Assurance Co. of America v. Kirkland

                            UNITED STATES COURT OF APPEALS
                                     FIFTH CIRCUIT

                                            ____________

                                            No. 01-60913
                                            ____________


                ASSURANCE COMPANY OF AMERICA,


                                                Plaintiff - Appellee,

                versus


                BRUCE KIRKLAND,


                                                Defendant - Appellant.



                            Appeal from the United States District Court
                              For the Southern District of Mississippi

                                          November 26, 2002


Before EMILIO M. GARZA and CLEMENT, Circuit Judges, and HUDSPETH*, District Judge.

EMILIO M. GARZA, Circuit Judge:

        Bruce Kirkland (“Kirkland”) appeals the district court’s grant of summary judgment in favor

of plaintiff-appellee Assurance Company of America (“Assurance”) in Assurance’s action, pursuant

to the relitigation exception to the Federal Anti-Injunction Act (the “Act”),1 to enjoin Kirkland from

        *
         District Judge of the Western District of Texas, sitting by designation.
        1
          28 U.S.C. § 2283 (stating, in relevant part, “[a] court of the United States may not grant an
injunction to stay proceedings in a state court except . . . to protect or effectuate its judgments.”).
The relitigation exception allows a federal court “to prevent state litigation of an issue that previously
individually pursuing an insurance claim against Assurance in state chancery court.

                                                  I.

       Kirkland Development, Inc. (“KDI”), a company wholly owned by Kirkland and primarily

involved in the construction of homes, filed a civil complaint in the Mississippi Chancery Court,

seeking to recover on a general-liability insurance policy it maintained with Assurance. In support

of its claims, KDI alleged that it, through Kirkland, orally contracted to repair or reconstruct a

retaining wall on the property of Heritage Apartments, a partnership run by Kirkland and his mother,

and adjacent to property owned by Marion and Chyrl Lynn Grubbs. KDI also alleged that it

subcontracted with a company owned by Keith Moon (“Moon”) to perform the repairs. Kirkland

signed the alleged contract with Moon on the letterhead of Kirkland Company, a company that was

owned by Kirkland’s mother and that was primarily in the business of managing apartment houses.

KDI alleged that, while repairs were underway, the retaining wall, and the soil which it supported,

collapsed and caused damage to the apartments and the Grubbs’ property. According to KDI, it had

to spend approximately $137,000 of its own money to repair the damage. KDI thus sought indemnity

for these expenditures pursuant to its contract with Assurance.2

       Assurance removed the action from the Mississippi Chancery Court to the federal district


was presented to and decided by the federal court. It is founded in the well-recognized concepts of
res judicata and collateral estoppel.” J.R. Clearwater, Inc. v. Ashland Chem. Co., 93 F.3d 176, 179
(5th Cir. 1996) (citing Chick Kam Choo v. Exxon Corp., 486 U.S. 140, 147, 108 S. Ct. 1684, 1690,
100 L.Ed. 2d. 127 (1988)) (other citations omitted).
       2
          In its claim on the Assurance policy, KDI blamed the damage caused by the collapse of the
retaining wall on the faulty workmanship of Moon’s company. Assurance initially denied coverage
for the claim of KDI based on an exclusion in the policy, but, after further investigation and after KDI
filed suit in Madison County Chancery Court, Assurance accepted liability for the damage to the
property adjacent to Heritage Apartments. Assurance did not, however, accept liability for the
damage to Heritage Apartments.

                                                  -2-
court, where the action proceeded to a bench trial. Refusing t o accept liability for the damage to

Heritage Apartments, Assurance argued that KDI had not contracted with Heritage Apartments to

repair the retaining wall and was, therefore, not covered by the policy. Rather, Assurance argued,

Kirkland Company, through its employee, Kirkland, had orally contracted with Heritage Apartments

and subcontracted with Moon to make repairs to the retaining wall that resulted in the claimed

damages. The district court entered an oral opinion in which it granted summary judgment in favor

of Assurance. Regarding the issue of whom Kirkland represented when he orally contracted with

Heritage Apartments to repair the retaining wall, the court found that “Mr. Kirkland was acting, as

between him and [Heritage Apartments], as . . . Kirkland Company, [not] Kirkland Development.”

Further, the court found that Kirkland, individually, had “borrowed” money “in his own name” to pay

for the cost of the wall and repairs to the Grubbs’ property. Accordingly, the court denied KDI

declaratory relief and dismissed all of KDI’s claims with prejudice for the “simple reason” that KDI

had not met its burden of proving that it incurred the expenses for the repairs.3

        On appeal, we affirmed the district court’s judgment in an unpublished per curiam order,

without an opinion.

                                                  II.

        Subsequent to the KDI litigation, Kirkland, as an individual, filed a civil complaint in state

chancery court against Assurance. Kirkland argued that, because the federal court found that he


        3
          In addition, the district court made alternative rulings “[i]n the event the court [is found to
be] incorrect [on appeal] in ruling that there [was] no coverage” for KDI: Under the insurance
contract, there was no coverage for KDI for damages that arose out of the contractor’s incorrect
repairs to the wall itself. However, because no work was incorrectly performed on “the concrete
apron on which the air-conditioning units sat or on the storm sewer drains which clogged and caused
flooding into the apartments themselves,” there theoretically would be coverage for KDI as to these
items.

