National Union Fire Ins. Co. of Pittsburgh, Pa. v. Care Flight Air Ambulance Service, Inc.

United States Court of Appeals,

Fifth Circuit.

No. 93-1154.

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
Plaintiff-Appellee-Cross-Appellant,

v.

CARE FLIGHT AIR AMBULANCE SERVICE, INC., ET AL., Defendants-
Appellees,

General Electric Capital Corp. and Avemco Insurance Co.,
Defendants-Appellants-Cross-Appellees.

April 12, 1994.

Appeals from the United States District Court for the Northern
District of Texas.

Before REAVLEY and DAVIS, Circuit Judges, and ROSENTHAL,* District
Judge.

ROSENTHAL, District Judge:

On March 3, 1989, General Electric Capital Corporation,

("GECC"), leased a Piper Cheyenne 400LS aircraft to Care Flight Air

Ambulance Service, Inc. ("Care Flight"). The lease prohibited Care

Flight from subleasing the aircraft without GECC's consent, and

required Care Flight to insure the plane. On March 5, 1989, Care

Flight obtained an insurance policy from National Union Fire

Insurance Co. of Pittsburgh, PA. ("National Union"). The policy

contained a war risk endorsement and a breach of warranty

endorsement. The breach of warranty endorsement named GECC as a

beneficiary along with the named insured, Care Flight. The breach

of warranty endorsement contained a clause excluding coverage for

*
District Judge of the Southern District of Texas, sitting
by designation.

1
loss due to conversion by or at the direction of the named insured.

GECC's interest in the plane was insured by AVEMCO.

Without seeking authorization from GECC, Care Flight subleased

the aircraft to James Coltharp ("Coltharp"), an admitted violation

of the lease. Coltharp in turn subleased it to Anthony Contraras

("Contraras"). There was a dispute in the summary judgment

evidence as to whether Care Flight participated in or knew of this

sublease to Contraras. It is undisputed that Contraras flew the

plane to several Central American countries, and that while the

aircraft was in Contraras's possession, the Colombian government

seized the plane for violation of Colombian air traffic laws.

GECC was notified by Care Flight on September 1, 1989 that the

aircraft had been confiscated. The aircraft was not returned to

the United States until almost three years later. Before the plane

was returned, AVEMCO paid GECC, its insured, $2.5 million for the

plane. Asserting subrogation rights, AVEMCO demanded that National

Union pay AVEMCO under National Union's policy with Care Flight.

National Union then filed this declaratory relief action and moved

for summary judgment that coverage was precluded because Care

Flight had converted the plane.

The district court granted summary judgment in favor of

National Union, ruling that Care Flight had converted the aircraft

as a matter of law and that the conversion limitation in the breach

of warranty endorsement precluded coverage. Final judgment was

entered on February 16, 1993.

In this appeal, GECC and AVEMCO assert that the district court

2
erred in finding that Care Flight had converted the plane and in

holding that the conversion limitation in the breach of warranty

endorsement precluded coverage. National Union cross-appealed from

the district court's refusal to award part of National Union's

attorneys' fees incurred in its dispute with GECC and AVEMCO.

I. Standard of Review

This court reviews summary judgments de novo. Fireman's Fund

Ins. Co. v. Murchison, 937 F.2d 204, 207 (5th Cir.1991); Mozeke v.

International Paper Co., 856 F.2d 722, 725 (5th Cir.1988). The

issue before this court is whether any questions of material fact

exist that bar the moving party from judgment as a matter of law.

Celotex Corp. v. Catrett, 477 U.S. 317, 323-25, 106 S.Ct. 2548,

2552-54, 91 L.Ed.2d 265 (1986); American Economy Ins. Co. v.

Tomlinson, 12 F.3d 505, 507 (5th Cir.1994). In making this

determination, this court must view all fact questions in the light

most favorable to the nonmovant. Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986);

United States v. Park Towers, Inc., 8 F.3d 306, 309 (5th Cir.1993).

This court reviews matters of contract interpretation de novo.

