Case: 08-50253 Document: 00511299197 Page: 1 Date Filed: 11/19/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
November 19, 2010
No. 08-50253 Lyle W. Cayce
Clerk
KELLER FOUNDATIONS, INC.; SUNCOAST POST-TENSION, L.P.,
formerly known as Keller Suncoast L.P.,
Plaintiffs–Appellees,
v.
WAUSAU UNDERWRITERS INSURANCE CO.,
Defendant–Appellant.
Appeal from the United States District Court
for the Western District of Texas
Before GARWOOD, GARZA, and OWEN, Circuit Judges.
PRISCILLA R. OWEN, Circuit Judge:
Wausau Underwriters Insurance Co. (Wausau) appeals the district court’s
judgment holding Keller Foundations, Inc. and Suncoast Post-Tension, L.P.
(collectively, Keller Companies) are entitled to defense and indemnity under a
commercial general liability policy Wausau issued to Travis International, Inc.,
from whom the Keller Companies acquired certain assets. Because the Keller
Companies agreed to assume liability for the particular losses in question and
explicitly excluded the Wausau policy from the asset transfer, we reverse.
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No. 08-50253
I
Keller Foundations entered into a purchase agreement with Travis
International, Inc. (Travis) to purchase certain assets and assume certain
liabilities from Suncoast Post-Tension, Inc. (Old Suncoast), a Travis subsidiary.
After the sale, Old Suncoast changed its name to Travis International Partners,
L.P., while the purchasing company, Keller Suncoast, L.P., changed its name to
Suncoast Post-Tension, L.P. (New Suncoast).
The purchase agreement transferred all of the assets of Old Suncoast to
New Suncoast except for the “Excluded Assets,” which included “all . . .
insurance policies” other than certain employment benefit plans. The purchase
agreement further provided that New Suncoast would “assume and agree to
perform, pay and discharge when due the Assumed Obligations,” and defined
“Assumed Obligations” as:
other than the Retained Obligations and other than liabilities and
operations attributable to operations of Seller after the Closing Date
. . . , all liabilities and obligations of Seller whether fixed, accrued,
contingent or otherwise, known or unknown, arising prior to, by
reason of, or after the consummation of the transactions contemplated
by the Transaction Documents including obligations and liabilities
. . . (b) arising under any Assumed Contract, . . . (d) for all services
and products provided by Seller including obligations and liabilities
under warranties arising under contract or law, (e) arising under any
applicable law including bulk sale laws . . . .
However, the purchase agreement also stated that “Seller shall retain and be
solely responsible for all Retained Obligations,” which included specific lawsuits
listed in the agreement, as well as other defined liabilities.
Wausau provided Old Suncoast with general liability insurance coverage.
Old Suncoast’s Wausau policy included a non-assignment clause providing,
“Your rights and duties under this policy may not be transferred without our
written consent except in the case of death of an individual named insured.” Old
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Suncoast never requested that Wausau transfer coverage under the policy to
New Suncoast.
After the sale took place, several lawsuits were filed in Texas, California,
and Florida for defects and property damage allegedly arising from Old
Suncoast’s work prior to the asset purchase and during the term of the Wausau
insurance policy. While the suits named various Suncoast Post-Tension entities
as defendants, the Keller Companies assumed the defense of all of them
consistent with its assumption of liabilities in the purchase agreement. The
Keller Companies notified Wausau of the lawsuits, but Wausau refused to
provide coverage. As a result, the Keller Companies brought suit against
Wausau in Texas state court, alleging breach of contract, violation of the Texas
Insurance Code, and breach of the duty of good faith and fair dealing. The
Keller Companies sought indemnity for the damages assessed in the underlying
suits, as well as reimbursement for the cost of defending the actions.
Wausau removed the case to federal court, where the parties consented to
trial by magistrate. The parties filed cross-motions for summary judgment, and
the magistrate judge denied Wausau’s motion and granted the Keller
Companies’ motion in part. The magistrate held that Wausau’s coverage
transferred from Old Suncoast to New Suncoast either as a chose in action with
the general transfer of all assets in the purchase agreement or by operation of
law. The transfer of the coverage thus obligated Wausau to defend and
indemnify New Suncoast and the Keller Companies in the underlying lawsuits.
The magistrate further held that the non-assignment clause in the policy did not
prohibit such post-loss assignments. Wausau timely appealed.
