NANCY F. ATLAS, District Judge.
Before the Court in this insurance coverage case are two issues raised by the parties since the Court issued its Amended Memorandum and Order on September 29, 2016 [Doc. # 109] ("Amended M&O"),
By way of overview, this case concerns a commercial general liability ("CGL") policy issued by Plaintiff Mid-Continent Casualty Co. ("Mid-Continent") to Defendant insured Petroleum Solutions, Inc. ("PSI") covering the period May 1, 2001, to May 1, 2002 (the "Policy").
In the 1990s, PSI sold to Bill Head and installed on his property a fuel storage system. It was discovered in 2001 that approximately 20,000 gallons of oil had leaked into the soil. Head notified PSI of the leak and accused PSI of violations of various duties including sale of a defective product. PSI reported the claim to its carrier, Mid-Continent, which agreed to defend PSI under a reservation of rights. Mid-Continent hired counsel to investigate the matter. PSI and counsel contended that a defective flex connector manufactured by Titeflex Corporation ("Titeflex") had been the cause of the leak. Counsel took possession of the flex connector from the site and submitted it to a laboratory for testing and storage. At some point, the flex connector was lost or destroyed.
In February 2006, Head sued PSI in Texas state court (the "State Court Litigation"). Mid-Continent selected Victor Vicinaiz, Esq., and Jennifer Hogan, Esq. as trial and appellate defense counsel, respectively, for PSI. Mid-Continent, defense counsel and PSI agreed that PSI would assert third-party claims against Titeflex (collectively, PSI's "Affirmative Claim") under Section 82.002 of the Texas Civil Practice and Remedies Code ("Section 82.002"), and filed the third-party action in October 2006.
In January 2007, Head amended his petition to name Titeflex a co-defendant based on a strict products liability theory similar to that PSI had asserted. Titeflex actively defended against all claims, asserting inter alia spoliation arguments because of the loss of the flex connector.
In March 2008, Head non-suited without prejudice his claims against Titeflex and focused his theories and trial strategy on PSI. In May 2008, Titeflex asserted a counterclaim against PSI for Titeflex's attorney's fees, costs and expenses (collectively, "fees") incurred after Head dismissed his claims. Titeflex subsequently amended its counterclaim to assert what was effectively a Section 82.002 claim against PSI, seeking "all past and future costs of court, reasonable expenses, and reasonable and necessary attorney's fees which were expended in defense of this action and in prosecution of this demand for indemnity."
On August 12, 2008, in consultation with Mid-Continent, PSI non-suited its Affirmative Claim, which constituted a dismissal without prejudice. Titeflex, however, refused to dismiss its counterclaim for indemnity against PSI unless PSI agreed to dismiss its Affirmative Claim against Titeflex with prejudice. PSI refused this dismissal with prejudice.
The claims by Head and Titeflex were tried in September and October 2008. After a trial spread over approximately eight weeks, the jury reached a verdict in Titeflex's favor against PSI, which was memorialized in a judgment entered January 13, 2009. Titeflex was awarded $463,246.97, plus post-judgment interest ("Titeflex Judgment").
Meanwhile, in response to PSI's notice of claim in 2001, Mid-Continent defended PSI against Head's and, later, Titeflex's claims under a reservation of rights. Mid-Continent has mounted numerous defenses to coverage. Mid-Continent commenced this declaratory judgment action in 2009, while the Titeflex Judgment was on appeal but before it had become final. PSI paid the Titeflex Judgment and has counterclaimed for reimbursement from Mid-Continent under the Policy.
This Court, on July 29, 2016, in an extensive ruling on a wide variety of issues presented by the parties on cross motions for summary judgment [Doc. # 93], held that there was coverage under the Policy for the fees in the Titeflex Judgment awarded pursuant to Section 82.002(a) incurred in defense against Head's claims, but no coverage for fees attributable to Titeflex's defense against PSI claims or awarded pursuant to Section 82.002(g). The Court also concluded that fact issues existed for trial regarding whether PSI satisfied its duty to cooperate under the Policy. Upon motions for reconsideration, the Court issued an Amended Memorandum and Order [Doc. # 109] altering several of its rulings in limited part, but did not alter its fundamental conclusions. Significantly for present purposes, the Court concluded that a trial also was necessary on the issue of whether Mid-Continent was collaterally estopped from arguing that the Titeflex fees should be segregated into components attributable to Section 82.002(a) as opposed to Section 82.002(g). Thereafter, the Court determined the issue of whether Mid-Continent waived the right to enforce the cooperation clause in the Policy.
The parties continue to contest certain aspects of this Court's rulings. There are several issues before the Court for decision, two of which are addressed below.
First, PSI argues that the Fifth Circuit's case of Hollybrook Cottonseed Processing, L.L.C. v. American Guarantee & Liability Insurance Co., 772 F.3d 1031 (5th Cir. 2014), not previously cited in the parties' briefing, establishes that there is coverage for both the Section 82.002(a) fees in the Titeflex Judgment and the Section 82.002(g) fees, as both types of fees are "damages" under the Policy's insuring clause. PSI asks the Court to alter its conclusion that Section 82.002(g) fees are not "damages because of . . . property damage" under the Policy. Mid-Continent contends the Hollybrook case is not probative.
