Opinion
5-18-CV-00129-FB-RBF
02-28-2023
ENCANA OIL & GAS (USA) INC, Plaintiff, v. D&L MANUFACTURING, INC., Defendant.
REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
RICHARD B. FARRER, UNITED STATES MAGISTRATE JUDGE
To the Honorable United States District Judge Fred Biery:
This Report and Recommendation concerns whether the Court has jurisdiction over the remaining third-party indemnity claims after Plaintiff's dismissal of all claims. See Dkt. Nos. 94, 97. The Court treats the requested jurisdictional briefing, see Dkt. Nos. 102, 103, 104, as a motion to dismiss. All pretrial matters in this action have been referred for resolution pursuant to Rules CV-72 and 1 of Appendix C to the Local Rules for the United States District Court for the Western District of Texas. See Dkt. No. 86. Authority to enter this recommendation stems from 28 U.S.C. § 636(b)(1)(B).
For the reasons set forth below, the Court has jurisdiction to hear this case, and any motion to dismiss should be DENIED. But for administrative clarity, the Court further recommends that the third-party defendant's remaining counterclaims, see Dkt. No. 98, be SEVERED into a new case, and that this case should be CLOSED.
Factual and Procedural Background
Plaintiff Encana Oil & Gas (USA) Inc. initially filed a products-liability suit against Defendant D&L Manufacturing, Inc., in Texas state court, which was removed to federal court on February 7, 2018. Dkt. No. 1. According to Encana's allegations, D&L manufactured a defective production packer that caused an oil spill when installed at one of Encana's wells in Karnes County, Texas. This then caused Encana to incur millions of dollars in remediation costs for surrounding property damage. See Dkt. No. 2-1. Shortly after removal, D&L filed a third-party complaint against the packer's seller and distributor, Wellbore Fishing & Rental Tools, LLC (“WFR”). See Dkt. No. 3. In its answer, WFR counterclaimed for Chapter 82 indemnity. See Dkt. No. 7.
Due to an arbitration clause in a service contract between Encana and WFR, the Court granted on May 17, 2019, a motion to stay the case pending arbitration. See Dkt. Nos. 25, 75. Over a year later, WFR notified the Court that the arbitration resulted in a confidential settlement, leaving only WFR's indemnity counterclaim against D&L unresolved. See Dkt. No. 76. But the case remained stayed and administratively closed until February 7, 2022. See Dkt. No. 85. Because all of Encana's claims were resolved in arbitration, Encana subsequently stipulated to voluntarily dismiss all claims. See Dkt. No. 94. And because the initial Plaintiff was no longer a party to this case, the Court, at a long-overdue initial pretrial conference, ordered WFR to file an amended complaint to clarify the parties and any remaining claims. See Dkt. No. 97. The Court also stayed all discovery pending jurisdictional briefing addressing the question of whether WFR's Chapter 82 indemnity claim can proceed under these circumstances. See id.
WFR filed its amended complaint on July 27, 2022, asserting causes of action against D&L for indemnity under Texas Civil Practice and Remedies Code § 82.002 and common law. See Dkt. No. 98 ¶¶ 4.01-04. The parties then filed the requested jurisdictional briefing on indemnity. See Dkt. Nos. 102, 103, 104.
Analysis
A. The Court Has Subject-Matter Jurisdiction over WFR's Chapter 82 Indemnity Claim, and Dismissal at This Juncture Is Not Appropriate.
The basic premise for diversity jurisdiction here is not genuinely disputed. Federal courts have subject-matter jurisdiction over suits between completely diverse parties where the amount in controversy exceeds $75,000. See 28 U.S.C. § 1332. And as far as diversity jurisdiction is concerned, “the plaintiff's amount-in-controversy allegation is accepted if made in good faith.” Dart Cherokee Basin Operating Co., LLC v. Owens, 574 U.S. 81, 87 (2014). As set forth in the Amended Complaint, WFR is an LLC with members from Louisiana and Texas, while D&L is a corporation based in Oklahoma. Dkt. No. 98 ¶¶ 1.01-02. Although the amount in controversy is unspecified, WFR alleges losses exceeding $75,000.00. Id. ¶ 2.03. And those losses resulted from arbitration between WFR and Encana, whose alleged damages under various theories of products liability in this case exceeded $13 million. See Dkt. No. 2. Assuming the truth of these allegations, which D&L does not seriously contest, the jurisdictional requirements of § 1332 are satisfied.
