Opinion
MO:17-CV-183-DC
2020-05-12
RLI INSURANCE COMPANY, Plaintiff, v. CALIENTE OIL, INC., Defendant.
C. Jeffrey Price, Hedrick Kring, PLLC, Gregory K. Winslett, Richard L. Smith, Jr., Tammy L. Clary, Quilling, Selander, Cummiskey & Lownds, P.C., Dallas, TX, for Plaintiff. Marion Sanford, III, William Patrick Lane, William Griffis, McCleskey, Harriger, Brazill & Graf, L.L.P., Lubbock, TX, for Defendant.
C. Jeffrey Price, Hedrick Kring, PLLC, Gregory K. Winslett, Richard L. Smith, Jr., Tammy L. Clary, Quilling, Selander, Cummiskey & Lownds, P.C., Dallas, TX, for Plaintiff.
Marion Sanford, III, William Patrick Lane, William Griffis, McCleskey, Harriger, Brazill & Graf, L.L.P., Lubbock, TX, for Defendant.
ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING THIRD-PARTY DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
DAVID COUNTS, UNITED STATES DISTRICT JUDGE
BEFORE THE COURT are the Motion for Summary Judgment filed by Plaintiff RLI Insurance Company (RLI) on December 6, 2019, and the Motion for Summary Judgment filed by Third-Party Defendant Woods Insurance Service, Inc. (Woods Insurance) on February 6, 2020. (Docs. 52, 57). After due consideration of the motions, the parties’ arguments, and the relevant law, the Court GRANTS RLI's Motion for Summary Judgment (Doc. 52) and DENIES Woods Insurance's Motion for Summary Judgment (Doc. 57).
I. BACKGROUND
RLI filed this declaratory judgment action on September 22, 2017, invoking the Court's diversity jurisdiction and requesting a declaration that certain stolen property was not covered under an insurance policy issued by RLI to Defendant Caliente Oil, Inc. (Caliente). (See generally Doc. 1). Caliente asserted counterclaims against RLI for a violation of the duty of good faith and fair dealing under Chapter 541 of the Texas Insurance Code, late payment of a claim under Chapter 542 of the Texas Insurance Code, and breach of contract. (See generally Doc. 20). Caliente also asserted third-party claims against its insurance broker, Woods Insurance, for negligence and negligent misrepresentation. See generally id.
On December 6, 2019, RLI moved for summary judgment on its declaratory judgment claim and Caliente's counterclaims. (Doc. 52). The Court granted Caliente leave to file an untimely response, and Caliente filed its Response in opposition to RLI's Motion for Summary Judgment on January 21, 2020. (Text Only Entry of January 16, 2020; Doc. 55). RLI filed a Reply in support of its Motion for Summary Judgment on January 27, 2020. (Doc. 56). Accordingly, RLI's Motion for Summary Judgment is ready for disposition.
On February 6, 2020, Woods Insurance filed its Motion for Summary Judgment. (Doc. 57). RLI filed a Response in opposition to Woods Insurance's Motion for Summary Judgment. (Doc. 60). Caliente filed an untimely Response to Woods Insurance's Motion for Summary Judgment on February 26, 2020. (Doc. 62). Woods Insurance did not file a reply to either response, and the time afforded to do so under the Local Rules has expired. See Local Rule CV-7(f)(2). Accordingly, Woods Insurance's Motion for Summary Judgment is ready for disposition.
II. FACTS
At the heart of this case is an insurance coverage dispute between RLI and Caliente. Caliente was a New Mexico corporation headquartered in Farmington, New Mexico that conducted oil field services and maintained a "yard" in Odessa, Texas to store equipment. (Doc. 52-2 at 164–66). RLI issued an inland marine policy to Caliente covering contractors’ equipment under policy number ILM0704608 for the relevant policy periods. (See generally Doc. 55-1). On April 24, 2017, Caliente submitted an insurance claim to RLI asserting some equipment had been stolen. (Doc. 52-2 at 50). The allegedly stolen equipment included the following: (1) a light tower; (2) two sand knockouts or traps; (3) a flare stack; and (4) oilfield fishing tools. Id. at 15, 430.
At the time the facts giving rise to this suit occurred, Caliente was owned by three individuals: Ken Stevens, Chris Beal, and Stuart Buckingham. Id. at 164. Messrs. Stevens, Beal, and Buckingham owned several other oilfield service companies including Eldorado Energy Rentals, LLC (Eldorado). Id. at 154, 167. On June 27, 2016, Eldorado and some of its sister companies became wholly owned subsidiaries of Caliente. Id. at 154. Mr. Stevens and Mr. Beal also had ownership interests in a company called Lynx Pressure Solutions, LLC (Lynx). Id. at 172. At the time of the events at issue in this case, Lynx made use of the Caliente yard in Odessa. Id. at 174.
The companies that became wholly owned subsidiaries of Caliente were Eldorado Wireline, LLC, Eldorado Energy Rentals, LLC, and T&T Energy Services, LLC. (Doc. 52-2 at 154). Lynx Pressure Solutions, LLC was not involved in the "Contribution Agreement" that made the other companies wholly owned subsidiaries of Caliente. See id.
