EL PASO COURT OF APPEALS REVERSES ORDER BARRING INSURED’S USE OF FUNDS RECEIVED IN SETTLEMENT OF COVERAGE DISPUTE

May 7, 2012

In  multi-party  litigation  involving  several  separate  lawsuits  arising  out  of  a  construction  dispute, American Home Insurance Company settled a coverage dispute with its insured for $4.2 million.  After the insured, E.E. Hood & Sons, Inc., informed its judgment creditor, Vernco Construction, Inc., of the settlement,  Vernco  obtained  a  temporary  restraining  order  that  barred  Hood  “from  dissipating, transferring, spending, encumbering, or disbursing” any of the funds.  In Nelson v. Vernco Constr., Inc., No. 08-10-00222-CV, 2012 WL 1529844 (Tex. App.—El Paso May 2, 2010), the Court of Appeals vacated the restraining order, finding that it was obtained in violation of a prior agreement between the parties.

Vernco had obtained a judgment in April 2010 against Hood & Sons that exceeded $5 million.  Hood & Sons filed a bond for $2.2 million — one half of its net worth at the time the bond was filed — and appealed.  Meanwhile, Hood had sued AHIC for failing to provide a defense in the Vernco case.  While the coverage action was pending, AHIC paid Hood & Sons $566,000 in defense costs with a reservation of rights.  Vernco learned of this payment and intervened in the coverage action in order to protect its alleged interest in these funds, but the parties entered into an agreement that Vernco would be notified of any future payments in exchange for Vernco abandoning its intervention.  As part of this agreement, Vernco agreed not to interfere with any such payment unless it was represented to be for indemnity of Vernco’s judgment.  AHIC and Hood & Sons eventually reached a settlement totaling $4.2 million.

Hood & Sons sent a letter to Vernco advising it of the settlement, and explaining that it was comprised of unpaid defense costs, settlement of a separate lawsuit, consequential damages, interest, and attorney’s fees.  Even though the letter expressly stated that no part of the settlement was for indemnity of Vernco’s judgment, Vernco sought a temporary restraining order “to preserve the status quo,” which the trial court granted.  On appeal, the El Paso court held that the temporary restraining order ignored the parties agreement, and therefore that the status quo “is not preserved but rather nullified” by the order.  The court of appeals also held that the trial court was required to find, with evidentiary support, that Hood & Sons had transferred assets, and that the Court’s implied findings in that regard were insufficient.  The court of appeals therefore vacated the temporary restraining order.