Trammell Crow Residential Co. v. American Protection Insurance

Case: 13-10451 Document: 00512688424 Page: 1 Date Filed: 07/07/2014
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 13-10451 FILED
July 7, 2014
Lyle W. Cayce
TRAMMELL CROW RESIDENTIAL COMPANY, Clerk
Plaintiff - Appellant
v.
AMERICAN PROTECTION INSURANCE COMPANY
Defendant - Appellee
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:10-CV-2163
Before DENNIS and PRADO, Circuit Judges, and BROWN, District Judge. *
PER CURIAM ∗∗:
Plaintiff Trammell Crow Residential Company (“Trammell Crow”)
operated a number of apartment complexes in Colorado. Between 2001 and
2004, Trammell Crow was covered by four insurance policies from three
different insurance companies—one policy issued by Defendant American
Protection Insurance Company (“APIC”), one policy issued by Virginia
Surety, and two policies issued by Old Republic. When Trammell Crow was
* District Judge of the Eastern District of Louisiana, sitting by designation.
∗∗
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should
not be published and is not precedent except under the limited circumstances set forth in
5TH CIR. R. 47.5.4.
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sued by residents due to a mold problem, it tendered its defense to Virginia
Surety. Virginia Surety later sued APIC seeking contribution, but the court
granted summary judgment to APIC finding no contribution was owed.
Following the litigation against Virginia Surety, APIC was paid funds from a
Trammell Crow expense account to reimburse its costs in defending against
Virginia Surety’s claims. Trammell Crow then brought this suit against
APIC, alleging that Trammell Crow was not required to reimburse APIC’s
defense costs and that the payment to APIC was improper. APIC
counterclaimed, urging that Trammell Crow owed it reimbursement.
The district court granted summary judgment in favor of APIC, and
Trammell Crow now appeals. Concluding that Trammell Crow is required to
reimburse APIC’s defense costs up to the amount of the deductible under the
APIC policy, but that the district court improperly determined that Trammell
Crow was collaterally estopped from arguing that the deductible had been
met, we affirm in part and reverse in part and remand.
BACKGROUND
This litigation is the third matter in a series of cases involving an
insurance policy issued to Trammell Crow by APIC. Trammell Crow operated
a number of apartment complexes in Colorado. Between 2001 and 2004,
Trammell Crow was covered by four insurance policies from three different
insurance companies—one policy issued by APIC (the “APIC Policy”), one
policy issued by Virginia Surety, and two policies issued by Old Republic. The
APIC policy, which is at issue in the pending case, had a $1,000,000 per
occurrence limit with a $250,000 deductible and a $5,000,000 general
aggregate limit.
In the first case, known as the “Colorado Litigation,” Trammell Crow
was sued by several residents regarding a mold problem. Trammell Crow
tendered its defense to Virginia Surety, and the claims ultimately settled.
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In the second matter, known as the “Insurance Litigation,” Trammell
Crow sued Virginia Surety, alleging that Virginia Surety had refused to pay
all of the defense and settlement payments incurred in the Colorado
Litigation. Virginia Surety filed a third-party complaint against APIC,
seeking contribution toward the defense and settlement costs from the
Colorado Litigation. The court granted APIC’s motion for summary
judgment, finding that APIC did not have a duty to defend or indemnify
Trammell Crow in the Colorado Litigation, and thus Virginia Surety was not
entitled to contribution.
APIC then billed an expense account owned by Trammell Crow for the
costs it incurred in the Insurance Litigation. Trammell Crow, contending that
it is not responsible for APIC’s defense costs, filed this lawsuit (the “Current
Litigation”) seeking return of the money that was paid to APIC out of the
expense account. APIC counterclaimed requesting compensation for the costs
incurred in the Insurance Litigation. The parties filed cross-motions for
summary judgment. The district court granted APIC’s motion for summary
judgment and denied Trammell Crow’s motion for summary judgment. The
district court found that APIC’s defense costs qualified as a “claim expense”
under the APIC policy, thus obligating Trammell Crow to pay these costs up
to the amount of its deductible. Further, the district court found that
Trammell Crow was barred pursuant to the doctrine of collateral estoppel
from arguing that the deductible had been met, based on a previous order in
the Insurance Litigation. Trammell Crow now appeals these determinations.
