UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
__________________
No. 94-30558
__________________
In the Matter Of: HANNOVER CORPORATION OF
AMERICA, ET AL.,
Debtors,
WILLIAM G. HAYS, JR., Receiver for
Debtor-In-Possession rpi Redwood
Raevine Corporation,
Appellant,
versus
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY,
Appellee.
______________________________________________
Appeal from the United States District Court for the
Middle District of Louisiana
______________________________________________
(October 4, 1995)
Before JOLLY and BENAVIDES, Circuit Judges, and FITZWATER*,
District Judge.
BENAVIDES, Circuit Judge:
The central issue of this appeal is whether an insurance
company's refusal to pay a claim on a stolen automobile was
unreasonable entitling the claimant to statutory penalties and
attorneys' fees under Louisiana law. Concluding that the
*
District Judge of the Northern District of Texas, sitting by
designation.
bankruptcy court clearly erred in finding that the insurance
company was reasonable in its refusal to pay the claim, we reverse
and remand for further proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
Appellant William G. Hays, Jr. ("the Receiver"), is the
Receiver for Debtor-in-Possession, Redwood Raevine Corporation
("Redwood"), which is a part of various bankrupt companies
associated with an individual, Sam Recile. By a July 29, 1992
order of the United States District Court for the Eastern District
of Louisiana, the Receiver took possession of Redwood's assets,
including a 1991 Mercedes Benz automobile that is at the center of
this controversy. This order also enjoined Redwood from selling,
disposing of, or encumbering any asset of the company without prior
court approval.
On August 24, 1992, the Receiver reported to the police that
the Mercedes had been stolen from the Redwood complex. The next
day, the Receiver notified the insurer of the car, appellee State
Farm Mutual Automobile Insurance Company ("State Farm"), of the
loss. State Farm, however, refused to settle the claim because it
was investigating whether or not the Mercedes had actually been
stolen. Apparently, State Farm had been informed that the car had
been sold and exported several days before the reported theft.
On June 25, 1993, the Receiver initiated an adversary
proceeding seeking payment of the loss, with interest, costs, and
statutory penalties and attorneys' fees under Louisiana Revised
2
Statutes 22:6581 and 22:1220.2 Following trial, the bankruptcy
1
Section 22:658 provides:
A. (1) All insurers issuing any type of contract . . .
shall pay the amount of any claim due any insured
within thirty days after receipt of satisfactory proofs
of loss from the insured or any party in interest.
. . . .
B. (1) Failure to make such payment within thirty days
after receipt of such satisfactory written proofs and
demand therefor . . . when such failure is found to be
arbitrary, capricious, or without probable cause, shall
subject the insurer to a penalty, in addition to the
amount of the loss, of ten percent damages on the
amount found to be due from the insurer to the insured,
or one thousand dollars, whichever is greater, payable
to the insured, or to any of said employees, together
with all reasonable attorney fees for the prosecution
and collection of such loss . . . .
La. Rev. Stat. Ann. § 22:658 (West Supp. 1995).
2
Section 22:1220 provides:
A. An insurer . . . owes to his insured a duty of good
faith and fair dealing. The insurer has an affirmative
duty to adjust claims fairly and promptly and to make a
reasonable effort to settle claims with the insured or
the claimant, or both. Any insurer who breaches these
duties shall be liable for any damages sustained as a
result of the breach.
B. Any one of the following acts, if knowingly
committed or performed by an insurer, constitutes a
breach of the insurer's duties imposed in Subsection A:
. . . .
(5) Failing to pay the amount of any claim
due any person insured by the contract within
sixty days after receipt of satisfactory
proof of loss from the claimant when such
failure is arbitrary, capricious, or without
probable cause.
