Recently, the United States District Court for the Western District of Texas reversed the United States Bankruptcy Court’s summary judgment in favor of the White Deer Independent School District over the Texas Association of Public Schools Property and Liability Fund. In In re Texas Association of Public Schools Property and Liability Fund, Civ. No. SA-18-CV-985-XR, Bkr. Adv. No. SA-18-5017-RBK, 2019 WL 989643 (W.D. Tex. Mar. 1, 2019) the underlying dispute related to TAPS’ declination to defend or indemnify White Deer in a state court tax suit in which White Deer was sued by Kelly Martin alleging White Deer improperly applied the tax law and charged Martin excessive taxes. White Deer applied to TAPS for defense and indemnity, which TAPS declined resulting in the defense/indemnity suit.

The Tax Suit related to the Texas Homestead Exemption—which provided pre-2015 that the first $15,000 of a homestead’s value was exempt from taxes—however this amount could be reduced by local governments using a Local Option Home Exemption. On June 15, 2015, a new Texas law raised the homestead exemption amount to $25,000 and barred local governments from reducing or repealing their LOHE until 2019. On June 30, 2015, White Deer lowered its 2014 LOHE. However, because the new law required constitutional amendment, it was not approved until November 2015. Meanwhile, White Deer collected Martin’s taxes under the reduced LOHE, resulting in Martin bringing suit.

TAPS is a self-funded risk program from which White Deer had purchased an insurance policy—the section at issue being the “Educators’ Legal Liability Cover.” After Martin filed suit, White Deer filed a claim for defense and indemnification which TAPS denied—prompting White Deer to file the present suit in state court. The defense/indemnity suit was subsequently removed to Federal Court and then transferred to Bankruptcy Court. Both White Deer and TAPS filed motions for summary judgment of which the bankruptcy court granted White Deer’s and denied TAPS’. This appeal followed.

The first issue the Western District addressed was whether TAPS had a duty to indemnify White Deer. TAPS asserted that the defense in the Tax Suit did not constitute a “claim” under the policy as defined, and even if so, the suit did not allege a “wrongful act.” (Note: the policy defines a qualifying “claim” as one that seeks to hold a “member responsible for a wrongful act through monetary damages, other than attorney’s fees or court costs alone.”) Accordingly, the primary question was whether Martin’s suit for the tax refund constituted allegations of “monetary damages.” Comparing analogous cases like In re TransTexas Gas Corp., the Westerm District concluded that the tax refund did not constitute “damages” under Texas law, but instead constituted the “restoration of an ill-gotten gain” and was therefore, equitable relief. As a result, the suit was not a qualifying claim under the policy at issue, nor was the restitution a qualifying loss, therefore TAPS had no duty to defend. The Western District came to a similar conclusion in considering whether the tax suit alleged a “wrongful act” which was defined in the policy by a laundry list of unrelated employment practices.

Assessing TAPS’ duty to indemnify, the Court considered similar reasoning to that of the duty to defend. Specifically, the Western District noted that, although a duty to indemnify arises after liability is determined, it can be determined based on the pleadings if “the same reasons that negate the duty to defend likewise negate any possibility the insurer will ever have a duty to indemnify.” The Court noted that even if it was determined through development of the suit that Martin was seeking “monetary damages,” there was no set of facts where the Tax Suit would have alleged White Deer performed “wrongful acts” as defined, negating TAPS’ duty to indemnify.

Because the Court found determined that TAPS did not possess a duty to defend or indemnify White Deer, the bankruptcy court’s decision was reversed and remanded.

Editor’s Note: For reference, full citation for In re TransTexas Gas Corp., is 597 F.3d 298 (5th Cir. 2010). This is an interesting case considering, among other things, the terms of an executive and organization liability policy and whether a “loss” occurred.  

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