In March or April 2016, Doug Batten of Combatt Oilfield Solutions LLC (Combatt) contacted Mr. Beal to inquire about opportunities for joint business ventures. Id. at 19–20, 181–82. Combatt was an oilfield service company which operated in east Texas and was owned by Mathew Vaughan, Doug Batten, and Ross Batten. Id. at 177, 182. Representatives of Caliente and its related companies and representatives of Combatt discussed various business opportunities. See id. at 48–49, 158, 183–84, 445. Combatt expressed an interest in using then-idle equipment owned by Caliente and its sister companies. Id. at 20–21, 181. An arrangement was reached whereby Mr. Beal and Mr. Stevens loaned Combatt money to finance Combatt's transportation of equipment owned by Caliente or its sister companies (including Eldorado and Lynx) to Combatt's yard in east Texas and to cover "working capital expenses" so Combatt could use the equipment in its operations. Id. at 182–83. Mr. Beal testified that he and Mr. Stevens loaned approximately $60,000 to Combatt. Id. at 190–91, 233. Mr. Stevens provided a somewhat different description of the relationship between Caliente and Combatt in an affidavit attached to Caliente's Response to RLI's Motion for Summary Judgment:
Caliente Oil allowed the equipment to be transported by Combatt Energy Services from various locations, inspected by Combatt Energy Services as part of due diligence of a business deal that never materialized, and then further transported by Combatt Energy Services to Caliente Oil's West Texas yard. Caliente Oil hired and paid Combatt Energy Services for this transport by canceling a portion of the debt Combatt Energy Services owed to Caliente Oil. Combatt Energy Services was never allowed to use the equipment or in any way treat the equipment as "entrusted" to them other than as a paid transporter of the equipment with a period of inspection during the transportation.
(Doc. 55-3 at 2).
Ross Batten, one of Combatt's owners, was responsible for the transportation of some of the equipment. (Doc. 52-2 at 182). Text messages between Ross Batten and Mr. Beal regarding a broken lock indicate that as of at least May 9, 2016, Ross Batten and other Combatt employees had visited Caliente's yard in Odessa. Id. at 141. Subsequent messages establish that on May 17, May 19, May 20, May 21, and May 23, 2016, Mr. Beal and Ross Batten communicated about equipment Ross Batten was picking up to transport. Id. at 131–39. Similar messages dated June 6 and June 7, 2016, indicate Ross Batten was picking up more equipment. Id. at 130.
In the course of his dealings with Combatt and Ross Batten, Mr. Beal became troubled by Ross Batten's behavior, including instances of apparent theft. On June 10, 2016, Mr. Beal confronted Ross Batten about Combatt employees’ practice of sleeping at the Caliente yard and the use and theft of tools belonging to a Caliente employee. Id. at 128. On June 22, 2016, Mr. Beal sent Doug Batten a text message inquiring if Combatt personnel had taken an air compressor that had been at the Caliente yard, Doug Batten's response indicates that he had not seen a new air compressor at the Combatt yard. Id. at 126. Mr. Beal testified that he realized the air compressor was missing from the Caliente yard and asked Ross Batten about its location. Id. at 196. Ross Batten claimed that the air compressor had been taken to the Combatt yard, but, when confronted with Doug Batten's denial that the air compressor was at the Combatt yard, admitted stealing the air compressor and pawning it for $300. Id. at 196–97. Mr. Beal testified that he later learned from Mathew Vaughan and Doug Batten that Ross Batten had stolen from Combatt as well. Id. at 191–93.
The light tower at issue in this suit was returned to Eldorado as part of the dissolution of an entity called Bull Dorado and the settlement of a lawsuit related to that entity. Id. at 453. Mr. Beal's testimony and text messages establish that Ross Batten picked up the light tower on May 23, 2016, and it was to be transported to Combatt. Id. at 133–35, 205–06, 239. Mr. Beal's testimony indicates it never arrived at the Combatt yard. Id. at 205. However, Mr. Stevens stated in a letter to RLI that the light tower and other equipment was at the Combatt yard as of August 30, 2016, and Doug Batten provided photographs and an inventory of the equipment. Id. at 462. Mr. Stevens made a similar assertion in his affidavit: "Combatt Energy Services verified that the equipment that it transported arrived in Combatt Energy Services's yard by providing accounting and photographs of the equipment." (Doc. 55-3 at 2).
Eldorado contributed equipment, including the light tower, to a business—Bull Dorado Holdings, LLC—which Eldorado had formed with Bull Dog Well Testing, LLC. (Doc. 52-2 at 25–27, 185–86, 260–66, 453). Bull Dorado was in the process of being dissolved in May and June 2016, and Eldorado's equipment was returned to it. Id. at 260–66, 404–17.
