Case: 09-10262 Document: 00511182336 Page: 1 Date Filed: 07/22/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
July 22, 2010
No. 09-10262 Lyle W. Cayce
Clerk
GREAT AMERICAN INSURANCE COMPANY,
Plaintiff - Appellant Cross-Appellee
v.
AFS/IBEX FINANCIAL SERVICES INC,
Defendant - Appellee Cross-Appellant
Appeal from the United States District Court
for the Northern District of Texas
Before GARWOOD, STEWART, and CLEMENT, Circuit Judges.
CARL E. STEWART, Circuit Judge:
Great American Insurance Company (“GAIC”) issued crime protection
policies to AFS/IBEX Financial Services, Inc. (“AFS”). After suffering a loss
caused by the forgery of certain checks, AFS submitted a claim to GAIC. GAIC
denied coverage and filed for declaratory judgment. AFS counterclaimed seeking
coverage and damages. After a jury trial, the district court entered judgment for
AFS. The appeals of both parties are now before the court. We affirm in part,
vacate in part, and remand.
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I.
AFS provides premium financing in the insurance industry. This service
is useful because many insurance carriers require the entire policy premium to
be paid up front and do not offer payment plans. In connection with this
business, AFS entered into an agreement with Charles McMahon, Sr.
(“McMahon Sr.”), who owns the Charles McMahon Insurance Agency. This
agreement contemplated that McMahon Sr. would create and sign premium
finance applications on behalf of insureds. AFS would then send a check to the
insurance company for the purchase price of the insurance, and the insureds
would send regular payments to AFS.
McMahon Sr.’s son, Charles McMahon, Jr. (“McMahon Jr.”), was the office
manager at McMahon Sr.’s agency and was responsible for submitting
applications for premium financing to AFS. McMahon Jr. exploited this
business relationship by submitting approximately 122 false applications for
premium financing to AFS. These fraudulent applications induced AFS to issue
127 checks made payable to “Charles McMahon Insurance Agency.” McMahon
Jr. endorsed these checks “Charles McMahon Insurance Agency” and deposited
the funds into his own personal bank account. McMahon Jr. never endorsed the
checks with his own name or signature. McMahon Sr. was aware that his son
had responsibility for submitting financing applications to AFS, but was not
aware of his son’s fraud. McMahon Sr. allowed McMahon Jr. to endorse checks
payable to the agency and to write checks out of the agency’s account for
legitimate business purposes.
After McMahon Jr.’s scheme was uncovered, AFS submitted a claim to
GAIC for $519,110.58 under the forgery coverage provision of its Crime
Protection Policy No. SAA 268-75-98-03 (the “SAA policy”) for losses beginning
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in July 2005 and discovered by AFS in June 2006. Asserting that no forgery
occurred under the terms of the SAA policy, GAIC denied coverage and filed for
a declaratory judgment from the district court, asking that it find that GAIC had
no duty to indemnify AFS for its loss. AFS counterclaimed for breach of contract
and alleged that coverage existed for its loss under the SAA policy which was in
effect from March 15, 2006 to March 15, 2007, as well as under the policy in
effect prior to the SAA policy, Crime Protection Policy No. CRP 268-75-98-02 (the
“CRP policy”), which was effective from March 16, 2005 to March 16, 2006. AFS
also counterclaimed for extra-contractual damages against GAIC, alleging bad
faith and violations of the Texas Insurance Code. Additionally, AFS
counterclaimed for consequential breach of contract damages to recover the
litigation expenses it incurred in its suit against McMahon Jr. and Chase Bank
(the “McMahon Jr. Lawsuit”) for the recovery of the alleged losses.
GAIC filed a motion for summary judgment, arguing that dismissal was
appropriate because neither insurance policy provides coverage for AFS’s claims.
