                      UNITED STATES COURT OF APPEALS
                           FOR THE FIFTH CIRCUIT

                           _____________________

                                No. 91-6152
                           _____________________

                   COLUMBIA MUTUAL INSURANCE COMPANY,
                    formerly known as COLUMBIA MUTUAL
                        CASUALTY INSURANCE COMPANY,

                                                      Plaintiff-Appellant,

                                   VERSUS

                            FIESTA MART, INC.,

                                                       Defendant-Appellee.

         ____________________________________________________

               Appeal from the United States District Court
                    for the Southern District of Texas

      _____________________________________________________
                         (March 26, 1993)

Before WILLIAMS, HIGGINBOTHAM, and BARKSDALE, Circuit Judges.

BARKSDALE, Circuit Judge:

     Columbia Mutual Insurance Company appeals the summary judgment

awarded its insured, Fiesta Mart, Inc., in Columbia's declaratory

judgment action on its liability (coverage) for a state court

judgment against Fiesta. Because the state court findings in issue

-- incorporating coverage terms from the Columbia policy -- were

not essential to the state court judgment, and because privity is

lacking between Columbia and Fiesta, Columbia is not collaterally

estopped from relitigating those findings.                 And, because the

Columbia policy does not cover the damages awarded by the state

court,    we    REVERSE   and   RENDER   in   favor   of   Columbia   on   its
declaratory judgment claim, and REMAND for disposition of the

remaining claims.1

                                       I.

     From April 23, 1987, to April 22, 1988, Columbia was an excess

insurer for Fiesta, which owns and operates a chain of grocery

stores in the Houston area that caters to the Hispanic community.

From 1982 to 1988, Fiesta leased vendor locations in its stores to

Monytron,   Inc.,   which    offered    financial    services    to   Fiesta's

customers. Unknown to Fiesta, Monytron was defrauding customers by

siphoning   deposits   and   investments       through   a   "Ponzi   scheme",

involving the illegal conversion of pesos to dollars.2

     Beginning in late 1988, hundreds of aggrieved customers sued

both Monytron and Fiesta in a state court class action, claiming

violations of the Texas Securities Act, Tex. Rev. Civ. Stat. Ann.

art. 581-1 et seq., the Texas Deceptive Trade Practices Act (DTPA),

Tex. Bus. & Com. Code Ann. § 17.01 et seq., common law fraud,

negligence, and gross negligence.           In addition to economic losses,

the plaintiffs claimed damages for mental anguish (some with

1
     Fiesta counterclaimed against Columbia for breach of contract,
breach of a duty of good faith and fair dealing, violations of the
Texas Insurance Code, negligence, and gross negligence. Columbia
then counterclaimed for attorneys' fees, alleging that Fiesta's
counterclaims were "groundless and brought in bad faith or for the
purpose of harassment". The district court issued a 28 U.S.C. §
1292(b) certificate on the summary judgment, which we construed as
a Fed. R. Civ. P. 54(b) certificate; and it stayed the
counterclaims pending this appeal. On remand, Fiesta's counter-
claims should, of course, be dismissed.
2
     A Ponzi scheme is "an investment swindle in which some early
investors are paid off with money put up by later ones in order to
encourage more and bigger risks". Webster's Ninth New Collegiate
Dictionary 914 (1990).

                                  - 2 -
physical manifestations)       resulting   from   the    "traumatic    loss".

Columbia received notice of the action in December 1988; and in

January 1989, it issued a reservation of rights letter, reserving

any coverage   defenses   in    the   event   Fiesta    was   found   liable.

Furthermore, it did not provide a defense to Fiesta.3

     The plaintiffs sought approximately $100 million.                But, on

August 31, 1990, 17 days before trial was to begin, Fiesta advised

Columbia that the case could be settled for $7 million and demanded

that Columbia either accept or deny coverage by September 6.

Columbia elected to stand on its prior reservation of rights.

