Opinion

Tankersley v. Durish

IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,

AT AUSTIN

NO. 3-92-292-CV

LUTHER FRANK TANKERSLEY,

APPELLANT

vs.

STEPHEN S. DURISH, ANCILLARY RECEIVER FOR TRANSIT CASUALTY

COMPANY, WAL-MART STORES, INC., ALEXANDER & ALEXANDER, INC.

AND ALEXANDER & ALEXANDER OF TEXAS, INC.

APPELLEES

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 98TH JUDICIAL DISTRICT

NO. 454,530, HONORABLE PAUL R. DAVIS, JR., JUDGE PRESIDING

This appeal involves the determination of the validity of workers' compensation

insurance policies. Luther Frank Tankersley appeals from a district court order denying his

motion for summary judgment and granting summary judgment in favor of appellees, Stephen S.

Durish, ancillary receiver for Transit Casualty Company; Wal-Mart Stores, Inc.; and Alexander

& Alexander, Inc. and Alexander & Alexander of Texas, Inc. (collectively "A&A"). We will

affirm the judgment of the district court.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Insurance Policies

In 1983 and 1984, Wal-Mart negotiated with Transit, a Missouri insurer, to obtain

workers' compensation insurance to cover its operations in several states, including Texas.

Participating in the negotiations were A&A, Wal-Mart's insurance consultant and broker, and

Miro & Associates, Inc. ("Miro"), Transit's sub-agent. As a result of the negotiations, Transit

issued two consecutive workers' compensation insurance policies to Wal-Mart. The policies

provided for payment of statutory workers' compensation benefits to Wal-Mart employees injured

during the period from February 1, 1983, through January 31, 1985.

The estimated annual premium reflected in each policy was $3,500,000. Estimated

payroll figures were reflected in the policies and used to calculate the premiums. These figures,

however, were significantly lower than the estimated figures submitted by Wal-Mart. Wal-Mart

and A&A were aware that the figures reflected in the policies had been understated, but accepted

the policies as written. The policies specifically provided that "[t]he premium stated in the

declarations [$3,500,000] is an estimated premium only"; the ultimate premium to be paid would

be adjusted pursuant to an audit conducted at the end of each policy year. In addition, certain

endorsements provided for an increased premium if losses proved greater than expected. Miro,

however, represented to Wal-Mart that the $3,500,000 premium was a flat-rate premium that was

not subject to adjustment.

After the policies were issued, Transit filed a "Form 18a" with the Texas State

Board of Insurance and the Industrial Accident Board, indicating that Transit agreed to provide

workers' compensation coverage to Wal-Mart's Texas employees beginning February 1, 1983.

2. The Arkansas Litigation

In 1985, problems surfaced. Claims under the policies were far in excess of the

$7,000,000 in premiums collected. Transit demanded $20,000,000 in additional premium

payments in accordance with rates indicated in the policies and Wal-mart's actual payroll figures.

After receiving Transit's demand, Wal-Mart filed suit in Arkansas federal district court seeking

to enforce the agreement entered into with Miro. Transit counterclaimed for the additional

premium, alleging that the "side agreement" with Miro was illegal and unenforceable. Wal-Mart

then filed a third-party claim against A&A seeking recovery of any amount assessed against Wal-Mart pursuant to Transit's counterclaim.

In December 1985, Transit was placed into receivership. A domiciliary receiver

was appointed in Missouri and was substituted into the Arkansas lawsuit in place of Transit. At

the same time, an ancillary receiver was appointed in Texas to handle Transit's Texas affairs. The

Texas ancillary receiver, however, was not joined in the Arkansas lawsuit.

In 1986, the Arkansas federal district court concluded that the side agreement was

illegal and unenforceable and rendered judgment that Wal-Mart pay an additional $16,772,144

in premiums to Transit and that Wal-Mart take nothing by its claim against A&A. Wal-Mart

Stores, Inc. v. Crist , 664 F. Supp. 1242 (W.D. Ark. 1987), aff'd in part and rev'd in part , 855

F.2d 1326 (8th Cir. 1988), cert. denied , 489 U.S. 1090 (1989). Wal-Mart appealed the judgment

awarding Transit the additional $16,772,144 premium. The Eighth Circuit concluded that the side

agreement and the policies themselves were illegal and unenforceable and rendered judgment that

both Wal-Mart and the domiciliary receiver for Transit take nothing. Wal-Mart Stores, Inc. , 855

F.2d 1326 .