Nonetheless, the Court specifically requested jurisdictional briefing from the parties based on the potentially novel question of whether losses resulting from a settlement reached during arbitration are any different for the purposes of an indemnity claim under Chapter 82. See Dkt. No. 97 at 2. The Court therefore addresses the parties' arguments for and against retaining jurisdiction on the sole remaining claim in this case.
1. The Court Discerns No Appreciable Difference Between Arbitration and Litigation Settlements as Recoverable Losses Under Chapter 82.
WFR's primary claim against D&L is for statutory indemnity. The relevant statute provides that “[a] manufacturer shall indemnify and hold harmless a seller against loss arising out of a products liability action,” with exceptions for certain losses caused by the seller's independent actions. Tex. Civ. Prac. & Rem. Code § 82.002(a). This duty to indemnify “applies without regard to the manner in which the action is concluded.” Id. § 82.002(e)(1). The term “loss” in the statute is defined as including reasonable costs and attorney's fees, as well as “any reasonable damages.” Id. § 82.002(b). As for the definition of “products liability action,” the term “means any action against a manufacturer or seller for recovery of damages arising out of personal injury, death, or property damage allegedly caused by a defective product,” regardless of the underlying theory of liability. Id. § 82.001(2).
Texas courts have interpreted this duty to indemnify as being “triggered by the injured claimant's pleadings,” even without any adjudication of liability. Gen. Motors Corp. v. Hudiburg Chevrolet, Inc., 199 S.W.3d 249, 256 (Tex. 2006). The statutory language of Chapter 82, such as the term “products liability action,” is to be construed “broadly” in light of the statute's purpose. See Centerpoint Builders GP, LLC v. Trussway, Ltd., 496 S.W.3d 33, 36 (Tex. 2016). What constitutes a recoverable “loss” for purposes of Chapter 82 thus includes settlement agreements, with or without any admission of liability. See Fresh Coat, Inc. v. K-2, Inc., 318 S.W.3d 893, 900 (Tex. 2010); Fitzgerald v. Advanced Spine Fixation Sys., Inc., 996 S.W.2d 864, 867 (Tex. 1999); cf. Hartford Underwriters, Ins. Co. v. Elite Spice, Inc., No. 3:10-CV-00466-P, 2011 WL 13233390, at *4 (N.D. Tex. Mar. 21, 2011) (“Because the duty to indemnify remains intact regardless of the manner in which the action is concluded, the Court determines a pre-litigation settlement is also covered.”). Settlement amounts sought to be recovered, however, must be “reasonable.” See, e.g., FLS Miljo, Inc. v. Munters Corp., 682 F.Supp.2d 681, 689-90 (N.D. Tex. 2010) (accepting stipulations to reasonableness of settlements). No court has squarely addressed the situation where products-liability claims are settled in arbitration. But cf. Charlie Thomas Ford, LTD v. Ford Motor Co., No. 14-19-00844-CV, 2021 WL 786600, at *3 (Tex. App.-Houston [14th Dist.] Mar. 2, 2021, no pet.) (considering Chapter 82 claims for arbitration award, concluding that the statute “requires, at a minimum, allegations of personal injury, death, or property damage caused by an allegedly defective product,” but not indicating the fact that the underlying action was an arbitration to be of significance).
The submitted briefing never quite addresses the Court's stated concerns as to whether arbitration pursuant to a contract can nonetheless be considered a “products liability action” for purposes of Chapter 82. See Dkt. No. 102 at 5-6 & n.1 (conceding that no courts have addressed this issue). But upon review of relevant caselaw, the Court is satisfied that WFR's claims are viable. Federal courts in Texas routinely decide Chapter 82 indemnity claims. See, e.g., A Cath. High Sch. for Austin, Inc. v. Tyco Fire Prod. LP, No. 1:16-CV-791-RP, 2017 WL 1628987, at *2 (W.D. Tex. May 1, 2017) (permitting third-party defendant to amend pleadings to assert indemnity claim). And the clear statutory command is that the duty to indemnify “applies without regard to the manner in which the action is concluded.” Tex. Civ. Prac. & Rem. Code § 82.002(e)(1). This mandate is broad enough to encompass losses from settlement agreements and associated costs. See Fresh Coat, 318 S.W.3d at 900. Moreover, Texas courts reviewing indemnity claims based on arbitral awards have not dismissed those claims outright on that basis. See, e.g., Charlie Thomas Ford, 2021 WL 786600, at *1. Because Encana brought this litigation against D&L while arbitration between Encana and WFR was pending, and because D&L was apparently aware that the arbitration covered the same underlying incident, see Dkt. No. 3, there is ample basis for the Court to conclude that the settlement here qualifies as a “loss arising out of a products liability action.” Tex. Civ. Prac. & Rem. Code § 82.002(a). The Court is aware of no reason why a settlement reached during arbitration as opposed to litigation would somehow affect the availability of indemnity claims under Chapter 82.
