Opinion
MO:19-CV-00048-DC
2020-07-24
RLI INSURANCE COMPANY, Plaintiff, v. 2 G ENERGY SYSTEMS, LLC, Defendant.
Richard L. Smith, Jr., Gregory K. Winslett, Quilling, Selander, Lownds, Winslett & Moser, P.C., Dallas, TX, for Plaintiff.
Richard L. Smith, Jr., Gregory K. Winslett, Quilling, Selander, Lownds, Winslett & Moser, P.C., Dallas, TX, for Plaintiff.
ORDER GRANTING MOTION FOR DEFAULT JUDGMENT
DAVID COUNTS, UNITED STATES DISTRICT JUDGE
BEFORE THE COURT is Plaintiff RLI Insurance Company's (RLI) Motion for Default Judgment filed on January 10, 2020. (Doc. 20). RLI seeks a default judgment, declaring that RLI Policy No. ILM0707648 issued to 2 G Energy Systems, LLC (2G Energy) is void ab initio and that 2G Energy's claim for the alleged theft of its lay flat hose is excluded from coverage under the terms of the RLI Policy, and thus, RLI does not owe any payment to 2G Energy. Id. at 1. After due consideration, the Court GRANTS RLI's Motion for Default Judgment. (Doc. 20).
I. BACKGROUND
This case stems from an insurance coverage dispute between RLI, the insurer, and 2G Energy, the insured. (Doc. 1). On February 20, 2019, RLI filed its Complaint, including the following facts and allegations. Id.
2G Energy is a Midland, Texas oil and gas company engaged in the business of leasing equipment. Id. at 3. One type of equipment 2G Energy leases is lay flat hose, which is used to transfer water during fracking operations. Id. The year before the RLI inland marine policy at issue in this case was created, the Hanover Insurance Group issued an insurance policy to 2G Energy that was effective from September 6, 2017 to September 6, 2018 (the Hanover Policy). Id. On May 1, 2018, 2G Energy reported a loss under the Hanover Policy for the theft of lay flat hose from a job site that 2G Energy alleged occurred on or about February 28, 2018. Id. Hanover paid 2G Energy's claim for the reported theft but chose not to renew its policy with 2G Energy. Id.
2G Energy began shopping for a new inland marine policy to take effect after the Hanover Policy expired in September 2018. Id. In July 2018, RLI received from 2G Energy, through its agent, an application for inland marine insurance to be effective starting September 6, 2018. Id. In its transmittal of the application, the broker informed RLI that Hanover was the current carrier, that Hanover paid a claim for the theft of lay flat hose, and that Hanover was not renewing the policy. Id. The broker also informed RLI that it had requested from 2G Energy preventative measures to avoid a similar loss in the future. Id. RLI did not provide a quote until 2G Energy identified its preventative measures. Id. On or about August 13, 2018, RLI received an email with a statement from Carl Seawright (Mr. Seawright), a member and manager of 2G Energy, that 2G Energy's "[p]reventative measures in the future will be acquiring strap on GPS wafers that will be place[ed] on [the] hose and can be tracked if ever moved." Id. at 3–4. RLI claims that, during an examination under oath, Mr. Seawright admitted that this statement was made by him and that he made it in response to RLI's question specifically asking what preventative measures 2G Energy was taking to keep another theft of lay flat hose from happening. Id. at 4.
On August 15, 2018, after receiving and relying on 2G Energy's assurance that it would strap GPS tracking devices on its lay flat hose as a preventative measure, RLI offered 2G Energy a quote for inland marine insurance. Id. On September 5, 2018, RLI received 2G Energy's request to bind coverage effective September 6, 2018. Id. RLI bound coverage and issued to 2G Energy Inland Marine Insurance Policy No. ILM0707648, effective September 6, 2018 to September 6, 2019 (the RLI Policy). Id. Despite 2G Energy's representations during the insurance application process that it would strap GPS tracking devices on its lay flat hose, 2G Energy never did. During his examination under oath, Mr. Seawright admitted that 2G Energy never even tried to use GPS tracking devices on its lay flat hose. Id. He further admitted that GPS tracking devices cannot be affixed to lay flat hose. Id. He also acknowledged that he never informed his insurance agent, RLI, or anyone else that 2G Energy did not implement the preventative measures it had promised. Id.
