Charla Aldous, P.C. v. Darwin National Assu

Case: 16-10537 Document: 00513914606 Page: 1 Date Filed: 03/16/2017

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fif h Circuit

FILED

March 16, 2017

No. 16-10537

Lyle W. Cayce

Clerk

CHARLA ALDOUS; CHARLA G. ALDOUS, P.C., doing business as Aldous

Law Firm,

Plaintiffs - Appellants Cross-Appellees

v.

DARWIN NATIONAL ASSURANCE COMPANY,

Defendant - Appellee Cross-Appellant

Appeals from the United States District Court

for the Northern District of Texas

Before REAVLEY, ELROD, and GRAVES, Circuit Judges.

REAVLEY, Circuit Judge.

Litigation over two trusts begat litigation between the prevailing party,

Albert Hill III, and his attorneys. Appellant Charla Aldous is one of those

attorneys, and she prevailed against her erstwhile client. In addition to

establishing an entitlement to significant attorney’s fees, Aldous and her

cohort also successfully defended against breach of contract and professional

negligence claims, among others. Hill’s claims against the attorneys triggered

insurance coverage provided by appellee Darwin National Assurance, Co.,

Aldous’s insurer. And now, in this third layer of litigation, we confront the

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resulting coverage dispute. Aldous claims Darwin did not pay enough to fully

cover the costs of her defense. Darwin asserts it paid too much.

This case was decided in favor of Darwin on summary judgment. In a

ruling that effectively doomed Aldous’s claims, the district court ruled she was

judicially estopped from claiming defense costs in excess of $668,068.38.

Building on this ruling, the district court further found that Darwin was

entitled to recover “overpayments” on an equitable “money had and received”

theory. Aldous appealed.

In addition to issues raised by the district court’s summary judgment

ruling, we are also called upon to decide whether the district court erred in

partially granting a motion to dismiss brought by Darwin. Lastly, Darwin has

filed a cross-appeal, contending that judgment should not have been granted

in favor of Aldous with respect to a breach of contract claim.

I. BACKGROUND

Along with Lisa Blue and Steve Malouf, Aldous represented Hill in

litigation that resulted in a judgment for their client valued at $114,745,870.

(The association of lawyers Blue, Aldous, and Malouf are hereinafter referred

to as “BAM.”) BAM represented Hill on a contingency basis, but Hill did not

want to pay. Litigation ensued. After BAM sued Hill, Hill counterclaimed,

alleging breach of fiduciary duty, duress, breach of oral contract, fraud, and

professional negligence.

Aldous had a valid professional liability insurance policy through

Darwin (the “Policy”), and Hill’s counterclaims triggered coverage. Blue and

Malouf were also covered under separate policies through separate insurers.

BAM had already retained Alan Loewinsohn to represent its affirmative claims

against Hill and requested that the insurers allow Loewinsohn to handle the

defense as well. The insurers relented. The various parties agreed (and

continue to agree) that Darwin is responsible only for one-third of the covered

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costs of defense; Blue and Malouf (or their insurers) were separately

responsible for their one-third shares.

BAM ultimately prevailed against Hill, securing an award of

$21,942,961 in earned attorney’s fees (offset by $691,175.93), costs of

$479,595.67, and the “reasonable costs and fees in defending against Hill III’s

counterclaims in the amount of $2,586,560.11.” By the time judgment was

entered, Aldous and Darwin were already embroiled in this coverage dispute.

Aldous filed this suit in Texas state court, and it was removed to federal

court on the basis of diversity jurisdiction. As relevant here, Aldous alleged

breach of contract, breach of the duty of good faith and fair dealing, violations

of the Texas Insurance Code, and violations of the Texas Deceptive Trade

Practices Act. She also sought a declaratory judgment that Darwin is liable

for the costs associated with the prosecution of her affirmative claims against

Hill to the extent those affirmative claims were inextricably intertwined with

her defense. Darwin counterclaimed, alleging (among other things) breach of

contract, unjust enrichment, and money had and received. The district court

partially granted a Rule 12(b)(6) motion filed by Darwin, dismissing Aldous’

breach of the duty of good faith and fair dealing claim, as well as a Texas

Insurance Code § 541 claim and the Texas Deceptive Trade Practices Act claim.

Subsequently, the parties filed cross-motions for summary judgment.

On summary judgment, the district court ruled largely in favor of

Darwin. In a ruling with major consequences, the district court ruled that

Aldous was judicially estopped from claiming that the costs in defending

against Hill’s counterclaims exceeded $668,068.38. This ruling meant that

Darwin’s coverage obligations were limited to $222,689.44—one-third of the

total cost to defend. Darwin had paid Aldous far more than that, $502,364.59.

Based on this ruling, Aldous’ breach of contract claim necessarily failed. The

judicial estoppel ruling also meant that Darwin had overpaid, and the district

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court ruled that Darwin could recover this overpayment through an action for

money had and received. The district court further ruled that Aldous was not

entitled to costs related to the prosecution of her affirmative claims against

Hill, even if she could show those affirmative claims were inextricably

intertwined with her defense against Hill’s counterclaims. And, as clarified in

a subsequent order, the district court granted summary judgment against

Darwin with respect to its breach of contract counterclaim, reasoning that the

anti-subrogation rule prevented it from asserting subrogation rights against

its own insured.

II. STANDARD OF REVIEW

Summary Judgment. Summary judgment rulings are subject to de

novo review. Cal-Dive Int’l, Inc. v. Seabright Ins. Co., 627 F.3d 110, 113 (5th

Cir. 2010). “We will affirm the district court’s judgment if no genuine issues of

fact are presented and if judgment was proper as a matter of law.” Id. On

cross-motions for summary judgment, we consider “each party’s motion

independently, viewing the evidence and inferences in the light most favorable

to the nonmoving party.” Morgan v. Plano Indep. Sch. Dist., 589 F.3d 740, 745

(5th Cir. 2009).

