Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

IN RE TEXAS EASTERN TRANSMISSION CORP.

July 9, 1992

In re TEXAS EASTERN TRANSMISSION CORPORATION PCB CONTAMINATION INSURANCE COVERAGE LITIGATION


The opinion of the court was delivered by: BY THE COURT; DONALD W. VANARTSDALEN

 VanARTSDALEN, S.J.

 July 9, 1992

 TABLE OF CONTENTS

 I. Introduction

 II. Procedural History

 III. Summary Judgment Standard

 IV. Motions to Strike

 A. Motion to Strike Texas Eastern's Motion for Summary Judgment

 B. Motion to Strike Certain Evidence Offered by Texas Eastern in Support of its Motion for Summary Judgment

 C. Supplemental Motion to Strike

 V. Choice of Law

 VI. Governing Principles of Insurance Law

 A. Texas Rules of Insurance Contract Construction

 B. Texas Rules Concerning the Burden of Proof

 VII. Imputation of Employee Knowledge

 VIII. Facts

 A. Preliminary Issues

 B. Factual Background

 1. Texas Eastern's Corporate History

 2. Texas Eastern's Operational History

 3. Texas Eastern's Knowledge of PCBs in its Lubricant

 4. The Change-Out program

 5. Tracking Environmental Legislation

 6. PCB Contamination in the Natural Gas Pipeline

 7. PCB Cleanup

 8. The Results of Weston's Survey

 9. Texas Eastern's Problems Become Public Knowledge

 10. Texas Eastern's Negotiations with EPA

 11. Texas Eastern's Notice to its CGL Carriers

 IX. Occurrence

 A. The Policy Language

 B. Texas Law

 C. The Applicable Facts

 1. Knowledge that the Lubricant was Escaping into the Environment

 2. Knowledge that the Lubricant Contained PCBs

 D. The Alternative Theory of an Occurrence

 X. Damages

 A. Equitable Relief as Damages

 B. Compliance Costs as Property and/or Bodily Injury Damage

 C. Civil Fines and Penalties

 1. Choice of Law--Fines and Penalties

 2. New Jersey Fines

 3. Pennsylvania Fines

 4. EPA Fines

 XI. Owned Property Exclusion

 XII. Pollution Exclusion

 XIII. Late Notice

 A. The Policy Terms

 B. Accrual of Texas Eastern's Obligation to Notify its CGL Insurers

 1. 1981

 2. 1982

 3. 1983

 4. 1984

 5. 1985

 6. 1986

 7. 1987

 C. Texas Law

 D. The Applicable Facts

 E. Prejudice

 XIV. Duty to Defend

 A. The Policy Language

 B. Texas Law

 I. INTRODUCTION

 Texas Eastern Transmission Corporation (Texas Eastern), the owner-operator of a natural gas pipeline system extending from natural gas well fields in Texas, Louisiana, and the Gulf of Mexico to the New York metropolitan area, brought suit against approximately twenty-one insurance companies *fn1" (the Carriers) that provided Texas Eastern with primary and excess comprehensive general liability (CGL) insurance coverage between 1958 and the present. *fn2" Texas Eastern seeks to recover the expense that it will incur in the governmentally mandated environmental cleanup of polychlorinated biphenyl *fn3" (PCB) contamination at multiple locations on Texas Eastern's property along the transmission line. The total costs are estimated to exceed $ 750 million. After more than two years of discovery, the parties have now filed cross-motions for summary judgment.

 II. PROCEDURAL HISTORY

 The present litigation consolidates three lawsuits, each seeking declaratory judgment as to the respective duties and liabilities of the Carriers to defend and/or indemnify Texas Eastern against claims and settlements made by and with the United States Environmental Protection Agency (EPA), various state agencies, and private parties. *fn4"

 On December 11, 1987, Fidelity & Casualty Company of New York (Fidelity or F&C), Texas Eastern's primary CGL carrier throughout all relevant periods, filed Case No. 87-2925T against Texas Eastern in the United States District Court for the Northern District of Texas (Northern District action). The Northern District action was a diversity case establishing federal subject-matter jurisdiction pursuant to 28 U.S.C. § 1332.

 On March 11, 1988, Associated Electric & Gas Insurance Services Limited (Aegis) and National Surety Corporation filed Civil Action No. 88-2126 in the United States District Court for the Eastern District of Pennsylvania (Eastern District action) against Texas Eastern, F&C, and Texas Eastern's other CGL insurers. Jurisdiction was based on 28 U.S.C. §§ 1330(a), 1603(a), and 1605(2) of the Foreign Sovereign Immunities Act (FSIA), because one of the insurers, the Insurance Company of Ireland (one of the London Market Insurers), was an instrumentality of a foreign state.

 On March 21, 1988, Texas Eastern filed an action in Texas state court, in Houston (Texas state court action), against all of its insurers. *fn5" The Texas state court action was removed to the United States District Court for the Southern District of Texas on the basis of the FSIA and was docketed in that court as Civil Action No. 88-1910.

 After extensive (and perhaps exhaustive) discovery, the parties filed cross-motions for either partial or total summary judgment. Texas Eastern moved for partial summary judgment on six major issues seeking the following legal rulings: (1) the pollution exclusion in its insurance policies does not bar coverage for long-term pollution; (2) all of its insurance policies were triggered due to the latent nature of the PCB contamination; (3) the Carriers' defenses of late notice and misrepresentation should be stricken; (4) the cleanup costs it has and will incur are recoverable as "damages"; (5) F&C breached its duty to defend Texas Eastern in the underlying lawsuits; and (6) the underlying lawsuits asserted claims for bodily injury, property damage, and personal injury.