C. In addition to any general or special damages to
which a claimant is entitled for breach of the imposed
duty, the claimant may be awarded penalties assessed
3
court rendered judgment in favor of the Receiver for $45,000, the
amount of the loss, plus interest and costs. However, the
bankruptcy court did not award penalties or attorneys' fees
pursuant to sections 22:658 or 22:1220 because it found that State
Farm acted reasonably in conducting its investigation. The
Receiver appealed to the district court alleging that the
bankruptcy court erred in failing to award the penalties and
attorneys' fees. The district court affirmed the bankruptcy
court's judgment; this appeal ensued.
ARBITRARY AND CAPRICIOUS ACTION
Under section 22:658, an insurance beneficiary is entitled to
penalties and attorneys' fees if, following satisfactory proof of
loss, the insurer fails to pay a claim within thirty days and the
failure is found to be arbitrary, capricious, or without probable
cause. La. Rev. Stat. Ann. §§ 22:658(A)(1), (B)(1) (West Supp.
1995). Similarly, section 22:1220 imposes a duty of good faith and
fair dealing on an insurer and subjects an insurer to penalties if
the insurer fails to pay a claim within sixty days following
satisfactory proof of loss, and the failure was arbitrary,
capricious, or without probable cause. La. Rev. Stat. Ann. §§
22:1220(A), (B)(5), (C). Satisfactory proof of loss occurs when
the insurer has adequate knowledge of the loss. Cotton Bros.
Baking Co. v. Industrial Risk Insurers, 941 F.2d 380, 386 (5th Cir.
against the insurer in an amount not to exceed two
times the damages sustained or five thousand dollars,
whichever is greater.
La. Rev. Stat. Ann. § 22:1220 (West Supp. 1995).
4
1991), on rehearing, 951 F.2d 54, cert. denied, 504 U.S. 941
(1992); Hart v. Allstate Ins. Co., 437 So.2d 823, 828 (La. 1983).
As this Court recently noted, both statutes are penal in
nature. Real Asset Management, Inc. v. Lloyd's of London, 1995 WL
469807, at *1 (5th Cir. Aug. 24, 1995). Because of the penal
nature, the statutes are strictly construed and should not be
invoked when the insurer has a reasonable basis for denying
coverage. See Saavedra v. Murphy Oil U.S.A., Inc., 930 F.2d 1104,
1111 (5th Cir. 1991). Therefore, the threshold issue is whether
the insurer acted reasonably in failing to timely pay the claim
once the insurer had adequate knowledge of the loss.
The bankruptcy court explicitly found that State Farm did not
act arbitrarily or capriciously in refusing to pay or settle the
claim because "State Farm had a reasonable suspicion and was making
a reasonable investigation of the matter." The court based this
finding on the testimony of a State Farm claim representative that
there was still a reasonable doubt in his mind as to whether the
vehicle was actually stolen or whether it was sold. The court
concluded: "While it appears quite clear now as a matter of fact
that the vehicle was not sold, at least was not sold by an
authorized representative of the corporation, there was a
reasonable doubt in the mind of State Farm representatives and they
proceeded with reasonable caution to investigate the matter."
This court reviews findings of fact by the bankruptcy court
under the clearly erroneous standard and decides issues of law de
novo. Haber Oil Co. v. Swinehart (In re Haber Oil Co.), 12 F.3d
5
426, 434 (5th Cir. 1994); see Chevalier v. Reliance Ins. Co., 953
F.2d 877, 883 (5th Cir. 1992). A finding of fact is clearly
erroneous when, although there is evidence to support it, the
reviewing court on the entire evidence is left with a firm and
definite conviction that a mistake has been committed. Haber, 12
F.3d at 434.
We believe that the bankruptcy court clearly erred considering
the undisputed facts of this case. It is uncontested that the
Receiver was rightfully in possession of the Mercedes in accordance
with the July 1992 court order. This same order precluded Redwood
and its officers, directors, or employees from disposing of
Redwood's property without court approval. The Receiver presented
uncontroverted testimony that the Mercedes was parked at the
Redwood complex in August 1992, just days prior to the theft.