Motion to Dismiss. Dismissal for failure to state a claim is also

reviewed de novo. Colony Ins. Co. v. Peachtree Const., Ltd., 647 F.3d 248, 252

(5th Cir. 2011). Dismissal is appropriate if, assuming the truth of all facts

alleged in the complaint, the plaintiff is not entitled to relief as a matter of law.

Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949 (2009); see Fed. R.

Civ. P. 12(b)(6).

III. DISCUSSION

A. Judicial Estoppel

As the parties understand, the district court’s judicial estoppel ruling

had major ripple effects. It is the foundation of the grant of summary judgment

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in favor of Darwin’s equitable claim for relief, and it precludes Aldous from

establishing any breach of contract. As we will see, however, the foundation is

faulty. Application of judicial estoppel was inappropriate.

Texas law governs the substance of this dispute, but “we apply federal

principles of judicial estoppel.” RSR Corp. v. Int’l Ins. Co., 612 F.3d 851, 859

(5th Cir. 2010). There are two basic requirements: “First, it must be shown

that ‘the position of the party to be estopped is clearly inconsistent with its

previous one; and [second,] that party must have convinced the court to accept

that previous position.” 1 Id. (quoting Hall v. GE Plastic Pac. PTE Ltd., 327

F.3d 391, 396 (5th Cir. 2003)). That said, “the Supreme Court has refused to

‘establish inflexible prerequisites or an exhaustive formula for determining the

applicability of judicial estoppel,’ stating instead that different considerations

‘may inform the doctrine’s application in specific factual contexts.’” Reed v.

City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011) (en banc) (quoting New

Hampshire v. Maine, 532 U.S. 742, 751, 121 S.Ct. 1808, 1815 (2001)). Even

when serving as the basis for a summary judgment ruling, a district court’s

judicial estoppel determination is reviewed for abuse of discretion. Kane v.

Nat’l Union Fire Ins. Co., 535 F.3d 380, 384 (5th Cir. 2008). “A district court

abuses its discretion if it misapplies the law or bases its decision upon

erroneous findings of fact.” RSR Corp., 612 F.3d at 859.

After thorough review of the record, we can only conclude that Aldous

never took the position (let alone “clearly”) that her defense costs in the

underlying suit were limited to $668,068.31 and that the prior court never

accepted such a position. The district court’s contrary determination

represents an abuse of discretion.

1 Though not relevant here, we also typically ask whether the party to be estopped

acted inadvertently. Reed v. City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011) (en banc).

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During the prior proceedings, BAM was required to show how much it

expended both in prosecuting its claims against Hill and in defending against

Hill’s counterclaims. The parties stipulated that these attorney’s fees could be

established through declarations, and BAM’s attorney filed a series of relevant

declarations (the “Loewinsohn Declarations”). The first of the declarations

makes it plain that BAM did not claim its costs of defense were limited to

$668,068.31. Therein, Loewinsohn asserted legal fees of $2,054,178.18,

including both affirmative and defensive claims. He expressly declared that

the “fees and expenses can all be allocated either to the prosecution of BAM’s

breach of contract claim or to the defense of the counterclaims and affirmative

defenses asserted by the Hills, which was necessary in BAM’s prosecution of

their claim, or both.”

That first declaration was filed on April 29, 2011. After that day, the

rest of the litigation concerned only Hill’s counterclaims. On June 29, 2011,

Loewinsohn submitted a “supplemental declaration” that further testified that

“for the time period of May 1, 2011 to June 24, 2011, for the defense of the

Counterclaims,” $668,068.31 had been reasonably expended. Then, on

January 9, 2012, he submitted a “second supplemental declaration” which

“incorporated by reference” the first and reiterated his opinion “that an

attorney’s fee, including expenses, of $668,068.31 was a reasonable and

necessary fee for the defense of the Counterclaims.” As can be readily seen,

mere recitation of the Loewinsohn Declarations establishes that Aldous never

claimed that defense costs totaled $668,068.31. Rather, the fees incurred after

April 29 totaled $668,068.31 and were purely defense-related.

Two other notable facts emerge from the declarations and a review of the

prior proceedings. First, the reason that fees incurred after April 29 related

solely to defending against Hill’s claims is that BAM’s affirmative claims had

already been litigated. An evidentiary hearing commencing April 20th

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resolved those claims. Second, the lion’s share of dispositive defense work was

done prior to April 29, as shown by the judge’s ruling that, with one exception,

all of Hill’s counterclaims “were legally barred based on her prior rulings”

stemming from the April 20 hearing. 2

The district court’s ruling contains several errors. Most fundamentally,

the district court unjustifiably read the supplemental declaration in isolation.

It took as Aldous’s binding position that defense costs in the prior proceeding

were incurred only between May 1 and June 24 and that those costs totaled

$668,068.31. To make this large error, the district court was required to make

small antecedent errors.

For example, the district court refused to credit Aldous’s argument that

the first declaration did not segregate fees and therefore included costs related

to defending against Hill. In the district court’s view, this argument was

undercut by the fact that “Loewinsohn segregate[d] the fees associated with

the affirmative and defensive claims in his supplemental and second

supplemental declaration.” Charla G. Aldous, P.C. v. Darwin Nat. Assur. Co.,

92 F.Supp.3d 555, 566 (N.D. Tex. 2015). Loewinsohn’s newfound ability to

segregate fees is easily explained, however. As mentioned above, after June

29 the only remaining work to be done was defense work.

Further, even the district court’s interpretation of the supplemental

declaration ignores its plain language. The supplemental declaration

establishes fees incurred “for the time period of May 1, 2011 to June 24, 2011.”