AFS filed a cross motion for summary judgment, alleging that coverage existed
under the SAA policy’s plain meaning; alternatively, it argued that its loss was
covered under the CRP policy because it was ambiguous and thus should be
strictly construed in its favor. AFS also moved for summary judgment on its
damage claims. The district court concluded that coverage for AFS’s loss existed
under the plain meaning of the SAA policy. Finding the relevant contract
language of the CRP policy ambiguous, it concluded that coverage for AFS’s loss
was available under that policy as well. However, the district court found that
issues of fact remained regarding AFS’s damage claims.
The remaining issues went to trial by jury. At the close of evidence, the
district court dismissed AFS’s extra-contractual damage claims, stating that
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since AFS’s damages all potentially flowed from GAIC’s breach of its insurance
contract, the same damages could not, as a matter of law, satisfy the damage
element for AFS’s extra-contractual claims. The jury found that litigation
expenses incurred by AFS in the McMahon Jr. Lawsuit were a natural, probable,
and foreseeable consequence of GAIC’s failure to comply with its duty to pay
under the insurance policy, entitling AFS to recover consequential breach of
contract damages. The district court entered final judgment against GAIC
awarding AFS $469,110.58 for GAIC’s breach of contract, 18% statutory interest
of $204,506.50 under the Texas Insurance Code, $102,607.83 for consequential
breach of contract damages, attorney’s fees of $146,440.00, and $60,852.88 for
prejudgment interest.
On appeal, GAIC challenges (1) the district court’s finding of coverage for
AFS’s loss under the SAA and CRP policies; (2) the district court’s award of
statutory interest and attorney’s fees to AFS for its breach of contract; and (3)
the jury’s award of consequential damages to AFS. AFS challenges (1) the
district court’s dismissal, at the close of evidence, of its extra-contractual claims
and (2) the district court’s award of statutory interest only until the date of
judgment. We address each issue in turn.
II.
We review summary judgment rulings de novo, Potomac Ins. Co. v.
Jayhawk Med. Acceptance Corp., 198 F.3d 548, 550 (5th Cir. 2000), and apply
the same standard as the district court. Wyatt v. Hunt Plywood Co., Inc., 297
F.3d 405, 408 (5th Cir. 2002). Summary judgment is appropriate when there is
no genuine issue of material fact and the moving party is entitled to judgment
as a matter of law. F ED. R. C IV . P. 56(c). We view all evidence and factual
inferences in the light most favorable to the party opposing the motion. Price v.
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Fed. Exp. Corp., 283 F.3d 715, 719 (5th Cir. 2002). We review de novo the district
court’s determination of state law, Salve Regina Coll. v. Russell, 499 U.S. 225,
231 (1991), as well as its interpretation of the insurance contract. Potomac Ins.
Co., 198 F.3d at 550.
III.
The threshold question is whether AFS’s loss was caused by a forgery
such that the forgery provision of the SAA policy was implicated. We focus our
initial inquiry only upon the SAA policy because if coverage existed under it,
AFS’s entire loss is covered and we need not decide whether the CRP policy also
covers the loss. The relevant portion of the SAA policy states:
2. Forgery or Alteration
a. We will pay for loss resulting directly from forgery or
alteration of checks, drafts, promissory notes or similar
written promises, orders or directions to pay a sum certain in
money that are:
(1) Made or drawn by or drawn upon you; or
(2) Made or drawn by one acting as your agent;
that are purported to have been so made or drawn . . . .
GAIC admits that the SAA policy insured AFS against losses for the
forgery or alteration of checks, and that the numerous checks issued by AFS
were covered under the SAA policy. It disputes, however, that a forgery occurred
such that the coverage contemplated by the SAA policy was triggered. According
to the SAA policy,
Forgery means the signing of the name of another person or
organization with intent to deceive; it does not mean a signature
which consists in whole or in part of one’s own name signed with or
without authority in any capacity, for any purpose.
