Opinion ID: 4749
Heading Depth: 3
Heading Rank: 3

Heading: Petitioners, Royal Insurance Company of

Text: 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 8 Although numerous policies were at issue throughout the federal and state litigation, the parties agree that this is the essential policy language. 15 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 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 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 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 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 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 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 19 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 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 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 21 (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. 22 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.