Pak-Mor Mfg Co. v. Royal Surplus Lines Ins. Co.

2005 WL 3487723

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United States District Court,

W.D. Texas, San Antonio Division.

PAK-MOR MANUFACTURING CO., Plaintiff

v.

ROYAL SURPLUS LINES INSURANCE CO. et al., Defendants

No. SA-05-CA-135-RF.

|

Nov. 3, 2005.

ORDER REVERSING BANKRUPTCY COURT’S DENIAL OF ROYAL’S MOTION FOR SUMMARY JUDGMENT

FURGESON, J.

This appeal from the Bankruptcy Court involves the question of whether the obligations of Royal Surplus Lines Insurance Co. (“Royal”) under its insurance contract with Pak-Mor Manufacturing Co. (“Pak-Mor”) are triggered even though Pak-Mor failed to satisfy the self-insured retention provision of that contract. This Court answers in the negative.

INTRODUCTION

On September 1, 2001, Royal commenced insurance coverage of Pak-Mor under a commercial general liability insurance policy. A year later-around November 12, 2002-Lorenza Lockhart, a garbage collector in Tyler, Texas, slipped off the back step of his garbage truck, fell to the ground, and suffered horrific injury when the wheels of the truck rolled over his legs and crushed them.¹ Lockhart blamed Pak-Mor for his injuries, taking the view that Pak-Mor had improperly designed the step from which he had slipped, and that this had caused him to fall.² Accordingly, on May 22, 2003, Lockhart filed suit against Pak-Mor.³

Very shortly after Lockhart filed suit-on June 2, 2003-Pak-Mor filed for bankruptcy. This immediately sparked a tussle between Royal and Pak-Mor as to Royal’s obligations under their insurance policy. Royal’s view was that Pak-Mor’s bankruptcy and consequent inability to satisfy the self-insured retention provision of the policy relieved Royal of any liability to Pak-Mor under the policy. Pak-Mor took the opposite view, that Royal’s obligations under the policy persisted whether or not Pak-Mor satisfied the policy’s self-insured retention provision.

Eventually, on August 28, 2003, Pak-Mor initiated this declaratory judgment action in the Bankruptcy Court. … After considering both parties’ arguments, the Bankruptcy Court denied Royal’s motion and in fact awarded partial summary judgment in favor of Pak-Mor. Royal appealed.

The question presented on appeal is whether the Bankruptcy Court erred when it denied summary judgment on Royal’s claim that, under the policy, Royal’s obligations do not arise until Pak-Mor satisfies the self-insured retention. [The] Court reverses the Bankruptcy Court and grants summary judgment for Royal.⁶

REASONING

1. The Plain Meaning of the Policy’s Text Compels the Conclusion that Royal Has No Obligation Until Pak-Mor Pays the Retained Limit.

The unambiguous text of the insurance policy compels the conclusion that Pak-Mor must pay the self-insured part of the policy before Royal has any obligation to pay any excess. Section 3.11 of the policy’s Self-Insured Retention Endorsement says:

Notwithstanding any provisions of the policy or any endorsements to the contrary, it is a condition precedent to the company’s liability under this policy that the insured, and no other person, insurer or organization for or on behalf of the insured, makes actual payment of the ‘Retained Limit’. Any of our obligations under the policy shall not attach or arise unless or until the insured alone, and no other person, insurer or organization for or on behalf of the insured, pays the amount of the ‘Retained Limit’....¹⁰

This language is clear as daylight. … The policy is thus totally unambiguous. There is only one reasonable way to interpret the policy, and this interpretation says that Royal does not have to pay anything until Pak-Mor first pays the retained limit.¹²

It follows that the Court must so find as well. In a case like this, where the question is one of contract interpretation, state law controls.¹³ And under Texas law, a court seeking to determine the meaning of a contract must follow the plain meaning of the text when it can be ascertained-that is, when the text can reasonably be interpreted in only one way.¹⁴ Since the plain meaning of the policy’s text is evident here, the Court must follow what it says: Royal is not obligated to pay anything until Pak-Mor first pays the retained limit.

