St. Paul Fire & Marine Insurance v. Compaq Computer Corp. ( 2006 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 05-3224
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St. Paul Fire and Marine Insurance *
Company, *
*
Appellee, *
* Appeal from the United States
v. * District Court for the District of
* Minnesota.
Compaq Computer Corporation, *
*
Appellant. *
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Submitted: April 18, 2006
Filed: August 4, 2006
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Before MURPHY, MELLOY and GRUENDER, Circuit Judges.
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GRUENDER, Circuit Judge.
Compaq Computer Corporation (“Compaq”) appeals the orders of the district
court1 granting summary judgment to insurer St. Paul Fire and Marine Insurance
Company (“St. Paul”) on St. Paul’s action to recover payments made in defending
Compaq from a class-action lawsuit and on Compaq’s counterclaim for additional
1
The Honorable David S. Doty, United States District Judge for the District of
Minnesota.
costs of defending that lawsuit. For the reasons discussed below, we affirm the
judgment of the district court.
I. BACKGROUND
St. Paul provided liability insurance to Compaq under a “Tech E&O” policy
to cover damages arising from any “errors and omissions” in Compaq’s computer
products. “Errors and omissions” were defined to include negligent mistakes but not
intentional misconduct. Under the Tech E&O policy, St. Paul had a duty to defend,
and a right to control the defense of, any lawsuit against Compaq that alleged a
covered liability. The policy allowed Compaq to take control of the defense of any
reported claim only “if [St. Paul and Compaq] both agree, or if a court orders
[Compaq] to do so.” The associated Major Account Services Instructions (“MASI”)
agreement between St. Paul and Compaq provided additional detail about the right
to control the defense of a covered claim, stating that “Compaq has been given right
to select [defense counsel] subject to StPaul’s [sic] right of refusal if refusal is
reasonable. Selected counsel is subject to StPaul’s [sic] retainer agrmnt [sic] &
negotiated rates.”
In October 1999, the Thurmond class action lawsuit2 was filed against Compaq,
alleging that Compaq “was aware, or should have been aware” of a technical problem
with its floppy disk controllers. In a letter dated November 24, 1999, St. Paul agreed
to defend Compaq “pursuant to the terms and conditions of the [Tech E&O] policy”
but reserved its right to deny liability under the policy upon any subsequent
determination that the Thurmond claim was not covered. The letter also expressed
concern that Compaq was retaining defense counsel without St. Paul’s approval in
violation of the terms of the policy and the MASI agreement. St. Paul asked for
immediate meetings to determine whether St. Paul would “agree to allow Compaq to
2
Thurmond v. Compaq Computer Corp., 171 F. Supp. 2d 667 (E.D. Tex. 2001).
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maintain their current defense team and control defense.” In the alternative, St. Paul
offered to refer the matter to defense counsel of St. Paul’s choice.
On January 31, 2000, St. Paul sent a letter recognizing that Compaq had
continued to retain three law firms of Compaq’s choice to defend the suit without St.
Paul’s approval. St. Paul stated that the rates charged by those firms were excessive
compared to those charged by comparable firms and that Compaq’s employment of
three separate firms would likely lead to duplicative work and additional staffing and
conferencing costs for interfacing among the three firms. After reiterating its rights
under the Tech E&O policy and the MASI agreement to veto Compaq’s choice of
defense counsel and to pay no defense costs which were unreasonable or in excess of
its approved rates, St. Paul stated its desire to “cooperate” with Compaq to allow
Compaq to retain its choice of defense counsel. St. Paul offered to consent to
Compaq’s chosen defense counsel with the condition that St. Paul would pay only a
reduced percentage of Compaq’s defense costs. St. Paul also repeated its earlier
reservation of the right to deny all coverage and, in addition, specifically reserved a
right to recover any defense costs paid to Compaq in the event St. Paul later
determined that the claim was not covered. The letter concluded by asking Compaq
for confirmation that it accepted the offered defense of the Thurmond claim. No
official acceptance by Compaq is documented in the record on appeal, but Compaq
continued to employ its chosen counsel and began accepting payments from St. Paul
in March 2000 at a rate of 50 percent of Compaq’s approved defense costs.