 The Carriers moved jointly for partial or complete summary judgment on the following issues seeking the following legal rulings: (1) no insurable occurrence ever accrued; (2) the costs incurred by Texas Eastern were not incurred as "damages" because of bodily injury or property damage; (3) Texas Eastern provided late notice of its claims to all Carriers; (4) civil fines and penalties are not insurable as "damages"; (5) the owned property exclusion in Texas Eastern's insurance policies bars coverage for damage to Texas Eastern's own property; and (6) the pollution exclusion in Texas Eastern's insurance policies bars coverage for all costs incurred to remediate the PCB contamination. In addition, twelve of the Carriers individually filed separate motions for partial or total summary judgment in which some of the other Carriers joined. Finally, the Carriers jointly filed several motions to strike exhibits offered by Texas Eastern in support of its motion for summary judgment.

 I held hearings on the summary judgment motions on January 13, 14, and 15, 1992. After consideration of the briefs and the arguments made during the hearings, I have reached numerous conclusions and decisions which are hereafter set forth. I have decided most, but not all, of the issues raised. I have determined that all of the Carriers are entitled to summary judgement on all claims against them because of Texas Eastern's late notice. Other primary issues have been decided in order to avoid extensive further appeals and litigation in the event that a different result occurs on appeal. *fn6"

 III. SUMMARY JUDGEMENT STANDARD

 A court shall grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); Williams v. Borough of West Chester, 891 F.2d 458, 463-64 (3d Cir. 1989). In a motion for summary judgment, the court may examine evidence beyond the pleadings. The court must always consider the evidence, and the inferences therefrom, in the light most favorable to the nonmoving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 8 L. Ed. 2d 176 (1962); Tigg Corp. v. Dow Corning Corp., 822 F.2d 358, 361 (3d Cir. 1987).

 The initial burden is on the moving party to demonstrate the absence of a genuine issue of material fact. First Nat'l Bank v. Lincoln Nat'l Life Ins. Co., 824 F.2d 277, 280 (3d Cir. 1987). Once the moving party has satisfied this burden, the nonmoving party must demonstrate that genuine disputes exist concerning each essential element of its case on which it bears the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). For a dispute to be "genuine," a reasonable jury must be able to return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). If the nonmoving party's evidence is "'merely colorable' or is 'not significantly probative,' summary judgment may be granted" in favor of the moving party. Equimark Commercial Fin. Co. v. C.I.T. Fin. Servs. Corp., 812 F.2d 141, 144 (3d Cir. 1987) (quoting Anderson, 477 U.S. at 249-50). In essence, it is my duty to determine whether the nonmoving party has submitted evidence which "presents a sufficient disagreement to require submission to a jury or whether [the evidence] is so one-sided that [the moving party] must prevail as a matter of law." Anderson, 477 U.S. at 251-52.

 I have gone to great lengths to give Texas Eastern the benefit of every doubt in interpreting the thousands of pages of record evidence submitted by all parties. I have taken this course because the Carriers' summary judgment motion heavily relies on factual findings, while Texas Eastern's summary judgment motion, by its own admission, relies more on interpretations of the law than on express factual findings. In the interest of fairness, I have made extensive findings concerning the "undisputed facts." See infra part VIII. *fn7"

 IV. MOTIONS TO STRIKE

 A. Motion to Strike Texas Eastern's Motion for Summary Judgment

 The Carriers contend that Texas Eastern's motion for summary judgment is merely a request for hypothetical legal rulings calculated to induce me to reveal my position on particular legal disputes and thereby enable Texas Eastern to better prepare its case for trial. As an example, the Carriers cite Texas Eastern's motion for partial summary judgment on the issue of whether gradual discharge, dispersal, release, or escape of pollutants can be "sudden and accidental" within the meaning of a pollution exclusion clause. In the Carriers' view, Texas Eastern's motion is more appropriate to a Rule 16 conference or a motion in limine, where evidentiary rulings are appropriately requested and received.

 Texas Eastern responds that seeking legal rulings which narrow the issues for trial are entirely proper in Rule 56 motions, and that its motion need not necessarily allow the court to pronounce final judgment on a particular claim, as long as the court's decision finally disposes of at least some portion of that claim. In addition, Texas Eastern asserts that it need not proffer substantial factual support for its summary judgment motion because it primarily focuses on legal issues which are matters of law for the court to decide and, thus, do not require an extensive factual background.

 Federal Rule of Civil Procedure 56(a) expressly entitles a party to move for summary judgment "in the party's favor upon all [claims] or any part thereof." In my view, Rule 56 is broad enough to allow Texas Eastern to move for summary judgment on issues which are crucially important to this litigation, and about which no factual dispute exists. The interpretation of insurance policy language is just such an issue. The Carriers' motion to strike will therefore be denied.

 B. Motion to Strike Certain Evidence Offered by Texas Eastern in Support of its Motion for Summary Judgment

 Exhibits 19-27 present a more difficult question. Texas Eastern has offered evidence of the drafting history of one form of a pollution exclusion used in many of the insurance policies at issue in this litigation. *fn8" For the reasons set forth in my discussion of the "Pollution Exclusion" issue, infra part XII, I have decided that consideration of this evidence is permissible under Texas law and, thus, the Carriers' motion to strike exhibits 19-31 will be denied.

 Exhibits 47 and 48 are excerpts from the depositions of Texas Eastern expert witnesses John A. Cherry and Bradford S. Cushing. The Carriers object to this evidence on the ground that the excerpts are insufficient to allow me to determine the experts' qualifications, or the facts and data upon which the opinions are based. Additionally, the Carriers believe that this evidence sets forth mere conclusions and does not offer any evidence of the experts' thought processes or rationale. Texas Eastern has responded by providing some of the deposition transcript missing from its initial proffer. (See TApp. *fn9" 222; TApp. 223.) I am satisfied that when considered together with the additional deposition testimony, this evidence is properly before the court and the motion to strike will therefore be denied.

