     Case: 11-20408     Document: 00511888677         Page: 1     Date Filed: 06/15/2012




            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                     Fifth Circuit

                                                                            FILED
                                                                           June 15, 2012

                                       No. 11-20408                        Lyle W. Cayce
                                                                                Clerk

FLAGSHIP CREDIT CORPORATION,

                                                  Plaintiff-Appellant
v.

INDIAN HARBOR INSURANCE COMPANY,

                                                  Defendant-Appellee



                   Appeal from the United States District Court
                        for the Southern District of Texas
                             USDC No. 4:10-CV-3616


Before JONES, Chief Judge, and PRADO and SOUTHWICK, Circuit Judges.
PER CURIAM:*
        A finance company that was sued in a class action sought a declaratory
judgment that it was entitled to indemnity under an insurance policy. The
district court granted summary judgment to the insurance company and
dismissed the finance company’s breach of contract claim. We REVERSE and
REMAND for further proceedings consistent with this opinion.




        *
         Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
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                                      FACTS
      In December of 2009, Glynn Hartt initiated a class action lawsuit in
Pennsylvania alleging that Flagship Credit Corporation, which provides
automobile financing in Texas, had failed to provide class members with
adequate notice of default as required by the Texas Business and Commerce
Code. The class included over 900 borrowers. Statutory minimum damages
under the code were sought. The pertinent code provision states:
      [I]f the collateral is consumer goods, a person that was a debtor or
      secondary obligor at the time the secured party failed to comply
      with this subchapter may recover for that failure in any event an
      amount not less than the credit service charge plus 10 percent of the
      principal amount of the obligation or the time price differential plus
      10 percent of the cash price.

Tex. Bus. & Com. Code § 9.625(c)(2). In January 2010, Flagship requested
Indian Harbor Insurance Company provide a defense and indemnify it in the
class action suit. Indian Harbor agreed, reserving the right to deny coverage for
any amount that did not constitute “loss” under the policy, including any amount
“in the nature of . . . penalties.” The policy defined “loss” as:
      damages, judgments, settlements or other amounts (including
      punitive or exemplary damages, where insurable by law) and
      Defense Expenses in excess of the Retention that [Flagship] is
      legally obligated to pay. Loss will not include:
            (1) the multiplied portion of any damage award;
            (2) fines, penalties or taxes imposed by law; or
            (3) matters which are uninsurable under the law pursuant to
            which this Policy is construed.

The policy did not define “damages,” “settlements,” or “penalties.”
      After Flagship and Hartt reached a settlement agreement, Indian Harbor
refused to indemnify Flagship. It asserted that the policy did not cover the
settlement because it was a penalty.
      Flagship sued for breach of contract and sought a declaratory judgment in


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the United States District Court for the Southern District of Texas. Jurisdiction
exists because the parties are citizens of different states and the amount in
controversy exceeds $75,000. See 28 U.S.C. § 1332. Flagship argued that the
statutory minimum damages paid in settling the Hartt suit were covered losses.
Indian Harbor counterclaimed for a declaratory judgment that the Hartt suit’s
statutory minimum damages were a penalty that fell outside the policy’s scope.
Both sides moved for summary judgment. Concluding that these damages are
“penalties” under the policy, the district court granted Indian Harbor’s motion
for summary judgment and dismissed Flagship’s breach of contract claim.
Flagship now appeals from those rulings.
                                 DISCUSSION
      “We review a grant of summary judgment de novo, applying the same
standard as the district court.” Vaughn v. Woodforest Bank, 665 F.3d 632, 635
(5th Cir. 2011). 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 district court’s
interpretation of an insurance contract or provision is a question of law that we
review de novo.” French v. Allstate Indem. Co., 637 F.3d 571, 577 (5th Cir. 2011).
“This broad standard of review includes the initial determination of whether the
contract is ambiguous.” Wal-Mart Stores, Inc. v. Qore, Inc., 647 F.3d 237, 242
(5th Cir. 2011) (quotation marks and citation omitted).
      The dispute in this case is whether the statutory minimum damages
provided by Section 9.625(c)(2) are “penalties . . . imposed by law” under
Flagship’s policy. Neither party argues that in analyzing the exclusion from
coverage of “fines, penalties or taxes imposed by law,” we should limit the
“imposed by law” phrase to modifying the immediately preceding word in the
list, i.e., “taxes.” Such a limitation would be implausible, as “taxes” are by
definition imposed by some governmental body.            The damages here were