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Despite the definition of forgery found within the SAA policy, GAIC argues
that the district court erred by failing to interpret the term “forgery” in the
commercial paper context. Commercial paper in Texas is governed by the
Uniform Commercial Code (“UCC”) which Texas has adopted. Under Section
3-405 of the UCC (Section 3.405 of the Texas Business and Commerce Code), if
one is authorized to sign another’s name, and does so, but deposits the checks
into his own account or for his personal gain, that signature is not a forgery.
GAIC reasons that since McMahon Jr. was authorized to sign the name “Charles
McMahon Insurance Agency” his signature is not a forgery and AFS is not
entitled to any recovery under the SAA policy.
GAIC’s argument conflicts with the basic principles of Texas insurance
law, and we decline its invitation to interpret the term “forgery” under the UCC.
Under Texas law, an insurance policy, like other contracts, is the law between
the parties. Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex. 1987). In
interpreting an insurance contract, terms are given their plain, ordinary
meaning unless the parties intended the term to have a different, technical
meaning. DeWitt County Elec. Coop. Inc., v. Parks, 1 S.W.3d 96, 101 (Tex. 1999);
Puckett v. U.S. Fire Ins. Co., 678 S.W.2d 936, 938 (Tex. 1984). When terms are
defined in an insurance policy, those definitions control. Trinity Universal Ins.
Co. v. Cowan, 945 S.W.2d 819, 823 (Tex. 1997). The SAA policy specifically
defines the term “forgery.” Consequently, its definition controls and there is no
merit to GAIC’s argument that the court should look outside the four corners of
the insurance agreement and define it according to the UCC definition. See
Trinity Universal Ins. Co., 945 S.W.2d at 823.
Having failed to persuade the court that the UCC’s definition of “forgery”
should prevail, GAIC has further argument. According to it, even if the court
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looks solely to the definition of “forgery” found within the SAA policy, no forgery
occurred because the signature found on the checks at issue contains in part the
name “Charles McMahon.” As noted above, the SAA policy defines forgery as
“the signing of the name of another person or organization with intent to deceive;
it does not mean a signature which consists in whole or in part of one’s own name
signed with or without authority, in any capacity, for any purpose.” (emphasis
added).
GAIC reasons that because the words “Charles McMahon” are part of the
endorsement (here “Charles McMahon Insurance Agency”) and also part of the
endorser’s name (here “Charles McMahon Jr.”), the endorsements at issue are
not forgeries under the SAA policy. This reading distorts the phrase “a signature
which consists in whole or in part of one’s own name” to mean that there would
be no forgery and therefore no coverage when an endorser shares any part of the
name he or she is signing even though the endorser purports to be signing the
name of another for a deceitful purpose. For example, if a person named Bob
Smith stole Bob Jones’s checkbook and endorsed a check “Bob Jones,” there
would be no coverage because “Bob” was part of the endorsement and also part
of the endorser’s name. As the district court noted, GAIC’s interpretation of the
SAA policy’s exclusionary clause is unreasonable and leads to absurd results.
A better reasoned reading of the exclusionary clause leads to the conclusion that
the phrase “a signature which consists in whole or in part of one’s own name”
encompasses two types of signatures: (1) a signature which consists of only the
signer’s own name or (2) a signature which consists of the signer’s own name and
the name of another. Under this reading, the exclusionary clause does not bar
coverage because it is undisputed that McMahon Jr. did not sign his own name
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to endorse the checks; he used only the name of “Charles McMahon Insurance
Agency.”
Finally, GAIC argues that no forgery occurred under the SAA policy
because McMahon Jr. was an agent for his father’s insurance company with
general authority to endorse checks payable to his father’s company. Initially
we note that the central requirement of forgery under Texas law is that there be
deception as to the identity of the signer. See Charter Bank Northwest v.
