Filed: Mar. 25, 1993
Latest Update: Mar. 02, 2020
Summary: UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _ No. 91-6152 _ COLUMBIA MUTUAL INSURANCE COMPANY, formerly known as COLUMBIA MUTUAL CASUALTY INSURANCE COMPANY, Plaintiff-Appellant, VERSUS FIESTA MART, INC., Defendant-Appellee. _ Appeal from the United States District Court for the Southern District of Texas _ (March 26, 1993) Before WILLIAMS, HIGGINBOTHAM, and BARKSDALE, Circuit Judges. BARKSDALE, Circuit Judge: Columbia Mutual Insurance Company appeals the summary judgment awarded its ins
Summary: UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _ No. 91-6152 _ COLUMBIA MUTUAL INSURANCE COMPANY, formerly known as COLUMBIA MUTUAL CASUALTY INSURANCE COMPANY, Plaintiff-Appellant, VERSUS FIESTA MART, INC., Defendant-Appellee. _ Appeal from the United States District Court for the Southern District of Texas _ (March 26, 1993) Before WILLIAMS, HIGGINBOTHAM, and BARKSDALE, Circuit Judges. BARKSDALE, Circuit Judge: Columbia Mutual Insurance Company appeals the summary judgment awarded its insu..
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UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 91-6152
_____________________
COLUMBIA MUTUAL INSURANCE COMPANY,
formerly known as COLUMBIA MUTUAL
CASUALTY INSURANCE COMPANY,
Plaintiff-Appellant,
VERSUS
FIESTA MART, INC.,
Defendant-Appellee.
____________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
_____________________________________________________
(March 26, 1993)
Before WILLIAMS, HIGGINBOTHAM, and BARKSDALE, Circuit Judges.
BARKSDALE, Circuit Judge:
Columbia Mutual Insurance Company appeals the summary judgment
awarded its insured, Fiesta Mart, Inc., in Columbia's declaratory
judgment action on its liability (coverage) for a state court
judgment against Fiesta. Because the state court findings in issue
-- incorporating coverage terms from the Columbia policy -- were
not essential to the state court judgment, and because privity is
lacking between Columbia and Fiesta, Columbia is not collaterally
estopped from relitigating those findings. And, because the
Columbia policy does not cover the damages awarded by the state
court, we REVERSE and RENDER in favor of Columbia on its
declaratory judgment claim, and REMAND for disposition of the
remaining claims.1
I.
From April 23, 1987, to April 22, 1988, Columbia was an excess
insurer for Fiesta, which owns and operates a chain of grocery
stores in the Houston area that caters to the Hispanic community.
From 1982 to 1988, Fiesta leased vendor locations in its stores to
Monytron, Inc., which offered financial services to Fiesta's
customers. Unknown to Fiesta, Monytron was defrauding customers by
siphoning deposits and investments through a "Ponzi scheme",
involving the illegal conversion of pesos to dollars.2
Beginning in late 1988, hundreds of aggrieved customers sued
both Monytron and Fiesta in a state court class action, claiming
violations of the Texas Securities Act, Tex. Rev. Civ. Stat. Ann.
art. 581-1 et seq., the Texas Deceptive Trade Practices Act (DTPA),
Tex. Bus. & Com. Code Ann. § 17.01 et seq., common law fraud,
negligence, and gross negligence. In addition to economic losses,
the plaintiffs claimed damages for mental anguish (some with
1
Fiesta counterclaimed against Columbia for breach of contract,
breach of a duty of good faith and fair dealing, violations of the
Texas Insurance Code, negligence, and gross negligence. Columbia
then counterclaimed for attorneys' fees, alleging that Fiesta's
counterclaims were "groundless and brought in bad faith or for the
purpose of harassment". The district court issued a 28 U.S.C. §
1292(b) certificate on the summary judgment, which we construed as
a Fed. R. Civ. P. 54(b) certificate; and it stayed the
counterclaims pending this appeal. On remand, Fiesta's counter-
claims should, of course, be dismissed.
2
A Ponzi scheme is "an investment swindle in which some early
investors are paid off with money put up by later ones in order to
encourage more and bigger risks". Webster's Ninth New Collegiate
Dictionary 914 (1990).
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physical manifestations) resulting from the "traumatic loss".
Columbia received notice of the action in December 1988; and in
January 1989, it issued a reservation of rights letter, reserving
any coverage defenses in the event Fiesta was found liable.
