsideration, the court has
discretion to reopen a case that has been closed and may change its
8
The district court’s order stated, “The defendants’ motion
to reconsider the memorandum order on cross motions for partial
summary judgment, and in the alternative, motion for a new trial
is DENIED.” Therefore, because it made no mention of the
underlying partial summary judgment, we assume that it did not
consider the argument. Moreover, there had already been a final
judgment issued in this case.
14
ruling on the merits).
Moreover, there was no reason for the defendants not to have
raised the issue sooner, nor do they give any reason.9 Therefore,
the district court did not abuse its discretion. See Rosenzweig v.
Axurix Corp., 332 F.3d 854, 863 (5th Cir. 2003) (“a motion to alter
or amend the judgment under Rule 59(e) ‘must clearly establish
either a manifest error of law or fact or must present newly
discovered evidence’ and ‘cannot be used to raise arguments which
could, and should, have been made before the judgment issued.’”)
(quoting Simon v. United States, 891 F.2d 1154, 1159 (5th Cir.
1990)).10
Under Texas law, the duty to defend is determined only by the
pleadings and the language contained in the insurance policy. See
National Union Fire Ins. Co v. Merchants Fast Motor Lines, Inc.,
939 S.W.2d 139, 141 (Tex. 1997). Moreover, the loss in progress
9
The underlying partial summary judgment order on which
appellants now rely was entered on November 19, 2001, some 10
months before RLI filed its motion for summary judgment and over
a year before the district court’s grant of RLI’s summary
judgment motion on April 22, 2003.
10
We also point out that the underlying partial summary
judgment order was interlocutory at all times. Because the
entire case was settled, no final judgment was ever entered, and
RLI never admitted or agreed that there were no violations before
July 2000 (nor did General Supply). See Avondale Shipyards, Inc.
v. Insured Lloyd’s,786 F.2d 1265, 1269-72 (5th Cir. 1986).
Additionally, even if there was a unity of ownership between the
insureds, there was another dealer, in Denver, that was also a
recipient of the most discounted price list. The partial summary
judgment holding has no effect on the sales between the insureds
and other parties receiving discounted rates.
15
doctrine is also triggered by the allegations in the pleadings.
See Scottsdale, 68 S.W.3d at 75. Here, an examination of the
allegations in the pleadings, as well as a consideration of the
general rule that parties are charged with knowing the law,
reflects that the district court properly applied the fortuity
doctrine to bar coverage. Because we affirm the district court on
this ground, we need not address the appellants’ other contentions.
Conclusion
For the foregoing reasons, the district court’s grant of
summary judgment is
AFFIRMED.
16