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Mid-Continent Casualty Co. v. Petroleum Solutions, Inc.

United States District Court, S.D. Texas, Houston Division

March 29, 2017




         Before the Court is Defendant Petroleum Solutions, Inc.'s (“PSI”) Motion for Entry of Final Judgment [Doc. # 183] (“Motion”), which Plaintiff Mid-Continent Casualty Company (“Mid-Continent”) opposes [Doc. # 187] on several grounds. PSI has filed a reply [Doc. # 188]. The Motion is ripe for decision. The Court will enter a final judgment as described hereafter.

         I. BACKGROUND

         State Court Litigation.- In the 1990s, PSI sold to Bill Head and installed on his property a fuel storage system. It was discovered in 2001 that approximately 20, 000 gallons of oil had leaked into the soil. Head notified PSI of the leak and accused PSI of violations of various duties including sale of a defective product. PSI reported the claim to its carrier, Mid-Continent, which agreed to defend PSI under a reservation of rights in connection with a commercial general liability policy in effect from May, 2001 to May, 2002, Policy No. 04-GL-000051591 (the “Policy”).

         Mid-Continent hired counsel to investigate the matter. PSI and counsel contended that a defective flex connector manufactured by Titeflex Corporation (“Titeflex”) had been the cause of the leak. Counsel took possession of the flex connector from the site and submitted it to a laboratory for testing and storage. At some point, the flex connector was lost or destroyed.

         Head filed suit in February, 2006, in state court, in Hidalgo County, Texas. Mid-Continent issued five additional reservation of rights letters during the state court litigation.

         In the state court suit, Mid-Continent and PSI agreed to assert a third party contribution or indemnity claim against Titeflex, as the manufacturer of the allegedly defective component part in the fuel system giving rise to Head's property damage. PSI filed that affirmative claim on October 5, 2006. On January 30, 2007, Head asserted a similar claim against Titeflex.[1]

         After PSI and Titeflex learned that the flex connector in issue had been destroyed or lost while in the expert's custody, Titeflex and Head asserted spoliation claims against PSI.

         Head non-suited his claims against Titeflex in March, 2007. In May, 2008, Titeflex asserted a counterclaim against PSI for certain of its own attorneys' fees, expenses, and costs (collectively, “fees”). Intending to eliminate the spoliation issue and simplify the trial of Head's claims, PSI non-suited without prejudice its claims against Titeflex in August, 2008. Titeflex then clarified that it would not dismiss its counterclaim for fees unless PSI dismissed its affirmative contribution/indemnity claims against Titeflex with prejudice. PSI refused. In September, 2008, Titeflex broadened its counterclaim to seek all fees from PSI that it incurred in the Head/PSI litigation, relying on Texas Civil Practice and Remedies Code § 82.002 (“§ 82.002”).

         Head's products liability claim and Titeflex's fee claim against PSI were tried to a jury over approximately eight weeks in Hidalgo County, Texas, in or about September, October, and November, 2008. The jury rendered verdicts against PSI exceeding $1.2 million in favor of Head and $463, 000 on Titeflex's § 82.002 claim. The state court entered judgment on both aspects of the verdict in January, 2009. PSI appealed.

         On December 19, 2014, the Texas Supreme Court affirmed the Titeflex judgment against PSI.[2] The Supreme Court vacated the judgment in Head's favor and remanded for a new trial.

         Mid-Continent formally denied coverage under the Policy with respect to the Titeflex judgment, but continued to defend PSI against Head's claims, asserting reservations of rights. In February, 2015, upon demand, PSI paid the Titeflex judgment in full, which by that time totaled, with interest, almost $620, 000.

         Commencement of Federal Litigation.- Mid-Continent commenced this federal action in February, 2009, seeking a declaration that Mid-Continent does not owe PSI any indemnity for PSI's payment of the Titeflex judgment. This case was stayed pending completion of all appeals of the verdict in state court. Upon notification that the Texas Supreme Court had ruled in the state court litigation, the Court reopened this declaratory judgment case.

         PSI then counterclaimed for breach of the Policy terms, complaining that Mid-Continent had failed to cover PSI's payment of the Titeflex judgment.[3] PSI alleged Mid-Continent had violated Texas Insurance Code § 541.060(a)(4), and sought damages equaling the total sum PSI paid Titeflex on the judgment as well as PSI's own attorneys' fees under Texas Civil Practice and Remedies Code § 38.001. This extended coverage litigation followed.

