POLICY’S LIMITATION ON LIABILITY COVERAGE DID NOT APPLY TO DEFENSE COSTS

Anadarko Petroleum Corp. v. Houston Casualty Co.
Supreme Court of Texas, No. 16-1013 (January 25, 2019)
Opinion by Justice Boyd (linked here)
In yet another insurance dispute arising out of the 2010 Deepwater Horizon drilling-rig catastrophe, the Texas Supreme Court rejected the insurer’s argument that its policy limited coverage for defense costs to a fraction of the actual costs. The opinion is another lesson in the Court’s approach to interpreting insurance policies.

Anadarko owned a 25% minority interest in BP’s Deepwater Horizon operation. After a federal court held BP and Anadarko jointly and severally liable for damages under the Oil Pollution Act, Anadarko reached a settlement with BP, under which Anadarko paid BP $4 billion and relinquished its 25% interest in exchange for BP’s agreement to indemnify Anadarko for any additional liability. BP did not agree to pay Anadarko’s defense costs, so Anadarko sought to recover those costs, which exceeded $100 million, under an excess liability policy purchased on the Lloyd’s London market. The policy provided coverage up to $150 million for Anadarko’s “Ultimate Net Loss,” which included both liability and defense costs. The Underwriters, however, took the position that a joint-venture endorsement limited the insurers’ responsibility to 25 % of the limit, i.e., $37.5 million, which it paid. Anadarko acknowledged the $37.5 million limit applied to the $4 billion settlement payment, but argued it did not limit its right to recover defense costs up to $112.5 million—the remaining balance of the $150 million policy limit.
The joint-venture endorsement had three clauses. The first provided the basic coverage limitation: [A]s regards any liability of [Anadarko] which is insured under this Section III and which arises in any manner whatsoever out of the operation or existence of any joint venture … in which [Anadarko] has an interest, the liability of Underwriters under this Section III shall be limited to the product of (a) the percentage interest of [Anadarko] in said Joint Venture and (b) the total limit afforded [Anadarko] under this Section III.
The second and third clauses provided exceptions to the limit imposed by the first clause. The trial court granted part of the relief sought by Anadarko, finding the first clause applied but was modified by the third clause, so that Anadarko was entitled to recover some, but not all, of the costs it requested. The Beaumont Court of Appeals granted the parties’ cross-petitions for permissive appeal, reversed the judgment, and granted judgment for the Underwriters. The appellate court agreed the first clause’s limitation was triggered, but held neither of the exceptions applied. On review, the Texas Supreme Court disagreed with both of the lower courts, and held the limitation imposed by the first clause applied only to Anadarko’s liability, not to defense costs.

The Court parsed the first clause, quoted above, in the context of the policy’s defining “Ultimate Net Loss” to mean:
the amount [Anadarko] is obligated to pay, by judgment or settlement, as damages resulting from an “Occurrence” covered by this policy, including the service of suit, institution of arbitration proceedings and all “Defence Expenses” in respect of such “Occurrence.”
After consulting dictionaries, cases describing common uses in insurance and other legal contexts, and other provisions in the policy using the term “liability,” the Court construed the term as referring to the insured’s “legally imposed obligation to pay for a third party’s damages in response to a written claim.” As such, the term does not encompass defense costs, i.e., the “voluntarily assumed obligation to pay lawyers, investigators, or others for services provided to defend against the liability.” Consequently, the Court held, “the liability insured and defense expenses are two separate components of the Ultimate Net Loss,” and only the former is limited by the joint-defense endorsement.

The Court reversed the judgment of the court of appeals, rendered judgment granting Anadarko’s motion for partial summary judgment, and remanded to the trial court “for further proceedings consistent with this opinion”—a determination of the amount of defense costs incurred up to the remaining policy limit.