In early October 2018, 2G Energy learned of a possible new project that would require the use of lay flat hose in Reeves County, Texas. Id. at 5. On or about October 9, 2018, 2G Energy transported 64 reels of lay flat hose (approximately eight miles worth) to the expected job site near Pecos in Reeves County. Id. 2G Energy dropped off this equipment at the Pecos site when nobody was there to receive or take custody of its property. Id. 2G Energy then simply left the hose unprotected for the better part of a week. Id. On or about October 16, 2018, 2G Energy learned that the Pecos project was not going forward. Id. 2G Energy went back to the site to pick up its reels of lay flat hose and upon arrival discovered it was gone. Id. 2G Energy searched the area for the missing hose but found nothing. Id. On or about October 30, 2018, 2G Energy reported the incident to the Reeves County Sherriff's Office, who likewise investigated and was unable to find any physical evidence indicating what happened to 2G Energy's missing hose. Id. On or about November 20, 2018, 2G Energy made a claim under the RLI Policy for approximately $553,197.60 for the missing lay flat hose. Id.
The RLI Policy covers "direct physical loss caused by a covered peril" to 2G Energy's property "described on the ‘schedule of coverages.’ " Id. The RLI Policy, in relevant part, contains the following provision regarding misrepresentations and concealment:
5. Misrepresentation, Concealment, Or Fraud – This coverage is void as to "you" and any other insured if, before or after a loss:
a. "you" or any other insured have willfully concealed or misrepresented:
1) a material fact or circumstance that relates to this insurance or the subject thereof; or
2) "your" interest herein; or
b. there has been fraud or false swearing by "you" or any other insured with regard to a matter that related to this insurance or the subject thereof.
Id. at 5–6. The RLI Policy also contains the following exclusions:
2. "We" do not pay for loss or damage that is caused by or results from one or more of the following:
...
g. Missing Property—"We" do not pay for missing property where the only proof of loss is unexplained or mysterious disappearance of covered property, or shortage of property discovered on taking inventory, or any other instance where there is no physical evidence to show what happened to the covered property.
This exclusion does not apply to covered property in the custody of a carrier for hire.
...
k. Voluntary Parting—"We" do not pay for loss or damage caused by or resulting from voluntary parting with title to or possession of any property because of any fraudulent scheme, trick, or false pretense.
Id. at 6.
On May 14, 2019, RLI filed the executed summons. (Doc. 6). The return of service indicates that Jason West executed service on May 10, 2019, by delivering a true copy of the summons and complaint for declaratory relief with exhibits to Mr. Seawright as the registered agent of 2G Energy at the address of 2218 Green Meadows Circle, McAlester, Oklahoma, 74501. Id. 2G Thus, 2G Energy's responsive pleading was due on May 31, 2019. See Fed. R. Civ. P. 12(a). When 2G Energy failed to file a responsive pleading by the deadline, RLI moved for entry of default. (Doc. 7). The Court issued a show-cause order requiring 2G Energy to show cause in writing on or before Monday, August 12, 2019, why entry of default and default judgment on RLI's Complaint should not be granted. (Doc. 8).
2G Energy did not comply with the Court's order. Consequently, the Clerk of the Court entered default against 2G Energy. (Doc. 9). However, because the order to show cause was never mailed to 2G Energy, the Court ordered that the entry of default be stricken and that 2G Energy be sent the Court's order to show cause by certified mail/return receipt requested. (Doc. 10). The order to show cause was mailed to 2G Energy at the address where the summons was served and the address where the order striking the Clerk's entry of default was sent and received. Id. Nonetheless, 2G Energy did not file a responsive pleading. Consequently, on November 22, 2019, the Court issued a final show cause order, providing 2G Energy ten (10) days from the date of service of the order to show why entry of default and default judgment on RLI's Complaint should not be entered. (Doc. 15). The final order to show cause was mailed to the same addresses the first order to show cause was sent to. (Doc. 16).
2G Energy did not file a response to the Court's final order to show cause. Thus, on January 2, 2020, the Clerk of the Court entered default against 2G Energy. (Doc. 18). RLI moved for default judgment on January 10, 2020. (Doc 20).
