Travelers Indem. Co. v. Gustine Indep. Sch. Dist.

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TRAVELERS INDEMNITY COMPANY, Appellant v. GUSTINE INDEPENDENT SCHOOL DISTRICT, Appellee

No. 11-21-00229-CV

Court of Appeals of Texas, Eleventh District

May 25, 2023

On Appeal from the 220th District Court Comanche County, Texas Trial Court Cause No. CV03220

Panel consists of: Bailey, C.J., Trotter, J., and Williams, J.

MEMORANDUM OPINION

JOHN M. BAILEY, CHIEF JUSTICE

This appeal arises from the denial of a motion to dismiss or stay a lawsuit pending arbitration. Gustine Independent School District ("Gustine") is a member of the Texas Rural Education Association Risk Management Cooperative ("the TREA"). Travelers Indemnity Company ("Travelers") is a reinsurer of the TREA. The reinsurance certificate between the TREA and Travelers includes a clause requiring arbitration of disputes that arise under the reinsurance certificate.

After several of Gustine's buildings were damaged by wind and hail in May 2019, Gustine filed suit against the TREA and Travelers. This interlocutory appeal was filed by Travelers after the trial court denied its request to dismiss or stay Gustine's claims in lieu of arbitration.

Travelers has also filed a motion to compel arbitration against Gustine and two other school districts in the United States District Court for the District of Connecticut ("the federal court"). After Travelers filed its appeal of this matter, the federal court denied Travelers' motion to compel arbitration. We hold that the judgment of the federal court now precludes any determination on the issue of arbitrability in this court or in the court below. We also hold that, in any event, Gustine is not required to arbitrate its claims against Travelers under the terms of the reinsurance agreement. As such, we affirm the order of the trial court.

Background Facts

The TREA is a self-funded intergovernmental risk pool. It provides property coverage to Gustine pursuant to the terms of a coverage agreement form that is similar to an insurance policy. The TREA, in turn, is insured under a Property Facultative Reinsurance Certificate issued by Travelers. Under the terms of the reinsurance certificate, Travelers is liable for any property loss that is outside of a $500,000 retention. Travelers is not a party to the coverage agreement, and Gustine is not a party to the reinsurance certificate.

The reinsurance certificate states that the TREA has an obligation to investigate any claims or suits relating to coverage provided by Travelers. However, once the claim exceeds the retained limit, Travelers assumes the duty to investigate. The certificate provides that, notwithstanding Travelers' duty to investigate, the TREA is ultimately obligated to make "all payments due" under the coverage agreement. The reinsurance certificate also contains an arbitration clause, which includes the following language:

As a condition precedent to any right of action hereunder any dispute between [the TREA] and [Travelers] arising out of, or relating to the formation, interpretation, performance or breach of this CERTIFICATE, whether such dispute arises before or after termination of this CERTIFICATE, shall be submitted to arbitration.

In May 2019, a storm caused hail and wind damage to multiple buildings owned by Gustine that are included within the coverage agreement. Gustine asserted a claim against the TREA for the loss. Travelers then adjusted the claim, arriving at a final replacement cost estimate in the amount of $1,438,564.70. Gustine, on the other hand, maintains that its replacement costs are $4,149,540.80.

Gustine filed this suit against both the TREA and Travelers. In its live pleadings, Gustine alleges that Travelers mishandled the investigation and adjustment of the claim, and that Travelers made multiple misrepresentations to Gustine. Gustine also asserts claims against the TREA for failure to pay benefits under the coverage agreement.

After suit was filed, Travelers sent a demand for arbitration to counsel for Gustine. It then filed a motion to dismiss or stay the litigation pending arbitration pursuant to the Federal Arbitration Act (hereinafter the FAA). See 9 U.S.C. § 3. The trial court denied the motion on August 6, 2021, and Travelers filed an interlocutory appeal from the order shortly thereafter.^[1]

The Collateral Litigation

This is one of three lawsuits that Travelers is seeking to arbitrate under the same TREA reinsurance certificate. The other two lawsuits involve claims by Alto Independent School District ("Alto") and Grapeland Independent School District ("Grapeland"). All three lawsuits arise out of storm-related property damage that occurred during the spring of 2019.

In Alto, the trial court denied Travelers' motion to dismiss or stay, and Travelers filed an interlocutory appeal. Travelers Indem. Co. v. Alto ISD, No 12-21-00143-CV, 2022 WL 1668859 (Tex. App.-Tyler May 25 2022, pet. denied) (mem. op.). On May 25, 2022, the Tyler Court of Appeals affirmed the trial court's order denying the motion. Id.

