Warren E & P, Inc. v. Gotham Insurance Co.

368 S.W.3d 633, 2012 WL 1339485, 2012 Tex. App. LEXIS 3006

• Court: Court of Appeals of Texas
• Decided: April 18, 2012
• Docket: No. 08-10-00198-CV
• Status: Published

Opinions

OPINION

GUADALUPE RIVERA, Justice.

This is the third appeal that has arisen from a dispute relating to the payment of insurance proceeds following an oil well blow-out.¹ The first appeal was resolved in Gotham Ins. Co. v. Petroleum Development Corp., No. 04-01-00375-CV, 2003 WL 21696625 (Tex.App.-San Antonio, July 23, 2003, pet. denied) (mem. op.) (Gotham I). The second appeal was resolved in Warren E & P, Inc., f/k/a Petroleum Development Corp. d/b/a Pedeco, Inc., et al. v. Gotham Ins. Co., No. 04-05-00186-CV, 2006 WL 1080246 (Tex.App.-San Antonio, April 26, 2006, pet. denied) (mem. op.) (Gotham I). In this third appeal, Warren E & P, Inc., f/k/a Petroleum Development Corporation d/b/a Pedeco, Inc., Warren Resources, Inc., and Oil Technology Fund 1996 — Series D, L.P., appeal from the trial court’s summary judgment in favor of Gotham Insurance Company. Gotham cross-appeals. We reverse.

BACKGROUND

In April of 1996, Pedeco, Inc., a New Mexico oil and gas concern, decided to operate in Texas and sought assistance from a Texas company, R.W. Dirks Petroleum Engineers, Inc. Pedeco and Dirks entered into a business agreement, under which Dirks agreed to serve as the record operator of Pedeco’s Texas wells until Pe-deco obtained its official Texas registration. The agreement also charged Dirks with obtaining well-control insurance.

In May of 1996, Dirks obtained from Gotham Insurance Company a $2,000,000 well-control insurance policy. Dirks was the named insured (or “assured”) in the policy. Under the terms of the policy, Gotham agreed to:

[Reimburse the Assured for actual costs and/or expenses incurred by the Assured [in proportion to the Assured’s ownership interest] (a) in regaining or attempting to regain control of any and all well(s) insured hereunder which get(s) out of control ... and (b) in extinguishing or attempting to extinguish ... fires ... which may endanger the well(s) insured hereunder.

The insurance policy also contained a “care, custody, and control” endorsement, under which Gotham agreed to:

[C]over the Assured’s legal or contractual liability as oil lease operator(s) (or Co-Venturer(s) where applicable) [in proportion to the Assured’s ownership interest] for physical loss or damage to, or expenses of salvage of, oil field equipment ... leased or rented by the Assured or in its care, custody and control at the site.

In December of 1996, Pedeco entered into a joint operating agreement (“JOA”) with Warren Resources, Inc. (“WRI”), a New York company that solicited investors to create limited partnerships to fund oil well drilling and then acted as the limited partnerships’ managing general partner. Also party to the JOA was one of WRI’s limited partnerships, Oil Technology Fund 1996 — Series D, L.P. (“the Fund”). According to Norman Swanton, WRI’s chief executive officer, the Fund took “the responsibility to drill the wells,” while WRI and Pedeco “agree[d] to supply the tangible equipment and costs on those wells.” Among the oil and gas leases listed in the JOA was the Halff-Oppenheimer Well (“H & O Well”) in Frio County.

In January of 1997, Dirks asked Gotham to add Pedeco as an additional insured in the well-control insurance policy because, according to Dirks, Pedeco owned a non-operating working interest in 22 of Dirks’ wells. Based on that information, Gotham added an endorsement to the policy naming Pedeco as an additional insured. Unlike Dirks and Pedeco, WRI and the Fund did not obtain well-control insurance.

On July 21, 1997, Pedeco filed a drilling permit with the Texas Railroad Commission, listing Pedeco as the operator of record of the H & O Well. On July 27, 1997, the H & O Well blew out and caught fire, destroying Strieker Drilling Company’s drilling rig, third-party contractors’ equipment, and neighboring landowners’ crops and fences. That same day, Gotham received notice of the blow-out and assigned adjusters from Rush Johnson Associates to investigate. Rush Johnson later reported to Gotham that the losses from the blowout would exceed the policy limits. Rush Johnson also reported to Gotham that Pe-deco representatives had advised one of the Rush Johnson adjusters that Pedeco owned a 100 percent working interest in the H & O Well and was operating it at the time of the blow-out. That representation regarding Pedeco’s 100 percent working interest was repeated in 1997 in the sworn proofs of loss submitted by Dirks and Pedeco to Gotham. Based on those and other representations, Gotham’s attorneys recommended that it pay Pedeco’s claims.

To facilitate payment, the parties entered into an escrow agreement, under which Gotham paid the policy benefits into Rush Johnson’s escrow account “to be held in escrow for R.W. Dirks Petroleum Engineers, Inc. and Pedeco, Inc. for payment direct to vendors of adjusted and approved claim amounts.”