Travelers Ins. Co. v. Liljeberg Enterprises, Inc., 7 F.3d 1203,

1206 (5th Cir.1993); Matador Drilling Co. v. Post, 662 F.2d 1190,

1197 (5th Cir.1981).

II. The Relevant Policy Language

National Union's policy contained a breach of warranty

endorsement insuring against physical damage to the aircraft. The

endorsement provided in part as follows:

3
 1. As to the interest of the said Lienholder only, the
Insurance afforded by any Physical Damage Coverage of this
policy shall not be invalidated by any act or neglect of the
Named Insured nor by any change in the title or ownership of
the aircraft but conversion, embezzlement or secretion by or
at the direction of the Named Insured is not covered
hereunder; provided however that:

(a) in case the Named Insured shall neglect to pay any premium
due under this policy the Lienholder shall, on demand,
pay the premium; and

(b) the Lienholder shall notify the Company of any change of
title or ownership of the aircraft or apparent increase
of hazard, which shall come to the knowledge of the
Lienholder, and, unless permitted by this policy, it
shall be endorsed thereon and the Lienholder shall, on
demand, pay the premium for such increased hazard.

(III R. 35).

Page 2 of the main body of the insurance policy contained the

policy's coverage exclusion. Paragraph 6(a) of the policy excluded

from coverage "loss or damage due to conversion ... by any person

in possession of the aircraft under a bailment, lease ... or other

encumbrance." (III R. 25).

The policy also included a war risk endorsement, which

provided that "notwithstanding anything in the policy to the

contrary," the policy covered physical loss of or damage to the

aircraft if caused by "[c]onfiscation, nationalisation [sic],

seizure, restraint, detention, appropriation, requisition for title

or use by or under the order of any Government." (III R. 31).

Both the breach of warranty endorsement and the war risk

endorsement stated that "[n]othing herein contained shall vary,

alter, waive or extend any of the terms, provisions,

representations, conditions or agreements of the policy other than

as above stated." (III R. 31, 35)

4
III. Conversion As a Matter of Law

The district court found that the unauthorized sublease,

resulting in the confiscation, was a conversion as a matter of law.

Texas law defines conversion as "the unauthorized and unlawful

exercise of dominion and control over property inconsistent with or

to the exclusion of another's superior rights in that property."

Vickery v. Texas Carpet Co., 792 S.W.2d 759, 762 (Tex.App.—Houston

[14th Dist.] 1990, writ denied); Waisath v. Lack's Stores, Inc.,

474 S.W.2d 444, 446 (Tex.1971). Under Texas law, wrongful intent

is not an element of conversion. Killian v. Trans Union Leasing

Corp., 657 S.W.2d 189 (Tex.App.—San Antonio 1983, writ ref'd

n.r.e.). GECC and AVEMCO claim that because Care Flight's conduct

breached its lease contract, such conduct cannot as a matter of law

constitute the tort of conversion.

Texas law has long distinguished tort liability from contract

liability as between the parties to a contract, seeking to avoid

the availability of both tort and contract liability for the same

conduct and the same kind of harm or loss. See Southwestern Bell

Telephone Co. v. DeLanney, 809 S.W.2d 493 (Tex.1991); Jim Walter

Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex.1986); Mid-Continent

Aircraft Corp. v. Curry County Spraying Service Inc., 572 S.W.2d

308, 312 (Tex.1978). However, the Texas cases also recognize that

when certain legal relationships exist between contracting parties,

the law may impose affirmative duties that are separate and apart

from the contractual promises made between those parties. To

determine whether conduct that breaches a contract can also be a

5
tort, Texas law requires a court to look to the origin of the duty

owed and the nature of the resulting injury. 809 S.W.2d at 494-95.

