Education Management, Inc. v. Scottsdale Insurance Company

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 07-30205
EDUCATION MANAGEMENT, INC.
Plaintiff - Appellant
v.
SCOTTSDALE INSURANCE COMPANY
Defendant - Appellee
Appeal from the United States District Court
for the Eastern District of Louisiana
(2:06-cv-05846-HGB-DEK)
Before WIENER, BARKSDALE, and DENNIS, Circuit Judges.
PER CURIAM:*
In December 2002, Plaintiff-Appellant Education Management, Inc.
(“EMI”) was sued by numerous individuals in Mississippi state court for
emotional and psychological harm assertedly incurred in EMI’s “re-birthing”
workshops. Defendant-Appellee Scottsdale Insurance Company (“Scottsdale”),
which provided Commercial General Liability Insurance to EMI, defended EMI
in this suit under a reservation of rights.
United States Court of Appeals
Fifth Circuit
F I L E D
January 31, 2008
Charles R. Fulbruge III
Clerk

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No. 07-30205
1 Scottsdale and EMI have reached a settlement on Scottsdale’s declaratory judgment
action and the district court has dismissed that case.
2 Fed. R. Civ. P. 13(a).
2
In April 2004, Scottsdale filed suit in the Eastern District of Louisiana
seeking a declaratory judgment that its Policy No. CLS705445, which covered
EMI for the period from August 26, 2000 to August 26, 2001, did not require it
to defend and indemnify EMI against the state claims. EMI responded with a
counterclaim that this policy did cover the state claims against it.1
In September 2006, EMI filed the instant suit, claiming that its Policy No.
CLS626016, which covered EMI for the period from August 26, 1999 to August
26, 2000, entitled it to defense and indemnification from Scottsdale for the state
claims, and that Scottsdale had violated various insurance laws by refusing
coverage. Scottsdale filed a motion for summary judgment, which the district
court granted on the basis that EMI’s claims under Policy No. CLS626016 should
have been raised as compulsory counterclaims in Scottsdale’s earlier declaratory
judgment action. EMI timely filed a notice for appeal.
We are convinced that the district court correctly barred EMI from
bringing its claims under Policy No. CLS626016. Pursuant to Federal Rule of
Civil Procedure 13, EMI must have raised its claims under Policy No.
CLS626016 as compulsory counterclaims in Scottsdale’s 2004 declaratory
judgment action as they “arise[] out of the transaction or occurrence that [was]
the subject matter”2 of that suit, viz., incidents occurring at EMI’s “re-birthing”
classes. Although several of the state court plaintiffs were injured during the
period covered by Policy No. CLS626016, EMI did not assert claims for coverage
under this policy in the counterclaim it filed in response to Scottsdale’s 2004
declaratory judgment action. Neither did EMI submit a supplemental
memorandum therein as to whether Policy No. CLS705445 was a renewal of
Policy No. CLS626016 when the district court requested briefing on this issue.

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No. 07-30205
3
As EMI’s claims under Policy No. CLS626016 arose out of the same transaction
or occurrence as those addressed in the earlier suit, such claims are compulsory
counterclaims. EMI thus waived these compulsory counterclaims when it failed
to assert them in Scottsdale’s 2004 lawsuit. As such, EMI’s claims are deemed
to have been adjudicated in a prior final judgment and are therefore barred by
res judicata. The judgment of the district court is AFFIRMED.

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