The sand knockouts (or "sand traps") at issue in this suit belonged to Lynx and were transported from Colorado to west Texas by Combatt. (Doc. 52-2 at 179, 181, 203, 437). On June 7, 2016, Mr. Beal contacted Ross Batten to provide him with the location of the sand knockouts so they could be transported from west Texas to Combatt's yard. Id. at 129, 203–04. Mr. Beal testified that he was informed by representatives of Combatt that the sand knockouts never made it to the Combatt yard. Id. at 203–05. In contrast, Mr. Stevens’ letter and affidavit indicate that the sand knockouts arrived and were photographed and inventoried with the other equipment at the Combatt yard in August 2016. (Doc. 52-2 at 462; Doc. 55-3 at 2).
The flare stack at issue was returned to Eldorado as part of the Bull Dorado dissolution and settlement. (Doc. 52-2 at 249). Text messages dated May 23, 2016, demonstrate Mr. Beal and Ross Batten discussed Combatt's need for flares. Id. at 131. Mr. Beal testified that Ross Batten was supposed to transport the flare stack from Oklahoma to east Texas, but "it didn't wind up making it there." Id. at 242. However, as with the light tower and sand knockouts, Mr. Stevens has asserted that the flare stack was photographed and inventoried at the Combatt yard in August 2016 but was not returned to the Caliente yard. (Doc. 52-2 at 462; Doc. 55-3 at 2).
The fishing tools at issue in this suit belonged to Eldorado. (Doc. 52-2 at 198). They were stored on a rack at the Caliente yard. Id. at 197. Mr. Buckingham noticed some of the tools were missing and informed Mr. Beal. Id. at 198–99. Mr. Beal's testimony indicates that he learned some fishing tools were missing from the rack and that Ross Batten was sleeping at the Caliente yard at the same time. Id. at 199. Text messages between Mr. Beal and Ross Batten indicate that Mr. Beal broached the topic of overnight stays at the Caliente yard on June 10, 2016. Id. at 128. Mr. Beal testified that Ross Batten informed him that he had taken the fishing tools to be repaired before they were sent to east Texas. Id. at 199. Mr. Beal asserted that the fishing tools did not need to be repaired and there had been no discussion of moving them to east Texas. Id. Mr. Beal's deposition testimony indicates that transportation of the fishing tools was not part of the arrangement with Combatt, and Ross Batten only had access to the fishing tools because he had access to the Caliente yard. Id. at 38. Mr. Stevens testified that he considered Ross Batten the likely suspect for the theft of the fishing tools, but the tools were not found in Ross Batten's possession. Id. at 438–39. Mr. Stevens’ affidavit indicates that the fishing tools were stolen from the Caliente yard and were "never allowed in Combatt Energy Services's or Ross Batten's possession." (Doc. 55-3 at 1).
Some of the equipment at issue was scheduled with RLI in August and September 2016. Specifically, Caliente maintains that the fishing tools were the "attached equipment" associated with five reverse units added to the policy by the "Change Endorsement" effective August 18, 2016. (See Doc. 55-2 at 2). Additionally, the sand knockouts and flare stack were scheduled through the "Change Endorsement" made effective on September 6, 2016, and listed in the "Policy Change Request" dated October 5, 2016. (See Doc. 55-2 at 5, 11–12).
III. LEGAL STANDARD
Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "A fact is material if it might affect the outcome of the suit under the governing law, and a dispute is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." United States v. Renda , 709 F.3d 472, 478 (5th Cir. 2013) (quoting Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ).
"Initially, the moving party bears the burden of demonstrating the absence of a genuine issue of material fact." Cannata v. Catholic Diocese of Austin , 700 F.3d 169, 172 (5th Cir. 2012) (citing Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ). The burden then shifts to the nonmoving party to point to "specific facts showing that there is a genuine issue for trial." Celotex , 477 U.S. at 324, 106 S.Ct. 2548. "Unsubstantiated assertions, improbable inferences, and unsupported speculation are not sufficient to defeat a motion for summary judgment." Brown v. City of Hous., Tex. , 337 F.3d 539, 541 (5th Cir. 2003). Additionally, "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Scott v. Harris , 550 U.S. 372, 380, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007) (emphasis in original) (quoting Anderson , 477 U.S. at 247–48, 106 S.Ct. 2505 ). "Where critical evidence is so weak or tenuous on an essential fact that it could not support a judgment in favor of the nonmovant, or where it is so overwhelming that it mandates judgment in favor of the movant, summary judgment is appropriate." Duron v. Albertson's, LLC , 560 F.3d 288, 291 (5th Cir. 2009) (quoting Alton v. Tex. A&M Univ. , 168 F.3d 196, 199 (5th Cir. 1999) ).
Further, the court does not have "a duty to sift through the record in search of evidence to support a party's opposition to summary judgment." Malacara v. Garber , 353 F.3d 393, 405 (5th Cir. 2003) (quoting Ragas v. Tenn. Gas Pipeline Co. , 136 F.3d 455, 458 (5th Cir. 1998) ). Evidence that exists in the summary judgment record but is not referred to in the nonmovant's response to the motion for summary judgment is not properly before the court. Id.