In March or April of 1998, an adjuster from Rush Johnson advised Gotham’s attorneys that Strieker Drilling Company and several third-party contractors had filed a lawsuit (“the Frio County lawsuit”) alleging that Pedeco had not acted as a reasonably prudent operator and had used substandard blow-out prevention equipment. After learning of the allegations in the Frio County lawsuit, Gotham commenced an investigation, ultimately stopped payment on Pedeco’s unpaid claims, notified Pedeco of its decision, and then, in May of 1999, intervened in the Frio County lawsuit with claims against Pedeco, WRI, and the Fund, seeking equitable restitution of the insurance benefits paid on behalf of Pedeco. Pedeco counterclaimed for breach of contract, bad faith, and violations of the Texas Insurance Code.

Each of the parties moved for summary judgment on each of the claims and counterclaims. The trial court granted summary judgment in favor of Pedeco, WRI, and the Fund on Gotham’s reimbursement claim, in favor of Gotham on Pedeco’s counterclaims for bad faith and violations of the Texas Insurance Code, and in favor of Pedeco on its counterclaim for breach of contract, rendering judgment in Pedeco’s favor for $271,741.88, attorney’s fees, and interest. Gotham appealed, and Pedeco cross-appealed. The Fourth Court of Appeals affirmed the trial court’s summary judgment in favor of Gotham on Pedeco’s counterclaims for bad faith and violations of the Texas Insurance Code, reversed the trial court’s summary judgment in all other respects, and remanded the case for further proceedings. The Fourth Court explained its decision, in part, as follows:

Gotham argues the trial court erred in denying its motion for summary judgment on Pedeco’s breach of contract claim and instead granting Pedeco’s, because the summary judgment record conclusively establishes that Pedeco did not sustain an actual loss from the blowout of the H & 0 Well and therefore was not entitled to recover under the indemnity policy. We agree.

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[The summary judgment evidence conclusively shows that] although Pede-co may have paid blowout costs, the funds were advanced to Pedeco by WRI; and WRI was not reimbursed by Pedeco for any of the funds advanced. Consequently, any loss that Pedeco suffered as a result of the blowout was made good by WRI.

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We therefore hold that, because Pede-co did not suffer a “legal loss,” it was not entitled to benefits under the well control policy.

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Because Pedeco was not entitled to policy benefits, Gotham argues it is entitled to restitution of the policy benefits it paid under an erroneous belief or mistake of fact. We again agree.

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Because the evidence conclusively establishes that Gotham paid Pedeco’s claims under the mistaken belief that the claims were covered by the [well-control] indemnity policy, and because there is no evidence tending to establish that restitution would be inequitable, we hold Gotham is entitled to restitution of the benefits paid to Pedeco. Therefore, the trial court erred in denying Gotham’s motion for summary judgment on its restitution claim against Pedeco.

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Gotham also argues the trial court erred in denying its motion for summary judgment on its restitution claims against WRI and the Fund, because Gotham’s payments extinguished the valid claims of vendors and thereby discharged WRI and the Fund from debts [they] owed under the JO A; consequently, Gotham argues, WRI [and the Fund were] unjustly enriched by Gotham’s payments. We agree.

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We affirm the trial court’s summary judgment against Pedeco and in favor of Gotham on Pedeco’s counterclaims for bad faith and violations of the Texas Insurance Code. In all other respects, the trial court’s judgment is reversed. We render judgment in favor of Gotham that Pedeco take nothing on its breach of contract counterclaims. Gotham asks that we render judgment in its favor on its restitution claims as well. However, it gives no particulars; and the judgment that should have been rendered is not at all obvious. We therefore exercise our discretion to simply remand Gotham’s restitution claims to the trial court for further proceedings consistent with this opinion.

Gotham I, 2008 WL 21696625, at *3-8.

On remand, Gotham filed a “motion to enter final judgment,” seeking $1,823,156.27 in restitution plus interest, and a motion for attorney’s fees. The trial court, without receiving additional evidence, granted both of Gotham’s motions. Warren E & P, Inc. (fik/a Pedeco), WRI, and the Fund appealed. The Fourth Court reversed the portion of the trial court’s judgment awarding restitution in the amount of $1,823,156.27 plus interest, and remanded the case to the trial court with instructions that it proceed with a new trial on the amount of restitution to be awarded to Gotham. Gotham II, 2006 WL 1080246, at *3. In its opinion, the Fourth Court noted that the parties were in dispute as to the amount that Gotham, as opposed to Gotham’s underwriters, actually paid in policy benefits. Id. at *2. The Fourth Court also reversed the portion of the trial court’s judgment awarding attorney’s fees to Gotham and rendered judgment that Gotham take nothing in that regard. Id. at *3.

