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Prophet Equity LP v. Win City Fire Insurance Co.

Court of Appeals of Texas, Fifth District, Dallas

August 19, 2019


          On Appeal from the 134th Judicial District Court Dallas County, Texas Trial Court Cause No. DC-14-12313

          Before Justices Bridges, Brown, and Whitehill



         This case concerns insurance coverage for wrongful employment practices in a terminated employee dispute. Prophet Equity LP and Ross Gatlin, the insureds, sued Twin City Fire Insurance Company after it denied indemnity coverage. On cross-summary judgment motions, the trial court granted Twin City's motion and denied Prophet's motion. (Prophet includes Prophet, Prophet Equity, LP, its affected affiliates, and Gatlin unless indicated otherwise.)

         Fundamentally, we must interpret and apply this insuring obligation to that dispute:

The Insurer shall pay, on behalf of any Insured, Loss arising from Claims for Wrongful Acts in connection with Wrongful Employment Practices.

         In three issues with multiple subparts, Prophet argues that the trial court erred by: (i) rejecting its contract breach claim because it conclusively established coverage for which there were no applicable exclusions, (ii) rejecting its confidentiality agreement breach, bad faith, and insurance code claims, and (iii) denying its no-evidence summary judgment motion on Twin City's remaining defenses.

         We conclude in part that:

• Prophet established Losses arising from a Claim in connection with Wrongful Employment Practices that exhausted the underlying policies' limits.
• The Wrongful Employment Practices exception negates the Insured versus Insured (IvI) exclusion on which Twin City relies.
• Twin City did not show that the dishonesty exclusion applies, because there was no final adjudication establishing any of the acts to which this exclusion applies.
• Twin City did not show that Prophet failed to allocate Losses between covered and uncovered Losses, including Defense Costs.[1]

         Thus, the trial court erred in granting Twin City's summary judgment motion and in denying Prophet's summary judgment motion regarding Prophet's contract breach claims.

         The trial court also erred by dismissing Prophet's extracontractual claims except breach of the confidentiality agreement. Twin City did not move for summary judgment on Prophet's bad faith and insurance code claims. And even if we construe Twin City's statement that the extracontractual claims are conditioned on coverage as raising the issue, we have concluded that Prophet established coverage. So summary judgment on this ground would be error.

         But Twin City's no-evidence motion addressed the confidentiality agreement breach claim, and Prophet did not respond or raise a fact issue regarding that claim, which the trial court properly dismissed.

         We affirm the trial court's summary judgment for Twin City on the breach of confidentiality claim, reverse the trial court's summary judgment for Twin City and against Prophet on all other claims and defenses, render judgment for Prophet for $4, 123, 382.61, and remand to the trial court for further proceedings.

         I. Background

         A. The Parties' Relationships

         In 2008, Gatlin and George Stelling partnered to raise a pool of equity capital and form a small market investment fund (the Prophet entities) to acquire control of underperforming entities. They formed Prophet Management to manage the fund. Stelling had a 30% interest in Prophet Management and acted as its Chief Operating Officer. Gatlin had a 70% interest and acted as its Chief Executive Officer and managing member.

         According to Stelling, as Prophet Management's only members, Stelling and Gatlin were to receive guaranteed partner draws throughout the year with a substantial portion of their annual profits distributed at year end. They were also to receive carried interests. When profits were distributed, the limited partners/investors were to receive a preferential return with 20% of the remaining distribution going to the general partner. That distribution would then pass from the general partner to the limited partners as their "carried interests."

         The partnership agreement required the general partner to create a new class of partnership rights to determine the carried interests once a new portfolio company was acquired. These new interests were to be reflected on a class designation schedule. Stelling alleges that his class sharing ratio for each portfolio company was to be a minimum of 22%.[2]

         B. The Policy

         In January 2011, Prophet purchased a "Private Equity Professional and Management Liability Insurance Policy" (the HCC Policy). Prophet is an Insured Organization and Gatlin is an Insured Person under the HCC Policy. Prophet added employment practices liability coverage to the HCC Policy. That additional coverage undergirds this dispute. Prophet also purchased a first excess policy from Great American and a second excess policy from Twin City (the Policy).

         All three policies have the same substantive coverage but at different loss levels. The HCC Policy has a $5, 000, 000 liability limit.[3] Great American covers the next $5, 000, 000, and Twin City covers an additional $5, 000, 000.