 Exhibit 50 consists of two affidavits sworn by Karen Hammerstrom, an EPA employee, which were submitted in support of EPA's enforcement action against Texas Eastern. Texas Eastern relies heavily on these affidavits to prove that at least some of its response costs are the direct result of actual or threatened third-party harm to property or persons. Although the affidavits were not created specifically for this litigation, they appear to be reliable and relevant, and appear to satisfy the requirements of Federal Rule of Civil Procedure 56(e). As such, they are properly before me. The Carriers' motion to strike the Hammerstrom Affidavits will therefore be denied.

 Second, the Carriers object to any reliance on Texas Eastern's "Statement of General Background Facts" filed contemporaneously with, and in support of, its motion for summary judgment because, in general, it does not cite to record evidence. It is settled law that all evidence relied upon in deciding a motion for summary judgment must be reducible to admissible evidence. Texas Eastern admitted at oral argument that its "Statement of General Background Facts" was not "admissible evidence" and, as such, I have not relied on it in deciding these motions for summary judgment. The Carriers' motion to strike Texas Eastern's "Statement of General Background Facts" will therefore be granted.

 C. Supplemental Motion to Strike

 The Carriers have moved to strike certain additional evidence offered by Texas Eastern. First, the Carriers seek to strike paragraphs 4, 5, 7, and 8 of the Declaration of H. Douglas Church, located at TApp. 191, on the ground that the information contained therein is not based on Mr. Church's personal knowledge. The information in these paragraphs relates to Texas Eastern's historical practices concerning PCB use and containment. The Carriers contend that Mr. Church cannot have personal knowledge of events which occurred before 1985, the date when he first became responsible for dealing with Texas Eastern's PCB-related problems.

  Texas Eastern responds that although Mr. Church does not have first-hand personal knowledge of all the events to which he attested, he acquired personal knowledge by reviewing relevant documents and discussing the issues with senior management *fn10" and other personnel from Texas Eastern's Operations, Engineering, Environmental, and Legal departments. (Church Decl., TApp. 191 at P 4.) The Carriers have in turn challenged the quality of Mr. Church's efforts to "get up to speed" on these important issues. (Ins.' Reply in Supp. of Suppl. Mot. to Strike at 4-5.)

  Federal Rule of Evidence 602 prohibits a witness from testifying about an issue unless the witness has personal knowledge of the matter. The Carriers complain that Mr. Church's knowledge cannot be personal to him because it was acquired from third parties. This argument proves too much. All perception is inferential to some degree. As the Seventh Circuit recently noted:

  
Knowledge acquired through others may still be personal knowledge within the meaning of Fed. R. Evid. 602, rather than hearsay, which is the repetition of a statement made by someone else . . . . Such a statement is different from a statement of personal knowledge merely based, as most knowledge is based, on information obtained from other people.

  Agfa-Gevaert, A.G. v. A.B. Dick Co., 879 F.2d 1518, 1523 (7th Cir. 1989).

  Mr. Church acknowledges that he relied on various sources to acquire his knowledge of the events to which he attests. He does not, however, offer his statement solely on the authority of those statements, but rather vouches for the statements' truth himself. Mr. Church's alleged reliance on documents distinguishes this case from one in which a declarant relies solely on the "say-so" of third parties. See, e.g., Kaczmarek v. Allied Chem. Corp., 836 F.2d 1055, 1060-61 (7th Cir. 1987). I conclude that the Church Declaration is sufficiently based on personal knowledge and is therefore admissible evidence that can be relied on in deciding these motions for summary judgment.

  Next, the Carriers have moved to strike paragraphs 6 and 8 of the Declaration of Steve L. Horton, found at TApp. 194. In paragraph 6, Mr. Horton states that after discussions with environmental representatives of other pipeline companies, it is his understanding that no other pipeline company has been required by EPA or any state authority to install the same source control equipment that Texas Eastern is required to install under the terms of the EPA Consent Decree. (Horton Decl., TApp. 194 at P 6.) The Carriers and Texas Eastern agree that this statement is hearsay if it is offered to prove the truth of the matter, that is, that no other company has, in fact, been required to install the above-mentioned source control equipment.

  Texas Eastern contends that this evidence is being offered only to establish what Steve Horton, Texas Eastern's Vice President of Environmental Affairs, believed other companies have been required to do. Without ruling on the relevance of Mr. Horton's opinion, I will deny the motion to strike; however, Mr. Horton's statement is admissible only to establish what he believed has been the practice in the industry.

  In Paragraph 8, Mr. Horton states that the residual value of a computer and software, purchased by Texas Eastern exclusively to help carry out the required activities under the Consent Decree, will be little or none when the activities are completed. (Horton Decl., TApp. 194 at P 8.) The Consent Decree involves a ten-year cleanup program. (App. 385 at 16.) Thus, Mr. Horton is merely stating that in his opinion, a computer purchased today will have little value ten years from now.

