IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_______________

No. 90-7038

No. 90-7070

_______________

ROYAL INSURANCE COMPANY OF AMERICA and ROYAL LLOYDS OF TEXAS,

Plaintiffs-Appellees,

VERSUS

QUINN-L CAPITAL CORPORATION, et al.,

Defendants-Appellants.

_________________________

Appeals from the United States District Court

for the Northern District of Texas

_________________________

(May 5, 1992)

Before WISDOM, DAVIS, and SMITH, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

The district court enjoined the appellants from pursuing their

suit in state court; the appellants contend that the injunction

violates the Anti-Injunction Act ("the Act"), 28 U.S.C. § 2283. We

find that the portion of the injunction based upon the

"relitigation" exception to the Act was proper. We further find

that the portion of the injunction based upon the "in aid of

jurisdiction" exception was improper. We therefore affirm in part,

reverse in part, and remand.
2

I.

In May 1987, some 157 investors ("the investors") brought

twenty-six lawsuits in federal district court against numerous

Quinn-L entities ("Quinn-L") and other parties. The investors, who

alleged that they had lost money in various real estate investments

offered or managed by Quinn-L, asserted claims under federal

securities and anti-racketeering laws as well as Texas law. The

cases were assigned to Judge Barefoot Sanders, who consolidated

them ("the federal liability suit").

Subsequently, Quinn-L asked Royal Insurance Company of America

and Royal Lloyds of Texas (collectively "Royal") to defend it in

the federal liability suit pursuant to several insurance policies

it had issued to Quinn-L. Royal agreed to do so but reserved its

right to contest coverage. On May 10, 1988, Royal filed a

declaratory judgment action ("first federal declaratory judgment

action"), asking the court to determine whether Royal had a duty to

defend or indemnify Quinn-L against the investors' claims brought

in the federal liability suit. This declaratory judgment action

also was assigned to Judge Sanders. 

On June 6, the investors moved to intervene in the federal

declaratory judgment action SQ a motion Royal opposed. The court

denied the motion on the ground that the investors had failed to

meet the requirements for intervention as of right and that their

interest would be protected adequately by Quinn-L. 

Royal moved for partial summary judgment on December 12, 1988.

While this motion was pending, the investors entered into a
 

1 The exception is Quinn-L Capital Corporation. Lovell is the sole

owner of all of its voting stock and is the beneficial owner of all of its

assets. 

 

2 At this point, Lovell was not a party to the federal liability suit. 

The investors had, however, objected to the discharge of their claims in

Lovell's personal bankruptcy proceeding.

3

settlement agreement dated April 5, 1989, with Mark Lovell, the

sole shareholder of all but one of the Quinn-L entities.1 Lovell

promised to cooperate with the investors in the litigation against

Quinn-L and to assign to them any claims he might have against

Royal; in return, the investors promised not to pursue any claims

against him.2 The district court found that "settlement

negotiations between the Investors' counsel and Lovell started as

early as June, 1988 and resulted in a letter agreement by October

11, 1988." Royal Ins. Co. of Am. v. Quinn-L Capital Corp., 759

F. Supp. 1216, 1224 n.10 (N.D. Tex. 1990) ("Royal"). It also found

that the "sole purpose" of this agreement was to pursue Royal. Id.

at 1224.

On April 14, 1989, the court granted Royal's partial summary

judgment motion, concluding that Royal's policies did not impose

any duty to defend or indemnify Quinn-L against the investors'

claims in the federal liability suit. The court held that 

the language of the insurance coverage is

unambiguous . . . . As a matter of law, the allegations

in the pending suits do not state claims within coverage.

Although the investors allege loss of their investments,

they allege no injury to tangible property which could

constitute an "occurrence". Additionally, none of the

losses constitutes "property damage" as required by the

policy. [Footnote and citation omitted.]

The court added that "[n]either have Defendants shown that personal
4

injuries (in the form of mental anguish) were caused by an

`occurrence'." The court formally entered partial summary judgment

in favor of Royal on April 27.

On May 4, Quinn-L notified the district court regarding the

status of the litigation. It stated that in view of the partial

summary judgment, no issues remained to be litigated aside from

attorneys' fees.

The investors moved to dismiss all their pending actions

against Quinn-L on August 3, stating that they and Quinn-L had

"reached an agreement in principle for settlement of [their] claims

and anticipate reaching an agreement as to the precise terms and

conditions of settlement over the next few weeks" and requesting

the dismissal in order to "further streamline the litigation

pending in this Honorable Court." On August 28, the court

dismissed the federal liability suit in its entirety, dismissing

the federal claims with prejudice and SQ declining to exercise

pendent jurisdiction SQ dismissing the state claims without

prejudice. 

The court entered a final judgment on the federal declaratory

action on September 8. At that time, the court again held that

Royal had no duty to defend or indemnify Quinn-L for any claims

brought in the federal liability suit. This judgment was not

appealed.

Approximately five days later, the investors filed suit

against Quinn-L in state court in Dallas County, based upon the

same events and conduct at issue in the just-dismissed federal
 

3 In a deposition taken on October 18, 1990, Lovell stated:

There was certainly an offer of some type of a defense

offered me by Royal or to the companies. I had gone through a

similar situation like that with Royal on other situations [i.e.,

in the federal liability action]. And for two reasons, one, my

own and, two for the purposes as part of my settlement agreement

with the [investors], I advised to keep them informed. 

I refused to accept a settlement or a defense unless there

was a full defense. Coverage, I guess, is what it is. I would

still maintain that because of those two things that I just

mentioned.