2. Equity Considerations Also Support This Conclusion.

Equitable arguments generally do not carry predominant weight with this Court in cases where, as here, the law clearly declares the legal primacy of a contract’s plain meaning and the decision therefore invariably turns on a close reading of the specific text at issue. Nevertheless, this Court takes them seriously here, because this case comes out of the Western District’s Bankruptcy Court, and the Fifth Circuit has held that “the bankruptcy court is a court of equity and it must undertake an analysis of equitable considerations.”¹⁵

The reasoning must start with the candid acknowledgment that there is an equitable problem here that cries out for a solution. As Pak-Mor notes, relieving insurers of liability in the bankruptcy context leaves “third party plaintiffs ... no means of recovery in the event that they are successful despite the fact that the insured [defendants] took the precaution of obtaining insurance to cover such losses such as those the claimants have suffered.”¹⁶ And this is a tragic position for plaintiffs to be in. Having endured suffering and having finally won a favorable judgment from the courts, it is unfair for them to get nothing because culpable defendants throw up their arms in insolvency and insurers quietly exit through the back door. This is an injustice, and something ought to be done about it.

The solution, however, does not lie in judicially compelling an insurer to pay plaintiffs the amount they are due, contrary to contractual obligations. After all, the injustice does not lie at the insurer’s doorstep. Indeed, an insurer should not be put on the hook in this kind of situation because it writes liability insurance generally. Insurers, like anyone else, make a living by promising to do particular things in exchange for the payment of premiums. They are bound to keep the promises they make, but they cannot be held to promises they never made and never received payment for. Here, if the insured had wanted this insurer to assume liabilities in the bankruptcy context, then the insured could have paid the insurer to do it. But where the insured has asked the insurer to assume liability in a situation such as this, and where no payment was made to do so, this Court cannot simply order the insurer now to do it for free. That would only replace one injustice with another one.

3. Pak-Mor’s Intention Argument Fails.

Because the written instrument here is unambiguous (as already discussed), Pak-Mor’s intention argument cannot persuade the Court.

4. Pak-Mor’s Bankruptcy Clause Argument Fails.

Similarly, a plausible argument can be made that the policy’s bankruptcy clause negates the retained limit requirement in the bankruptcy context and thereby establishes Royal’s liability here. The bankruptcy clause states, “Bankruptcy, insolvency or any other inability of the insured or of the insured’s estate or any other insured to pay the ‘Retained Limit’ will not increase or otherwise change our obligations under this Coverage Part and our obligations shall continue to apply only in excess of the ‘Retained Limit’.”²¹

At first blush, of course, this clause appears to confirm the retained limit requirement’s applicability in the bankruptcy context. After all, that requirement appears to apply upon reading the rest of the policy, and the clause explicitly states that it “will not increase or otherwise change [Royal’s] obligations” when the context is shifted to bankruptcy.

But, as this argument goes, this “plain meaning” reading of the clause does not get it right. Instead, Pak-Mor asserts, one must conduct a historical reading of the clause to properly understand it. In the past, retained limit requirements yielded unhappy results in the bankruptcy context. It was precisely when the insured went bankrupt that his creditors most needed the insurance funds, since the insured was not in a position to pay them. Yet it was precisely at that moment that the insurer was relieved of liability, since the insured could not pay the retained limit.²² Several legislatures did not like that creditors thus got nothing, while the insurers paid nothing, so they mandated that insurers insert “bankruptcy clauses” into their policies.²³ These clauses were to negate the retained limit requirements in the bankruptcy context and thereby keep insurers on the hook when the insureds went bankrupt.²⁴ Many insurers (both in states with such statutes and in other states) inserted bankruptcy clauses into their policies pursuant to these laws.²⁵ And Royal’s should be understood as one such, according to Pak-Mor. It looks unmistakably like traditional bankruptcy clauses, and it was included in policies issued after the state statutes were in place.²⁶ Because such clauses were never intended to relieve insurers of liability in the bankruptcy context, but indeed precisely the opposite, is it not now totally disingenuous for Royal to turn the clause on its head through artfully drafted language?

