Great American Insurance Co v. AFS/IBEX Financial Services In

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Great American Insurance Co v. AFS/IBEX Financial Services In

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IN THE UNITED STATES COURT OF APPEALS United States Court of Appeals FOR THE FIFTH CIRCUIT Fifth Circuit FILED
July 22, 2010 N o . 09-10262 Lyle W. Cayce Clerk

G R E A T AMERICAN INSURANCE COMPANY, Plaintiff - Appellant Cross-Appellee v. A F S /I B E X FINANCIAL SERVICES INC, Defendant - Appellee Cross-Appellant

A p p e a l from the United States District Court for the Northern District of Texas

B e fo r e GARWOOD, STEWART, and CLEMENT, Circuit Judges. C A R L E. STEWART, Circuit Judge: G r e a t American Insurance Company ("GAIC") issued crime protection p o lic ie s to AFS/IBEX Financial Services, Inc. ("AFS"). After suffering a loss c a u s e d by the forgery of certain checks, AFS submitted a claim to GAIC. GAIC d e n ie d coverage and filed for declaratory judgment. AFS counterclaimed seeking c o v e r a g e and damages. After a jury trial, the district court entered judgment for A F S . The appeals of both parties are now before the court. We affirm in part, v a c a t e in part, and remand.

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09-10262 I. A F S provides premium financing in the insurance industry. This service is useful because many insurance carriers require the entire policy premium to b e paid up front and do not offer payment plans. In connection with this

b u s in e s s , AFS entered into an agreement with Charles McMahon, Sr. (" M c M a h o n Sr."), who owns the Charles McMahon Insurance Agency. This a g r e e m e n t contemplated that McMahon Sr. would create and sign premium fin a n c e applications on behalf of insureds. AFS would then send a check to the in s u r a n c e company for the purchase price of the insurance, and the insureds w o u ld send regular payments to AFS. McMahon Sr.'s son, Charles McMahon, Jr. ("McMahon Jr."), was the office m a n a g e r at McMahon Sr.'s agency and was responsible for submitting a p p l i c a t io n s for premium financing to AFS. McMahon Jr. exploited this

b u s in e s s relationship by submitting approximately 122 false applications for p r e m iu m financing to AFS. These fraudulent applications induced AFS to issue 1 2 7 checks made payable to "Charles McMahon Insurance Agency." McMahon J r . endorsed these checks "Charles McMahon Insurance Agency" and deposited t h e funds into his own personal bank account. McMahon Jr. never endorsed the c h e c k s with his own name or signature. McMahon Sr. was aware that his son h a d responsibility for submitting financing applications to AFS, but was not a w a r e of his son's fraud. McMahon Sr. allowed McMahon Jr. to endorse checks p a y a b le to the agency and to write checks out of the agency's account for le g it im a t e business purposes. After McMahon Jr.'s scheme was uncovered, AFS submitted a claim to G A I C for $519,110.58 under the forgery coverage provision of its Crime P r o t e c t io n Policy No. SAA 268-75-98-03 (the "SAA policy") for losses beginning 2

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09-10262 in July 2005 and discovered by AFS in June 2006. Asserting that no forgery o c c u r r e d under the terms of the SAA policy, GAIC denied coverage and filed for a declaratory judgment from the district court, asking that it find that GAIC had n o duty to indemnify AFS for its loss. AFS counterclaimed for breach of contract a n d alleged that coverage existed for its loss under the SAA policy which was in e f f e c t from March 15, 2006 to March 15, 2007, as well as under the policy in e ffe c t prior to the SAA policy, Crime Protection Policy No. CRP 268-75-98-02 (the " C R P policy"), which was effective from March 16, 2005 to March 16, 2006. AFS a ls o counterclaimed for extra-contractual damages against GAIC, alleging bad fa it h and violations of the Texas Insurance Code. Additionally, AFS c o u n t e r c la im e d for consequential breach of contract damages to recover the lit ig a t io n expenses it incurred in its suit against McMahon Jr. and Chase Bank (t h e "McMahon Jr. Lawsuit") for the recovery of the alleged losses. G A I C filed a motion for summary judgment, arguing that dismissal was a p p r o p r ia te because neither insurance policy provides coverage for AFS's claims. A F S filed a cross motion for summary judgment, alleging that coverage existed u n d e r the SAA policy's plain meaning; alternatively, it argued that its loss was c o v e r e d under the CRP policy because it was ambiguous and thus should be s t r ic tly construed in its favor. AFS also moved for summary judgment on its d a m a g e claims. The district court concluded that coverage for AFS's loss existed u n d e r the plain meaning of the SAA policy. Finding the relevant contract la n g u a g e of the CRP policy ambiguous, it concluded that coverage for AFS's loss w a s available under that policy as well. However, the district court found that is s u e s of fact remained regarding AFS's damage claims. T h e remaining issues went to trial by jury. At the close of evidence, the d is t r ic t court dismissed AFS's extra-contractual damage claims, stating that 3