II. LEGAL STANDARD
Rule 55 of the Federal Rules of Civil Procedure authorizes the Court to enter a default judgment against a defendant who has failed to plead or otherwise defend a suit. See Fed. R. Civ. P. 55(b). "Default judgments are a drastic remedy, not favored by the Federal Rules and resorted to by courts only in extreme situations." Sun Bank of Ocala v. Pelican Homestead & Savs. Ass'n , 874 F.2d 274, 276 (5th Cir. 1989). In addition, "[a] party is not entitled to a default judgment as a matter of right, even where the defendant is technically in default." Ganther v. Ingle , 75 F.3d 207, 212 (5th Cir. 1996). Rather, the district court "has the discretion to decline to enter a default judgment." Lindsey v. Prive Corp. , 161 F.3d 886, 893 (5th Cir. 1998).
Courts have developed a three-part test to determine whether a default judgment should be entered. First, the court considers whether the entry of default judgment is procedurally warranted. Nasufi v. King Cable Inc. , 2017 WL 6497762, * 1 (N. D. Tex. 2017) (citing Lindsey , 161 F.3d at 893 ). The factors relevant to this inquiry include:
(1) whether material issues of fact exist; (2) whether there has been substantial prejudice; (3) whether the grounds for default are clearly established; (4) whether the default was caused by a good faith mistake or excusable neglect; (5) the harshness of a default judgment; and (6) whether the court would think itself obliged to set aside the default on the defendant's motion.
Lindsey , 161 F.3d at 893.
Second, the court assesses the substantive merits of the plaintiff's claims to determine whether there is a sufficient basis in the pleadings for the judgment. See Nishimatsu Constr. Co., Ltd. v. Hous. Nat'l Bank , 515 F.2d 1200, 1206 (5th Cir. 1975). In doing so, courts are to assume that due to its default, defendant admits all well-pleaded facts in the plaintiff's complaint. Id. Third, the court determines what form of relief, if any, the plaintiff should receive in the case. Id. Normally, damages are not to be awarded without a hearing or a demonstration by detailed affidavits establishing the necessary facts. See United Artists Corp. v. Freeman , 605 F.2d 854, 857 (5th Cir. 1979). However, if the amount of damages can be determined with mathematical calculation by reference to the pleadings and supporting documents, a hearing is unnecessary. See James v. Frame , 6 F.3d 307, 310 (5th Cir. 1993).
III. DISCUSSION
RLI moves for default judgment alleging 2G Energy misrepresented that it was placing GPS tracking devices on its lay flat hose to obtain coverage and that there is no physical evidence to show what happened to 2G Energy's missing lay flat hose. (Doc. 1 at 7).
A. Court's Jurisdiction
As an initial matter, the Court considers whether it has jurisdiction. A party seeking a default judgment must make a prima facie showing of jurisdiction in the pleadings and records before a court will enter default judgment. See Sys. Pipe & Supply, Inc. v. M/V VIKTOR KURNATOVSKIY , 242 F.3d 322, 325 (5th Cir. 2001). RLI requests a declaratory judgment. (Doc. 1). 28 U.S.C. § 2201(a) authorizes federal courts to "declare the rights and other legal relations of any interested party seeking such declaration." However, the power to issue a declaratory judgment is limited to "a case of actual controversy within [a court's] jurisdiction." 28 U.S.C. § 2201(a). Accordingly, the Court must determine whether it has subject-matter jurisdiction and whether an actual controversy exists.
28 U.S.C. § 2201(a) offers a remedy but does not supply jurisdiction. See Medical Components, Inc. v. Osiris Med., Inc. , 226 F. Supp. 3d 753, 760 (W.D. Tex. 2016) ; see also Okpalobi v. Foster , 244 F.3d 405, 434 (5th Cir. 2001) (en banc) ("It is familiar doctrine that the Declaratory Judgment Act does not itself grant federal jurisdiction."). Consequently, there must be an independent basis for invoking either federal-question jurisdiction or diversity jurisdiction. See Red Lobster Inns of Am., Inc. v. New England Oyster House, Inc. , 524 F.2d 968, 968 (5th Cir. 1975).