This argument has a certain appeal. Indeed, what does not make immediate sense is why Royal would insert the bankruptcy clause into its policy if that clause actually does nothing.²⁷ Parties seeking to accomplish nothing usually do nothing, and parties who insert clauses into contracts are usually instead trying to accomplish something. Nevertheless, this Court cannot accept the historical reading argument. For one thing, it only properly offers a historical account of bankruptcy clauses in general. Pak-Mor has offered no evidence to indicate that Royal specifically intended its bankruptcy clause to negate the retained limit requirement in the bankruptcy context. Furthermore (and more importantly), Texas law says: “It is the settled law in this state that contracts of insurance in their construction are governed by the same rules as other contracts, and that terms used in them are to be given their plain, ordinary and generally accepted meaning unless the instrument itself shows them to have been used in a technical or different sense.”²⁸ And here, there is nothing in the written policy to indicate that the bankruptcy clause was intended to mean anything other than what its plain meaning says. This Court has to assume that what parties agree to in plain English is their actual agreement. When the policy’s words have a clear meaning and the writing nowhere indicates the parties’ intentions to convey something else, this Court must honor the plain meaning of the words. The argument therefore fails.

5. Pak-Mor’s Precedential Argument Fails.

Finally, Pak-Mor seeks to bring the weight of precedent in support of its position. The first case it cites is Columbia Casualty Co. v. Federal Press Co.²⁹ In that case, the policy stated,

No action shall lie against the Company with respect to any one occurrence unless, as a condition precedent thereto, the Insured shall have fully complied with all the terms of this policy, nor until the amount of the Insured’s obligation to pay an amount of ultimate net loss in excess of the retained limit shall have been finally determined either by judgment against the Insured after actual trial or by written agreement of the Insured, the claimant and the Company.... Bankruptcy or insolvency of the Insured shall not relieve the Company of any of its obligations hereunder.³⁰

In other words, the policy was similar to the policy here. And the court concluded “that Federal Press’ possible inability to satisfy its retained limit of $300,000 due to its bankruptcy or insolvency does not relieve Columbia of its obligation to indemnify Federal Press.”³¹

Pak-Mor also cites Home Ins. Co. of Illinois v. Hooper.³² That case also contained a retained limit requirement like the one here. The court stated, “[T]he unambiguous language of the self-insured provision contained in the instant policy would release Home from the obligation of payment under the policy due to Lester’s bankruptcy. Lester’s pending bankruptcy petition will almost certainly make it impossible for Lester to pay the initial $250,000 of any judgment.”³³ The court held that the insurance company would be liable even in the event that the insured was unable to satisfy the self-insured retention.³⁴

As a final example, Pak-Mor cites Albany Ins. Co. v. Bengal Marine, Inc.³⁵ [[[a Fifth Circuit case from 1988 applying Louisiana law]]]. Once again, the court there faced a policy similar to the one here, and once again, the court held that the insurer would be liable even if the insured failed to pay the retained limit.³⁶

None of these cases affects the outcome here. As an initial matter, two of them were decided by courts with no controlling authority over this Court. Columbia Casualty was decided by the United States Bankruptcy Court of the Northern District of Indiana, and Home Ins. was decided by the Appellate Court of Illinois. But beyond this (and more importantly), the reasoning in those cases does not apply to this case. In all those cases, the courts’ decisions were virtually compelled by applicable statutes in those states that required insurers to assume liability in the bankruptcy context just as they would outside the bankruptcy context, regardless of what the policies themselves said.³⁷ Texas law provides no such restriction, however. Under Texas law, insurers are free to issue policies that relieve them of liability in the bankruptcy context. This Court is thus not constrained by statutory law in interpreting particular policies that claim to so relieve insurers. Since the policy here plainly says that the retained limit requirement applies in the bankruptcy context, that is what this Court holds as well.³⁸