Second, the parties seek a ruling regarding whether collateral estoppel prevents Mid-Continent from contesting coverage under the Policy for fees Titeflex incurred in defense of PSI's Affirmative Claim while Head's claim was not pending against Titeflex. The parties have stipulated to facts pertaining to this issue and to the sums potentially owed if Mid-Continent is collaterally estopped and if it is not.
The Court addresses these issues in turn.
As interpreted by the Texas Supreme Court on appeal in the underlying suit, Head's allegations of property damage caused in part by a Titeflex product, which claim was dismissed, were sufficient under Section 82.002 to sustain the judgment in favor of Titeflex, as an innocent component part seller-indemnitee, against PSI, which the Supreme Court characterized as a manufacturer-indemnitor. Titeflex's claimed losses were solely its attorney's fees, costs, and expenses (collectively, "fees") incurred in the State Court Litigation. The state trial and appellate courts did not differentiate between fees incurred by Titeflex in defending against Head's product liability allegations, that is, Section 82.002(a) fees,
This Court has concluded that fees awarded to Titeflex pursuant to 82.002(g) do not constitute "damages" under the Policy Insuring Agreement.
Applying this reasoning, this Court concluded that the Titeflex Judgment, to the extent it included fees under Section 82.002(a), was compensation for a "loss arising out of a products liability action"
The Court concluded, however, that because Section 82.002(g) grants recovery of fees incurred "to enforce" an innocent seller's Section 82.002(a) indemnification rights, Section 82.002(g) fees do not meet the definition of compensatory "damages" under Texas law or the Policy.
PSI contends the Fifth Circuit's decision in Hollybrook Cottonseed Processing, L.L.C. v. Am. Guarantee & Liab. Ins. Co., 772 F.3d 1031 (5th Cir. 2014), is grounds for reconsideration of the Court's ruling that fees awarded pursuant to Section 82.002(g) are not "damages" covered by the Policy. The Court is unpersuaded.
Hollybrook is a case addressing the Louisiana redhibition statute, Louisiana Civil Code article 2545 ("article 2545"). Plaintiff Hollybrook Cottonseed Processing, L.L.C. ("Hollybrook") purchased and used equipment manufactured by Carver, Inc. ("Carver") in its processing facility.
In Hollybrook, the insurance policy, like the Policy at bar, obligates the insurer to "pay as damages because of . . . `property damage'. . . ."
Both the Hollybrook insured and PSI's claims for coverage arise out of product liability actions. Both cases are brought for fees awarded under statutes that expressly provide for awards of attorney's fees as an element of damages available to a plaintiff. Nevertheless, the reach of Hollybrook does not extend as far as PSI advocates. First, Hollybrook's holding is grounded in specific Louisiana precedent. The Fifth Circuit's statutory interpretation of article 2545 relies heavily on Louisiana case law that "specifically stated about redhibition actions that `[t]he buyer's reasonable attorney fees are nothing more than an element of the buyer's damage.'"
Second, structurally, article 2545 provides recovery for the buyer of a defective good, much like Section 82.002(a).
The Policy provides coverage for "damages because of . . . `property damage'. . . ."
During the course of the State Court Litigation, Titeflex proved it suffered "losses" cognizable under Section 82.002 consisting of attorney's fees, expenses and costs (collectively, "fees") incurred defending against Head's products liability claims and PSI's Affirmative Claim under Section 82.002. As noted earlier, PSI asserted its third-party claim for indemnity against Titeflex on October 5, 2006, and Head asserted his direct claim on January 30, 2007. PSI non-suited its Affirmative Claim in mid-August 2008, more than five months after Head dismissed his action against Titeflex in March 2008. The Titeflex Judgment comprises fees incurred in (1) defense against Head's products liability claims; (2) defense against PSI's Affirmative Claim under Section 82.002(a); and (3) prosecution for fees from PSI pursuant to Section 82.002(g) for enforcement of Titeflex's Section 82.002(a) indemnity claim. The jury verdict and Titeflex Judgment did not segregate these components.
This Court concluded on summary judgment that the Policy covers the Titeflex Judgment for all fees awarded for indemnification due from PSI under Section 82.002(a), i.e., for Titeflex's "loss" incurred in defending against Head's claims from January 30, 2007 to approximately March 7, 2008. The Court further concluded that to the extent fees during this period were for work defending against Head's claims, which work was also helpful in countering PSI's claims, the fees are recoverable under the Policy.