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STANDARD OF REVIEW
Summary judgment is appropriate when “there is no genuine dispute
as to any material fact and the movant is entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317,
322–23 (1986). We review a district court’s grant of summary judgment de
novo, construing all facts and evidence in the light most favorable to the non-
moving party. See EEOC v. Chevron Phillips Chem. Co., 570 F.3d 606, 615
(5th Cir. 2009).
With respect to the district court’s application of collateral estoppel,
“[g]enerally, the issue of whether to apply collateral estoppel is a question of
law, making our review de novo.” Bradberry v. Jefferson Cnty., 732 F.3d 540,
549 (5th Cir. 2013).
DISCUSSION
I.
The dispute between Trammell Crow and APIC focuses on whether
APIC’s costs and expenses in the Insurance Litigation qualify as a “claim
expense” under the APIC Policy. In relevant part, the APIC Policy defines
“claim expense,” stating:
As used in this endorsement, the words claim expense mean:
...
D. all reasonable expenses incurred by the insured and by us in
1. investigating an occurrence, offense, claim or “suit”,
2. defending a “suit”,
3. pursuing rights of recovery against others, and
4. investigating, defending and settling any coverage dispute under this
policy
but not including wages or salary of any employee of the insured, normal
operating or overhead expenses or payments made by the insured under
contract with the claim service provider stated in the schedule of this
endorsement.
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Under the terms of the APIC Policy, costs qualifying as a claim expense are
to be allocated between Trammell Crow and APIC as follows:
A. When the total amount of all damages and claim expense paid for all
claims or “suits” as a result of any one “occurrence” or offense does not
exceed the Deductible Amount, we [APIC] will not be obligated to
pay any part of the claim expense.
B. When the total amount of damages and claim expense paid for all
claims or “suits” as a result of any one “occurrence” or offense is in
excess of the Deductible Amount, we [APIC] will be obligated to pay
that part of the claim expense that exceeds the Deductible Amount.
As mentioned above, the APIC Policy had a $1,000,000 per occurrence limit
with a $250,000 deductible and a $5,000,000 general aggregate limit.
Trammell Crow argues that the term “claim expense” does not include
the attorneys’ fees and litigation costs that APIC incurred in defending
against Virginia Surety’s third-party complaint in the Insurance Litigation.
Trammell Crow points to the policy’s definition of “claim expense,” noting
that subsection D provides that reasonable expenses must be incurred by
Trammell Crow and APIC, as opposed to stating that the expenses may be
incurred by either Trammell Crow or APIC. Drawing on the distinction
between “and” and “or,” Trammell Crow reasons that there are no joint
expenses at issue; rather APIC’s defense costs were only incurred by APIC.
Accordingly, Trammell Crow maintains that these costs do not qualify as a
“claim expense.”
Alternatively, Trammell Crow argues that if APIC’s costs in the
Insurance Litigation qualify as a “claim expense,” then Trammell Crow would
be deemed to have met its deductible and therefore should not be obligated to
reimburse APIC for APIC’s defense costs to the extent that they exceed the
deductible. According to Trammell Crow, it is not collaterally estopped from
making this argument. Trammell Crow asserts that APIC did not raise the
issue of collateral estoppel before the district court; rather the district court
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addressed collateral estoppel sua sponte. Further, Trammell Crow maintains
that the requisite factors for collateral estoppel are not met here.
According to APIC, its costs in the Insurance Litigation qualify as a
claim expense because the word “and” in subsection D should be interpreted
as “either or both.” Additionally, APIC contends that Trammell Crow is
precluded from asserting that the deductible on the APIC Policy has been
met on the grounds of collateral estoppel. APIC argues that in the Insurance
Litigation, the district court found that APIC had no duty to indemnify
Trammell Crow because Trammell Crow had not met its deductible.
II.
The first issue presented in this appeal is whether APIC’s defense costs
from the Insurance Litigation qualify as a “claim expense” under the policy.
In diversity cases, this court applies the substantive law of the forum state.
See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938). Thus, in this case, we
apply Texas law to determine the meaning of “claim expense.”
In examining an insurance policy under Texas law, this court first
“look[s] to the plain language of the contract to determine whether it is
ambiguous.” Horn v. State Farm Lloyds, 703 F.3d 735, 738 (5th Cir. 2012)
(applying Texas law). Whether a contract is ambiguous is a legal question. Id.