Indeed, this Court believes that the best approach in these matters is a case-by-case approach. One interesting case this Court reviewed in its research was Fidelity and Guaranty Ins. Co. v. Employers Ins. of Wausau.³⁹ That case, in setting forth its reasoning, reviewed several cases confronting the issue here: “whether or not the SIR must be exhausted in order for the [insurer’s] duty to arise.”⁴⁰ The review revealed that, in case after case, every court ultimately reached its decision by closely examining the precise text of the policy before it.⁴¹ Indeed, that is what the Fidelity and Guaranty court itself did.⁴² Thus, this Court emphasizes the necessity in deciding these cases of applying the specific law of contract interpretation in the jurisdiction to the specific text of the policy at issue. Even though persuasive precedents often concern insurance policies that look very similar and legal questions that look nearly identical to those in a particular case, even minor differences in law and fact require this practice. Pak-Mor’s precedential argument fails.

6. Pak-Mor Can Pay the Retained Limit in Any Form.

Thus, Royal has no obligation under the policy to pay anything until Pak-Mor satisfies the self-insured retention. This leaves two remaining points of dispute: (1) In what form can Pak-Mor pay its $100,000 retained limit?;⁴³ and (2) If Pak-Mor satisfies its self-insured retention, then what does Royal have to pay?⁴⁴

To answer the first question, Pak-Mor can pay the retained limit in any form. Again, the plain meaning of the policy compels this conclusion. The policy consistently describes Pak-Mor’s duty as being to “pay” the retained limit.⁴⁵ Yet the plain meaning of “pay” does not indicate a required method of payment. To the contrary, the standard dictionary definition leaves it open: “to discharge indebtedness for.”⁴⁶ Common usage does as well; people often speak of paying by check or money order, paying in cash, and paying by credit card. Even Black’s Law Dictionary fails to confuse the matter: “performance of an obligation by the delivery of money or some other valuable thing accepted in partial or full discharge of the obligation.”⁴⁷ Indeed, there is case law to support this conclusion: “An obligation to pay is satisfied when something of value is given and accepted in full discharge of that obligation.”⁴⁸ Thus, this Court finds that Pak-Mor may satisfy the self-insured retention by making its payment in whatever form it wants.⁴⁹

….

Therefore, under the circumstances, while Royal’s summary judgment must be granted at this point in the proceedings, facts can change to change the result. If Pak-Mor issues a promissory note to its judgment creditor in the sum of $100,000, which note is not dischargeable in bankruptcy and which note is shown to be a credible obligation of Pak-Mor and its estate and its principals, then the Bankruptcy Court would be within its power to find Pak-Mor’s self-insured retention requirement to be satisfied, triggering Royal’s obligation under its policy.

7. Royal Need Only Pay the Amount Beyond the $100,000 Retained Limit.

[[[omitted]]]

CONCLUSION

In conclusion, this Court finds that, as the facts presently stand, Royal has no obligations under the policy until Pak-Mor satisfies the self-insured retention. Pak-Mor can pay the retained limit in any form it desires, so long as the Bankruptcy Court confirms that the payment is performed in a credible and reliable manner. And upon satisfaction of the self-insured retention, Royal is obligated only to pay amounts beyond the $100,000 self-insured retention, up to the limits of the policy.

The Bankruptcy Court’s order is REVERSED, and summary judgment for Royal is GRANTED. This matter is REMANDED to the Bankruptcy Court for further action, consistent with this Order.

[[[Footnotes deleted except the ones you should read]]]

Not Reported in F.Supp.2d, 2005 WL 3487723