To the extent that this issue may present a novel question of state law, such that remand or certification may become necessary, the Court can address such matters if and when they are squarely presented and fully briefed. But there are no pending motions before the Court.
2. WFR's Amended Complaint Is Adequate Under the Federal Pleading Standards, But D&L May Reraise Its Discovery Issues in a Motion to Compel.
D&L's primary argument is premised on whether WFR's amended complaint contains sufficient factual allegations to plausibly establish any Chapter 82 claims. A complaint must generally include “a short and plain statement” on jurisdiction, the party's claims, and the relief sought. Fed.R.Civ.P. 8(a). Although factual allegations in a complaint are generally presumed true for purposes of a motion to dismiss, cursory allegations need not be credited. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (noting that “legal conclusions” and “conclusory statements” in a complaint are not accepted as true). At the same time, the Rule 8(a) notice-pleading standard “does not require pleading specific facts in support of each element of plaintiff's prima facie case.” Lovick v. Ritemoney Ltd., 378 F.3d 433, 438 (5th Cir. 2004); see also Wooten v. McDonald Transit Assocs., Inc., 788 F.3d 490, 499 (5th Cir. 2015) (reasoning that a complaint satisfies federal pleading standards when “all elements of the cause of action are present by implication”).
Although WFR has thus far refused to disclose any of the arbitration documents, that failure does not defeat its claim at this early juncture. D&L urges otherwise, stating that WFR's cursory statements in the amended complaint cannot meet federal pleading standards. See Dkt. No. 103 at 7-8. According to D&L, WFR must attach or sufficiently describe the arbitration proceedings in the amended complaint to plausibly state a claim for relief. But WFR asserts that Chapter 82's “broad duty of indemnity” was triggered by Encana's claims in the instant case. Dkt. No. 102 at 6. Alternatively, WFR argues that the arbitration itself qualifies as a “products liability action.” Id. at 6 n.1. WFR also points out that D&L's arguments on evidentiary burdens and discovery disputes are premature at this juncture. See Dkt. No. 104.
Encana's original complaint alleged a defective product resulting in extensive property damage, and it explicitly asserted claims in products liability. See Dkt. No. 2-1. Encana's underlying suit, therefore, is a products-liability action under Chapter 82. See Tex. Civ. Prac. & Rem. Code § 82.001(2) (defining “products liability action”). Moreover, when D&L initially joined WFR as a third-party defendant, D&L asserted Chapter 82 indemnity claims against WFR. See Dkt. No. 3 ¶ 5. Although WFR's cursory allegation that its “counterclaim constitutes a products liability action,” Dkt. No. 98 ¶ 3.05, is indeed a legal conclusion not accepted as true, D&L provides no explanation why the Court must ignore prior pleadings as relevant context. D&L also provides no argument why WFR's common law indemnity claims should be dismissed. See Dkt. No. 104 at 4 n.13.
But even if the Court were restricted to only the allegations in WFR's amended complaint, there are sufficient factual allegations to satisfy Rule 8(a)(2). WFR alleges that D&L manufactured a defective packer that WFR sold to Encana, and that the defect allegedly caused an uncontrolled discharge of oil in May of 2015. See Dkt. No. 98 ¶¶ 3.02-03. WFR alleges that Encana demanded arbitration pursuant to a clause in a Master Service Agreement, and that “Encana and WFR entered into a settlement agreement, disposing of all claims that had been made or could have been made in this case or in the arbitration.” Id. ¶¶ 3.06-09. Although WFR asserts that confidentiality provisions prevent it from disclosing the full settlement amount, id. ¶ 5.01, WFR has allegedly incurred damages exceeding $75,000. Id. ¶ 2.03. Accordingly, the factual allegations in the amended complaint more than suffice to put D&L on notice of any claims. And to the extent that the amended complaint omits any details on certain elements of a Chapter 82 indemnity claim, the proper remedy in this context would be further amendment or a more definite statement, not dismissal.