5

liability suit. In October, Lovell, on behalf of Quinn-L, directed

his personal attorney to request that Royal defend Quinn-L in the

Dallas County litigation. Royal offered to provide a defense

subject to a reservation of rights SQ the same offer it had made in

relation to the federal liability suit.

While awaiting Quinn-L's response, Royal retained an attorney,

Coyt Randal Johnston, to represent Quinn-L in the Dallas County

case. Because Royal had not received a response from Quinn-L

regarding its offer of a qualified defense, Johnston entered a

general denial on November 17. 

On January 9, 1990, Lovell rejected Royal's offer and demanded

an unqualified defense. As the district court later found, "[t]he

evidence conclusively establishes that Lovell, on behalf of the

Quinn-L Entities, refused Royal's offer of a defense subject to a

reservation of rights at the urging of the Investor Plaintiffs."

Royal, 759 F. Supp. at 1224.3 Royal declined to acknowledge

coverage and instructed Johnston to take no further action in the

Dallas County action.

Royal repeatedly notified Lovell and his personal attorney

that Johnston would no longer take any action in that suit. In a
 

4 In their brief, the appellants note that "[b]y this time, Johnston

finally had withdrawn from Quinn-L's defense. Quinn-L, however, was unable

financially to hire its own counsel to defend the suit, and, therefore, was

unrepresented and did not participate further."

6

letter dated April 24, Johnston warned them of the "significant

risk" of default if they failed to retain new counsel. 

On May 16, Johnston filed his motion to withdraw, which was

granted on May 30. On May 21, while Johnston's withdrawal motion

was pending, the investors served Quinn-L (through Johnston) with

numerous requests for admissions. Johnston answered the requests,

denying the majority of them. On June 27, the investors moved to

strike the responses on the ground that Johnston had prepared them

without his client's input. On July 6, a visiting judge granted

the investors' unopposed motion to deem the denied requests

"admitted."4

The Dallas County litigation proceeded to trial the first week

of August; Quinn-L did not make an appearance. Based solely upon

the deemed admissions obtained by the investors, the court entered

a default judgment against Quinn-L in the amount of $741 million,

including "actual damages consisting of [lost] investment, . . .

damages for bodily injury including mental pain, suffering and

anguish which has manifested itself physically," attorneys' fees,

and exemplary damages "in an amount equal to treble the actual

damages suffered by each Plaintiff."

On September 4, Quinn-L (through Lovell) assigned its rights

and causes of action against Royal to the investors. In exchange,

the investors agreed to pay (1) Quinn-L ten dollars, and (2) Lovell
 

5 In the Cameron County action, discussed infra, the investors seek to

treble the amount of the default judgment. Lovell's share of the potential

$2.2 billion judgment would be some $74 million. See Royal, 759 F. Supp. at

1226 n.13. 

7

five percent of any future recoveries against Royal in excess of

the $741 million default judgment.5

On the same day the assignment was executed, the investors

filed suit against Royal in state court in Cameron County, bringing

claims in two capacities. As assignees of Quinn-L, the investors

brought tort, waiver, and estoppel claims based upon Royal's

handling of the Dallas County litigation. As judgment creditors,

the investors sought recovery of the Dallas County judgment under

the applicable insurance policies. On September 17, the investors

filed a second action in Cameron County seeking a declaration of

coverage for the damages awarded in the Dallas County judgment.

The Cameron County litigation proceeded at an accelerated

pace. The day after suit was filed SQ before Royal had even been

served SQ the court set a trial date of December 10. This was in

violation of the court's rules, which provide that a case will be

set for trial only after the filing of an answer. See Cameron

County Civ. Ct. R. 1.5(a). On October 12, the investors filed a

motion for summary judgment, which was set for hearing on

November 8.

The present action stems from Royal's attempt to enlist the

federal district court's aid in enforcing the September 1989

declaratory judgment issued in its favor. On March 9, 1990, while

the Dallas County action was pending, Royal filed this suit in
8

federal court (again, before Judge Sanders) seeking a declaratory

judgment that would establish that it had no duty to defend or

indemnify Quinn-L in the Dallas County litigation.

Quinn-L filed an answer on August 15. It asserted as

affirmative defenses, inter alia, those claims the investors would

bring on September 4 in the Cameron County litigation as Quinn-L's

assignees (i.e., the tort, waiver, and estoppel claims). On

September 4, Royal moved to add the investors as defendants.

On October 30, Royal asked the federal court to issue a

preliminary injunction against further prosecution of the entire

Cameron County litigation. After a hearing, the court granted

Royal's request. The court found that

[t]o state the facts bluntly but fairly, the Investor

Plaintiffs bought Lovell's cooperation with their

April 5, 1989 Agreement and through their collusion with

Lovell obtained an enormous default judgment against

Lovell's companies.

759 F. Supp. at 1226. The appellants now ask us to reverse the

district court's order granting Royal's request for a preliminary

injunction.

Prior to oral argument of this case, the appellants filed a

petition for writ of prohibition, and in the alternative, a motion

for a stay, to prevent the district court from considering any

other aspects of this case pending their appeal of the preliminary

injunction. We denied their requests on September 9, 1991. Oral

argument was held on October 2.

On October 29, the appellants asked this court to reconsider

its earlier denial of the stay. On December 20, while this motion
9

was pending, the district court (1) denied the appellants' motion

to dismiss filed pursuant to Fed. R. Civ. P. 12(b)(7); (2) denied

their motion for continuance and reopening of discovery;

(3) granted Royal's motion for summary judgment on the appellants'

affirmative defenses of tort, waiver, and estoppel; and

(4) deferred consideration of Royal's application for permanent

injunctive relief, pending this appeal. On December 24, the

appellants asked us to "vacate all orders entered by the court

below during the pendency of the improperly issued preliminary

injunction, including the December 20, 1991 summary judgment

order." Thus, in addition to the propriety of the district court's

preliminary injunction, we consider the appellants' request to

vacate the district court's orders of December 20.

