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Two people injured in a 1992 accident allegedly caused by a trucking firm employee can’t collect damages that a jury awarded against the trucking firm’s insurance company because the judgment isn’t the result of a fully adversarial proceeding, the 5th Court of Appeals ruled recently. The 5th Court’s April 16 ruling came in Stroop, et al. v. Northern County Mutual Insurance Co., et al. and Dillen, et al. v. Charter County Mutual Insurance Co., et al. The Dallas appeals court issued its latest ruling � its third in the case � after a decade-long legal battle that has twisted and turned through three different suits in three state district courts. At issue in Stroop is whether the Texas Supreme Court’s 1996 ruling in State Farm Fire and Casualty Co. v. Gandy precludes two victims of a 1992 accident from recovering damages from an insurance carrier for the trucking firm whose driver was involved in the accident. In Gandy, a woman sued her stepfather, who was insured by State Farm under a homeowner’s policy. Without going to trial, the woman settled the suit with the stepfather, who agreed to a judgment against himself and assigned his claims against State Farm to the woman. In exchange, the woman agreed not to execute the judgment against the stepfather. A similar agreement is involved in Stroop, which stems from an April 7, 1992, accident in which Ray Dillen and his passenger, Deniese Stroop, alleged they suffered “catastrophic injuries” when their vehicle collided with an 18-wheel truck driven by a Sunset Transportation Co. employee, according to a brief filed with the 5th Court on behalf of Stroop and Dillen. Gregory Ave, Northern’s attorney, says the ruling in Stroop indicates that for a claimant to pursue a tortfeasor’s insurer, the claimant must reduce the claim to a bona fide judgment that is the product of a fully adversarial trial in which the insured is a party. “There are no shortcuts,” says Ave, a partner in Touchstone, Bernays, Johnston, Beall, Smith & Stollenwerck in Dallas. “Agreed judgments and settlements with the insured whereby the insured is no longer genuinely exposed to liability are not an effective avenue to the insured’s liability policy.” As noted in the 5th Court’s opinion, in Dallas’ 95th District Court, Stroop and Dillen filed Dillen, et al. v. Glidewell Corp, et al. in 1994 against Sunset, its truck driver and the leasing company that owned the truck involved in the collision. Northern declined to defend Sunset in that suit. According to the 5th Court’s opinion, Northern contended that Sunset canceled its insurance policy with Northern several days before the accident. According to the opinion, Sunset purchased a less expensive policy from Underwriters Lloyds Insurance Co., and that policy took effect on April 1, 1992. Because Underwriters Lloyds had been designated as an “impaired insurer” by the time Stroop and Dillen filed their suit, the Texas Property and Casualty Guaranty Association assumed Sunset’s defense, according to the opinion. The parties settled Dillen v. Glidewell in 1996 without going to trial, and Texas Property agreed to pay Stroop and Dillen $52,500 each plus court costs. Sunset also agreed to a $750,000 judgment in favor of Dillen and a $500,000 judgment in favor of Stroop and assigned Stroop and Dillen Sunset’s rights under the Northern policy, according to the opinion. “In return, Dillen and Stroop agreed not to execute personally against Sunset on the agreed judgments,” Justice Michael J. O’Neill wrote for the 5th Court. With Sunset’s assigned rights in hand, Stroop and Dillen initiated legal action against Northern. In April 1996, Dillen and Stroop filed Stroop, et al. v. Northern County Mutual Insurance Co., et al. in Dallas’ 14th District Court, alleging that Northern breached its obligations under the policy with Sunset in failing to defend the trucking company. According to the 5th Court’s opinion, Stroop and Dillen sought recovery from Northern on the agreed judgments against Sunset. But the 14th District Court granted summary judgment to Northern on the basis that the Texas Supreme Court’s 1996 decision in Gandy voided Sunset’s assignment of its rights to Stroop and Dillen. O’Neill noted in the opinion that the 5th Court initially affirmed the summary judgment, holding in December 1999 that Northern had proved as a matter of law that the assignment of rights was void. According to the 5th Court’s opinion, in 2000, Stroop and Dillen returned to the 95th District Court, where they had filed Dillen, et al. v. Glidewell Corp., et al., and obtained a turnover order, which required Sunset to turn over its rights against Northern to Stroop and Dillen, who then filed a second suit against Northern in Dallas’ 162nd District