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09-10262 s in c e AFS's damages all potentially flowed from GAIC's breach of its insurance c o n t r a c t, the same damages could not, as a matter of law, satisfy the damage e le m e n t for AFS's extra-contractual claims. The jury found that litigation e x p e n s e s incurred by AFS in the McMahon Jr. Lawsuit were a natural, probable, a n d foreseeable consequence of GAIC's failure to comply with its duty to pay u n d e r the insurance policy, entitling AFS to recover consequential breach of c o n t r a c t damages. The district court entered final judgment against GAIC a w a r d in g AFS $469,110.58 for GAIC's breach of contract, 18% statutory interest o f $204,506.50 under the Texas Insurance Code, $102,607.83 for consequential b r e a c h of contract damages, attorney's fees of $146,440.00, and $60,852.88 for p r e ju d g m e n t interest. On appeal, GAIC challenges (1) the district court's finding of coverage for A F S 's loss under the SAA and CRP policies; (2) the district court's award of s t a t u t o r y interest and attorney's fees to AFS for its breach of contract; and (3) t h e jury's award of consequential damages to AFS. AFS challenges (1) the d is t r ic t court's dismissal, at the close of evidence, of its extra-contractual claims a n d (2) the district court's award of statutory interest only until the date of ju d g m e n t . We address each issue in turn. II. W e review summary judgment rulings de novo, Potomac Ins. Co. v. J a y h a w k Med. Acceptance Corp., 198 F.3d 548, 550 (5th Cir. 2000), and apply t h e same standard as the district court. Wyatt v. Hunt Plywood Co., Inc., 297 F .3 d 405, 408 (5th Cir. 2002). Summary judgment is appropriate when there is n o genuine issue of material fact and the moving party is entitled to judgment a s a matter of law. FED. R. CIV. P. 56(c). We view all evidence and factual in fe r e n c e s in the light most favorable to the party opposing the motion. Price v. 4

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09-10262 F e d . Exp. Corp., 283 F.3d 715, 719 (5th Cir. 2002). We review de novo the district c o u r t's determination of state law, Salve Regina Coll. v. Russell, 499 U.S. 225, 2 3 1 (1991), as well as its interpretation of the insurance contract. Potomac Ins. C o ., 198 F.3d at 550. III. T h e threshold question is whether AFS's loss was caused by a forgery such that the forgery provision of the SAA policy was implicated. We focus our in it ia l inquiry only upon the SAA policy because if coverage existed under it, A F S 's entire loss is covered and we need not decide whether the CRP policy also c o v e r s the loss. The relevant portion of the SAA policy states: 2 . Forgery or Alteration a. We will pay for loss resulting directly from forgery or a lt e r a t io n of checks, drafts, promissory notes or similar w r it t e n promises, orders or directions to pay a sum certain in m o n e y that are: (1) Made or drawn by or drawn upon you; or (2 ) Made or drawn by one acting as your agent; t h a t are purported to have been so made or drawn . . . . G A I C admits that the SAA policy insured AFS against losses for the fo r g e r y or alteration of checks, and that the numerous checks issued by AFS w e r e covered under the SAA policy. It disputes, however, that a forgery occurred s u c h that the coverage contemplated by the SAA policy was triggered. According t o the SAA policy, Forgery means the signing of the name of another person or o r g a n iz a tio n with intent to deceive; it does not mean a signature w h ic h consists in whole or in part of one's own name signed with or w it h o u t authority in any capacity, for any purpose.