Further, it is uncontested that car was removed from the Receiver's
possession, without consent. These facts lead to the inexorable
conclusion that the Mercedes was stolen from the Receiver.
State Farm, however, contends that its failure to settle the
claim was reasonable because of the "suspicious circumstances"
surrounding the disappearance of the vehicle. Central to its
theory is the discovery of a purported bill of sale reflecting that
Redwood sold the car on June 20, 1992, one month prior to the
Receiver taking possession of Redwood's assets. State Farm argues
that since there was reason to believe that the car was not part of
the receivership estate, it acted reasonably when it denied
coverage pending resolution of its investigation. The Receiver
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does not dispute that State Farm was entitled to a reasonable
investigation. However, the Receiver maintains that once State
Farm confirmed the fraudulent nature of the bill of sale, it no
longer had a reasonable basis to dispute that the car was stolen
from the Receiver and was required to settle the claim. The
Receiver is correct.
The undisputed evidence reflects that State Farm procured the
alleged bill of sale in April 1993, eight months after the reported
theft. This handwritten document reflects the sale of a gold
Mercedes Benz, with only 104 miles from Redwood to Yasser M.S.
Tokatli with a Saudi Arabian mailing address. The signature of the
seller was Mike T. Butler. The buyer's signature appears to be
John G. Davis, who also signed along with Butler as a witness. The
document is notarized by Georgia Notary Public, Linda C. Davis. In
late April 1993, State Farm deposed the president of Redwood, V.
Rae Phillips. Phillips testified that Redwood bought a taupe-
colored Mercedes Benz that was used for business purposes in
December 1990. At the time of receivership, it had seven to ten
thousand miles on it. Concerning the bill of sale, Phillips
testified that she knew none of the names listed on the document.
Specifically, Phillips had never heard of the alleged seller, Mike
T. Butler, and Butler was not associated with Redwood or any of the
Recile companies. Following this deposition, State Farm clearly
had notice that the bill of sale was not genuine. In August 1993,
the fraudulent nature was confirmed when State Farm learned that
the signature of notary Linda Davis was also a forgery. State Farm
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adjuster Kenneth Mann testified that State Farm had no other
evidence, aside from the bill of sale, indicating that the car was
transferred by Redwood prior to the receivership. Despite concrete
evidence as of August 1993 that the bill of sale was fraudulent,
State Farm continued to refuse payment.
State Farm's sole basis for disputing the Receiver's claim
was that the car was sold prior to the Receiver's possession of it.
The only evidence of prior sale is the fraudulent bill of sale.
Consequently, it is clear from this record that as of August 1993,
State Farm no longer had any reasonable basis to dispute that the
car was stolen from the Receiver. At that time, State Farm was
under a statutory duty to settle the Receiver's claim. However,
State Farm paid the claim only after trial and adverse judgment was
rendered, some eighteen months after learning of the theft and six
months after definitive proof that the bill of sale was fraudulent.
State Farm relies on Headrick v. Pennsylvania Millers Mutual
Insurance Co., 245 So.2d 324, 327 (La. 1971), for the proposition
that an insurer is entitled to a reasonable time for investigation
where there are suspicious circumstances surrounding a loss.
Headrick involved an arson defense where the claimant was a suspect
and the investigation was ongoing prior to trial. The situation
here is quite different. By August 1993, with the confirmation of
the fraudulent bill of sale, there was no evidence that Redwood
sold the vehicle prior to receivership. It was likewise clear
that: the Receiver was the rightful possessor of the Mercedes; only
the Receiver could approve sale of the car; and that no approval
8
was ever given. At this point State Farm's defense evaporated; its
failure to pay became arbitrary and capricious. See Bohn v.
Louisiana Farm Bureau Mutual Ins. Co., 482 So.2d 843, 857-58 (La.