         In light of this Court's rulings on summary judgment, PSI presently seeks entry of final judgment awarding it damages for Mid-Continent's breach of the Policy for a “total recovery of $187, 604.17, ” an amount to which the parties stipulated as “damages” in the Joint Pretrial Order [Doc. # 126] (“Joint PTO”), plus pre- and post-judgment interest.[4] Mid-Continent contends that the Joint PTO stipulation has been misinterpreted by PSI and there remains another question for the Court to decide, namely, what portion of the reduced sum stipulated by the parties on the collateral estoppel issue is covered under the Policy as interpreted by the Court.[5]

         The Court assumes familiarity with its prior rulings, and describes these federal proceedings only to the extent pertinent to the pending issues raised by Mid-Continent pertaining to entry of the final judgment requested by PSI.

         Proceedings in This Federal Litigation Pertaining to the Amount of Damages to PSI Covered by the Policy.- After close of discovery, the parties filed motions for summary judgment on numerous issues surrounding Policy defenses asserted by Mid-Continent. The Court decided as a matter of law most of the issues presented in an 82-page opinion. See Memorandum and Order [Doc. # 93], dated July 29, 2016. The Court's rulings generated motions for reconsideration seeking clarifications and alterations of conclusions in the Memorandum and Order. The Court carefully considered each of the parties' points and, on September 29, 2016, issued a 97-page Amended Memorandum and Order [Doc. # 109] (“Amended M&O”). Ultimately, the Court held that Mid-Continent breached the Policy by not paying indemnity covering certain of the Titeflex fees that PSI claimed were its covered losses, but held that there was a threshold issue of fact whether PSI had satisfied a condition precedent that it cooperate in the investigation and settlement of the claims against PSI, including whether PSI cooperated when it refused to dismiss with prejudice its affirmative claim against Titeflex for indemnity.[6] The Court also concluded that there were other issues of fact arising from the Court's interpretation of the Policy coverage language and its determination that Policy coverage extended only to Titeflex's fees, expenses and costs (i.e., fees) incurred in connection with defending against Head's claims, and did not include fees incurred solely in defense of PSI's affirmative claims.[7] Specifically, the Court identified the following fact issues: (1) whether, for purposes of this coverage case, there was a waiver by counsel for PSI in the state court litigation (hired and paid for by Mid-Continent) of the issue of segregation, or allocation, of Titeflex's fees attributable, respectively, to PSI or to Head's claims against Titeflex, and (2) if waiver occurred, whether it collaterally estopped Mid-Continent from objecting to Policy coverage in this coverage action for sums PSI paid attributable to Titeflex's fees incurred solely in connection with defending against PSI's affirmative claims.[8] The parties disagreed about what work should be included and the Court held the issue had to be resolved at trial because these sums were not ascertainable from the record.[9]

         Pretrial Proceedings.- To address the issue of segregation, among other open issues, Mid-Continent submitted on October 17, 2016, a joint report from the parties to the Court in light of the issues remaining after Amended M&O. The Report states in pertinent part:

In its Amended Memorandum and Order (“Order”) [Doc. #109], the Court ordered the parties to submit briefing on Texas law of collateral estoppel. The parties are diligently working on stipulations of fact such that the Court can rule on the collateral estoppel issue as a matter of law. If the parties reach stipulations, the collateral estoppel briefing can be submitted to the court within 15 days. If the parties cannot reach stipulations, then it may require the re-opening of discovery.
* * * *
The parties will agree to stipulate to the amount of Titeflex's attorney's fees, and applicable post-judgment interest, for the period when Titeflex was defending Head's claim and, if Collateral Estoppel applies, for the period when PSI's claim was pending against Titeflex. These stipulations will negate any jury issue regarding damages (other than attorneys' fees for the prevailing party).[10]

         Mid-Continent contends the parties merely planned to agree “to the amount of Titeflex's damages, ” not the damages to which PSI is entitled to recover if it did or did not prevail on the collateral estoppel issue.[11] Shortly thereafter, the parties reported they reached agreement on the collateral estoppel issue and submitted briefing on the subject in early and mid- November. See Docs. ## 118, 119, 122, 123. The Court took the matter under advisement.

         On November 30, 2016, the parties submitted their Joint PTO in which they stated:

31. The Parties have stipulated to damages as follows:
a. If the Court determines collateral estoppel does not apply, and PSI only gets the period that Judge Atlas identified in the Amended Opinion and Order, the Parties have agreed that the damages are $136, 499.97 plus $51, 104.40 in post-judgment interest, for a total recovery of $187, 604.17.
b. Alternatively, if the Court determines collateral estoppel applies, the parties have agreed that the damages are $278, 545.36 plus $104, 285.11 in post-judgment interest, for a total recovery of $382, 830.47.
c. These are exclusive of attorneys' fees in this case, and any pre-judgment interest that would apply to ...

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