Turner v. Cincinnati Insurance ( 2021 )

Case: 20-50548 Document: 00515978684 Page: 1 Date Filed: 08/13/2021
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
FILED
August 13, 2021
No. 20-50548 Lyle W. Cayce
Clerk
Blakely Turner; Damon Brooks; Deandra Simpson;
Shamiyan Walton; Michael Harris; Anita Simpson,
Plaintiffs—Appellants,
Charles Levy,
Intervenor—Appellant,
versus
Cincinnati Insurance Company,
Defendant—Appellee.
Appeal from the United States District Court
for the Western District of Texas
USDC No. 6:19-CV-642
Before Higginbotham, Southwick, and Engelhardt, Circuit
Judges.
Leslie H. Southwick, Circuit Judge:
After obtaining a default judgment in state court against defunct
entities, six plaintiffs filed this coverage action to collect on that judgment
from the entities’ insurer. The district court granted summary judgment to
the insurer on two grounds. First, it determined that the Plaintiffs lacked
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standing to sue the insurer without either an adversarial judgment against the
entities or a valid assignment from the entities. Second, it determined that
the Plaintiffs’ claims against the entities fell outside the scope of the entities’
liability insurance coverage. We disagree with the district court on the first
ground but agree on the second. Accordingly, we AFFIRM.
FACTUAL AND PROCEDURAL BACKGROUND
A company with trade schools in several Texas counties has been the
subject of multiple similar lawsuits brought by former students who have
claimed the schools were a failure in various ways. The outcome of this
appeal will turn on whether the suits that were filed before the insurance-
coverage period are based on the same wrongful acts as the acts alleged in the
current suit – which was filed during the policy period. If any of the prior
suits are based on the same wrongful acts as the later one, then a policy
limitation that denies coverage when the relevant claims are not first made
against the insured during the policy period apples.
Now, some of the details. Cincinnati Insurance Company issued a
claims-made liability insurance policy to the directors and officers of Ability
Holdings, Inc., ATI Enterprises, Inc., and ATI Acquisition Company
(collectively, “ATI”). The policy included up to $10 million in liability
coverage for claims “first made” during the “policy period” against ATI’s
directors and officers for a “wrongful act.” 1 The relevant policy period was
December 30, 2010 to December 30, 2011.
1
The coverage provision stated: “We will pay on behalf of the ‘company’ all ‘loss’
which the ‘company’ is required to pay as indemnification to the ‘individual insureds’
resulting from any ‘claim’ first made during the ‘policy period’ . . . for a ‘wrongful act’.”
The term “loss” includes defense costs and indemnification costs.
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Under the policy, a “wrongful act” is “any actual or alleged error,
misstatement, misleading statement, act, omission, neglect or breach of duty
committed, attempted or allegedly committed or attempted.” Multiple acts
constitute “interrelated wrongful acts” if they “have as a common nexus any
fact, circumstance, situation, event, transaction or series of facts,
circumstances, situations, events, or transactions.” Further, “all ‘claims’
based upon or arising out of the same ‘wrongful act’ or any ‘interrelated
wrongful acts’ shall be considered a single ‘claim’.” A claim is considered
“first made” at the moment “notice of the earliest ‘claim’ arising out of such
‘wrongful act’ or ‘interrelated wrongful acts’ is received in writing by [ATI]
or by [Cincinnati], whichever comes first.” The limitation that the policy
covers only claims first made during the policy period is relevant to this
appeal because the district court determined that the underlying lawsuit
against ATI was sufficiently related to another lawsuit filed against ATI prior
to the policy period, such that the two lawsuits constitute a single coverage
claim first made prior to the period of coverage.
In addition to that limitation, the policy also contains several
exclusions. One is an exclusion for prior notice of a claim that applies when
a new claim is “[b]ased upon, arising out of, or in consequence of, or in any
way involving” any wrongful act, interrelated wrongful act, or other fact that
was the subject of notice prior to the policy period. Another is the
prior/pending litigation exclusion, which applies when a claim is “[b]ased
upon, arising out of, or in consequence of, or in any way involving any prior
and/or pending litigation as of [December 30, 2010,] or any fact,
circumstance, situation, transaction or event underlying or alleged in such
litigation, regardless of the legal theory asserted in such ‘claim’.”
With these exclusions in mind, we examine the relevant facts. ATI
operated trade schools across Texas from 2009 to 2011. On February 8,
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2010, former students sued ATI 2 in Dallas County, Texas. See Nelson v. ATI
Enters., Inc., No. DC-10-01479-I, 162nd District Court of Dallas County,
Texas (“Nelson lawsuit”). That lawsuit alleged that ATI misrepresented the
quality and results of its programs through its website, promotional materials,
and admissions representatives; that ATI pressured its admissions
representatives to increase enrollment by engaging in aggressive and
misleading sales techniques; that its schools were overcrowded; that ATI
suffered from “chronic shortages of qualified instructors”; and that the
facilities and equipment at the Dallas campus were inadequate. The Nelson
lawsuit sought relief under Section 17.46(b) of the Texas Deceptive Trade
Practices Act, and under theories of common-law fraud, fraud by
nondisclosure, and unjust enrichment.
On June 29, 2010, the Nelson plaintiffs filed a First Amended Petition,
which apparently added more plaintiffs. Around that time, the Nelson lawsuit
was submitted to arbitration. Six of the Nelson plaintiffs did not participate
in arbitration. Those six “non-arbitration plaintiffs” filed a Second
Amended Petition that added Ability Holdings, Inc. as a defendant and added
claims for breach of contract and breach of warranty. Because the arbitration
resulted in an award for the participating plaintiffs, the state court in March
2013 severed the claims of the non-arbitration plaintiffs and assigned them a
new case number. Harper v. ATI Enters., Inc., No. DC-13-02560, 162nd
Judicial District Court of Dallas County, Texas (“Harper lawsuit”). The
Harper plaintiffs then filed a Third Amended Petition.
