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Aldous v. Darwin National Assurance Co.

United States Court of Appeals, Fifth Circuit

March 16, 2017

CHARLA ALDOUS; CHARLA G. ALDOUS, P.C., doing business as Aldous Law Firm, Plaintiffs - Appellants Cross-Appellees
DARWIN NATIONAL ASSURANCE COMPANY, Defendant-Appellee Cross-Appellant

         Appeals from the United States District Court for the Northern District of Texas

          Before REAVLEY, ELROD, and GRAVES, Circuit Judges.

          REAVLEY, Circuit Judge.

         Litigation over two trusts begat litigation between the prevailing party, Albert Hill III, and his attorneys. Appellant Charla Aldous is one of those attorneys, and she prevailed against her erstwhile client. In addition to establishing an entitlement to significant attorney's fees, Aldous and her cohort also successfully defended against breach of contract and professional negligence claims, among others. Hill's claims against the attorneys triggered insurance coverage provided by appellee Darwin National Assurance, Co., Aldous's insurer. And now, in this third layer of litigation, we confront the resulting coverage dispute. Aldous claims Darwin did not pay enough to fully cover the costs of her defense. Darwin asserts it paid too much.

         This case was decided in favor of Darwin on summary judgment. In a ruling that effectively doomed Aldous's claims, the district court ruled she was judicially estopped from claiming defense costs in excess of $668, 068.38. Building on this ruling, the district court further found that Darwin was entitled to recover "overpayments" on an equitable "money had and received" theory. Aldous appealed.

         In addition to issues raised by the district court's summary judgment ruling, we are also called upon to decide whether the district court erred in partially granting a motion to dismiss brought by Darwin. Lastly, Darwin has filed a cross-appeal, contending that judgment should not have been granted in favor of Aldous with respect to a breach of contract claim.

         I. BACKGROUND

         Along with Lisa Blue and Steve Malouf, Aldous represented Hill in litigation that resulted in a judgment for their client valued at $114, 745, 870. (The association of lawyers Blue, Aldous, and Malouf are hereinafter referred to as "BAM.") BAM represented Hill on a contingency basis, but Hill did not want to pay. Litigation ensued. After BAM sued Hill, Hill counterclaimed, alleging breach of fiduciary duty, duress, breach of oral contract, fraud, and professional negligence.

         Aldous had a valid professional liability insurance policy through Darwin (the "Policy"), and Hill's counterclaims triggered coverage. Blue and Malouf were also covered under separate policies through separate insurers. BAM had already retained Alan Loewinsohn to represent its affirmative claims against Hill and requested that the insurers allow Loewinsohn to handle the defense as well. The insurers relented. The various parties agreed (and continue to agree) that Darwin is responsible only for one-third of the covered costs of defense; Blue and Malouf (or their insurers) were separately responsible for their one-third shares.

         BAM ultimately prevailed against Hill, securing an award of $21, 942, 961 in earned attorney's fees (offset by $691, 175.93), costs of $479, 595.67, and the "reasonable costs and fees in defending against Hill III's counterclaims in the amount of $2, 586, 560.11." By the time judgment was entered, Aldous and Darwin were already embroiled in this coverage dispute.

         Aldous filed this suit in Texas state court, and it was removed to federal court on the basis of diversity jurisdiction. As relevant here, Aldous alleged breach of contract, breach of the duty of good faith and fair dealing, violations of the Texas Insurance Code, and violations of the Texas Deceptive Trade Practices Act. She also sought a declaratory judgment that Darwin is liable for the costs associated with the prosecution of her affirmative claims against Hill to the extent those affirmative claims were inextricably intertwined with her defense. Darwin counterclaimed, alleging (among other things) breach of contract, unjust enrichment, and money had and received. The district court partially granted a Rule 12(b)(6) motion filed by Darwin, dismissing Aldous' breach of the duty of good faith and fair dealing claim, as well as a Texas Insurance Code § 541 claim and the Texas Deceptive Trade Practices Act claim. Subsequently, the parties filed cross-motions for summary judgment.

