Certain Underwriters at Lloyd's v. Warrantech Corporation

Full title: CERTAIN UNDERWRITERS AT LLOYD'S, LONDON AND OTHER REINSURERS SUBSCRIBING…

Court: United States District Court, N.D. Texas, Fort Worth Division

Date published: Aug 24, 2004

No. 4:04-CV-208-A (N.D. Tex. Aug. 24, 2004)

Opinion

NO. 4:04-CV-208-A.

August 24, 2004

MEMORANDUM OPINION and ORDER

JOHN McBRYDE, District Judge

Came on for consideration the motion of plaintiffs, Certain Underwriters at Lloyd's, London and other Reinsurers Subscribing to Reinsurance Agreements F96/2992/00 and No. F97/2992/00, for partial summary judgment. The court, having considered the motion, the response, the record, the summary judgment evidence, and applicable authorities, concludes that the motion should be granted, that the defenses of res judicata and collateral estoppel raised by defendants, Warrantech Corporation, Warrantech Consumer Products Services, Inc., Warrantech Help Desk, Inc., (collectively "Warrantech"), and Joel San Antonio ("San Antonio"), are without merit, and that the counterclaims asserted by Warrantech Corporation against plaintiffs are without merit and should be dismissed.

I. Plaintiffs' Claims

This action was filed in state court on September 19, 2002, and was removed to this court by Notice of Removal filed March 19, 2004.¹ The operative pleading of plaintiffs is their third amended complaint.

Plaintiffs allege: Warrantech is in the business of administering extended service plans and consumer warranty programs on computers and other retail goods. San Antonio is Warrantech's founder, CEO, and majority stockholder. In 1995, Warrantech contracted with CompUSA to administer its warranty program. To fulfill its obligation under the contract, Warrantech acquired insurance from Houston General Insurance Company ("Houston General") to pay the warranty claims of CompUSA customers. Houston General, in turn, acquired reinsurance from plaintiffs. The Houston General policies named Warrantech as an insured and CompUSA as an additional insured. Houston General also entered into an administrative agreement making Warrantech its agent for purposes of adjusting and paying claims made on the insurance policies Warrantech purchased from Houston General to cover warranty claims made by CompUSA customers. As administrator, Warrantech authorized payment of claims for which valid warranties did not exist or could not be found. Ultimately, plaintiffs discovered that Warrantech had authorized significant overpayment of claims, and plaintiffs refused to reimburse Houston General for those claims. In June 2000, Houston General commenced an arbitration proceeding against plaintiffs to recover approximately $46 million it had paid to Warrantech. In August 2002, the arbitration panel awarded Houston General more than $39 million.

Plaintiffs assert causes of action against defendants for fraud and negligent misrepresentation. They allege that they are subrogated to all rights Houston General may have to seek damages from defendants concerning claims wrongfully submitted and paid under the insurance policies. Plaintiffs also seek to recover for spoliation, alleging that Warrantech destroyed certain evidence during the course of the arbitration proceeding.

II. Affirmative Defenses

All defendants plead as affirmative defenses, inter alia, that plaintiffs' claims are barred by the principles of collateral estoppel and res judicata by reason of the award in favor of Houston General and against plaintiffs in the arbitration proceeding.

III. Warrantech Corporation's Counterclaim

On or about August 8, 2003, Warrantech Corporation filed a counterclaim against plaintiffs asserting causes of action for (1) fraud, (2) unfair and deceptive insurance practices in violation of Article 21.21 of the Texas Insurance Code, and (3) violation of their duties of good faith and fair dealing. The causes of action allegedly arise from plaintiffs' discovery conduct during the arbitration proceeding and the failure of plaintiffs voluntarily to make payment of warranty claims that Houston General or plaintiffs refused to pay. Also, Warrantech Corporation seeks recovery of reasonable and necessary attorneys' fees.

Plaintiffs have responded to the counterclaim with the affirmative defenses that (1) Warrantech Corporation was guilty of fraud in connection with the submission of insurance claims to Houston General, (2) because of Warrantech Corporation's spoliation of evidence, it is estopped to assert that its submission of insurance claims to Houston General was proper and not fraudulent, (3) Warrantech Corporation does not have standing to assert against plaintiffs the claims it alleges in its counterclaim, (4) Warrantech Corporation's claims are barred by the applicable statute of limitation, and (5) to whatever extent Warrantech Corporation claims plaintiffs owed a contractual duty to it, there is no consideration to support the existence of any such contractual duty.

