Opinion ID: 1774526
Heading Depth: 2
Heading Rank: 2

Heading: Preclusion of Kenneco's Claims

Text: Collateral estoppel may preclude relitigation of issues previously litigated even though the subsequent suit is based upon a different cause of action. Wilhite v. Adams, 640 S.W.2d 875 (Tex.1982). If a cause of action in the second lawsuit involves an element already decided in the first lawsuit, that cause of action is barred. For this to be true, however, the issue decided in the first action must be actually litigated, essential to that lawsuit's judgment, and identical to the issue in the pending action. Getty Oil v. Insurance Co. of N. Am., 845 S.W.2d 794, 802 (Tex.1992); Eagle Properties, 807 S.W.2d at 721-22; Tarter v. Metropolitan Sav. & Loan Ass'n, 744 S.W.2d 926, 927 (Tex.1988); Van Dyke v. Boswell, O'Toole, Davis & Pickering, 697 S.W.2d 381, 384 (Tex.1985). The federal courts have applied the same test. See Interoceanica Corp. v. Sound Pilots, Inc., 107 F.3d 86, 91 (2d Cir.1997); Levy v. Kosher Overseers Ass'n of America, Inc., 104 F.3d 38, 41 (2d Cir.1997); Hicks v. Quaker Oats Co., 662 F.2d 1158, 1166 (5th Cir.1981). Kenneco's state court claims include: (1) breach of contract, (2) Insurance Code violations, (3) common-law fraud, and (4) negligence. Kenneco's negligence and Insurance Code claims are barred by limitations. We hold that, to the extent Kenneco's remaining claims are based on lost profits coverage, they are barred by collateral estoppel and to the extent they are based on contingency coverage, they are not barred.

Kenneco's claim for breach of the alleged agreement to secure lost profits coverage is barred by collateral estoppel. In its state court claim, Kenneco asserts that J & H breached its agreement to provide the type of coverage it assured [Kenneco] it would secure. The jury question submitted asks, Did Johnson & Higgins and Armada agree on November 30, 1982, that Johnson & Higgins would secure for Kenneco's (Armada's) benefit a policy of insurance protecting the profits on the sale of the cargo in question? The instruction further clarifies that the jury was asked to decid[e] whether the parties reached an agreement. That identical issue was previously decided against Kenneco in the federal action. In the federal suit, Kenneco argued that J & H specifically agreed to lost profits coverage at the November 30 meeting. Armada Supply, 665 F.Supp. at 1057. Even a cursory reading of the federal district court's opinion demonstrates its finding that no such agreement to secure lost profits coverage was made. At least twice in its opinion, the court explicitly found that J & H neither made an agreement to insure the profits on the contract nor purported to make such an agreement. Armada Supply, 665 F.Supp. at 1051, 1066-67. The Second Circuit noted the district court's rejection of Kenneco's argument that the parties agreed to coverage of lost profits at the meeting, and affirmed the finding that Brown did not ask for, nor did Anderson agree to, coverage on lost profits. Armada Supply, 858 F.2d at 847, 851. In order to succeed on its breach of contract claim in state court, Kenneco was required to establish that an agreement concerning lost profits coverage was made. That issue was already decided against Kenneco in the prior action. Thus, Kenneco's claim for breach of a contract to secure lost profits coverage is precluded if the claim was actually litigated and essential to the judgment in the federal action. The issue concerning whether J & H agreed to secure lost profits coverage was actually litigated in the federal action because the issue was properly raised, submitted for determination, and determined. RESTATEMENT (SECOND) OF JUDGMENTS § 27 cmt. d (1982); Van Dyke v. Boswell, O'Toole, Davis & Pickering, 697 S.W.2d 381, 384 (Tex. 1985). The real question concerns the extent to which the federal district court's finding that no such agreement was made was essential to its judgment. Kenneco argues that, because the federal district court's holding of no lost profits coverage was based on the alternative findings of no agreement and no authority, neither finding was essential to the prior judgment. Section 27 of the Restatement (Second) of Judgments provides in part: If a judgment of a court of first instance is based on determinations of two issues, either of which standing independently would be sufficient to support the result, the judgment is not conclusive with respect to either issue standing alone. Id. § 27, cmt. i (1982). Thus, according to the Restatement, the general rule is that there cannot be estoppel by alternative holdings. [8] In response, J & H correctly asserts that both of the district court's findings can have a preclusive effect because both were reviewed and affirmed by the Second Circuit. An exception exists to the general rule of no preclusion when alternative holdings are appealed and affirmed. Comment o to the Restatement provides: If the judgment of the court of first instance was based on a determination of two issues, either of which standing independently would be sufficient to support the result, and the appellate court upholds both of these determinations as sufficient, and accordingly affirms the judgment, the judgment is conclusive as to both determinations. In contrast to the case discussed in Comment i, the losing party has here obtained an appellate decision on the issue, and thus the balance weighs in favor of preclusion. RESTATEMENT (SECOND) OF JUDGMENTS § 27, cmt. o (1982). The district court's alternative findings of no agreement to insure the Sun contract and no authority to do so were both appealed and affirmed by the Second Circuit. The finding that no agreement was made to cover the Sun contract profits was rigorously consideredthe district court discussed this issue extensively in its findings of fact and conclusions of law. This finding was affirmed by the Second Circuit and could, standing independently, support the result of no coverage; it thus serves as a valid estoppel in this action. Because we conclude that alternative findings that are in fact reviewed and affirmed by an appellate court may have preclusive effect, we need not address J & H's additional argument under Eagle Properties, Ltd. v. Scharbauer, 807 S.W.2d 714, 721 (Tex.1990), that estoppel is allowed for alternative holdings that were rigorously considered and sufficient to sustain the judgment.