2 That is not to say that the lion’s share of defensive costs were necessarily incurred

during that time. The cost of the defense work done during that period is a disputed question

of fact. And, as will be seen later, we reject Aldous’s argument that Darwin must pay all

costs of prosecuting BAM’s affirmative claims to the extent the costs were “inextricably

intertwined” with the defense. It does, however, vindicate Aldous’s position, taken early in

the coverage dispute, that the April 20th hearing, though ostensibly intended only to resolve

BAM’s affirmative claims, would serve as the proving ground for BAM’s defense as well.

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When Aldous pointed out that the declaration was time-limited, the district

court closed its ears and refused to consider the point. See id. at 566 (“The

purpose of judicial estoppel, however, prevents Plaintiffs from taking positions

such as this one.”). As the district court saw it, judicial estoppel itself

precluded Aldous from explaining her prior position. It should go without

saying that judicial estoppel cannot be applied to the question of whether

judicial estoppel applies. Aldous should have been permitted make arguments

reconciling and harmonizing the declarations. 3

We also cannot condone the district court’s approach to the second aspect

of judicial estoppel—whether the first court accepted the prior inconsistent

position. To find judicial estoppel applicable, the district court was required to

find that the prior court accepted $668,068.31 as BAM’s total costs on defense.

Instead, the prior court issued a judgment “[t]hat BAM shall recover from Hill

III its reasonable costs and fees in defending against Hill III’s counterclaims

in the amount of $2,586,560.11.” (Emphasis added.) As Aldous argues, this

single sentence from the judgment demonstrates that judicial estoppel was

improper.

Nonetheless, the district court found that the “record clearly reflects the

court’s acceptance of and reliance on Plaintiffs’ prior position in the Hill

lawsuit.” Charla G. Aldous, P.C., 92 F.Supp.3d at 568. The evidence cited by

the district court does not show that the prior court accepted $668,068.31 as

3 The district court’s interpretation of the Loewinsohn Declarations requires the

acceptance of a very unlikely fact—that BAM did not spend any resources defending against

the counterclaims until May 1, 2011, even though Hill filed the counterclaims on February

15, 2011. The district court had an explanation: “Hill filed his counterclaims on February 15,

2011, and Aldous provided notice of this counterclaim to Darwin on March 9, 2011. . . . Thus,

Loewinsohn’s estimation that his work for defense occurred between May 1, 2011–June 24,

2011, is not unreasonable, despite Plaintiffs attempt to make it appear so.” 92 F.Supp.3d at

566–67. Without remarking on whether this reasoning is plausible, we note that it includes

a clear error of fact. Aldous provided notice of the counterclaims to Darwin on February 17,

2011, a mere two days after Hill filed them.

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the full measure of defense costs. It shows the parties agreed “to be bound by

[the prior court’s] attorney’s fees determination” and “agreed that they would

submit the issue of attorney’s fees to [a magistrate judge]; that they could

appeal only to [a district court judge]; and that they would not request an

additional evidentiary hearing before [the district court judge].” Id. The

relevance of this procedural background and summary of the parties’

agreements is unclear. What is clear is that the district court erred in

assessing the evidence.

Judicial estoppel is an equitable doctrine concerned with “judicial

acceptance of an inconsistent position in a later proceeding [that] would create

the perception that either the first or the second court was misled.” Reed

Elsevier, Inc. v. Muchnick, 559 U.S. 154, 170, 130 S.Ct. 1237, 1249 (2010)

(quoting New Hampshire v. Maine, 532 U.S. at 750, 121 S.Ct. at 1815).

Nothing in the judgment issued by the prior court would suggest that Aldous

should not be permitted to claim defense costs in excess of $668,068.31.

Indeed, the judgment suggests defense costs far outpacing that figure. Any

inconsistency of rulings was confected when the district court estopped Aldous

from claiming BAM’s costs on defense exceeded $668,068.31. We now undo

that error. 4

4 Darwin asserts that collateral estoppel also applies because “[t]he amount of fees

and expenses reasonably incurred in the defense of the Fee Counterclaim that was submitted

to Darwin for coverage was distinctly at issue in the Fee Lawsuit, was in fact litigated, and

was determined” in the prior proceedings. Darwin does not point us to the specific ruling it

believes should be given preclusive effect, however. In the ordinary course, if collateral

estoppel were appropriate, we would give preclusive effect to rulings deemed “necessary to

[the] final judgment.” See Duffy & McGovern Accommodation Servs. v. QCI Marine Offshore,

Inc., 448 F.3d 825, 829 (5th Cir. 2006). Here, that would mean Aldous has already

established “reasonable costs and fees in defending against Hill III’s counterclaims in the

amount of $2,586,560.11.” Any different prior-court ruling Darwin may have in mind was

manifestly not essential to the final judgment. Fortunately for Darwin, it is inappropriate to

apply collateral estoppel against a party who did not have a full and fair opportunity to

litigate the question. See Taylor v. Sturgell, 553 U.S. 880, 892, 128 S.Ct. 2161, 2171 (2008).

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B. Aldous’s Claims

1. Breach of Contract

The district court granted summary judgment on Aldous’s breach of

contract claim in part because Aldous had already received from Darwin

payments in excess of its one-third share of $668,068.31 in defense costs. That

logic was predicated on the judicial estoppel ruling and no longer holds. But

the district court also granted summary judgment against Aldous for reasons

beyond the judicial estoppel ruling. Under the district court’s interpretation of

the contract, Darwin “did not breach the contract as a matter of law because

the terms of the Policy provide Defendant with discretion to determine

reasonable claim expenses.” Charla G. Aldous, P.C., 92 F.Supp.3d at 569. We

cannot agree. Summary judgment should not have been granted against

Aldous on the breach of contract claim.