On October 14, 2011, 107 former students (including the 6 former
students who are appellants now) sued ATI in McLennan County, Texas.
See Bartlett v. ATI Enters., No. 2011-4333-4, 170th Judicial District Court of
2
The original Nelson petition did not include Ability Holdings, Inc. as a defendant.
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McLennan County, Texas (“Bartlett lawsuit”). The allegations in the
Bartlett lawsuit are virtually identical to the allegations in the Nelson lawsuit.
As in the Nelson lawsuit, the Bartlett lawsuit alleged that ATI misrepresented
the quality and results of its programs through its website, promotional
materials, and admissions representatives; that ATI pressured its admissions
representatives to increase enrollment through aggressive and misleading
sales techniques and tactics; that its schools were overcrowded; that
overcrowding led to “chronic shortages of qualified instructors”; and that
the schools lacked access to necessary equipment and supplies. 3 The Bartlett
lawsuit sought relief under the Texas Deceptive Trade Practices Act, and
under theories of common-law fraud, fraud by nondisclosure, unjust
enrichment, breach of contract, and breach of warranty. This appeal arises
collaterally from those six plaintiffs’ efforts to prosecute the Bartlett lawsuit
and collect on the judgment they obtained against ATI.
As of November 11, 2011, after the Bartlett lawsuit commenced,
Cincinnati assumed the defense of ATI, while reserving its rights to challenge
or deny coverage. Several months later, Cincinnati learned about the Nelson
lawsuit in Dallas County. On July 25, 2012, Cincinnati sent a letter to ATI
that denied all coverage for the Bartlett lawsuit and explained its reasons for
doing so. According to the letter, Cincinnati had concluded: (1) that the
Nelson lawsuit and the Bartlett lawsuit were “based upon the same Wrongful
Acts and/or Interrelated Wrongful Acts,” meaning that the two lawsuits
constituted a single claim first made against ATI prior to the period of policy
coverage; (2) that the prior/pending litigation exclusion precluded coverage;
and (3) that the prior notice exclusion also precluded coverage.
3
The only noticeable difference between the two petitions is that the Nelson lawsuit
included a few allegations directed specifically at ATI’s Dallas campus, while the Bartlett
lawsuit did not make any allegations facially attributable only to the Waco campus.
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On January 21, 2014, ATI filed for Chapter 7 bankruptcy, which
stayed the Nelson lawsuit, the Bartlett lawsuit, and several others pending
against ATI. On January 29, 2016, ATI’s bankruptcy trustee filed a coverage
action against Cincinnati and other insurance companies in Dallas County.
During discovery for the coverage action, and after a trial date had been set,
the trustee and Cincinnati executed a settlement-and-release agreement for
the ATI bankruptcy estate’s claims against Cincinnati. ATI’s bankruptcy
estate agreed to release and discharge Cincinnati from liability “arising out
of, or related to” the coverage lawsuit, the former-student lawsuits, and the
insurance policy. The bankruptcy court approved the settlement on June 20,
2017.
On July 25, 2018, despite the settlement and release, three sets of
plaintiffs moved to have the bankruptcy court lift the automatic stay so that
they could prosecute claims against Cincinnati and another insurance
company. Those plaintiffs included former-student plaintiffs in the Nelson
lawsuit who did not participate in arbitration, former-student plaintiffs in the
Bartlett lawsuit, and a former-employee plaintiff who had filed a
discrimination action against Cincinnati. Cincinnati objected to the relief-
from-stay motion, arguing that the plaintiffs had fully released Cincinnati
through its earlier settlement-and-release agreement. Over Cincinnati’s
objection, the bankruptcy court granted the various plaintiffs’ collective
motion for relief from the stay. The court remarked that it was not ruling on,
among other things, the scope of the settlement-and-release agreement or as
to whether the plaintiffs were entitled to recover from Cincinnati, i.e.,
whether any coverage defenses applied.
After the stay was lifted, six of the Bartlett lawsuit plaintiffs — Blakely
Turner, Michael Harris, Anita Simpson, Deandra Simpson, Shamiyan
Walton, and Damon Brooks — began to move forward with their claims
against ATI in McLennan County. (From this point, we will use “Plaintiffs”
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to refer to these six individuals, who are the appellants). The state court
severed these Plaintiffs’ claims from the rest of the Bartlett lawsuit and
assigned them a new case number. On June 6, 2019, the state court called the
Plaintiffs’ case to trial. ATI did not appear at trial or provide any defense.
The state court entered a default judgment in favor of the Plaintiffs in the
amount of $1,662,200.00 on June 19, 2019, which included several forms of
damages as well as costs and attorneys’ fees.
Then, on September 20, 2019, the Plaintiffs filed this lawsuit against
Cincinnati, originally in state court in McLennan County, seeking recovery
on ATI’s insurance policy. The state-court petition asserted a claim against
Cincinnati for breach of contract. The Plaintiffs claimed that “as judgment
creditors of” ATI, they were “entitled to enforce Defendant Cincinnati’s
obligations under the insurance contract.” Cincinnati removed the case to
the Western District of Texas, then unsuccessfully tried to transfer venue to
the Northern District of Texas.
The Plaintiffs filed a motion for partial summary judgment, arguing
that Cincinnati wrongfully breached its duty to defend ATI. They also made
clear that they sought trial in which Cincinnati would defend ATI’s interests,
so that the Plaintiffs could prove Cincinnati’s duty to indemnify ATI and
then access the insurance-policy funds.
Cincinnati cross-moved for summary judgment with three arguments.
First, it argued that the Plaintiffs lacked standing to bring a direct action
against Cincinnati without either an adversarial judgment against ATI or a
valid assignment from ATI. Second, it argued that ATI released its claims
against Cincinnati through the settlement-and-release agreement approved
by the bankruptcy court. Third, it argued that the Plaintiffs’ lawsuit against
ATI was not covered by ATI’s insurance policy with Cincinnati because it
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was not a claim first made during the policy period and several other
exclusions applied.