IV. Grounds of the Motion

Plaintiffs urge that defendants cannot provide evidentiary support for, and cannot prevail, on their res judicata and collateral estoppel defenses, and that Warrantech Corporation cannot provide evidentiary support for the elements of its counterclaims.

V. Applicable Summary Judgment Principles

A party is entitled to summary judgment on all or any part of a claim as to which there is no genuine issue of material fact and as to which the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). The moving party has the initial burden of showing that there is no genuine issue of material fact.Anderson, 477 U.S. at 256. The movant may discharge this burden by pointing out the absence of evidence to support one or more essential elements of the non-moving party's claim "since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Celotex Corp. v. Catrett, 477 U.S. 317, 323-25 (1986). Once the moving party has carried its burden under Rule 56(c), the non-moving party must do more than merely show that there is some metaphysical doubt as to the material facts.Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The party opposing the motion may not rest on mere allegations or denials of pleading, but must set forth specific facts showing a genuine issue for trial. Anderson, 477 U.S. at 248, 256. To meet this burden, the nonmovant must "identify specific evidence in the record and articulate the `precise manner' in which that evidence support[s] [its] claim[s]." Forsyth v. Barr, 19 F.3d 1527, 1537 (5th Cir. 1994). An issue is material only if its resolution could affect the outcome of the action. Anderson, 477 U.S. at 248. Unsupported allegations, conclusory in nature, are insufficient to defeat a proper motion for summary judgment. Simmons v. Lyons, 746 F.2d 265, 269 (5th Cir. 1984).

The standard for granting a summary judgment is the same as the standard for a directed verdict. Celotex Corp., 477 U.S. at 323. If the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial. Matsushita, 475 U.S. at 597. See also Boeing Co. v. Shipman, 411 F.2d 365, 374-75 (5th Cir. 1969) (en banc) (explaining the standard to be applied in determining whether the court should enter judgment on motions for directed verdict or for judgment notwithstanding the verdict).

VI. Undisputed Evidence

The following is an overview of evidence pertinent to plaintiffs' motion that is undisputed in the summary judgment record:

Warrantech markets and administers extended service plan programs for retailers. In 1995, it entered into a written contract with CompUSA to procure insurance for, and to administer, CompUSA's extended service plan program. As part of administering the program, Warrantech acquired insurance from Houston General to pay the warranty claims of CompUSA customers. Houston General acquired reinsurance from plaintiffs. Houston General entered into an administrative agreement with Warrantech, making Warrantech its agent for purposes of adjusting and paying claims on the insurance policies. In 1997, plaintiffs became concerned because of the number of claims being paid. Ultimately, plaintiffs withheld payments due under the insurance policies. Houston General commenced an arbitration proceeding against plaintiffs to resolve their obligations to reimburse Houston General for losses under the CompUSA program. On August 19, 2002, the arbitration panel made its final award requiring plaintiffs to pay $39 million to Houston General. The panel did not issue any fact-findings or otherwise explain its award.

VII. Discussion

A. Res Judicata

Res judicata, also known as claim preclusion, insures the finality of judgments by precluding a second suit between the same parties on the same claim or any part thereof. Medina v. INS, 993 F.2d 499, 503 (5th Cir. 1993). For res judicata to apply, four requirements must be met. First, parties in the later action must be identical to, or in privity with, the parties in the prior action; second, the judgment in the prior action must have been rendered by a court of competent jurisdiction; third, the prior action must have concluded with a final judgment on the merits; and, fourth, the same claim or cause of action must be involved in both suits. United States v. Shanbaum, 10 F.3d 305, 310 (5th Cir. 1994). If the requirements are met, neither party may raise any claim or defense in the later action that was or could have been raised in the earlier action. Id. A non-party is in privity with a party if (1) he succeeded to the party's interest in property; (2) he controlled the prior litigation; or (3) a party to the prior proceeding actually and adequately represented the non-party's interests in the litigation. Latham v. Wells Fargo Bank N.A., 896 F.2d 979, 983 (5th Cir. 1990).

Plaintiffs contend that the doctrine of res judicata is not applicable, because their claims against defendants were not, and could not have been, brought in the arbitration. They additionally argue that defendants cannot establish the element of privity.

The record establishes that plaintiffs' claims against defendants were not and could not have been raised in the arbitration proceeding. Defendants were not parties to the proceeding. Moreover, plaintiffs' claims against defendants did not arise until plaintiffs' liability to Houston General was established. As for privity, the record reflects that Houston General argued that it and plaintiffs would have recourse against Warrantech for failing to properly perform its job. Pls.' App. at 209. It could hardly be said that Houston General was representing defendants' interests in the arbitration proceeding.² There are no facts that would support the conclusion that defendants were in privity with Houston General in the arbitration proceeding.