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II
We review a magistrate judge’s grant or denial of summary judgment de
novo, applying the same standard as the district court.1 Summary judgment is
appropriate if “the pleadings, the discovery and disclosure materials on file, and
any affidavits show that there is no genuine issue as to any material fact and
that the movant is entitled to judgment as a matter of law.” 2
III
Wausau challenges the magistrate judge’s holding that insurance
coverage for the Keller Companies’ losses constituted a “chose in action” that
was transferred as part of the general catch-all transfer of “all other assets” in
the purchase agreement between Old Suncoast and New Suncoast. Wausau
argues that the non-assignment clause in the insurance policy barred the
transfer of the policy without prior approval by Wausau. The Keller Companies
contend that Texas courts would not enforce such a non-assignment clause for
losses that took place prior to the transfer of the coverage. We agree with
Wausau that the non-assignment clause bars any assignment of the coverage
without Wausau’s approval, rendering invalid any transfer that might have
taken place.
According to Couch on Insurance, “the great majority of courts adhere to
the rule that general stipulations in policies prohibiting assignments thereof
except with the consent of the insurer apply only to assignments before loss, and
do not prevent an assignment after loss.”3 These courts reason that “[t]he
purpose of a no assignment clause is to protect the insurer from increased
1
Cavalier ex rel. Cavalier v. Caddo Parish Sch. Bd., 403 F.3d 246, 250 (5th Cir. 2005).
2
FED . R. CIV . P. 56(c).
3
3 COUCH ON INSURANCE § 35:7 (Westlaw 2010).
4
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liability, and after events giving rise to the insurer’s liability have occurred, the
insurer’s risk cannot be increased by a change in the insured’s identity.” 4
Texas courts, however, diverge from this majority and enforce non-
assignment clauses even for assignments made post-loss. For example, in Texas
Farmers Insurance Co. v. Gerdes, a Texas court of appeals held that a non-
assignment clause barred the post-loss assignment by a third-party beneficiary
of her benefits under an insurance policy.5 There, Sally Gerdes was injured in
a car accident with the insured, Bernardo Saldano. Gerdes assigned her right
to benefits under Saldano’s policy to a chiropractic clinic where she received
treatments. The insurance company paid the benefits to Gerdes, who never paid
the clinic. The clinic then brought suit against the insurance company.6 After
recognizing that “[n]on-assignment clauses have been consistently enforced by
Texas courts,” the court held that the non-assignment clause applied to Gerdes
and that Gerdes’s transfer of her rights under the insurance policy had no
effect.7 Similarly, in Texas Pacific Indemnity Co. v. Atlantic Richfield Co.,
another Texas court of appeals relied on a non-assignment clause to invalidate
a post-loss assignment, holding that “[i]n the absence of a successful attack upon
4
Id.; see also N. Ins. Co. of N.Y. v. Allied Mut. Ins. Co., 955 F.2d 1353, 1358 (9th Cir.
1992) (applying California law); Imperial Enters., Inc. v. Fireman’s Fund Ins. Co., 535 F.2d
287, 290-92 (5th Cir. 1976) (applying Georgia law); Peck v. Pub. Serv. Mut. Ins. Co, 114 F.
Supp. 2d 51, 56 (D. Conn. 2000) (citing 3 COUCH ON INSURANCE § 35.7 (3d ed. 1999) and
holding that a post-loss assignment “in no way increased the insurer’s risks or obligations”);
Int’l Rediscount Corp. v. Hartford Accident & Indem. Co., 425 F. Supp. 669, 672-73 (D. Del.
1977) (applying Delaware law); Conrad Bros. v. John Deere Ins. Co., 640 N.W.2d 231, 237-38
(Iowa 2001) (holding that non-assignment clauses only applied to pre-loss assignments, and
that the prohibition of post-loss assignments would be “in contravention of public policy and
the general purpose of indemnity contracts”); Pilkington N. Am., Inc. v. Travelers Cas. & Sur.
Co., 861 N.E.2d 121, 129 (Ohio 2006) (“[T]he chose in action as to the duty to indemnify is
unaffected by the anti-assignment provision when the covered loss has already occurred.”).
5
880 S.W.2d 215, 219 (Tex. App.—Fort Worth 1994, writ denied).
6
Id. at 217.
7
Id. at 218, 219.
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the anti-assignment clause, Texas Pacific was entitled to have the trial court
enforce it.”8
Additionally, in Conoco, Inc. v. Republic Insurance Co., this court, applying
Texas law, enforced a non-assignment clause to invalidate a post-loss
assignment and held that the assignee lacked standing to bring a claim against
the insurance company.9 There, Bonanza Corp., the insured, had assigned to
Conoco the rights to any insurance proceeds Bonanza might collect from
Republic Insurance Co. for the sinking of one of Bonanza’s vessels.10 Conoco
then brought suit against Republic Insurance to recover those proceeds.