  The Carriers also move to strike the excerpts of the deposition testimony of Texas Eastern expert Davis L. Ford concerning Texas Eastern's waste management practices. (TApp. 31; TApp. 206.) The grounds for striking the testimony are the same as those asserted in the Carriers' original motion to strike the deposition testimony of experts Cushing and Cherry. Texas Eastern has supplemented its offer with additional deposition testimony sufficient to allow its admission as evidence. (See TE's Opp'n to Suppl. Mot. to Strike at 13-14; Ex. F.) The Carriers' argument that the subject matter of Mr. Ford's testimony is not helpful because it fails to consider Texas Eastern's PCB use goes to the weight, not the sufficiency, of the evidence. *fn11"

  Finally, the Carriers move to strike TApp. 127 and 129. These exhibits are part of the evidence offered by Texas Eastern concerning circumstances surrounding the drafting of the pollution exclusion which appears in a number of the insurance policies at issue in this case. Having decided that consideration of such evidence is proper under Texas law to help determine whether the term "sudden" is, or is not, ambiguous, I conclude that the evidence is properly before me. For all of these reasons, the Carriers' supplemental motion to strike will be denied in its entirety.

  V. CHOICE OF LAW

  The parties agree that Texas law applies *fn12" to all of the issues in this multidistrict litigation except those concerning the insurability of civil fines and penalties, where the Carriers contend that the law of the state which imposed the fine or penalty should apply. I will address the choice of law issue regarding civil fines and penalties in my discussion of that issue. (See infra part X.C.1.) Otherwise, Texas law will be applied throughout this opinion.

  It is axiomatic that the decisions of a state's highest court are the ultimate authority regarding state law. Connecticut Mut. Life Ins. Co. v. Wyman, 718 F.2d 63, 65 (3d Cir. 1983). If the state's highest court has not ruled on the issue in question, it is my duty to predict how the state court would rule. Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1167 (3d Cir. 1981). In making these predictions, I have relied, to the best of my ability, on lower Texas state court decisions, well-reasoned authority from other jurisdictions, and other relevant sources.

  With respect to my use of sources other than the Texas Supreme Court, I have relied first on lower court decisions from the Texas state courts. Intermediate state court decisions are presumptive evidence of state law. Commercial Union Ins. Co. v. Bituminous Casualty Corp., 851 F.2d 98, 100 (3d Cir. 1988). As the Third Circuit recently stated:

  
Although we are not bound in a diversity case to follow decisions of a state intermediate appellate court, we are instructed that such decisions are "not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise."

   Northern Ins. Co. v. Aardvark Assocs., Inc., 942 F.2d 189, 193 (3d Cir. 1991) (quoting West v. American Tel. & Tel. Co., 311 U.S. 223, 237, 61 S. Ct. 179, 85 L. Ed. 139 (1940)).

  I have also relied on decisions from other jurisdictions, as well as other miscellaneous sources, to aid in my predictions in instances where the lower courts have either (1) not decided an issue, or (2) have decided an issue with insufficient rationale to be a good indicator of what the Texas Supreme Court would conclude if faced with a similar question. Although I cannot guarantee that I have predicted correctly, I have relied on my own understanding of the law, and on the insurance and contract principles which Texas courts have historically considered important, to reach the conclusions which follow.

  VI. GOVERNING PRINCIPLES OF INSURANCE LAW

  A. Texas Rules of Insurance Contract Construction

  Under Texas law, insurance policies are governed by the same rules of construction which apply to contracts generally. National Union Fire Ins. Co. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991); Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 665 (Tex. 1987); Garrison v. Fielding Reinsurance, Inc., 765 S.W.2d 536, 538 (Tex. Ct. App. 1989) (writ denied). "When terms of an insurance policy are unambiguous, they are to be given their plain, ordinary and generally accepted meaning unless the instrument itself shows that the terms have been used in a technical or different sense." Garrison, 765 S.W.2d at 538.

  When the terms of an insurance policy are ambiguous, a court should apply the construction that favors the insured and permits recovery. Yancey v. Floyd West & Co., 755 S.W.2d 914, 918 (Tex. Ct. App. 1988) (writ denied). A term is ambiguous when the language of a policy is susceptible to more than one reasonable construction. Yancey, 755 S.W.2d at 918. "Where the clause of the insurance policy subject to dispute involves exceptions or limitations on the insurer's liability under the policy, even more stringent construction than usual is required." Id. (citing Glover v. National Ins. Underwriters, 545 S.W.2d 755, 761 (Tex. 1967)). The court must adopt the insured's construction of an exclusionary clause "as long as that construction is not unreasonable, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties' intent." Hudson Energy Co., 811 S.W.2d at 555. However, courts should refrain from creating an ambiguity where none exists. Yancey, 755 S.W.2d at 918. In this regard, "a policy which is otherwise clear is not rendered ambiguous simply because it requires the insured to read the policy thoroughly and carefully." Labatt Co. v. Hartford Lloyd's Ins. Co., 776 S.W.2d 795, 800 (Tex. Ct. App. 1989). Additionally, mere disagreement over the interpretation of an instrument does not make it ambiguous. Cohen v. Rains, 769 S.W.2d 380, 389 (Tex. Ct. App. 1989) (writ denied). Indeed, a court must avoid a construction of the policy which renders a portion of the contract meaningless. Liberty Mut. Ins. Co. v. American Employers Ins. Co., 556 S.W.2d 242, 245 (Tex. 1977); Ideal Mut. Ins. Co. v. Last Days Evangelical Ass'n, Inc., 783 F.2d 1234, 1238 (5th Cir. 1986). If no ambiguity exists, parol evidence is inadmissible to create an ambiguity. Entzminger v. Provident Life & Accident Ins. Co., 652 S.W.2d 533, 537 (Tex. Ct. App. 1983). However, in determining whether a contract term is ambiguous, a court should consider the contract terms in light of the surrounding circumstances. Sun Oil Co. (Del.) v. Madeley, 626 S.W.2d 726, 731-32 (Tex. 1981).