Federal courts have jurisdiction over cases arising under state law if the parties are citizens of different states and the amount in controversy exceeds $75,000. See 28 U.S.C. § 1332. "In actions seeking declaratory or injunctive relief, it is well established that the amount in controversy is measured by the value of the object of the litigation." Hunt v. Wash. State Apple Advert. Comm'n , 432 U.S. 333, 347, 97 S.Ct. 2434, 53 L.Ed.2d 383 (1977). "When an insurer seeks a declaratory judgment regarding the coverage provided by an insurance policy, the object of the litigation is the policy and the value of the right to be protected is plaintiff's potential liability under that policy." St. Paul Reinsurance Co., Ltd. v. Greenberg , 134 F.3d 1250, 1253 (5th Cir. 1998) (quoting Allstate Ins. Co. v. Hilbun , 692 F. Supp. 698, 700 (S.D. Miss. 1988) ) (internal quotation marks omitted). The current facts indicate that RLI is a citizen of Illinois, 2G Energy is a citizen of Texas and Oklahoma, and that 2G Energy made a claim under the RLI Policy in the amount of approximately $553,197.60 for the missing lay flat hose. (Doc. 1 at 5). Accordingly, the Court concludes there is complete diversity of citizenship, the amount in controversy requirement is satisfied, and, therefore, there is subject-matter jurisdiction under 28 U.S.C. § 1332.
Next, the Court must determine if this case presents an actual controversy. A declaratory action is ripe and justiciable if an actual controversy exists; there is an actual controversy "where ‘a substantial controversy of sufficient immediacy and reality exists between parties having adverse legal interests.’ " Shields v. Norton , 289 F.3d 832, 835 (5th Cir. 2002) (quoting Orix Credit All., Inc. v. Wolfe , 212 F.3d 891, 896 (5th Cir. 2000) ). Whether an actual controversy exists is determined on an ad hoc basis, but a "specific and concrete" threat of litigation can establish a justiciable controversy. Lower Colo. River Auth. v. Papalote Creek II, L.L.C. , 858 F.3d 916, 924 (5th Cir. 2017). Courts "look to the practical likelihood that a controversy will become real." Shields , 289 F.3d at 835. The evidence in the record indicates RLI and 2G Energy disagreed about whether the lay flat hose was covered under the insurance policy and whether the insurance policy is enforceable. There is a practical likelihood of 2G Energy asserting breach-of-contract claims against RLI. On the facts of this case, the Court concludes there is an actual controversy.
Having concluded that this case presents an actual controversy within the Court's jurisdiction, the Court turns to the three-part test to determine whether a default judgment should be entered.
B. Whether the Entry of Default Judgment is Procedurally Warranted
The first step is to review RLI's motion in light of the six Lindsey factors to determine whether default judgment is procedurally warranted.
First, 2G Energy has not filed any responsive pleadings. Consequently, there are no material facts in dispute. See Lindsey , 161 F.3d at 893 ; see also Nishimatsu Constr. , 515 F.2d at 1206 (noting the "defendant, by his default, admits the plaintiff's well-pleaded allegations of fact"). Second, 2G Energy's failure to respond threatens to bring the entire process to a halt, effectively prejudicing RLI's interest. See Lindsey , 161 F.3d at 893. Third, grounds for default are "clearly established" since 2G Energy has not responded to the summons, the entry of default, or the motion for default judgment. See J.D. Holdings, LLC v. BD Ventures, LLC , 766 F. Supp. 2d 109, 113 (D.D.C. 2011) (finding default judgment appropriate "if defendants are ‘totally unresponsive’ and the failure to respond is ‘plainly willful, as reflected by the parties’ failure to respond either to the summons and complaint, the entry of default, or the motion for default judgment’ "). Fourth, there is no evidence before the Court to indicate 2G Energy's silence is the result of a "good faith mistake or excusable neglect." See Lindsey , 161 F.3d at 893. Fifth, RLI only seeks declaratory judgment that the RLI Policy is void ab initio and that the alleged theft of 2G Energy's lay flat hose is excluded from coverage under the terms of the RLI Policy. Id. The Court finds it would not be an abuse of discretion to award the requested relief and that this factor does not mitigate against the entry of a default judgment. Finally, the Court is not aware of any facts that would give rise to "good cause" to set aside the default if challenged by 2G Energy. Lindsey , 161 F.3d at 893.