II.

First, the appellants challenge the district court's subject

matter jurisdiction over the present controversy. They argue that

the requirement of complete diversity is absent, see Carden v.

Arkoma Assocs., 494 U.S. 185, 187 (1990) (citing Strawbridge v.

Curtiss, 7 U.S. (3 Cranch) 267 (1806)), as Royal Lloyds of Texas,

one of the plaintiffs, is a Texas citizen, as are several of the

defendants. They also question whether the district court had

jurisdiction over the first declaratory judgment action.

A.

Royal Lloyds of Texas is an unincorporated association of
 

6 According to Royal, the Royal Lloyds of Texas underwriters are

citizens of New York and North Carolina. 

10

insurance underwriters. Citizenship of such an unincorporated

association is determined by the citizenship of its "members." Id.

at 195-96. None of the underwriters is a Texas citizen.6 Texas

law, however, requires that "Lloyd's Plan" insurers such as Royal

Lloyds of Texas designate "an attorney in fact or other

representative[]" to execute "[p]olicies of insurance." Tex. Ins.

Code Ann. art. 18.01-1. The attorney-in-fact must be a citizen of

Texas, see id. art. 18.02, and Royal Lloyds of Texas's attorney-infact is Royal Lloyds, Inc., a Texas corporation.

The appellants argue that as attorney-in-fact, Royal Lloyds,

Inc., is a "member" of the unincorporated association of Royal

Lloyds of Texas. Royal disagrees, arguing that an attorney-in-fact

is a mere agent of the underwriters, not a member. We need not

resolve this question, however, for the district court could

exercise ancillary jurisdiction over this controversy regardless of

the citizenship of the parties.

It is well settled that a federal district court can exercise

ancillary jurisdiction over a second action in order "to secure or

preserve the fruits and advantages of a judgment or decree

rendered" by that court in a prior action. Southmark Properties v.

Charles House Corp., 742 F.2d 862, 868 (5th Cir. 1984) (quoting

Local Loan Co. v. Hunt, 292 U.S. 234, 238 (1934)). Such

jurisdiction is appropriate where the effect of an action filed in

state court would "effectively nullif[y]" the judgment of a prior
11

federal action. Id. This is true even where the federal district

court would not have jurisdiction over the second action if it had

been brought as an original suit. Local Loan Co., 292 U.S. at 238;

Southwest Airlines Co. v. Texas Int'l Airlines, 546 F.2d 84, 89-90

(5th Cir.), cert. denied, 434 U.S. 832 (1977). 

As discussed more fully infra, Royal returned to federal court

in order to prevent the appellants from robbing it of the "fruits

and advantages" of the federal declaratory judgment rendered in its

favor. Because both the Dallas County and Cameron County

litigation had the potential of "effectively nullify[ing]" the

previous declaratory judgment, we conclude that the district court

had ancillary jurisdiction over the present controversy.

B.

The appellants also argue that the district court did not have

subject matter jurisdiction over the first declaratory judgment

action. From this they conclude that Royal should not be able to

bootstrap its way into federal court by filing a second action that

depends upon a prior action over which the district court had no

jurisdiction. 

The appellants, however, cannot launch such a collateral

attack of the district court's subject matter jurisdiction. As the

Supreme Court has stated,

A party that has had an opportunity to litigate the

question of subject-matter jurisdiction may not . . .

reopen that question in a collateral attack upon an

adverse judgment. It has long been the rule that

principles of res judicata apply to jurisdictional

determinations SQ both subject matter and personal.
 

7 The investors respond that this is not a "collateral attack" because

they were not parties to the first declaratory action (their motion to

intervene having been denied). Thus, they argue, they had "no opportunity to

litigate subject matter jurisdiction." As a preliminary matter, the

investors, as assignees of Quinn-L, would stand in no better position than

Quinn-L, which is bound by the earlier judgment. In addition, as developed

more fully infra, the investors are also bound to the first declaratory

judgment as judgment creditors, for they were "virtually represented" by

Quinn-L during the first declaratory judgment action. See infra part III.A.3. 

12

Insurance Corp. of Ireland, Ltd. v. Compagnie des Bauxites de

Guinee, 456 U.S. 694, 702 n.9 (1982) (citations omitted).

The question is not whether the issue of subject matter was

actually litigated, but instead whether the parties had the

opportunity to raise the question. Republic Supply Co. v. Shoaf,

815 F.2d 1046, 1053 (5th Cir. 1987). If the parties against whom

judgment was rendered did not appeal, the judgment becomes final

and the court's subject matter jurisdiction is insulated from

collateral attack. Id. See also Donovan v. Mazzola, 761 F.2d

1411, 1416 n.2 (9th Cir. 1985).

The final judgment in the first declaratory action was not

appealed. The subject matter jurisdiction of the district court

thus is not subject to collateral attack.7 

III.

The appellants next contend that the preliminary injunction

violates the Anti-Injunction Act, 28 U.S.C. § 2283, which provides,

A court of the United States may not grant an

injunction to stay proceedings in a State court except as

expressly authorized by Act of Congress, or where

necessary in aid of its jurisdiction, or to protect or

effectuate its judgments.
13

The district court utilized the second and third exceptions to

enjoin two different types of claims at issue in the Cameron County

litigation.

