CENTURY SURETY COMPANY, Plaintiff - Appellee v. SCOTT M. SEIDEL, Trustee of the Pastazios Pizza, Incorporated Creditor Trust, Defendant - Appellant; JANE DOE, Intervenor Defendant - Appellant
No. 17-10026
United States Court of Appeals, Fifth Circuit
June 25, 2018
Before STEWART, Chief Judge, and JOLLY and OWEN, Circuit Judges.
Appeals from the United States District Court for the Northern District of Texas
Ajredin Deari, owner of Pastazios Pizza, Inc., lured eighteen-year-old Jane Doe to his restaurant. Doe alleged that Deari and his restaurant—yes, the insured restaurant itself—plied Doe with alcohol despite her protests. Once Doe was unconscious, Deari then drove her to a nearby hotel and sexually assaulted her. This insurance-coverage case asks whether Century Surety Company breached a contractual duty to defend and indemnify Deari‘s restaurant in the underlying state tort lawsuit brought by Jane Doe.
The district court granted summary judgment in favor of Century, applying the insurance policy‘s liquor-liability and intentional-harm exclusions. Doe and the restaurant‘s trustee now appeal. But because Doe and the trustee concede that all of Doe‘s injuries arose out of or resulted from the restaurant‘s criminal act of giving alcohol to a minor, we hold that the policy‘s criminal-act exclusion applies and bars all coverage claims. Thus, we affirm.
I.
A.
Jane Doe‘s complaint in the underlying state-court litigation, which concluded with a twenty-million dollar judgment in her favor, alleged the following facts: In April 2011, Doe was an eighteen-year-old high school graduate. She met with a man named Dritan Kreka at a restaurant called Back 9 Sports Bar & Grill (“Back 9“), to interview for a position at Kreka‘s own restaurant and to discuss “other possible networking opportunities.”
At Back 9, Kreka introduced Doe to Ajredin Deari, who owned a nearby restaurant called Pastazios Pizza, Inc. (“Pastazios“). Deari asked Doe how old she was, and she informed him that she was eighteen years old. Deari subsequently tried to order Doe an alcoholic beverage, but Back 9‘s server “refused to bring the beverage because [Doe] was underage.” So Deari suggested that the three of them should move the conversation to Pastazios. Thus, the three of them drove from Back 9 to Pastazios.
Along the way, Deari stopped at a liquor store to purchase a bottle of 80-proof liquor, Crown Royal Black. He took it with him to Pastazios. Neither he nor Pastazios was licensed to serve hard liquor.
Upon arriving at Pastazios, “Deari proceeded to walk inside of Pastazios, grab a round of beers, and placed one of the beers in front of [Doe] and encouraged her to
Doe‘s complaint then alleges that, over the next few hours, Deari and “Pastazios” “continued to encourage and provide [Doe] with more and more alcoholic products from within and owned by Pastazios, despite [Doe] telling them she did not want anymore.” Following two beers and three 2-ounce shots of Crown Royal Black, “things started getting fuzzy” for Doe. “Pastazios then proceeded to provide [Doe] with yet another 2-ounce shot of 80 proof hard liquor.” In total, Deari and “Pastazios” gave Doe “5-6 shots of Crown Royal Black and 3 beers.” Although Doe expressed “grave concerns about her growing level of intoxication and her inability to function normally, . . . [Doe] was effectively detained as a direct result of being provided intoxicating products by Pastazios.”
The complaint alleges that “Pastazios” then “allowed” Deari and Kreka to load the drunken Doe into a car on Pastazios’ property. Doe lost consciousness. A urine test would later reveal that Doe had been given a date-rape drug called Rohypnol. Doe regained consciousness sometime later in a hotel room, only to find that Deari was sexually assaulting her. During that encounter, Deari infected Doe with herpes. Deari later pleaded no-contest to the crime of aggravated assault.
B.
In 2013, Doe sued Kreka, Deari, and Pastazios in Texas state court. Against Kreka and Deari, Doe alleged a variety of intentional torts. Against Pastazios, Doe alleged negligence, gross negligence, Dram Shop liability, false imprisonment, and premises liability. Against all three defendants, Doe requested punitive damages.
