Tesoro Refining & Marketing Co. v. National Union Fire Insurance Co.
Docket: Cv. No. SA:13-CV-931-DAE
Court: District Court, W.D. Texas; April 7, 2015; Federal District Court
Plaintiff Tesoro Refining and Marketing Company LLC's Motion for Partial Summary Judgment is denied, while Defendant National Union Fire Insurance Company of Pittsburgh, Pennsylvania's Motion for Summary Judgment is granted. The Court also denies as moot Defendant's alternative Motion for Partial Summary Judgment regarding Plaintiff's bad faith and punitive damages claims. The case involves a dispute over a commercial crime insurance policy. Tesoro, a Delaware LLC based in San Antonio, Texas, sold fuel on credit to Enmex Corp., accumulating a credit balance of approximately $45 million by December 2007. Concerned about Enmex's repayment ability, Calvin Leavell, Tesoro's credit manager, interacted with Deloitte & Touche, the auditor, about the account's status. Leavell claimed the account was secured by a $12 million letter of credit, and subsequent inquiries led to the creation of a document purporting to modify this letter to $24 million. Documentation related to these letters of credit was stored in a password-protected area of Tesoro's server.
On February 13, an email from Leavell to Phil Anderson and Otto Schwethelm discussed a $24 million letter of credit, causing Schwethelm to believe Enmex was under its credit limit. By March 30, 2008, Enmex's credit balance was approximately $59 million. In April, Ernst & Young, the new auditor, met with Tesoro employees to discuss Enmex’s balance. On May 1, a security agreement allegedly executed by Enmex on January 25 was created on a password-protected section of Tesoro’s server. Ernst & Young noted this agreement in their quarterly review. By September 30, 2008, Enmex's account balance rose to $88.9 million. On October 13, a new $24 million letter of credit was similarly created on the server. Leavell represented to the CFO on October 20 that Tesoro had this letter of credit, and a PDF version was created on October 23 featuring a Bank of America logo. In December, when the letter was presented to Bank of America, it was deemed invalid. Subsequently, Plaintiff ceased fuel sales to Enmex and filed a breach of contract lawsuit in January 2009. Forensic evidence indicated that Leavell may have created and forged the signatures on the documents, but he denied these allegations in his testimony. Plaintiff filed an insurance claim in August 2009 for losses due to forgery, which was denied by the Defendant in November 2009 and again in May 2011. An amended claim for employee theft was submitted in January 2011, which was also denied in April 2013. In May 2013, Plaintiff sued Defendant for breach of contract and other claims, seeking declaratory relief and damages. The case was transferred to this Court in October 2013. Various motions for summary judgment were filed by both parties in late 2014.
Summary judgment is warranted when the movant demonstrates no genuine dispute regarding any material fact and is entitled to judgment as a matter of law, as outlined in Federal Rule of Civil Procedure 56(a). Material facts are determined by substantive law, and a genuine dispute exists only if a reasonable jury could favor the nonmoving party. The moving party must initially show the absence of a genuine issue of material fact. If this burden is met, the nonmoving party must present specific facts indicating a genuine issue for trial. If the overall record does not allow a rational trier of fact to rule for the nonmoving party, no genuine issue exists. The court must interpret facts in favor of the nonmoving party without making credibility assessments or weighing evidence. However, unsubstantiated claims or unsupported speculation cannot defeat a motion for summary judgment.
In the case at hand, the Defendant seeks summary judgment on all Plaintiff's claims, contending that the Plaintiff has not demonstrated that its loss is covered by the insurance policy, specifically arguing that Leavell's actions do not constitute "theft" under the policy and that the loss did not result directly from Leavell's conduct. Concurrently, the Plaintiff has filed for partial summary judgment regarding the interpretation of "theft" and the coverage of Leavell's actions under the policy. The Court will consider both motions together due to overlapping issues. Both parties agree that Texas law applies, where the insured typically bears the burden of proving coverage, with courts interpreting insurance policies based on standard contract construction rules and giving words their ordinary meaning unless a different interpretation is explicitly indicated in the policy.
Policy language that has a definite legal meaning is not ambiguous, and its interpretation is a legal matter. Ambiguity arises only when contract language allows for two or more reasonable interpretations. In cases of ambiguity, courts favor the insured’s interpretation unless it is unreasonable, even if the insurer’s interpretation seems more reasonable. These rules apply specifically to ambiguous policy language; if the language allows only one reasonable interpretation, the court must enforce it as written.
The interpretation of "Employee Theft" is central to both the Plaintiff’s and Defendant’s motions for summary judgment. The policy defines "Employee Theft" as covering loss or damage from theft committed by an employee, including forgery. Theft is defined as the unlawful taking of property to the deprivation of the insured.