“A contract is ambiguous ‘if its plain language is amenable to more than one
reasonable interpretation.’” Id. (quoting Nautilus Ins. Co. v. Country Oaks
Apartments, Ltd., 566 F.3d 452, 455 (5th Cir. 2009)). If a contract is not
ambiguous, then this court “appl[ies] its plain meaning and enforce[s] it as
written.” Id. However, if a contract is ambiguous, the court may “consider
extrinsic evidence for ‘the purpose of ascertaining the true intentions of the
parties expressed in the contract.’” Id. (quoting Friendswood Dev. Co. v.
McDade + Co., 926 S.W.2d 280, 283 (Tex. 1996)).
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When interpreting a policy, “courts are to ensure the policy is
interpreted in such a way as to give effect to each term in the contract so that
none will be rendered meaningless.” Nat’l Union Fire Ins. Co. of Pittsburgh,
PA v. Willis, 296 F.3d 336, 339 (5th Cir. 2002). Moreover, “all provisions of
the policy should be considered with reference to the whole contract so that
no provision is controlling.” Id.
“Under Texas law, the maxims of contract interpretation regarding
insurance policies operate squarely in favor of the insured.” Lubbock Cnty.
Hosp. Dist. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 143 F.3d 239, 242
(5th Cir. 1998). When interpreting an ambiguous provision, “the court must
adopt the insured’s construction of the provision, ‘as long as that construction
is not unreasonable, even if the construction urged by the insurer appears
more reasonable or a more accurate reflection of the parties’ intent.’” Id.
(quoting Nat’l Union Fire Ins. Co. of Pittsburgh, PA v. Hudson Energy Co.,
811 S.W.2d 552, 555 (Tex. 1991)).
Under the APIC Policy, “claim expense” includes “D. all reasonable
expenses incurred by the insured and by us in . . . 4. investigating, defending
and settling any coverage dispute under this policy.” The dispute on appeal is
the meaning of the phrase “incurred by the insured and by us.” 1
First, this court determines whether the language of the contract is
ambiguous. As this court has previously observed, “the word ‘and’ is often
construed as conjunctive.” In re Velazquez, 660 F.3d 893, 897 (5th Cir. 2011)
(applying Texas law). “However, ‘and’ can be interpreted as disjunctive when
the context requires.” Id. at 898. In Board of Insurance Commissioners of
1Before the district court, the parties contested whether the Insurance Litigation
between Virginia Surety and APIC qualifies as a “coverage dispute” as listed in subsection
D.4. The district court found that it does qualify as a “coverage dispute,” and neither party
challenges this finding on appeal.
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Texas v. Guardian Life Insurance Co. of Texas, the Texas Supreme Court
adopted language from Corpus Juris Secundum to explain when the
disjunctive interpretation of “and” is appropriate:
Ordinarily the words ‘and’ and ‘or,’ are in no sense interchangeable terms,
but, on the contrary, are used in the structure of language for purposes
entirely variant, the former being strictly of a conjunctive, the latter, of a
disjunctive, nature. Nevertheless, in order to effectuate the intention of the
parties to an instrument, a testator, or a legislature, as the case may be, the
word ‘and’ is sometimes construed to mean ‘or.’ This construction, however, is
never resorted to except for strong reasons and the words should never be so
construed unless the context favors the conversion; as where it must be done
in order to effectuate the manifest intention of the user; and where not to do
so would be to render the meaning ambiguous, or result in an absurdity; or
would be tantamount to a refusal to correct a mistake.
180 S.W.2d 906, 908 (Tex. 1944) (quoting 3 Corpus Juris Secundum § 1068
(now 17A Corpus Juris Secundum Contracts § 411)) (internal quotation
marks omitted); see also Robinson v. Reliable Life Ins. Co., 569 S.W.2d 28, 30
(Tex. 1978) (recognizing that Board of Insurance Commissioners looked to
Corpus Juris Secundum “in stating the rule for interpreting ‘and’ to mean
‘or’”).