On March 10, 2000, the Thurmond plaintiffs filed a Second Amended
Complaint that set forth in more detail the alleged misconduct by Compaq. After
reviewing the Second (and also Third) Amended Complaint, St. Paul decided that the
Thurmond claim alleged only intentional, rather than negligent, misconduct and was,
therefore, not covered under the Tech E&O policy. On September 5, 2000, St. Paul
notified Compaq that it was withdrawing from Compaq’s defense of the Thurmond
suit retroactive to March 10, 2000, the date the Second Amended Complaint was
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filed. However, St. Paul stated that it would continue to review defense fees and
expenses incurred in the action prior to March 10, 2000. St. Paul continued to pay
50 percent of Compaq’s approved costs incurred before that date, eventually paying
a total of $668,739.95 to Compaq.
Compaq prevailed on summary judgment in the Thurmond action on March 20,
2001. In January 2002, Compaq sued St. Paul in Minnesota state court (“the state-
court action”), seeking a declaration of St. Paul’s duty to defend the Thurmond action
and damages amounting to “any and all costs incurred [by Compaq] in defending” the
Thurmond action. On St. Paul’s motion to dismiss, the state trial court analyzed the
identical language suggesting a negligence claim in the original and five amended
Thurmond complaints and found that none of the complaints stated a cause of action
based in negligence. Accordingly, the state trial court found that St. Paul had no duty
to defend under the policy. The state trial court also stated that “the parties have not
raised nor argued the question of whether St. Paul can retroactively withdraw its
defense, and the Court renders no opinion regarding the same.” The Minnesota Court
of Appeals affirmed the trial court’s reasoning in an unpublished opinion, and the
Minnesota Supreme Court denied further review.
Reading the state-court action result to establish that St. Paul had no duty to
defend any of the Thurmond complaints, St. Paul filed a subsequent action in
Minnesota state court to recoup the payments it had made for defense costs incurred
prior to the Second Amended Complaint.3 Compaq removed the case to federal
3
St. Paul was not required to assert this action as a compulsory counterclaim
in Compaq’s state-court action because St. Paul responded to that complaint with a
motion to dismiss, which was granted, rather than with a responsive pleading. See
Minn. R. Civ. P. 13.01 (requiring counterclaims arising out of the same subject matter
as an opposing party’s claim to be stated in the responsive pleading to that claim);
Minn. R. Civ. P. 12.02 (stating that, if a party opts to respond to a suit with a motion
to dismiss under the rule, the motion “shall be made” before a responsive pleading).
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district court under diversity jurisdiction and counterclaimed for its remaining unpaid
defense costs incurred before the Second Amended Complaint. On St. Paul’s motion
to dismiss the counterclaim, converted by the district court to a motion for summary
judgment, the district court found that Compaq’s counterclaim for coverage prior to
the Second Amended Complaint was barred by the res judicata effect of the state-
court action. In a subsequent order, the district court granted summary judgment to
St. Paul on its action to recover from Compaq the payments it had already made.
Compaq appeals both orders.
II. DISCUSSION
“We review a grant of summary judgment de novo and apply the same
standards as the district court.” Bockelman v. MCI Worldcom, Inc., 403 F.3d 528,
531 (8th Cir. 2005). “Summary judgment is warranted if the evidence, viewed in the
light most favorable to the nonmoving party, shows that no genuine issue of material
fact exists and that the moving party is entitled to judgment as a matter of law.” Id.
A. Res Judicata
We agree with the district court that res judicata bars Compaq’s counterclaim
for coverage under the policy prior to the Second Amended Complaint. The
application of res judicata, or claim preclusion, is reviewed de novo. Daley v.
Marriott Int’l, Inc., 415 F.3d 889, 895 (8th Cir. 2005).4 The “res judicata effect of the
first forum’s judgment is governed by first forum’s law,” in this case Minnesota law.
Austin v. Super Valu Stores, Inc., 31 F.3d 615, 618 (8th Cir. 1994) (quoting Semler
4
St. Paul contends that the district court made a “finding of fact” that the state-
court order rules on St. Paul’s duty to defend the original complaint and that such a
“finding of fact” should be reviewed for clear error. This contention has no merit.