“Interpretation of an insurance contract is a question of law,” meaning

our review is de novo. Tesoro Ref. & Mktg. Co., L.L.C. v. Nat’l Union Fire Ins.

Co., 833 F.3d 470, 473 (5th Cir. 2016). “Under Texas law, we interpret

insurance policies using the same rules of interpretation and construction

applicable to contracts generally.” Id. at 474. The Policy contains a promise

that Darwin will pay “all” covered “Claim Expenses.” Only “reasonable”

expenses qualify, however, and “[t]he determination by the insurer as to the

reasonableness of Claim Expenses shall be conclusive on all Insureds.” The

district court interpreted these provisions to provide Darwin with a right to

decide how much it wants to pay. And there was no breach, according to the

district court, because Darwin merely exercised that right and did not do so

arbitrarily:

Darwin’s stated reasons for making the deductions demonstrate

that it did not arbitrarily make these deductions but rather made

a determination as to the reasonableness of the Claim Expenses,

as permitted by the Policy, according to reasonable considerations,

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such as its Billing Guidelines and the fact that it did not have a

duty to pay for attorney’s fees associated with BAM’s affirmative

claims.

Charla G. Aldous, P.C., 92 F.Supp.3d at 571.

Aldous contends that Darwin never made a reasonableness

determination that should now be treated as binding and that the district

court’s interpretation of the Policy renders the duty to defend illusory.

According to Darwin, “the District court determined ‘as a matter of law’ that

Darwin did not breach the Policy in making the reductions, because the Policy

gave Darwin the right to do so,” such that “[e]vidence” of a reasonableness

determination was “unnecessary.” This is an accurate description of the

district court’s ruling, but it proves Aldous’s point. If the Policy provides

Darwin with the unquestionable right to pay only to the extent it pleases, it is

illusory. Accordingly, we agree with both aspects of Aldous’ argument.

Darwin’s right to make a binding determination regarding the

reasonableness of Aldous’s claims would be implicated only if Darwin actually

made a reasonableness determination. Darwin disclaims any obligation to

provide evidence of reasonability and goes further still, asserting that

“[e]vidence showing example of” the challenged “reductions was . . .

unnecessary.” Despite this questionable assertion, it assures us “[t]he

pleadings and evidence are replete with examples of Darwin’s ‘reasonableness’

determinations.” From a record “replete” with examples, however, it gives us

none. Instead, it points us into legal thickets.

For example, Darwin asserts that its reliance on billing guidelines to

categorically exclude certain expenses represents a reasonableness

determination and explains that “Darwin was clear from the beginning that its

consent to Loewinsohn as counsel . . . was conditioned upon ‘adherence to

Darwin’s Billing and Reporting Guidelines.’” The “Billing Guidelines” are not

part of the Policy, and Darwin informed Aldous of its intent to utilize them

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only in a reservation-of-rights letter. But “a unilateral reservation-of-rights

letter cannot create rights not contained in the insurance policy.” Texas Ass’n

of Cntys. Cnty. Gov’t Risk Mgmt. Pool v. Matagorda Cnty., 52 S.W.3d 128, 131

(Tex. 2000). The same is true of the Billing Guidelines themselves. As a

matter of basic contract law, an extra-contractual document—a document to

which Aldous never agreed—cannot limit or define her rights under the Policy.

Baylor Univ. v. Sonnichsen, 221 S.W.3d 632, 635 (Tex. 2007) (identifying

“mutual assent” as a basic component of any contractual agreement); see also

Philadelphia Indem. Ins. Co. v. Chicago Title Ins. Co., Case No. 09 C 7063,

2012 WL 2115487, at *5 (N.D. Ill. June 10, 2012) (rejecting an argument that

“later-provided conditions can govern the amount to which an insured is

entitled when those guidelines were not a part of the original insurance

contract.”).

Darwin also refers us to Aldous’s brief, which assertedly “describes and

cites extensive evidence of reductions Darwin made to defense bills based on

the Billing Guidelines.” Again, reliance on the Billing Guidelines is

problematic under the circumstances. 5 Further, survey of the evidence cited

in Aldous’s brief suggests that Darwin’s reductions were in fact made

arbitrarily and even against the Darwin adjuster’s reasoned judgment.

In correspondence with Aldous, Darwin explained that it reached the

proper sum by applying “Billing Guidelines” calling for certain relatively

modest deductions “off the top.” Far more significant was its next step—simply

cutting the remaining claimed balance in half based on an assumption that

half of the claimed costs were associated with prosecution of Aldous’

affirmative claims and were therefore not covered. It made this “50/50

5In the ordinary case, where the insurer has selected and retained counsel, the Billing

Guidelines may very well have a wholly different and perfectly appropriate application. But

they are not part of the agreement between the insurer and insured.

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reduction” even though Aldous’s invoicing had already been adjusted to

eliminate costs related solely to the affirmative claims. Darwin’s own adjuster

initially opposed cutting Aldous’s claimed costs in this manner, saying such an

approach “would be taking two bites at the apple and would be deducting likely

more than we should.” The adjuster was persuaded to fall into line not by

Darwin officials asserting “reasonableness” but by the insurance companies

representing Blue and Malouf. The record shows that Travelers insurance

company pressed the 50/50 reduction. Further, the Travelers adjuster’s

rationale had nothing to do with a reasonableness determination. Rather, the

evidence indicates that Travelers was still bitter about Loewinsohn’s retention,

reasoned “What’s the harm in trying?,” and “suspect[ed]” the insureds wouldn’t

“quibble over a hundred thousand here or there.”