3. The Texas Litigation

There are three proceedings involved in the "Texas litigation": (1) the lawsuit at

issue in this appeal filed by the Receiver against Wal-Mart and A&A in the district court of Travis

County ("the present cause"); (2) an ancillary receivership proceeding involving Transit's Texas

receivership estate, also filed in Travis County ("the receivership cause"); and (3) a lawsuit filed

by Tankersley in Harris County against Wal-Mart and A&A.

In November 1988, the Receiver filed the present cause against Wal-Mart and A&A

requesting alternative forms of relief. (1) The Receiver requested payment of the unpaid balance of

the statutorily correct premium owed on the Texas portion of the policies, assuming the policies

were valid. Alternatively, assuming the policies were invalid, the Receiver requested

reimbursement of the sums paid by Transit, the Receiver, and the Texas Property & Casualty

Insurance Guaranty Association ("Guaranty Association") on claims made under the policies. The

Receiver also joined Wal-Mart's Texas employees currently receiving benefits under the policies

as parties and designated all such employees, including Tankersley, as "claimants."

Ancillary receivership proceedings began in Texas when Transit was placed into

receivership in December 1985, before the filing of the suit at issue in this appeal. All actions

taken in connection with Transit's Texas receivership estate required approval of the receivership

court. Accordingly, in 1990, the Receiver submitted to that court for approval a proposed

settlement agreement for the present cause. The Receiver, Wal-Mart, A&A, and the Guaranty

Association were parties to the settlement agreement, but the claimants were not. On May 1,

1990, after reviewing the agreement, the receivership court rendered judgment in the receivership

cause approving the settlement agreement, declaring the policies valid, and authorizing the

Receiver to execute all documents necessary to effectuate the settlement in the present cause

(hereinafter referred to as the "May 1990 settlement order").

In July 1989, after the ancillary receivership proceedings began and after the

Receiver filed the present cause, but before the May 1990 settlement order was issued, Tankersley

filed suit in a Harris County district court against Wal-Mart and A&A. Tankersley alleged that

he was injured in the scope of his employment with Wal-Mart and that his injury was a proximate

result of Wal-Mart's negligence. Tankersley claimed that he was entitled to pursue his common-law claims because Wal-Mart had misrepresented that it had a valid workers' compensation policy

and that Wal-Mart and A&A are precluded from claiming that the policies were valid. This

lawsuit has been abated pending determination of the present cause.

After the May 1990 settlement order was issued in the receivership cause, appellees

filed a joint motion for summary judgment in the present cause. In response, Tankersley also

filed a motion for summary judgment. The district court denied Tankersley's motion and granted

that of appellees. In two points of error, Tankersley complains that the district court erred in

rendering summary judgment against him and in failing to grant summary judgment in his favor.

TANKERSLEY'S MOTION FOR SUMMARY JUDGMENT

We will address Tankersley's second point of error first. In this point, Tankersley

complains that the district court erred in denying his motion for summary judgment. (2) Tankersley

argues that the collateral-estoppel doctrine precludes Wal-Mart and A&A from asserting that the

policies are valid and enforceable. Collateral estoppel generally precludes relitigation of an issue

that was actually litigated in a previous lawsuit where the issue was essential to the judgment and

where a final judgment on the merits was rendered. Parklane Hosiery Co. v. Shore , 439 U.S.

322 , 326 n.5 (1979); Bonniwell v. Beech Aircraft Corp. , 663 S.W.2d 816, 818 (Tex. 1984).

Initially, we note that the Receiver is not bound by the Eighth Circuit's decision,

irrespective of whether collateral estoppel is applicable under the facts of the present cause. The

Texas Insurance Code provides that:

No judgment or order rendered by any court of this State or of any other

jurisdiction in any action pending by or against the delinquent insurer after the

commencement of delinquency proceedings shall be binding upon the receiver

unless the receiver shall have been made a party to such suit.

Tex. Ins. Code Ann. art. 21.28, § 4(f) (West Supp. 1993). Tankersley concedes this issue by

stating in his brief to this Court that he "is not contending that the Receiver is estopped from

doing anything based on the Arkansas litigation." Accordingly, the Receiver is not precluded

from asserting that the policies are valid and enforceable under Texas law. (3)

1. Choice of Law

Because Tankersley is attempting to assert collateral estoppel against Wal-Mart and

A&A in a state proceeding at the conclusion of a related federal proceeding, the threshold question

in determining the applicability of collateral estoppel is whether state law or federal law governs

in this context. This Court has previously stated its belief that federal law controls. See Hayes

v. Pin Oak Petroleum, Inc. , 798 S.W.2d 668, 671 (Tex. App.--Austin 1990, writ denied). When

presented with this same choice-of-law question recently, however, the Texas Supreme Court did

not decide the issue because the same result would have been reached whether federal or state law

was applied. See Eagle Properties, Ltd. v. Scharbauer , 807 S.W.2d 714, 721 (Tex. 1990); see

also Trapnell v. Sysco Food Servs., Inc. , No. 13-91-367-CV, slip op. at 12 n.5 (Tex.