Century Surety Company (“Century“), the insurer of Pastazios, initially provided Pastazios a defense under a Commercial General Liability Policy (“Policy“). A few months later, however, Century withdrew its defense and advised Pastazios that it had no duty to defend under the Policy based on the factual allegations in Doe‘s complaint.
Century then filed this action in federal court, seeking a declaratory judgment that it had no duty under the Policy to defend or indemnify Pastazios.
In 2014, Pastazios filed for bankruptcy because it could no longer afford to defend against Doe‘s lawsuit. The bankruptcy court confirmed a plan of reorganization, creating the Pastazios Pizza Inc. Creditor Trust (“Trust“).1 Scott Seidel was appointed trustee (“Trustee“), and the Trust was assigned all of Pastazios’ causes of action, including those arising under the Policy.
In 2015, back in state court, Doe won a bench-trial verdict against Pastazios and Deari. The state-court judge entered “Findings of Fact and Conclusions of Law,” which were drafted by Doe‘s attorneys with no objection from Pastazios. The judgment held Pastazios and Deari jointly and severally liable for over twenty million dollars. With respect to Pastazios, the state court found the restaurant liable for gross negligence, Dram Shop liability, and “negligent” false imprisonment, and imposed punitive damages. Despite Century‘s repeated offers to fund an appeal, no appeal was filed.
After obtaining her twenty-million-dollar state-court judgment, Doe intervened in this declaratory-judgment action, as a judgment creditor, to enforce Pastazios’ rights under the Policy by asserting several counterclaims against Century. Relevant here, Doe and the Trustee asserted that Century breached its duties under the Policy to defend and to indemnify Pastazios with respect to the underlying suit brought by Doe.
II.
All parties moved for summary judgment. The district court granted Century‘s motion, holding that Century had neither a duty to defend nor a duty to indemnify Pastazios. With respect to the duty to defend, the district court based its denial of coverage on a finding that Doe‘s claim against Pastazios was not covered because of two exclusions: the liquor-liability and intentional-act exclusions. Reasoning that the duty to defend is “broader” than the duty to indemnify, the district court then held that Century thus had no duty to indemnify. Doe and the Trustee (“Appellants“) appealed.
We begin our consideration of this appeal by setting out the basic legal principles that broadly guide us. “We review grants and denials of summary judgment de novo. Summary judgment is appropriate when ‘there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.‘” Lyda Swinerton Builders, Inc. v. Okla. Surety Co., 877 F.3d 600, 609 (5th Cir. 2017) (internal citation omitted) (quoting
“We may affirm summary judgment on any legal ground raised below, even if it was not the basis for the district court‘s decision.” Performance Autoplex II Ltd. v. Mid-Continent Cas. Co., 322 F.3d 847, 853 (5th Cir. 2003). Both sides raised the Policy‘s criminal-act exclusion in the proceedings before the district court and argued the exclusion on appeal. The Policy‘s criminal-act exclusion, if it applies, is thus an appropriate ground for affirmance.
The interpretation of an insurance contract is a question of law reviewed de novo. Principal Health Care of La., Inc. v. Lewer Agency, Inc., 38 F.3d 240, 242 (5th Cir. 1994). In this diversity case, Texas‘s rules of contract interpretation control our reading of the Policy. See Lyda Swinerton Builders, 877 F.3d at 609. “Under Texas law, the interpretation of insurance contracts is governed by the same rules that apply to contracts generally. The terms used in an insurance policy are to be given their ordinary and generally accepted meaning, unless the policy shows that the words were meant in a technical or different sense. The contract is to be considered as a whole, with each part given effect and meaning.” Canutillo Indep. Sch. Dist. v. Nat‘l Union Fire Ins. Co. of Pittsburgh, Pa., 99 F.3d 695, 700 (5th Cir. 1996) (citations omitted).
III.
At issue in this appeal are Century‘s duties to defend and indemnify Pastazios in the underlying suit brought by Doe. At the outset, although the parties raised several coverage issues, including the threshold issues of whether there was coverage under the Policy in the first place or whether Deari is an “insured” under the Policy, it is unnecessary for us to address those issues because we conclude that the criminal-act exclusion, addressed by all parties both in the proceedings below and in this appeal, applies and bars all coverage. We hold that Century had no duty to defend because Doe‘s complaint demonstrates that all of Doe‘s damages arose out
A.