On March 12, 2020, the district court denied the Plaintiffs’ partial
motion for summary judgment and granted summary judgment for
Cincinnati for two reasons. First, it determined that the Plaintiffs lacked
“standing” to bring a direct action against Cincinnati, their wrongdoer’s
insurer, because they had neither a judgment against ATI resulting from a
fully adversarial trial or a valid assignment of ATI’s claims against Cincinnati.
Second, it determined in the alternative that the insurance policy did not
provide any coverage for the Bartlett lawsuit. It concluded that the Nelson
lawsuit and the Bartlett lawsuit were “sufficiently related to constitute a
single claim under the policy’s provisions,” which was first made against
ATI prior to the policy period. The court did not address whether any of the
exclusions barred coverage nor whether the settlement-and-release
agreement precluded any recovery from Cincinnati. 4
Four days later, on March 16, 2020, the district court entered final
judgment in Cincinnati’s favor and purportedly closed the case. After the
district court did so, the Plaintiffs took two courses of action: one in state
court and another in federal court.
On April 6, 2020, in McLennan County state court, the Plaintiffs filed
a motion for a declaration of entitlement of ATI’s claims for insurance-policy
proceeds against Cincinnati. 5 In that motion, the Plaintiffs also requested the
4
We will not address the Cincinnati’s policy-exclusions and settlement-and-
release arguments either. Both are unnecessary in light of our analysis.
5
As the federal district court acknowledged, when the Plaintiffs filed this collateral
state-court motion, they “did not notify anyone associated with ATI or [Cincinnati] of the
Transfer Motion” and did not “disclose to the state court this coverage litigation or this
Court’s summary judgment decision.”
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appointment of a receiver, Charles Levy, for ATI and asked the court to order
Levy to prosecute ATI’s claims and then to convey recovered proceeds to
the Plaintiffs. On April 21, 2020, the state court granted the Plaintiffs’
motion, appointed Levy as receiver, and purportedly conveyed the Plaintiffs’
and ATI’s claims and causes of action against Cincinnati to Levy. On April
23, 2020, Levy moved to intervene permissively in this federal-court case.
Also in federal court, the Plaintiffs filed a Rule 59(e) motion to alter
judgment, which challenged the district court’s legal conclusions about
standing in its summary-judgment ruling. The district court issued an order
denying the Plaintiffs’ Rule 59(e) motion. It also entered an order denying
Levy’s motion to intervene.
The Plaintiffs filed a notice of appeal to challenge the orders granting
summary judgment, entering final judgment, and denying their motion to
alter judgment. Levy filed a notice of appeal to challenge the order denying
his motion to intervene.
DISCUSSION
We review the district court’s grant of summary judgment de novo.
Gonzalez v. Mid-Continent Cas. Co., 969 F.3d 554, 556 (5th Cir. 2020). In this
diversity case, we must apply the substantive law of Texas. Erie R.R. Co. v.
Tompkins, 304 U.S. 64, 78 (1938). “This court also reviews de novo a district
court’s interpretation of state law and is bound to resolve the issue as the
state’s highest court would.” Ironshore Eur. DAC v. Schiff Hardin, L.L.P.,
912 F.3d 759, 764 (5th Cir. 2019). We look first to the opinions of the Texas
Supreme Court. Id. If the state high court has not resolved an issue, we will
make a reasoned effort to determine what that court would decide under
these facts. Id. “In doing so, we typically treat state intermediate courts’
decisions as the strongest indicator of what [the] state supreme court would
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do, absent a compelling reason to believe that the state supreme court would
reject the lower courts’ reasoning.” Id. (quotation marks and footnote
omitted).
As for Levy’s appeal, “[w]e have ‘provisional jurisdiction’ to review
a district court’s order denying permissive intervention.” Rotstain v.
Mendez, 986 F.3d 931, 942 (5th Cir. 2021). “If the district court did not abuse
its discretion by denying permissive intervention, we ‘must dismiss the
appeal for lack of jurisdiction.’” Id. (citation omitted).
We separately analyze each issue.
I. Was Cincinnati entitled to summary judgment?
The district court granted summary judgment to Cincinnati for two
reasons. First, it determined that the Plaintiffs lacked standing to bring a
direct action against Cincinnati without either an adversarial judgment or a
valid assignment. Second, it determined that the Bartlett lawsuit fell outside
the scope of ATI’s insurance coverage. Because, as we will explain, Texas
courts consider the no-direct-action rule to be jurisdictional, we must begin
there and reach the scope of the insurance coverage only if we are satisfied
that the Plaintiffs have standing to sue. We now begin.
A. Can the Plaintiffs maintain a direct action against Cincinnati?
The Plaintiffs obtained a default judgment against ATI. The parties
dispute whether that non-adversarial judgment is enough to sue Cincinnati,
their wrongdoer’s insurer.
The answer to this question lies at the intersection of two lines of
Texas Supreme Court cases. In one, the court has enforced a rule that “an
injured party cannot sue the [defendant’s] insurer directly until the
[defendant’s] liability has been finally determined by agreement or
judgment.” See, e.g., In re Essex Ins. Co., 450 S.W.3d 524, 525 (Tex. 2014).
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This is an application of the “no direct action” rule. Id. In another line, the
Texas Supreme Court has explained when “a judgment or settlement
between the insured and [that] plaintiff” is “binding” on the insurer in a
subsequent coverage suit. See, e.g., Great Am. Ins. Co. v. Hamel, 525 S.W.3d
655, 662, 668 (Tex. 2017). To bind an insurer, a judgment against a
defendant it insured must result from a “fully adversarial” proceeding. See
id. at 666–68.