Furthermore, it did not provide a defense to Fiesta.3
The plaintiffs sought approximately $100 million. But, on
August 31, 1990, 17 days before trial was to begin, Fiesta advised
Columbia that the case could be settled for $7 million and demanded
that Columbia either accept or deny coverage by September 6.
Columbia elected to stand on its prior reservation of rights.
That "trial" began and ended on September 17. It lasted only
one hour, and consisted solely of the admission, without objection,
of several volumes of packaged exhibits. The next day, the
district court entered findings of fact and conclusions of law,
which had been agreed upon, drafted, and submitted by the parties
before trial, holding Fiesta liable in the amount of $7 million4
for unknowing violations of §§ 17.46(b)(2) and (3) of the DTPA and
3
The parties dispute who did provide the defense. Columbia
contends that CIGNA Property and Casualty Company, which provided
Fiesta's primary liability coverage during the Columbia policy
period, provided defense through its affiliated claims servicing
organization, ESIS, Inc. Fiesta denies that either CIGNA or ESIS
defended it. The Hartford Casualty Insurance Company, which
provided primary liability coverage for the policy period preceding
CIGNA's, acknowledged a duty to defend Fiesta and paid a portion of
the defense costs.
4
The findings and conclusions refer to the judgment as a
"compromise agreement" between the parties; and, if promptly paid,
Fiesta would be released from liability for prejudgment interest.
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ordinary negligence.5
Fiesta satisfied the judgment and demanded indemnity from
Columbia.6 Columbia responded by initiating this action in
November 1990, seeking a declaratory judgment that it had no duty
to indemnify Fiesta. On cross motions for summary judgment, the
district court ruled for Fiesta, holding that Columbia was
obligated to indemnify it for the judgment.
II.
Among other contentions, Columbia maintains that the district
court erred in ruling (1) that Columbia was collaterally estopped
from relitigating the state court's factual findings, and (2) that
5
Section 17.46(a) makes unlawful false, misleading, or
deceptive acts or practices in the conduct of any trade or
commerce. Section 17.46(b) provides, in relevant part:
(b) [T]he term "false, misleading, or deceptive acts or
practices" includes, but is not limited to, the following
acts: ...
(2) causing confusion or misunderstanding as to the
source, sponsorship, approval, or certification of goods
or services;
(3) causing confusion or misunderstanding as to
affiliation, connection, or association with, or
certification by, another; ....
Tex. Bus. & Com. Code Ann. § 17.46.
6
The findings stated that $5.5 million of the damages were
caused during the Columbia/CIGNA policy period (April 23, 1987, to
April 22, 1988). The remaining $1.5 million in damages was
attributed to the Hartford policy period, and was paid by Hartford.
Fiesta demanded $4.5 million with interest from Columbia,
representing the amount exceeding Fiesta's $1 million primary
coverage limit under the CIGNA policy.
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the Columbia policy provided coverage for the damages awarded.7
Needless to say, we apply Texas law in deciding these issues. Erie
R. Co. v. Tompkins, 304 U.S. 64 (1938); Allison v. ITE Imperial
Corp.,
928 F.2d 137, 138 (5th Cir. 1991). And, because these are
issues of law, we review the district court's conclusions de novo.
Enserch Corp. v. Shand Morahan & Co.,
952 F.2d 1485, 1492 (5th Cir.
1992). Moreover, such de novo review is also required because a
summary judgment is at issue. E.g., Johnson v. Odom,
910 F.2d
1273, 1277 (5th Cir. 1990), cert. denied,
111 S. Ct. 1387, ___ U.S.
___ (1991).
A.
It is well-settled in Texas that when an insurer breaches a
duty to defend its insured, it is bound, in subsequent proceedings,
by a settlement or judgment rendered against the insured. Rhodes
v. Chicago Ins. Co., 719 F.2d 116, 120 (5th Cir. 1983). But, of
course, an insured's liability and whether there is concomitant
coverage are "separate and distinct" matters; and a prior judgment
establishing liability is not binding in a subsequent proceeding on
coverage. Employers Casualty Co. v. Block,
744 S.W.2d 940, 943
7
Columbia also asserts, with considerable force, that the state
court's findings were the product of collusion between the
underlying parties and, thus, not binding on it. See Coblentz v.
American Surety Co. of New York, 416 F.2d 1059, 1063 (5th Cir.