                                                  -3-
personally borrowed money to account for damages caused by the collapse of the retaining wall,4 he

is entitled to recover on the Assurance policy as a individual insured.

         In April of 2001, Assurance filed the instant complaint in federal district court for injunctive

relief pursuant to the relitigation exception to the Act. Assurance urged the district court to enjoin

the chancery court action filed by Kirkland, o n the ground that the issues set forth in Kirkland’s

complaint had been “finally litigated” in the prior federal action.5 Assurance argued that the parties

in the two actions were in privity with one another; that the prior federal judgment was by a court of

competent jurisdiction; that the prior action concluded with a judgment on the merits; and that “the

same claim or cause of action” was involved in both actions. In his answer, Kirkland denied that, as

an individual, he was barred by the prior federal judgment. Subsequently, Assurance filed a motion

for summary judgment, which the district court granted in favor of Assurance pursuant to the

relitigation exception. We now review the district court’s decision to grant summary judgment in

favor of Assurance.

                                                   III.

         The issue here is whether the district court erred in applying the Act’s relitigation exception

to enjoin Kirkland’s chancery court action. “The application of the relitigation exception is an issue

of law, and therefore, this court reviews de novo the [district] court’s determination that an injunction

may be issued under that exception.” Regions Bank of La. v. Rivet, 224 F.3d 483, 488 (5th Cir.), cert

denied, 531 U.S. 1126 (2001).


         4
             The court determined that Kirkland had “borrowed” money to pay for the repairs “in his own
name.”
         5
        Alternatively, Assurance sought partial injunctive relief limiting damages in the chancery
court action in accordance with the federal district court’s alternative ruling.

                                                    -4-
       To determine whether the relitigation exception was applicable, the district court applied the

four-part test adopted in New York Life Ins. Co. v. Gillispie, 203 F.3d 384 (5th Cir. 2000).6

According to the district court, the only issues were whether the parties were in privity with the

parties in the prior federal action, and whether the same claim or cause of action is involved in both

suits.7 The court concluded that privity exists between the parties in the two actions because 1) it was

not disputed that Assurance was a party to the prior suit, and 2) Kirkland is the sole shareholder of

KDI and, at the prior trial, had spoken of KDI “as if he were speaking of himself.” To determine

whether the two actions involved the same claim or cause of action, the district court used a

“transactional test,” whereby the court addressed whether the two actions were based on the same

“nucleus of operative facts.”8 The court reasoned that “[t]here is only one key fact of relevance in


       6
        In Gillispie, the court explained that, to determine whether the relitigation exception is
applicable, the Fifth Circuit uses a four-part test:

                 First, the parties in a later action must be identical to (or at l east in privity
                 with) the parties in a prior action. Second, the judgment in the prior action
                 must have been rendered by a court of competent jurisdiction. Third, the
                 prior action must have been concluded with a final judgment on the merits.
                 Fourth, the same claim or cause of action must be involved in both suits.

Gillispie, 203 F.3d at 387 (quoting United States v. Shanbaum, 10 F.3d 305, 310 (5th Cir. 1994)).
       7
         The court noted that it is not disputed that the judgment in the prior action was rendered by
a court of competent jurisdiction and that the prior act ion concluded with a final judgment on the
merits.
       8
           In this Circuit, courts apply

                 a transactional test to determine whether two claims involve the same cause
                 of action, under which the critical question is ‘not the relief requested or the
                 theory asserted but whether the plaintiff bases the two actions on the same
                 nucleus of operative facts.’ In evaluating the res judicata effect of a prior
                 claim on a subsequent one, the transactional test does not inquire whether the
                 same evidence has been presented in support of the two claims, but rather

                                                    -5-
both the prior and instant actions: Whether Kirkland orally contracted with Heritage Apartments on

behalf of Kirkland Company to make the repairs to the retaining wall that ultimately caused the

damages upon which Kirkland filed his insurance claim with Assurance.” Thus, according to the

district court, to prevail in the chancery court action, Kirkland would be required to show that the

federal court’s judgment in the prior action “was in error and that [Kirkland] was acting on his own

behalf, not as Kirkland Company, when he orally contracted with Heritage Apartments to repair the

retaining wall.” The court granted summary judgment in favor of Assurance, reasoning that “this is

precisely the type of claim that is barred by the doctrine of res judicata, and that in turn is precisely

the type of situation that the relitigation exception to the Anti-Injunction Act is intended to cover.”