COURT ERRED IN HOLDING THAT WELLS FARGO FAILED TO PROVE ITS CAPACITY TO SUE FOR NON-JUDICIAL FORECLOSURE

Wells Fargo Bank, N.A. v. Kingman Holdings, LLC
Dallas Court of Appeals, No. 05-17-01240 (January 17, 2019)
Justices Schenck, Reichek (opinion linked here), and Nowell
The Woomers’ home mortgage went through several assignments before they defaulted on their payments in 2016. The only contested issue in this declaratory judgment action was Wells Fargo’s capacity to bring suit to establish its lien and to proceed with a non-judicial foreclosure on the property as trustee for Lehman ABS Mortgage Loan Trust 2007-1, Mortgage Pass-Through Certificates, Series 2007-1. Wells Fargo introduced several documents proving its capacity, including copies of the note, the security instrument, and documents showing the chain of assignments of the security instrument from the original mortgage holder to Wells Fargo. In an attempt to contest Wells Fargo’s capacity to bring suit, Kingman Holdings (which had purchased the home subject to the mortgage) submitted an “attestation” by a records and information management specialist for the Securities and Exchange Commission that “[a] diligent search has this day been made of the records and files of this Commission, and the records and files do not disclose that any filings have been received in this Commission under the name of Lehman ABS Mortgage Loan Trust 2007-1, or Lehman ABS Mortgage Loan Trust 2007-1, Mortgage Pass-Through Certificates, Series 2007-1, pursuant to any of the Acts administered by the Commission.” Kingman argued the attestation showed that the trust of which Wells Fargo claimed to be trustee did not exist “or at least [was] not found in the records of the Securities and Exchange Commission.” The trial court found Wells Fargo had failed to meet its burden to prove capacity and entered judgment against Wells Fargo.

The Dallas Court of Appeals disagreed. It held that Kingman had failed to show Wells Fargo was required to make any filings with the SEC or that the lack of any filings with the SEC prevented Wells Fargo from bringing suit on behalf of the trust. Absent such proof, the attestation was meaningless, and Wells Fargo’s evidence that it was the last entity to which the security interest was assigned was sufficient to conclusively show it had capacity to bring the action. So the appellate court reversed the trial court and rendered judgment declaring that Wells Fargo has a valid and subsisting superior lien on the property.

CONTRACTUAL “LATE-PAYMENT INTEREST” = “COMPENSATORY DAMAGES” FOR SUPERSEDEAS PURPOSES

Top Cat Ready Mix, LLC v. Alliance Trucking, L.P.
Dallas Court of Appeals, No. 05-18-00175-CV (December 27, 2018)
Chief Justice Wright and Justices Evans (Opinion, linked here) and Brown
Under Civil Practice & Remedies Code § 52.006(a) and Appellate Rule 24.2(a)(1), an appellant can supersede a money judgment pending appeal by filing security in an amount equal to the “compensatory damages” and costs awarded in that judgment, plus interest on that amount for the anticipated duration of the appeal. Like attorney’s fees, pre-judgment interest commonly is understood not to be part of the “compensatory damages” amount that must be superseded. See In re Xerox Corp., No. 16-0671, 2018 WL 3077704, at *8 and n. 66 (Tex. June 22, 2018) (orig. proceeding). But what about interest for late payments that is prescribed by the contract upon which the contested judgment is based—“late-payment interest” that, like the principal of the debt, hasn’t been paid and has therefore been awarded to the plaintiff in the judgment? In that case, says the Dallas Court of Appeals, such “contractual interest” is to be treated as part of the “compensatory damages” amount to be superseded in order to stave off execution pending appeal. That “contractual interest” is “a part of the debt, as much so as the principal.” On motion of the appellee Alliance Trucking, therefore, the Court of Appeals increased the supersedeas amount on this appeal to include the “contractual pre-judgment interest” awarded in the judgment, plus interest on that added amount for the estimated duration of the appeal.

EXCLUDING MENTAL-HEALTH EVIDENCE WAS REVERSIBLE ERROR

JBS Carriers, Inc. v. Washington
Supreme Court of Texas, No. 17-0151 (December 21, 2018)
Opinion by Justice Johnson (linked here)
In a rare opinion reversing a judgment as a result of a trial court’s evidentiary rulings, the Supreme Court of Texas overturned a plaintiff’s judgment in a traffic-accident case because the trial court had excluded evidence that a person’s fatal injuries were caused, at least in part, by her own mental health.

A pedestrian died after being run over by an 18-wheeler near an intersection in San Antonio. Her family sued the trucking company and the truck driver. The case was tried to a jury, which allocated 50% of the responsibility to the truck driver, 30% to the trucking company, and 20% to the deceased pedestrian. At trial, the defendants sought to introduce evidence of the pedestrian’s mental health and possible impairment, including an autopsy, medical records, recent prescriptions, and expert testimony, to support their defense that she negligently walked into the road outside the crosswalk when a large truck was moving toward her. The trial court excluded that evidence under Evidence Rule 403, holding it would evoke unfair prejudice that would substantially outweigh its probative value. The family presented opinion testimony attributing the decedent’s decision to enter the street to her misunderstanding the truck driver’s hand gestures to another vehicle’s driver as a signal for her to cross the road. Additionally, there was evidence the truck driver did not see the decedent because he was distracted by the other driver and the truck had a blind spot near its right fender. The trucking company, in addition to being responsible for the driver’s negligence, was found directly liable for negligently training the driver concerning the blind spot.

