Fort Worth Appeals Court Holds Insurance Company is Estopped from Forcing Arbitration

In an interlocutory appeal, Texas’ 2nd District Appeals Court has affirmed a trial court’s order denying arbitration. In New Hampshire Insurance Co. v. Magellan Reinsurance Company Ltd., No. 02-12-00196-CV (Tex.App.–Fort Worth, 2013), New Hampshire Insurance and Magellan Reinsurance Company entered into a reinsurance agreement where a trust account was set up to perfect payment. As part of the reinsurance agreement, the two companies agreed to arbitrate all disputes related to the interpretation of the agreement in New York.

According to Magellan, New Hampshire allegedly withdrew more than $2 million from the trust account. New Hampshire also reportedly informed Magellan that an additional $1.2 million was due pursuant to the parties’ agreement. Magellan responded by stating New Hampshire made several accounting errors and requested reimbursement of nearly $1 million. Instead, New Hampshire demanded an additional $1.4 million from Magellan. When Magellan refused payment, New Hampshire filed litigation to wind up Magellan’s allegedly insolvent business in the Turks and Caicos Islands (“TCI”) where Magellan is chartered. Magellan filed a motion to stay judicial proceedings and compel arbitration pursuant to the reinsurance agreement. New Hampshire argued against arbitration by stating the dispute was not related to the interpretation of the parties’ agreement. The TCI trial court agreed with New Hampshire and ordered that Magellan be wound up due to insolvency. On appeal, the lower court’s order was reversed and the case was remanded.

Before the lower TCI court issued its initial ruling, Magellan began proceedings to stay the TCI litigation and compel arbitration in New York. New Hampshire again argued the parties’ dispute was not subject to arbitration because it was not related to the interpretation of their agreement. After the TCI trial court refused to compel arbitration, the New York court agreed with New Hampshire.

While the TCI litigation was still pending, Magellan filed judicial proceedings seeking declaratory relief in Tarrant County, Texas, where the company’s principal place of business is located. New Hampshire then filed a motion to dismiss or abate the Texas action and the Texas court abated the proceedings pending the outcome of the TCI litigation. Finally, a TCI court held that New Hampshire was not a creditor of Magellan and could not wind up the company’s business. Two years later, the Texas trial court vacated its order abating the case.

Approximately ten years after the parties’ initial dispute arose, New Hampshire filed a motion to compel arbitration in the Texas court. Magellan responded by arguing that “judicial estoppel, judicial admission, collateral estoppel, and waiver barred New Hampshire” from compelling the case to arbitration. In addition, Magellan completely amended the company’s claims against New Hampshire. Instead of seeking declaratory relief, Magellan accused New Hampshire of breach of contract, fraud, conversion, and several other allegations. The trial court refused to compel the dispute to arbitration and New Hampshire then filed an interlocutory appeal with the 2nd Court of Appeals.

On appeal, New Hampshire argued that the company’s past claims against arbitration were irrelevant because they addressed Magellan’s previous request for declaratory relief. According to New Hampshire, the company should be allowed to compel arbitration because Magellan’s new claims were separate and distinct from those previously filed. Magellan responded by stating none of its claims against New Hampshire were related to the interpretation of the parties’ agreement. In addition, Magellan argued that New Hampshire was estopped from compelling arbitration regarding any of Magellan’s claims due to the company’s prior conduct in three separate judicial venues.

After holding that Magellan’s breach of contract claims were within the scope of the parties’ agreement to arbitrate, the Fort Worth Court stated New Hampshire was judicially estopped from compelling the dispute to arbitration. According to the court,

The foregoing portions of the record thus show that, regarding the scope of the TCI and New York litigation as it pertained to the propriety of compelling arbitration, New Hampshire, to its benefit, maintained a position in the TCI lower court and the New York proceeding that was inconsistent with its position in the Texas action. Now, a number of years later, New Hampshire is attempting to accomplish a similar feat; it successfully argued against arbitration of Magellan’s claims in the TCI litigation and the New York proceeding but now wants to compel arbitration. The unfair advantage that New Hampshire stands to gain simply consists of the fruits of shifting position to suit the exigencies of each particular cause. See Ferguson, 295 S.W.3d at 643; Moore, 629 S.W.2d at 829. This is the precise conduct that judicial estoppel is meant to prohibit.

In addition, the 2nd District Appeals Court dismissed New Hampshire’s argument that Magellan’s amended claims were distinct from the previous claims and thus subject to arbitration by stating,

According to New Hampshire, “Magellan identifies no case law or other authority . . . holding that an alleged waiver or estoppel of a party’s right to arbitration applies to a later-amended complaint alleging entirely new causes of action.” This is a compelling argument, but it is ultimately unpersuasive because it relies upon a hypertechnical perspective of the proceedings that is inconsistent with the reality of what this dispute has always been, and continues to be, about—both parties’ rights and duties and compliance or noncompliance with one or more terms of the Reinsurance Agreement.

The court continued,

A thorough review of the record thus reveals this: Neither New Hampshire’s varying characterizations of the proceedings nor the labels attached to the claims alleged by Magellan in its petitions define the essence of the dispute between New Hampshire and Magellan. The dispute has always centered around, and continues to entail, each party’s rights and duties and compliance or noncompliance under the Reinsurance Agreement. On more than one occasion, in one form or another, New Hampshire has argued against the arbitrability of this dispute. Its conduct has been overwhelmingly inconsistent with its present attempt to compel arbitration. Accordingly, in light of all the foregoing, we cannot agree with New Hampshire’s overriding argument that it has never challenged the arbitrability of the claims alleged by Magellan in its second amended petition.

Finally, the 2nd District of Texas held that New Hampshire was judicially estopped from compelling the dispute to arbitration and affirmed the order of the trial court.