In light of the Court's analysis,
The state trial record reveals that PSI's counsel raised the issue of the segregation of fees Titeflex incurred in defense of PSI claims as contrasted with fees in defense of Head's claims. First, during cross-examination on October 22, 2008, Victor Vicinaiz, Esq., questioned Titeflex's attorney, George Petersmarck, Esq., regarding whether Titeflex distinguished between fees in defense of Head's claims and fees in defense of PSI's Affirmative Claim. The witness testified that Titeflex did not segregate those fees because they were completely intertwined:
Additionally, during the charge conference, on November 3, 2008, PSI's appellate counsel, Jennifer Hogan, Esq., objected to other parties' proposed jury charges, arguing that the jury should be instructed "not to award [to Titeflex] attorneys' [sic] fees that are not segregated and are not recoverable under Chapter 82. . . ."
The state trial court simply stated that Hogan's objections were "overruled" and "refused" the proposed jury instructions without any explanation or reasoning.
PSI contends that Mid-Continent is estopped from arguing that the Policy does not cover the fees Titeflex incurred in defense of PSI's Affirmative Claim because that issue was decided in the State Court Litigation by virtue of the quoted testimony and rulings on the proffered jury instructions. Mid-Continent responds that the issue was not fully litigated or determined, that it is not in privity with PSI, and that the brief rulings do not entitle PSI to collateral estoppel. The Court concludes that Mid-Continent is in privity with PSI but that the issue was not fully litigated, and thus Mid-Continent is not collaterally estopped from arguing segregation in this coverage proceeding.
Collateral estoppel, or issue preclusion, "`prevents relitigation of particular issues already resolved in a prior suit.'"
"For collateral estoppel purposes, `full and fair litigation' means actual litigation in the previous suit of the same fact issues."
"Strict mutuality of parties is not required."
The issue actually presented and determined in the state court suit was the total amount of fees and expenses incurred by Titeflex in that suit through the trial.
In order to assess whether collateral estoppel should apply, the Court turns first to the question of whether PSI and Mid-Continent were in privity regarding this issue before the state court.
There are "dangers of formalism tied up in the word `privity'. . . ."
Regarding the first factor, the evidence reveals that Mid-Continent in fact generally controlled and had substantial input into PSI's defense in the underlying State Court Litigation.
The second factor focuses on whether Mid-Continent and PSI held "conflicting positions with respect to the issue determined in the liability suit." The Court discerns no conflict here. Mid-Continent and PSI were aligned in seeking to limit Titeflex's fee award as much as possible. Both Mid-Continent and PSI would have benefitted from the state trial court's granting Hogan's proposed jury instructions and ruling that the jury could not award Titeflex Section 82.002 fees that were not appropriately segregated. PSI feared there would be no insurance coverage and wanted to limit its potential exposure; similarly, Mid-Continent, if there was coverage under the Policy, sought to pay as little as possible. Substantively, both wanted to prevent any award to Titeflex of fees incurred against PSI's claims (as opposed to fees in defense of Head's claims) and, more generally, to prevent an award of all fees that were not segregated as between the PSI and Head claims. The fact that state trial and appellate counsel were not focused on how the segregation issue would impact coverage questions, as presented in the declaratory judgment suit at bar, is immaterial. Thus, Mid-Continent's argument that there was no privity between itself and PSI for collateral estoppel purposes under Texas law is rejected.
The Court next addresses whether the issue of segregation of Titeflex fees attributable to defense against the PSI claims as opposed to the fees attributable to defense against the Head claim was fully and fairly litigated.
Furthermore, in making legal rulings, the trial judge simply summarily "overruled" a vague objection to the absence of segregation and, in one word, "refused" the requested jury instructions. There was no consideration of the issue, nor explanation of the reasons for denial of the requests.
PSI suggests that the state court determined the segregation issue as a matter of law when it held that the segregation issue was not to go to the jury.
For all these reasons, PSI has failed to meet its burden to prove that the segregation issue was actually litigated in the state court case.
For the foregoing reasons, the Court concludes that the Fifth Circuit's decision in Hollybrook Cottonseed Processing, L.L.C. v. Am. Guarantee & Liab. Ins. Co., 772 F.3d 1031 (5th Cir. 2014), does not affect the Court's previous conclusion that fees awarded under Section 82.002(g) of the Texas Civil Practice and Remedies Code are not "damages" covered by the commercial general liability Policy at issue.
The Court also holds that plaintiff Mid-Continent is not collaterally estopped from seeking segregation of Titeflex's fees attributable to defense against the PSI claims as opposed to the fees attributable to defense against the Head claim. The Amended Memorandum and Order is amended to this extent.
It is
The jury also awarded Head $1,131,321.26 in damages and prejudgment interest and $91,500.00 in attorney's fees. This award was vacated by the Texas Supreme Court. On remand, Head's claims were dismissed by the trial court for reasons unrelated to the matters before this Court.
Policy [Doc. # 63-2], at CGL Form page 1 (ECF page 14), § I(A)(1)(a). See Amended M&O [Doc. # 109], at Appendix, at 94.
Stipulations [Doc. # 117], Exhibit A, at 202-03 (emphasis added).
Id. at 110. The Fifth Circuit's "raised and determined" in Bay Rock is equivalent to the "full and fair litigation," "actually litigated," and "full and fair opportunity to litigate" element in the Texas collateral estoppel rubric.