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imposed by law inasmuch as they were computed using a statutory minimum set
by the Texas legislature. All three categories in the exclusion are limited to
payments imposed by law. Our issue is whether these particular impositions of
law were penalties as meant by the contract. They were not taxes or fines.
What ultimately will prove dispositive is whether all three categories signify
payments mandated by law that are to be paid to the government.
      A federal court sitting in diversity applies the substantive law of the forum
state, which in this case is Texas. See Bayle v. Allstate Ins. Co., 615 F.3d 350,
355 (5th Cir. 2010). In Texas, courts only undertake a choice-of-law analysis if
there is a conflict of law that actually affects the outcome of an issue. See
Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 419 (Tex. 1984). The party
asserting a conflict with Texas substantive law must demonstrate the existence
of a true conflict. Greenberg Traurig of N.Y., P.C. v. Moody, 161 S.W.3d 56, 70
(Tex. App.—Houston [14th Dist.] 2004, no pet.). Absent such a demonstration,
Texas law applies. Id. The district court determined there were no meaningful
differences in the law of the two states relevant to the issues here.
      In the district court, Indian Harbor argued Pennsylvania law must be
applied to interpreting this contract.       On appeal, that contention barely
resurfaces. Instead, Indian Harbor cites Pennsylvania caselaw on various points
but only once states that it contends Pennsylvania law applies. It never argues
how that state’s law differs from Texas law. Consequently, it never mounts a
challenge to the district court’s conclusion that the relevant law of the two states
is the same.    Pennsylvania law perhaps would apply under choice-of-law
analysis, but the district court did not and should not have engaged in such
analysis until first finding a true conflict. Indian Harbor has waived any
argument that there is a true conflict, and we apply Texas law. See Procter &
Gamble Co. v. Amway Corp., 376 F.3d 496, 499 n.1 (5th Cir. 2004).



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      We start with a review of Texas law concerning the meaning of the term
“penalties.” Because it is undefined in the contract, “we presume that the
parties intended its plain, generally accepted meaning.” Epps v. Fowler, 351
S.W.3d 862, 866 (Tex. 2011). Dictionaries are often helpful to find the generally
accepted meaning. Id. One such definition is this:
      penalty. (15c) 1. Punishment imposed on a wrongdoer, usu. in the
      form of imprisonment or fine; esp., a sum of money exacted as a
      punishment for either a wrong to the state or a civil wrong (as
      distinguished from compensation for the injured party’s loss).
      Though usu. for crimes, penalties are also sometimes imposed for
      civil wrongs.

Black’s Law Dictionary 1247 (9th ed. 2009). This definition supports that
“[c]entral to the definition of penalty is the ‘idea of punishment.’” In re Hickman,
260 F.3d 400, 403 (5th Cir. 2001) (citation omitted); see also Matter of Wood, 643
F.2d 188, 190-91 (5th Cir. 1980).
      When a term can have multiple meanings, context often is determinative.
Johnson v. United States, 130 S. Ct. 1265, 1270 (2010); see also Fiess v. State
Farm Lloyds, 202 S.W.3d 744, 750-51 (Tex. 2006). Here, “penalties” is the
second item of three, placed between “fines” and “taxes.” Flagship contends that
the placement of “penalties” supports that the entire clause concerns payments
made to the government. It argues that the canon of construction known as
noscitur a sociis supports its interpretation. That canon gives the meaning to
one word in a group that will be consistent with the meaning of its companion
words. United States v. Jasso, 587 F.3d 706, 711 (5th Cir. 2009).
      Texas courts apply canons of construction prior to deciding whether a term
is ambiguous: “[i]f the contract is subject to two or more reasonable
interpretations after applying the pertinent rules of construction, the contract
is ambiguous . . . .” Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am.,
341 S.W.3d 323, 333 (Tex. 2011) (quotation marks and citation omitted). Indian


