IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 21, 2009
No. 07-31061 Charles R. Fulbruge III
Clerk
AMERICAN ELECTRIC POWER COMPANY INC; AMERICAN ELECTRIC
POWER SERVICE CORP; CENTRAL AND SOUTHWEST CORPORATION
Plaintiffs-Appellants
v.
AFFILIATED FM INSURANCE COMPANY
Defendant-Appellee
Appeal from the United States District Court
for the Middle District of Louisiana
Before GARWOOD, GARZA, and OWEN, Circuit Judges.
EMILIO M. GARZA:
In this insurance-coverage dispute, plaintiff American Electric Power
Company and its subsidiaries (collectively, “AEP”) appeal from the district
court’s grant of summary judgment in favor of defendant-insurer Affiliated FM
Insurance Company (“Affiliated”). For the following reasons, we affirm the
district court’s order.
I
This is an insurance dispute between public-utilities conglomerate AEP
and its insurer Affiliated. In 2000, Affiliated issued a policy covering AEP and
its subsidiaries from loss due to employee theft or misconduct (the “Affiliated
No. 07-31061
Policy”). Later that year, AEP acquired another utilities conglomerate, Central
& Southwest Corporation (“CSW”). The Affiliated Policy was amended to include
CSW and its subsidiaries as covered subsidiaries of AEP. Subsequently, AEP
discovered losses that occurred in 1999 due to employee theft at two of CSW’s
subsidiary limited liability companies (“LLCs”). AEP claimed that these losses
were covered under the Affiliated Policy’s “prior loss” clause, which provided
coverage for earlier losses if those losses would have been covered under an
insurance policy in existence at the time. At the time of the theft, CSW was
covered by an insurance policy with Chubb Insurance Group (the "Chubb
Policy"). Thus, for purposes of this appeal, the parties agree that the Affiliated
Policy covers the losses in 1999 if the Chubb Policy would have extended
coverage at that time. After receiving AEP’s claim, Affiliated determined that
the 1999 thefts would not have been covered under the Chubb Policy, and thus
denied AEP coverage under the Affiliated Policy’s prior loss clause. AEP
disagreed and filed suit in federal court.
After discovery, Affiliated moved for summary judgment. The Chubb
Policy expressly covered CSW “and any subsidiary corporation now existing or
hereafter created or acquired.” (emphasis added). According to Affiliated, this
language limited coverage to true corporations and excluded other subsidiary
entities like the two LLCs at issue in the 1999 thefts. AEP responded that the
term “corporation” was ambiguous and filed affidavits from both CSW and
Chubb stating that LLCs were intended to be covered under the general heading
of “corporation” in the Chubb Policy. Affiliated moved to strike the affidavits,
alleging that they constituted impermissible parol evidence and raising several
other evidentiary challenges. The district court determined that the term
“corporation” was unambiguous and did not include LLCs. Thus, the court
granted summary judgment and struck the affidavits as impermissible parol
evidence.
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No. 07-31061
AEP subsequently filed a Rule 59(e) motion for rehearing, claiming inter
alia that the district court should reform the Chubb Policy to match the original
intent of CSW and Chubb to include LLCs. The district court declined to reform
the Chubb Policy and entered a final order granting summary judgment. AEP
now appeals this final order, claiming that the district court erred in (1) finding
the policy unambiguous and (2) declining to reform the policy.
II
A
AEP first contends that the district court erred in finding the term
“corporation” to be unambiguous and thereby excluding AEP’s affidavits
containing relevant parol evidence.1 “We review de novo the court’s grant of
summary judgment. We also review de novo the interpretation of a contract,
including the question of whether the contract is ambiguous.” Advocare Intern.
LP v. Horizon Labs., Inc., 524 F.3d 679, 685 (5th Cir. 2008) (internal quotation
marks omitted).
1
The district court did not resolve Affiliated’s other evidentiary challenges to the
affidavits. Accordingly, we address only their exclusion as impermissible parol evidence to an
unambiguous contract.
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Under Louisiana law,2 “[i]nterpretation of a contract is the determination
of the common intent of the parties.” LA. CIV. CODE ANN. art. 2045. This
involves a two-step process: The court must first look to the plain text of the
contract to determine whether its meaning is clear and unambiguous. See LA.
CIV. CODE ANN. art. 2047 (“The words of a contract must be given their generally
prevailing meaning.”). “When the words of a contract are clear and explicit and
lead to no absurd consequences, no further interpretation may be made in search
of the parties’ intent.” LA. CIV. CODE ANN. art. 2046; see also Abshire v.