Interpretation of the effect of a previous court order is a matter of law. See Daley,
415 F.3d 895-96.
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v. Psychiatric Inst. of Washington, D.C., Inc., 575 F.2d 922, 930 (D.C. Cir. 1978));
see also 28 U.S.C. § 1738. Under Minnesota law, the elements of res judicata are:
“(1) the earlier claim involved the same set of factual circumstances; (2) the earlier
claim involved the same parties or their privies; (3) there was a final judgment on the
merits; [and] (4) the estopped party had a full and fair opportunity to litigate the
matter.” Hauschildt v. Beckingham, 686 N.W.2d 829, 840 (Minn. 2004). “[B]ecause
res judicata is a flexible doctrine, the focus is on whether its application would work
an injustice on the party against whom estoppel is urged.” R.W. v. T.F., 528 N.W.2d
869, 872 n.3 (Minn. 1995).
Generally, a ruling on an insurer’s duty to defend under one version of a
complaint does not bar a later suit over the duty to defend under a different version
of the complaint if the different version “change[s] the nature of the cause of action
alleged or assert[s] a new or different cause of action. . . .” Bernard v. Gulf Ins. Co.,
542 S.W.2d 429, 431 (Tex. Civ. App. 1976); see also N. Trust Co. v. Aetna Life &
Sur. Co., 549 N.E.2d 712, 715-16 (Ill. App. Ct. 1989). Compaq contends that this
rule should apply in the instant case, arguing that the state-court action only
addressed St. Paul’s duty to defend after the Second Amended Complaint. In support,
Compaq notes that St. Paul continued to review and pay 50 percent of Compaq’s
approved pre-Second Amended Complaint costs during the pendency of the state-
court action, giving Compaq no reason to sue for those costs at the time of the state-
court action. “[C]laims cannot be considered the same cause of action [for res
judicata purposes] if the right to assert the second claim did not arise at the same time
as the right to assert the first claim.” Hauschildt, 686 N.W.2d at 841 (internal
quotation omitted).
In a usual case, Compaq’s contentions might carry the day. However, this is
an unusual case because Compaq itself asked the state court to resolve the issue of St.
Paul’s duty to defend the original complaint. Compaq, apparently trying to leverage
the fact that St. Paul was still reviewing and paying defense costs incurred before the
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Second Amended Complaint, argued in the state-court action that the Second through
Fifth Amended Thurmond complaints stated claims for negligence because (1) those
complaints carried forward language from the original Thurmond complaint which
stated a covered claim for negligence, and (2) the addition of new allegations of
intentional misconduct in the later amended complaints did not dilute the negligence
claim carried forward from the original complaint. In response, St. Paul was careful
to state that it did not concede a duty under the policy to defend the original
complaint and that it had reserved the right to recover the payments made. In other
words, the state court was required to resolve the parties’ dispute over whether the
original complaint stated a covered claim for negligence in order to resolve Compaq’s
proffered argument. In addition, Compaq sought as relief in the state-court action
“any and all costs incurred in defending” the Thurmond suit, rather than limiting its
claim for damages to costs incurred after the filing of the Second Amended
Complaint.
The state trial court addressed Compaq’s argument as follows:
[A] careful reading of the various complaints in the underlying
actions discloses that the plaintiffs are pursuing claims for intentional
conduct only. . . .
. . . In paragraph 22 of each of the six complaints in [the
Thurmond] action the plaintiffs allege Compaq “was aware, or,
alternatively, should have been aware” of the problem with the [floppy
disk controllers] in its products. The “should have been aware”
language sounds in negligence or unintentional conduct. But this
language cannot be read in a vacuum. A reading of the complaints as a
whole makes it clear that phrase is purely gratuitous and that the
plaintiffs were seeking recovery only for intentional conduct. . . .
It is this Court’s opinion that, taking the complaints as a whole,
a reasonable person could not conclude that the plaintiffs intended
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anything other than a cause of action for “intentionally wrongful act(s)
or omission(s).”