         C. The Claim and Notice to Carriers

         In October 2011, Gatlin removed Stelling as Prophet Management's COO and as interim president of a Prophet portfolio company. A few days later Stelling responded with a demand letter alleging wrongful termination and that Prophet and Gatlin were spreading rumors to harm his reputation and damage his career. Prophet notified all three carriers of Stelling's demand.

         Prophet, Gatlin, and Stelling attended mediation, during which Stelling alleged breach of fiduciary duty, negligence, oppression, and wrongful termination and demanded $57, 500, 000 in damages. The mediation failed, and an arbitration followed.

         D. The Arbitration

         During the arbitration, Stelling continued to demand $57, 500, 000, alleging that Gatlin fired him to interfere with Stelling's contract rights and partnership benefits, and that Prophet misrepresented his responsibilities and the actions he took as COO that led to his termination. Stelling also asserted derivative claims on behalf of various Prophet entities. His thirty-six page First Amended Statement of Claim asserted nineteen causes of action against some combination of Prophet and Gatlin. Each count is rooted in Stelling's termination or its consequences.

         The arbitration panel found partially for Stelling and entered an award that requires: (i) specific performance of Prophet's contracts with Stelling; (ii) Profit and Gatlin each to pay Stelling $1, 330, 167.63 for his attorneys' fees and related arbitration fees and costs; (iii) Gatlin to pay Stelling $5, 040, 000 (without specifying what that amount compensates); and (iv) Gatlin to reimburse Prophet $4, 227, 432.74 for attorneys' fees incurred in the arbitration and up to $1, 193, 915.30 for any additional fees and expenses.

         The 95th Judicial District Court of Dallas County confirmed the award. That judgment grants Stelling a total of $7, 700, 335.36 in monetary relief, consisting of $1, 330, 167.63 from Prophet and $6, 370, 167.63 from Gatlin. Prophet and Gatlin satisfied the judgment.

         E. Other Claims Deplete the HCC Coverage

         Two other disputes partially depleted the $5, 000, 000 HCC Policy limits. Specifically, HCC paid $256, 405.88 for the Ludlum claim and $949, 216.45 for the Kerr claim. For summary judgment purposes, these payments and claim amounts were undisputed.

         F. Post Judgment Mediations

         Following the arbitration award, all three carriers initially denied coverage. But in a subsequent joint mediation, HCC agreed to pay $2, 323, 180.16 for the Stelling matter.

         During a first joint post-judgment mediation, Prophet submitted $13, 052, 468.96 in claimed Losses including $5, 352, 133.60 in Defense Costs and $7, 700, 335.36 in judgments. After subtracting the deductible, defense counsel fee write-offs, Gatlin's and Prophet's responsibility under the HCC settlement agreement, and HCC payments, $8, 728, 647.29 in claimed uncompensated Losses remained.

         Prophet, Great American, and Twin City mediated again, after which Great American agreed to pay $3, 127, 949.07 on the Stelling matter. The settling parties recognized that this payment, augmented by other credits, exhausted the Great American policy limits.

         G. Additional Costs Incurred

         Between the first and second post-judgment mediations, Prophet and Gatlin incurred $473, 686.88 in additional attorneys' fees and related costs. After deducting defense counsel write-offs and the HCC and Great American payments, $3, 804, 709.60 in claimed Losses remained. Additional attorneys' fees and related costs were subsequently incurred, bringing the total unpaid alleged Losses to $4, 123, 382.61.

         H. The Lawsuit

         When Twin City still wouldn't pay, Prophet sued, alleging contract breach, insurance code violations, and bad faith coverage denial. Twin City answered with several affirmative defenses, including failure to exhaust the underlying policies and that the claims were barred by the Policy's terms, exclusions, and conditions. Prophet amended its petition to allege breach of a confidentiality agreement.

         All parties moved for summary judgment.[4] Prophet requested a traditional summary judgment on the coverage issues and a no-evidence summary judgment on Twin City's affirmative defenses based on (i) the fraud/unlawful profit or advantage exclusion, (ii) the allocation exclusion, (iii) the insured versus insured exclusion, and (iv) Twin City's remaining affirmative defenses.