Republic argued that Conoco lacked standing to bring suit because the non-
assignment clause in the policy invalidated Bonanza’s assignment of its rights.11
We agreed, recognizing that “Texas law permits the enforcement of no-
assignment clauses in insurance policies.” 12
Given these precedents, we believe that Texas courts would enforce the
non-assignment clause in the Wausau policy. Thus, no transfer of the insurance
coverage for the pre-acquisition losses could have been valid without the consent
of Wausau, and it is undisputed that Wausau never consented to such a transfer.
Nor can the Keller Companies circumvent the non-assignment clause by
casting the transfer of the insurance coverage as the transfer of a “chose in
action.” In Conoco, we rejected the argument that the non-assignment clause
had no effect on the assignment of “proceeds” of insurance rather than a “claim
8
846 S.W.2d 580, 583 (Tex. App.—Houston [14th Dist.] 1993, writ denied).
9
819 F.2d 120, 124 (5th Cir. 1987).
10
Id. at 121.
11
Id. at 123-24.
12
Id. at 124.
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or demand.”13 We called the distinction “specious,” stating that “[Conoco] cannot
enlarge Bonanza’s boots by putting the label ‘proceeds’ on its claim. Words
cannot change a plugged nickel into a silver dollar.”14 The Texas Pacific court
held likewise, rejecting the argument that the policy limited only assignments
of “interests” in the policy and not “fully matured claims based upon the
Policy.”15 The distinction the Keller Companies seek is the same as that rejected
in Conoco and Texas Pacific Indemnity.
We also reject the Keller Companies’ contention that Wausau must show
prejudice in order to enforce the non-assignment clause. The Keller Companies
rely on Hernandez v. Gulf Group Lloyds, a Supreme Court of Texas case
involving a clause in an insurance contract requiring the insured to obtain
consent prior to settling any claims.16 Applying the “fundamental principle of
contract law” that only material breach of a contract would excuse the other
party from performance, the court held that a breach of the settlement-without-
consent clause would only be material if the insurance company could show that
it had been prejudiced by the breach.17 This same requirement for a showing of
prejudice has also been extended to clauses requiring prompt notice of a claim.18
However, unlike settlement-without-consent and notice-of-claim clauses, Texas
courts did not require a showing of prejudice in either Gerdes or Texas Pacific,
13
Id.
14
Id.
15
Tex. Pac. Indem. Co. v. Atl. Richfield Co., 846 S.W.2d 580, 584 (Tex. App.—Houston
[14th Dist.] 1993, writ denied) (citing Conoco, 819 F.2d at 124).
16
875 S.W.2d 691, 692 n.1 (Tex. 1994).
17
Id. at 692-93.
18
See Hanson Prod. Co. v. Ams. Ins. Co., 108 F.3d 627, 630-31 (5th Cir. 1997) (citing
Hernandez, 875 S.W.2d at 693); PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630, 636-37 (Tex.
2008).
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and the Keller Companies have failed to cite any cases indicating that Texas
courts intended the Hernandez rule to override these cases. Hence, we do not
believe Texas courts would require a showing of prejudice here.
IV
Wausau also challenges the magistrate judge’s alternative holding that the
policy covering Old Suncoast transferred by operation of law when the Keller
Companies acquired the assets of Old Suncoast. The question of whether
insurance coverage for pre-acquisition liabilities transfers by operation of law to
a purchasing company who assumed those liabilities by contract is one of first
impression for Texas courts.
The Keller Companies argue that Texas courts would follow Northern
Insurance Co. of New York v. Allied Mutual Insurance Co., a Ninth Circuit case
that held that insurance coverage for pre-acquisition losses transferred by
operation of law when the liabilities in question were transferred by operation
of law.19 In Northern Insurance, the asset purchase agreement specified that all
liability for the selling company’s pre-acquisition activities would remain with
the selling company, as would any contracts that required consent to assign,
including the insurance policy covering the liabilities at issue.20 Nevertheless,
the court applied California’s rule of product-line successor liability, which
provides that a purchaser of substantially all assets of a firm assumes the
obligation for product liability claims arising from pre-acquisition activities.21
The court held that both the liability for the pre-acquisition activities and the
insurance coverage for that liability transferred by operation of law to the
19
955 F.2d 1353, 1358 (9th Cir. 1992).
20
Id. at 1355-56.
21
Id. at 1357.
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acquiring company.22 The court disregarded the insurance policy’s non-
assignment clause, which prevented assignment of the policy without consent.