Consequently, the Court finds default judgment is procedurally warranted.
C. Whether there is a Sufficient Basis in the Pleadings for the Judgment
Due to the entry of default, 2G Energy is deemed to have admitted the allegations outlined in the Complaint. See Nishimatsu Constr. , 515 F.2d at 1206. Nonetheless, the Court must review the pleadings to determine whether they provide a sufficient basis for RLI's claim for relief. See id. In conducting this analysis, the Fifth Circuit has looked to Rule 8 case law for guidance:
Rule 8(a)(2) requires a pleading to contain "a short and plain statement of the claim showing that the pleader is entitled to relief." The purpose of this requirement is "to ‘give the defendant fair notice of what the ... claim is and the grounds upon which it rests.’ " The factual allegations in the complaint need only "be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." "[D]etailed factual allegations" are not required, but the pleading must present "more than an unadorned, the-defendant-unlawfully-harmed-me accusation."
Wooten v. McDonald Transit Assocs., Inc. , 788 F.3d 490, 498 (5th Cir. 2015) (internal citations and footnote omitted) (alteration in original).
"To avoid a policy because of the misrepresentation of the insured, an insurer must show (1) the making of a representation, (2) the falsity of the representation, (3) reliance upon the representation by the insurer, (4) the intent to deceive on the part of the insured in making the representation, and (5) the materiality of the representation." Essex Ins. Co. v. Redtail Prods., Inc. , No. A3:97-CV-2120-D, 1999 WL 627379, at *5 (N.D. Tex. Aug. 17, 1999), aff'd sub nom. 213 F.3d 636 (5th Cir. 2000) (citations omitted). "An insured's misrepresentation during the process of obtaining insurance also implicates Texas statutory law." Id. Under the Texas Insurance Code, "the insurer bears the burden of proving the insured made the misrepresentation intentionally." Id. (citation omitted).
RLI has shown that it may void the RLI Policy. It specifically alleged that 2G Energy misrepresented that it would strap on the lay flat hose GPS wafers so that it can be tracked if ever moved as a preventative measure. (Doc. 1). Further, RLI contends that during an examination under oath, Mr. Seawright admitted that the statement regarding the preventative measures 2G Energy was implementing was made by him and that he made it in response to RLI's question specifically asking what preventative measures 2G Energy was taking to keep another theft of lay flat hose from happening. Id. Thereafter, Mr. Seawright admitted that 2G Energy never even tried to use GPS tracking devices on its lay flat hose and that GPS tracking devices cannot be affixed to lay flat hose. Id. He also acknowledged that he never informed RLI that 2G Energy did not implement the preventative measures it had promised. Id. RLI claims it relied on the misrepresentation that 2G Energy would place GPS tracking devices on the lay flat hose to issue a policy and that the misrepresentation was material because due to 2G Energy's history with missing lay flat hoses, it would not have issued the RLI Policy without appropriate preventative measures. Id.
Moreover, RLI has also shown that the lay flat hose is not covered under the RLI Policy because its missing property provision states that RLI does not "pay for missing property where the only proof of loss is unexplained or mysterious disappearance of covered property, or shortage of property discovered on taking inventory, or any other instance where there is no physical evidence to show what happened to the covered property." Id. Plaintiff specifically contends that two investigations, one conducted by 2G Energy and the other by the Reeves County Sherriff's Office, resulted in no evidence concerning the location of the missing hose or regarding what might have happened to it. Id.
D. Form of Relief
The burden is on RLI to establish its entitlement to recovery. Freeman , 605 F.2d at 857. RLI asks the Court for declaratory judgment declaring that RLI Policy No. ILM0707648 issued to 2G Energy is void ab initio and, in any event, that 2G Energy's claim for the alleged theft of its lay flat hose is excluded from coverage under the terms of the RLI Policy, and thus, RLI does not owe any payment to 2G Energy. (Doc. 20). The Court concludes that such a declaration is appropriate and will enter judgment to that effect.
IV. CONCLUSION
Based on the foregoing, the Court GRANTS RLI's Motion for Default Judgment. (Doc. 20).
It is so ORDERED .