First, it used the "protect or effectuate" judgments, or

"relitigation," exception to enjoin the investors' claims brought

as judgment creditors. 759 F. Supp. at 1235. These "direct"

claims were brought under the policy to recover damages up to the

policy limits. The district court found that it had decided the

issue of "coverage" under the language of the applicable Royal

policies in the first declaratory judgment action, id. at 1234, and

that therefore any attempt to relitigate the coverage issue SQ such

as an attempt to recover under the policy language SQ was barred.

Id. at 1235.

Second, it enjoined the remaining tort, waiver, and estoppel

claims under the "in aid of jurisdiction" exception. These claims,

which depend upon conduct and events that occurred after the

issuance of the first declaratory judgment, were brought by the

investors as assignees of Quinn-L. The district court enjoined the

pursuit of these "post-declaratory judgment" claims, which were

also before the district court as affirmative defenses to Royal's

second declaratory judgment action, on the ground that "absent the

injunctive relief sought by Royal, the [Cameron County court] could

irreparably injure the [district court's] ability to decide the

present case." Id. We will consider the two separate facets of

the preliminary injunction in turn. 
14

A.

The relitigation exception was "designed to permit a federal

court to prevent state litigation of an issue that previously was

presented to and decided by the federal court." Chick Kam Choo v.

Exxon Corp., 486 U.S. 140, 147 (1988). The exception is grounded

in principles of res judicata and collateral estoppel. Id. An

"essential prerequisite" for application of the relitigation

exception "is that the claims or issues which the federal

injunction insulates from litigation in state proceedings actually

have been decided by the federal court." Id. at 148. See also

Texas Employers' Ins. Ass'n v. Jackson, 862 F.2d 491, 501 (5th Cir.

1988) (en banc), cert. denied, 490 U.S. 1035 (1989). 

In determining which issues have been "actually decided," the

emphasis is on the record and on what the earlier federal court

actually said, not on the court's post hoc judgment as to what the

previous judgment was intended to say. Chick Kam Choo, 486 U.S. at

148. Any doubt as to whether the order precludes subsequent claims

must be resolved in favor of allowing the state court to proceed.

Jackson, 862 F.2d at 499.

This analysis requires us to compare the issues "actually

decided" by the district court in the first federal declaratory

judgment action with the issues raised in the direct contractual

obligation claim brought by the investors in Cameron County. 
 

8 Although numerous policies were at issue throughout the federal and

state litigation, the parties agree that this is the essential policy

language.

15

1.

Royal's contractual obligations rest on the policy language8

in question, which requires it to

pay on behalf of [Quinn-L] all sums which [it] shall

become legally obligated to pay as damages because of 

(A) bodily injury or

(B) property damage

to which this insurance applies, caused by an occurrence

. . . . 

"Occurrence" is defined as

[a]n 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.

In its final judgment disposing of the declaratory judgment

action dated September 8, 1989, the court stated,

1. The allegations in the pending[] suits do

not allege an "occurrence," as defined by the policies;

2. The allegations in the pending suits do not

allege[] "property damage," or "personal injury" as

defined by the policies;

3. Petitioners, Royal Insurance Company of

America and Royal Lloyds of Texas, have no duty to defend

the Defendants in the pending suits . . . .

The appellants first argue that the federal declaratory judgment

has little or no binding effect because it was a "specific

declaration with respect to existing pleadings that were subject to

change before, during, or even after trial." The appellants then

stress that the final judgment "declares nothing with respect to
 

9 The appellants indeed take their argument to the logical extreme. 

Focusing upon the district court's use of the "pending suits" language, the

appellants contend that the declaratory judgment has no meaning because there

were no liability suits pending before the district court at the time (The

federal liability suit had been dismissed by the court on August 28; the final

declaratory judgment action was issued on September 8.) We again reject

appellants' needless formalism.

 

10 The appellants reject this reading of the policy. They emphasize

the policy's definition of "occurrence." They conclude that in order for

there to be an occurrence, there must be an accident and injury. From this,

they argue that the district court did not necessarily conclude that there was

no accident, but rather could have based its "no occurrence" finding on "no

injury" SQ i.e., no mental anguish. 

This argument neglects the fact that the district court, in order to

find that Royal had no duty to defend the federal liability suit, was

obligated to consider the investors' claims of mental anguish. An insurer may

16

Royal's obligations should the pleadings be amended, let alone with

regard to a different lawsuit not even pending at the time the

declaration issued." In other words, the declaratory judgment

should be read as applicable only to those pleadings pending before

the district court at the time. 

Taken to its logical extreme, this argument defeats itself.

Under appellants' rule, the losing party could defeat an adverse

declaratory judgment by changing one word of its pleadings and

filing them in state court. We thus reject the appellants'

construction of the declaratory judgment as artificial and

unnecessarily formalistic.9

Instead, we give the district court's decision a more natural

reading. Based upon the language of the policy, there must be an

occurrence and an injury in order for there to be coverage. In

this case, the district court found that the investors' injuries SQ

as alleged in the complaint SQ were not caused by an occurrence.

Without an occurrence, there could be no coverage, and thus there

was no duty to defend.10 In sum, the district court did not simply
be excused from its duty to defend only if "no state of facts could be proved"

that would come within the policy coverage. Green v. Aetna Ins. Co., 349 F.2d

919, 926 (5th Cir. 1965). Thus, as Royal argues, "the court could not

properly have ignored the Investors' allegations of personal injury SQ which

had long been before it in Quinn-L's counterclaim and summary judgment briefs,

in the Investors' proposed amended petitions, and in the Investors'

representation that such injuries were `subsumed in' their previously asserted

claims . . . ." The district court could not, as a matter of law, rule that

the investors suffered no bodily injury, for that would be a disputed factual

issue. The only decision it could make, as a matter of law, would be that

whatever the injuries, they were not caused by an occurrence or accident. And

this is what the court did indeed conclude in its April 14, 1989, partial

summary judgment order when it stated that the "Defendants [failed to show]

that personal injuries (in the form of mental anguish) were caused by an

`occurrence'." See infra n.11.