Kenneco's claim for breach of the alleged agreement to secure contingency coverage is not barred by collateral estoppel. The issue sought to be litigated in this action, as framed by the submitted jury question, is: Did Johnson & Higgins and Kenneco (Armada) agree on November 30, 1982, that Johnson & Higgins would secure for Kenneco's (Armada's) benefit `contingency coverage'? The jury found that such an agreement was made and awarded Kenneco $412,273.66. Kenneco's cause of action for breach of an agreement to secure contingency coverage is not collaterally estopped because, in contrast to their consideration of whether J & H agreed to secure lost profits coverage, the federal courts never addressed whether an agreement was made to secure contingency coverage. It is undisputed that Brown went to J & H to obtain back up insurance in the event the Brazilian underwriters failed to pay on a claim. It is also undisputed that Anderson told Brown such coverage could be triggered by the policy's already existing contingency coverage. The federal district court found that the contingency coverage did not apply because: (1) the sale was not back-to-back C.I.F., and (2) the London underwriters did not waive the coverage requirements. Armada Supply, 665 F.Supp. at 1051, 1067. Thus, the district court's finding that the policy's contingency coverage did not apply to the sale does not preclude a finding by the jury in the state action that Anderson agreed to secure contingency coverage. Collateral estoppel is not proper because the issue decided in the federal action is not identical to the issue Kenneco litigated as a basis for the contingency coverage breach of contract claim in the state court. See Getty Oil, 845 S.W.2d at 802. Similarly, the ultimate issues in Kenneco's state action were neither expressly nor necessarily adjudicated in the federal action nor were the federal court findings inconsistent with the state court findings. See Tarter v. Metropolitan Sav. & Loan Ass'n, 744 S.W.2d 926, 928 (Tex.1988). The federal courts never decided whether J & H agreed to secure contingency coverage. Kenneco's assertions in the federal courts regarding contingency coverage were mainly that events after the November 30 meeting ( e.g., the underwriters' receiving and retaining premiums for contingency coverage) resulted in a waiver of the back-to-back C.I.F. requirement. Armada Supply, 665 F.Supp. at 1061-63, 1067-68, 1061 ([Kenneco] claims that during the course of later events the London underwriters waived the requirement of the cover note.). In contrast, the jury question in the state action focused only on whether J & H agreed on November 30 to secure coverage. The issue of whether J & H mistakenly billed Kenneco for premiums after the London underwriters disputed coverage is not identical to whether Anderson agreed on November 30 to secure contingency coverage. Further, the federal district court's statements regarding the state of knowledge of both parties as to the nature of the sale from Kenneco to Sun ( i.e., that it was not back-toback C.I.F.) should not support collateral estoppel. These statements were not affirmed on appeal and were not essential to the district court's holdings that the sale was not covered and that the back-to-back C.I.F. requirement was not waived. Not every fact finding in the district court's opinion may be afforded preclusive effect. To allow such broad preclusion would eviscerate the requirement that the finding be essential to the judgment in the prior suit. Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, at 818-19 (Tex.1984); Eagle Properties, 807 S.W.2d at 721-22. In federal court, Kenneco argued that the C.I.F. back-to-back requirement was not a material term of the cover note and that the underwriters waived the requirement because they retained the contingency premium. The district court made three inquiries that were essential to its holding of no contingency coverage: (1) whether the back-toback C.I.F. requirement of the cover note was a material term; (2) if so, whether it was satisfied; and (3) if not satisfied, whether the London underwriters waived that requirement by accepting and retaining the premium. The district court concluded that it was a material term, it was not satisfied, and that it was not waived. Although the district court stated that Anderson understood Brown to say that the sale was back-to-back C.I.F. and that Kenneco did not affirmatively state until December 1992 that the sale to Sun was delivered, what Brown said and what Anderson knew or understood regarding the sale to Sun were not essential to the district court's holding. Armada Supply, 665 F.Supp. at 1061-62. Regarding Kenneco's claim that the underwriters waived the requirement of the cover note because they received and retained the `contingency' premium, the district court made two alternative holdings. Id. at 1067. First, it concluded that waiver could not rewrite the requirements of the