Evanston Ins. Co., 791 F.2d 379, 382 (5th Cir. 1986). While it is true that an
agent who signs his own true name does not commit forgery, even where acting
as an agent without actual authority, this is not what happened here. See Nobles
v. Marcus, 533 S.W.2d 923, 926 (Tex. 1976) (noting that “while the alleged agent
may be culpable for his fraud he has not committed a forgery”). It is undisputed
that McMahon Jr. did not sign his own name. Rather, by the signature “Charles
McMahon Insurance Agency,” he represented himself to be someone else, and
therefore signed “the name of another person or organization with intent to
deceive,” the SAA policy definition of forgery.
Furthermore, GAIC’s reliance upon 1st Coppell Bank v. Smith, 742 S.W.2d
454, 460 (Tex. App.— Dallas 1981, no writ) (rev’d on other grounds) for the
proposition that “if a person signs the name of another with authority to do so,
the signature is not a forgery” is misplaced. 1st Coppell Bank and the other
Texas civil cases that stand for this proposition all reference the Texas Penal
Code section that encompasses forgery, 32.21. In relevant part, section
32.21(a)(1) defines “forge” to mean “to alter, make, complete, execute, or
authenticate any writing so that it purports: (I) to be the act of another who did
not authorize that act . . . .” T EX. P ENAL C ODE A NN. § 32.21(a)(1)(I). But these
cases all refer to, as the Penal Code section also contemplates, specific
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“writings”—in 1st Coppell Bank, for example, a specific deed of trust. They do
not stand for the proposition, advanced by GAIC, that no forgery occurred
because McMahon Jr. had general authority to sign checks on behalf of his
father’s agency. Indeed, in 1st Coppell Bank, the court concluded that sufficient
evidence existed to support the trial court’s finding of fact that the deed of trust
in question was a forgery where the forger’s mother testified that “she let her son
sign their names to some documents” and agreed that “her son had ‘loose
permission’ to sign [her and her husband’s] names to a lot of papers.” 742 S.W.2d
at 460. Critical was her unequivocal testimony that she did not authorize anyone
to sign her name to the specific deed of trust in question. Id. Here, it is
undisputed that as to the 127 checks at issue, the Charles McMahon Insurance
Agency (or its principal, McMahon Sr.) did not authorize McMahon Jr. to sign
its name and deposit the checks into his account. It is of no consequence that
McMahon Jr. was authorized to endorse other checks or sign other documents,
so long as he knew he had no authority to endorse these checks.
For the reasons discussed above, we affirm the district court’s finding of
coverage under the SAA policy.
IV.
GAIC next argues that the district court erred by awarding statutory
interest and attorney’s fees to AFS. Under the Texas Insurance Code, an
insured is entitled to recover 18% statutory interest and attorney’s fees if a
covered claim is not paid within 60 days of the insurer receiving a proof of loss.
T EX. INS. C ODE A NN. §§ 542.058, 542.060. GAIC concedes that it did not pay
AFS’s claim within the 60-day time frame mandated by the Texas Insurance
Code. It argues, however, that because AFS’s claim was not covered that the
district court erred by awarding AFS statutory interest and attorney’s fees. Our
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conclusion that AFS’s loss was covered eviscerates GAIC’s argument, and we
find no error in the district court’s award of statutory interest and attorney’s fees
to AFS.
V.
Lastly, GAIC argues that even assuming that it breached its insurance
contract with AFS, under Texas law, the attorney’s fees and expenses that AFS
incurred in prosecuting the McMahon Jr. Lawsuit are not recoverable as
consequential breach of contract damages. This question presents a legal
determination subject to de novo review. Walker v. Sears, Roebuck & Co., 853
F.2d 355, 358 (5th Cir. 1988).
Generally under Texas law, attorney’s fees and litigation expenses may not
be recovered unless provided for by statute or by contract between the parties.
Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 310 (Tex. 2006). But a
plaintiff may recover attorney’s fees and other reasonable expenses which were
incurred in litigation with a third party as damages when such damages are the
natural and proximate consequence of the defendant’s wrongful conduct, i.e.,
when those expenses represent consequential damages. See, e.g., Baja Energy,
Inc. v. Ball, 669 S.W.2d 836, 839 (Tex. App.—Eastland 1984, no writ) (noting
that a litigant may recover its attorney’s fees and other reasonable expenses
incurred in a third party lawsuit as consequential damages when the “wrongful
act or contractual violation involves the claimant in litigation with third parties
and forces the claimant to incur expenses to protect his interests”); see also
Lesikar v. Rappeport, 33 S.W.3d 282, 306 (Tex. App.—Texarkana 2000, pet.
denied) (holding that a plaintiff may recover attorney’s fees and other reasonable
expenses as consequential damages where defendant’s wrongful conduct forces
plaintiff to prosecute or defend litigation in another proceeding). Consequential
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damages are those that “result naturally, but not necessarily, from the
defendant’s wrongful acts.” Arthur Andersen & Co. v. Perry Equip. Co., 945
S.W.2d 812, 816 (Tex. 1997).
One example of a Texas case where a party was forced to defend itself in
a third party lawsuit and thus entitled to the recovery of its attorney’s fees as
consequential damages is Baja Energy, Inc. v. Ball. Baja operated an oil and gas
lease owned by ACR Exploration. Baja Energy, 669 S.W.2d at 837. It contracted
with Ball Oil Field Service for Ball to plug a well on the lease in October 1980.
Id. The contract between the parties contained Baja’s warranty that it owned
the well and would defend title to it. Id. In February 1981, ACR assigned the
well to Don Shaefer, but the assignment was not recorded. Id. Ball plugged the
well and removed personal property and equipment pursuant to its contract with
Baja. Id. Ball contended that it had neither constructive nor actual notice of the
assignment prior to its plugging the well. Id. Due to the plugging of his well and
the removal of personal property, Schaefer sued Ball for trespass and conversion
and sued Baja as co-defendant for breach of warranty. Id. Ball subsequently
filed a third party lawsuit against Baja for contribution and indemnity for any
recovery Schaefer might have against Ball. Id. at 838. Ball also sought to
recover its costs and expenses for defending the suit brought against it by
Schaefer as consequential breach of contract damages. Id. The trial court
entered judgment that Schaefer take nothing against Ball and Baja. Id. In
addition, the judgment awarded Ball $5,000 in damages against Baja for
litigation expenses, including the attorney’s fees and loss of time in defending
the action by Schaefer. Id. On appeal, Baja challenged the award of attorney’s
fees to Ball. The Eastland Court of Appeals held that Ball was entitled to the
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recovery of attorney’s fees and expenses because it “would not have been forced
to defend the suit for trespass and conversion [brought by Schaefer] absent
Baja’s wrongful act.” Id. at 839. Similarly, other Texas courts of appeal have
followed the Baja court’s holding. See, e.g., Lesikar, 33 S.W.3d at 306; Mattly v.
Spiegel, 19 S.W.3d 890, 897 (Tex. App.—Houston [14th Dist.] 2003).
While a party under Texas law may recover its attorney’s fees and
expenses as consequential damages if the wrongful act of another forces it to
prosecute or defend itself in a third party lawsuit, this is not the case here.
Rather, the attorney’s fees and expenses that AFS incurred in the McMahon Jr.
Lawsuit were the direct result of AFS’s voluntary choice to file that lawsuit
instead of pursuing litigation directly against GAIC for its breach of contract.
Nothing demonstrates this more clearly than the fact that AFS filed the
McMahon Jr. Lawsuit approximately eight months before GAIC made its
decision to deny coverage on AFS’s claim. Thus, there was no decision or
wrongful action of GAIC which forced AFS to incur the attorney’s fees and
expenses associated with the McMahon Jr. Lawsuit. Accordingly, this award to
AFS is vacated.
VI.
We now turn to AFS’s assertion that the district court erred by granting
GAIC’s motion for a judgment as a matter of law on its extra-contractual claims.