App.Corpus Christi Nov. 17, 1992, writ requested). Similarly, the same result would be

reached in the present cause whether this Court applied federal or state law. Accordingly, we also

decline to address the choice-of-law issue.

2. Standard of Review

Because of the alignment of the parties involved in the underlying suit, the present

case involves "offensive" use of collateral estoppel. The applicable standard of review is "abuse

of discretion." Parklane Hosiery , 439 U.S. at 331 ; see also Scurlock Oil Co. v. Smithwick , 724

S.W.2d 1, 7 (Tex. 1986) (citing Parklane Hosiery with approval). A court abuses its discretion

only when it makes a decision without reference to any guiding rules or principles; in other

words, if the court's action was arbitrary and unreasonable, such action constitutes an abuse of

discretion. Beaumont Bank, N.A. v. Buller , 806 S.W.2d 223, 226 (Tex. 1991); Downer v.

Aquamarine Operators, Inc. , 701 S.W.2d 238, 241-42 (Tex. 1985).

3. Exceptions to Application of Collateral Estoppel

We will assume arguendo that the requirements necessary to invoke the collateral-estoppel doctrine against Wal-Mart and A&A have been fulfilled. Before those parties are

precluded from relitigating the validity of the policies, however, we must determine whether any

exceptions to the application of the doctrine exist under the facts of the present cause. Where

application of offensive collateral estoppel would be "unfair," the doctrine should not be invoked:

"[W]here, either for the reasons discussed above or for other reasons , the application of offensive

estoppel would be unfair to a defendant, a trial judge should not allow the use of offensive

collateral estoppel." Parklane Hosiery , 439 U.S. at 331 (emphasis added).

In making this determination, we look to section 29 of the Restatement (Second)

of Judgments. Both federal and Texas state courts have cited various provisions under section 29

with approval when determining whether to apply collateral estoppel. See Hardy v. Johns-Manville Sales Corp. , 681 F.2d 334, 343, 346 (5th Cir. 1982); Glictronix Corp. v. American Tel.

& Tel. Co. , 603 F. Supp. 552, 571-72 (D.N.J. 1984); Trapnell , slip op. at 14. Even where the

requirements for invoking collateral estoppel have been met, section 29 recognizes certain

circumstances that may justify allowing a party to relitigate an issue, at least two of which are

applicable in the present cause. (4)

(a) Issue of Law. The first circumstance we consider relevant is whether "[t]he

issue is one of law and treating it as conclusively determined would inappropriately foreclose

opportunity for obtaining reconsideration of the legal rule upon which it was based." Restatement

(Second) of Judgments § 29(7) (1980). In the context of the present case, the issue of the validity

of the policies is clearly one of lawthe parties do not dispute the underlying facts. Courts

disfavor applying collateral estoppel in the context of a pure question of law. See United States

ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Blue Cross Blue Shield of Ga., Inc. , 755

F. Supp. 1040, 1045-46 (S.D. Ga. 1990); see also Divine v. Commission of Internal Revenue , 500

F.2d 1041, 1048-50 (2d Cir. 1974). The rationale underlying this exception is provided in

comment i to section 29(7):

When the issue involved is one of law, stability of decision can be regulated by the

rule of issue preclusion or by the more flexible rule of stare decisis . If the rule of

issue preclusion is applied, the party against whom it is applied is foreclosed from

advancing the contention that stare decisis should not bind the court in determining

the issue. Correlatively, the court is foreclosed from an opportunity to reconsider

the applicable rule, and thus perform its function of developing the law. This

consideration is especially pertinent when there is a difference in the forums in

which the two actions are to be determined . . . .

Restatement (Second) of Judgments § 29 cmt. i (1980) (citation omitted); see also Glictronix, 603

F. Supp. at 571-72 . Absent application of collateral estoppel, a state district court would not be

bound by an Eighth Circuit opinion interpreting Texas law. Accordingly, we conclude that the

district court in the present case should be allowed the opportunity to reconsider the validity of

the policies under Texas law.