  B. Texas Rules Concerning the Burden of Proof

  Pursuant to Texas law, the insured bears the burden of establishing that the claimed loss is within the coverage of the policy. Employers Casualty Co. v. Block, 744 S.W.2d 940, 944 (Tex. 1988). The insured also bears the burden of proving that it complied with all conditions precedent to coverage. Trevino v. Allstate Ins. Co., 651 S.W.2d 8, 11 (Tex. Ct. App. 1983) (writ refused n.r.e.).

  Texas law also requires the insured to prove that the loss does not fall within an exclusion or exception where the insurer pleads such exclusion or exception to coverage. Sherman v. Provident Am. Ins. Co., 421 S.W.2d 652, 654 (Tex. 1967); American Home Assurance Co. v. Brandt, 778 S.W.2d 141, 143 (Tex. Ct. App. 1989) (writ denied); Britt v. Cambridge Mut. Fire Ins. Co., 717 S.W.2d 476, 482 (Tex. Ct. App. 1986) (writ refused n.r.e.). I recognize that this is a minority rule, but it appears to be the settled law in Texas. *fn13" Finally, if it is determined that the policy provides coverage for only a portion of the insured's loss, the burden of apportioning the damages between covered and noncovered losses is on the insured. Winn v. Continental Casualty Co., 494 S.W.2d 601, 606 (Tex. Civ. App. 1973).

  VII. IMPUTATION OF EMPLOYEE KNOWLEDGE

  When individual parties are involved in litigation, the determination of what a party knew or intended is rarely a simple matter. Engaging in a post hoc analysis of what an individual was thinking requires powers of clairvoyance which most mortals do not possess. This difficult task is even more formidable when a corporate party is involved. A corporation operates solely through its individual employees. The employees' knowledge and intentions must therefore ordinarily be deemed the knowledge and intentions of the corporation. As Judge Dalton observed:

  
A corporation can only act through its employees and, consequently, the acts of its employees, within the scope of their employment, constitute the acts of the corporation. Likewise, knowledge acquired by employees within the scope of their employment is imputed to the corporation. In consequence, a corporation cannot plead innocence by asserting that the information obtained by several employees was not acquired by any one individual employee who then would have comprehended its full import. Rather, the corporation is considered to have acquired the collective knowledge of its employees and is held responsible for their failure to act accordingly.

  United States v. T.I.M.E.--D.C., Inc., 381 F. Supp. 730, 738 (W.D. Va. 1974). When dealing with a corporation as large as Texas Eastern, imputation requires an inquiry into the minds of literally thousands of people, and in this case, spanning a time period of three to four decades.

  The difficulty of this task does not relieve the parties (or me) of the duty to attempt to reconstruct what Texas Eastern "knew" at the relevant times. If a corporation were able to escape this imputation of knowledge, it would always be in a position to limit its liability by professing corporate ignorance. At the other extreme, the imputation of every bit of knowledge known to each individual employee--from the Chief Executive Officer to the most recently hired recruit--would likely paralyze a corporation as upper level management attempted to keep informed of all information known to all of the corporation's employees.

  Cognizant of this dilemma, courts have created a compromise approach which limits the information imputed to the corporation to that which was learned in the course of an employee's employment-related activities, and which is known by an employee of a sufficient level of corporate responsibility to justify charging the corporation with that knowledge. Texas law is in accord with this approach. Texas Eastern is a corporation and each employee is an agent for the corporation. In accordance with Texas agency law, knowledge which an employee or other agent acquires in the course of employment is imputed to the principal. Green Tree Acceptance, Inc. v. Holmes, 803 S.W.2d 458, 460 (Tex. Ct. App. 1991) (writ denied). Texas law makes it clear that this rule of imputation does not depend upon whether the principal actually shares the agent's knowledge, Williams v. Jennings, 755 S.W.2d 874, 883 (Tex. Ct. App. 1988) (writ denied), because a principal should not be entitled to the benefits of the agent's services without being charged with the agent's knowledge. Wellington Oil Co. v. Maffi, 136 Tex. 201, 150 S.W.2d 60, 63 (Tex. 1941).

  Texas Eastern is thus charged with the knowledge of its employees as long as that knowledge was gained in the course of the individual employee's employment-related activities. Of course, not all of Texas Eastern's employees will have knowledge of particular events, but this does not prevent the corporation from being charged with the knowledge of those who do.

  Texas Eastern has raised an objection to being charged with the collective knowledge of its many employees for the purpose of determining the intent of the corporation. In Kern Oil & Refining Co. v. Tenneco Oil Co., 792 F.2d 1380, 1386-87 (9th Cir. 1986), cert. denied, 480 U.S. 906, 107 S. Ct. 1349, 94 L. Ed. 2d 520 (1987), the court concluded that under Texas law, a corporation's subjective intent could not be established by imputing the collective knowledge of its employees. In Tenneco, the court reviewed a district court's determination that an overpayment of money was recoverable by the payor corporation, because it was made based on a mistake of fact, and thus was involuntarily made.

  Under Texas law, if a party to a contract makes an overpayment, even though it is under no legal obligation to do so, it cannot recover the money if it was voluntarily paid with full knowledge of the relevant facts. Tenneco, 792 F.2d at 1386. The payee argued that the corporate party could not claim that its payment was made under a mistake of fact when its employees collectively knew all of the relevant facts. The Ninth Circuit concluded that the collective knowledge could not be imputed because Texas law required that the overpayment be truly voluntary, that is, done intentionally or purposefully or by choice of one's own accord or by the free exercise of the will; the collective knowledge was insufficient to charge the corporation with this action. Id.