In order to decide whether the Plaintiffs’ non-adversarial default
judgment against ATI permits them to sue Cincinnati, we must determine
whether (and if so, to what extent) the Texas Supreme Court’s holdings in
Hamel and related opinions affect whether a default judgment for a plaintiff
against an insured–defendant satisfies the no-direct-action rule. We begin by
providing a background of both lines of Texas authority, then analyze
whether and how they work together.
1. The no-direct-action rule
“[A]n ‘insurance policy is a contract’ that establishes the respective
rights and obligations to which an insurer and its insured have mutually
agreed.” USAA Tex. Lloyds Co. v. Menchaca, 545 S.W.3d 479, 488 (Tex.
2018) (citation omitted). The contracting parties, i.e., ATI and Cincinnati,
generally can maintain suit on the insurance policy. See, e.g., State Farm
Lloyds v. Richards, 966 F.3d 389, 391 (5th Cir. 2020) (insurer sued insured);
Menchaca, 545 S.W.3d at 485 (insured sued insurer).
A party aggrieved in contract or tort “by the insured is a third party
beneficiary of a liability insurance policy.” State Farm Cnty. Mut. Ins. Co. v.
Ollis, 768 S.W.2d 722, 723 (Tex. 1989). In Texas, though, these third-party
beneficiaries face the hurdle of the no-direct-action rule. “[T]he general rule
is that an injured party cannot sue the [defendant’s] insurer directly until the
[defendant’s] liability has been finally determined by agreement or
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judgment.” In re Essex, 450 S.W.3d at 525 (ellipses omitted). In other words,
a third-party beneficiary as plaintiff “cannot enforce the policy directly
against the insurer until it has been established, by judgment or agreement,
that the insured has a legal obligation to pay damages to the injured party.”
Ollis, 768 S.W.2d at 723.
Important to our need to address this issue, several Texas courts of
appeals have held that the no-direct-action rule is jurisdictional because there
is no justiciable controversy between the third-party plaintiff and the insurer
without a judgment or agreement establishing the insured–defendant’s
liability. See Landmark Am. Ins. Co. v. Eagle Supply & Mfg. L.P., 530 S.W.3d
761, 772 (Tex. App.—Eastland 2017, no pet.) (analyzing the rule as an issue
of ripeness); Auzenne v. Great Lakes Reinsurance, PLC, 497 S.W.3d 35, 37–38
(Tex. App.—Houston [14th Dist.] 2016, no pet.) (ripeness); Ohio Cas. Ins.
Co. v. Time Warner Ent. Co., L.P., 244 S.W.3d 885, 888–89 (Tex. App.—
Dallas 2008, pet. denied) (standing).
The no-direct-action rule arises in part from the frequent usage of no-
action clauses in insurance policies and the Texas courts’ willingness to
enforce such provisions: “We have held that when such ‘no action’ policy
provisions exist, ‘a third party’s right of action against the insurer does not
arise until he has secured such an agreement or a judgment against the
insured.’” Getty Oil Co. v. Ins. Co. of N. Am., 845 S.W.2d 794, 801 (Tex.
1992) (quoting Great Am. Ins. Co. v. Murray, 437 S.W.2d 264, 265–66 (Tex.
1969)). The insurance policy in this case contains a no-action clause. Even
beyond the inclusion of such language in contracts of insurance, there also is
a public-policy reason against allowing a third-party plaintiff to sue an
insured–defendant’s insurer before liability has been established, as the
lawsuit would create a conflict of interest for the insurer. See Ohio Cas. Ins.
Co., 244 S.W.3d at 888–89.
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The Plaintiffs in this case obtained a default judgment against ATI.
Our question is whether the default judgment satisfies the no-direct-action
rule such that the Plaintiffs can sue Cincinnati under ATI’s insurance policy
to collect on the default judgment. That question implicates the group of
Texas Supreme Court cases that discuss when a judgment against an
insured–defendant binds the insurer.
2. Hamel and related cases
In a series of decisions, the Texas Supreme Court established the
circumstances under which a judgment against an insured–defendant, or a
settlement between the third-party plaintiff and the insured–defendant, is
“binding” on the insurer in a subsequent coverage suit. We draw from those
decisions a general principle that “an insurer that wrongfully refuses to
defend its insured is barred from collaterally attacking a judgment or
settlement between the insured and the plaintiff.” Hamel, 525 S.W.3d at
662–63 (discussing Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256
S.W.3d 660, 671 (Tex. 2008), and Employers Cas. Co. v. Block, 744 S.W.2d
940, 943 (Tex. 1988)). The reach of that general principle was limited by
State Farm Fire & Casualty Co. v. Gandy, 925 S.W.2d 696, 714 (Tex. 1996).
See Hamel, 525 S.W.3d at 663.
In Gandy, as part of a settlement, an insured–defendant assigned his
insurance-coverage claims to a third-party plaintiff without giving notice to
his insurer. 925 S.W.2d at 698. The trial court entered an agreed judgment
for the plaintiff against the insured–defendant, and then the plaintiff sued the
insurer as a judgment creditor and assignee. Id. The Texas Supreme Court
invalidated the assignment as contrary to public policy because it prolonged
and distorted the litigation. Id. at 711–12. “Without the assignment and
covenant not to execute, the agreed judgment would never have been
rendered.” Id. at 713. As a result, the court rendered a take-nothing judgment
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in the suit against the insurer. Id. at 720. After announcing a narrow set of
circumstances under which an assignment will be invalidated, 6 the Gandy
court stated: “In no event, however, is a judgment for plaintiff against
defendant, rendered without a fully adversarial trial, binding on defendant’s
insurer or admissible as evidence of damages in an action against defendant’s
insurer by plaintiff as defendant’s assignee.” Id. at 714.