The ruling that “each of the six complaints” (the original and five amended
complaints) in the Thurmond action stated claims only for intentional misconduct
involved the same set of factual circumstances and the same parties as the instant
action and constituted a final judgment on the merits that St. Paul had no duty to
defend any version of the complaint. Furthermore, Compaq gave itself a full and fair
opportunity to litigate coverage under the original Thurmond complaint when it
asserted such coverage in the state-court action as an element of its claim for
coverage under later versions. Because all of the elements of res judicata are
established, the state-court action must be given preclusive effect with regard to St.
Paul’s duty to defend the original complaint.
We address briefly two additional arguments raised by Compaq. First, Compaq
argues that the state court’s concluding statement that “the parties have not raised nor
argued the question of whether St. Paul can retroactively withdraw its defense, and
the Court renders no opinion regarding the same” reserved the question of a duty to
defend the original Thurmond complaint. Instead, we read this language to reserve
only the question of St. Paul’s right to recover money it already had paid to Compaq,
the question St. Paul raises in the instant suit. This is the only reading that is
consistent both with the plain language of that statement and the entirety of the state
court’s order.
Second, Compaq argues that because St. Paul continued to pay pre-Second
Amended Complaint costs during the state-court action, it should be estopped from
denying a duty to defend the original complaint under the doctrine of judicial
estoppel. Minnesota courts have yet to adopt this doctrine. See Ill. Farmers Ins. Co.
v. Glass Serv. Co., 683 N.W.2d 792, 800-01 (Minn. 2004). In addition, to be
estopped from disclaiming a duty to defend the original complaint, St. Paul would
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have had to prevail in the state-court action by arguing to the court that it had a duty
to defend the original complaint. See, e.g., Bethesda Lutheran Homes & Servs., Inc.
v. Born, 238 F.3d 853, 857-58 (7th Cir. 2001) (stating that under the doctrine of
judicial estoppel, “a party that has won a suit on one ground may not turn around and
in another case obtain another judgment on an inconsistent ground”). St. Paul’s
decision to continue paying pre-Second Amended Complaint costs during the state-
court action does not constitute an argument to the court; instead, St. Paul carefully
and consistently refused to concede any legal duty to defend the original complaint.
In any case, an argument by St. Paul that it had a duty to defend the original
complaint would have tended to defeat St. Paul in the state-court action, rather than
to help it prevail.
We conclude that the district court did not err in granting summary judgment
to St. Paul on Compaq’s counterclaim for pre-Second Amended Complaint defense
costs on the basis of the res judicata effect of the state-court action.
B. Reservation of the Right to Recover Payments Made
We next address St. Paul’s right to recover the payments it made for defense
costs incurred prior to the Second Amended Complaint, the subject of the district
court’s second summary judgment order. We find that the January 2000 letter offered
a supplemental agreement regarding control of the defense of the Thurmond claim,
as contemplated by the Tech E&O policy, and that the offer was accepted by Compaq.
As a result, St. Paul’s reservation of rights in the January 2000 letter is effective to
permit recovery of the payments made under that agreement.
The parties agree that Texas law governs St. Paul’s claim for reimbursement.
“[T]he interpretation of insurance contracts is governed by the same rules of
construction applicable to other contracts.” State Farm Life Ins. Co. v. Beaston, 907
S.W.2d 430, 433 (Tex. 1995). The district court granted summary judgment to St.
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Paul under a quantum meruit theory, relying on a series of Texas decisions which
analyze insurers’ unilateral attempts to reserve a right of recovery of defense and
settlement costs where the policy did not provide for the right. See Matagorda
County v. Texas Ass’n of Counties County Gov’t Risk Mgmt. Pool, 975 S.W.2d 782,
784-85 (Tex. App. 1998) (“Matagorda I”) (holding that a unilateral reservation-of-
rights letter did not establish a right to recover defense costs under the theory of
quantum meruit because the letter did not state that the insurer would seek
reimbursement of defense costs if it later won a finding of no coverage); Texas Ass’n
of Counties County Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 131
(Tex. 2000) (“Matagorda II”) (holding that the same letter established no right to
reimbursement from the insured of a settlement payment because the insurance policy
allowed the insurer to settle any claim at its own discretion without the insured’s
consent but established no right to reimbursement for such settlement payments; in
this context, the court stated that “a unilateral reservation-of-rights letter cannot
create rights not contained in the insurance policy”).