  It is apparent to me that the Tenneco court assumed that Texas law required the corporation to subjectively intend to make the overpayment. Tenneco is distinguishable from the present litigation because, as will be explained in this opinion, Texas insurance law is not concerned with the subjective intentions of the insured, but with the objective ones. In an objective analysis, the focus of the inquiry is what the corporation is likely to have known, and not necessarily what the corporation in fact intended. Under these circumstances, I believe the Texas Supreme court would require the corporation to be charged with the collective knowledge of its employees. *fn14"

  As I previously observed, information known to corporate employees should not be blindly imputed to the corporation. An inquiry should be made as to whether the employee had a sufficient level of corporate responsibility to justify charging the corporation with that particular bit of knowledge. I do not understand this requirement to mean that an employee must have climbed to a particular rung on the corporate ladder, as Texas Eastern has argued, before an employees's knowledge will be imputed. Rather, I believe this to mean that the knowledge must be substantially related to the task which the corporation has assigned the employee to perform. Therefore, information known to an employee which relates to the performance of the employee's job will be imputed to Texas Eastern.

  VIII. FACTS

  A. Preliminary Issues

  Both Texas Eastern and the Carriers have submitted versions of the "undisputed" facts. The Carriers initially filed the "Insurers' Statement of Material Facts As To Which No Genuine Issue Exists" (SOF). Texas Eastern responded to the Carriers' filing with "Texas Eastern's Response To The Insurers' Statement Of Material Facts As To Which No Genuine Issue Exists" (TRSOF), in which Texas Eastern either disputed the Carriers' assertions or admitted them. Texas Eastern contemporaneously filed its own version of the material facts in "Texas Eastern Statement Of Facts" (TSOF). Finally, the Carriers' filed a response to the TRSOF.

  The Carriers' response to the TRSOF raised several important issues. First, the Carriers objected to the filing of the TSOF after Texas Eastern had filed its motion for summary judgment. In the Carriers' view, Texas Eastern bore the initial burden of "identifying those portions of the 'pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any,' which it believed demonstrate the absence of a genuine issue of material fact." Celotex, 477 U.S. at 323. By failing to meet this burden in its initial filing, the Carriers contend that Texas Eastern gained an unfair advantage by waiting until the Carriers had "tipped their hand before it too committed itself." (Ins.' Reply to TRSOF at 2 n.1.)

  The Carriers are clearly correct in their assertion that a party seeking summary judgment must file, in support of its motion, a statement of the facts which is supported by record evidence. However, this is not a case where a party has failed to file such a statement, but one in which a party has failed to file its statement contemporaneously with its original motion.

  Texas Eastern filed a response to the SOF, and its own TSOF, on September 9, 1991, almost two months after its initial filing of the summary judgment motion, filed on July 12, 1991. There is no dispute that taken together, the TRSOF and the TSOF satisfy the Celotex requirement of identifying those portions of the pleadings which Texas Eastern believes demonstrate the absence or existence of a genuine issue of material fact.

  In light of the voluminous filings in this case, I conclude that while it would have been more appropriate for Texas Eastern to have filed its statement of facts with its summary judgment motion, the Carriers have not been significantly prejudiced by Texas Eastern's late filing. All of the filings in this case were made pursuant to a Case Management Order, which clearly sets forth the timetable for opposition and reply briefs. Texas Eastern filed its statement and response well within the allowable time. For these reasons, I will consider both the TRSOF and the TSOF in the disposition of these motions. *fn15"

  The second issue raised by the Carriers in their reply brief is the sufficiency of the record evidence upon which Texas Eastern relies to "dispute" many of the Carriers' factual assertions. Having reviewed Texas Eastern's responses, I conclude that the Carriers have raised numerous meritorious objections. Because many of the factual assertions are immaterial to my decision on the pending motions, I will not restate each of these objections in detail.

  In the factual section which follows, I have set forth what I conclude to be the "undisputed" facts. These facts will be relied upon in deciding the cross-motions for summary judgment. Many of the facts have been admitted by Texas Eastern or by the Carriers. Some of the facts, however, have been disputed by the parties, but after a thorough investigation of the record evidence, the disputes have been found not to be "genuine." The facts below reflect many of the Carriers' above-mentioned objections. In many instances, but not all, I will discuss the reasons for my conclusion that no genuine dispute exists.

  B. Factual Background16

  1. Texas Eastern's Corporate History

  The Texas Eastern Corporation was incorporated in Delaware in 1976. It was incorporated as the parent holding company of Texas Eastern and other subsidiaries. In 1989, the Texas Eastern Corporation was acquired by Panhandle Eastern Corporation. The real party in interest in this litigation is Texas Eastern, not its parent holding company or any of the unidentified subsidiaries, and I will refer solely to Texas Eastern in this opinion.

  By 1987, Texas Eastern operated a natural gas transmission network which included as its primary operation a pipeline approximately 9,500 miles in length from supply areas in Texas, Louisiana, and the Gulf of Mexico to the New York Metropolitan area. *fn17" (TRSOF P 5.) Approximately 65 stations at various locations along the pipeline system used turbine-driven centrifugal compressors to increase the pressure of the natural gas being transmitted. (TRSOF P 2.)

  2. Texas Eastern's Operational History

  In late 1957 or early 1958, Texas Eastern identified a problem with the lubricating oil used at its centrifugal compressor stations. It was suspected that the extreme heat of the turbines caused the oil to ignite; the ignitions caused a number of dangerous fires. (TSOF PP 4, 5.) In response to the fires, Texas Eastern conducted an extensive study of commercially available fire-resistant lubricants and, in 1958, selected Monsanto Chemical Corporation's (Monsanto) OS-81 *fn18" as a replacement. (TRSOF PP 6, 8.) The lubricant (apparently almost all PCB) had PCB concentrations of approximately 88%-90%. (TRSOF P 13.)