In Southwestern Bell Telephone Co. v. DeLanney, the Texas

Supreme Court described the relevant inquiry into the origin of the

duties owed, as follows:

As one prominent authority has explained: "Tort obligations
are in general obligations that are imposed by law—apart from
and independent of promises made and therefore apart from the
manifested intention of the parties—to avoid injury to
others." W. Keeton, D. Dobbs, R. Keeton & D. Owen, Prosser
and Keeton On the Law of Torts § 92 at 655 (5th Ed.1984)....
If the defendant's conduct—such as negligently burning down a
house—would give rise to liability independent of the fact
that a contract exists between the parties, the plaintiff's
claim may also sound in tort. Conversely, if the defendant's
conduct—such as failing to publish an advertisement—would give
rise to liability only because it breaches the parties'
agreement, the plaintiff's claim ordinarily sounds only in
contract.

809 S.W.2d at 494.

In Southwestern Bell v. DeLanney, the plaintiff sued over

Southwestern Bell's breach of its promise to print plaintiff's

advertising in the "yellow pages." The Texas Supreme Court

examined the origin of the duties between the parties and found

that the only duty breached arose from the contract itself. The

court held that the plaintiff therefore had no tort claim.

In this case, Care Flight owed GECC a contractual duty not to

sublease the aircraft without GECC's consent. However, under the

Texas law of bailment, Care Flight also owed GECC a tort-based duty

not to exercise unauthorized dominion and control over the leased

plane inconsistent with, or to the exclusion of, GECC's superior

rights in the plane. Vickery, 792 S.W.2d at 762. Care Flight's

unauthorized sublease of the plane to Coltharp was admittedly a

6
breach of the contract. The issue is whether it also breached Care

Flight's separate and independent obligation originating under the

Texas tort law of conversion.

Texas courts have specifically recognized that because the law

of conversion and bailment imposes legal duties outside any

contractual agreements, separate causes of action for breach of

contract and conversion may arise from the same facts. For

example, in Vickery, 792 S.W.2d at 762-63, the court held that a

breach of contract and a conversion claim both arose when the

defendants failed to pay an invoice for goods delivered and kept

the goods. Similarly, in Allied Bank of Texas v. Plaza DeVille

Assoc., 733 S.W.2d 566 (Tex.App.—San Antonio 1987, writ ref'd

n.r.e.), the court held that the defendant's wrongful withholding

of rental proceeds constituted a conversion; in High Plains Wire

Line Services Inc. v. Hysell Wire Line Service, Inc., 802 S.W.2d

406, 410 (Tex.App.—Amarillo 1991, no writ), the court found for

conversion arising out of an alleged breach of a purchase

agreement; and in Virgil T. Walker Const. Co., Inc. v. Flores, 710

S.W.2d 159 (Tex.App.—Corpus Christi 1986, no writ), the court found

a claim for conversion and a claim for breach of contract from a

failure to relinquish control over construction machinery after a

sale.

Appellants do not dispute that under Texas law, a claim for

breach of contract and the tort of conversion can arise from the

same facts. Appellants argue that there cannot be a separate tort

here because the lease between GECC and Care Flight abrogated the

7
rights and duties arising under the common law of conversion and

bailment.

Appellants cite Anchor Casualty Co. v. Robertson Transport

Co., 389 S.W.2d 135, 138 (Tex.Civ.App.—Corpus Christi 1965, writ

ref'd n.r.e.), for the proposition that parties may, by express

contract, "enlarge, abridge, qualify or supersede the obligations

which otherwise would arise from the bailment by implication of the

law." Id. (citations omitted). Anchor Casualty involved collision

insurance for the protection of a leased truck. The parties to

that lease agreed that the lessee would not be liable for any loss

to the truck, and the court relied on the parties' mutual

understanding of the lease agreement in denying subrogation rights.

389 S.W.2d at 139. By contrast, the lease in this case expressly

placed the entire risk of loss on Care Flight, the lessee, (III R.

153), and provided that "[n]o remedy referred to herein is intended

to be exclusive, but each shall be cumulative and in addition to

any other remedy referred to above or otherwise available to Lessor

at law or in equity," (III R. 156) (emphasis added). Rather than

expressly abrogating the rules of tort liability, or the duties

imposed through the law of bailment, the lease at issue here

retained the lessor's right to assert all common law remedies.

