Atain Specialty Ins. Co. v. Galvestonian Condo. Ass'n

ATAIN SPECIALTY INSURANCE COMPANY, PLAINTIFF, v. GALVESTONIAN CONDOMINIUM ASSOCIATION, INC.,NICK C. CARDIAS, DAVID L. HARSHBARGER,ROBERTO H. VAN DE WYNGARD, YUSHA ABOUHALKAN,REBECCA J. FAULCONER, GAIL ANN PRATHER,GREG CLARK, AND J. RAY RILEY, DEFENDANTS.

No. 3:16-cv-00329

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS GALVESTON DIVISION

April 6, 2020

MEMORANDUM OPINION AND ORDER

JEFFREY VINCENT BROWN, UNITED STATES DISTRICT JUDGE.

This is a declaratory-judgment action in which Atain Specialty Insurance Company seeks a declaration that no coverage exists, it has no duty to provide a defense, and it has no duty to provide indemnity to, or pay for any judgment rendered against, its insureds for claims made against them in Cause No. 2016-04629, J. Ray Riley v. Nick C. Cardias, et al., in the 281st Judicial District Court of Harris County, Texas.

Before the court are Atain's motions for summary judgment and for leave to file a supplemental brief in support of its motion for summary judgment. Dkts. 68 and 78. For the reasons explained below, Atain's motion for summary judgment is denied and its motion for leave is denied as moot.

I. Background and Procedural History

This case involves a messy insurance-coverage dispute, at the center of which is J. Ray Riley, a licensed attorney and condominium owner at The Galvestonian. Beginning in January 2016, Riley embarked on a course of blitzkrieg-style litigation in Texas state court. Filing voluminous pleadings, he asserted dozens of causes of action and sought millions of dollars in damages—as well as other, non-monetary relief—against the Galvestonian Condominium Association, Inc. (a non-profit property owners' association for The Galvestonian's residents), the association's board members,¹ and the association's former general manager, Greg Clark (individual defendants are collectively referred to as "directors and officers").²

The litigation was precipitated by an association-run condo-rental program used by a minority of The Galvestonian's property owners. The association managed the rental arrangements for those owners who participated in the program, with the association receiving a portion of the rent collected. Other owners, including Riley, who were not members of the rental program, rented their units outside of the program, either personally or through a leasing agent orwebsite. Outside renters did not share any percentage of their rental fee with the association.

Due to the rental program's popularity, as well as a concern that renting too many units was harming or could harm other condominium owners' use and enjoyment of the property, the association's board voted to limit the participation in the rental program to 40% of units owned. Owners who were not part of the program but wanted to join were placed on a waiting list until another owner left the program or sold his or her unit. In addition, though the association did not explicitly prohibit the renting of units outside the program, owners who did so were subject to a fine—$100 for the first offense and $200 for each subsequent offense. Atain App'x at 006.

When stripped of his pleadings' hyperbolic rhetoric, Riley's lawsuit essentially alleges a conspiracy, spearheaded by the association and its directors and officers. The conspiracy's objective, Riley contends, is to restrict competition and monopolize the rental of The Galvestonian's condominium units by fixing prices and excluding most owners from participating. See Atain App'x at 001-030.

After Riley sued them, the association and its directors and officers sought a defense from Atain, which carried the association's D&O insurance policy. See Dkt. 1. Atain agreed to provide a defense, subject to a reservation of rights. See id.

In Riley's seventh amended petition—the live petition at the time the case proceeded to trial—he alleges causes of action for negligence, gross negligence, multiple violations of the Texas Free Enterprise and Antitrust Act and TexasUniform Condominium Act, various breaches of the association's Declaration of Condominium and its incorporated bylaws (collectively "the declaration"), civil conspiracy, and breach of fiduciary duty. Riley also seeks to recover his costs and attorneys' fees; requests that the trial court appoint a receiver "to protect the Association and its members" from the alleged "illegal, oppressive, or fraudulent conduct"; and enjoin the defendants from implementing or enforcing certain of The Galvestonian's rules. See Atain App'x at 001-030.

A. Result of the Lawsuit in State Court

Before trial, the parties filed cross-motions for partial summary judgment related to Riley's claims for the alleged breaches of the declaration's restrictive covenants. The trial court granted summary judgment in Riley's favor as to two of his nine claims for alleged breaches.³ Specifically, the court found: (1) the association's 40% cap on the number of units that may participate in its rental program violated the declaration; and (2) the association could not impose fees on owners who rent outside the rental program because the declaration does not provide the association with the authority to impose fees other than a pro rata common expense charge. See Atain App'x at 092.