Court. The case also restarted at the appellate level. In December 2000, the 5th Court, acting on a motion for rehearing filed by Stroop and Dillen, withdrew its initial opinion declaring the assignment invalid and held that Sunset’s policy from Northern had not been cancelled before the accident. In December 2002, the plaintiffs’ second suit against Northern went to trial in the 162nd District. O’Neill noted in the 5th Court’s opinion that the jury found that the Sunset truck driver was 55 percent responsible for the accident and that Dillen was 45 percent responsible. The jury awarded $140,500 to Dillen and $360,000 to Stroop, according to the opinion. But 162nd District Judge Bill Rhea threw out the verdict. Rhea granted summary judgment as well as judgment notwithstanding the verdict in favor of Northern. Stroop and Dillen appealed. “The issue in this appeal turns on whether the jury trial in the second suit was a “fully adversarial trial,’ as required under Gandy,” O’Neill wrote in the 5th Court’s opinion. As noted in the opinion, the purpose of the trial was to find facts concerning Sunset’s fault and Dillen and Stroop’s damages from the collision. “But Sunset was not a named defendant, was not served with citation and did not make an appearance in the second suit,” O’Neill wrote. The 5th Court found that the trial was not a fully adversarial proceeding because any fact issues addressed by the “purported verdict” had previously been resolved when Stroop and Dillen settled with Sunset. Justices Jim Moseley and Martin Richter joined O’Neill in the opinion. The appeals court also held that Stroop and Dillen could not recover damages from Northern because they signed an agreement with Sunset that released Sunset from all liability resulting from the accident. Thus, Northern’s indemnity obligation under its policy with Sunset to pay sums that Sunset “legally must pay” could not be triggered by any judgment resulting from the jury verdict in the second suit against Northern, O’Neill wrote in the opinion. Ave, Northern’s attorney, says Stroop expands on Gandy, making it clear that a fully adversarial proceeding is required whether, as in Gandy, an insurer defended its insured under a reservation of rights or, as in Stroop, the insurer declined to provide a defense. Michael W. Lee, a Houston solo who represents Stroop and Dillen, contends that the 5th Court’s application of Gandy results in an unconstitutional taking of his clients’ private property rights without due process and also violates the open-courts provision of the Texas Constitution. “The plaintiffs are never going to have their day in court to try their case against Sunset,” Lee says. But Ave contends that Stroop and Dillen could have had their day in court against Sunset but chose to settle without a trial so that they could obtain an assignment of the trucking firm’s rights against Northern. Lee says the Supreme Court caught his clients unaware when it issued the decision in Gandy in July 1996 � after they had settled with Sunset. The high court made Gandy retroactive to pending cases. The consequence of the 5th Court’s decision, based on Gandy, is that the valuable rights Stroop and Dillen had as a result of the settlement “just evaporated,” Lee says. Stroop and Dillen will file a motion for rehearing with the 5th Court, he says. Elaborating on Gandy Michael Huddleston, a Dallas attorney who represented State Farm in Gandy, says the 5th Court’s decision in Stroop further defines and elaborates on Gandy. If claimants have relied on a pretrial covenant with the insured � as Stroop and Dillen did with Sunset � that in itself may make the process non-adversarial even if the claimants go to trial, says Huddleston, a partner in Shannon Gracey Ratliff & Miller. Huddleston says the 5th Court makes it clear in Stroop that a claimant can’t resurrect an unlitigated claim against an insured in an insurance coverage suit against the insured’s carrier. Still an unanswered question, Huddleston says, is what happens when an insured is broke. He says the rule under Gandy puts the heaviest burden on an insured who has been sued but has no money to defend itself in a trial and nothing to trade but the assignment of its rights against the insurer who refused to defend it. According to the 5th Court’s opinion, Northern attempted to defend the actions of Sunset’s driver in trial in the second suit that Stroop and Dillen filed against Northern. But the court held that Northern’s attempt to reconstruct a defense cannot be deemed a “fully adversarial trial” because Northern had no control over witnesses. Ave says Sunset was not involved in the trial and its truck driver refused to testify. “What did Sunset care? It had a release,” Ave says.

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