Later, in the Hamel case, third-party plaintiffs had obtained a non-
adversarial judgment and an assignment from an insured–defendant, then
sued the insurer. 525 S.W.3d at 661. Prior to obtaining the judgment and
assignment, the plaintiff and insured–defendant reached a pretrial agreement
that “removed the [insured–defendant’s] stake in the outcome and any
corresponding incentive to defend itself.” Id. at 668. Because the judgment
and assignment were not the product of a “fully adversarial” proceeding, the
court held that the judgment was “not binding against [the insurer] in the
present suit brought by the [third-party plaintiffs] as judgment creditors and
assignees,” id., despite the insurer’s wrongful refusal to defend the insured–
defendant, id. at 666.
In its analysis, the Hamel court clarified what it meant in Gandy when
it said that “a judgment for plaintiff against defendant, rendered without a
fully adversarial trial, [is not] binding on defendant’s insurer.” Hamel, 525
S.W.3d at 663, 666 (quoting Gandy, 925 S.W.2d at 714). As the Hamel court
6
The court explained:
[A] defendant’s assignment of his claims against his insurer to a plaintiff is
invalid if (1) it is made prior to an adjudication of plaintiff’s claim against
defendant in a fully adversarial trial, (2) defendant’s insurer has tendered
a defense, and (3) either (a) defendant’s insurer has accepted coverage, or
(b) defendant’s insurer has made a good faith effort to adjudicate coverage
issues prior to the adjudication of plaintiffs claim.
Gandy, 925 S.W.2d at 714.
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explained, a judgment does not bind an insurer unless “at the time of the
underlying trial or settlement, the insured bore an actual risk of liability for
the damages awarded or agreed upon, or had some other meaningful
incentive to ensure that the judgment or settlement accurately reflects the
plaintiff’s damages and thus the defendant–insured’s covered liability loss.”
Id. at 666.
In Hamel, the non-adversarial judgment did not bind the insurer, but
the court allowed the case to proceed: “Accordingly, while we will not hold
an insurer to a judgment that was not the result of an adversarial proceeding,
we will not preclude the parties from properly litigating the underlying
liability issues in a subsequent coverage suit.” Id. at 669.
From this background, we must determine whether the Plaintiffs’
non-adversarial default judgment satisfies the no-direct-action rule.
3. Does the Plaintiffs’ non-adversarial default judgment
satisfy the no-direct-action rule?
From the Texas Supreme Court’s no-direct-action rule decisions, we
know that “the general rule is that an injured party cannot sue the [insured–
defendant’s] insurer directly until the [insured–defendant’s] liability has
been finally determined by agreement or judgment.” See In re Essex, 450
S.W.3d at 525 (ellipses omitted). Texas’s highest court, though, has not
decided a case involving the no-direct-action rule in the context of plaintiffs
obtaining a judgment that is potentially insufficient. At the same time, the
court decided each of the cases in the Hamel line — including Hamel, Gandy,
ATOFINA, and Block — without any reference to the no-direct-action rule.
We must determine whether there is any overlap.
After Hamel, one Texas court of appeals applied the no-direct-action
rule and Hamel together, holding that two non-adversarial judgments did not
satisfy the no-direct-action rule. See Landmark, 530 S.W.3d at 770–72. In
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that case, a third-party plaintiff sought to enforce two non-adversarial
judgments against the insured–defendant’s insurer. Id. at 770. There was a
policy provision barring direct actions under certain circumstances, as
follows:
No action will be taken against [Landmark] unless, as a
condition precedent, the Insured is in full compliance with all
of the terms of this policy and until the amount of the insured’s
obligations to pay shall have been finally determined, either by
judgment against the insured after actual trial, or by written
agreement of the insured, the claimant and the Company.
Id. (first alteration in original) (emphasis added). Applying the no-direct-
action rule and Hamel together, the court held that, “without a sufficient
judgment against [the insured–defendant], [the third-party plaintiff] does not
have a ripe claim under the no-direct-action rule to pursue a breach of
contract claim as a judgment creditor against [the insurer].” Id. at 772. In
other words, the judgments against the insured–defendant did not satisfy the
no-direct-action rule because neither was “the result of a fully adversarial
trial under Hamel and Gandy.” Id.The Landmark decision is distinguishable from this case because the
language of the no-action clause in that case is materially different from the
no-action clause in this case. Cincinnati’s policy provision did not include
language requiring an actual trial, but it did require an “adjudication”:
No action shall be taken against us unless, as a condition
precedent thereto, there shall have been full compliance with
all of the terms of this policy and until the obligation of the
“policy insureds” to pay shall have been finally determined,
either by an adjudication against them or by written agreement
of the “policy insureds,” the claimant and us. Any person or
organization or the legal representative thereof who has
secured such judgment or written agreement shall thereafter be
entitled to recover under this policy to the extent of the
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insurance afforded by this policy. Bankruptcy or insolvency of
a “policy insured” or of a “policy insured’s” estate shall not
relieve us of any of our obligations hereunder.
An important insurance-law treatise analyzed caselaw involving
policies that prohibit direct actions until an actual trial has been held and
concluded that such language should be applied literally:
There is authority that where a liability policy provides that no
action may be brought against the insurer until the amount of
the insured’s obligation is determined by judgment against the
insured after actual trial, it is necessary that there have been an
actual trial, for such a provision imposes the requirement of an
actual contest of issues and does not include a judgment
entered by the court after the approval of a compromise
settlement agreement by the insured and the injured party nor
a default judgment.
7A Couch on Insurance § 105:20 (emphasis added) (footnotes
omitted). In one of the opinions cited by the treatise, a Texas court of appeals
had held that an “actual trial” in the context of a no-action clause means “a
contest of issues leading up to final determination by court or jury, in contrast
to a resolving of the same issues by agreement of the parties; i.e., without a
contest.” Wright v. Allstate Ins. Co., 285 S.W.2d 376, 379–80 (Tex. App.—
Dallas 1955, writ ref’d n.r.e.). The Wright court concluded that the non-
adversarial consent judgment in that case did not satisfy the no-direct-action
rule. Id. at 380.