         On summary judgment, the district court ruled largely in favor of Darwin. In a ruling with major consequences, the district court ruled that Aldous was judicially estopped from claiming that the costs in defending against Hill's counterclaims exceeded $668, 068.38. This ruling meant that Darwin's coverage obligations were limited to $222, 689.44-one-third of the total cost to defend. Darwin had paid Aldous far more than that, $502, 364.59. Based on this ruling, Aldous' breach of contract claim necessarily failed. The judicial estoppel ruling also meant that Darwin had overpaid, and the district court ruled that Darwin could recover this overpayment through an action for money had and received. The district court further ruled that Aldous was not entitled to costs related to the prosecution of her affirmative claims against Hill, even if she could show those affirmative claims were inextricably intertwined with her defense against Hill's counterclaims. And, as clarified in a subsequent order, the district court granted summary judgment against Darwin with respect to its breach of contract counterclaim, reasoning that the anti-subrogation rule prevented it from asserting subrogation rights against its own insured.


         Summary Judgment. Summary judgment rulings are subject to de novo review. Cal-Dive Int'l, Inc. v. Seabright Ins. Co., 627 F.3d 110, 113 (5th Cir. 2010). "We will affirm the district court's judgment if no genuine issues of fact are presented and if judgment was proper as a matter of law." Id. On cross-motions for summary judgment, we consider "each party's motion independently, viewing the evidence and inferences in the light most favorable to the nonmoving party." Morgan v. Plano Indep. Sch. Dist., 589 F.3d 740, 745 (5th Cir. 2009).

         Motion to Dismiss. Dismissal for failure to state a claim is also reviewed de novo. Colony Ins. Co. v. Peachtree Const., Ltd., 647 F.3d 248, 252 (5th Cir. 2011). Dismissal is appropriate if, assuming the truth of all facts alleged in the complaint, the plaintiff is not entitled to relief as a matter of law. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949 (2009); see Fed. R. Civ. P. 12(b)(6).


         A. Judicial Estoppel

         As the parties understand, the district court's judicial estoppel ruling had major ripple effects. It is the foundation of the grant of summary judgment in favor of Darwin's equitable claim for relief, and it precludes Aldous from establishing any breach of contract. As we will see, however, the foundation is faulty. Application of judicial estoppel was inappropriate.

         Texas law governs the substance of this dispute, but "we apply federal principles of judicial estoppel." RSR Corp. v. Int'l Ins. Co., 612 F.3d 851, 859 (5th Cir. 2010). There are two basic requirements: "First, it must be shown that 'the position of the party to be estopped is clearly inconsistent with its previous one; and [second, ] that party must have convinced the court to accept that previous position."[1] Id. (quoting Hall v. GE Plastic Pac. PTE Ltd., 327 F.3d 391, 396 (5th Cir. 2003)). That said, "the Supreme Court has refused to 'establish inflexible prerequisites or an exhaustive formula for determining the applicability of judicial estoppel, ' stating instead that different considerations 'may inform the doctrine's application in specific factual contexts.'" Reed v. City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011) (en banc) (quoting New Hampshire v. Maine, 532 U.S. 742, 751, 121 S.Ct. 1808, 1815 (2001)). Even when serving as the basis for a summary judgment ruling, a district court's judicial estoppel determination is reviewed for abuse of discretion. Kane v. Nat'l Union Fire Ins. Co., 535 F.3d 380, 384 (5th Cir. 2008). "A district court abuses its discretion if it misapplies the law or bases its decision upon erroneous findings of fact." RSR Corp., 612 F.3d at 859.

         After thorough review of the record, we can only conclude that Aldous never took the position (let alone "clearly") that her defense costs in the underlying suit were limited to $668, 068.31 and that the prior court never accepted such a position. The district court's contrary determination represents an abuse of discretion.

          During the prior proceedings, BAM was required to show how much it expended both in prosecuting its claims against Hill and in defending against Hill's counterclaims. The parties stipulated that these attorney's fees could be established through declarations, and BAM's attorney filed a series of relevant declarations (the "Loewinsohn Declarations"). The first of the declarations makes it plain that BAM did not claim its costs of defense were limited to $668, 068.31. Therein, Loewinsohn asserted legal fees of $2, 054, 178.18, including both affirmative and defensive claims. He expressly declared that the "fees and expenses can all be allocated either to the prosecution of BAM's breach of contract claim or to the defense of the counterclaims and affirmative defenses asserted by the Hills, which was necessary in BAM's prosecution of their claim, or both."

