IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
STANFORD TRADING COMPANY,
NATIONWIDE MUTUAL INSURANCE
Appeal from the United States District Court for the Northern District of Texas
October 31, 2000
Before GARWOOD, HIGGINBOTHAM, and STEWART, Circuit Judges.
Stanford Trading Company ("Stanford") claims on appeal that the district court erred by
granting summary judgment in favor of Nationwide Mutual Insurance Company ("Nationwide") upon
concluding that Nationwide had no duty to pay for losses that Stanford incurred after the FDA's
seizure of misbranded drugs from the shelves of Stanford's customers. For the following reasons,
we affirm the district court's ruling.
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 R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited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.
FACTUAL AND PROCEDURAL BACKGROUND
Stanford, which buys and sells pharmaceutical drugs wholesale, did business with VRI
Distribution Corporation ("VRI"), a company that sells pharmaceuticals. By agreement, Stanford
was added as an insured under the comprehensive general liability ("CGL") policy that Nationwide
provided for VRI. The policy states that Nationwide will cover Stanford for sums that it becomes
"legally obligated to pay as damages."
This language formed the basis of Stanford's claim to Nationwide after the FDA confiscated
drugs, which VRI had mislabeled, from the shelves of St anford's customers. Contending that the
FDA's drug seizure did not amount to a legal obligation for Stanford to pay, Nationwide refused to
honor Stanford's claim. Stanford filed suit, and the district court granted summary judgment in favor
of Nationwide. Stanford now appeals that decision.
I. Standard of Review
This court reviews the granting of summary judgment de novo. Bussian v. RJR Nabisco,
Inc., 223 F.3d 286
, 293 (5th Cir. 2000). "We must view all evidence in the light most favorable to
the party opposing the motion and draw all reasonable inferences in that party's favor." Id. If the
evidence demonstrates that there is no genuine issue regarding any material fact, summary judgment
is proper. Id.
Texas courts have interpreted the policy language "legally obligated to pay as damages" to
mean that the insured is required by a settlement or a judgment in a filed suit to pay a third party.
Heyden Newport Chemical Corp. v. Southern Gen. Ins. Co., 387 S.W. 2d 22, 25 (Tex. 1965);
[End Page 2]
Southern County Mut. Ins. Co. v. Ochoa, 19 S.W. 3d 452, 460 (Tex. App.-- Corpus Christi 2000,
no pet. h.);Reser v. State Farm Fire & Cas. Co., 981 S.W. 2d 260, 263 (Tex. App.-- San Antonio
1998, no pet.). None of the customers from whose shelves the drugs were actually seized have sued
Stanford; they merely refused to pay for the commandeered drugs. Moreover, Standard has proffered
no evidence demonstrating its legal liability to pay any sum related to the seized drugs. Accordingly,
Nationwide is not obligated to pay Stanford's claim.
In a novel argument, Stanford attempts to characterize the drug confiscation itself as the event
that created a legally compelled payment of damages satisfying its prerequisite to recovery from
Nationwide under Texas law. Stanford contends that the FDA confiscation mirrored an
environmental cleanup. In at least two cases, this court has concluded that an insurer must pay the
expenses that third parties incur as a result of performing such an environmental cleanup. See, e.g.,
Bituminous Cas. Corp. v. Vacuum Tanks, Inc., 75 F. 3d 1048, 1053 (5th Cir. 1996) (concluding that
environmental cleanup costs incurred by the federal government under CERCLA and attributed to
an insured were damages within the meaning of the insured's policy and that the insurer was therefore
obligated to pay the costs); Snydergeneral Corp. v. Century Indemnity Co., 113 F. 3d 536, 539 (5th
Cir. 1997) (extending Bituminous to include individuals who voluntarily undertake the task of
cleaning up hazardous waste).
These cases do not, however, strengthen Stanford's effort to save its claim against
Nationwide. As stated earlier, none of Stanford's customers have sued it regarding the drugs that
the FDA siezed. Moreover, unlike the situations created by the environmental cleanups in Bituminous
and Snydergeneral, neither the government nor any other third party seeks to recover the costs
associated with the FDA's mislabeled drug confiscation. Essentially, Stanford proposes that this
[End Page 3]
court take the giant leap from holding that the term "damages" includes environmental cleanup costs
to holding that under Texas law, the CGL policy language "legally obligated to pay as damages" does
not require a settlement or a judgment resulting from a third party suit against the insured.
Sitting as an Erie court, it is simply beyond the scope of our authority or prerogative to make
this bold legal conclusion. The strictures of diversity jurisdiction demand that "we must apply Texas
law as interpreted by Texas state courts." Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d 487
, 491 (5th Cir. 2000) (citing Erie R.R. co. v. Tompkins, 304 U.S. 64
, 58 S. Ct. 817
, 82 L. Ed.
1188(1938)). The Texas Supreme Court and appellate courts have held that before an insurer's
responsibility to honor the terms of its CGI policy is triggered, an insured must be legally obligated
to pay a settlement or a judgment resulting from a third party suit against it. Because Stanford has
presented no such evidence, Nationwide is not bound to pay the losses that Stanford suffered from
the FDA drug confiscation.
Accordingly, we hold that the district court did not err in granting summary judgment to
Nationwide and AFFIRM its ruling.
[End Page 4]