There is a dispute regarding whether forgery falls under "Employee Theft." The Defendant contends that forgery only covers instances where it involves an unlawful taking of property by an employee. In contrast, the Plaintiff argues that forgery is inherently a form of theft, thus all losses from an employee’s forgery should be covered. The Court concludes that the language of the policy is unambiguous and that "Employee Theft" includes losses resulting from unlawful takings via forgery, but not losses solely arising from forgery without an unlawful taking. Hence, "Employee Theft" as defined does not extend to all forgery-related losses.
Interpreting the term "include" in the context of the policy, the Court rejects the Plaintiff's argument that forgery is equivalent to unlawful taking, asserting that forgery is merely a potential method of committing an unlawful taking that could be covered. The definition of "theft" in the policy does not encompass forgery, indicating that forgery's inclusion was not meant to redefine theft. Furthermore, losses from employee forgery are explicitly excluded under the policy, which requires any forgery-related loss to align with the criteria of unlawful taking to qualify for coverage. The Court emphasizes that both parties failed to provide relevant commentary from the Insurance Services Office to support their definitions. The Plaintiff's claim, which relies on an interpretation of the Defendant's denial letter, is also dismissed; even if the language were ambiguous, the letter does not support an interpretation that separates forgery from the requirement of unlawful taking. Overall, the Court finds the Plaintiff's interpretation unreasonable and maintains that the terms of the contract must be read consistently.
The interpretation of the insurance policy is constrained by the definitions and exclusions outlined in specific paragraphs. Notably, Paragraph A.1, Paragraph F.20 (defining “theft”), and Paragraph D.1.c (excluding employee forgery from coverage under Paragraph A.2) indicate that losses due to employee forgery are not covered unless linked to an unlawful taking. The term “unlawful taking” remains undefined in the policy, prompting the plaintiff to reference Texas law and the Texas Penal Code to derive its meaning, while the defendant contends that the term has a singular, plain interpretation. The court, lacking precedent on “unlawful taking” within commercial crime insurance, will apply Texas contract interpretation principles to ascertain likely judicial outcomes.
The policy defines “theft” as the unlawful taking of property from the insured. Definitions for “taking” from both the Oxford English Dictionary and Black’s Law Dictionary indicate it involves exerting control over property, not necessarily requiring physical possession. The term "unlawful" necessitates reference to Texas law, particularly in the context of conversion and theft. Conversion is characterized as the wrongful control of another's property, while theft involves the unlawful appropriation of property with intent to deprive the owner. Therefore, the court concludes that “unlawful taking” refers to the act of exercising control over property without the owner's consent or authorization.
The evidence, viewed favorably for the Plaintiff, does not create a material factual dispute regarding whether Leavell’s actions constituted an unlawful taking. From 2003 to 2008, the Plaintiff extended credit for fuel sales to Enmex, managed by Leavell, who forged documents misrepresenting collateral. This led the Plaintiff to believe their account was secure, resulting in approximately $90 million in losses when Enmex defaulted. The Plaintiff claims Leavell unlawfully took its fuel and seeks policy coverage for the loss. However, there is no evidence that Leavell seized or controlled the fuel, as the transfer was part of the credit sale arrangement. Even if the Plaintiff was misled by Leavell’s representations regarding collateral, these do not equate to actual possession or control over the fuel. The Plaintiff invokes Texas Penal Code definitions of theft to support its interpretation of “taking,” arguing for a plain meaning approach based on Texas law. While the court acknowledges that Texas law can inform the interpretation of insurance policy terms, it finds the broad definition of theft under Texas law insufficiently specific for the context of the policy in question, which defines theft as an unlawful taking resulting in deprivation of the insured. The court distinguishes between statutory interpretation and contract interpretation, emphasizing that insurance terms are typically understood in their ordinary meaning unless otherwise specified.
The offense of theft is characterized as general due to its legislative consolidation of various specific theft types previously defined in law. The statutory definition extends beyond the traditional meaning of "unlawful taking." Originating from common law larceny, earlier definitions mandated that property be taken fraudulently, without consent, and with intent to deprive the owner of value. The Texas Penal Code defines "appropriate" in theft as acquiring or exercising control over property, aligning with the ordinary notion of "taking." However, the plaintiff argues for a broader interpretation of "appropriate" to include transferring title or interest in property, which the court finds misaligned with the plain meaning of "taking."
Under Texas law, possession is not necessary to establish theft, as noted in Stewart v. State, which emphasizes that the essence of theft lies in depriving the owner of property without consent. Yet, the court clarifies that actual control over the property is essential for establishing theft. The plaintiff failed to demonstrate that Leavell exercised control over the fuel claimed as lost under the policy or that his actions deprived the plaintiff of its value. Misrepresentations by Leavell did not equate to control or possession transfer of the fuel; control only passed upon its sale by the plaintiff to Enmex. The court also references decisions from other jurisdictions to inform its interpretation but finds the cited cases largely unhelpful and factually distinguishable from the present situation.