We do not opine on the general enforceability of the Policy provision at

issue. We hold that it is simply not implicated on these facts, where there is

no evidence that Darwin made any genuine determination as to the

reasonableness of claimed fees and instead slashed the claimed defense costs

arbitrarily. As Aldous argues, under the circumstances, reading the Policy to

effectively immunize Darwin from breach of contract claims would render the

contract illusory. See Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256

S.W.3d 660, 669 (Tex. 2008) (“We cannot adopt a construction that renders any

portion of a policy meaningless, useless, or inexplicable.”). Darwin is not

entitled to summary judgment on Aldous’s breach of contract claim. In ruling

otherwise, the district court erred.

2. Declaratory Judgment

Aldous seeks “a declaration that Darwin was required to pay all of

[Loewinsohn’s] attorneys’ fees and costs that were inextricably intertwined

with her defense and pursuit of her affirmative claim.” In other words, though

the Policy covers only expenses related to the defense against Hill’s claims,

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Aldous seeks to recover fees related to the affirmative prosecution of her

affirmative claims insofar as it can be said the work was “inextricably

intertwined” with the defense. The problem with this argument is that there

is absolutely no support for it.

As a federal court with diversity jurisdiction and an obligation to follow

Texas law, innovation is verboten. Dean v. Dean, 821 F.2d 279, 284 (5th Cir.

1987). No Texas court has ever held that the duty to defend includes the duty

to pay legal fees incurred in the course of prosecuting affirmative claims that

are inextricably intertwined with the defense. Relied upon by Aldous, Zurich

American Insurance Co. v. Nokia, Inc., explains that “[i]f a complaint

potentially includes a covered claim, the insurer must defend the entire suit.”

268 S.W.3d 487, 491 (Tex. 2008). The duty to defend the entire suit does not

give rise to a duty to prosecute claims helpful to or even inextricably

intertwined with that defense, however. Aldous also points to Stewart Title

Guaranty Co. v. Sterling, 822 S.W.2d 1 (Tex. 1991). Stewart Title is concerned

with the circumstances under which a plaintiff seeking attorney’s fees from a

vanquished defendant may also recover attorney’s fees related to defending

against that same defendant’s counterclaims—“when the attorney’s fees

rendered are in connection with claims arising out of the same transaction and

are so interrelated that their ‘prosecution or defense entails proof or denial of

essentially the same facts.’” Id. at 11 (quoting Flint & Assocs. v. Intercont’l

Pipe & Steel, Inc., 739 S.W.2d 622, 624–25 (Tex. App. 1987)). The case has

nothing to do with an insured’s duty to defend and does not support Aldous’

novel argument that the duty to defend may also include a duty to prosecute

integrally related affirmative claims.

Aldous cites no Policy language in support of her argument, which the

district court rightly viewed as an effort to rewrite the agreement. See

Mustang Tractor & Equip. Co. v. Liberty Mut. Ins. Co., Case No. CIV. A. H-91-

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2523, 1993 WL 566032, at *9 (S.D. Tex. Oct. 8, 1993), aff’d, 76 F.3d 89 (5th Cir.

1996) (declining to extend an insurer’s duty to defend to cover prosecution of

defense-minded affirmative claims because, while “the duty to defend is

expansive,” all surveyed “cases uniformly hold that the duty is limited to cases

potentially within the policy coverage”). Aldous is not entitled to the

declarations she seeks, and summary judgment was properly granted against

her on these claims. Based on our rulings thus far, the proper measure of

covered defense costs remains an unsettled question of fact.

3. Breach of the Duty of Good Faith and Fair Dealing

Aldous’s claim for breach of the duty of good faith and fair dealing did

not survive Darwin’s motion to dismiss for failure to state a claim. For over

twenty years, the law in Texas has been clear that an insurer does not owe its

insured “a duty of good faith and fair dealing to investigate and defend claims

by a third party against its insured.” 6 Maryland Ins. Co. v. Head Indus.

Coatings & Servs., Inc., 938 S.W.2d 27, 27 (Tex. 1996). Nonetheless, Aldous

asserts that a failure to provide the required defense may represent a breach

of the duty of good faith and fair dealing. Consistent with Mid-Continent

Casualty. Co. v. Eland Energy, Inc., 709 F.3d 515 (5th Cir. 2013), we reject that

argument.

“Under Texas law, an insurer owes a duty of good faith in handling its

insured’s own claim of loss.” Med. Care Am., Inc. v. Nat’l Union Fire Ins. Co.,

341 F.3d 415, 425 (5th Cir. 2003). But there is no common law duty of good

faith and fair dealing between an insurer and insured with respect to third-

6 Head Industrial has been partially superseded by statue as explained in Chickasha

Cotton Oil Co. v. Houston General Insurance Co. See Case No. 05-00-01789-CV, 2002 WL

1792467, at *7 (Tex. App. 2002). “However, Head Industrial has not been overruled relative

to an insured’s attempt to impose common-law, as opposed to statutory, duties on an insurer

with respect to settling third-party claims.” Methodist Hosp. v. Zurich Am. Ins. Co., 329

S.W.3d 510, 517 n.6 (Tex. App. 2009).

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party claims. Eland Energy, 709 F.3d at 520. The parties agree that the

viability of the cause of action depends on whether Aldous’ claim is classified

as a first-party claim or a third-party claim.

To identify the nature of the claim, it is proper to ask: When the insured

“sought coverage” was it to cover its own loss or the loss of a third party? Id.

at 520–21; see also Lamar Homes, Inc. v. Mid–Continent Cas. Co., 242 S.W.3d

1, 17 (Tex. 2007) (“[A] first party claim is stated when ‘an insured seeks

recovery for the insured’s own loss,’ whereas a third-party claim is stated when

‘an insured seeks coverage for injuries to a third party.’ ” (quoting Universe Life

Ins. Co. v. Giles, 950 S.W.2d 48, 54 n.2 (Tex. 1997))). Here, a third-party (Hill)

allegedly suffered a loss and sued the insured (Aldous), who then sought

coverage from the insurer (Darwin). Viewed this way, this is not a claim

involving the insured’s claim of loss, meaning there is no duty of good faith and

fair dealing between the insurer and insured. See Eland Energy, 709 F.3d at

520.