In certain situations, courts applying Texas law have interpreted “and”
to be disjunctive. For example, in Velazquez, this court examined a deed of
trust between a mortgagor and a mortgagee securing a note executed for the
purchase of the mortgagor’s home. Section 9 of the deed provided that if
. . . there is a legal proceeding that might significantly affect Lender’s
interest in the Property and/or right under this Security Instrument . . . then
the Lender may do and pay for whatever is reasonable or appropriate to
protect Lender’s interest in the Property and rights under the Security
Instrument, including protecting and/or assessing the value of the Property,
and securing and/or repairing the Property. Lender’s action can include but
are not limited to (a) paying any sums secured by a lien which has priority
over this Security Instrument; (b) appearing in court; and (c) paying
reasonable attorneys’ fees to protect its interest in the Property and/or rights
under this Security Instrument, including its secured position in a
bankruptcy proceeding. . . . Any amounts disbursed by the Lender under this
Section 9 shall become additional debt of the Borrower secured by this
Security Instrument.
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Velazquez, 660 F.3d at 895–96 (emphasis added). The mortgagor filed for
bankruptcy under Chapter 13, and the mortgagee filed a proof of claim in the
bankruptcy action. Id. at 895. The proof of claim included $200 in “Post-
Petition Bnk. Atty. Fees.” Id. The mortgagee argued that the fees were
recoverable pursuant to Section 9. Id. However, the bankruptcy court
interpreted the deed of trust as allowing only the recovery of fees that were
incurred to protect both the mortgagee’s interest in the property and its
rights under the Security Instrument. Id. at 896. The bankruptcy court
further found that the mortgagee’s “interest in the property—i.e., the
Velazquezes’ homestead—cannot be affected by the Velazquezes’ Chapter 13
proceedings because 11 U.S.C. § 1322(b)(2) expressly provides that a Chapter
13 plan may not modify a home lender’s contract rights.” Id. (internal
quotation marks and alterations omitted).
This court reversed. First, it cited Lanier v. Spring Cypress
Investments, a Texas state appellate court case. Id. at 898 (citing Lanier v.
Spring Cypress Inv., No. 01-93-00414, 1995 WL 489427 (Tex. App.—Houston
Aug. 17, 1995, no pet.) (mem. op., not designated for publication)). In Lanier,
a note provided that “[m]aker shall be fully liable to Payee or other holder of
this note . . . for: (a) ad valorem and other taxes, assessments and impositions
paid by Payee to protect its interest and the lien of the Deed of Trust securing
this note.” Id. (emphasis in original) (internal quotation marks omitted)
(citing Lanier, 1995 WL 489427, at *2). The Texas appellate court
“interpreted the language of the note as imposing liability ‘for any taxes paid
by Lanier to protect either or both his interest and the lien.’” Id. (quoting
Lanier, 1995 WL 489427, at *3). Second, this court explained that
“consideration of Section 9 as a whole requires construing ‘and’ to mean
‘either or both’ to effectuate the clear intent of the parties.” Id. This court
noted that under Section 9, the mortgagee’s actions could include “paying
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reasonable attorneys’ fees to protect its interest in the Property and/or rights
under this Security Instrument, including its secured position in a
bankruptcy proceeding.” Id. at 899 (internal quotation marks omitted). It
then reasoned that “[i]n light of this language, it is clear that the Deed of
Trust contemplates entitlement to attorney’s fees incurred to protect [the
lender’s] interest in the property or rights under the Deed of Trust.” Id. Thus,
to interpret “and” in the conjunctive sense “would impermissibly render
portions of the agreement meaningless and frustrate the intentions of the
parties as made clear by Section 9 as a whole.” Id.
In Aerospatiale Helicopter Corp. v. Universal Health Services, Inc., a
Texas appellate court examined the meaning of “and” in the context of an
indemnity provision in a lease agreement for a helicopter. 778 S.W.2d 492,
495 (Tex. App.—Dallas 1989, pet. denied). The lessor was a helicopter
manufacturer; the lessee was a healthcare provider that used the helicopter
as an air ambulance. Id. at 495. An indemnity clause in the lease provided
that the lessee would indemnify the lessor
. . . against any and all losses, damages, injuries, claims, demands and
expenses including legal expenses of whatsoever kind and nature arising on
account of (i) the use or operation of the helicopter or any part thereof, by
whomsoever used or operated other than the LESSOR, its agents, servants,
or employees and (ii) the installation or removal of any unit of equipment
pursuant to any provisions of this lease.