In addition to looking to the origin of the duties, the Texas

courts also look to the nature of the injury to determine whether

a claim is for contract, tort, or both. The general rule is that

where a defendant's conduct breaches an agreement between the

parties and does not breach an affirmative duty imposed outside the

8
contract, the plaintiff ordinarily may not recover on a tort claim

if the damages are economic losses to the subject matter of the

contract. Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618

(Tex.1986).

GECC and AVEMCO assert that the conduct here not only violated

duties imposed outside the contract, but also caused injuries that

go beyond economic losses to the subject matter of the contract.

They point to the loss of use of the aircraft for over three years,

well beyond the four-month lease term, and the repair costs for the

damage the aircraft received during the unauthorized sublease and

confiscation.

The Texas cases clearly hold that a plaintiff asserting

negligent failure to perform a contract does not have a tort cause

of action when the only injury is economic harm to the subject of

the contract itself. Jim Walter Homes, 711 S.W.2d at 618.1 By

1
The Texas cases have sharply divided as to whether there
must be proof of tort damages separate and independent from
damages for breach of contract when the conduct violates duties
independent of the contract. See, e.g., Prudential Insurance Co.
v. Jefferson Associates, Ltd., 839 S.W.2d 866, 876
(Tex.App.—Austin 1992, writ granted) (damages for conduct that is
both fraud and a breach of contract are recoverable even though
the measure of damages is the same for the tort and the breach of
contract); Schindler v. Austwell Farmers Cooperative, 829 S.W.2d
283, 290-91 (Tex.App.—Corpus Christi), aff'd as modified on other
grounds, 841 S.W.2d 853 (Tex.1992) (no requirement that damages
independent from the injuries for breach of contract must be
proven to recover for fraud); but see Barbouti v. Munden, 866
S.W.2d 288, 293-94 (Tex.App.—Houston [14th Dist] 1993, writ
filed) (a fraud cause of action will not arise where the only
damages are for breach of the contract); Central Savings & Loan
Assoc. v. Stemmons Northwest Bank, 848 S.W.2d 232
(Tex.App.—Dallas 1992, no writ) (a cause of action sounds in
contract and not tort where the only injury is economic loss to
the subject matter of contract); Hebisen v. Nassau Development
Co., 754 S.W.2d 345, 348 (Tex.App.—Houston [14th Dist.] 1988,

9
contrast, the Texas courts have consistently found claims for both

conversion and breach of contract based on a single set of facts

and a single injury. See Vickery, 792 S.W.2d at 762; Plaza

National Bank v. Walker, 767 S.W.2d 276 (Tex.App.—Beaumont 1989,

writ denied); Allied Bank, 733 S.W.2d at 566; see also, Ames v.

Great Southern Bank, 672 S.W.2d 447 (Tex.1984); Prewitt v.

Branham, 643 S.W.2d 122 (Tex.1982). The Texas courts have not held

that in order to allege both a breach of contract and the tort of

conversion, the conversion damages must be separate and distinct

from the contract damages.

Given the record before this court and the Texas law, the

district court correctly found that the fact that Care Flight

breached its lease contract did not preclude a finding that Care

Flight also committed the tort of conversion.

The district court was also correct in holding that Care

Flight's initial lawful possession of the plane by Care Flight did

not preclude a finding of conversion. "One who is authorized to

make a particular use of a chattel, and uses it in a manner

exceeding the authorization, is subject to liability for conversion

to another whose right to control the use of the chattel is thereby

seriously violated." Restatement (Second) of Torts § 228 (1965).

writ denied) (even if the breach of a lease is also the tort of
fraud, there is no claim for fraud if the only damages are
failure to pay the basic amounts); see also C & C Partners v.
Sun Exploration & Production Co., 783 S.W.2d 707, 719-20
(Tex.App.—Dallas 1989, writ denied) (recovery for both fraud and
breach of contract is precluded by a failure to prove actual
damages arising from the tort). The Texas Supreme Court has not
resolved this conflict.