In reviewing the record, "the court must draw all reasonable inferences in favor of the nonmoving party and it may not make credibility determinations or weigh the evidence." Reeves v. Sanderson Plumbing Prods. , 530 U.S. 133, 150, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000). However, the court may not "in the absence of any proof, assume that the nonmoving party could or would prove the necessary facts." Little v. Liquid Air Corp. , 37 F.3d 1069, 1075 (5th Cir. 1994).
IV. DISCUSSION
RLI asserts that the stolen items were not covered by the insurance policy as a matter of law and seeks summary judgment on its declaratory judgment claim and on the counterclaims of breach of the duty of good faith and fair dealing, late payment, and breach of contract asserted by Caliente. (See generally Doc. 52). Woods Insurance seeks summary judgment on Caliente's third-party claims of negligence and negligent misrepresentation on the grounds that the stolen items were covered by the RLI policies and RLI should have paid the claim. (See generally Doc. 57). The Court must determine whether fact issues preclude a legal determination of the issue of coverage at this time. Consequently, the Court will first take up RLI's Motion for Summary Judgment.
A. RLI's Motion for Summary Judgment
RLI contends that the allegedly stolen equipment is not covered under the policy for several reasons. The equipment was not owned by Caliente, and the policy only extends coverage to contractors’ equipment belonging to others that was in the care, custody, or control of the insured and listed on a schedule. (Doc. 52 at 10–15). Additionally, the policy's provision related to criminal, fraudulent, dishonest or illegal acts excludes losses when the person who commits the criminal or dishonest act was entrusted with the property or was the employee of a partner or joint venturer. Id. at 15–16. Further, the policy's "missing property" provision excludes losses of property that disappears and where there is no physical evidence indicating what happened to the property. Id. at 15. Consequently, RLI argues, summary judgment is appropriate as to the declaratory judgment claim and Caliente's counterclaims because the equipment was not covered and this lack of coverage negates the counterclaims for breach of the duty of good faith and fair dealing, lack of prompt payment, and breach of contract. Id. at 16–17.
Caliente contends that fact issues pertaining to when the equipment was stolen preclude summary judgment. (Doc. 55 at 11). It also argues Caliente had an ownership interest in the equipment and the policy's definition of the insured is broad enough to extend to Caliente's subsidiaries. Id. at 4–6, 12. Additionally, Caliente maintains that the property was listed on insurance schedules prior to the time it was stolen, and the equipment was not entrusted to Ross Batten. Id. at 7–8, 13. Finally, Caliente asserts that RLI acted in bad faith by denying its insurance claim. Id. at 9, 14.
1. Governing Law
Initially, the Court must decide whether to apply Texas or New Mexico law in interpreting the insurance policy. RLI did not brief the choice of law issue but cites to Texas law in its motion for summary judgment. (See generally Doc. 52). Caliente references the choice of law issue in a footnote in its response to RLI's motion, asserting there is no significant difference between New Mexico and Texas law relevant to the interpretation of insurance policies, and also cites Texas law. (Doc. 55 at 2).
The first step in a choice of law analysis is to determine whether the substantive laws of the relevant jurisdictions conflict. See Schneider Nat. Transport v. Ford Motor Co. , 280 F.3d 532, 536 (5th Cir. 2002). "If the laws of the states do not conflict, then no choice-of-law analysis is necessary." Id. (quoting W.R. Grace and Co. v. Cont'l Cas. Co. , 896 F.2d 865 874 (5th Cir. 1990) ). In the absence of a conflict, federal courts apply the law of the forum state. See id. ("Thus, the law of the forum state, Texas, should apply here as there is no conflict ....") Accordingly, the Court must determine whether a conflict exists between the law of Texas and New Mexico regarding the interpretation of insurance policies.
Under Texas law, insurance policies are contracts and are generally construed under the rules of contract construction. USAA Texas Lloyds Company v. Menchaca , 545 S.W.3d 479, 488 (Tex. 2018). Accordingly, courts look to the language of the policy to ascertain the parties’ intent, examine the policy as a whole, try to harmonize and give effect to all provisions, and honor the parties’ agreement as written. Crownover v. Mid-Continent Cas. Co. , 772 F.3d 197, 202 (5th Cir. 2014) (citing Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd's London , 327 S.W.3d 118, 126 (Tex. 2010) ). "Unless the policy dictates otherwise, [courts] give words and phrases their ordinary and generally accepted meaning, reading them in context and in light of the rules of grammar and common usage." Nassar v. Liberty Mut. Fire Ins. Co. , 508 S.W.3d 254, 258 (Tex. 2017) (alteration in original) (quoting RSUI Indem. Co. v. The Lynd Co. , 466 S.W.3d 113, 118 (Tex. 2015) ). If a court determines one party's interpretation of the policy is reasonable, "then the policy is unambiguous and the reasonable interpretation should be adopted." Id. If the policy is ambiguous, i.e., "genuinely subject to more than one meaning after applying the pertinent rules of contract interpretation," then the policy is construed in favor of the insured. Id.