         Twin City's motion cites both traditional and no-evidence standards, but it devotes only a footnote to a no-evidence point seeking summary judgment on Prophet's breach of the confidentiality agreement claim. The remaining motion seeks traditional summary judgment on three of Twin City's affirmative defenses: (i) the allocation exclusion, (ii) the fraud/unlawful profit or advantage exclusion, and (iii) the insured versus insured exclusion.

         The trial court granted Twin City's motion, denied Prophet's motion, and entered a final judgment from which Prophet appeals.

         I. Relevant Policy Terms

         The Policy has these terms (bolded words are policy defined terms and appear in bold in the Policy):


The Insurer shall pay, on behalf of any Insured, Loss arising from Claims for Wrongful Acts in connection with Wrongful Employment Practices.

         It is undisputed that Gatlin and Prophet are both "Insureds" under the Policy. "Loss" means:

[D]amages, settlements, judgments, and Defense Costs incurred by any Insured, including pre and post judgment interest, back and front pay, punitive, exemplary or multiplied damages where insurable under the law of the most favorable venue to the Insured . . . . Loss shall not include . . . (7) any amount or claim for variable compensation or pay of any sort including, but not limited to bonuses, stock or other options, equity, benefits, and interest . . . .

         But Losses do not include:

(5) Any amount allocable to uncovered Loss under this Policy;
(6) The return and/or disgorgement of any capital commitments or any money, assets or personal profit received by an Insured to which such Insured is not legally entitled as established by a final adjudication . . . .

         "Claim" means:

(1) any written demand for monetary or non-monetary damages or injunctive relief against an Insured alleging a Wrongful Act, deemed to be first made by receipt of such demand by the Insured;
(2) any civil, judicial, administrative, regulatory or arbitration proceeding, including but not limited to any investigation . . . .

         A "Wrongful Act" in this context includes "Wrongful Employment Practices." Wrongful Employment Practices include:

(3) termination, actual or constructive, of an employment relationship in any manner which is allegedly against the law;
(4) wrongful demotion, retaliation, misrepresentation, promissory estoppel and intentional interference with contract which arises from an employment relationship;
(5) libel, slander, defamation, infliction of emotional distress or mental anguish, humiliation, false imprisonment, invasion of privacy and other personal injury allegations that arise from the employment relationship;
(6) breach of an implied employment contract and breach of the covenant of good faith and fair dealing in the employment contract;
(7) employment terminations, disciplinary actions, demotions or other employment decisions . . .;
(10) retaliation against an Insured Person . . . [and]
(11) wrongful deprivation of career opportunity. . . .

         Interrelated Wrongful Acts means any "Wrongful Acts which have as a common nexus any fact, circumstances, situation, event, transaction or series of facts, circumstances, situations, events or transactions."

         The Policy further provides that "more than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts constitute a single Claim . . . ."

         Defense Costs means "legal fees and expenses (including expert fees) and cost . . . incurred by the Insured in defense of a Claim . . . ."

         The Policy's Exclusion H excludes "any payment in connection with any Claim . . . by or on behalf of any Insured in any capacity . . . ."

         II. Analysis

         A. Standard of Review

         We begin with the parties' traditional summary judgment motions addressing the Policy's terms as applied to undisputed facts.[5]

         The party moving for a traditional summary judgment has the burden to show that no genuine issue of material fact exists and it is entitled to judgment as a matter of law. See Tex. R. Civ. P. 166a(c). To determine if there is a fact issue, we review the evidence in the light most favorable to the party against whom the summary judgment was rendered, crediting evidence favorable to that party if reasonable jurors could do so, and disregarding contrary evidence and inferences unless reasonable jurors could not. Gonzalez v. Ramirez, 463 S.W.3d 499, 504 (Tex. 2015) (per curiam). More than a scintilla of evidence exists, and the evidence raises a genuine fact issue, when the evidence rises to a level that would enable reasonable and fair minded jurors to differ in their conclusions in light of all the summary judgment evidence. Goodyear Tire & Rubber Co. v. Mayes, 236 S.W.3d 754, 755 (Tex. 2007) (per curiam).

         When facing cross-motions for summary judgment, we apply the same standards of de novo review as when reviewing a trial court's ruling on a singular motion. See Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). When the trial court grants one motion and denies the other, we must consider all the grounds presented by both sides, and in the case of an improper judgment, render the judgment the trial court should have rendered. Id.

         B. ...

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