A hailstorm struck Comanche County in May 2019, damaging several buildings owned by the Gustine Independent School District. At the time of the storm, the district had coverage underwritten by the Texas Rural Education Association Risk Management Cooperative (TREA). The policy did not include an arbitration clause. TREA, however, executed a reinsurance contract with Travelers to cover part of its risk under the district’s policy. The reinsurance contract included an arbitration clause. A dispute arose between the district and the insurers, resulting in a lawsuit in which the district alleged claims against Travelers for negligence, common law fraud, conspiracy, misrepresentation, and violations of the DTPA. Travelers moved to dismiss the claims or, alternatively, to compel arbitration. The trial court denied the motions. Travelers appealed.
Wait—we just told this story in yesterday’s post. In Travelers Indemnity Company v. Gustine Independent School District (No. 11-21-00229; filed May 25, 2023), we see the same insurer and the same argument as to the application of the arbitration clause in the reinsurance contract to the non-signatory school district. And the same outcome, except for one significant distinction. Once the Comanche County district court denied its motion to dismiss or compel arbitration, Travelers hied off to its home turf in Hartford, Connecticut, where it filed a motion to compel arbitration against the Gustine, Grapeland, and Alto ISDs in federal court. But before the federal court ruled on the motion, Travelers filed an interlocutory appeal of the state court’s ruling denying the motion to compel in the Eastland court. While the interlocutory appeal was pending, the federal court in Connecticut denied the motion to compel. Consequently, unlike the Tyler Court of Appeals’ in the cases involving Grapeland and Alto, the Eastland court poured out the insurer on the issue of claims preclusion, or res judicata.
Travelers made several arguments in an attempt to derail the claims preclusion train in this case. First, it argued that the district waived res judicata by failing to raise the issue in the trial court. While that failure could result in waiver, the court observed, it did not here because the federal court’s judgment was not rendered before Traveler’s filed its interlocutory appeal in Eastland. The district thus could not possibly have waived the issue in the trial court. Trying again, Travelers asserted that since the district did not raise res judicata in its appellate briefing, it waived the issue. Unfortunately for Travelers, the district filed its brief several months before the federal court rendered its judgment. The district further filed a notice with the Eastland court bringing the court’s attention to the existence of the federal judgment. It also addressed the issue in post-submission letter briefs, as did Travelers.
Having hit the wall on its waiver arguments, Travelers contended that the court of appeals could not consider the federal judgment at all because it was not part of the trial record. However, the court pointed out, an appellate court may take judicial notice of a collateral judgment that is readily available to the court through opinion reporting services. Moving on, Travelers argued that the federal judgment cannot have preclusive effect “because it was not rendered prior to the trial court’s rendition of the order denying the motion to stay.” This argument likewise failed because the Comanche County district court retained jurisdiction over the case while the interlocutory appeal was pending. Consequently, there was “an ongoing potential for the interlocutory order in the state trial court to be affected by a final judgment in another court.”
Finally arriving at the merits of the case, the court of appeals turned to the Restatement (Second) of Judgments, which SCOTX has repeatedly referred to, for the black letter law. The question here involved the finality of the federal court judgment for purposes of its preclusive effect. As the court noted, “[o]nce the federal court determined that Gustine was not required to arbitrate by way of its final judgment in July 2022, it precluded any contrary determination in the trial court, where a final determination of the issue was pending between the same parties. Furthermore, even if the trial court had initially ordered a stay, it would serve no purpose for such stay to remain in effect after Traveler’s request to compel arbitration had been rejected by way of a final judgment in the federal court.” The court of appeals thus determined that collateral estoppel precluded Traveler’s from requesting a stay pending arbitration.
Although its decision as to res judicata disposed of the appeal, the court of appeals went on to opine that even if it didn’t, Travelers had failed to make case for direct benefits estoppel based on the same reasoning as the Tyler court. We speculated yesterday about the potential liability for Travelers in the Grapeland case as motivating repetitive appeals of the same issue. In this case, the company could be on the hook for more than $4 million plus interest penalties and attorney’s fees, so we assume those figures are comparable to the other cases. In any event, four courts have now ruled the same way. Presumably, settlements will follow.