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09-10262 D e s p ite the definition of forgery found within the SAA policy, GAIC argues t h a t the district court erred by failing to interpret the term "forgery" in the c o m m e r c ia l paper context. Commercial paper in Texas is governed by the U n ifo r m Commercial Code ("UCC") which Texas has adopted. Under Section 3 -4 0 5 of the UCC (Section 3.405 of the Texas Business and Commerce Code), if o n e is authorized to sign another's name, and does so, but deposits the checks in t o his own account or for his personal gain, that signature is not a forgery. GAIC reasons that since McMahon Jr. was authorized to sign the name "Charles M c M a h o n Insurance Agency" his signature is not a forgery and AFS is not e n tit le d to any recovery under the SAA policy. GAIC's argument conflicts with the basic principles of Texas insurance la w , and we decline its invitation to interpret the term "forgery" under the UCC. Under Texas law, an insurance policy, like other contracts, is the law between t h e parties. Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex. 1987). In in t e r p r e t i n g an insurance contract, terms are given their plain, ordinary m e a n in g unless the parties intended the term to have a different, technical m e a n in g . DeWitt County Elec. Coop. Inc., v. Parks, 1 S.W.3d 96, 101 (Tex. 1999); P u c k e tt v. U.S. Fire Ins. Co., 678 S.W.2d 936, 938 (Tex. 1984). When terms are d e fin e d in an insurance policy, those definitions control. Trinity Universal Ins. C o . v. Cowan, 945 S.W.2d 819, 823 (Tex. 1997). The SAA policy specifically d e fin e s the term "forgery." Consequently, its definition controls and there is no m e r it to GAIC's argument that the court should look outside the four corners of t h e insurance agreement and define it according to the UCC definition. See T r in ity Universal Ins. Co., 945 S.W.2d at 823. Having failed to persuade the court that the UCC's definition of "forgery" s h o u ld prevail, GAIC has further argument. According to it, even if the court 6

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09-10262 lo o k s solely to the definition of "forgery" found within the SAA policy, no forgery o c c u r r e d because the signature found on the checks at issue contains in part the n a m e "Charles McMahon." As noted above, the SAA policy defines forgery as " t h e signing of the name of another person or organization with intent to deceive; it does not mean a signature which consists in whole or in part of one's own name s ig n e d with or without authority, in any capacity, for any purpose." (emphasis a d d e d ). GAIC reasons that because the words "Charles McMahon" are part of the e n d o r s e m e n t (here "Charles McMahon Insurance Agency") and also part of the e n d o r s e r 's name (here "Charles McMahon Jr."), the endorsements at issue are n o t forgeries under the SAA policy. This reading distorts the phrase "a signature w h ic h consists in whole or in part of one's own name" to mean that there would b e no forgery and therefore no coverage when an endorser shares any part of the n a m e he or she is signing even though the endorser purports to be signing the n a m e of another for a deceitful purpose. For example, if a person named Bob S m it h stole Bob Jones's checkbook and endorsed a check "Bob Jones," there w o u ld be no coverage because "Bob" was part of the endorsement and also part o f the endorser's name. As the district court noted, GAIC's interpretation of the S A A policy's exclusionary clause is unreasonable and leads to absurd results. A better reasoned reading of the exclusionary clause leads to the conclusion that t h e phrase "a signature which consists in whole or in part of one's own name" e n c o m p a s s e s two types of signatures: (1) a signature which consists of only the s ig n e r 's own name or (2) a signature which consists of the signer's own name and t h e name of another. Under this reading, the exclusionary clause does not bar c o v e r a g e because it is undisputed that McMahon Jr. did not sign his own name