2 Defendants' principle-agent cases are not in point, as plaintiffs did not bring the prior proceeding and are not now seeking a second bite at the apple. See Russell v. SunAmerica Sec., Inc., 962 F.2d 1169, 1174 (5th Cir. 1992); Lubrizol Corp. v. Exxon Corp., 871 F.2d 1279, 1288-89 (5th Cir. 1989).

B. Collateral Estoppel

The doctrine of collateral estoppel, also known as issue preclusion, bars re-litigation of issues necessarily and finally adjudicated in an earlier action. Texas Employers Ins. Ass'n v. Jackson, 862 F.2d 491, 500 (5th Cir. 1988). Collateral estoppel is appropriate only if (1) the issue under consideration is identical to the issue litigated in the prior action; (2) the issue was fully and vigorously litigated in the prior action; (3) the issue was necessary to support the judgment in the prior case; and (4) no special circumstance exists that would render preclusion inappropriate or unfair. Shanbaum, 10 F.3d at 311. Whether to apply the doctrine of collateral estoppel to arbitral findings lies within the court's broad discretion. Universal Am. Barge Corp., v. J-Chem, Inc., 946 F.2d 1131, 1137 (5th Cir. 1991). In the case of arbitration, ambiguous pleadings or the absence of written findings may make preclusion impossible. Id.

In this case, there are no findings by the arbitration panel. The court is not persuaded that the issues raised here were by necessary implication decided in the arbitration proceeding.Fuchsberg Fuchsberg v. Galizia, 300 F.3d 105, 109 (2d Cir. 2002). Defendants have not shown that the "necessary implication" requirement has been clearly met. Id. See Postlewaite v. McGraw-Hill, Inc., 333 F.3d 42 (2d Cir. 2003) (to obtain summary judgment on collateral estoppel grounds based on an arbitration award, the defendants must make a showing so strong that no fair-minded jury could fail to find that the arbitrator necessarily denied the claim for the reason they assert). The record indicates that the arbitration award could have been based, for example, on the follow-the-fortunes doctrine, which would not require a conclusion that the insurance payments made by Houston General were not the result of fraudulent or negligent conduct on the part of Warrantech, or a conclusion that plaintiffs had failed to persuade the arbitration panel that the insurance payments were made by reason of fraudulent or negligent conduct on the part of Warrantech. Finally, even if the first three elements of collateral estoppel could be said to be met, the court considers as a special circumstance that defendants here were not parties to the arbitration and both plaintiffs and Houston General contemplated that Warrantech might later be sued.

C. Warrantech Corporation's Counterclaims

Warrantech Corporation has asserted counterclaims against plaintiffs for fraud, violations of Art. 21.21, and breach of duty of good faith and fair dealing. Warrantech Corporation has not shown, however, that it has standing to bring direct claims against plaintiffs. See State County Mut. Fire Ins. Co. v. Miller, 52 S.W.3d 693, 697 (Tex. 2001) (a person does not have any rights against a reinsurer that are not specifically set forth in the contract of reinsurance or in a specific agreement between the reinsurer and the person). It is undisputed that Warrantech Corporation did not have any contractual relationship with plaintiffs or a relationship of a kind that would give rise to fiduciary duties. And, in any event, Warrantech Corporation has made no attempt to show that there is evidence to support each element of its counterclaims against plaintiffs. See, e.g., Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 674 (Tex. 1998) (elements of fraud); Natividad v. Alexsis, Inc., 875 S.W.2d 695, 698 (Tex. 1994) (elements of good faith and fair dealing). Finally, plaintiffs have shown that defendant's counterclaims under the Insurance Code are barred by limitations.Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 828 (Tex. 1990). Warrantech Corporation has not made any attempt to raise a genuine fact issue in this regard.

VIII. Order

For the reasons discussed herein,

The court ORDERS and DECLARES that plaintiffs' motion for partial summary judgment be, and is hereby, granted; that defendants' defenses of res judicata (claim preclusion) and collateral estoppel (issue preclusion) are without merit; that Warrantech Corporation take nothing on its counterclaims against plaintiffs; and that such counterclaims be, and are hereby, dismissed with prejudice.

The court determines that there is no just reason for delay in, and hereby directs, entry of final judgment as to the dismissal of the counterclaims against plaintiffs.