policy. Id. Then, it stated, In any event, the evidence does not support the conclusion that the London underwriters waived their objections to coverage through retention of a premium. Id. The district court's statement that it appears that Johnson & Higgins did not clearly understand the situation and mistakenly billed Armada for a premium for contingency coverage, id. at 1062, was not essential in its evaluation of whether the conduct of the underwriters resulted in waiver. The district court focused on the fact that the London underwriters reserved decision on the contingency coverage, did not waive their position after J & H billed Kenneco for premiums, and plainly denied coverage when the facts were fully known. Id. at 1067-68. Thus, J & H's billing actions did not affect the London underwriters' position. If J & H's act of billing Kenneco was irrelevant to the determination of no waiver, surely J & H's state of mind in so doing was also irrelevant. Simply put, the facts relevant to the contingency claims in this case were not identical to the facts decided in the federal case and were not essential to the federal court's holding. Therefore, the contingency coverage breach of contract claim is not collaterally estopped.
In the state action, the court submitted the following question to the jury: Did Johnson & Higgins misrepresent Kenneco's (Armada's) insurance coverage with the London underwriters at the November 30, 1982, meeting? The question did not differentiate between the increased value coverage and the contingency coverage, although the pleadings alleged that Anderson misrepresented Kenneco's coverage under both provisions. The jury answered affirmatively and awarded Kenneco $1.5 million in damages. The elements of common-law fraud are that: (1) a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the representation was made with the intention that it be acted upon by the other party; (5) the party acted in reliance upon the representation; and (6) the party suffered injury. T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 222 (Tex.1992); Eagle Properties, 807 S.W.2d at 723. J & H argues that Kenneco's fraud claim is estopped because Kenneco contended in the federal action that Anderson misrepresented coverage under the London policy, and the federal district court found against Kenneco on that issue. To support its position, J & H points to the federal district court's statement that [Kenneco] contends that [J & H] agreed that the London insurance would cover lost profits on the Sun contract. 665 F.Supp. at 1058. J & H further argues that Kenneco relies on the same arguments and facts that it relied on in federal court to now support its fraud claim. Kenneco responds that its fraud claim could not be estopped by the prior action because, in the federal action, it contended that Anderson did not misrepresent coverage because J & H correctly represented the coverage under the London policy, whereas here its position is that J & H did misrepresent coverage. Further, Kenneco argues that the federal suit was nothing more than a contract construction suit, and therefore the federal court's determination of that suit should have no bearing on Kenneco's fraud claim. We hold that, to the extent that Kenneco's fraud claim is based on its allegation that Anderson knowingly or recklessly represented that Kenneco's lost profits on the contract were insured by the increased value provision, it is barred by collateral estoppel. Kenneco's state court fraud claim necessarily involves proof that a representation was made, and that that representation was false. Although Kenneco never contended that Anderson or J & H mis -represented coverage in the federal courts, Kenneco did contend that Anderson made certain representations regarding lost profits coverage, and the federal courts rejected that contention. In fact, the Second Circuit specifically characterized the issue being decided as whether the London underwriters were bound by the alleged representations of J & H, a Houston broker, that the insurance would cover lost profits. Armada Supply, 858 F.2d at 851 (emphasis added). Even Kenneco's own brief states that Kenneco offered evidence concerning representations made by Anderson of [J & H] as to the extent of coverage for lost profits. Thus, insofar as Kenneco's fraud claim is based on an alleged representation by Anderson that Kenneco's lost profits were covered, the claim is barred by the federal courts' conclusion that no such representation was made. However, Kenneco's allegation that Anderson knowingly or recklessly represented that Kenneco was fully insured for any loss to which the Brazilian underwriters did not respond under the `contingency' clause is not barred because that issue was not decided in the federal suit. The federal courts made no findings that would preclude a verdict in favor of Kenneco on this claim, and the jury's findings are not inconsistent with the federal courts' findings.