Under New Mexico law, insurance policies are construed by the principles used in contract interpretation. Rummel v. Lexington Ins. Co. , 123 N.M. 752, 945 P.2d 970, 976 (1997). "The insurance contract—with its declarations, endorsements, and any other attachments—will be construed as a whole." Id. at 978. "As with other contracts, where an insurance policy's terms have a common and ordinary meaning, that meaning controls in determining the intent of the parties." United Nuclear Corp. v. Allstate Ins. Co. , 285 P.3d 644, 647 (N.M. 2012) (internal quotation marks omitted). A policy that is clear and unambiguous will be enforced as it is written. Slack v. Robinson , 134 N.M. 6, 71 P.3d 514, 517 (2003). Ambiguity does not exist merely because the parties offer competing interpretations; ambiguity is present if a policy term is "reasonably and fairly susceptible of different interpretations" United Nuclear Corp. , 285 P.3d at 648. A policy provision that is ambiguous "must be construed against the insurance company as the drafter of the policy." Id. (internal quotation marks omitted).
The Court concludes that the laws of Texas and New Mexico regarding the interpretation of insurance policies are not materially different and do not conflict. See Jacked Up, L.L.C. v. Sara Lee Corp. , 854 F.3d 797, 813 (5th Cir. 2017) (concluding that no choice of law analysis was necessary when there were no material differences between laws of states). Consequently, no choice of law analysis is necessary, and the Court will apply Texas law to interpret the relevant policy provisions as it is the law of the forum. See Schneider Nat'l Transp. , 280 F.3d at 536.
2. Extent of Coverage
The RLI policy covers the loss of contractors’ equipment and generally defines "contractors’ equipment" as "machinery, equipment, and tools of a mobile nature that ‘you’ use in ‘your’ contracting, installation, erection, repair, or moving operations or projects." (Doc. 55-1 at 10). The policy provides that "[t]he words ‘you’ and ‘your’ mean the persons or organizations named as the insured on the declarations." Id. Under the terms of the policy, RLI covered "direct physical loss caused by a covered peril to: 1) ‘your’ ‘contractors’ equipment’; and 2) ‘contractors’ equipment’ of others in ‘your’ care, custody, or control." Id. at 11. However, the policy limits coverage to the insured's contractors’ equipment and the contractors’ equipment of others in the insured's care, custody, or control "that are listed in a schedule which ‘you’ must submit to ‘us’ and ‘we’ keep on file, the schedule must contain a description of each item to be covered and a ‘limit’ for each item." Id. The policy's tools endorsement also provides coverage to the insured's unscheduled tools—"equipment and tools of a mobile nature that ‘you’ use in ‘your’ contracting, installation, erection, repair, or moving operations or projects." Id. at 23. Consequently, the policy provides coverage to the insured's contractors’ equipment listed in a schedule on file with RLI, the insured's unscheduled tools, and contractors’ equipment belonging to others that was in the care, custody, or control of the insured and was listed in a schedule on file with RLI.
The policy provides coverage to "Scheduled Equipment" or equipment listed in a "Schedule on File" depending on which option was selected on the "schedule of coverages." (Doc. 55-1 at 11). The schedule of coverages for the policy indicates the "Schedule on File" option was selected. Id. at 8.
a. Coverage Limited to Caliente's Equipment
RLI contends that the equipment at issue did not belong to Caliente and is not covered as the insured's contractors’ equipment or under the tools endorsement because the summary judgment evidence establishes the equipment belonged to Lynx and Eldorado. (See Doc. 52 at 10–14). Caliente argues that it had an ownership interest in the equipment because of the "roll up" and, even if it did not, the policy's definition of the insured is broad enough to extend to Caliente's subsidiaries. (See Doc. 55 at 4–6, 12).
The Court will first address the issue of ownership. The sand knockouts at issue in this suit belonged to Lynx, and Lynx was not involved in the "roll up" that Caliente refers to. (Doc. 52-2 at 154, 457). The light tower, flare stack, and fishing tools belonged to Eldorado. Id. at 198, 249, 453. The contribution agreement, which accomplished the "roll up," transferred the membership interests of Messrs. Stevens, Beal, and Buckingham in three limited liability companies (including Eldorado) to Caliente. See id. at 154–57. Critically, the contribution agreement made Caliente the sole member of the limited liability companies. See id.
It is fundamental to the law of business organizations that a legal entity such as a corporation or a limited liability company has an existence separate and apart from that of its shareholders or members. See Cedric Kushner Promotions, Ltd. v. King , 533 U.S. 158, 163, 121 S.Ct. 2087, 150 L.Ed.2d 198 (2001) (noting "incorporation's basic purpose is to create a distinct legal entity, with legal rights, obligations, powers, and privileges different from those of the natural individuals who created it, who own it, or whom it employs"). Texas law recognizes that a limited liability company is a legal entity that is distinct from its members, and members do not have interests in the property of the company. Sherman v. Boston , 486 S.W. 3d 88, 94 (Tex. App.—Houston [14th Dist.] 2016, pet. denied) ; see also Tex. Bus. Orgs. Code Ann. § 101.106(b) ("A member of a limited liability company ... does not have an interest in any specific property of the company"). Caliente cites no case law to support its argument that it had an ownership interest in the property. Consequently, the Court concludes that Caliente did not have an ownership interest in any of the equipment at issue in this suit.