Although D&L's summary-judgment arguments are premature in the current procedural posture, the Court is inclined to agree that reasonableness is an element of WFR's Chapter 82 indemnity claim that it must show at some point. See Oasis Oil Corp. v. Koch Ref. Co. L.P., 60 S.W.3d 248, 255 (Tex. App.-Corpus Christi-Edinburg 2001, pet. denied). And WFR cannot simultaneously seek to recoup its arbitration losses while refusing to produce any arbitration documents. Although WFR's refusal to produce confidential arbitration documents does not necessarily mandate dismissal at this juncture, D&L is free to reraise its arguments in a motion to compel once discovery is reopened.
B. Severance Is Appropriate for Administrative Clarity, So Encana's Lawsuit May Be Closed While WFR's Amended Complaint Proceeds in a New Case.
The Court next addresses sua sponte the issue of severance. Courts have broad discretion to sever claims into separate lawsuits. See Fed.R.Civ.P. 21; Brunet v. United Gas Pipeline Co., 15 F.3d 500, 505 (5th Cir. 1994). The effect of a Rule 21 severance is to simply “create[] two separate actions or suits where previously there was but one,” such that “a court may render a final, appealable judgment in either one of the resulting two actions notwithstanding the continued existence of unresolved claims in the other.” United States v. O'Neil, 709 F.2d 361, 368 (5th Cir. 1983). The Fifth Circuit has indicated that the following factors should be considered when determining the appropriateness of severance:
(1) whether the claims arise out of the same transaction or occurrence; (2) whether the claims present some common questions of law or fact; (3) whether settlement of the claims or judicial economy would be facilitated; (4) whether prejudice would be avoided if severance were granted; and (5) whether different witnesses and documentary proof are required for the separate claims.In re Rolls Royce Corp., 775 F.3d 671, 680 n.40 (5th Cir. 2014) (quotation omitted).
In this instance, severance would further the interests of judicial economy. Encana, the original Plaintiff, has already settled and dismissed all claims. See Dkt. No. 94. As a result, none of the other factors are truly relevant here. The only issues remaining are WFR's counterclaims in response to D&L's third-party complaint. Those indemnity claims are now fully contained within the amended complaint. See Dkt. No. 98. Severing WFR's amended complaint from Encana's now-dismissed claims would clean up the docket and promote administrative clarity. The Court may then proceed to close and fully resolve Encana's case, while permitting WFR's indemnity action to proceed with a new title and caption properly identifying the parties to the dispute.
Conclusion and Recommendation
For the reasons discussed above, it is recommended that any motion to dismiss for lack of jurisdiction or failure to state a claim should be DENIED. WFR's indemnity claims asserted in the Amended Complaint, Dkt. No. 98, should remain in federal court but should be SEVERED into a new case that should be restyled to accurately reflect the parties to the remaining dispute. It is further recommended that the new severed case should be assigned to the same District Court and Magistrate Court as this case, for obvious reasons of judicial economy.
Because all other claims asserted by Encana, the original Plaintiff in this case, have been voluntarily dismissed, see Dkt. No. 94, this case should be CLOSED even as the newly created case that will include the severed claims proceeds.
Having considered and acted upon all matters for which this case was referred, it is ORDERED that this case is RETURNED to the District Court for all purposes.
Instructions for Service and Notice of Right to Object/Appeal
The United States District Clerk shall serve a copy of this report and recommendation on all parties by either (1) electronic transmittal to all parties represented by attorneys registered as a “filing user” with the clerk of court, or (2) by mailing a copy by certified mail, return receipt requested, to those not registered. Written objections to this report and recommendation must be filed within fourteen (14) days after being served with a copy of same, unless this time period is modified by the district court. 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b). Objections, responses, and replies must comply with the same page limits as other filings, unless otherwise excused by the district court's standing orders. See Rule CV-7. The objecting party shall file the objections with the clerk of the court, and serve the objections on all other parties. A party filing objections must specifically identify those findings, conclusions, or recommendations to which objections are being made and the basis for such objections; the district court need not consider frivolous, conclusory, or general objections. A party's failure to file written objections to the proposed findings, conclusions, and recommendations contained in this report shall bar the party from a de novo determination by the district court. Thomas v. Arn, 474 U.S. 140, 149-52 (1985); Acuna v. Brown & Root, Inc., 200 F.3d 335, 340 (5th Cir. 2000). Additionally, failure to timely file written objections to the proposed findings, conclusions, and recommendations contained in this report and recommendation shall bar the aggrieved party, except upon grounds of plain error, from attacking on appeal the unobjected-to proposed factual findings and legal conclusions accepted by the district court. Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en banc).
IT IS SO ORDERED.