In Pine Belt Automotive, Inc. v. Royal Indemnity Co., the court examined a case where an employee falsified credit applications, resulting in the bank issuing loans to unqualified customers. The employer sought reimbursement for losses incurred due to these defaults, which the court ruled did not constitute a taking under the insurance policy. In contrast, the Plaintiff in the current case claims losses from fuel sold on credit due to an employee's alleged misrepresentations. The court references another case, Morris Kirschman & Co. L.L.C. v. Hartford Fire Ins. Co., where employee manipulation of accounts receivable was deemed an unlawful taking, leading to a loss that fell under the definition of “theft” in the policy. However, the court finds this reasoning unpersuasive, asserting that an "unlawful taking" requires actual control over the property, which was not present in this case. As such, the Plaintiff's claimed loss of fuel is not covered by the policy due to a lack of an unlawful taking, leading to a judgment in favor of the Defendant regarding the Plaintiff's claims for declaratory relief and breach of contract. The court also denies the Plaintiff's Motion for Partial Summary Judgment. Additionally, on the breach of the implied covenant of good faith and fair dealing claim, the Defendant argues it is entitled to summary judgment because the Plaintiff has not demonstrated that the denial of the claim lacked a reasonable basis or shown extra-contractual damages. The Plaintiff contends that the claim's liability was clear and that the Defendant's investigation was improper, while also asserting claims for extra-contractual damages in the form of attorneys’ fees.
An insurer has a legal obligation to act fairly and in good faith when processing and paying claims. Generally, an insured must demonstrate that the insurer breached the contract to succeed in a bad faith claim. However, an insurer's extreme conduct in denying a claim can lead to liability independent of a breach of contract. Insurers must investigate claims promptly, regardless of the final coverage decision. An insurer is liable for bad faith if it knew or should have known that a claim was evidently covered. A bona fide coverage dispute alone does not constitute bad faith, and an erroneous claim denial is permissible if a reasonable basis exists for that denial.
In the present case, the Plaintiff has not established that the Defendant breached the contract or failed to investigate the claim in a timely manner. Instead, the Plaintiff alleges that the Defendant conducted a pretextual investigation aimed at denying coverage. However, to prove bad faith, the Plaintiff must show that the insurer's liability was clear or that there was no reasonable basis for the denial. The Defendant had a reasonable basis for denying the claim, specifically that the alleged falsification by Leavell did not constitute "theft" as defined in the policy. The criticisms raised by the Plaintiff about the investigation do not indicate that the Defendant ignored evidence that would clarify its liability under the policy. The Defendant's assumption regarding Leavell's conduct did not imply negligence in considering relevant information, and the evidence related to the reliance of the Plaintiff's auditors was not necessary for the Defendant's determination of liability.
Plaintiff asserts that Defendant's investigation focused on irrelevant topics, but this claim does not demonstrate bad faith, merely reiterating Plaintiff's legal arguments regarding policy interpretation. Plaintiff has not shown any injury beyond the denial of its claim, as costs and attorneys’ fees incurred to pursue the lawsuit are not recoverable without evidence of wrongful conduct by Defendant. Consequently, there is no genuine dispute of material fact, warranting judgment for Defendant on the breach of duty of good faith and fair dealing claim. The Court grants Defendant’s Motion for Summary Judgment and denies as moot the alternative partial summary judgment motion.
Defendant objected to Plaintiff's Exhibit Q, a forensic consultant's report, deeming its conclusions about Leavell's creation of falsified documents inadmissible hearsay, which Plaintiff could not successfully counter. However, the Court will consider the forensic evidence within the report, while rejecting its conclusions. The parties disagree on the definition of "forgery" in relation to the policy and Texas law, but this is deemed irrelevant for current analysis. Plaintiff's objection to Defendant's expert witness declaration regarding the term "theft" is overruled. The Court finds the policy clear and unambiguous, determining that conversion and theft necessitate different mental states under Texas law.
Conversion does not require intent; good faith or innocence cannot defend against it, as established in Henson v. Reddin. In contrast, theft necessitates intent to deprive the owner of property per Tex. Penal Code § 31.03(a). The Court refrains from determining whether an "unlawful taking" under the policy requires a specific mental state. Leavell’s assertion that he neither created nor forged the disputed documents raises a genuine factual dispute relevant to the Plaintiff's Motion for Summary Judgment. While forensic evidence is circumstantial, Leavell’s direct testimony effectively contests the forgery allegations when viewed favorably toward the Defendant. However, even if Leavell did commit forgery, his actions would not legally constitute an "unlawful taking." The Plaintiff's loss stemmed from Enmex's failure to pay for fuel purchased on credit, not from the loss of fuel itself. The Plaintiff had enforceable promises of future payment for the fuel, and the actual loss occurred only when it could not collect on Enmex's debt. Case law supports that loss is measured by the amount of credit extended and the outstanding balance on loans. The analysis provided resolves the Plaintiff's contract claims, rendering further interpretation of "resulting directly from" under the policy unnecessary.