  Texas Eastern immediately began installing the new lubricant in some of its turbine-driven centrifugal compressors. (TRSOF PP 17, 18.) By 1970, Texas Eastern had installed the lubricant in 24 compressor units, at 19 compressor stations, located in approximately 8 or 9 states. (TRSOF P 19.)

  Texas Eastern used the Monsanto lubricant in its centrifugal compressors as both a lubricant and a seal oil. (TRSOF P 31.) As a seal oil, the lubricant provided a pressurized seal against the natural gas compressed inside the compressor cases, which prevented the natural gas from escaping into the atmosphere. (TRSOF P 32.) The centrifugal compressors were designed as "closed systems" and should therefore have operated without a noticeable leakage of oil. (TRSOF P 35; TSOF PP 31-33.) Texas Eastern was aware, however, that the lubricating oil was "used" or "consumed" by the compressors, thereby requiring a routine replacement of the oil. (TRSOF PP 37, 38.) Texas Eastern prepared and maintained a "Compressor Department Annual Report" which detailed the amount of lubricant consumption at each compressor station. (TRSOF P 37.) *fn19"

  For example, Texas Eastern's Superintendent of Compressor Stations, E.C. Riall, testified that he was aware, at the time he was working for Texas Eastern, that the passage of some amount of lubricant into the compressor case was "an inherent design of centrifugal compressors." (Dep. of Eugene Riall, App. 56 at 186). See also App. 14 at 358-59 (deposition testimony of Texas Eastern's Assistant Chief Engineer, Conrad W. Marvin, stating that Texas Eastern understood that the seal oil leaked as early as 1949).

  There were occasional accidents and malfunctions involving the compressor unit systems, which explains how some of the lubricant was lost; the vaporizing of lubricant provides a second potential explanation. These explanations are insufficient, however, to explain the disappearance of the majority of the used lubricant, and Texas Eastern has offered insufficient evidence to refute the testimony of its own employees. Those Texas Eastern employees who testified that they understood that the seal oil system was not working perfectly and that a significant amount of lubricant was thereby lost, must therefore be believed. *fn21"

  Texas Eastern's contention that the compressor seal systems were designed as "closed systems" with no leakage or "consumption" of lubricant oil is immaterial because there is no credible evidence which tends to establish that all Texas Eastern employees were working under this assumption or, more importantly, that this assumption was correct. Texas Eastern's reliance on the fact that its senior management was unaware of the extent of the seal oil failures, and the amount of oil which leaked into the pipeline, is equally unavailing. Texas Eastern's managers, charged with running the individual compressor stations, knew that lubricant oil was escaping down the pipeline and Texas Eastern is therefore charged with that knowledge. Texas Eastern cannot hide behind its senior management's ignorance of the basic aspects of its compressor stations' daily operations. For all of these reasons, there is no material dispute that Texas Eastern was aware, for many years, that some of the lubricant oil was escaping from the turbine-compressors and entering the natural gas pipeline.

  The centrifugal compressors operating on Texas Eastern's natural gas pipeline were routinely started-up and shut-down during the course of normal pipeline operation. (TRSOF P 48.) During start-up, the compressor was purged of air and pressurized, and natural gas present in the compressor case was vented to the atmosphere through the compressor vent stacks. (TRSOF P 49.) During shut-down, the compressor case was depressurized and the natural gas within the compressor case was again vented to the atmosphere. (TRSOF P 50.)

  Pipeline liquids, consisting of hydrocarbon distillates *fn22" and water, routinely entered Texas Eastern's natural gas pipeline. (TRSOF P 57.) The lubricant that escaped from the compressor cases and entered the pipeline mixed with those fluids already present in the pipeline. From the time it began operations in 1947, Texas Eastern used its compressor stations as sites for the collection, removal, storage, and disposal of those pipeline liquids. *fn23" (TRSOF P 56.) Texas Eastern primarily used two methods for the removal of pipeline liquids: gas/liquid separation equipment (scrubbers and strainers) and cylindrical devices known as "scrapers" or "pigs." *fn24" (TRSOF P 63.)

  The liquids accumulated by scrubbers, strainers, scrapers, and pigs were routinely *fn25" discharged into unlined earthen pits at the compressor stations. *fn26" (TRSOF PP 71, 77; TSOF P 74.) The PCB-based lubricant, carried along in the pipeline liquids, was thereby discharged into the unlined earthen pits. (TRSOF P 73.)

  Texas Eastern used its pits to collect, contain, and prevent the escape of pipeline liquids to other areas including neighboring third-party property. (TSOF P 74.) The pipeline liquids were generally burned, but in some cases were hauled away, or were applied by Texas Eastern employees to kill weeds or control dust on dirt roads. *fn27" (TSOF P 75; TRSOF PP 84-86, 101, 106.) Texas Eastern personnel understood that some of the liquids were absorbed into the ground, but it is disputed whether this was an intended method of disposal or simply a fact about which Texas Eastern was aware. (See App. 113 at 002021610; App. 118 at 002021192; App. 119 at 002021024--All three Effluent Discharge Survey reports indicating that absorption of pipeline liquids was known to occur.)

  The survey results indicated that some of the lubricant used in the compressors was migrating from Texas Eastern's property to the property of third parties. (TRSOF PP 135, 137, 143-45.) These instances were considered isolated occurrences and were generally remedied once Texas Eastern was made aware of their existence. The survey also establishes that Texas Eastern was fully aware of both potential and actual occurrences of off-site migration of pipeline liquids, and once Texas Eastern understood that the pipeline liquids contained PCBs, Texas Eastern should have been aware of the potential for off-site PCB migration.