Id. at 500–01 (emphasis added). Universal Health argued that in order to
establish that the underlying claims fell within the scope of the indemnity
clause, Aerospatiale was required to prove that the claims satisfied both
subsections. Id. at 501.
The Texas appellate court rejected this argument. The court noted that
it was “mindful of the fact that indemnity agreements are to be strictly
construed in favor of the indemnitor,” and it further acknowledged that “in
common usage ‘and’ is conjunctive and ‘or’ is disjunctive.” Id. at 502.
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However, the court explained that “[o]ne of the recognized uses of ‘and’ is to
refer to ‘either or both’ of two alternatives, when ‘or’ might be interpreted as
referring to only one or the other.” Id. Looking at the contract language, the
Court concluded that “[a] common sense reading of the indemnity agreement
is that Universal agreed to indemnify Aerospatiale for liability arising from
two separate circumstances which the lease placed under Universal’s
exclusive control: use and operation of the helicopter, and alteration of the
helicopter.” Id.
In support of its position that the APIC Policy is not ambiguous,
Trammell Crow cites American National Insurance Company v. Wilson State
Bank, a Texas state appellate court decision. 480 S.W.2d 296 (Tex. Civ.
App.—Amarillo 1972, no pet.). In Wilson State Bank, American National
Insurance Company would offer a policy of hospital and medical insurance to
the depositors of a bank in a county of a state. Id. at 297. American National
would issue a numbered franchise to the bank, and each franchise would be
limited to the county in which the bank was located without regard to the
addresses of the depositors. Id. American National would then contact the
depositors, and if the depositors subscribed to the insurance, American
National would draw a draft for the premium on the depositors’ accounts in
the bank. Id. American National granted a franchise to Wilson State Bank in
Lynn County, Texas. Id. Each policy issued under the franchise contained a
provision stating that “American National shall not have the right to refuse
to renew any Benefit of this policy during the Renewal Period of such Benefit
unless, at the same time, it declares its intention to non-renew all policies of
the same class which were issued on this form in the same state and county.”
Id. at 298 (emphasis added). Three years after the Wilson State Bank
franchise was granted, American National decided not to renew the policies
in Lynn County. Id. Wilson State Bank and a number of policyholders sued,
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seeking an injunction to prohibit the non-renewal of the Lynn County policies
unless American National refused to renew all policies of the same class in
Texas. Id. American National argued that under the policy, it had the right to
decline to renew all policies in Lynn County without the obligation not to
renew all policies of the same class in Texas. Id.
The Texas Court of Civil Appeals rejected American National’s
argument, holding that the insurance company “deliberately restricted its
right to non-renew the Lynn County policies only if it declared its intention to
non-renew all policies of the same class in the State of Texas.” Id. at 299. The
court explained that “[o]rdinarily, nice distinctions in language are not
favored, and the desired meaning of the language is that which would be
attached by the ordinary person of average understanding in purchasing the
insurance.” Id. at 300. Therefore, “[h]ad appellant meant to convey its right of
non-renewal on a selected area basis only, it would have been simple to
eliminate the phrase ‘state and,’ or to substitute for the phrase ‘in the same
state and county’ such language as ‘in the same state or county,’ or ‘in the
same county of this state,’ or some other expression free from doubt.” Id.
As mentioned above, “[a] contract is ambiguous ‘if its plain language is
amenable to more than one reasonable interpretation.’” Horn, 703 F.3d at 738
(quoting Nautilus Ins. Co., 566 F.3d at 455). Under Texas law, “and” can be
used disjunctively, as Velazquez, Lanier, and Aerospatiale Helicopter
demonstrate. To be sure, “and” may also be used conjunctively, as was the
case in Wilson State Bank. However, considering that Texas law accepts both
the conjunctive and the disjunctive use of “and,” the plain language of the
definition of claim expense is amenable to more than one reasonable
interpretation—that is, “and” can be interpreted conjunctively or
disjunctively. Thus, under the definition of “ambiguous” set forth in Horn, the
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provision “all reasonable expenses incurred by the insured and by us” is
ambiguous.