1969); Britt v. Cambridge Mutual Fire Ins. Co.,
717 S.W.2d 476, 483
(Tex. App.--San Antonio 1986, writ ref'd n.r.e.). Additionally, it
contends that it had no duty to defend Fiesta, under a policy
exclusion, because an "other insurer" at all times had a duty to
defend it, or, if not, that Fiesta breached a duty to maintain
primary coverage containing such a duty. Because collateral
estoppel does not apply for the reasons stated infra, we need not
address these alternative contentions.
- 5 -
(Tex. 1988); see also Enserch, 952 F.2d at 1493. Furthermore,
whether an insurer is bound by a specific finding from the
liability action -- i.e., whether it is collaterally estopped from
contesting that finding -- depends upon "whether the fact
determined in the prior suit was essential to the judgment in the
prior suit, and whether the necessary requirement of privity exists
between the parties".
Block, 744 S.W.2d at 943; see also Edinburg
Consolidated I.S.D. v. INA,
806 S.W.2d 910, 913-14 (Tex. App.--
Corpus Christi 1991, no writ). Assuming, without deciding, that
Columbia breached a duty to defend Fiesta, we hold that it is not
bound by the hereinafter-described state court findings in issue,
because they were not essential to the liability judgment and
because the requisite privity was lacking.
The state court finding upon which Fiesta relies states: "An
occurrence of Fiesta Mart, Inc.'s act of negligence and negligently
causing confusion and misunderstanding and the continuous exposure
to that occurrence ... proximately caused and produced resulting
property damage and bodily injury and recoverable attorneys' fees
...". (Emphasis added.) Although coverage was not at issue in the
state court litigation, this language virtually mirrors that
contained in the relevant coverage provisions of the Columbia
policy.8 Additionally, as noted, the findings precisely
8
Columbia's basic coverage clause provides:
COVERAGE: The Company hereby agrees to indemnify the
Insured against such ultimate net loss in excess of the
Insured's primary limit as the Insured sustains by reason
of liability, imposed upon the Insured by law or assumed
by the Insured under contract, for damages because of
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apportioned the damages between the applicable policy periods,
stating that $5.5 million and 80% of the court costs were
"proximately caused and produced" between April 23, 1987, and April
22, 1988 (the Columbia policy period).
The characterizations of Fiesta's actions as an "occurrence"
and the damages as "bodily injury" and "property damage" were not
essential to determining Fiesta's liability. See Block, 744 S.W.2d
at 943 ("the recitation in the agreed judgment that the
`[plaintiffs] sustained property damage ... as a result of an
occurrence on [a specific date within the policy period]' was not
essential in determining [the insured's] liability"). Furthermore,
there was no valid reason for the court to apportion the damages
between the applicable policy periods. Id. To maintain an action
personal injury or property damage to which this policy
applies, caused by an occurrence anywhere in the world.
(Emphasis added.) The policy defined "occurrence" as follows:
"OCCURRENCE" means an accident, including continuous or
repeated exposure to conditions, which results in
personal injury or property damage neither expected nor
intended from the standpoint of the Insured. All
personal injury and property damage arising out of
continuous or repeated exposure to substantially the same
general conditions shall be considered as arising out of
one occurrence.
(Emphasis added.) An endorsement to the policy modified the
definition of "personal injury" to conform to the "bodily injury"
clause in the underlying (CIGNA) primary policy. "Bodily injury",
as defined in that policy and, thus, incorporated in the Columbia
policy, means
bodily injury, sickness or disease sustained by any
person which occurs during the policy period, including
death at any time resulting therefrom.
(Emphasis added.)
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under the DTPA, a consumer need only prove that a deceptive act or
practice was a "producing cause" of "actual damages". Tex. Bus.
Com. Code Ann. § 17.50(a). Similarly, negligence requires only
proof of "a duty of reasonable care, breach of that duty, and
damages resulting from the breach." Hayes v. United States, 899
F.2d 438, 443 (5th Cir. 1990).
Additionally, because "the respective positions of [Columbia
and Fiesta] regarding coverage were in conflict", the parties were
not in privity. Block, 744 S.W.2d at 943; see also Cluett v.
Medical Protective Co.,
829 S.W.2d 822, 827 (Tex. App.--Dallas
1992, writ denied).9
Accordingly, we conclude that the findings in issue are not
binding on Columbia and, therefore, do not preclude it from
litigating coverage in this case. Thus, we turn to whether the
Columbia policy covers the damages awarded against Fiesta.
B.