 

11 This conclusion is further supported by the district court's order

of April 14, 1989. In its memorandum opinion and order, which awarded partial

summary judgment in Royal's favor, the district court stated,

The Court finds that the language of the insurance coverage is

unambiguous . . . . As a matter of law, the allegations contained

in the pending suits do not state claims within coverage. 

Although the investors allege loss of their investments, they

allege no injury to tangible property which could constitute an

"occurrence".3 Additionally, none of the losses constitutes

"property damage" as required by the policy.

--------------

3 Neither have Defendants shown that personal injuries (in

the form of mental anguish) were caused by an "occurrence".

[Citation and footnote omitted.] In other words, the investors suffered "no

injury" SQ either to property or in the form of mental anguish SQ that "could

constitute an `occurrence'" within the terms of the policy. 

 

We recognize that orders of partial summary judgment, standing by

themselves, have no preclusive effect, as they are interlocutory. Avondale

Shipyards, Inc. v. Insured Lloyd's, 786 F.2d 1265, 1269-72 (5th Cir. 1986). 

Avondale, however, does not prevent us from considering the preclusive effect

of the summary judgment order in this case. 

 

As we noted in Avondale, the partial summary judgment order in that case

had no preclusive effect because the final judgment "made no direct or

indirect reference whatever to the [prior] partial summary judgment or to

prior orders in general . . . ." Id. at 1272. By contrast, the September 8

final judgment explicitly states that Royal "move[s] this Court to enter this

Final Judgment against [Quinn-L] in light of the Court's ruling on [Royal's]

Motion for Partial Summary Judgment." The "partial" summary judgment was

"partial" in name only. It decided the major issues in the case and entry of

the final judgment was a mere formality.

17

decide whether the investors had alleged "injury" caused by an

"occurrence," but instead necessarily determined that the

investors' allegations did not fit within the coverage of the

policy language.11
 

12 The appellants argue that the district court erroneously applied

principles of claim preclusion, as opposed to issue preclusion, in coming to

this conclusion. Although the court did mention claim preclusion in its

opinion, its analysis of the first declaratory judgment plainly states that

"the Court finally interpreted the language in certain policy clauses, and the

issue of the meaning of those clauses was necessary and essential to the

Court's Judgment," 759 F. Supp. at 1234 (emphasis added) SQ language of issue

preclusion. We therefore disagree with the appellants that the district court

ran afoul of Jackson. See Jackson, 862 F.2d at 501 (noting that "true" res

judicata, or claim preclusion, "appears to be inconsistent with Chick Kam

Choo's admonishment that the relitigation exception `is strict and narrow' so

that only `claims or issues which . . . actually have been decided' in the

prior proceeding as reflected by what the prior `order actually said' are

protectable thereunder" (citation omitted)).

18

The cases cited by the appellants discussing the complaintallegation rule are not to the contrary. It is true that "[u]nder

Texas law, the insurer's duty to defend is determined solely from

the face of the pleadings and without reference to facts outside of

the pleadings." Rhodes v. Chicago Ins. Co., 719 F.2d 116, 119 (5th

Cir. 1983). Application of this "complaint-allegation" rule "gives

rise to a duty to defend if one or more of the plaintiff's claims,

`if taken as true, [are] sufficient to state a cause of

action . . . coming within the terms of the policy.'" Id.

(citation omitted).

But simply because the duty to defend is determined on the

face of the complaint, and not with reference to the truth or

falsity of the allegations contained therein, does not mean that

the preclusive effect of a declaration of no duty to defend must be

limited to the precise allegations contained in the pleadings. In

this case, the district court determined the issue of coverage SQ

that no "occurrence" had befallen the investors within the terms of

the policy SQ and this determination can be applied to allegations

in subsequent complaints.12 
19

2.

We now must compare the foregoing interpretation of the

district court's final judgment with the investors' claims in the

Cameron County litigation. In their original petition, the

investors allege the following:

29. The injuries suffered by Plaintiffs as a result

of Quinn-L Entities['] conduct, for which damages have

been awarded by [the Dallas County] Judgment are injuries

which are covered by the relevant insurance policies

issued by Defendants The Royal Insurance Group . . . .

30. The allegations of Plaintiffs' complaint in

[the Dallas County petition] stated an "occurrence" which

had resulted in "property damage" or "bodily injury," as

defined by the insurance policies . . . . The Quinn-L

E[n]tities' conduct . . . has caused the Plaintiffs

property damage and bodily injury and, therefore, the

Defendants are responsible for the payment of the

Judgment entered therein.

. . . 

32. [Royal is] liable directly to Plaintiffs, as

judgment creditors under the [Dallas County judgment].

The Plaintiffs, judgment creditors, would further allege

that [Royal is liable] to them for the entirety of the

judgment rendered [in the Dallas County judgment] against

the Quinn-L Entities . . . for the reason that the

policies of insurance purchased by Quinn-L Entities

provide coverage for the injuries caused to Plaintiffs by

the Quinn-L entities and upon which judgment was granted

by the [Dallas County court]. [Emphasis added.]

Given that the investors allege that the Dallas County

judgment would be covered by the policy language, the question 

is whether the investors, after the issuance of the first federal

declaratory judgment, amended their pleadings in such a way as to

bring their claims within policy coverage. Indeed, the investors

argue that they substantially altered their claims between

September 8 (the date the district court entered its final
 

13 In the Dallas County petition, the investors alleged that 

"Plaintiffs' . . . injuries and damages were proximately caused by the

negligent conduct of Defendant in," among other things, "improperly treating

all partnerships and companies as one entity for financial purposes,"

"syndicating partnerships while having lack of the financial wherewithal to

fund the cash needs of the partnerships," and "improperly managing and

structuring the companies and partnerships and thereby creating tax problems

with the IRS concerning various entities." These improper acts caused the

investors to "suffer[] bodily injury, including mental pain, suffering and

anguish."