     That "trial" began and ended on September 17.            It lasted only

one hour, and consisted solely of the admission, without objection,

of several volumes of packaged exhibits.                The next day, the

district court entered findings of fact and conclusions of law,

which had been agreed upon, drafted, and submitted by the parties

before trial, holding Fiesta liable in the amount of $7 million4

for unknowing violations of §§ 17.46(b)(2) and (3) of the DTPA and




3
     The parties dispute who did provide the defense. Columbia
contends that CIGNA Property and Casualty Company, which provided
Fiesta's primary liability coverage during the Columbia policy
period, provided defense through its affiliated claims servicing
organization, ESIS, Inc. Fiesta denies that either CIGNA or ESIS
defended it.    The Hartford Casualty Insurance Company, which
provided primary liability coverage for the policy period preceding
CIGNA's, acknowledged a duty to defend Fiesta and paid a portion of
the defense costs.
4
     The findings and conclusions refer to the judgment as a
"compromise agreement" between the parties; and, if promptly paid,
Fiesta would be released from liability for prejudgment interest.


                                  - 3 -
ordinary negligence.5

     Fiesta satisfied the judgment and demanded indemnity from

Columbia.6      Columbia     responded   by   initiating   this   action    in

November 1990, seeking a declaratory judgment that it had no duty

to indemnify Fiesta.         On cross motions for summary judgment, the

district     court   ruled    for   Fiesta,   holding   that   Columbia    was

obligated to indemnify it for the judgment.

                                      II.

     Among other contentions, Columbia maintains that the district

court erred in ruling (1) that Columbia was collaterally estopped

from relitigating the state court's factual findings, and (2) that




5
     Section 17.46(a) makes unlawful false, misleading,                     or
deceptive acts or practices in the conduct of any trade                     or
commerce. Section 17.46(b) provides, in relevant part:

     (b) [T]he term "false, misleading, or deceptive acts or
     practices" includes, but is not limited to, the following
     acts: ...

          (2) causing confusion or misunderstanding as to the
     source, sponsorship, approval, or certification of goods
     or services;

          (3) causing confusion or misunderstanding as to
     affiliation, connection, or association with, or
     certification by, another; ....

Tex. Bus. & Com. Code Ann. § 17.46.
6
     The findings stated that $5.5 million of the damages were
caused during the Columbia/CIGNA policy period (April 23, 1987, to
April 22, 1988).     The remaining $1.5 million in damages was
attributed to the Hartford policy period, and was paid by Hartford.
Fiesta demanded $4.5 million with interest from Columbia,
representing the amount exceeding Fiesta's $1 million primary
coverage limit under the CIGNA policy.

                                     - 4 -
the Columbia policy provided coverage for the damages awarded.7

Needless to say, we apply Texas law in deciding these issues.   Erie

R. Co. v. Tompkins, 304 U.S. 64 (1938); Allison v. ITE Imperial

Corp., 928 F.2d 137, 138 (5th Cir. 1991).   And, because these are

issues of law, we review the district court's conclusions de novo.

Enserch Corp. v. Shand Morahan & Co., 952 F.2d 1485, 1492 (5th Cir.

1992).   Moreover, such de novo review is also required because a

summary judgment is at issue.     E.g., Johnson v. Odom, 910 F.2d

1273, 1277 (5th Cir. 1990), cert. denied, 111 S.Ct. 1387, ___ U.S.

___ (1991).

                                 A.

     It is well-settled in Texas that when an insurer breaches a

duty to defend its insured, it is bound, in subsequent proceedings,

by a settlement or judgment rendered against the insured.    Rhodes

v. Chicago Ins. Co., 719 F.2d 116, 120 (5th Cir. 1983).     But, of

course, an insured's liability and whether there is concomitant

coverage are "separate and distinct" matters; and a prior judgment

establishing liability is not binding in a subsequent proceeding on

coverage.     Employers Casualty Co. v. Block, 744 S.W.2d 940, 943


7
     Columbia also asserts, with considerable force, that the state
court's findings were the product of collusion between the
underlying parties and, thus, not binding on it. See Coblentz v.
American Surety Co. of New York, 416 F.2d 1059, 1063 (5th Cir.
1969); Britt v. Cambridge Mutual Fire Ins. Co., 717 S.W.2d 476, 483
(Tex. App.--San Antonio 1986, writ ref'd n.r.e.). Additionally, it
contends that it had no duty to defend Fiesta, under a policy
exclusion, because an "other insurer" at all times had a duty to
defend it, or, if not, that Fiesta breached a duty to maintain
primary coverage containing such a duty.        Because collateral
estoppel does not apply for the reasons stated infra, we need not
address these alternative contentions.

