Turner v. Cincinnati Ins. Co.
| Decision Date | 13 August 2021 |
| Docket Number | No. 20-50548,20-50548 |
| Citation | 9 F.4th 300 |
| Parties | Blakely TURNER; Damon Brooks; Deandra Simpson; Shamiyan Walton; Michael Harris ; Anita Simpson, Plaintiffs—Appellants, Charles Levy, Intervenor—Appellant, v. CINCINNATI INSURANCE COMPANY, Defendant—Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Jay Carl English, Esq., English Law Group, P.L.L.C., Robert D. Allen, Allen Law Group, Linda Marie Dedman, Dallas, TX, for Plaintiffs-Appellants.
Darius N. Kandawalla, Esq., James Michael Young, Bailey Cavalieri, L.L.C., Columbus, OH, for Defendant-Appellee.
Before Higginbotham, Southwick, and Engelhardt, Circuit Judges.
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 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.
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 applies.
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.
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, 2010, former students sued ATI2 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 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.
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...
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