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09-10262 t o endorse the checks; he used only the name of "Charles McMahon Insurance A g e n c y ." Finally, GAIC argues that no forgery occurred under the SAA policy b e c a u s e McMahon Jr. was an agent for his father's insurance company with g e n e r a l authority to endorse checks payable to his father's company. Initially w e note that the central requirement of forgery under Texas law is that there be d e c e p t io n as to the identity of the signer. See Charter Bank Northwest v. E v a n s to n Ins. Co., 791 F.2d 379, 382 (5th Cir. 1986). While it is true that an a g e n t who signs his own true name does not commit forgery, even where acting a s an agent without actual authority, this is not what happened here. See Nobles v . Marcus, 533 S.W.2d 923, 926 (Tex. 1976) (noting that "while the alleged agent m a y be culpable for his fraud he has not committed a forgery"). It is undisputed t h a t McMahon Jr. did not sign his own name. Rather, by the signature "Charles M c M a h o n Insurance Agency," he represented himself to be someone else, and t h e r e fo r e signed "the name of another person or organization with intent to d e c e iv e ," the SAA policy definition of forgery. Furthermore, GAIC's reliance upon 1st Coppell Bank v. Smith, 742 S.W.2d 4 5 4 , 460 (Tex. App.-- Dallas 1981, no writ) (rev'd on other grounds) for the p r o p o s it io n that "if a person signs the name of another with authority to do so, t h e signature is not a forgery" is misplaced. 1st Coppell Bank and the other T e x a s civil cases that stand for this proposition all reference the Texas Penal C o d e section that encompasses forgery, 32.21. In relevant part, section 3 2 .2 1 (a )(1 ) defines "forge" to mean "to alter, make, complete, execute, or a u t h e n t ic a t e any writing so that it purports: (I) to be the act of another who did n o t authorize that act . . . ." TEX. PENAL CODE ANN. § 32.21(a)(1)(I). But these c a s e s all refer to, as the Penal Code section also contemplates, specific 8

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09-10262 " w r it in g s " -- in 1st Coppell Bank, for example, a specific deed of trust. They do n o t stand for the proposition, advanced by GAIC, that no forgery occurred b e c a u s e McMahon Jr. had general authority to sign checks on behalf of his fa t h e r 's agency. Indeed, in 1st Coppell Bank, the court concluded that sufficient e v id e n c e existed to support the trial court's finding of fact that the deed of trust in question was a forgery where the forger's mother testified that "she let her son s ig n their names to some documents" and agreed that "her son had `loose p e r m is s io n ' to sign [her and her husband's] names to a lot of papers." 742 S.W.2d a t 460. Critical was her unequivocal testimony that she did not authorize anyone t o sign her name to the specific deed of trust in question. Id. Here, it is

u n d is p u t e d that as to the 127 checks at issue, the Charles McMahon Insurance A g e n c y (or its principal, McMahon Sr.) did not authorize McMahon Jr. to sign it s name and deposit the checks into his account. It is of no consequence that M c M a h o n Jr. was authorized to endorse other checks or sign other documents, s o long as he knew he had no authority to endorse these checks. For the reasons discussed above, we affirm the district court's finding of c o v e r a g e under the SAA policy. IV . G A I C next argues that the district court erred by awarding statutory i n te r e s t and attorney's fees to AFS. Under the Texas Insurance Code, an

in s u r e d is entitled to recover 18% statutory interest and attorney's fees if a c o v e r e d claim is not paid within 60 days of the insurer receiving a proof of loss. TEX. INS. CODE ANN. §§ 542.058, 542.060. GAIC concedes that it did not pay A F S 's claim within the 60-day time frame mandated by the Texas Insurance C o d e . It argues, however, that because AFS's claim was not covered that the d is t r ic t court erred by awarding AFS statutory interest and attorney's fees. Our 9

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09-10262 c o n c lu s io n that AFS's loss was covered eviscerates GAIC's argument, and we fin d no error in the district court's award of statutory interest and attorney's fees t o AFS. V. L a s t ly , GAIC argues that even assuming that it breached its insurance c o n t r a c t with AFS, under Texas law, the attorney's fees and expenses that AFS in c u r r e d in prosecuting the McMahon Jr. Lawsuit are not recoverable as c o n s e q u e n t ia l breach of contract damages. This question presents a legal