  Although Texas Eastern personnel were warned of the potential for overflow from the pits due to rainfall, and were instructed to guard against it, Texas Eastern was aware that overflows occasionally occurred. (TRSOF P 147.) Texas Eastern was also aware of the potential for movement of the pipeline liquids from the compressor stations to other property from various sources, including the earthen pits and the pig receivers. (TRSOF P 151.) In 1975, Texas Eastern drafted a "Water Pollution Prevention and Control Plan" for the purpose of controlling this undesirable spread of pipeline liquids. (TRSOF PP 150-51, 231-32.)

  3. Texas Eastern's Knowledge of PCBs in its Lubricant

  In February 1970, Monsanto sent correspondence to its customers alerting them to an increasing concern over the adverse environmental impact of Monsanto's PCB-containing products and Monsanto's intention to reformulate those products. (SOF P 183.) Monsanto recommended that PCBs no longer be used in applications which would lead either directly or indirectly to the contamination of food and water supplies for humans or animals. (TRSOF P 184; TSOF P 12.) Following its own advice, Monsanto terminated its sale of certain products containing PCBs to certain of its customers.

  After informing its customers of the decision to terminate the sale of certain products, however, Monsanto published a promotional booklet about Turbinol-153, stating that it had a history of safe use as both a lubricant and control fluid in commercial pipeline gas turbines. (TSOF P 14; App. 27 at 2.) Texas Eastern was aware of this booklet. (TSOF P 14.) On January 7, 1972, however, Monsanto proposed that Texas Eastern sign a hold harmless agreement promising to indemnify Monsanto for any future liability arising out of the sale of Turbinol-153 after January 15, 1972. (TRSOF P 187; App. 186.) Monsanto further informed Texas Eastern that because Turbinol contained "major amounts" of certain polychlorinated biphenyl products (PCBs), it would no longer sell any Turbinol to Texas Eastern after June 30, 1972. (TRSOF P 189; App. 186.)

  Texas Eastern elected not to sign the hold harmless agreement, but it did attempt to purchase Monsanto's remaining stock of lubricant oil available for sale before the January 15, 1972 deadline. (App. 190.) Monsanto apparently refused to sell Texas Eastern any more PCB-based lubricant. (Id.) In May 1972, Texas Eastern began a program referred to as the "phase-out" or "change-out" program to replace the PCB-based lubricant with non-PCB-based oil. (TRSOF P 199.)

  4. The Change-Out Program

  Because Turbinol-153 and the replacement oil were compatible, the change-out program did not necessarily require Texas Eastern to flush the turbine driven compressors of the PCB-based lubricant and replace it with non-PCB-based oil. (App. 194 at 3.) Complete flushing was advisable from an ecological standpoint, however, presumably because anything less would have resulted in Texas Eastern's continued use of a lubricant containing PCBs. On April 12, 1972, Texas Eastern chose the replacement for Monsanto's Turbinol-153. (App. 214 at 2.) In May 1972, Texas Eastern began installation of the replacement lubricant. (Id.)28

  The speed with which Texas Eastern conducted its change-out program is a subject of dispute between the parties. The Carriers contend that the speed depended upon the rate of consumption of the PCB-based oil in the turbine compressor units. (SOF P 203.) Texas Eastern responds that it intended to convert its compressors to non-PCB-based lubricants as quickly as possible, but that it was restrained by the technical difficulty of the change-out and the difficulty of finding an appropriate replacement lubricant. (TSOF PP 21-26.)

  Ultimately, the rate at which Texas Eastern completed the change-out probably depended on all of these factors. There can be no dispute, however, that Texas Eastern was, at least initially, concerned with utilizing as much of the its remaining inventory of Turbinol-153 as it could. (Dep. of Walter Woods, App. 42 at 754-59; App. 195 at 010028581.) To achieve this end, Texas Eastern made its change-out decisions based, at least in part, on the lubricant consumption rates of various compressor stations--choosing to change those compressor stations with higher consumption rates last. (App. 203; Dep. of Eugene Riall, App. 56 at 109-12; App. 200.)

  As early as August 1972, Texas Eastern was aware of evidence indicating that a break-down product of the Monsanto Oil was in the compressor units and the pipeline, contaminating the non-PCB-based replacement lubricant. (App. 213.) In July 1976, Texas Eastern's testing confirmed that some of the replacement lubricant was contaminated with PCBs. (TRSOF P 223.) In the same year, one Texas Eastern employee wrote a memorandum in which he indicated that he understood that using the PCB lubricant meant that the oil was being spread throughout the entire pipeline system. (App. 211.) This evidence indicates that Texas Eastern was on notice, during this time period, that the change-out program had not completely solved its PCB lubricant problems.

  Throughout the change-out program, Texas Eastern continued to dump pipeline liquids into the unlined earthen pits at its compressor stations. Texas Eastern was aware that the amount of liquids accumulating in its pits was increasing and raised some concerns as to whether the pits were adequate containment vessels. (App. 221.) One explanation for this increase is that Texas Eastern's management discouraged burning in the disposal pits as early as 1972, (App. 220 at 010020659), and implemented a formal "no burn" policy in 1975. (App. 221; TRSOF P 235.) This required Texas Eastern to rely more heavily on evaporation and siphoning to reduce the amount of liquid in the pits. (App. 221)

  By July 11, 1975, Texas Eastern's Operating Department abandoned the policy of disposing pipeline liquids into the unlined pits in order to comply with environmental regulations being established by the various states in which Texas Eastern operated. (App. 223.) Subsequently, Texas Eastern commenced a program to install diffuser tanks at the compressor stations to replace the unlined earthen pits as the receptacles for the pipeline liquids. The replacement program was substantially completed by 1985. (TRSOF P 237.) After a pit was replaced by a diffuser ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.