If a provision is ambiguous, under Texas law, “the court must adopt the
insured’s construction of the provision, ‘as long as that construction is not
unreasonable, even if the construction urged by the insurer appears more
reasonable or a more accurate reflection of the parties’ intent.’” Lubbock
Cnty. Hosp. Dist., 143 F.3d at 242 (quoting Nat’l Fire Ins. Co., 881 S.W.2d at
555). Thus, the question becomes whether Trammell Crow’s, the insured,
construction—using “and” in the conjunctive sense—is unreasonable.
In the context of the APIC policy, Trammell Crow’s construction is
unreasonable. As previously mentioned, “courts are to ensure that the policy
is interpreted in such a way as to give effect to each term in the contract so
that none will be rendered meaningless,” and “all provisions of the policy
should be considered with reference to the whole contract so that no provision
is controlling.” Nat’l Union Fire Ins. Co., 296 F.3d at 339. Looking at the
APIC policy as whole, it appears that the policy contemplates that either one
party or the other will incur the costs of investigating an occurrence, offense,
claim or suit; defending a suit; pursuing rights of recovery against others;
and investigating, defending and settling any coverage dispute under the
policy.
Just above the provision defining “claim expense,” there is a provision
regarding APIC’s obligations in the defense of suits and in the investigation
and settlement of claims:
A. We shall have the right, but not the duty or obligation to:
1. defend or participate in the defense of any “suit” against the
insured and
2. investigate and settle any “occurrence”, offense, claim or suit.
B. If we choose not to investigate any “occurrence”, offense or claim, or
not to defend any “suit” against the insured, you will see to it that all
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necessary investigation and defense is made, and will, to the best of
your ability effect settlement we agree to. You agree to discharge this
obligation solely by means of your contract with the claim service
provider stated in the schedule of this endorsement for claim
adjustment services. If such services do not run to the ultimate
disposition of all claims or ‘suits’ to which this insurance applies, we
shall have the right to approve a replacement or to assign to
NATLSCO, Inc. to provide claim adjustment services at your expense.
This provision contemplates that if APIC exercises its right to defend, then it
will be responsible for defending and investigating an offense, claim, or suit.
However, if APIC chooses not to participate, then Trammell Crow will be
responsible for defending and investigating an offense, claim, or suit. In this
manner, the costs of defending and investigation will be incurred either by
APIC or by Trammell Crow. If the “claim expense” provision were read not to
cover costs only incurred by APIC or costs only incurred by Trammell Crow,
then costs incurred investigating a suit as well as costs incurred defending
suit would never qualify as a “claim expense.” This reading would render
subsections D1 and D2 of the definition of “claim expense” effectively
meaningless, 2 which would be an unreasonable result.
Further supporting that “and” should be read disjunctively, there is a
provision of the policy entitled “Reimbursement” which states:
In the event we pay all or any part of the Deductible Amount in order to
effect settlement of any claim or suit, the first named insured shall promptly,
upon notification of the action taken, reimburse us for any such part of the
Deductible Amount that has been paid by us including any claim expense.
This section of the policy specifically describes a situation in which a claim
expense is paid by APIC, requiring reimbursement from Trammell Crow. In
light of the principle that “all provisions of the policy should be considered
with reference to the whole contract so that no provision is controlling,” the
inclusion of this reimbursement requirement further indicates that “claim
2 The definition of “claim expense” includes “D. all reasonable expenses incurred by
the insured and by us in 1. investigating an occurrence, offense, claim, or ‘suit’, 2. defending
a ‘suit’ . . . .”
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expense” includes costs incurred by either or both Trammell Crow or APIC.
Nat’l Union Fire Ins. Co., 296 F.3d at 339.
Accordingly, “and” should be construed in the disjunctive, and costs
incurred by either or both Trammell Crow or APIC qualify as a “claim
expense.” Therefore, APIC can recover the defense costs it incurred in the
Insurance Litigation up to the deductible amount. We affirm the district
court on this issue.
III.
The second issue presented is whether Trammell Crow is barred from
asserting that the deductible has been met pursuant to the doctrine of
collateral estoppel. Federal law governs the application of collateral estoppel
in a diversity suit involving a prior federal judgment. Rabo Agrifinance, Inc.
v. Terra XXI, Ltd., 583 F.3d 348, 353 (5th Cir. 2009); see also Hardy v. Johns-
Manville Sales Corp., 681 F.2d 334, 337 (5th Cir. 1982). To establish
collateral estoppel under federal law, a party must make three showings:
(1) that the issue at stake be identical to the one involved in the prior
litigation;
(2) that the issue has been actually litigated in the prior litigation; and
(3) that the determination of the issue in the prior litigation has been a
critical and necessary part of the judgment in that earlier action.