A divided court of appeals affirmed the judgment, holding the trial court’s exclusion of the mental-health evidence was not an abuse of discretion. In the Texas Supreme Court, both defendants challenged the exclusion of evidence, and the trucking company argued it was erroneously held liable for direct negligence in addition to its respondeat-superior liability for the driver’s negligence. The Court acknowledged that evidentiary rulings are reviewed for abuse of discretion. It reiterated, however, that relevant evidence is “presumed to be admissible,” and the test for excluding evidence under Rule 403 is whether its “probative value is substantially outweighed by the danger of unfair prejudice.” Quoting its 2018 Diamond Offshore opinion, the Court reiterated that “unfair prejudice … means an undue tendency to suggest a decision on an improper basis, commonly … an emotional one.” After reviewing the proffered evidence in the context of the parties’ positions and the admitted evidence, the Court concluded exclusion of the mental-health evidence was an abuse of discretion that was not harmless error because the evidence “likely would have affected the jury’s allocation of responsibility.” The Court’s explanation is destined to be quoted by parties seeking to justify admission of challenged evidence: “Absent the excluded evidence, the jury was not properly informed in making its decision. It had to judge [the decedent’s] decision-making and actions after having seen and heard only a limited, filtered version of the evidence as to those processes and actions.” The case was remanded to the trial court for further proceedings.

The Court reversed and rendered judgment for the trucking company on the “direct negligence” claim, finding legally insufficient evidence of negligent training. The Court—as it has done in previous cases--declined to resolve the propriety of submitting a jury question on an employer’s direct liability for “negligent training and hiring” when the employer does not contest its vicarious liability for an employee’s actions.

NO, YOU DON’T HAVE TO MITIGATE DAMAGES BY FIRING A CLIENT AT THE FIRST MISSED PAYMENT

Wyde v. Francesconi
Dallas Court of Appeals, No. 05-17-01333-CV (December 19, 2018)
Justices Bridges (Opinion linked here), Brown, and Whitehill
A lawyer may withdraw from representing a client when the client does not timely pay the agreed fee. Must the lawyer withdraw at the first missed payment, or risk endangering the right to recover from a non-paying client because continuing that representation amounts to a failure to mitigate damages? “No,” says the Dallas Court of Appeals.

Dan Wyde represented Tatianna Francesconi in her divorce and child-custody lawsuit, with a written fee agreement. Francesconi made sporadic small payments, but never paid any invoice in full. Wyde said he expected the court would require Francesconi’s husband to pay Wyde’s fees, which by the time of judgment totaled over $77,000. The trial court entered a final divorce decree ordering the husband to pay one-half of the incurred fees, but never filled in the blank specifying an amount to be paid. Francesconi and her husband subsequently entered into a Rule 11 agreement under which the husband would pay $40,000 and Francesconi would be responsible for the balance of Wyde’s fees. However, immediately after signing that agreement, Francesconi fired Wyde, and the trial court refused to allow Wyde to participate further in the case or to recover his fees as a third-party beneficiary of the Rule 11 agreement.

Wyde sued Francesconi for breach of contract, seeking to recover $77,779 in unpaid attorney’s fees. At a bench trial, Francesconi successfully argued that Wyde could not recover the full amount of his fees because (1) he failed to mitigate his damages by not withdrawing from representing her after her first failure to pay his fees; and (2) he was estopped from recovering part of his damages because he falsely represented that her husband would be responsible for payment. The trial court found Francesconi had breached the agreement, but awarded Wyde only $7500 in damages. Wyde appealed.

The Dallas Court of Appeals held the trial court erred as a matter of law in holding Wyde had a duty to mitigate his damages by withdrawing from the representation following his client’s breach. The Court described the attorney-client relationship as “different from other relationships such as landlord-tenant that apply the mitigation of damages doctrine.” The Disciplinary Rules do not mandate withdrawal in these circumstances, and indeed encourage lawyers generally to “handle the matter to completion.” Moreover, the Court concluded, “requiring or encouraging attorneys to file a motion to withdraw as soon as a client fails to pay conflicts with the aspirational goals of the Texas Lawyer’s Creed.”

The Court also rejected the trial court’s finding of equitable estoppel, holding there was no evidence Wyde made any false representations to Francesconi. The Court therefore reversed the damages award and remanded to the trial court “for a new trial on damages based on Francesconi’s breach of contract.”