20

declaratory judgment) and September 14 (the date the investors

refiled their state claims in Dallas County state court).

The crucial difference, they argue, is that in the Dallas

County action they "alleged mental anguish caused by Quinn-L's

negligence and gross negligence" in making a number of improper

management decisions.13 They argue that in the first declaratory

judgment action, the sole dispute was over whether the investors

alleged mental anguish. In the words of the appellants, "the

declaratory judgment only decided that the then pending action did

not allege mental anguish."

As noted above, however, the declaratory judgment did more

than that. The appellants' reading of the judgment simply ignores

the fact that the court held that "allegations in the pending[]

suits do not allege an `occurrence,' as defined by the policies."

Thus, the only way that the appellants could overcome the

declaratory judgment hurdle was to allege, in the Dallas County

petition, a basis for finding an occurrence.

The allegedly improper acts on Quinn-L's part, however,

remained constant from the federal liability suit to the Dallas

County suit. Thus, the district court's determination of the

coverage issue would dispose of the appellants' claims to recover
21

under the policy language. We therefore affirm the district

court's injunction of the appellants' direct contractual claims

under the relitigation exception. 

3. 

The investors respond that they cannot be bound by the first

declaratory judgment because they were not parties to the action

(their motion to intervene having been denied). We have

recognized, however, that "it is within the discretion of a

district court to expand the scope of an otherwise valid injunction

issued pursuant to the relitigation exception of the AntiInjunction Act to include those in privity with parties to the

federal court action." Quintero v. Klaveness Ship Lines, 914 F.2d

717, 721 (5th Cir. 1990), cert. denied, 111 S. Ct. 1322 (1991). 

Indeed, a non-party will be considered "in privity, or

sufficiently close to a party in the prior suit so as to justify

preclusion," where the party to the first suit is so closely

aligned with the nonparty's interests as to be his "virtual

representative." Benson & Ford, Inc. v. Wanda Petroleum Co., 833

F.2d 1172, 1174-75 (5th Cir. 1987). See also Aerojet-Gen. Corp. v.

Askew, 511 F.2d 710, 719 (5th Cir.), cert. denied, 423 U.S. 908

(1975). In order for virtual representation to arise, however,

there must be "an express or implied legal relationship" between

the party and the nonparty "in which [the] part[y] to the first

suit [is] accountable to [the] non-part[y] who file[s] a subsequent

suit raising identical issues." Benson & Ford, 833 F.2d at 1175
22

(citation omitted).

The question of "whether a party's interests in a case are

virtually representative of the interests of a nonparty is one of

fact for the trial court." Aerojet-Gen., 511 F.2d at 719. In the

preliminary injunction context, we review findings of fact for

clear error. Apple Barrel Prods. v. Beard, 730 F.2d 384, 386 (5th

Cir. 1984).

In this case, the district court found that the investors were

in privity with Quinn-L. 759 F. Supp. at 1232. The court

concluded that the "Investor Plaintiffs bought Lovell's cooperation

with their April 5, 1989 Agreement and through their collusion with

Lovell obtained an enormous default judgment against Lovell's

companies." Id. at 1226. The court further found that "settlement

negotiations between the investors' counsel and Lovell started as

early as June, 1988 and result in a letter agreement by October 11,

1988." Id. at 1224 n.10. Thus, Lovell and the investors came to

a cooperation agreement long before anything of substance was

adjudicated in the first declaratory judgment action.

The appellants stress that in the October 1988-April 1989

assignment, Lovell gave the investors only the right to sue in

Lovell's name for the damages Royal had caused him personally and

that only later (September 4, 1990) did Quinn-L assign its rights

to the investors to pursue Royal. But simply because the formal

legal relationship between Quinn-L and the investors did not arise

until September 4, 1990, does not mean that there was no privity

between them before that time.
 

14 In January 1989, the bankruptcy court returned Quinn-L's valueless

stock to Lovell. Since Lovell filed for personal bankruptcy in 1987, Quinn-L

has had no officers, directors, or significant assets. Thus, since January

1989 Lovell has had sole authority to act for Quinn-L. See Royal, 759 F.

Supp. at 1219 n.1.

 

15 In a letter written to Lovell's counsel, the investors' attorney

noted that "the whole point of the [April 5] Compromise and Settlement

Agreement was for Plaintiffs to be able to pursue Royal Insurance Company."

23

The district court found that Lovell had sole authority to act

for Quinn-L, 759 F. Supp. at 1219 n.1,14 that Lovell was "bought

off" by the settlement agreement, id. at 1226, that the "sole

purpose" of that agreement was to pursue Royal,15 id. at 1224, and

that from that point on the investors and Quinn-L (through Lovell)

pursued a course of conduct to obtain a hefty payment from Royal in

which they would all share, id. at 1226 & n.13. The district court

did not clearly err in concluding that the investors were virtually

represented by Quinn-L in the first declaratory judgment action.

We therefore determine that the investors can be bound by the first

declaratory judgment action.

B.

In their Cameron County suit, the investors also seek to

recover damages from Royal based upon Royal's post-declaratory

judgment conduct. As Quinn-L's assignees, the investors allege,

inter alia, that Royal (1) "wrongfully refused" an unqualified

defense of the Dallas County litigation; (2) "negligently failed"

to settle the Dallas County litigation; (3) waived its right to

challenge coverage and is estopped from denying coverage because of

its representations to Quinn-L; (4) was negligent in its handling
 

16 Royal has conceded that the injunction of these claims cannot be

justified under the relitigation exception.