10
Texas generally follows the elements of conversion as stated in the

Restatement, which provides that "[t]he limits of the permitted use

ordinarily are determined by the terms, express or reasonably

implied, of the contract or other agreement between the parties,

and the question becomes one of whether there is a material breach

of the agreement." Id. at Cmt. C.

The district court correctly determined that the unauthorized

sublease of the aircraft was a material breach. Texas law

recognizes the distinction between serious violations of another's

right of control, which constitute conversion, and minor or

technical violations insufficient in degree of interference to

constitute conversion.

The several reported cases on point are all consistent with

this result. In Swish Mfg. Southeast v. Manhattan Fire & Marine

Ins., 675 F.2d 1218 (11th Cir.1982), the Eleventh Circuit held that

a conversion exclusion in an insurance policy precluded coverage

where a leased aircraft was used to transport marijuana, in

violation of the lease agreement, and was subsequently confiscated

by the Bahamian government. 675 F.2d at 1219. Relying on § 228 of

the Restatement, the court concluded that, under Georgia law, the

conversion exclusion applied. Id. at 1220. The applicable Georgia

law was the same in relevant respects as Texas conversion law. See

also, National Union Fire Ins. Co. v. Carib Aviation, Inc., 759

F.2d 873 (11th Cir.1985); Gelder v. Puritan Ins. Co., 100 N.M.

240, 241, 668 P.2d 1117, 1118 (1983).

Appellants' assertion that there could be no conversion

11
because National Union made no formal demand is not supported by

Texas law. Formal demand and refusal are not necessary if demand

would be useless, or "if the possessor's acts amount to a clear

repudiation of the owner's rights." Bures v. First National Bank,

Port Lavaca, 806 S.W.2d 935 (Tex.App.—Corpus Christi 1991); see

also Permian Petroleum Co. v. Petroleos Mexicanos, 934 F.2d 635,

651 (5th Cir.1991). Demand and refusal are not necessary if other

proof demonstrates a conversion. Presley v. Cooper, 155 Tex. 168,

284 S.W.2d 138, 141 (1955).

It is undisputed that the aircraft at issue was confiscated by

the government of Colombia. GECC's formal demand to Care Flight to

return the aircraft would have been useless. Moreover, there was

other proof that a conversion occurred so that demand and release

were not necessary as a matter of law. Presley, 284 S.W.2d at 141.

The district court's summary judgment that Care Flight

converted the aircraft is affirmed.

IV. Coverage Under the Policy

Appellants challenge the district court's holding that the

exception to the breach of warranty endorsement for conversion

precluded coverage under the policy. Appellants argue that the war

risk endorsement extended coverage for losses caused by a

confiscation.

Under Texas law, insurance contracts are subject to the same

rules of interpretation that govern other contracts. Forbau v.

Aetna Life Ins. Co., --- S.W.2d ----, ----, 1994 WL 2810 at * 1,

1994 Tex. LEXIS 14 at * 4 (January 5, 1994); Upshaw v. Trinity

12
Cos., 842 S.W.2d 631, 633 (Tex.1992). The interpretation of a

contract, including the question of whether or not a contract is

ambiguous, is a legal determination to be made by a court.

National Union Fire Ins. Co. v. Kasler Corp., 906 F.2d 196 (5th

Cir.1990); Praeger v. Wilson, 721 S.W.2d 597 (Tex.App.—Fort Worth

1986, writ ref'd n.r.e.). The court's primary concern is to give

effect to the written expression of the parties' intent. Forbau,

--- S.W.2d at ----, 1994 WL 2810 at * 1, 1994 Tex. LEXIS 14 at * 4.

The court shall read "all parts of the contract together to

ascertain the agreement of the parties." Id. A court should

interpret a contract so that each provision of the contract is

given effect. Id.