MANDAMUS VACATES TARDY DESIGNATION OF UNKNOWN CRIMINAL AS RESPONSIBLE THIRD PARTY

In re Echols
Dallas Court of Appeals, No. 05-18-01226-CV (December 19, 2018)
Justices Lang-Miers (Opinion, linked here), Fillmore, and Stoddart
Echols sued a physician who treated him for a gunshot wound. About nine months after he answered, the defendant physician sought leave to designate the “Unknown Gunman” who shot Echols as a responsible third party under section 33.004 of the Civil Practice and Remedies Code. When the trial court granted that request, Echols sought mandamus relief, arguing the requested designation was not timely under the statute. The Dallas Court of Appeals agreed and ordered the designation vacated. In so doing, the Court made two significant rulings in areas where there had been sparse authority:

First, breaking new ground, the Court of Appeals held there is no adequate remedy at law or by appeal when a trial court abuses its discretion by improperly granting a motion for leave to designate a responsible third party. Several courts had recognized the availability of mandamus relief when a trial court erroneously denied such a motion, but the Dallas Court went a step further in holding mandamus appropriate where a trial court improperly grants a motion to designate a responsible third party. In the process, the Court parted ways with the San Antonio Court of Appeals, which held earlier this year, in In re Macoroni Enterprises, that parties aggrieved by such an allegedly improper designation did not “show they have no adequate remedy at law,” and therefore that mandamus relief was unavailable.

Second, the Dallas Court joined the Houston First in concluding that section 33.004(j) of the Civil Practice and Remedies Code provides the exclusive procedure for designating as a responsible third party an unknown person whose criminal act contributed to the plaintiff’s loss or injury. Under subsection (j), a defendant must seek to make such a designation “not later than 60 days after the filing of [his] original answer”—as opposed to the more lenient deadline, 60 days before trial, provided in subsection (a) for known third parties. The defendant’s attempt to designate the shooter here, therefore, was late by several months, and the trial court’s decision to allow that designation was contrary to statute and an abuse of discretion.

FORUM NON CONVENIENS: AFGHAN FAMILY BUSINESS DISPUTE BELONGS IN AFGHANISTAN AND PAKISTAN

Rasul v. Rasul
Dallas Court of Appeals, No. 05-17-00612-CV (December 17, 2018)
Justices Stoddart, Whitehill, and Boatright (Opinion, linked here)
Abdul Rahman Rasul founded a business in Afghanistan owning and managing more than thirty properties. Later, he moved to Pakistan and started a successful tire-import business. After his death, two of his sons sued their brothers in Texas concerning the businesses. Based on the extensive evidentiary record, including expert testimony on the laws and procedures of the courts in Afghanistan and Pakistan, the district court dismissed the suit based on forum non conveniens, finding there were available, adequate, and convenient legal forums in the foreign countries. The Dallas Court of Appeals, reviewing for abuse of discretion, affirmed.

PRIOR MATERIAL BREACH—IT’S AN ELECTION; CHOOSE WISELY

Richardson Communications & Consulting, Inc. v. McNeese
Dallas Court of Appeals, No. 05-17-00969-CV (December 12, 2018)
Justices Francis, Stoddart, and Schenck (Opinion, linked here)
When McNeese sued RCC for breach of a settlement agreement, RCC defended by arguing that McNeese’s prior material breaches of the agreement excused RCC’s continued performance under that contract. But the trial court granted summary judgment to McNeese, and the Dallas Court of Appeals affirmed, rejecting RCC’s prior-material-breach defense. The appeals court acknowledged that, generally, when one party to a contract commits a material breach, the other party is excused from further performance. But, the Court cautioned, “[t]he non-breaching party must elect between two courses of action, either continuing performance or ceasing performance…. If the non-breaching party elects to treat the contract as continuing and insists the party in default continue performance, the previous breach constitutes no excuse for nonperformance on the part of the party not in default and the contract continues in force for the benefit of both parties.” Here, after one set of alleged breaches by McNeese, RCC both continued making payments under the contract and filed a motion for contempt against McNeese, arguing he had violated an agreed injunction entered as part of the settlement agreement. This was fatal to RCC’s prior-material-breach defense to McNeese’s claim against RCC for breach of the agreement. “By seeking a contempt order after discovering these alleged violations of the injunction, which was put in place pursuant to the Agreement, RCC treated McNeese’s obligations under the Agreement as continuing, and therefore, it could not cease its own performance thereunder,” the Court explained. Judgment for McNeese on his claim that RCC had violated the Agreement, therefore, was affirmed. Moral of the story: If someone breaches a contract to which you or your client is a party, think carefully about your “election” under the prior-material-breach rule and your own obligation to continue performance under that contract, depending on which course you elect.