Compaq argues, as it did below, that the statement in Matagorda II that “a
unilateral reservation-of-rights letter cannot create rights not contained in the
insurance policy” compels a decision in Compaq’s favor. The district court’s
application of quantum meruit was based in part on a more recent Texas Supreme
Court case which expressly disavowed the broad statement in Matagorda II and held
that, in some circumstances, a reservation-of-rights letter would entitle the insurer to
reimbursement of the settlement amount from the insured; however, that case has
since been vacated for rehearing. See Excess Underwriters at Lloyds v. Frank’s
Casing Crew & Rental Tools, Inc., 48 Tex. Sup. Ct. J. 735 (Tex. 2005), reh’g
granted, No. 02-0730 (Tex. Jan. 6, 2006). Compaq contends that Matagorda II
currently controls the instant case, or that in the alternative we should certify the
question of the effect of a unilateral reservation-of-rights letter to the Texas Supreme
Court.
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We disagree with both contentions because, as the district court noted, St.
Paul’s conduct in this case was not unilateral. The Matagorda II line of cases does
not address the situation where the insurer agrees to relinquish another right it has
under the policy in return for the reservation of the right to recover. The January
2000 letter contained an offer by St. Paul to forego its right under the Tech E&O
policy and the MASI agreement to veto Compaq’s choice of counsel if Compaq
would agree to reduced coverage of defense costs—and to St. Paul’s reservation of
the right to reimbursement of those defense costs upon a subsequent determination
that the policy did not cover the claim. Compaq could have dismissed the three firms
it had hired and chosen a firm acceptable to St. Paul, as required by the policy and
MASI agreement, which would have entitled Compaq to coverage of 100 percent of
its reasonable defense costs. In that case, any attempt by St. Paul to assert a
reservation of rights would have “lack[ed] the element of mutual promises” necessary
to create a bilateral agreement. Time Out Grocery v. Vanguard Group, Inc., 187
S.W.3d 41, 44 (Tex. App. 2005) (citing Hutchings v. Slemons, 174 S.W.2d 487, 489
(1943)). Instead, by continuing to employ its chosen counsel while accepting St.
Paul’s partial defense, Compaq accepted St. Paul’s offer and created a supplemental
agreement. See United Concrete Pipe Corp. v. Spin-Line Co., 430 S.W.2d 360, 364
(Tex. 1968) (noting that performance under the conditions specified in an offer
operates as an acceptance of the offer). The proviso in the Tech E&O policy that
“[Compaq] may take over control of the defense of any outstanding claim
. . . if [St. Paul and Compaq] both agree” contemplated such a supplemental
agreement in cases where the insured wished to have greater control of its own
defense than the policy granted.
A party who accepts the benefit of a contract must also assume its burdens.
Trinity Universal Ins. Co. v. Bill Cox Constr., Inc., 75 S.W.3d 6, 10-11 (Tex. App.
2001) (citing Daniel v. Goesl, 341 S.W.2d 892, 895 (Tex. 1960)). In this case,
Compaq received the benefit of St. Paul’s relinquishment of its right to veto
Compaq’s choice of counsel to defend the Thurmond suit; therefore, Compaq must
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assume the burden of St. Paul’s reservation of rights. St. Paul’s reserved right to
recover became enforceable when the state court held that St. Paul had no duty to
defend the original Thurmond complaint, a holding to which we must give preclusive
effect as discussed above. Therefore, the district court did not err in granting
summary judgment to St. Paul on its action to recover defense costs paid to Compaq
as provided in the January 2000 letter.
III. CONCLUSION
We conclude that the district court did not err in granting summary judgment
to St. Paul on its claim to recover pre-Second Amended Complaint defense costs paid
by St. Paul and on Compaq’s counterclaim for unpaid pre-Second Amended
Complaint defense costs. Therefore, we affirm the judgment of the district court.
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