We turn first to whether Century breached a duty to defend Pastazios. In determining an insurer‘s duty to defend, Texas courts follow the “eight-corners” rule, which “looks only to the four corners of the most recent complaint in the underlying action as well as the four corners of the insurance policy.” City of College Station, Tex. v. Star Ins. Co., 735 F.3d 332, 336 (5th Cir. 2013). In this case, the most recent complaint in the underlying action is Doe‘s fourth amended petition. “If the underlying complaint pleads facts sufficient to create the potential of covered liability, the insurer has a duty to defend the entire case, even if the allegations are demonstrably false, fraudulent, or groundless, and even if some of the injuries alleged are not covered or fall within the scope of an exclusion.” Id. (footnote omitted). “However, if the insurer can show that all of the alleged liability falls . . . within the scope of an exclusion, the insurer has no duty to defend.” Id.
The Policy excludes coverage for bodily injury “arising out of or resulting from a criminal act committed by any insured.” In Texas, “[w]hen an exclusion precludes coverage for injuries ‘arising out of’ described conduct, the exclusion is given a broad, general and comprehensive interpretation. A claim need only bear an incidental relationship to the described conduct for the exclusion to apply.” Scottsdale Ins. Co. v. Tex. Sec. Concepts & Investigation, 173 F.3d 941, 943 (5th Cir. 1999); see Sport Supply Grp., Inc. v. Columbia Cas. Co., 335 F.3d 453, 458 (5th Cir. 2003); Utica Nat‘l Ins. Co. of Tex. v. Am. Indem. Co., 141 S.W.3d 198, 203 (Tex. 2004).
In Texas, it is a Class A misdemeanor to give alcohol to a minor in the absence of her parents: “[A] person commits an offense if he purchases an alcoholic beverage for or gives or with criminal negligence makes available an alcoholic beverage to a minor.”
Here, Doe‘s complaint states that Doe was a minor: “[Doe] was underage.”2 The complaint also states that “Pastazios,” the restaurant itself, gave more than one alcoholic beverage to Doe: “Throughout the course of approximately . . . two hours, Pastazios . . . continued to encourage and provide Plaintiff with more and more alcoholic products from within and owned by Pastazios, despite [Doe] telling them she did not want anymore.” Additionally: “Pastazios then proceeded to provide [Doe] with yet another 2-ounce shot of 80 proof hard liquor.” And: “Despite her desire to go home safely, [Doe] was effectively detained as a direct result of being provided intoxicating products by Pastazios.” Thus, Doe‘s bodily injury arose out of or resulted from a criminal act committed by “Pastazios,” the insured. In fact, Doe‘s complaint is unequivocal that all of her injuries arose out of Pastazios’ provision of alcohol: “[Doe‘s] intoxication—as a result of the
Accordingly, coverage is precluded because all of Doe‘s injuries arose out of or resulted from Pastazios’ criminal act.3 Before concluding our discussion, however, we acknowledge that Appellants offer a number of arguments to the
contrary. None of them change the result, but we will briefly address the issues that have been raised.4
First, Appellants argue that the criminal-act exclusion should not apply because Doe‘s complaint did not specifically plead that Pastazios’ provision of alcohol was criminal. We cannot agree. Doe specifically pleaded that she was eighteen years old and “underage,” thus necessarily implying that she could not be served alcohol under the laws of Texas because of her age. And in any event, Appellants have cited no case law stating that, to trigger a criminal act exclusion, the plaintiff in the underlying suit must, in addition to describing actions that necessarily imply a crime, also specifically label those actions as criminal. Such a rule is incongruous with the plain language of the Policy and would create an artifice in criminal-act exclusions. Cf. James v. La. Laborers Health & Welfare Fund, 29 F.3d 1029, 1034 (5th Cir. 1994) (per curiam) (noting the “illogic” of such a rule in the context of an ERISA exclusion for injuries sustained during the course or commission of a felony).