d e t e r m in a t io n subject to de novo review. Walker v. Sears, Roebuck & Co., 853 F .2 d 355, 358 (5th Cir. 1988). Generally under Texas law, attorney's fees and litigation expenses may not b e recovered unless provided for by statute or by contract between the parties. Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 310 (Tex. 2006). But a p la in t iff may recover attorney's fees and other reasonable expenses which were in c u r r e d in litigation with a third party as damages when such damages are the n a t u r a l and proximate consequence of the defendant's wrongful conduct, i.e., w h e n those expenses represent consequential damages. See, e.g., Baja Energy, I n c . v. Ball, 669 S.W.2d 836, 839 (Tex. App.--Eastland 1984, no writ) (noting t h a t a litigant may recover its attorney's fees and other reasonable expenses in c u r r e d in a third party lawsuit as consequential damages when the "wrongful a c t or contractual violation involves the claimant in litigation with third parties a n d forces the claimant to incur expenses to protect his interests"); see also L e s ik a r v. Rappeport, 33 S.W.3d 282, 306 (Tex. App.--Texarkana 2000, pet. d e n ied ) (holding that a plaintiff may recover attorney's fees and other reasonable e x p e n s e s as consequential damages where defendant's wrongful conduct forces p la in t iff to prosecute or defend litigation in another proceeding). Consequential 10

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09-10262 d a m a g e s are those that "result naturally, but not necessarily, from the d e fe n d a n t 's wrongful acts." Arthur Andersen & Co. v. Perry Equip. Co., 945 S .W .2 d 812, 816 (Tex. 1997). One example of a Texas case where a party was forced to defend itself in a third party lawsuit and thus entitled to the recovery of its attorney's fees as c o n s e q u e n t ia l damages is Baja Energy, Inc. v. Ball. Baja operated an oil and gas le a s e owned by ACR Exploration. Baja Energy, 669 S.W.2d at 837. It contracted w it h Ball Oil Field Service for Ball to plug a well on the lease in October 1980. Id. The contract between the parties contained Baja's warranty that it owned t h e well and would defend title to it. Id. In February 1981, ACR assigned the w e ll to Don Shaefer, but the assignment was not recorded. Id. Ball plugged the w e ll and removed personal property and equipment pursuant to its contract with B a ja . Id. Ball contended that it had neither constructive nor actual notice of the a s s ig n m e n t prior to its plugging the well. Id. Due to the plugging of his well and t h e removal of personal property, Schaefer sued Ball for trespass and conversion a n d sued Baja as co-defendant for breach of warranty. Id. Ball subsequently file d a third party lawsuit against Baja for contribution and indemnity for any r e c o v e r y Schaefer might have against Ball. Id. at 838. Ball also sought to r e c o v e r its costs and expenses for defending the suit brought against it by S c h a e fe r as consequential breach of contract damages. Id. The trial court e n te r e d judgment that Schaefer take nothing against Ball and Baja. Id. In a d d it io n , the judgment awarded Ball $5,000 in damages against Baja for lit ig a t io n expenses, including the attorney's fees and loss of time in defending t h e action by Schaefer. Id. On appeal, Baja challenged the award of attorney's fe e s to Ball. The Eastland Court of Appeals held that Ball was entitled to the

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09-10262 r e c o v e r y of attorney's fees and expenses because it "would not have been forced t o defend the suit for trespass and conversion [brought by Schaefer] absent B a j a 's wrongful act." Id. at 839. Similarly, other Texas courts of appeal have fo llo w e d the Baja court's holding. See, e.g., Lesikar, 33 S.W.3d at 306; Mattly v. S p ie g e l, 19 S.W.3d 890, 897 (Tex. App.--Houston [14th Dist.] 2003). W h ile a party under Texas law may recover its attorney's fees and e x p e n s e s as consequential damages if the wrongful act of another forces it to p r o s e c u t e or defend itself in a third party lawsuit, this is not the case here. Rather, the attorney's fees and expenses that AFS incurred in the McMahon Jr. L a w s u it were the direct result of AFS's voluntary choice to file that lawsuit in s t e a d of pursuing litigation directly against GAIC for its breach of contract. Nothing demonstrates this more clearly than the fact that AFS filed the M c M a h o n Jr. Lawsuit approximately eight months before GAIC made its d e c is io n to deny coverage on AFS's claim. Thus, there was no decision or

w r o n g fu l action of GAIC which forced AFS to incur the attorney's fees and e x p e n s e s associated with the McMahon Jr. Lawsuit. Accordingly, this award to A F S is vacated. VI. W e now turn to AFS's assertion that the district court erred by granting G A I C 's motion for a judgment as a matter of law on its extra-contractual claims. We review de novo whether a district court properly granted judgment as a m a t t e r of law, applying the same legal standard as the district court. Brown v. B r y a n County, Okla., 219 F.3d 450, 456 (5th Cir. 2000). In its complaint, AFS alleged that it was entitled to extra-contractual d a m a g e s for GAIC's alleged bad faith and violations of the Texas Insurance