        We disagree with the district court’s judgment that the relitigation exception applies in this

situation. “[A]n essential prerequisite for applying the relitigation exception is that the claims or

issues which the federal injunction insulates from litigation in state proceedings actually have been

decided by the federal court.” Chick Kam Choo v. Exxon Corp., 486 U.S. 140, 148, 108 S.Ct. 1684,

100 L.Ed.2d 127 (1988). This prerequisite is “strict and narrow,” and so we must “assess[] the

precise state of the record and what the earlier federal order actually said,” rather than “render a post

hoc judgment as to what the order was intended to say.” Id. In the prior federal trial, the district

court entered judgment for Assurance for the “simple reason that the proof has failed to show that

[KDI] has itself incurred th[e] expenditures” associated with the repairs, at least some of which were

paid personally by Kirkland. Simply, KDI lost because it was an improper plaintiff. The “key fact”

at issue in the prior federal action was thus whether KDI was even a proper party to the action. The


                asks whether the same key facts are at issue in both of them.

Gillispie, 203 F.3d at 387 (citation and footnote omitted).

                                                  -6-
subsequent chancery court suit by Kirkland raises a different factual inquiry: whether Kirkland is

entitled to coverage under the Assurance policy as an individual insured.

           Kirkland concedes that, if he, rather than KDI, had been the plaintiff in the prior federal

action, res judicata would bar him from suing Assurance company a second time in the state chancery

court. However, “[a] party appearing in an action in one capacity, individual or representative, is not

thereby bound by . . . the rules of res judicata in a subsequent action in which he appears in another

capacity.” RESTATEMENT (SECOND)            OF JUDGMENTS     § 36(2) (1982). Therefore, even though

Kirkland was in privity in the first suit with KDI, res judicata does not bar Kirkland’s instant chancery

court claim because Kirkland now sues on his own behalf, as a named insured.

           Neither do the principles of collateral estoppel bar Kirkland’s instant chancery court claim.

“When an issue of fact or law is actually litigated and determined by a valid and final judgment, and

the determination is essential to the judgment, the determination is conclusive in a subsequent action

between the parties, whether on the same or a different claim.” Id. at § 27. Assurance argues that,

because the district court in the prior federal case concluded that Kirkland was acting in his capacity

as manager of the uninsured Kirkland Company, and not as KDI, when he orally contracted with

Heritage Apartments to make repairs to the retaining wall, the district court also finally decided the

question of whether Kirkland is entitled to redress as an individual insured. On the contrary, the issue

of whether Kirkland is entitled to redress as an individual insured was not adjudicated. The only

determinations essential to the prior judgment rendered by the district court were that KDI was not

a party to the repair contract with Heritage Apartments, and that KDI did not incur expenses for the

repairs.     These determinations are binding on Kirkland in later litigation.         However, these

determinations did not finally decide the issue of whether Kirkland is entitled to redress as an


                                                    -7-
individual insured.9 It is at least arguable that, to answer the question of whether Kirkland is entitled

to redress as an individual insured, it does not matter whether Kirkland negotiated the construction

contract on behalf of Kirkland Company, because he is separately named as an insured, and the policy

might not restrict Kirkland’s right to coverage to situations in which he represents any particular

person or entity.10 Furthermore, contrary to Assurance’s argument, the district court in the prior

federal action did not find that Kirkland “was not acting in his individual capacity” in connection with

the repairs. Rather, the district court found that Kirkland had “borrowed” money to pay for the

repairs “in his own name.” Such a finding leaves open the possibility that Kirkland might have some

personal liability that does not belong solely to KDI. Moreover, even if the district court had

determined that Kirkland “was not acting in his individual capacity” in connection with the repairs,

relitigation of that issue in a subsequent action would not be precluded because the district court’s

decision to dismiss KDI’s claims was not dependent upon that determination. See id. at § 27(h) (“If

issues are determined but the judgment is not dependent upon the determinations, relitigation of those

issues in a subsequent action between the parties is not precluded. Such determinations have the


        9
         Kirkland concedes that, if KDI had lost the prior federal suit because of a finding of fact,
necessary to the judgment, which would defeat Kirkland’s individual claim as a separately named
insured on Assurance’s policy, then that previously adjudicated fact would be binding on Kirkland
under principles of collateral estoppel and, if it were a fact which would preclude him from recovering
as an individual, it would thus defeat his claim in the instant chancery court action. For example,
Kirkland would be collaterally estopped from arguing in a second suit against Assurance Company
that KDI was involved in the construction contract, because that was the adjudicated fact forming
the essential basis of the district court’s prior dismissal.
        10
          Kirkland argues that the Assurance policy does not restrict Kirkland’s right to coverage to
situations in which he represents any particular person or entity. Kirkland also points out that, if
Assurance had not intended to insure Kirkland as a party separate from his corporation, KDI, it would
have been unnecessary for the po licy to name both Kirkland and KDI as named insureds. Thus,
according to Kirkland, the policy itself recognizes the possibility that there may be coverage for
Kirkland and not for KDI, or vice versa.

                                                  -8-
characteristics of dicta.”).

        Therefore, we conclude that the district court erred when it applied the Act’s relitigation

exception to enjoin Kirkland’s chancery court action. The district court’s grant of summary judgment

in favor of Assurance is REVERSED.




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