App. 2d Cir.) (holding insurer acts arbitrarily and capriciously
for failing to settle claim once investigation clearly suggests
that insurer's defense is no longer available to it), writs denied,
486 So.2d 750, 752 (La. 1986).
Despite this clear duty, State Farm still maintains that it
acted reasonably because other investigations by the National
Insurance Crime Bureau and the East Baton Rough Parish Sheriff's
Office had not concluded and that State Farm still does not know
what became of the Mercedes. These arguments, however, are
irrelevant to the validity of the Receiver's claim. Even though
other investigations into the disappearance failed to piece
together the ultimate fate of the Mercedes, there was still no
evidence before State Farm that the car was sold prior to the
receivership or that the Receiver had sold the car. In the absence
of such evidence, we hold that State Farm's refusal to settle the
claim was arbitrary and capricious.
APPLICATION OF SECTIONS 22:658 AND 22:1220
Given our holding, it is necessary to remand this cause to the
bankruptcy court for determination of applicable statutory
penalties and attorneys' fees under sections 22:658 and 22:1220.
Because the relationship between these statutes has created some
confusion, we briefly offer our guidance.
Section 22:658 subjects an insurer to a penalty of ten percent
9
of the amount due the insured or one thousand dollars, whichever is
greater, if the insurer fails to pay a claim within thirty days of
satisfactory proof of loss and the insurer acts arbitrarily,
capriciously, or without probable cause. La. Rev. Stat. Ann. §§
22:658(A)(1), (B)(1) (West Supp. 1995). The bankruptcy court
determined the amount of the covered loss was $45,000; therefore,
the Receiver is entitled to the ten percent penalty of $4,500.
Additionally, section 22:658 provides for reasonable attorneys'
fees for the prosecution and collection of the loss. On remand,
the bankruptcy court shall determine and award these reasonable
fees.
The application of section 22:1220 is more complex.
Initially, State Farm argues that section 22:1220 is inapplicable
because the Receiver did not amend his complaint to include section
22:1220 damages until the eve of trial. State Farm objected to the
section 22:1220 allegations during its closing argument, but the
issue was mooted when the trial court found no arbitrary or
capricious action. State Farm argues on appeal that its objection
should therefore be resurrected. This point is meritless. While
the Receiver's initial complaint included only section 22:658, it
also prayed for recovery of penalties and fees as provided by law.
Additionally, the pretrial order specifically identified sections
22:658 and 22:1220 as the issues of law in dispute. Under Federal
Rule of Civil Procedure 54(c), a final judgment shall grant the
relief to which the prevailing party is entitled. Fed. R. Civ. P.
54(c). If the defendant has appeared and begun defending the
10
action, adherence to a particular legal theory suggested by the
pleadings is subordinated to the court's duty to grant the relief
to which the prevailing party is entitled, whether it has been
demanded or not, provided the failure to demand has not prejudiced
the adversary. 10 Charles A. Wright et al., Federal Practice and
Procedure § 2664 (1983). While the Receiver's initial pleadings
may have raised only section 22:658, it is clear from the pretrial
order that both statutes were at issue. Consequently, the
Receiver's failure to initially plead section 22:1220 damages does
not bar recovery if the statute otherwise applies.
Sections 22:658 and 22:1220 are similar in that each statute
provides for penalty awards when an insurer has arbitrarily,
capriciously, or without probable cause failed to timely settle a
claim. As we noted in Real Asset, the primary difference between
the two statutes is that section 22:1220 provides for an insured or
claimant or both to sue for breach of the duties under the statute,
whereas section 22:658 only allows an insured to sue for breach.
1995 WL 469807, at *1. Because this is an action between an
insured and insurer, both statutes apply. See id.