(b) Complication or Prejudice. The second circumstance we consider relevant

in determining whether Wal-Mart and A&A should be allowed to relitigate the issue of the validity

of the policies is whether "[t]reating the issue as conclusively determined may complicate

determination of issues in the subsequent action or prejudice the interests of another party

thereto." Restatement (Second) of Judgments § 29(6) (1980); see also Trapnell , slip op. at 14,

24. Under the facts of the present cause, treating the issue of the validity of the policies as

conclusively determined both complicates the determination of the issues and prejudices the

interest of another party, the Receiver.

Precluding Wal-Mart and A&A from asserting the validity of the policies, yet

allowing the Receiver to do so, would clearly complicate the determination of issues in this action.

As all parties agree, where a valid policy exists, the insurance company (or receiver for such) is

entitled to receive premiums, and an employee covered under such policy is precluded from

recovering on common-law claims. If the court is allowed to determine the validity of the policies

without the limitation of collateral estoppel, the court could impose only one of two valid

remedies: validate the policies and require payment of the additional premium, or invalidate the

policies and allow workers such as Tankersley to pursue common-law claims. However, if the

court is limited by collateral estoppel, yet concludes that the policies are in fact valid under Texas

law (as the Receiver is entitled to claim), the court's judgment would be internally

inconsistentthe policies would be valid as between Wal-Mart, A&A, and the Receiver, yet

invalid as between Wal-Mart, A&A, and Tankersley. Such a judgment might leave Wal-Mart

obligated to pay the Receiver additional premiums on policies covering workers such as

Tankersley, yet simultaneously leave Wal-Mart open to liability for damages as to Tankersley's

common-law claims. In other words, invoking collateral estoppel against fewer than all parties

would allow the possibility of imposing both remedies, requiring Wal-Mart to pay for coverage

from which it could receive no benefit. The obvious inconsistency that would result would

therefore complicate the court's determination of this issue.

Moreover, precluding Wal-Mart and A&A from asserting the validity of the

policies would prejudice the interests of the Receiver. A Texas receiver is directed by statute to

"immediately proceed to conduct the business of the insurer, or to take such steps as may be

necessary to conserve the assets and protect the rights of policyholders and claimants for the

purpose of liquidating, rehabilitating, reinsuring, reorganizing or conserving the affairs of the

insurer." Tex. Ins. Code Ann. art. 21.28, § 2(e) (West Supp. 1993). Under the facts of the

present cause, the Receiver has concluded (and in its May 1990 settlement order, the ancillary

receivership court agreed) that declaring the policies valid and settling the dispute with Wal-Mart

and A&A was appropriate. Precluding Wal-Mart and A&A from asserting the validity of the

policies, however, would prevent such a settlement and limit the Receiver's ability to resolve the

dispute. In other words, the practical effect of allowing Tankersley to preclude Wal-Mart and

A&A from asserting the validity of the policies would be to limit the Receiver's ability to carry

out his statutory duties. Accordingly, the Receiver's interest would be prejudiced.

(c) Policy Objectives. Independent of the exceptions to invoking the collateral-estoppel doctrine identified in section 29, we must also consider whether the policy objectives that

collateral estoppel is designed to further will be achieved if Wal-Mart and A&A are precluded

from asserting the validity of the policies. See Trapnell , slip op. at 25. The policy objectives

include protecting parties from multiple lawsuits, conserving judicial resources, and protecting

parties from the possibility of inconsistent decisions. Lytle v. Household Mfg., Inc. , 110 S. Ct.

1331, 1337 (1990); Trapnell , slip op. at 12, 25. If these purposes are not fulfilled, collateral

estoppel should not be invoked. Lytle , 110 S. Ct. at 1337 ; Trapnell , slip op. at 25.

We will first examine whether judicial resources would not be conserved under the

facts of the present cause. Although Wal-Mart and A&A would be precluded from asserting the

validity of the policies, the Receiver would not. This issue would, therefore, be redetermined by

the court in the context of this dispute between the Receiver, Wal-Mart, and A&A. Accordingly,

judicial resources would not be conserved. See, e.g., Trapnell , slip op. at 25. In addition,

invoking collateral estoppel in the present cause would create the possibility of inconsistent

decisions. As indicated previously, if the court determined that the policies were valid, the court's

judgment would be internally inconsistent and, as a result, could subject Wal-Mart to double

liability. This result would only guarantee injustice. See, e.g., id. at 25-26 Accordingly, we

conclude that the policy objectives of collateral estoppel would not be furthered by invoking this

doctrine in the present cause.