The court reasoned that non-assignment clauses were enforceable because
assignments could “alter drastically the insurer’s exposure depending on the
nature of the new insured,” and this rationale “vanishes when liability arises
from presale activity,” since the characteristics of the successor would not affect
that risk.23
Subsequent decisions by California state courts raise questions as to the
validity of the Northern Insurance rule even in California. At least one
California court of appeals has rejected outright the Northern Insurance rule.24
Moreover, the California Supreme Court has refused to extend the Northern
Insurance rule to instances where the successor corporation assumed liability by
contract, as opposed to by operation of law.25 In such situations, the court has
held that any rights the successor might have in insurance coverage for those
liabilities must also come from the contract between the parties.26
Other courts have also rejected the Northern Insurance rule where the
acquiring company assumes liability through contract. In Pilkington North
America, Inc. v. Travelers Casualty & Surety Co., the Ohio Supreme Court
rejected the idea that coverage should follow liability, holding that, where
22
Id. at 1355-56.
23
Id. at 1358.
24
Gen. Accident Ins. Co. of Am. v. Superior Court, 55 Cal. Rptr. 2d 781, 788 (Cal. Ct.
App. 1997) (“We hold that the finding of successor liability in tort does not entitle the successor
corporation, by operation of law, to the insurance coverage of its corporate predecessor. . . . The
law can impose tort liability on a successor corporate entity; it cannot impose a contractual
insurance relationship between an insurer and a stranger to the insurance contract.”).
25
Henkel Corp. v. Hartford Accident & Indem. Co., 62 P.3d 69, 73-74 (Cal. 2003).
26
Id. at 74 (“[W]hen liability is assumed by contract, the successor’s rights are defined
and limited by that contract.”).
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liability is assumed contractually, allowing indemnity to follow liability as a
matter of law would interfere with the parties’ ability to contract to control
liability or assign liability while preserving rights under the policy for the
original insured.27 The court also noted that “if coverage were to arise by
operation of law and the original insured remains in operation, the limits of its
coverage available under the policy may be reduced by any indemnity payments
made on behalf of the additional insured,” and “the insurer may be placed in the
position of defending an additional insured where there was only one under the
policy.”28 Washington and Hawaiian state courts have held similarly.29
We believe that Texas courts would reject the Northern Insurance rule
where, as here, the liabilities in question were assumed through a contract that
also specifically excluded the transfer of the insurance policy covering those
liabilities. Unlike California, Texas law does not have a product-line successor
liability rule. Texas statutes specifically provide that a purchase of all or
substantially all of the property or assets of another corporation “does not make
the acquiring corporation . . . responsible or liable for any liability or obligation
of the selling corporation that the acquiring corporation . . . did not expressly
assume.” 30
27
861 N.E.2d 121, 130-31 (Ohio 2006).
28
Id. at 131.
29
See Del Monte Fresh Produce (Haw.), Inc. v. Fireman’s Fund Ins. Co., 183 P.3d 734,
745 (Haw. 2007) (holding that an assignment of an insurance policy by operation of law to a
party who acquired liabilities through contract was inconsistent with Hawaiian law’s
requirement that insurance policies be subject to general rules of contract interpretation);
Unigard Ins. Co. v. Leven, 983 P.2d 1155, 1164 (Wash. Ct. App. 1999) (refusing to extend the
Northern Insurance rule to “nonsuccessors who voluntarily enter into partial indemnification
agreements in exchange for substantial personal compensation”).
30
TEX . BUS . CORP . ACT ANN . art. 5.10(B) (Vernon 2007); see also Griggs v. Capitol Mach.
Works, Inc., 690 S.W.2d 287, 294 (Tex. App.—Austin 1985, writ ref’d n.r.e.) (rejecting the
product successor theory of liability).
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Moreover, Texas’s enforcement of non-assignment clauses in insurance
agreements for post-loss assignments further suggests that Texas courts would
reject the Northern Insurance rule, since the unenforceability of such a clause
served as an important factor in the Ninth Circuit’s decision in Northern
Insurance.31 Given its focus on contracts in the insurance context, we believe
Texas would enforce the contract between Old Suncoast and New Suncoast as
written. The purchase agreement between Old Suncoast and New Suncoast
specifically excluded the Wausau policy covering the assumed liabilities from the
transfer of assets. The parties clearly intended for the insurance coverage to
remain with Old Suncoast and Travis. We see no reason why Texas courts
would interfere with the parties’ ability to enter into such a contract.
* * *
We REVERSE the district court’s grant of partial summary judgment
in favor of the Keller Companies and RENDER summary judgment in favor of
Wausau.
31
See N. Ins. Co. of N.Y. v. Allied Mut. Ins. Co., 955 F.2d 1353, 1358 (9th Cir. 1992).
11