New Mexico law similarly provides that a limited liability company is legally distinct from its members. N.M. Stat. Ann. § 53-19-10 ; Childress v. Deering , 1:18-CV-00455 LF-KBM, 2019 WL 409825, at *5 (D.N.M. January 29, 2019). Additionally, under New Mexico law, the property of a limited liability company belongs to the company, and members of the company have no interest in the property of the limited liability company. N.M. Stat. Ann. § 53-19-29
Caliente's argument that the definition of the terms "you" and "your" in the policy is broad enough to extend coverage to its subsidiaries is similarly unpersuasive. Caliente argues the following:
The definition of the singular named insured to consist of plural ‘persons or organizations’ can only mean that the insured is intended to be comprised of any number of the insured's ‘persons or organizations,’ and results in coverage of all parts of the insured's ‘organizations’ with no further limitation of that definition in the contract.
(Doc. 55 at 4). Therefore, Caliente argues, insurance for a parent entity should extend to its subsidiary entities because "[t]here is no language in the policy that defines an insured's subsidiaries as not part of the insured's ‘organizations.’ " Id.
The Court finds Caliente's interpretation of the policy language to be unreasonable. The Court looks to the plain language of the policy. See Gilbert Tex. Constr., L.P. , 327 S.W.3d at 131 ("Insurance policy interpretation principles emphasize a policy's plain language in determining its intended coverage."). The policy provides the following: "The words ‘you’ and ‘your’ mean the persons or organizations named as the insured on the declarations." (Doc. 55-1 at 10). The Court interprets this to mean that the terms "you" and "your" refer to the insured, and the insured is the natural or legal person or persons named as such on the declarations. The plural forms of "person" and "organization" indicate that one or more natural or legal persons could be insured under the policy. However, the controlling factor is the name or names included in the policy declarations. In this instance, the page titled "Policy Declarations" provides the "named insured" as Caliente Oil, Inc. (Doc. 55-1 at 1). Conceivably, the "named insured" could have been Caliente Oil, Inc., Eldorado Energy Rentals, LLC, and Lynx Pressure Solutions, LLC, and any number of other persons or entities. However, Caliente Oil, Inc. was the only "named insured" listed on the policy declarations page, and the only "insured name" listed on the "Change Endorsement" forms. (Doc. 55-1 at 1, 34, 35; Doc. 55-2 at 1, 2,4–7). The Court concludes that there is no basis for interpreting the terms "you" and "your" in the policy to mean any entity other than Caliente. Consequently, the provisions extending coverage to contractors’ equipment and tools owned by Caliente are inapplicable to the equipment at issue in this suit.
A result that flows from this conclusion is the determination that the policy does not provide coverage for the light tower. In its response to RLI's motion for summary judgment, Caliente concedes that the light tower was not listed on a schedule. (Doc. 55 at 5). Caliente contends that "coverage for the stolen light tower is limited to $2,500 because it was included in unscheduled property." Id. However, the coverage for unscheduled property in the amount of $2,500 is derived from the tools endorsement, which is only applicable to Caliente's property. (See Doc. 55-1 at 23; see also Doc. 55-2 at 1 (increasing the coverage for any one "tool" to $2,500)). As previously discussed, the light tower belonged to Eldorado. (See Doc. 52-2 at 453). Accordingly, the policy does not provide any coverage for the light tower.
b. Coverage Limited to Scheduled Equipment in Caliente's Care, Custody, and Control
Even though the equipment at issue in this suit did not belong to Caliente, the policy potentially provides coverage if the equipment was in the care, custody, or control of Caliente and was listed on a schedule on file with RLI. (See Doc. 55-1 at 11). The summary judgment record contains inconsistent accounts of when the equipment was stolen; Mr. Beal's testimony indicates that the equipment was stolen in May and June of 2016, but Mr. Stevens’ letter and affidavit suggest that the equipment was stolen in late August or September 2016. Caliente contends that this fact issue precludes summary judgment. (Doc. 55 at 11). RLI argues the fact issue is not material because the policy requires that the contractors’ equipment of others be both listed on a schedule and in Caliente's care, custody, or control for it to be covered. (Doc. 52 at 11–15). Under Mr. Beal's version of events, the equipment was stolen several months before it was listed on a schedule and under Mr. Stevens's version of events, the equipment was listed when it was stolen, but was in the care, custody, and control of Combatt rather than Caliente. See id.