24

of the Dallas County litigation; and (5) breached its "duty of good

faith and fair dealing." 

These claims were brought before the federal district court on

August 15, 1990, when Quinn-L answered Royal's declaratory judgment

petition of March 9, 1990. They were presented to the Cameron

County court on September 4, 1990, when the investors filed suit

therein. The district court enjoined these post-declaratory

judgment claims under the "in aid of jurisdiction" exception to the

Anti-Injunction Act.16

1.

The "in aid of jurisdiction" exception is designed to "prevent

a state court from so interfering with a federal court's

consideration or disposition of a case as to seriously impair the

federal court's flexibility and authority to decide that case."

Atlantic Coast Line R.R. v. Brotherhood of Locomotive Eng'rs, 398

U.S. 281, 295 (1970). The district court noted that "[t]his is

precisely such a case; absent injunctive relief the Court will

likely lose the ability to decide this case (filed well before

either [Cameron County] Action) and may well have its prior

Judgments (which are inextricably intertwined with the present

action) nullified by contrary state court decrees." 759 F. Supp.

at 1235.

The "in aid of jurisdiction" exception, however, does not
25

reach this far. In Texas v. United States, 837 F.2d 184, 186 n.4

(5th Cir.), cert. denied, 488 U.S. 821 (1988), we noted the

following:

In cases decided under [the "in aid of jurisdiction"]

exception, courts have interpreted the language narrowly,

finding a threat to the court's jurisdiction only where

a state proceeding threatens to dispose of property that

forms the basis for federal in rem jurisdiction, or where

the state proceeding threatens the continuing

superintendence by a federal court, such as in a school

desegregation case. In no event may the "aid of

jurisdiction" exception be invoked merely because of the

prospect that a concurrent state proceeding might result

in a judgment inconsistent with the federal court's

decision. [Emphasis added.] [Citations omitted.]

 

See also Phillips v. Chas. Schreiner Bank, 894 F.2d 127, 132 (5th

Cir. 1990) (exception only applies to in rem actions, citing Texas

v. United States). The post-declaratory judgment claims at issue

in this case do not fit in either category described in Texas v.

United States. They obviously do not involve the district court's

in rem jurisdiction, nor do they implicate any "superintendence"

jurisdiction on the district court's part. 

Royal correctly points out that the contours of the categories

described in Texas v. United States are not well-defined. The

district court relied upon an Eleventh Circuit holding that

"lengthy, complicated litigation is the `virtual equivalent of a

res,'" Battle v. Liberty Nat'l Life Ins. Co., 877 F.2d 877, 882

(11th Cir. 1989) (citation omitted), and indeed our opinion in

Texas v. United States does not specifically preclude such
 

17 The district court also relied heavily upon our decision in In re

Corrugated Container Antitrust Litig., 659 F.2d 1332 (5th Cir. Unit A Oct.

1981), cert. denied, 456 U.S. 936 (1982), which involved a massive antitrust

class action against manufacturers of corrugated containers that was

consolidated by the Judicial Panel on Multidistrict Litigation and transferred

to the Southern District of Texas. The multidistrict court approved of

"settlements executed between the class plaintiffs and most of the

defendants." Id. at 1335.

Some of the class plaintiffs, apparently unhappy with the settlements,

went to state court with their claims. A panel of this court held that the

injunction of the state action was proper because the multidistrict court's

approval of the settlements would "bar the South Carolina litigation" on

principles of res judicata. Id. Thus, the panel based its decision upon the

relitigation exception, and to that extent the case does not support the

district court's injunction of the tort, waiver, and estoppel claims.

The Corrugated Container case does contain some jurisdictional language,

but it must be construed in light of the factual circumstances of the case. 

When the plaintiffs filed in state court, they asked for and immediately

obtained an injunction prohibiting the defendants (many of whom were

defendants in the multidistrict litigation) from "preparing, disseminating or

utilizing any settlement document . . . wherein such settlement document

contains any release of any antitrust claims" under state law. Id. at 1335. 

The panel noted that this limitation "would clearly interfere with the

multidistrict court's ability to dispose of the broader action pending before

it." Id. The court also noted that the multidistrict court's injunction of

the state suit would not flout "the policies of federalism" because the

plaintiffs' attorneys "ha[d] taken, and manifested an intention to continue to

take, actions threatening this court's exercise of its proper jurisdiction and

the effectuation of its judgments, by filing and threatening to file

duplicative and harassing litigation in the courts of various states and by

seeking therein orders disrupting the proceedings" in the multidistrict

litigation. Id. (quoting the multidistrict court).

This interference, however, was based upon the attorneys' (and,

presumably, the state court's) apparent disregard of the prior federal

settlement judgment SQ again, a consideration more appropriate for the

relitigation exception. Thus, we disagree with the district court when it

states that "[t]he same considerations [as those posed in Corrugated

Container] apply to the present action . . . ." 759 F. Supp. at 1236.

26

interpretation.17 But even if we were to broaden the "in aid of

jurisdiction" exception to include "lengthy, complicated

litigation" that is the "equivalent of a res," we would not put the

present action in that category.

The Cameron County court posed no threat to the district

court's continuing jurisdiction to decide the post-declaratory

judgment claims, other than the fact that there was a possibility

that it could reach judgment first. This is not sufficient to

invoke the "in aid of jurisdiction" exception. Texas v. United
 

18 The nature of the "threat" is shown most vividly by the fact that

the district court entered an order disposing of these claims on December 20,

1991. The district court's resolution of these claims is discussed infra part

IV.