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Harbor objects to the use of noscitur a sociis here, even if state law generally
permits its application prior to a determination of ambiguity. Accepting that the
word “taxes” is without ambiguity, Indian Harbor asserts that “fines” is
ambiguous and cannot provide the necessary pattern of common meaning to
apply noscitur a sociis. So we examine the meaning of “fines.”
      A “fine” is “[a] pecuniary criminal punishment or civil penalty payable to
the public treasury.” Black’s Law Dictionary 708 (9th ed. 2009). Indian Harbor
provides citations to a few cases in which “fine” has included some form of
payment to an individual. A careful word search in caselaw can uncover such
examples, but the discovery of the occasional use of “fines” in an unusual manner
does not alter that the “plain, generally accepted meaning” of a “fine” is a
payment received by a government. “Taxes” also are governmental receipts. As
we have noted, “penalties” usually but not exclusively means punishments for
criminal matters. See Black’s Law Dictionary 1247 (9th ed. 2009). The common
meaning, though not the exclusive meaning, of all three terms involves a
payment to the government.
      Indian Harbor argues that the interpretation is not reasonable because it
has the effect of adding words to the contract. There is a difference, however,
between using the canons of construction to determine the meaning of a term
and rewriting the terms of a contract. Cf. United States v. Monsanto, 491 U.S.
600, 611 (1989). A court’s decision to use an applicable canon of construction to
uncover the meaning of a term is not an instance of impermissible judicial
redrafting. Rather, the canon is used to show the implicit meaning of the term
the parties chose. Indian Harbor’s position would require us to reject the
manner in which Texas courts use the canons of construction. See Italian
Cowboy Partners, Ltd., 341 S.W.3d at 333. That is something we will not do.
      We now consider why the district court came to a different conclusion. The
court examined the same Black’s definition of “penalties.” After reciting the

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definition, which refers to “civil wrongs,” the court focused on the phrase “civil
penalty” and considered it to be synonymous. The definition of “civil penalty”
includes as one meaning a “statutory penalty.” Black’s Law Dictionary 1247 (9th
ed. 2009). A statutory penalty is exactly what these damages were. Having
found through this progression of definitions that “penalties” definitely could
include statutory penalties, the district court was unconvinced that noscitur a
sociis actually led to a better understanding of meaning. Instead, it determined
Flagship’s argument would be a rewriting of the contract to add something like
“fines, penalties, or taxes payable to governmental bodies.” The court agreed
that fines and taxes were often paid to the government, but the court would not
add that understanding to penalties.
      The district court’s analysis is not unreasonable. Where we disagree,
though, is that by rejecting the canon of construction, the court allowed all the
possible meanings of “penalties” to apply. Noscitur a sociis is a traditional
means of limiting statutory or contract words from being given every conceivable
meaning. Instead, when a list of words contains some whose generally accepted
meanings have a commonality, then those associate words should limit a single
word that has more varied meanings. The canon is the equivalent, likely not
invariably correct but a serviceable approach, of asking drafters which of the
varied meanings of the doubtful word they intended.
      Aided by the canon of construction, we conclude that the term “penalties”
within the phrase, “fines, penalties or taxes” is limited to payments made to the
government. Accordingly, the statutory-minimum-damages portion of the Hartt
settlement is not a “penalty.”
      There are two other issues we must also address in this appeal. First,
Flagship argues that the attorneys’ fees are not “penalties” and therefore must
be paid by Indian Harbor. While Flagship made a passing reference to this
argument before the district court, this is the first time Flagship has pressed the

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issue. Flagship’s comments to the district court were not enough to afford the
court an opportunity to rule on the issue. Therefore, this argument is not
properly before us on appeal. See Benefit Recovery, Inc. v. Donelon, 521 F.3d
326, 329 (5th Cir. 2008).
      Second, Indian Harbor asserts that Flagship has abandoned its breach of
contract claim by not presenting it to the district court. Our review of the record
shows that Flagship adequately identified its claim. Moreover, the district court
dismissed the claim; so it clearly had the opportunity to rule on it.
      We REVERSE the grant of summary judgment for Indian Harbor,
VACATE the dismissal of Flagship’s breach of contract claim, and REMAND for
further proceedings consistent with this opinion.




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