The case proceeded to trial on September 10, 2018. During the trial, Riley nonsuited his claims against the directors and officers for breaches of thedeclaration's restrictive covenants. Atain App'x at 093. At the close of Riley's evidence, the trial court granted the defendants' motion for directed verdict on "some"⁴ of Riley's causes of action but determined the remainder must be submitted to the jury. See id.

On September 19, the jury returned a verdict for the association and its directors and officers on all remaining counts, save for finding that the association's practice of charging an independent rental owner more than owners who participated in the rental program for rush housekeeping services was arbitrary, capricious, or discriminatory. See Atain App'x at 077-086.

Both sides filed motions to disregard certain jury findings that the trial court implicitly overruled when it entered a final take-nothing judgment against Riley. Atain App'x at 092-095; see Atain App'x at 041-068. On December 25, Riley moved to modify the final judgment, requesting the court (1) award Riley mandatory attorneys' fees; (2) tax costs against the association because Riley obtained a judgment on a civil claim; and (3) award damages resulting from the association charging excessive service fees for rush housekeeping services. Atain App'x at 096-114. On December 27, the trial court denied all of Riley's proposed modifications. Atain App'x at 115.

Riley has appealed the trial court's final judgment.⁵ The court takes judicial notice that the appeal is still pending. Fed. R. Evid. 201(c)(1); see Taylor v. Charter Med. Corp., 162 F.3d 827, 829-31 (5th Cir. 1998) (noting that courts take judicial notice of the filings in another court "to establish the fact of such litigation and related filings").

B. Proceedings in This Court

On November 21, 2016, Atain filed its underlying complaint seeking a declaration that: (1) the claims made in the state lawsuit are not covered by the policy; (2) Atain has no duty to defend the association or its directors and officers for the claims asserted against them in the state lawsuit; and (3) Atain has no duty to indemnify the association, its directors and officers, or "any person or entity that obtains a judgment against the association" in the state lawsuit. Dkt. 1 at 9-10.⁶

On February 27, 2018, the parties jointly moved for a stay pending the state-court trial, which the court granted. Dkts. 51 and 52. On the parties joint motion, the court reinstated the case in February 2019.⁷ On March 22, Atain moved for summary judgment, urging the court to "rule, as a matter of law, on the duty todefend and, if the Court feels it is appropriate, to also rule on the duty to indemnify." Dkt. 68 at 11. In reaching its decision on its duty to defend, Atain requests that the court consider extrinsic evidence. Id.

Atain gives numerous reasons why Riley's claims are not covered. But all its arguments are premised on the notion that Riley has abandoned most of his claims—specifically his claims for negligence and gross negligence—on appeal. See Dkt. 68. Nevertheless, whether some of Riley's claims are adjudicated and final is immaterial to the court's duty-to-defend analysis. And because the court concludes that Atain does have an ongoing duty to defend the association and its directors and officers in the state-court litigation, the court cannot, as a matter of law, reach the question of whether Atain has a duty to indemnify.

II. Applicable Principles of Insurance Law

Because this suit is in federal court on the basis of diversity jurisdiction, the court must apply Texas law to any substantive issues. Citigroup Inc. v. Fed. Ins. Co., 649 F.3d 367, 371 (5th Cir. 2011) (citing Erie R.R. v. Tompkins, 304 U.S. 64, 58 (1938)). The motion for summary judgment, however, is decided using the procedures established by the Federal Rules of Civil Procedure. Barrett Computer Servs., Inc. v. PDA, Inc., 884 F.2d 214, 217 n.3 (5th Cir. 1989).

A. Burden of Proof of Contract Interpretation

In general, the insured bears the initial burden of establishing that coverage is potentially provided by the applicable insurance policy, while it is the insurer's burden to prove the applicability of an exclusion permitting it to deny coverage.Tex. Ins. Code § 554.002; Venture Encoding Serv., Inc. v. Atl. Mut. Ins. Co., 107 S.W.3d 729, 733 (Tex. App.—Fort Worth 2003, pet. denied); see Trinity Universal Ins. Co. v. Emp'rs Mut. Cas. Co., 592 F.3d 687, 691-92 (5th Cir. 2010) ("Although the burden is typically 'on the insured to show that a claim against him is potentially within the scope of coverage under the policies,' when 'the insurer relies on the policy's exclusions, it...