Aldous attempts to distinguish Eland Energy by creating two categories

of duty-to-defend disputes. In the first batch, you have mishandled defenses,

and Eland Energy fits into this category because there we held that the

plaintiff failed to “show that Texas law recognizes a cause of action for an

insurer’s mishandling of third-party claims.” Id. at 520. In the second batch,

you have failure-to-pay cases, where the insurer did not pay for the defense as

required by law. We cannot accept this distinction because Eland Energy’s

holding is that the duty of good faith and fair dealing simply does not exist in

the present scenario. See id. It would be a strange duty if its existence

depended on whether or how it was violated.

Aldous’s argument, however, is not without force. For in Lamar Homes,

at least for purposes of the Prompt Payment Act, the Supreme Court of Texas

held that “an insured’s claim for defense costs is a first-party claim because it

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concerns a direct loss to the insured; that is, the claim does not belong to a

third party.” 242 S.W.3d at 17. Ultimately, we find Lamar Homes inapt.

Lamar Homes did not hold that a duty of good faith and fair dealing runs

from insured to insurer in circumstances where the duty to defend was

triggered and the insurer failed to adequately cover the defense. Indeed, the

case had nothing to do with the duty of good faith and fair dealing and

concerned statutory, rather than common law, duties. It would be odd if a

ruling on the Prompt Payment Act dramatically affected the common law

duties of insurers. Lamar Homes, 242 S.W.3d at 16 (describing the issue

presented as “whether the ‘Prompt Payment of Claims’ statute . . . applies to

an insurer’s breach of the duty to defend”). It would be odder still if the catalyst

for that change in the law was the Texas legislature’s decision to add the term

“first-party claim” to the Prompt Payment Act. See id. at 24 (Brister, J.

dissenting) (noting the addition of the phrase in 1991).

Notably, Aldous has pointed to no Texas courts interpreting Lamar

Homes to revise the common law duties of insurers in the manner for which

she advocates. Most courts that have considered the possibility have rejected

it. 7 Further, under Aldous’s view, the duty of good faith and fair dealing only

exists (and is violated) when the duty to defend has also been breached. In

rejecting this theory, we follow the Supreme Court of Texas’ pertinent

instructions. See Head Industrial, 938 S.W.2d at 28–29 (“[A]n insured is fully

7 See Allied World Specialty Ins. Co. v. Freese & Goss, PLLC, Case No. 3:15-CV-02792-

N, 2016 WL 6581922, at *3 (N.D. Tex. July 1, 2016) (“Lamar Homes . . . only interpreted the

meaning of a ‘first-party claim’ within the context of the Texas prompt payment statute.”);

One Beacon Ins. Co. v. T. Wade Welch & Assocs., Case No. CIV.A. H-11-3061, 2012 WL

2403500, at *6 (S.D. Tex. June 25, 2012) (“[T]he Texas Supreme Court was construing what

the Texas Legislature meant for the statute to cover, not re-writing all of its prior caselaw

relating to insurers' common law duties.”). But see Corinth Inv’rs Holdings, LLC v. Evanston

Ins. Co., Case No. 4:13-CV-682, 2014 WL 4222168, at *11 (E.D. Tex. Aug. 25, 2014).

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protected against his insurer’s refusal to defend or mishandling of a third-party

claim by his contractual and Stowers rights.”).

4. Aldous’s Remaining Claims

Aldous’s claims based on the Texas Insurance Code and Deceptive Trade

Practices Act are barred as a matter of law under Parkans International LLC

v. Zurich Ins. Co., 299 F.3d 514 (5th Cir. 2002). Under Parkans, “[t]here can

be no recovery for extra-contractual damages for mishandling claims unless

the complained of actions or omissions caused injury independent of those that

would have resulted from a wrongful denial of policy benefits.” Id. at 519. We

are not at liberty to second-guess this ruling. See Jacobs v. Nat’l Drug

Intelligence Ctr., 548 F.3d 375, 378 (5th Cir. 2008).

C. Darwin’s Claims

1. Money Had and Received/Equitable Reimbursement

In light of our judicial estoppel ruling, the district court’s grant of

summary judgment on Darwin’s claim for money had and received cannot

stand. Aldous argues that judgment was improper for another reason: under

Texas law, an insurer has no right of equitable reimbursement against its

insured. For the reasons that follow, as a federal court exercising diversity

jurisdiction, we cannot endorse the district court’s recognition of an insurer’s

previously unannounced equitable right of recovery against its insured.

In the words of the district court, an insurer “is entitled to recover to the

extent it made overpayments,” and overpayments are payments made but not

actually required “under the insurance contract.” Aldous v. Darwin Nat.

Assur. Co., Case No. 3:13-CV-3310-L, 2015 WL 1879677, at *5 (N.D. Tex. Apr.

24, 2015). Under this approach, an insurer that makes payments under a

policy while coverage is disputed can sue its insured, claiming a right to

equitable reimbursement if the coverage dispute is resolved in its favor. And,

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because the claim is equitable in nature, the insurer need not point to any

policy provision granting the right. Rather, the right exists by default.

Under Texas law, if an insurance company disputes coverage with its

insured but nonetheless settles the action on the insured’s behalf, there is no

right to equitable reimbursement if the third party’s claims are later

determined to be uncovered by the policy. Matagorda County, 52 S.W.3d at

135. This is true even where the insurer has provided coverage under a

reservation of rights. Id. at 131. But nothing stops insurers from including a

right to reimbursement in its Policy or obtaining “the insured’s clear and

unequivocal consent to the settlement and the insurer’s right to seek

reimbursement.” Id. at 135. The Supreme Court of Texas later described

Matagorda County broadly, as a case “declining to recognize an implied-in-fact,

an implied-in-law, or an equitable reimbursement right outside of the

insurance policy’s provisions.” Excess Underwriters at Lloyd’s, London v.

Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 45 (Tex. 2008).

Under the broad reading of Matagorda County suggested by Frank’s

Casing, Darwin has no equitable reimbursement right outside of the insurance

policy’s provisions. Both of those cases, however, apply where an insurer

“settles a claim against its insured when coverage is disputed.” See id. at 43.

And much of their reasoning is specifically tailored to that scenario. See id. at

46. (“Our analysis in Matagorda County highlighted the dilemma faced by both

insurer and insured when a claimant presents a settlement demand within

policy limits and coverage is uncertain.”). Thus, those cases strongly suggest

(but do not necessarily dictate) that insurers have no right to equitable

reimbursement of costs expended in defending an insured where coverage

exists but the scope of the duty to defend is disputed and later resolved in favor

of the insurer. See Am. Int’l Specialty Lines Ins. Co. v. Rentech Steel LLC, 620

F.3d 558, 564 (5th Cir. 2010) (“In making our Erie guess, we look first to those

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Texas Supreme Court cases that, while not deciding the issue, provide

guidance as to how the Texas Supreme Court would decide the question before

us.”).

The district court did not give due regard to Frank’s Casing and

Matagorda County. Moreover, instead of basing its decision on Texas law, the

district court relied primarily on Fifth Circuit cases that were not applying

Texas law. See Charla G. Aldous, P.C., 92 F.Supp.3d at 573 (relying on United

States v. St. Bernard Par., 756 F.2d 1116, 1127 (5th Cir. 1985) (applying federal

law), Peavey Co. v. M/V ANPA, 971 F.2d 1168, 1176 (5th Cir. 1992) (applying

Louisiana law), and Adams v. Unione Mediterranea Di Sicurta, 364 F.3d 646,

656 (5th Cir. 2004) (applying federal admiralty and maritime law). Its

subsequent “Supplemental Memorandum Opinion and Order” further reveals

that the district court’s ruling lacked a basis in Texas law. The district court

recognized that federal courts have permitted “restitution for overpayment as

a means of recovery under ERISA” and concluded that, “[b]y analogy, the

reasons for allowing recovery for overpayments in the context of ERISA are

applicable to the court’s decision today, as the concerns also pertain to

contracts for liability insurance.” See Aldous, 2015 WL 1879677, at *5. Federal

courts are not to make state law, and certainly not “by analogy” to federal law.

See Erie R. Co. v. Tompkins, 304 U.S. 64, 69, 58 S.Ct. 817, 818 (1938) (“There

is no federal general common law. Congress has no power to declare

substantive rules of common law applicable in a state . . . . And no clause in

the Constitution purports to confer such a power upon the federal courts.”).

The district court’s Supplemental Memorandum Opinion and Order also

included citations to Texas cases. While the district court sharpened its

analytical focus, the cases cited do not support its conclusion. The district court

relied on Fortune Production Co. v. Conoco, Inc., 52 S.W.3d 671 (Tex. 2000),

and Southwest Electric Power Co. v. Burlington Northern R.R. Co., 966 S.W.2d

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467 (Tex. 1998). We reject application of those cases for the simple reason that

they do not involve contracts for insurance. See Miga v. Jensen, 299 S.W.3d

98, 103 (Tex. 2009).

As plaintiff, Dennis Miga had initially been very successful in litigation

against Ronald Jensen, securing a judgment in excess of $20 million that was

largely upheld on appeal. Id. at 100. Because interest was accruing at an

alarming rate, Jensen paid the judgment just prior to filing a petition for

review with the Supreme Court of Texas. Id. Texas’ highest court then sided

with Jensen on the merits, again rendering judgment in favor of Miga but in

an amount just over $1 million. Id. at 101. Miga took the position that the

reversal had no financial consequences and denied any obligation to repay the

$21,560,150.67 he had received beyond the proper, adjusted judgment amount.

Id. Jensen then filed suit for restitution, and the case again wound up before

the Supreme Court of Texas, which applied the “restitution-after-reversal rule”

and held in Jensen’s favor. Id. at 101–02.

Miga argued that Frank’s Casing (which the Supreme Court of Texas

described broadly as a case “in which we declined to recognize an equitable

right of reimbursement”) should apply and bar Jensen’s claim. The argument

was rejected:

This case involves restitution upon reversal of a judgment, not

insurers seeking restitution from an insured on a third-party

claim, against the backdrop of a highly regulated industry. . . .

Restitution in insurance-related cases involves policy concerns not

present here:

[D]isputes between insurers and policyholders over the

insurer’s duty to pay a claim, or to settle or defend a claim

brought against the policyholder, present special difficulties

for the law of restitution, because the insurer’s duty to

indemnify and defend is subject to extensive regulation

under local law.

Id. (quoting Restatement (Third) § 35, cmt. c. (Tentative Draft No. 3, 2004)).

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Miga suggests that an “equitable right to reimbursement” does not exist

at all in the context of insurance cases. It shows that recognition of such a

right would be only proper after a thorough and conscientious review of Texas’

regulatory scheme in light of the unique “policy concerns” implicated. And it

firmly establishes that we cannot look to generic contract cases when trying to

identify equitable rights of insurers against their insureds.