The Wright court’s description of an “actual trial” parallels the
Hamel court’s description of “fully adversarial” proceedings, where it held
that “proceedings are ‘adversarial’ when the parties oppose each other.”
Hamel, 525 S.W.3d at 666. The similarities of these two descriptions support
the conclusion that an adversarial judgment will satisfy a no-action clause
containing an actual-trial requirement, while a non-adversarial judgment will
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not. By contrast, if the policy lacks such an actual-trial requirement or
similarly demanding language, we see no basis to require adversity in the
proceedings.
From these authorities, we determine that the Texas Supreme Court
would hold as follows. First, the “general rule” applies, i.e., a third-party
plaintiff is barred from suing the defendant’s insurer, when the third-party
plaintiff has obtained neither a judgment nor agreement of any kind
establishing the insured–defendant’s liability.
Second, if the third-party plaintiffs obtain a judgment, then the court
must look to the language of the no-action clause to determine whether it is
the sort of judgment that satisfies the no-direct-action rule. For example, if
the no-action clause contains an “actual trial” requirement, then the
judgment must be sufficiently adversarial under Hamel and Wright.
Generally speaking, the court must determine whether the obtained
judgment satisfies whatever requirement the relevant no-action clause
contains. After all, “an ‘insurance policy is a contract’ that establishes the
respective rights and obligations to which an insurer and its insured have
mutually agreed,” Menchaca, 545 S.W.3d at 488, and the plaintiffs are third-
party beneficiaries seeking to sue under that policy, Ollis, 768 S.W.2d at 723.
With this legal analysis in mind, we examine the facts of this case. The
Plaintiffs obtained a default judgment against ATI. The relevant question,
then, is whether the judgment suffices under the no-action clause. The
clause in Cincinnati’s policy does not require an actual trial, but the plaintiff
must have obtained “an adjudication against” ATI before bringing an action
directly against Cincinnati.
The Texas Supreme Court, as we explained, has not issued a decision
on this precise question. Texas courts of appeals, on the other hand, have
dealt with related fact patterns. Most recently, in Landmark, one court of
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appeals held that two non-adversarial judgments did not satisfy the no-direct-
action rule when the no-action clause contained an actual-trial requirement.
530 S.W.3d at 770–72. A different court of appeals applied the rule in a
manner seemingly inconsistent with Landmark when it held in two cases that
non-adversarial default judgments were enough to get the third-party
plaintiffs into court with the insurer, even though the no-action clauses
contained actual-trial requirements. See P.G. Bell Co. v. U.S. Fid. & Guar.
Co., 853 S.W.2d 187, 189–90 (Tex. App.—Corpus Christi–Edinburg 1993, no
writ); Filley v. Ohio Cas. Ins. Co., 805 S.W.2d 844, 846–88 (Tex. App.—
Corpus Christi–Edinburg 1991, writ denied). 7 Before that, a different court
of appeals held that a plaintiff satisfied a no-action clause containing an
actual-trial requirement through his non-adversarial appearance at trial after
the insurer wrongfully refused to defend. Gulf Ins. Co. v. Vela, 361 S.W.2d
904, 908 (Tex. App.—Austin 1962, writ ref’d n.r.e.). Finally, as already
explained, a court of appeals held that a non-adversarial agreed judgment was
not a “judgment following actual trial” and therefore did not satisfy the no-
action clause in that case. Wright, 285 S.W.2d at 379–80.
We do not find a seamless web of caselaw there, but most of the
decisions are reconcilable with each other. In Landmark and Wright, non-
adversarial judgments failed to satisfy no-action clauses that contained
actual-trial requirements. The Vela decision is explainable by the pre-Gandy
reluctance to allow insurers to attack a judgment collaterally after wrongfully
7
The Filley court held that the third-party plaintiffs’ suit failed because the insurer
was not liable to the insured, and therefore not liable to the plaintiffs’ either because the
default judgment made the plaintiffs “third party judgment creditors . . . bound by the same
rights, duties, and obligations of [the defendant–insured] under the terms and conditions
of the insurance contract.” 805 S.W.2d at 847.
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refusing to defend. See Block, 744 S.W.2d at 942–43. P.G. Bell Co. and Filley
may not completely fit with the other identified opinions.
In conclusion, the Plaintiffs’ default judgment against ATI is an
adjudication that satisfies the no-action clause. Accordingly, although the
non-adversarial default judgment does not bind Cincinnati to its terms,
Hamel, 525 S.W.3d at 668, the no-direct-action rule is not a bar to this
coverage suit. We therefore disagree with the district court’s determination
that the Plaintiffs lacked standing to sue.
B. Did the underlying lawsuit fall outside the scope of coverage?
The district court determined, in the alternative, that Cincinnati was
entitled to summary judgment because the Bartlett lawsuit was not within the
insurance policy’s scope of coverage.
Under Texas law, an insurer owes two “distinct and separate duties”:
the duty to defend the insured against lawsuits and the duty to indemnify the
insured against claims and judgments. D.R. Horton-Tex., Ltd. v. Markel Int’l
Ins. Co., 300 S.W.3d 740, 742 (Tex. 2009); see also 14 Couch on
Insurance § 200:3. Whether a lawsuit activates an insurer’s duty to defend
is controlled by the “eight-corners rule.” Richards, 966 F.3d at 392.
“[U]nder Texas’s well-established eight-corners rule, an insurer’s ‘duty to
defend is determined by the claims alleged in the petition and the coverage
provided in the policy.’” Id. (quoting Pine Oak Builders, Inc. v. Great Am.
Lloyds Ins. Co., 279 S.W.3d 650, 654 (Tex. 2009)). If the insured carries its
initial burden of showing “that a claim is potentially within the scope of
coverage,” then the burden shifts to the insurer to show that a limitation or
exclusion precludes “coverage of all claims, also within the confines of the
eight corners rule.” Id. at 393. Extrinsic evidence is generally irrelevant for
the duty-to-defend question. Id. at 392–93.