                                - 5 -
(Tex. 1988); see also Enserch, 952 F.2d at 1493.                      Furthermore,

whether    an   insurer   is   bound     by     a   specific    finding   from    the

liability action -- i.e., whether it is collaterally estopped from

contesting      that   finding    --     depends      upon     "whether   the    fact

determined in the prior suit was essential to the judgment in the

prior suit, and whether the necessary requirement of privity exists

between the parties".      Block, 744 S.W.2d at 943; see also Edinburg

Consolidated I.S.D. v. INA, 806 S.W.2d 910, 913-14 (Tex. App.--

Corpus Christi 1991, no writ).            Assuming, without deciding, that

Columbia breached a duty to defend Fiesta, we hold that it is not

bound by the hereinafter-described state court findings in issue,

because they were not essential to the liability judgment and

because the requisite privity was lacking.

     The state court finding upon which Fiesta relies states: "An

occurrence of Fiesta Mart, Inc.'s act of negligence and negligently

causing confusion and misunderstanding and the continuous exposure

to that occurrence ... proximately caused and produced resulting

property damage and bodily injury and recoverable attorneys' fees

...". (Emphasis added.)          Although coverage was not at issue in the

state   court    litigation,     this    language      virtually     mirrors     that

contained in the relevant coverage provisions of the Columbia

policy.8        Additionally,      as    noted,       the    findings     precisely

8
     Columbia's basic coverage clause provides:

     COVERAGE: The Company hereby agrees to indemnify the
     Insured against such ultimate net loss in excess of the
     Insured's primary limit as the Insured sustains by reason
     of liability, imposed upon the Insured by law or assumed
     by the Insured under contract, for damages because of

                                        - 6 -
apportioned the damages between the applicable policy periods,

stating    that    $5.5    million   and    80%    of    the    court     costs   were

"proximately caused and produced" between April 23, 1987, and April

22, 1988 (the Columbia policy period).

     The characterizations of Fiesta's actions as an "occurrence"

and the damages as "bodily injury" and "property damage" were not

essential to determining Fiesta's liability. See Block, 744 S.W.2d

at   943   ("the    recitation       in    the    agreed       judgment    that   the

`[plaintiffs] sustained property damage ... as a result of an

occurrence on [a specific date within the policy period]' was not

essential in determining [the insured's] liability"). Furthermore,

there was no valid reason for the court to apportion the damages

between the applicable policy periods.             Id.     To maintain an action


     personal injury or property damage to which this policy
     applies, caused by an occurrence anywhere in the world.

(Emphasis added.)         The policy defined "occurrence" as follows:

     "OCCURRENCE" means an accident, including continuous or
     repeated exposure to conditions, which results in
     personal injury or property damage neither expected nor
     intended from the standpoint of the Insured.          All
     personal injury and property damage arising out of
     continuous or repeated exposure to substantially the same
     general conditions shall be considered as arising out of
     one occurrence.

(Emphasis added.)    An endorsement to the policy modified the
definition of "personal injury" to conform to the "bodily injury"
clause in the underlying (CIGNA) primary policy. "Bodily injury",
as defined in that policy and, thus, incorporated in the Columbia
policy, means

     bodily injury, sickness or disease sustained by any
     person which occurs during the policy period, including
     death at any time resulting therefrom.

(Emphasis added.)

                                      - 7 -
under the DTPA, a consumer need only prove that a deceptive act or

practice was a "producing cause" of "actual damages".              Tex. Bus.

Com. Code Ann. § 17.50(a).       Similarly, negligence requires only

proof of "a duty of reasonable care, breach of that duty, and

damages   resulting from the breach."       Hayes v. United States, 899

F.2d 438, 443 (5th Cir. 1990).

     Additionally, because "the respective positions of [Columbia

and Fiesta] regarding coverage were in conflict", the parties were

not in privity.     Block, 744 S.W.2d at 943; see also Cluett v.

Medical Protective Co., 829 S.W.2d 822, 827 (Tex. App.--Dallas

1992, writ denied).9

     Accordingly, we conclude that the findings in issue are not

binding on   Columbia   and,   therefore,    do   not   preclude    it   from

litigating coverage in this case.         Thus, we turn to whether the

Columbia policy covers the damages awarded against Fiesta.

                                   B.