Vermilion Parish Sch. Bd., 848 So. 2d. 552, 555 n.5 (La. 2003) (“[E]xtrinsic
evidence is inadmissible either to explain or to contradict [an] instrument’s
[clear] terms”). However, if the plain text is subject to two or more reasonable
interpretations, then the court may look to parol evidence to determine the
parties’ intent. Campbell v. Melton, 817 So. 2d 69, 75 (La. 2002). Furthermore,
the court should generally construe an ambiguous insurance policy in favor of
the insured. Cadwallader v. Allstate Ins. Co., 848 So. 2d 577, 580 (La. 2003).
AEP contends that the district court erred in finding the policy
unambiguous. According to AEP, the term “subsidiary corporation” can be
reasonably interpreted to include LLCs. AEP argues that the common
understanding of “corporation” extends beyond its legal definition and includes
unincorporated entities like LLCs. For support, AEP points to numerous judicial
2
This action was filed in the Middle District of Louisiana pursuant to federal diversity
jurisdiction. See 28 U.S.C. § 1332. Accordingly, we are bound to apply the substantive law,
including the conflict-of-law rules, of the forum state Louisiana. See Klaxon Co. v. Stentor Elec.
Mfg. Co., 313 U.S. 487, 496 (1941). Under the Louisiana choice-of-law regime, the law of the
state where the insurance contract was issued and executed generally governs the
interpretation of that contract. Woodfield v. Bowman, 193 F.3d 354, 360 (5th Cir. 1999).
Here, the Chubb Policy was issued and delivered in Texas. However, neither party has
identified a conflict between the relevant law of Texas and Louisiana. When there is no
conflict, no conflict-of-law analysis is necessary, and the forum law applies. Mumblow v.
Monroe Broadcasting, Inc., 401 F.3d 616, 620 (5th Cir. 2005). Thus, we apply the forum law
of Louisiana in this appeal. However, we note that the outcome would remain the same under
an application of Texas law.
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No. 07-31061
and legal references to LLCs as “limited liability corporations.” In addition, AEP
argues that the term must be construed in light of the overarching policy. AEP
contends that interpreting the Chubb Policy to exclude LLCs would create an
“absurd consequence—an inexplicable gap in insurance coverage” among CSW’s
subsidiary entities.3
We find that the district court did not err in finding the Chubb Policy
unambiguous and excluding parol evidence. The generally prevailing meaning
of the term “corporation” does not include LLCs. See LA. CIV. CODE ANN. art.
2047 (“The words of a contract must be given their generally prevailing
meaning.”). LLCs are statutory creatures defined in part by their contrast to
corporate entities. See Harvey v. Grey Wolf Drilling Co., 542 F.3d 1077, 1079–80
(5th Cir. 2008) (holding that an LLC must be treated as an unincorporated
association—and not as a corporation—for purposes of diversity jurisdiction).
The LLCs at issue here were created in Oklahoma, and Oklahoma law defines
an LLC as “an unincorporated association or proprietorship.” OKLA. STAT. ANN.
tit. 18, § 2001(11). The relevant Louisiana statute tellingly provides that “[n]o
limited liability company organized under this Chapter shall be deemed,
described as, or referred to as an incorporated entity, corporation, body
corporate, [etc.].” LA. REV. STAT. ANN. § 12:1301(A)(10). The instances AEP cites
in which courts refer to LLCs as “limited liability corporations” are merely
imprecise and are clearly not intended to redefine the LLC. These imprecise
references do not alter the fundamental distinction between the two types of
entities. AEP has identified no case in which the term “corporation” was defined
broadly enough to include LLCs. Moreover, interpreting the term “corporation”
to exclude unincorporated entities does not lead to an “absurd consequence” in
3
AEP raises numerous other arguments relating to parol evidence of the parties intent to
include LLCs. However, parol evidence cannot be used to create an ambiguity in an otherwise
unambiguous contract. See Abshire, 848 So.2d. at 555 n.5.
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No. 07-31061
this case—there is nothing inherently absurd about an insurance policy that
covers a particular type of subsidiary and excludes others.
In sum, the term “corporation” is “clear and explicit and lead[s] to no
absurd consequences” in the context of the Chubb Policy. See LA. CIV. CODE
ANN. art. 2046. Accordingly, the district court did not err in finding the policy
unambiguous and excluding parol evidence of the parties’ intent.
B
AEP next contends that the district court erred in refusing to reform the
Chubb Policy to include LLCs. AEP raised this reformation argument for the
first time in its Rule 59(e) motion for reconsideration. Because the district court
considered the merits of the Rule 59(e) motion and still granted summary
judgment, we review the reformation issue under the familiar summary-
judgment standard of de novo. See Templet v. HydroChem Inc., 367 F.3d 473,
477 (5th Cir. 2004) (discussing review of a Rule 59(e) motion); GeoSouthern
Energy Corp. v. Chesapeake Operating Inc., 274 F.3d 1017, 1020 (5th Cir. 2001)
(discussing review of a reformation ruling).