Second, Appellants argue that Pastazios’ criminal act does not bar coverage because, they insist, the Policy specifically provides coverage for violations of alcohol statutes. They point to a subsection of the Policy‘s liquor-liability provision, and assert that it provides coverage for bodily injury resulting from the “[v]iolation of any statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages.” The problem for Appellants, however, is that this policy provision is not an endorsement but instead is a
See United Nat‘l Ins. Co. v. Hydro Tank, Inc., 497 F.3d 445, 451–52 (5th Cir. 2007) (“An exclusion . . . cannot affirmatively grant coverage that would not otherwise exist under the policy[.]“). We acknowledge that Appellants have argued at length that the Policy‘s “products-completed operations hazard” (“PCOH“) exception to the liquor-liability exclusion applies.6 But even if PCOH bars the liquor-liability exclusion, PCOH is not an affirmative grant of coverage. Further, PCOH has no bearing on the criminal-act exclusion, which is an independent coverage exclusion. Thus, even if PCOH applies, it does not affirmatively grant coverage for the violation of criminal statutes relating to alcoholic beverages when such violations also trigger the criminal-act exclusion. See id.; Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133–34 (Tex. 1994); Paradigm Ins. Co. v. Tex. Richmond Corp., 942 S.W.2d 645, 652 (Tex. App. 1997), writ denied (Nov. 20, 1997) (observing that a PCOH exception to a liquor-liability exclusion does not create coverage).
Third, Appellants argue that applying the criminal-act exclusion would render the Policy‘s liquor-liability endorsement meaningless. But this argument fails for the same reasons outlined in the immediately preceding paragraph. Appellants’ citation to Big Town Nursing Homes, Inc. v. Reserve Insurance Co., 492 F.2d 523, 525–26 (5th Cir. 1974), which held that an express endorsement may trump a criminal-act exclusion, does not save their case. As
we have noted, here, there is no express endorsement for the violation of criminal statutes; the Policy provision cited by Appellants constitutes an exclusion, not a coverage endorsement. Still further, Appellants’ objection fails because the liquor-liability endorsement is not rendered meaningless. As Century points out, the endorsement covers violations of statutes and ordinances that are not criminal in nature—i.e., statutory violations that do not also trigger the Policy‘s criminal-act exclusion. Indeed, the state court‘s Findings of Fact and Conclusions of Law, drafted by Doe‘s counsel without objection by Pastazios, identifies one such non-criminal statutory violation: “Pastazios violated Section 2.02(b) of the Texas Alcoholic Beverage Code,” which is the provision of Texas‘s Dram Shop statute imposing civil liability for damages resulting from serving alcohol to obviously intoxicated patrons. See Reeder v. Daniel, 61 S.W.3d 359, 362–63 (Tex. 2001) (observing that, while
In sum, we hold that the criminal-act exclusion precludes any duty to defend.
B.
1.
We turn next to Century‘s duty to indemnify, which is governed not by Doe‘s factual allegations but by the facts established in the underlying bench trial. See Burlington N. & Santa Fe Ry. Co. v. Nat‘l Union Fire Ins. Co. of Pittsburgh, Pa., 334 S.W.3d 217, 219 (Tex. 2011); D.R. Horton-Texas, Ltd. v. Markel Int‘l Ins. Co., Ltd., 300 S.W.3d 740, 744 (Tex. 2009). If, however, the trial court did not resolve factual issues related to coverage, the parties may offer additional evidence to determine whether the insurer has a duty to indemnify. Hartford Cas. Ins. Co. v. DP Eng‘g, L.L.C., 827 F.3d 423, 431 (5th Cir. 2016) (citing D.R. Horton, 300 S.W.3d at 744); Gilbane Bldg. Co. v. Admiral Ins. Co., 664 F.3d 589, 594 (5th Cir. 2001). Otherwise, courts could not resolve the duty to indemnify when the underlying trial leaves unresolved an issue irrelevant to liability but essential to coverage. Nat‘l Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp., 532 F.3d 398, 404 (5th Cir. 2008). Thus, in this case, we look primarily to the state court‘s official Findings of Fact and Conclusions of Law, which, we note again, were drafted by Doe‘s counsel with no objection from Pastazios. And to the extent there is any doubt about factual issues related to coverage, we look to the trial record, which is part of the record on appeal and to which both parties cite in support of their respective positions.