In light of Matagorda County, Frank’s Casing, Miga, and our constrained

role, our obligation is clear. We have been asked to recognize, as a matter of

Texas law, an insurer’s right to equitable reimbursement for “overpayments”

of defense costs. But “it is not for us to adopt innovative theories of recovery

for Texas law.” Dean, 821 F.2d at 284. Summary judgment should have been

granted in favor of Aldous with respect to Darwin’s claims for equitable

reimbursement (however denominated). 8

2. Breach of Contract

Darwin also seeks the return of money that was not overpaid but that

was properly paid. Darwin believes the legal fees Hill paid directly to Aldous

should have instead been paid directly to Darwin, at least in a measure

commensurate with the legal fees Darwin spent on Aldous’s behalf. This

scenario seems ready-made for subrogation. See Fortis Benefits v. Cantu, 234

S.W.3d 642, 645 (Tex. 2007) (explaining how subrogation rights “prevent the

insured from receiving a double recovery, first from the insurer, then from the

third party”). Darwin paid at least some measure of Aldous’s legal fees, and

Aldous then recovered legal fees from Hill. Understandably, Darwin thinks it

is entitled to some of the money paid by Hill. 9

8 Based on this holding, we do not need to reach Aldous’s argument that the district

court misapplied the law relating to claims for money had and received.

9 Aldous contends that allegations of a windfall recovery are “repudiated by the

evidence” because she “invested over $1.1 million of her own resources” in prevailing against

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For whatever reason, however, Darwin did not seek subrogation against

Hill. That is, it did not intervene in the prior litigation, step into the shoes of

Aldous, and assert (for its own benefit) Aldous’s right to attorney’s fees against

Hill. Darwin concedes that it cannot assert subrogation rights against Aldous,

its own insured. This result follows from the very nature of subrogation rights.

As a “purely conceptual” matter, an insurer cannot be subrogated against “an

insured because an insurer who seeks subrogation stands in the shoes of the

insured.” State Farm Mut. Auto. Ins. Co. v. Perkins, 216 S.W.3d 396, 401 (Tex.

App. 2006). “Because a person cannot sue himself for damages, that person’s

insurer, who stands in the person’s shoes for subrogation purposes, cannot sue

the person either.” Id.

According to Darwin, this analysis misses the point. Darwin isn’t

seeking to assert subrogation rights. Rather, Darwin is alleging Aldous

violated the terms of the Policy—ordinary breach of contract. Thus, Darwin

argues it “had a subrogation right against Hill as a result of its payments on

Aldous’ behalf, and Aldous impaired Darwin’s subrogation rights by

successfully suing Hill for money paid by Darwin that Aldous recovered and

then withheld.” Or, as stated in the reply brief, “Darwin had the right to step

into Aldous’ shoes to recover the defense fees it paid against Hill, but is not

attempting to do so in this lawsuit because Aldous prevented it from doing so.”

Thus, with its contract claim, Darwin is attempting to belatedly achieve the

same ends it should have achieved through subrogation. Its labored argument

fails.

The relevant Policy provision provides:

The Insurer shall be subrogated to all Insureds’ rights of

recovery against any person or organization. All Insureds shall

Hill. In deciding this appeal, we need not determine whether she stands to double-recover

or whether such a result would be permissible in this case.

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assist the Insurer in effecting any rights of indemnity,

contribution and apportionment available to any Insured,

including the execution of such documents as are necessary to

enable the Insurer to pursue claims in the Insureds’ names and

shall provide all other assistance and cooperation which the

Insurer may reasonably require. All Insureds shall cooperate

with the Insurer and do nothing to jeopardize, prejudice or

terminate in any way such rights.

The Insurer shall not exercise any such rights against any

Insureds except as provided herein. Notwithstanding the

foregoing, however, the Insurer reserves the right to exercise any

rights of subrogation against any Insured with respect to any

Claim brought about or contributed to by the intentional,

criminal, fraudulent, malicious or dishonest act or omission of such

Insured.

The Policy provides Darwin with subrogation rights, but Aldous did not

breach the Policy by seeking attorney’s fees against Hill. Indeed, she arguably

assisted Darwin, who could have benefited from the adjudication. 10 Darwin

should have asserted its subrogation rights against Hill. See, e.g., Fortis

Benefits, 234 S.W.3d at 648; Ortiz v. Great S. Fire & Cas. Ins. Co., 597 S.W.2d

342, 343 (Tex. 1980). Instead, it sat on its rights and, after being sued, brought

claims directly against its insured. As the district court stated, “[Darwin]

provides no case law to support a conclusion that receiving a judgment for

attorney’s fees is tantamount to jeopardizing, prejudicing, or terminating

Darwin’s subrogation rights.” 11 Aldous, 2015 WL 1879677, at *2.

10If anything, Darwin’s inaction is problematic. See Ortiz v. Great S. Fire & Cas. Ins.

Co., 597 S.W.2d 342, 344 (Tex. 1980) (“[W]hen an insurer does not assist in the collection of

damages from the third party tortfeasor, it must pay its share of the costs and expenses

incurred in obtaining recovery from the third party, including attorney fees.”).

11 In Fortis Benefits, the insurance policy at issue included a “Right of

Reimbursement,” which provided, in pertinent part: “If benefits are paid under this plan, and

any Covered Person recovers against any person or organization by settlement, judgment or

otherwise, We have a right to recover from that Covered Person an amount equal to the

amount We have paid.” Fortis Benefits, 234 S.W.3d at 645 n.11. Darwin has not claimed any

contractual right to reimbursement and yet essentially seeks the same end. “[I]nsurers are

well equipped to evaluate and reduce risk by, for example, ‘drafting policies to specifically

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IV. CONCLUSION

The district court’s judgment is REVERSED and, with respect to

Darwin’s breach of contract and equitable claims, ruled in favor of Aldous. The

case is REMANDED for proceedings consistent with this opinion.

provide for reimbursement,’” and we will not rewrite the contract to grant Darwin rights

beyond those it included in the contract. Id. at 649 (quoting Matagorda County, 52 S.W.3d at

136).

25