“DEATH PENALTY” SANCTIONS UPHELD

Ayati-Ghaffari v. Farmers Insurance Exchange
Dallas Court of Appeals, No. 05-17-00864-CV (December 11, 2018)
Justices Myers, Evans, and Brown (Opinion linked here)
Trial courts in civil cases are reluctant to impose “death penalty” sanctions (like striking a party’s pleadings) based on abuse of the discovery process, at least in part because such orders are often reversed on appeal. In this case, however, the Dallas Court of Appeals affirmed the ultimate sanction against a plaintiff whose “flagrant disregard” of the trial court’s discovery orders “demonstrated bad faith in the litigation process as a whole.” The case offers a roadmap to the type of record and extent of documentation required to justify death-penalty sanctions.

Citing alleged misrepresentations of material facts the policyholder (Ayati), Farmers Insurance denied a claim under a homeowner’s policy for $600,000 worth of property (including “bricks or bundles of Zimbabwean currency, a 103” TV, an antique King-size bed, and several Persian rugs”) reported stolen from a second-story condominium. Ayati sued Farmers, and the discovery battles began. Farmers repeatedly complained to the court of Ayati’s incomplete answers to written discovery, as well as evasive or untruthful deposition testimony.

The trial court held five discovery hearings in 14 months, and repeatedly ordered Ayati to produce requested documents and information related to his financial condition; claims, litigation, and criminal history; acquisition of the allegedly stolen currency and other property; eBay transactions; and other matters. (During this period, Ayati was represented by a series of at least three attorneys; the first two withdrew because of “irreconcilable differences” or lack of communication.) Finally, after finding Ayati had not complied with its previous orders and had provided testimony that “strains credibility,” the trial court struck Ayati’s pleadings, dismissed his claims with prejudice, and ordered him to pay court costs.

The Dallas Court of Appeals reviewed the record, including the trial court’s 13-page order detailing the chronology and explaining its conclusion that less stringent sanctions would be insufficient. Applying the standards articulated in its own opinions and by the Supreme Court of Texas, the Court held the trial court had not abused its discretion. In short, the Court determined the sanction “had a direct relationship to Ayati’s conduct and was not excessive.”

NO SUMMARY JUDGMENT ON AMBIGUOUS CONTRACT

Ticer v. Reed Migraine Centers of Texas, PLLC
Dallas Court of Appeals, No. 05-17-00721-CV (December 4, 2018)
Justices Lang, Fillmore, and Schenck (Opinion linked here)
Although the facts are a little complicated, this case reiterates a basic principle—ambiguous contract terms create fact issues that ordinarily cannot be resolved by summary judgment.

Mark Ticer represented Reed Migraine Centers and related entities (the “Reed parties”) in two lawsuits (state and federal) alleging breach of contract and unfair competition by Universal General Hospital and three doctors (the “UGH parties”). That suit resulted in a mediated settlement requiring the UGH parties to make a series of payments to the Reed parties. Shortly after the mediation, Ticer’s representation ended and a fee dispute arose; he withdrew as counsel and intervened in the state court lawsuit to recover his fees. The Reed parties counterclaimed for malpractice, and Ticer filed a third-party petition against his two former co-counsel for contribution. The Reed parties and the attorneys then entered into a separate settlement agreement (the “Ticer agreement”) under which Ticer would receive a portion of the UGH parties’ payments to the Reed parties and the settling parties would exchange mutual releases and dismiss all claims against each other.

Two months later, before making any payments under the previous settlement with the Reed parties, UGH filed bankruptcy, triggering an automatic stay of the state court action. The following year, the Reed parties again settled with the UGH parties, and the federal court ordered the entire settlement amount be deposited in the court’s registry and not distributed pending disposition of the state court action. After the state court lifted the stay and severed the claims against the UGH parties, the Reed parties sought summary judgment declaring Ticer’s claims had been released by the Ticer agreement. The court granted that motion. Ticer appealed.

The Dallas Court of Appeals reversed and remanded. The primary issue on appeal was whether the mutual releases were effective immediately upon execution of the agreement, or only after the contemplated payments were made. The court reviewed several provisions of the Ticer agreement and found some terms suggested immediate effect (e.g., “hereby releases”) while others suggested the releases were contingent on the contemplated payment (e.g., dismissal “within 3 days following the receipt of payments”). Finding it was “unable to harmonize the … provisions to give effect to all provisions,” the Court concluded the agreement was “reasonably susceptible to more than one meaning” and thus ambiguous. The ambiguity created a fact issue that made summary judgment improper, requiring remand to the trial court for resolution.

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