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09-10262 C o d e . See TEX. INS. CODE ANN. §§ 541.151, 541.152. The district court concluded t h a t GAIC was entitled to a judgment as a matter of law on AFS's extrac o n t r a c tu a l claims, solely because AFS failed to plead and prove injuries s e p a r a t e from those that flowed from GAIC's breach of contract.1 A s noted above, the district court's finding that AFS was entitled to r e c o v e r the attorney's fees it incurred in the McMahon Jr. Lawsuit as con seq u e n t ia l breach of contract damages was erroneous. But, the attorney's fees i n c u r r e d by AFS in that lawsuit may provide the separate injury necessary to s u p p o r t AFS's claim that it is entitled to extra-contractual damages for GAIC's a lle g e d bad faith and violations of the Texas Insurance Code. Notably, the d is t r ic t court never opined on the merits of AFS's extra-contractual claims nor w e r e they dismissed for lack of evidence that GAIC acted in bad faith or violated t h e Texas Insurance Code. For these reasons, we remand this matter to the d is t r ic t court to reconsider, in the first instance, whether there is any basis for A F S 's extra-contractual claims. V II. L a s t ly , AFS asserts that the district court erred because it concluded that t h e 18% statutory interest which is it entitled to under the Texas Insurance C o d e for GAIC's breach of contract only continues to accrue until the date of ju d g m e n t . Instead, AFS asserts that the 18% percent statutory interest should

In its briefing, AFS argues that it did not need to prove a separate injury in order to maintain its extra-contractual claims. It argues that GAIC's denial of insurance proceeds, standing alone, entitled it to recover on its extra-contractual claims. This assertion does not comport with this court's case law. See Parkans Int'l LLC v. Zurich Ins. Co., 299 F.3d 514, 519 (5th Cir. 2002) (a Texas insurance dispute case, noting that "[t]here can be no recovery for extra-contractual damages for mishandling claims unless the complained of actions or omissions caused injury independent of those that would have resulted from wrongful denial of policy benefits").

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09-10262 c o n t in u e to accrue until the claim is paid by GAIC. This court reviews a district c o u r t's interpretation of a state statute de novo. BellSouth Telecomm., Inc. v. J o h n s o n Bros. Corp. of La., 106 F.3d 119, 122 (5th Cir. 1997). Under the Texas I n s u r a n c e Code, I f an insurer that is liable for a claim under an insurance policy is n o t in compliance with this subchapter, the insurer is liable to pay t h e holder of the policy or the beneficiary making the claim under t h e policy, in addition to the amount of the claim, interest on the a m o u n t of the claim at the rate of 18 percent a year as damages, t o g e t h e r with reasonable attorney's fees. T EX. INS. CODE ANN. § 542.060. W h ile Section 542.060 does not expressly state when the 18% interest s t o p s accruing, the Supreme Court of Texas has noted that such interest only a c c r u e s until the date judgment is rendered in the trial court. See Republic U n d e r w r ite r s Ins. Co. v. Mex-Tex, Inc., 150 S.W.3d 423, 427--28 (Tex. 2004). The district court stopped the accrual of the 18% interest on the date judgment w a s rendered, which is consistent with what Mex-Tex requires. Accordingly, we a ffir m the district court's judgment. VIII. For the reasons discussed above, we AFFIRM the district court's grant of s u m m a r y judgment to AFS, the district court's award of statutory interest and a t t o r n e y 's fees to AFS, and the district court's conclusion that statutory interest s t o p s accruing on the date judgment is rendered in the trial court. We VACATE t h e award of consequential damages to AFS and REMAND AFS's extrac o n t r a c t u a l claims to the district court for further proceedings consistent with t h is opinion. All pending motions before the court are DENIED.

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