The policy does not define the phrase "care, custody, or control," and neither party has advanced an interpretation of that language. However, the phrase has been interpreted by courts in the analogous context of "care, custody, or control" exclusions in liability policies. See, e.g., SnyderGeneral Corp. v. Century Indem. Co. , 113 F.3d 536, 539 (5th Cir. 1997) ; Goswick v. Employers’ Cas. Co. , 440 S.W.2d 287, 289 (Tex. 1969) ; Frito-Lay, Inc. v. Trinity Universal Ins. Co. , No. 05-08-01263-CV, 2010 WL 4705526, at *3–4 (Tex. App.—Dallas Nov. 22, 2010, pet. denied). Courts typically interpret "care, custody, or control" to mean possession or "possessory control." See Goswick , 440 S.W.2d at 289 (describing "care, custody, and control" of property as having "possessory control" and linking it with total and physical manipulation and "immediate supervision" of the property); Mid-Continent Cas. Co. v. Third Coast Packaging Co., Inc. , 342 F. Supp. 2d 626, 631 (S.D. Tex. 2004) (determining that possession of property entails having care, custody, or control of the property); Frito-Lay, Inc. , 2010 WL 4705526, at *3–4 (holding property was subject to a party's "care, custody, or control" when the party had "sole and exclusive actual physical possession" of the property and of the facility where the property was located). The Court concludes that interpreting "care, custody, and control" to mean possession or possessory control is consistent with the generally accepted meaning of the words, their common usage, and the interpretation of the phrase employed by Texas courts in a similar context.
For the equipment to be covered it must have been both in Caliente's possession or subject to its possessory control and listed on a schedule. As discussed below, the sand knockouts, flare stack, and fishing tools cannot meet both requirements.
Mr. Beal contacted Ross Batten on June 7, 2016, to provide him with the location of the sand knockouts at issue in this suit so they could be transported to the Combatt yard. (Doc. 52-2 at 129). Mr. Beal's testimony indicates that the sand knockouts were not transported to the Combatt yard. Id. at 203–05. Mr. Stevens’ letter and affidavit suggest the sand knockouts were inventoried and photographed at the Combatt yard on August 30, 2016, but were stolen at some point between that date and the return of all the other equipment to Caliente. (Doc. 52-2 at 462; Doc. 55-3 at 2). The sand knockouts were listed on a schedule made effective on September 6, 2016. (Doc. 55-2 at 5, 11–12). If the sand knockouts were stolen prior to September 6, 2016, there is no coverage as they were not listed on a schedule as required by the policy. However, if the alleged theft of the sand knockouts occurred after September 6, 2016, there is still no coverage as the evidence in the summary judgment record establishes that Caliente did not have possession of the sand knockouts in September 2016. Therefore, the sand knockouts were not in Caliente's care, custody, or control as required by the policy. The Court concludes that regardless of the date of loss, the sand knockouts were not covered under the policy.
The summary judgment evidence suggests that the flare stack was not in Caliente's care, custody, or control at all in the time period that is relevant to this suit. Mr. Beal testified that the flare stack was in Oklahoma at Bulldog's yard and was to be transported directly to the Combatt yard, but never arrived. (Doc. 52-2 at 241–42). The flare stack was listed on a schedule made effective September 6, 2016. (Doc. 55-2 at 5, 11–12). Even if the flare stack was stolen at some unknown time after it was inventoried and photographed at the Combatt yard, as Mr. Stevens asserts, it was not in Caliente's care, custody, or control at the time of the loss. Accordingly, the Court concludes the flare stack is not covered under the policy.
Mr. Beal testified that the fishing tools were stored on a rack at the Caliente yard and were taken from the yard. (Id. at 52-2 at 197–98). Mr. Stevens’ affidavit similarly asserts that the fishing tools were stolen from the Caliente yard. (Doc. 55-3 at 1). Consequently, the Court concludes that the fishing tools were in Caliente's care, custody, or control. However, the fishing tools were listed on a schedule that was made effective on August 18, 2016. (Doc. 55-2 at 2). Neither Mr. Beal nor Mr. Stevens provided an exact date the fishing tools were stolen. However, Mr. Beal's testimony was that he learned some of the fishing tools were missing from Mr. Buckingham at the same time Mr. Buckingham informed him that Ross Batten and Combatt employees had been sleeping at the Caliente yard. (Doc. 52-2 at 199). Text messages in the summary judgment record establish that Mr. Beal confronted Ross Batten about sleeping at the Caliente yard on June 10, 2016. Id. at 128. Mr. Stevens’ affidavit emphasizes that the fishing tools were never entrusted to Combatt or Ross Batten and distinguishes them from the other equipment at issue in this suit, which Combatt was supposed to transport. (Doc. 55-3 at 1–2). The affidavit also states that "the equipment that [Combatt] transported" was the equipment inventoried and photographed at the Combatt yard. Id. at 2. There is no indication the fishing tools, which were not part of the arrangement with Combatt, were photographed and inventoried at the Combatt yard. Caliente points to no evidence in the summary judgment record that indicates the fishing tools were stolen from the Caliente yard after June 2016, much less in August 2016. The Court concludes that the fishing tools were stolen before they were listed on the schedule and, therefore, are not covered under the policy.