As we noted previously, the provision of alcohol to a minor is a criminal act. Here, Appellants concede in their briefs that it was established during trial that Pastazios gave alcohol to a minor: “[A]s the state court‘s Findings of Fact and Conclusions of Law . . . demonstrate, Doe proved that . . . she sustained bodily injury from [Pastazios‘] handling and distribution of alcoholic products to an intoxicated minor.” And, consistent with Doe‘s pleadings, the state court‘s Findings of Fact and Conclusions of Law states that Pastazios’ provision of alcohol to Doe was both a proximate and but-for cause of all of Doe‘s damages.7 Thus, it is undisputed that all of Doe‘s bodily injury arose out of or resulted from Pastazios’ criminal act of providing alcohol to a minor. These conceded facts trigger the criminal-act exclusion, to which we have earlier referred. Accordingly, Century has no duty to indemnify.
Although our analysis could properly end here, we address Appellants’ remaining counterargument.
2.
Appellants argue that the underlying trial did not establish that Pastazios committed a criminal act. Specifically, they argue that the mens rea component of the criminal statute was not established at trial. The criminal statute prohibits three distinct acts: (1) “purchas[ing]” an alcohol beverage for a minor; (2) “giv[ing]” an alcohol beverage to a minor; or (3) “with criminal negligence mak[ing] available” an alcoholic beverage to a minor.
First, we agree with Century that the state court‘s imposition of punitive damages against Pastazios necessarily satisfies the criminal-negligence element. In Texas, punitive damages may be awarded “only if” the plaintiff proves at trial that her harm resulted from (1) fraud, (2) malice, or (3) gross negligence.
Second, Appellants’ counterargument fails because Deari‘s culpable mental state is imputed to Pastazios under the vice-principal doctrine. In Texas, “[w]hen actions are taken by a vice-principal of a corporation, those acts may be deemed to be the acts of the corporation itself.” Bennett v. Reynolds, 315 S.W.3d 867, 883 (Tex. 2010) (quoting GTE Sw., Inc. v. Bruce, 998 S.W.2d 605, 618 (Tex. 1998)). “[A] vice-principal includes four classes of human agents: (a) Corporate officers; (b) those who have authority to employ, direct, and discharge servants of the master; (c) those engaged in the performance of nondelegable or absolute duties of the master; and (d) those to whom a master has confided the management of the whole or a department or division of his business.” Id. at 884. A vice-principal is established if the corporation‘s agent “used corporate authority over corporate employees, on corporate land, to [commit a tort] using corporate equipment.” Id. at 885.
Here, it was established in the underlying trial that Deari was the vice-principal of Pastazios. For example, it was agreed by all parties that Deari was the manager,
3.
In sum, because the record shows that all of Pastazios’ liability was caused by its own criminal act of furnishing alcohol to a minor, the criminal-act exclusion excuses Century from any duty to indemnify Pastazios.
IV.
The parties also dispute whether Appellants’ extra-contractual counterclaims against Century were waived due to Appellants’ failure to preserve them in their opening briefs on appeal. See Cinel v. Connick, 15 F.3d 1338, 1345 (5th Cir. 1994) (“An appellant abandons all issues not raised and argued in its initial brief on appeal.“). Appellants argue that they had no obligation to brief those issues on appeal, as those claims were dependent upon coverage under the Policy. Because the district court ruled there was no coverage, they argue, they had no duty to brief anything but the coverage issue on appeal.10
We do not need to rule on this matter. Because we find that all of Doe‘s claims against Pastazios are not covered under the Policy, and because Appellants concede that all of their extra-contractual claims are dependent upon a threshold finding of coverage, those claims fail.
V.
To sum up: We hold that the criminal-act exclusion bars all coverage for Century‘s duties to both defend and indemnify Pastazios in the underlying suit brought by Jane Doe. The district court‘s grant of summary judgment in favor of Century is
AFFIRMED.
Notes
Liquor Liability Exclusion
c. Liquor Liability
“Liquor Liability” is defined as “Bodily injury” . . . for which any insured may be held liable by reason of: . . .
c. Violation of any statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages.
We have neither a duty to defend nor a duty to indemnify any insured for any claim or suit, and this insurance does not apply if any proximate or contributing cause of an “occurrence” arises out of “liquor liability.”