Rabo Agrifinance, 583 F.3d at 353. Further, “[t]he parties to the suits need
not be completely identical, so long as the party against whom estoppel
applies had the full and fair opportunity to litigate the issue in the previous
lawsuit.” Id. Although usually an affirmative defense, collateral estoppel may
be raised sua sponte by the district court, particularly if both actions were
brought in courts of the same district, as is the case here. 3 United Home
3 The Insurance Litigation and the Current Litigation were both in the Northern
District of Texas.
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Rentals, Inc. v. Tex. Real Estate Comm’n, 716 F.2d 324, 330 (5th Cir. 1983)
(recognizing that “in the interest of judicial economy, res judicata may
properly be raised by a district court sua sponte, particularly where both
actions are brought in the courts of the same district”); see also Meador v.
McFaddin, 172 F.3d 869, 1999 WL 129938, at *1 (5th Cir. 1999)
(unpublished) (“Although usually an affirmative defense, collateral estoppel
may be raised sua sponte by the district court if both actions were brought in
courts of the same district.”). As mentioned above, this court reviews the
district court’s application of collateral estoppel de novo. Bradberry, 732 F.3d
at 549.
Although neither party raised the issue of collateral estoppel in their
memoranda to the district court regarding the cross-motions for summary
judgment, the district court found that the doctrine barred Trammell Crow
from arguing that it had met its deductible under the APIC policy. On appeal,
Trammell Crow argues that the district court’s determination in the
Insurance Litigation that the APIC deductible had not been met did not
include or consider APIC’s defense costs as a “claim expense.” Thus,
according to Trammell Crow, the deductible issue in the Insurance Litigation
did not involve the same facts and issues as the deductible issue in the
Current Litigation. APIC counters that collateral estoppel does apply because
the district court ruled in the Insurance Litigation that the APIC deductible
had not been met and Trammell Crow failed to appeal that determination.
For collateral estoppel to apply, the issue at stake in the Current
Litigation must be identical to the issue at stake in the Insurance Litigation.
See Rabo Agrifinance, 583 F.3d at 353. In the Insurance Litigation, the
district court examined whether Trammell Crow had met its deductible based
on the damages and claims expense then existing in November 2009, which
did not include APIC’s defense costs in the Insurance Litigation. The issue at
16
Case: 13-10451 Document: 00512688424 Page: 17 Date Filed: 07/07/2014
No. 13-10451
stake in the Current Litigation is different. Now the question is whether
Trammell Crow has currently met the deductible, considering the newly
added claim expense of APIC’s defense costs in the Insurance Action.
Therefore, the doctrine of collateral estoppel does not bar Trammell Crow
from arguing that it has met its deductible under the APIC Policy, which
would obligate APIC to pay any claim expense in excess of the deductible. 4
Accordingly, the district court erred in not considering whether Trammell
Crow had met its deductible after accounting for APIC’s defense costs, and we
reverse on this issue.
CONCLUSION
For the foregoing reasons, the district court’s judgment is AFFIRMED
IN PART and REVERSED IN PART and the cause is REMANDED for
further proceedings consistent with this opinion.
4 Looking at the district court’s ruling on the parties’ cross-motions for summary
judgment, it is apparent that the district court did not include APIC’s defense costs in its
consideration of the collateral estoppel issue. The district court framed the issue as
“whether Trammell Crow’s costs in the Colorado Action exceeded its deductible under the
APIC Policy.” Additionally, the district court made its determination, stating: “The Court
has reviewed the prior order [from the Insurance Litigation] presented by the parties as
summary judgment evidence and concludes that it addressed the issue of whether
Trammell Crow met the APIC deductible with the payments made by Trammell Crow itself
as well as the payments made by Virginia Surety on Trammell Crow’s behalf, which eroded
the deductible.” Nowhere in its analysis does the district court address the extent to which
APIC’s defense costs further impacted the deductible.
17