Section 22:1220 is triggered when, inter alia, an insurer
breaches its duty of good faith and fair dealing by failing to pay
the amount of a claim within sixty days of its receipt of
satisfactory proof of loss when its failure is arbitrary,
capricious or without probable cause. La. Rev. Civ. Stat. Ann. §§
22:1220(A), (B)(5) (West Supp. 1995). Under the statute, a
claimant "may be awarded penalties assessed against the insurer in
11
an amount not to exceed two times the damages sustained or five
thousand dollars, whichever is greater."3 Id. § 22:1220(C). State
Farm contends that under Louisiana law, a claimant must prove
damages sustained as a result of the breach to be entitled to the
penalty. See Champagne v. Hartford Casualty Ins. Group, 607 So.2d
752, 758 (La. App. 1st Cir. 1992); see also Khaled v. Windham, 657
So.2d 672, 680 (La. App. 1st Cir. 1995). According to State Farm,
the Receiver has no damages as a result of the breach, save
attorneys' fees, and therefore is not entitled to relief under the
statute. See Champagne, 607 So.2d at 758-59. The Receiver,
relying on Estate of Robichaux v. Jackson National Life Insurance
Co., 821 F. Supp. 429, 431 (E.D. La. 1993), aff'd without opinion,
20 F.3d 1169 (5th Cir. 1994), and Midland Risk Insurance Co. v.
State Farm Mutual Auto. Insurance Company, 643 So.2d 242, 244 (La.
App. 3d Cir. 1994), contends that there is no requirement of a
showing of damages arising from the breach before penalties are
applicable.
A careful reading of the most recent authority reveals that
the Louisiana courts of appeals have resolved much of the apparent
conflict. The Louisiana First Circuit holds that a penalty award
under section 22:1220 requires proof of damages arising from the
breach. See Champagne, 607 So.2d at 758; Khaled, 657 So.2d at 680.
3
We note that section 22:1220, which applies after a sixty-
day delay and provides for greater penalties, states that the
claimant "may be awarded penalties." In contrast, a violation of
section 22:658, applicable after a thirty-day delay and providing
for only a ten percent penalty, "shall subject the insurer to a
penalty."
12
While there is language in earlier Louisiana Third Circuit cases
that no showing of damages from the breach is necessary,4 the Third
Circuit now concurs that the double-damages provision applies only
after a showing of damages arising from the breach. See Hall v.
State Farm Mut. Auto. Ins. Co., No. 94-867, 1995 WL 323106, at *4
(La. App. 3d Cir. May 31, 1995). However, if no damages are proven
the claimant can still be awarded the maximum $5,000 penalty. Id.
Previous Third Circuit authority is consistent with this position.
See Midland Risk, 643 So.2d at 244 (affirming a $5,000 penalty
award in the absence of proof of damages); Harris v. Fontenot, 606
So.2d 72, 73-73 (La. App. 3d Cir. 1992) (affirming a $5,000 penalty
award although damages not proven). Likewise, Robichaux is
consistent with this interpretation. 821 F. Supp. at 431-32
(awarding $5,000 penalty where plaintiff failed to prove damages as
a result of the breach). Consequently, on remand the bankruptcy
court should consider appellant's claim for penalties under section
22:1220 and determine if the Receiver has damages arising from the
breach making the double-damage provision applicable. If there are
none, only the $5,000 maximum penalty can apply in the event
penalties are awarded under section 22:1220. In any event, the
Receiver shall be at least entitled to the $4,500 penalty and
reasonable attorneys' fees under section 22:658.
CONCLUSION
4
See, e.g., Midland Risk, 643 So.2d at 244 ("Thus, we find if
an insurer commits any one of the acts enumerated in Section
1220(B), penalties may be imposed without a showing of
damages.").
13
The bankruptcy court erred in finding that State Farm did not
act arbitrarily and capriciously in refusing to settle the
Receiver's claim. Accordingly, the district court's order
affirming that portion of the judgment denying appellant's claim
for penalties and attorneys' fees under sections 22:658 and 22:1220
must be REVERSED and the case REMANDED to the district court with
instructions to REMAND to the bankruptcy court for further
proceedings consistent with this opinion.
14