We review de novo whether a district court properly granted judgment as a
matter of law, applying the same legal standard as the district court. Brown v.
Bryan County, Okla., 219 F.3d 450, 456 (5th Cir. 2000).
In its complaint, AFS alleged that it was entitled to extra-contractual
damages for GAIC’s alleged bad faith and violations of the Texas Insurance
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Code. See T EX. INS. C ODE A NN. §§ 541.151, 541.152. The district court concluded
that GAIC was entitled to a judgment as a matter of law on AFS’s extra-
contractual claims, solely because AFS failed to plead and prove injuries
separate from those that flowed from GAIC’s breach of contract.1
As noted above, the district court’s finding that AFS was entitled to
recover the attorney’s fees it incurred in the McMahon Jr. Lawsuit as
consequential breach of contract damages was erroneous. But, the attorney’s fees
incurred by AFS in that lawsuit may provide the separate injury necessary to
support AFS’s claim that it is entitled to extra-contractual damages for GAIC’s
alleged bad faith and violations of the Texas Insurance Code. Notably, the
district court never opined on the merits of AFS’s extra-contractual claims nor
were they dismissed for lack of evidence that GAIC acted in bad faith or violated
the Texas Insurance Code. For these reasons, we remand this matter to the
district court to reconsider, in the first instance, whether there is any basis for
AFS’s extra-contractual claims.
VII.
Lastly, AFS asserts that the district court erred because it concluded that
the 18% statutory interest which is it entitled to under the Texas Insurance
Code for GAIC’s breach of contract only continues to accrue until the date of
judgment. Instead, AFS asserts that the 18% percent statutory interest should
1
In its briefing, AFS argues that it did not need to prove a separate injury in order to
maintain its extra-contractual claims. It argues that GAIC’s denial of insurance proceeds,
standing alone, entitled it to recover on its extra-contractual claims. This assertion does not
comport with this court’s case law. See Parkans Int’l LLC v. Zurich Ins. Co., 299 F.3d 514, 519
(5th Cir. 2002) (a Texas insurance dispute case, noting that “[t]here can be no recovery for
extra-contractual damages for mishandling claims unless the complained of actions or
omissions caused injury independent of those that would have resulted from wrongful denial
of policy benefits”).
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continue to accrue until the claim is paid by GAIC. This court reviews a district
court’s interpretation of a state statute de novo. BellSouth Telecomm., Inc. v.
Johnson Bros. Corp. of La., 106 F.3d 119, 122 (5th Cir. 1997). Under the Texas
Insurance Code,
If an insurer that is liable for a claim under an insurance policy is
not in compliance with this subchapter, the insurer is liable to pay
the holder of the policy or the beneficiary making the claim under
the policy, in addition to the amount of the claim, interest on the
amount of the claim at the rate of 18 percent a year as damages,
together with reasonable attorney’s fees.
T EX. I NS. C ODE A NN. § 542.060.
While Section 542.060 does not expressly state when the 18% interest
stops accruing, the Supreme Court of Texas has noted that such interest only
accrues until the date judgment is rendered in the trial court. See Republic
Underwriters Ins. Co. v. Mex-Tex, Inc., 150 S.W.3d 423, 427—28 (Tex. 2004).
The district court stopped the accrual of the 18% interest on the date judgment
was rendered, which is consistent with what Mex-Tex requires. Accordingly, we
affirm the district court’s judgment.
VIII.
For the reasons discussed above, we AFFIRM the district court’s grant of
summary judgment to AFS, the district court’s award of statutory interest and
attorney’s fees to AFS, and the district court’s conclusion that statutory interest
stops accruing on the date judgment is rendered in the trial court. We VACATE
the award of consequential damages to AFS and REMAND AFS’s extra-
contractual claims to the district court for further proceedings consistent with
this opinion. All pending motions before the court are DENIED.
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