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The duty to indemnify, by contrast, “is determined by the facts that
are eventually ascertained in the underlying lawsuit.” Hartford Cas. Ins. Co.
v. DP Eng’g, L.L.C., 827 F.3d 423, 430 (5th Cir. 2016). This usually means
“wait[ing] to resolve [the] duty to indemnify until after a trial in the
underlying litigation because facts established at trial determine the duty to
indemnify.” Id. Unlike the duty to defend, it is usually improper to resolve
“the duty to indemnify solely on the basis of the pleadings in the underlying
lawsuit.” Id. Because cases frequently do not go to trial, “the parties may
offer extrinsic evidence to prove or negate the insurer’s duty to indemnify if
the underlying lawsuit never goes to trial or if trial does not develop the facts
necessary to determine policy coverage.” Id. In sum, the duty to indemnify
“hinges on the facts established and the terms and conditions of the
[insurance] policy.” D.R. Horton-Tex., Ltd., 300 S.W.3d at 744.
To recap, ATI’s insurance policy covers any “claim” that is “first
made” against ATI during the “policy period” (basically, all of 2011) for a
“wrongful act.” Under the policy, “all ‘claims’ based upon or arising out of
the same ‘wrongful act’ or any ‘interrelated wrongful acts’ shall be
considered a single ‘claim’.” Multiple acts constitute “interrelated wrongful
acts” if they “have as a common nexus any fact, circumstance, situation,
event, transaction or series of facts, circumstances, situations, events, or
transactions.” Finally, a claim is considered “first made” at the moment
“notice of the earliest ‘claim’ arising out of such ‘wrongful act’ or
‘interrelated wrongful acts’ is received in writing by a ‘policy insured’ or by
[Cincinnati], whichever comes first.”
The district court determined that the Bartlett lawsuit, i.e., the
underlying lawsuit, fell outside of the scope of coverage because it was
“sufficiently related” to the Nelson lawsuit, which was filed before the policy
period. The court began its analysis by observing that the eight-corners rule
applied to the duty-to-defend analysis, but not the duty-to-indemnify
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analysis. It then compared the Bartlett lawsuit petition (a pleading in the
underlying lawsuit) to the Nelson lawsuit petition (an extrinsic pleading) and
determined that the two lawsuits were “sufficiently related to constitute a
single claim under the policy’s provisions.” The Nelson lawsuit was filed on
February 8, 2010, and the policy period began on December 30, 2010. As far
as we can determine, no party contested that notice of the Nelson suit was
timely received. As a result, the court concluded that the Nelson lawsuit and
the Bartlett lawsuit were a single claim “first made” prior to the period of
coverage. For that reason, the court held that Cincinnati was entitled to
summary judgment.
On appeal, the Plaintiffs raise two main issues about the district
court’s coverage analysis. First, the Plaintiffs argue that the two lawsuits are
not interrelated but, instead, are based on completely different acts. Second,
the Plaintiffs argue that Cincinnati breached its duty to defend under the
confines of the eight-corners rule. It appears that the Plaintiffs seek to
establish a breach of the duty to defend so that Cincinnati can be ordered to
defend ATI against the Plaintiffs’ claims in a coverage trial, and then to
indemnify ATI based on facts established at trial.
The complaint makes clear what relief the Plaintiffs seek:
(1) “damages for the portions of their Judgments against ATI that are
covered under the Cincinnati policy”; and (2) “insurance policy proceeds
for the covered claim under the policy.” That is indemnity. See D.R. Horton-
Tex., Ltd., 300 S.W.3d at 743. As a result, the relevant question at this stage
is whether Cincinnati has a duty to indemnify ATI for the Plaintiffs’ claims.
The Plaintiffs make two related arguments concerning the district
court’s method of determining the duty to indemnify, i.e., comparing the
Bartlett lawsuit petition to the Nelson lawsuit petition. They argue that the
court erred by determining the duty to indemnify based “solely on the
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allegations in the pleadings.” Relatedly, they argue that the duty to
indemnify should “be determined based on actual facts in connection with
proceedings envisioned by Hamel,” i.e., a coverage trial.
Contrary to the Plaintiffs’ suggestion, the district court did not rely
“solely on the pleadings in the underlying lawsuit.” See Hartford, 827 F.3d
at 430. It compared the Bartlett lawsuit petition (a pleading in the underlying
suit) to the Nelson lawsuit petition (an extrinsic pleading). The two petitions
were not filed as pleadings in this case, but rather were submitted as extrinsic
evidence to establish the relatedness of the two state-court lawsuits.
Contending that allegations in pleadings cannot constitute facts for a
duty-to-indemnify inquiry, the Plaintiffs quote an opinion from the Texas
Supreme Court that states, “Generally, pleadings are not competent
evidence, even if sworn or verified.” Laidlaw Waste Sys. (Dall.), Inc. v. City
of Wilmer, 904 S.W.2d 656, 660 (Tex. 1995). In that case, the plaintiff
attempted to rely on facts set forth in its petition to contest the defendant’s
motion for summary judgment in the same proceeding in which the petition
was filed as a pleading. Id. A complaint is not evidence of the facts that are
there alleged. Quite differently, we are not concerned with the accuracy of
the facts in the complaints filed in the two different lawsuits. Instead, the
similarity of the allegations is our inquiry. The pleadings that began the two
state-court suits are the evidence of relatedness.
More generally, consideration of extrinsic complaints filed in other
proceedings is not uncommon in the context of insurance litigation. For
example, a Texas court of appeals compared two extrinsic pleadings in an
appeal from summary judgment to determine whether a lawsuit filed after
coverage expired was sufficiently related to other lawsuits filed during the
period of coverage such that the later filed lawsuit fell within the scope of
coverage. See Burks v. XL Specialty Ins. Co., 534 S.W.3d 458, 461–65 (Tex.
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App.—Houston [14th Dist.] 2015, no pet.). The two extrinsic petitions are
proper summary-judgment evidence in this insurance-coverage dispute.