Reformation is “an equitable remedy used to correct errors or mistakes”
in contracts. See WMC Mortg. Corp. v. Weatherly, 963 So. 2d 413, 416 (La. Ct.
App. 2007). An insurance policy “may be reformed if, through mutual error or
fraud, the policy as issued does not express the agreement of the parties.”
Samuels v. State Farm Mut., 939 So. 2d. 1235, 1240 (La. 2006). The party
seeking reformation has the burden to establish a mutual error in the creation
of a contract.4 Id. Parole evidence is admissible to establish such a mutual
4
When a party seeks to reform a policy so as to provide coverage for a “substantially
different and greater risk” than expressly covered, the party must demonstrate a mutual error
by clear-and-convincing evidence. Samuels, 939 So. 2d. at 1240. While this higher standard
likely applies to AEP’s burden in this case, we note that the outcome would be the same even
under the usual preponderance standard.
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No. 07-31061
error, but not to create ambiguity in the meaning of an intended term. Compare
id. with Abshire, 848 So. 2d. at 555 n.5. Furthermore, even in the event of a
mutual error, reformation may be inappropriate if the rights of third parties are
affected. See Washington v. Savoie, 634 So.2d 1176, 1180 (La. 1994) (refusing
to reform a clerical mistake because reformation would limit the recovery of
third-party tort victims); Lewis v. Saucer, 653 So. 2d. 1254, 1259 (La. Ct. App.
1995) (noting that an “instrument may not be reformed or corrected to the
prejudice of third parties who are authorized to rely on the integrity of the
instrument”).
Here, the district court refused to reform the Chubb Policy because
Affiliated—who was not a party to the original agreement—had no knowledge
of any error in the Chubb Policy when it later assumed liability through the
Affiliated Policy. On appeal, AEP contends that reformation is nevertheless
appropriate and argues that the Samuels decision controls the instant case. In
Samuels, the Louisiana Supreme Court reformed a clerical error in an insurance
contract even though reformation worked to the detriment of a third party.
Samuels, 939 So. 2d. at 1240–41. There, a homeowner purchased a general
umbrella policy with State Farm and a separate policy for additional coverage
(in excess of the underlying State Farm policy) with Evanston. Id. at 1239.
However, an Evanston employee entered the wrong identifying number for the
underlying State Farm policy in the text of the Evanston policy. Id. As a result,
State Farm argued that Evanston was equally responsible for the underlying
loss of the homeowner. Id. Rather than allow State Farm to receive this
unintended windfall, the Louisiana court reformed the clerical error in the
Evanston policy, leading to a determination of full underlying liability against
State Farm. Id. at 1241. AEP argues that Samuels stands for the proposition
that reformation to correct mutual errors is proper even if such reformation
prejudices a third party.
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No. 07-31061
We find that the district court did not err in refusing to reform the Chubb
Policy. This case is distinguishable from Samuels on two dispositive grounds.
First, Samuels involved a third party who did not assume or rely on the original
contract in any manner. 939 So. 2d. at 1240–41 (“It is significant that State
Farm in no way relied on this clerical error . . . . In fact, State Farm had to have
known that there was no [insurance policy] with the [mistaken number].” Here,
Affiliated assumed the coverage obligations set forth under the unambiguous
terms of the Chubb Policy. There is no indication that Affiliated knew or should
have known of an informal understanding between Chubb and CSW regarding
the meaning of “corporation.” AEP has identified no case in which a third party
has assumed the obligations of a contract and a court has subsequently reformed
the contract’s unambiguous terms. Such a result would be contrary to basic
norms of fairness and notice. See Lewis, 653 So. 2d. at 1259.
Second, the use of the term “corporation” is not the type of “error” that
reformation is intended to remedy. Samuels involved an obvious clerical
mistake that lead to the inclusion of an unintended and inaccurate policy
number. See Samuels, 939 So. 2d. at 1241 (“[W]e are not interpreting an
ambiguity in this policy, we are simply correcting a clerical error to reflect the
parties’ mutual intent.”). Here, there is no allegation that Chubb and CSW
made a clerical error in using the word “corporation.” Rather, AEP argues that
the original parties had a broader-than-usual meaning in mind when they
purposefully included the word. In effect, AEP attempts to make an end-run
around the parol-evidence rule by framing its argument as a request for
reformation. We will not sanction such a strategy. See Abshire, 848 So.2d. at
555 n.5 (“[E]xtrinsic evidence is inadmissible either to explain or to contradict
[an] instrument's [clear] terms”).
In sum, we find that there is a significant difference between an obvious
clerical error and the alleged “hidden meaning” in a contract assumed by an
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No. 07-31061
unwitting third party. Equity may counsel relief for the former, but it does not
for the latter. Accordingly, the district court correctly declined to reform the
unambiguous text of the Chubb Policy.
III
For the foregoing reasons, the district court’s order granting summary
judgment is AFFIRMED.
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