27

States, 837 F.2d at 186 n.4 (citing Atlantic Coast Line).18 It is

true that, as Royal argues, the district court invested a great

deal of time in resolving the first declaratory judgment action and

in enforcing the first declaratory judgment in the second

declaratory judgment action. But that investment is adequately

protected by the relitigation exception, which avoids "costly and

judicially wasteful" duplicative proceedings. Quintero, 914 F.2d

at 721. 

The district court's investment of time and energy in

resolving the coverage issue would be protected by an injunction

barring relitigation of that issue SQ not by barring any claim

dependent upon that issue. We therefore conclude that the district

court should have limited the scope of its injunction to enjoining

relitigation of the coverage issue and that its injunction of the

post-declaratory judgment claims was improper.

2.

Royal offers a slightly different justification for enjoining

the post-declaratory judgment claims. It contends that the

district court "was entitled to conclude that the [Cameron County]

litigation should be temporarily enjoined until the district court

had an opportunity to sort through the complex web of claims raised

against enforcement of its prior judgment." In essence, Royal
28

argues that, given that this is a preliminary injunction, the

district court should be given greater leeway with regard to the

injunction's scope, especially considering what the district court

found to be collusive behavior on the appellants' part.

Although we are sympathetic, we cannot allow the exceptions to

be stretched beyond their justifications. As the Court noted in

Chick Kam Choo, "the exceptions are narrow and are `not [to] be

enlarged by loose statutory construction.'" 486 U.S. at 146

(citation omitted). Moreover, the district court plainly

recognized that there were two types of claims at issue SQ those

wholly dependent upon the prior declaratory judgment (the direct

claims as judgment creditors) and those "inextricably intertwined"

with the issues settled by the declaratory judgment (the postdeclaratory judgment claims).

The district court therefore did not enjoin the postdeclaratory judgment claims in order to "sort things out"; rather,

it did what it said it was doing SQ enjoining the Cameron County

action because the state court "could irreparably injure the

Court's ability to decide the present case." Royal, 759 F. Supp.

at 1235. As noted above, however, the only irreparable injury that

the state court posed was deciding the claims. This sort of

"interference" is not sufficient to overcome the obstacle of the

Anti-Injunction Act. 

IV.

Finally, we consider the various motions, pending in this
 

19 The district court did not rule on Royal's request for a permanent

injunction, deferring that issue pending the outcome of this appeal.

29

court, to prevent the district court from considering aspects of

the case not directly at issue in this appeal. Prior to oral

argument, the appellants asked us to stay the district court

proceedings pending appeal. Essentially, this would have prevented

the district court from considering the merits of the appellants'

tort, waiver, and estoppel claims brought as affirmative defenses

to Royal's request for declaratory judgment. We denied the motion

without opinion on September 6, 1991.

 After oral argument, on October 29, the appellants submitted

a motion to reconsider the motion for stay of the district court

proceedings. On December 20, while the motion for reconsideration

was pending, the district court disposed of, inter alia, the postdeclaratory judgment claims adversely to the appellants. By a

December 24 letter, the appellants asked us to "vacate all orders

entered by the court below during the pendency of the improperly

issued preliminary injunction, including the December 20, 1991

summary judgment order" covering the post-declaratory judgment

claims. Thus, the motion for reconsideration is partially mooted19

by the orders of the district court, and we now consider the

appellants' request to vacate the orders entered while this appeal

was pending.

We decline to vacate these orders. As noted above, the

appellants' tort, waiver, and estoppel claims were before both the

federal district court and the Cameron County court. There was
30

always the possibility that the federal court would win the race to

judgment; in fact, the odds were heavily in the federal court's

favor. It had dealt with the litigation among these parties for

over three years by the time the tort, waiver, and estoppel claims

were placed before it on August 15, 1990; therefore, it was

familiar with the facts and legal disputes. By contrast, the

Cameron County court's first exposure to the case was September 4,

1990, when the appellants filed their suit.

At most, what the district did by enjoining these claims was

to ensure it would win the race. We are well aware of the general

rule that parallel state and federal actions should be allowed to

proceed without interference from either court. Atlantic Coast

Line, 398 U.S. at 295-96. Vacating the orders of the district

court, however, would do nothing to put the state and federal

courts back on an even footing. Indeed, the district court would

be free to re-enter its orders the moment after they were vacated.

Thus, even if vacating orders would be appropriate in some cases,

it would merely be an academic exercise in this case.

Finally, we note that the equities do not weigh in the

appellants' favor. They created this tangled web of litigation by

seeking to evade the effect of the first declaratory judgment

action: Having encountered a roadblock in federal court, they

brought their claims to state court, collusively obtained an

inflated default judgment there, and sought to collect that

judgment (and more) in another state court. That their "victory"

on the "in aid of jurisdiction" question is a somewhat hollow one
31

does not persuade us to vacate the district court's orders. The

appellants presumably may appeal the district court's disposition

of their tort, waiver, and estoppel claims.

V.

In conclusion, we find that the district court had ancillary

jurisdiction over this matter. In addition, we find that the

portion of the injunction based upon the relitigation exception SQ

the injunction of the appellants' direct claims as judgment

creditors under the insurance contract SQ was proper. We further

find that the portion of the injunction based upon the "in aid of

jurisdiction" exception SQ the injunction of the appellants' tort,

waiver, and estoppel claims brought as assignees SQ was improper.

We therefore AFFIRM in part, REVERSE in part, and REMAND. Finally,

we DENY the appellants' request to vacate the district court's

orders entered during the pendency of this appeal.