Court of Appeals of Texas, Fifth District, Dallas
Appeal from the 134th Judicial District Court Dallas County,
Texas Trial Court Cause No. DC-14-12313
Justices Bridges, Brown, and Whitehill
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.)
we must interpret and apply this insuring obligation to that
D. EMPLOYMENT PRACTICES LIABILITY INSURANCE
The Insurer shall pay, on behalf of any Insured, Loss arising
from Claims for Wrongful Acts in connection with Wrongful
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.
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
• 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
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.
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.
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.
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.
The Parties' Relationships
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.
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
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
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
three policies have the same substantive coverage but at
different loss levels. The HCC Policy has a $5, 000, 000
liability limit. Great American covers the next $5, 000,
000, and Twin City covers an additional $5, 000, 000.
The Claim and Notice to Carriers
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
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
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.
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
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.
Other Claims Deplete the HCC Coverage
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
Post Judgment Mediations
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.
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.
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
Additional Costs Incurred
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.
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.
parties moved for summary judgment. 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
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.
trial court granted Twin City's motion, denied
Prophet's motion, and entered a final judgment from which
Relevant Policy Terms
Policy has these terms (bolded words are policy defined terms
and appear in bold in the Policy):
EMPLOYMENT PRACTICES LIABILITY INSURANCE
The Insurer shall pay, on behalf of any Insured, Loss arising
from Claims for Wrongful Acts in connection with Wrongful
undisputed that Gatlin and Prophet are both
"Insureds" under the Policy. "Loss"
[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 . . . .
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 . . . .
(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
(2) any civil, judicial, administrative, regulatory or
arbitration proceeding, including but not limited to any
investigation . . . .
"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
(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
(7) employment terminations, disciplinary actions, demotions
or other employment decisions . . .;
(10) retaliation against an Insured Person . . . [and]
(11) wrongful deprivation of career opportunity. . . .
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."
Policy further provides that "more than one Claim
involving the same Wrongful Act or Interrelated Wrongful Acts
constitute a single Claim . . . ."
Costs means "legal fees and expenses (including expert
fees) and cost . . . incurred by the Insured in defense of a
Claim . . . ."
Policy's Exclusion H excludes "any payment in
connection with any Claim . . . by or on behalf of any
Insured in any capacity . . . ."
Standard of Review
begin with the parties' traditional summary judgment
motions addressing the Policy's terms as applied to
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).
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.