     As   noted,   Columbia    contracted   to    indemnify   Fiesta     for

liability resulting from an "occurrence", defined as "an accident,

including continuous or repeated exposure to conditions, which

results in [bodily] injury or property damage neither expected nor

intended from the standpoint of the Insured".           For the following



9
     Fiesta's reliance on U.S. Aviation Underwriters, Inc. v.
Olympia Wings, Inc., 896 F.2d 949 (5th Cir. 1990) for the
proposition that it was in privity with Columbia is misplaced. In
that case, we recognized only that "an insurer which is obliged to
defend its insured but flatly refuses to do so is considered in
privity with the insured on all essential issues in the underlying
action". Id. at 955 (emphasis added).

                                  - 8 -
reasons, we hold that the injuries found for the class action

plaintiffs were not caused by an "occurrence".

     The alleged "conditions" to which the class action plaintiffs

were exposed through Fiesta's negligence and DTPA violations were

the fraudulent activities of Monytron.                 In their complaint, the

class action plaintiffs described these activities as "a malicious

scheme ... to defraud class members by inducing them through false

representations and false promises to place their savings or

investments      in     `Monytron'".         Although       Fiesta    attempts     to

characterize the occurrence as exposure to its own negligent and

unknowing    acts,      its   liability      is   clearly    "related     [to]   and

interdependent" on Monytron's fraud.                Old Republic Ins. Co. v.

Comprehensive Health Care Assoc's., Inc., 786 F. Supp. 629, 632

(N.D. Tex. 1992).         Without that fraud, there would have been no

basis for suit against Fiesta; thus, the "ultimate issue" is

whether the policy covers Monytron's fraudulent activities.                       See

id. (in claim against employer for negligence with respect to

employee's    sexual     harassment     of    fellow    employee,      "occurrence"

refers to employee's harassment, not employer's negligence); see

also Thornhill v. Houston Gen. Lloyds, 802 S.W.2d 127, 130 (Tex.

App.--Fort Worth 1991, no writ); Centennial Ins. Co. v. Hartford

Accident and Indemnity Co., 821 S.W.2d 192, 194 (Tex. App.--Houston

[14th   Dist.]        1991,   no   writ);      Fidelity      and     Guaranty    Ins.

Underwriters, Inc. v. McManus, 633 S.W.2d 787, 790 (Tex. 1982).

     Although we find no guidance from the Texas Supreme Court on

whether exposure to fraud constitutes an occurrence under the above


                                       - 9 -
definition, we agree with the conclusion of the Texas Court of

Appeals in a substantially similar matter, Houston Petroleum Co. v.

Highlands Ins. Co., 830 S.W.2d 153, 155-56 (Tex. App.--Houston [1st

Dist.] 1990, writ denied), which held that it does not.               In that

case, also a declaratory judgment action by an insurer, the insured

had been sued by investors for economic losses, among other things,

resulting from the insured's alleged fraud with respect to a

limited partnership venture.          In determining whether there was

"bodily injury", and applying an occurrence clause identical to

Columbia's, the court held that "exposure to `fraudulent promises,

false representations, and untrue statements' does not, as a matter

of    law,   fall   within   the   plain   meaning   of   the   definition   of

`occurrence'". Id. at 156. It explained that "[t]o hold otherwise

would require us to unnaturally extend the definition of the term

`conditions,' and consequently, the definition of `bodily injury'".

Id.

       Turning      to   whether    the    plaintiffs'    lost    investments

constituted "property damage" under the policy, the court noted

that the same definition of "occurrence" was applicable.                 But,

instead of first determining whether there was an occurrence, it

ruled that the loss was not "property damage".             See id.   In Royal

Ins. Co. of America v. Quinn-L Capital Corp., 960 F.2d 1286, 1295

(5th Cir. 1992), we interpreted a similar holding to preclude

coverage solely for lack of an occurrence, regardless of bodily




                                     - 10 -
injury or property damage.10 We emphasized that, under an identical

definition of "occurrence", both an occurrence and an injury are

required for coverage.    Id.     Therefore, because we hold that

exposure to Monytron's fraud does not constitute an "occurrence",

we need not address whether the damages found by the state court

constitute "bodily injury" or "property damage".

                                 III.

     For the foregoing reasons, the summary judgment is REVERSED,

and judgment is RENDERED in favor of Columbia on its declaratory

judgment (coverage) claim.   Because there are additional claims

pending in the district court, we REMAND for their disposition.

          REVERSED, RENDERED and REMANDED.




10
     In Quinn-L, the district court held both that alleged personal
injuries, in the form of mental anguish, were not caused by an
occurrence, and that lost investments did not constitute property
damage. 960 F.2d at 1295.

                                - 11 -