The trial court also denied Travelers' motion to dismiss or stay in the Grapeland litigation. Travelers Indem. Co. v. Grapeland Indep. Sch. Dist., No. 12-22-00311-CV, 2023 WL 3371072, at *1 (Tex. App.-Tyler May 10, 2023, no pet. hist.) (mem. op.). On May 10, 2023, the Tyler Court of Appeals likewise affirmed the trial court's order denying the motion in Grapeland. Id. at *3.

Travelers also filed a lawsuit against Gustine, Alto, and Grapeland in the United States District Court for the District of Connecticut ("the federal action"). The federal action sought an order compelling the school districts to arbitrate their claims against Travelers. See Travelers Indem. Co. v. Alto Indep. Sch. Dist., No. 3:21CV00909(SALM), 2022 WL 2981594 (D. Conn. July 28, 2022). Following the lead of the Tyler Court of Appeals in Alto, the federal court denied Travelers' motion to compel arbitration on July 28, 2022. Id. at *7. Travelers' appeal from the judgment of the federal district court is currently pending in the United States Court of Appeals for the Second Circuit. See Travelers Indem. Co. v. Alto Indep. Sch. Dist., No. 22-1760 (D. Conn. filed Aug. 12, 2022).

Travelers' Issue

In its sole issue in this appeal, Travelers complains that the trial court erred in denying its motion to dismiss or stay Gustine's lawsuit pending arbitration.

Res Judicata

We first address the question of whether the federal court's denial of Travelers' motion to compel arbitration now precludes consideration of a stay by the trial court. In so doing, we apply Texas law, since the loss at issue occurred in Texas and the relationship between the parties is centered in Texas. See Torrington Co. v. Stutzman, 46 S.W.3d 829, 848 (Tex. 2000) (the "most significant relationship" test under Restatement (Second) of Conflict of Laws applies to conflicts of laws in Texas).

Travelers argues that Gustine has waived the issue of res judicata by failing to raise it in the trial court. Travelers is correct that the failure to raise a defense based on res judicata must generally be pleaded at the trial court or waived. See Green v. Parrack, 974 S.W.2d 200, 202 (Tex App.-San Antonio 1998, no pet.) (res judicata must generally be pleaded or it is waived); Fitz v. Days Inns Worldwide, Inc., 147 S.W.3d 467, 470 (Tex. App.-San Antonio 2004, pet. denied) (collateral estoppel must be pleaded at the trial court level or it is waived). However, Gustine has not waived the issue under these particular facts.

Waiver is the intentional relinquishment of a known right, or intentional conduct inconsistent with claiming that right. In re RSR Corp., 568 S.W.3d 663, 666 (Tex. 2019) (orig. proceeding); Legacy Bank v. Fab Tech Drilling Equip., Inc., 566 S.W.3d 922, 931 (Tex. App.-Eastland 2018, pet. denied). It is normally applicable in cases of res judicata and collateral estoppel because the nature of the previous judgment is known before the issue is appealed. See Garner v. Long, 106 S.W.3d 260, 264 (Tex. App.-Fort Worth 2003, no pet.) (December 14, 2000 judgment in estate administration had become final and had been affirmed on appeal before the issues were raised again on November 16, 2001). In this case, however, the federal court's judgment had not been rendered before Travelers filed its interlocutory appeal, and Gustine therefore could not have waived any issues relating to the federal court's judgment prior to the appeal.

Travelers also maintains that we cannot consider the issue of res judicata because Gustine did not raise it in connection with its briefing on appeal, citing Maples v. Maples, 601 S.W.3d 23, 31 n.1 (Tex. App.-Tyler 2020, no pet.) ("An issue may not be raised for the first time at oral argument unless the issue has been first presented in the party's written brief."). Such a failure likewise cannot be construed as a waiver of the argument since Gustine's brief was filed on February 7, 2022, more than five months before the federal court rendered its judgment.

Furthermore shortly after the federal court rendered judgment, Gustine filed a document entitled "Notice of New Authority." The notice included language stating that the federal action "and the court's disposition thereof are relevant here in that they involve the same parties, i.e., Travelers and Gustine ISD, and the same legal and factual issues." While it would have been preferable for Gustine to have raised the issue more explicitly, such language was "sufficient to put us on notice" of a claim preclusion issue. See St. John Missionary Baptist Church v. Flakes, 595 S.W.3d 211, 215 (Tex. 2020) ("St. John's briefing was 'sufficient to put the court of appeals on notice' of the ecclesiastical-abstention issues in the case and 'invite[d] the court of appeals to correct any error of...