For the reasons stated above, we conclude that the district court did not abuse its

discretion in denying Tankersley's motion and refusing to invoke collateral estoppel against Wal-Mart and A&A. Accordingly, we overrule Tankersley's second point of error.

APPELLEES' MOTION FOR SUMMARY JUDGMENT

In his first point of error, Tankersley complains that the district court erred in

granting appellees' motion for summary judgment. Appellees asserted three grounds for granting

summary judgment: (1) the Wal-Mart policies are valid and enforceable under Texas law; (2) the

policies have been judicially declared valid and enforceable under Texas law, e.g., the May 1990

settlement order, and no claim can be asserted otherwise; and (3) Tankersley and other claimants

have "ratified" the policies by accepting benefits under such policies after discovering the alleged

fraudulent conduct. Because the district court did not indicate a particular ground for granting

the summary judgment, we must uphold the judgment on appeal if it is proper on any ground

asserted in the motion. Rogers v. Ricane Enters., Inc. , 772 S.W.2d 76, 79 (Tex. 1989).

First, appellees contend that the policies are valid under Texas law. Because there

is no dispute as to the underlying facts, this issue is presented to this Court as a pure question of

law. All parties involved concede that the "side agreement" is illegal and unenforceable under

Texas law. The issue before us is whether the policies themselves are legal and enforceable

notwithstanding the illegality of the side agreement.

Under Texas law, the mere presence of an illegal side agreement does not invalidate

a policy. See Associated Employers Lloyds v. Dillingham , 262 S.W.2d 544 (Tex. Civ. App.--Fort

Worth 1953, writ ref'd); English Freight Co. v. Knox , 180 S.W.2d 633 (Tex. Civ. App.--Austin

1944, writ ref'd w.o.m.). Where the illegal agreement is not incorporated in the policy, but is

apart from it, the policies themselves are valid. English Freight Co. , 180 S.W.2d at 640 .

In the present cause, Tankersley contends that the payroll figures reflected in the

policies were misrepresented and that this misrepresentation invalidates the policies. We disagree.

Although the payroll figures reflected in the policies and upon which the premiums were initially

calculated were understated, the policies specifically provided that "[t]he premium stated in the

declarations is an estimated premium only"; the ultimate premium to be paid would be adjusted

pursuant to an audit conducted at the end of each policy year. In addition, certain endorsements

provided for an increased premium if losses proved greater than expected.

The facts of the present cause are similar to those in English Freight , which

involved an agreement between the insurance company and the policyholder "to classify the

employees covered and to pay rates on such classifications, and with waiver of payment of, or

agreement not to pay, the additional premiums and debits provided for in the policies." 180

S.W.2d at 639 . Similarly, in the present cause, the side agreement was an agreement to use

certain payroll figures, to pay rates on such figures, and to forego payment of any additional

premiums as provided in the policies. Even though the payroll figures were understated in the

policy, specific provisions of the policy allowed for an adjustment to correct any erroneous

calculations, whether based on a misrepresentation or otherwise. The illegal side agreement,

therefore, was to waive enforcement of the provisions allowing for premium adjustment. This

agreement was not incorporated in the policies, but was apart from it. Accordingly, we conclude

that the policies themselves are valid. See id. at 640 .

Because the district court's summary judgment can be upheld on this basis, we need

not address the remaining grounds asserted by appellees. We overrule Tankersley's first point

of error.

CONCLUSION

Based on the forgoing analysis, we affirm the judgment of the district court.

J. Woodfin Jones, Justice

[Before Chief Justice Carroll, Justices Jones and Kidd]

Affirmed

Filed: June 2, 1993

[Publish]

1. The Texas Property & Casualty Insurance Guaranty Association intervened in the

present cause and participated in the proceedings; however, that association is not

designated as an appellee in this appeal.

2. Since both parties filed motions for summary judgment, this complaint is proper.

See Tobin v. Garcia , 316 S.W.2d 396, 400 (Tex. 1958).

3. Tankersley argues, however, that the Receiver cannot ratify illegal policies or bind

Tankersley through the May 1990 settlement order. We will address these issues later in

our discussion of the appellees' motion for summary judgment.

4. Section 29 applies in circumstances where collateral estoppel is alleged by a party in

subsequent litigation who was not a party to the prior litigation that determined the issue.

Because Tankersley was not a party to the Arkansas litigation, but is alleging that the

Eighth Circuit's ruling precludes Wal-Mart and A&A from relitigating issues involved in

that dispute, it is appropriate for us to review the exceptions identified in section 29.