In conclusion, the Court finds that the fact issue as to the time frame in which the equipment was stolen is not material and does not preclude summary judgment in this case. The light tower is not covered under the contractors’ equipment provision as it was not listed on a schedule during the relevant policy periods and is not covered under the tools endorsement as it did not belong to Caliente. The sand knockouts and flare stack also did not belong to Caliente and are not covered under the policy because they were either stolen prior to the date they were listed on a schedule or, if stolen after that date, were not in Caliente's care, custody, or control as required by the policy. Finally, the summary judgment evidence indicates the fishing tools were stolen before they were listed on a schedule as required by the policy. As the equipment at issue was not covered under the policy, there is no need to address RLI's alternative arguments about the applicability of the missing property and illegal or dishonest acts exclusions. The Court concludes the equipment at issue in this suit was not covered under the insurance policy, and, therefore, RLI is entitled to summary judgment on its declaratory judgment claim. See Fed. R. Civ. P. 56(a) (requiring that a summary judgment movant show both that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law).
3. Caliente's Counterclaims
The Court similarly concludes that RLI is entitled to summary judgment as to Caliente's counterclaims for breach of contract, and its extra-contractual claims of violation of the duty of good faith and fair dealing under Chapter 541 of the Texas Insurance Code, and late payment of a claim under Chapter 542 of the Texas Insurance Code.
Caliente's breach of contract claim is premised on RLI's failure to pay the insurance claim Caliente filed. (See Doc. 20 at 8). To establish breach of contract in an insurance context, "[i]nitially, the insured has the burden of establishing coverage under the terms of the policy." Gilbert Tex. Constr., L.P. , 327 S.W. 3d at 124. As the Court has concluded that there was no coverage for the equipment as a matter of law, RLI's denial of the claim was not a breach of the contract, and RLI is entitled to summary judgment as to the breach of contract claim.
Caliente's claim for violation of the duty of good faith and fair dealing is based on its allegation that "RLI denied liability on the claim submitted by Caliente to RLI at a time when RLI's liability was reasonably clear." (Doc. 20 at 7). A claim for violation of the statutory duty of good faith and fair dealing is distinct and independent of a claim for breach of contract. Ortiz v. State Farm Lloyds , 589 S.W.3d 127, 134 (Tex. 2019). However, " ‘there can be no claim for bad faith [denial of an insured's claim for policy benefits] when an insurer has promptly denied a claim that is not in fact covered.’ " Menchaca , 545 S.W.3d at 490 (alteration in original) (quoting Republic Ins. Co. v. Stoker , 903 S.W.2d 338, 341 (Tex. 1995) ). Accordingly, the Court concludes that the finding that there is no coverage under the policy negates Caliente's claim that RLI acted in bad faith by denying the claim. See State Farm Lloyds v. Page , 315 S.W. 3d 525, 532 (Tex. 2010) ("When the issue of coverage is resolved in the insurer's favor, extra-contractual claims do not survive."). RLI is entitled to summary judgment as to Caliente's claim RLI violated the duty of good faith and fair dealing.
Similarly, Caliente's extra-contractual late payment claim is premised on its assertion that "RLI is liable for the claim, yet RLI failed to timely pay the claim and instead wrongfully rejected Caliente's valid claim by waiting more than 60 days to pay the claim." (Doc. 20 at 8). However, there is no liability under the Texas Insurance Code for the lack of payment of an allegedly covered claim if the claim was not in fact covered. See Menchaca , 545 S.W. 3d at 491 (discussing the absence of liability under the Texas Insurance Code's prompt payment provisions "if the insurance claim is not covered by the policy"); see also Progressive County Mutual Ins. Co. v. Boyd , 177 S.W.3d 919, 922 (Tex. 2005) (same). As the Court has concluded that the equipment was not covered under the policy, denial of the claim was proper, and RLI is entitled to summary judgment on Caliente's prompt payment claim.
* * *
Based on the foregoing discussion, the Court concludes that the equipment at issue in this suit was not covered under the insurance policy. Consequently, the Court shall grant summary judgment in favor of RLI on its declaratory judgment claim and on Caliente's counterclaims.
B. Woods Insurance's Motion for Summary Judgment
Woods Insurance seeks summary judgment on the negligence and negligent misrepresentation claims asserted against it by Caliente. (See generally Doc. 57). The essence of Woods Insurance's summary judgment argument is that it could not have been negligent or made negligent misrepresentations "because Caliente's equipment was [a] covered loss that should have been paid by RLI." Id. at 3. Woods Insurance asserts that Caliente either owned the equipment or it was in Caliente's care, custody, or control and the equipment was listed on a schedule as required by the policy. Id. at 3–5.
As the Court has concluded that the equipment at issue in this suit was not covered under the policy, Woods Insurance's summary judgment arguments fail. Accordingly, the Court shall deny summary judgment as to the third-party claims.
V. CONCLUSION
Based on the foregoing reasoning, the Court ORDERS that RLI's Motion for Summary Judgment be GRANTED . (Doc. 52). The Court further ORDERS that Woods Insurance's Motion for Summary Judgment be DENIED . (Doc. 57).
It is so ORDERED .