Further, there is no need for a coverage trial if the court can determine
at the summary-judgment stage that Cincinnati had no duty to indemnify.
The duty to indemnify “hinges on the facts established and the terms and
conditions of the [insurance] policy.” D.R. Horton-Tex., Ltd., 300 S.W.3d at
744. The Texas Supreme Court explained in D.R. Horton that the duty to
indemnify can be determined based on evidence submitted in the subsequent
litigation when the underlying lawsuit did not result in a trial or sufficient
factual development. Id. As we once explained, “the parties may offer
extrinsic evidence to prove or negate the insurer’s duty to indemnify if the
underlying lawsuit never goes to trial or if trial does not develop the facts
necessary to determine policy coverage.” Hartford, 827 F.3d at 430.
Accordingly, the relatedness of the two lawsuits, which is dispositive as to
the duty to indemnify, can be decided via summary judgment. We now
examine whether the court properly concluded that they were related.
Again, the Cincinnati policy provides that “all ‘claims’ based upon or
arising out of the same ‘wrongful act’ or any ‘interrelated wrongful acts’ shall
be considered a single ‘claim’.” Multiple acts constitute “interrelated
wrongful acts” if they “have as a common nexus any fact, circumstance,
situation, event, transaction or series of facts, circumstances, situations,
events, or transactions.”
The plaintiffs in both lawsuits were students of ATI trade schools,
albeit at separate campuses. Both lawsuits alleged that “ATI intentionally
create[d] and maintain[ed] a high pressure sales culture that constantly
pushe[d] admissions representatives and managers to increase enrollment
through aggressive and misleading sales techniques and tactics.” Both
lawsuits make several other allegations, drafted in passive voice in a manner
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that hides the identity of the actor, as to how ATI’s recruiters were “driven,”
“placed in constant fear,” “encouraged,” “trained,” and “coached” to
mislead prospective students about the quality and results of ATI’s
programs. Both lawsuits alleged that ATI’s schools suffered from
overcrowding, inadequate resources, and a lack of qualified instructors. The
two petitions were, indeed, virtually identical to each other.
The Plaintiffs concede on appeal that the Bartlett lawsuit “claims were
predicated on some of the same contextual misrepresentations allegations”
as the Nelson lawsuit claims, and that the Nelson lawsuit petition “formed the
template for the petition” in the Bartlett lawsuit.
Still, the Plaintiffs contend that the two lawsuits are not based on the
same wrongful acts or interrelated wrongful acts. Instead, they argue that the
lawsuits involved different plaintiffs in different cities who attended different
schools. They also argue that there is no indication that any wrongful acts
alleged in the two lawsuits were “the result of an overall corporate policy.”
Rather, they say that the two lawsuits involved “separate acts committed by
separate schools.”
In an effort to show a dispute of fact on relatedness, the Plaintiffs rely
on an affidavit produced and submitted by their own counsel, Jay English, in
opposition to Cincinnati’s motion for summary judgment. His affidavit
stated, among other things, that each ATI campus coordinated its own
marketing outreach. English was the Plaintiffs’ counsel in state court, in
district court, and he continues to represent the Plaintiffs and Levy in this
appeal. Even if we assume that his affidavit is proper summary-judgment
evidence — which is disputed by Cincinnati — it does not create a genuine
dispute of material fact regarding relatedness. For all of the affidavit’s effort
to disprove any connection between the Dallas and Waco campuses, the
affidavit does not explain how the recruiters and admissions representatives
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at different campuses were identically trained to market the ATI programs in
misleading and deceptive ways — as the Plaintiffs alleged — without some
common nexus of planning and coordination.
The Plaintiffs’ arguments as to how the two lawsuits were different
does not overcome the clear similarities between them both. The virtually
identical petitions alleged that “ATI intentionally create[ed] and
maintain[ed] a high pressure sales culture that constantly pushe[d]
admissions representatives and managers to increase enrollment through
aggressive and misleading sales techniques and tactics.” The ATI entities’
role in creating and maintaining this “high pressure sales culture,” however
small that role might have been, is a fact common to both lawsuits and integral
to the claims presented in both. As a result, we conclude that the Bartlett
lawsuit and the Nelson lawsuit are based on at least one common “wrongful
act” or “interrelated wrongful act” and therefore constitute a single claim
under the insurance policy.
Accordingly, the two lawsuits are a single claim that was “first made”
against ATI prior to the period of policy coverage. 8 The claim fell outside
the scope of the insurance policy, and Cincinnati had no duty to indemnify
ATI.
II. Levy’s motion to intervene
The district court denied Levy’s motion to intervene permissively in
this case. He appealed that denial. “If the district court did not abuse its
discretion by denying permissive intervention, we ‘must dismiss the appeal
8
Again, because the Plaintiffs have not challenged the district court’s implicit
finding that ATI or Cincinnati received notice of the Nelson lawsuit “in writing” before the
policy period began such that the claim was first made against ATI at that moment, we will
not disturb that finding on appeal.
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for lack of jurisdiction.’” Rotstain, 986 F.3d at 942 (quoting Edwards v. City
of Hous., 78 F.3d 983, 992 (5th Cir. 1996)). Permissive intervention is
“wholly discretionary” and may be denied even when the requirements of
Rule 24(b) are satisfied. New Orleans Pub. Serv., Inc. v. United Gas Pipe Line
Co., 732 F.2d 452, 471–72 (5th Cir. 1984).
The district court explained that it rejected Levy’s motion to
intervene because ATI’s insurance policy did not cover the Bartlett lawsuit.
Without coverage, there is no relief for Levy to seek. Accordingly, we
conclude that the district court did not abuse its discretion in denying Levy’s
motion to intervene.
Levy’s appeal is DISMISSED for lack of jurisdiction. We
AFFIRM the district court’s grant of summary judgment for Cincinnati.
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