On the second remand, Gotham filed a motion for summary judgment on the amount owed in restitution, as did Warren E & P, Inc., WRI, and the Fund. The trial court granted Gotham’s motion and denied the motion filed by Warren E & P, Inc., WRI, and the Fund. The trial court’s judgment stated in relevant part:

The court hereby RENDERS judgment for Plaintiff Gotham Insurance Company, and ORDERS that:

1. Plaintiff, Gotham Insurance Company, recover damages from Defendants Warren E & P, Inc., f/k/a Petroleum Development Corporation d/b/a Pedeco, Inc., Warren Resources, Inc., and Oil Technology Fund 1996 — Series D, L.P., in the sum of $1,823,156.27, prejudgment interest on the sum of $1,823,156.27 at the annual rate of 5.00% running from the date Gotham filed suit on May 21, 1999 until the day before judgment is rendered in the sum of $989,497.61, and taxable court costs in the amount of $13,127.32.

THE ISSUES

In their first issue, Appellants Warren E & P, Inc., WRI, and the Fund argue that the trial court erred in granting Gotham’s motion for summary judgment because, contrary to the opinions in Gotham I and Gotham II, “Texas law [does] not recognize any equitable right to reimbursement for an insurer that fails to obtain a contractual right to reimbursement.” Appellants cite Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42 (Tex.2008), in support of their argument.

Under the law-of-the-case doctrine, a court of appeals is ordinarily bound by its initial decision if, as in this case, there is a subsequent appeal. Briscoe v. Goodmark Corp., 102 S.W.3d 714, 716 (Tex.2003). That doctrine is based on public policy and is aimed at putting an end to litigation. Id. However, a court of appeals is not bound by its initial decision if there has been a change in the governing law. City of Dallas v. Jones, 331 S.W.3d 781, 785 (Tex.App.-Dallas 2010, pet. dism’d).

As we noted above, the Fourth Court, in Gotham I, held that Gotham was entitled to equitable restitution from Pede-co, WRI, and the Fund because those three entities were unjustly enriched at Gotham’s expense. The Fourth Court considered the rule announced in TAC v. Matagorda County, 52 S.W.3d 128 (Tex.2000), that abolished the equitable right of restitution of insurance companies against their insureds but reasoned that Matagor-da did not apply to the issues before it. However, in Gotham I, the Fourth Court did not have the benefit of the Texas Supreme Court’s analysis in Frank’s Casing, which clarified the holding in Matagorda expressly rejecting the remedy of equitable reimbursement and refusing to recognize any exceptions to the rule. The Supreme Court reasoned that distinctions in the facts raised did not alleviate the contractual based concerns that drove the Court’s decision in Matagorda eliminating an insurer’s equitable right to reimbursement. The Court expressly held that an insurer can seek reimbursement only when that right is included in the policy or there is a clear and unequivocal contractual agreement reached to that effect. As a matter of law, an insurer may not seek equitable restitution against an insured for erroneous payment of a non-covered claim if the insurance policy does not provide for such a remedy. Frank’s Casing, 246 S.W.3d at 45-47. The Court explained that the rights of the parties to the insurance policy must be found in the policy itself, and if the insurer wants the right to reimbursement for erroneous payment of non-covered claims, the insurer must include such a right in the policy, which might yield a lower premium than a policy that does not contain such a right. Id. at 46, 50. To recognize an equitable right to reimbursement, where the policy does not provide for that right, would require us to rewrite the parties’ contract or add to its language. Id. at 50.

In the instant case, Pedeco’s policy with Gotham did not provide for a right to reimbursement for payment of non-covered claims. Therefore, Gotham has no right to reimbursement from Warren E & P, Inc. (f/k/a Pedeco) for payment of the non-covered claims in question.

Gotham seeks reimbursement from WRI and the Fund under the theory of unjust enrichment, claiming that Gotham’s payments extinguished the valid claims of vendors and thereby discharged WRI and the Fund from debts they owed. Where, as here, the parties to an insurance contract have spelled out their respective remedies and the policy addresses reimbursement issues, equity cannot give Gotham rights of recovery that the parties did not agree to in their contract. Frank’s Casing restated the bright-line rule disallowing reimbursement on an equitable unjust enrichment theory because insurers are in a superior position to evaluate the risks stemming from a coverage dispute and can expressly allocate that risk by delineating reimbursement rights in their policies. Gotham could have included a clause in the policy that would have provided for credit against loss payments to the insured in any amounts due to Pedeco by third parties not responsible for the loss. Prevailing Texas Supreme Court authority prohibits granting Gotham an equitable right of reimbursement that does not exist in the insurance policy. The Supreme Court has recognized the “ ‘strong public policy in favor of preserving the freedom of contract’ ” and has warned that courts “‘should not by judicial fiat insert nonexistent language ... into parties’ agreed-to contracts.’ ” Id. at 51 (quoting Fortis Benefits v. Cantu, 234 S.W.3d 642, 649 n. 41 (Tex.2007)). Therefore, Gotham has no right to reimbursement from WRI and the Fund for unjust enrichment.

Given our disposition of Appellants’ first issue, we need not reach their second and third issues or Gotham’s cross-issue.

CONCLUSION

We reverse the judgment of the trial court and render judgment that Gotham take nothing in its claims against Warren E & P, Inc., WRI, and the Fund.

ANTCLIFF, J., dissenting.

1 . The record reflects that the Texas Supreme Court transferred this case from the Fourth Court of Appeals to this Court. See Tex. Gov’t Code Ann. § 73.001 (West 2005).