As noted, Columbia contracted to indemnify Fiesta for
liability resulting from an "occurrence", defined as "an accident,
including continuous or repeated exposure to conditions, which
results in [bodily] injury or property damage neither expected nor
intended from the standpoint of the Insured". For the following
9
Fiesta's reliance on U.S. Aviation Underwriters, Inc. v.
Olympia Wings, Inc., 896 F.2d 949 (5th Cir. 1990) for the
proposition that it was in privity with Columbia is misplaced. In
that case, we recognized only that "an insurer which is obliged to
defend its insured but flatly refuses to do so is considered in
privity with the insured on all essential issues in the underlying
action".
Id. at 955 (emphasis added).
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reasons, we hold that the injuries found for the class action
plaintiffs were not caused by an "occurrence".
The alleged "conditions" to which the class action plaintiffs
were exposed through Fiesta's negligence and DTPA violations were
the fraudulent activities of Monytron. In their complaint, the
class action plaintiffs described these activities as "a malicious
scheme ... to defraud class members by inducing them through false
representations and false promises to place their savings or
investments in `Monytron'". Although Fiesta attempts to
characterize the occurrence as exposure to its own negligent and
unknowing acts, its liability is clearly "related [to] and
interdependent" on Monytron's fraud. Old Republic Ins. Co. v.
Comprehensive Health Care Assoc's., Inc., 786 F. Supp. 629, 632
(N.D. Tex. 1992). Without that fraud, there would have been no
basis for suit against Fiesta; thus, the "ultimate issue" is
whether the policy covers Monytron's fraudulent activities. See
id. (in claim against employer for negligence with respect to
employee's sexual harassment of fellow employee, "occurrence"
refers to employee's harassment, not employer's negligence); see
also Thornhill v. Houston Gen. Lloyds,
802 S.W.2d 127, 130 (Tex.
App.--Fort Worth 1991, no writ); Centennial Ins. Co. v. Hartford
Accident and Indemnity Co.,
821 S.W.2d 192, 194 (Tex. App.--Houston
[14th Dist.] 1991, no writ); Fidelity and Guaranty Ins.
Underwriters, Inc. v. McManus,
633 S.W.2d 787, 790 (Tex. 1982).
Although we find no guidance from the Texas Supreme Court on
whether exposure to fraud constitutes an occurrence under the above
- 9 -
definition, we agree with the conclusion of the Texas Court of
Appeals in a substantially similar matter, Houston Petroleum Co. v.
Highlands Ins. Co., 830 S.W.2d 153, 155-56 (Tex. App.--Houston [1st
Dist.] 1990, writ denied), which held that it does not. In that
case, also a declaratory judgment action by an insurer, the insured
had been sued by investors for economic losses, among other things,
resulting from the insured's alleged fraud with respect to a
limited partnership venture. In determining whether there was
"bodily injury", and applying an occurrence clause identical to
Columbia's, the court held that "exposure to `fraudulent promises,
false representations, and untrue statements' does not, as a matter
of law, fall within the plain meaning of the definition of
`occurrence'".
Id. at 156. It explained that "[t]o hold otherwise
would require us to unnaturally extend the definition of the term
`conditions,' and consequently, the definition of `bodily injury'".
Id.
Turning to whether the plaintiffs' lost investments
constituted "property damage" under the policy, the court noted
that the same definition of "occurrence" was applicable. But,
instead of first determining whether there was an occurrence, it
ruled that the loss was not "property damage". See
id. In Royal
Ins. Co. of America v. Quinn-L Capital Corp.,
960 F.2d 1286, 1295
(5th Cir. 1992), we interpreted a similar holding to preclude
coverage solely for lack of an occurrence, regardless of bodily
- 10 -
injury or property damage.10 We emphasized that, under an identical
definition of "occurrence", both an occurrence and an injury are
required for coverage. Id. Therefore, because we hold that
exposure to Monytron's fraud does not constitute an "occurrence",
we need not address whether the damages found by the state court
constitute "bodily injury" or "property damage".
III.
For the foregoing reasons, the summary judgment is REVERSED,
and judgment is RENDERED in favor of Columbia on its declaratory
judgment (coverage) claim. Because there are additional claims
pending in the district court, we REMAND for their disposition.
REVERSED, RENDERED and REMANDED.
10
In Quinn-L, the district court held both that alleged personal
injuries, in the form of mental anguish, were not caused by an
occurrence, and that lost investments did not constitute property
damage. 960 F.2d at 1295.
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