         That first declaration was filed on April 29, 2011. After that day, the rest of the litigation concerned only Hill's counterclaims. On June 29, 2011, Loewinsohn submitted a "supplemental declaration" that further testified that "for the time period of May 1, 2011 to June 24, 2011, for the defense of the Counterclaims, " $668, 068.31 had been reasonably expended. Then, on January 9, 2012, he submitted a "second supplemental declaration" which "incorporated by reference" the first and reiterated his opinion "that an attorney's fee, including expenses, of $668, 068.31 was a reasonable and necessary fee for the defense of the Counterclaims." As can be readily seen, mere recitation of the Loewinsohn Declarations establishes that Aldous never claimed that defense costs totaled $668, 068.31. Rather, the fees incurred after April 29 totaled $668, 068.31 and were purely defense-related.

         Two other notable facts emerge from the declarations and a review of the prior proceedings. First, the reason that fees incurred after April 29 related solely to defending against Hill's claims is that BAM's affirmative claims had already been litigated. An evidentiary hearing commencing April 20th resolved those claims. Second, the lion's share of dispositive defense work was done prior to April 29, as shown by the judge's ruling that, with one exception, all of Hill's counterclaims "were legally barred based on her prior rulings" stemming from the April 20 hearing.[2]

         The district court's ruling contains several errors. Most fundamentally, the district court unjustifiably read the supplemental declaration in isolation. It took as Aldous's binding position that defense costs in the prior proceeding were incurred only between May 1 and June 24 and that those costs totaled $668, 068.31. To make this large error, the district court was required to make small antecedent errors.

         For example, the district court refused to credit Aldous's argument that the first declaration did not segregate fees and therefore included costs related to defending against Hill. In the district court's view, this argument was undercut by the fact that "Loewinsohn segregate[d] the fees associated with the affirmative and defensive claims in his supplemental and second supplemental declaration." Charla G. Aldous, P.C. v. Darwin Nat. Assur. Co., 92 F.Supp.3d 555, 566 (N.D. Tex. 2015). Loewinsohn's newfound ability to segregate fees is easily explained, however. As mentioned above, after June 29 the only remaining work to be done was defense work.

         Further, even the district court's interpretation of the supplemental declaration ignores its plain language. The supplemental declaration establishes fees incurred "for the time period of May 1, 2011 to June 24, 2011." When Aldous pointed out that the declaration was time-limited, the district court closed its ears and refused to consider the point. See id. at 566 ("The purpose of judicial estoppel, however, prevents Plaintiffs from taking positions such as this one."). As the district court saw it, judicial estoppel itself precluded Aldous from explaining her prior position. It should go without saying that judicial estoppel cannot be applied to the question of whether judicial estoppel applies. Aldous should have been permitted make arguments reconciling and harmonizing the declarations.[3]

         We also cannot condone the district court's approach to the second aspect of judicial estoppel-whether the first court accepted the prior inconsistent position. To find judicial estoppel applicable, the district court was required to find that the prior court accepted $668, 068.31 as BAM's total costs on defense. Instead, the prior court issued a judgment "[t]hat BAM shall recover from Hill III its reasonable costs and fees in defending against Hill III's counterclaims in the amount of $2, 586, 560.11." (Emphasis added.) As Aldous argues, this single sentence from the judgment demonstrates that judicial estoppel was improper.

         Nonetheless, the district court found that the "record clearly reflects the court's acceptance of and reliance on Plaintiffs' prior position in the Hill lawsuit." Charla G. Aldous, P.C., 92 F.Supp.3d at 568. The evidence cited by the district court does not show that the prior court accepted $668, 068.31 as the full measure of defense costs. It shows the parties agreed "to be bound by [the prior court's] attorney's fees determination" and "agreed that they would submit the issue of attorney's fees to [a magistrate judge]; that they could appeal only to [a district court judge]; and that they would not request an additional evidentiary hearing before [the district court judge]." Id. The ...

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