The war risk endorsement to the policy between National Union

as insurer and Care Flight as insured stated that "notwithstanding

anything in the policy to the contrary ... [there is coverage for]

confiscation ... by any Government." (III R. 31). The war risk

endorsement continues: "Nothing herein contained shall vary,

alter, waive or extend any of the terms, provisions,

representations, conditions or agreements of the policy other than

as above stated." (Id.)2

The policy also contained a breach of warranty endorsement,

which named GECC, as the lienholder, a beneficiary. The breach of

warranty clause, like a mortgage clause, provided that the

lienholder's insurance will not be invalidated by any negligent or

2
The breach of warranty endorsement contained this same
phrase. (III R. 35).

13
intentional actions taken by the named insured. Don Chapman Motor

Sales, Inc. v. National Savings Insurance, Co., 626 S.W.2d 592, 597

(Tex.App.—Austin 1981, writ ref'd n.r.e.). Under Texas law, the

breach of warranty endorsement constituted a separate and

independent contract between National Union, as the insurer, and

GECC, as the lienholder. St. Paul Fire & Marine Insurance Co. v.

Crutchfield, 350 S.W.2d 534, 537 (Tex.1961); Don Chapman, 626

S.W.2d at 597. The parties to this suit do not dispute that the

coverage created in the basic policy was part of the contract

created by the breach of warranty endorsement.3

The breach of warranty endorsement excluded from coverage

losses resulting from "conversion, embezzlement or secretion by or

at the direction of the Named Insured." (III R. 35). Appellants

argue that the "confiscation" language in the war risk endorsement

explicitly covered the losses in this case, and that the

"notwithstanding anything in the policy to the contrary" language

overrides the "conversion" exception in the breach of warranty

endorsement. This ignores the last sentence of the war risk

endorsement, which states that nothing in the endorsement shall

"vary, alter, waive or extend" the terms of the policy except as

stated in the endorsement. (III R. 31). Both the basic policy and

the breach of warranty endorsement excluded losses following a

conversion. The extension of coverage for "confiscation" under the

3
The parties do dispute whether the territorial exclusions
contained in the basic policy limit the coverage contained in the
breach of warranty endorsement. However, our disposition of this
case makes it unnecessary to reach this question.

14
war risk endorsement is not "contrary" to the policy exclusion for

conversion. Confiscation and conversion are not identical and

coverage for one can coexist in a policy containing an exclusion

for the other.

The result appellants seek would make the conversion exclusion

to the breach of warranty endorsement meaningless. The conversion

here occurred when Care Flight subleased the aircraft. Coverage

under the breach of warranty endorsement terminated at that time.

The later confiscation by the Colombian government did not

resurrect coverage. Once Care Flight converted the aircraft,

potential insurance coverage for a subsequent event became

irrelevant. See, e.g., Fidelity & Cas. Co. of New York v. Central

Bank of Houston, 672 S.W.2d 641 (Tex.App.—Houston [14th Dist.]

1984, writ ref'd n.r.e.).

For the above reasons, we find that, as a matter of law, the

insurance contract excluded GECC's recovery for losses incurred due

to Care Flight's conversion of the aircraft.

V. Attorney's Fees

Texas law provides for the award of attorney's fees under

Tex.Civ.Prac. & Rem.Code § 37.009 (West 1986), which provides that

"[i]n any proceeding under this chapter, the court may award costs

and reasonable and necessary attorney's fees as are equitable and

just." The award of attorney's fees in a declaratory judgment

action "lies within the discretion of the trial court, and its

judgment will not be reversed on appeal absent a clear showing that

it abused that discretion." Oake v. Collin County, 692 S.W.2d 454,

15
455 (Tex.1985) (citations omitted).

National Union contends that the district court erred by

refusing to award attorney's fees that National Union incurred in

defending a separate lawsuit in the Eastern District of Texas

concerning the same issues. The district court judge ruled that

National Union was only entitled to attorney's fees incurred in the

case in that judge's court. Section 37.009 allows the

discretionary award of fees incurred "in any proceedings under this

chapter." National Union has not cited, and this court has not

found, a case awarding a litigant fees incurred in a separate but

related case. There is no basis to find that the district court

abused its discretion in denying National Union's claim for

attorney's fees incurred in the Eastern District of Texas

litigation.

The summary judgment is AFFIRMED.

16