LIMITATIONS ON LEGAL MALPRACTICE CLAIM BEGINS TO RUN WHEN IRS ISSUES ITS “30-DAY NOTICE” AND IMPOSES PENALTY

J.A. Green Development Corp. v. Grant Thornton, LLP
Dallas Court of Appeals, No. 05-15-00029-CV (June 28, 2016)
Justices Bridges, Evans, and O’Neill (Opinion)

Kelli Hinson

J.A. Green hired Akin Gump and Grant Thornton to represent it in connection with an IRS audit. The audit involved Green’s participation in a tax investment plan referred to as a “distressed debt strategy.” Akin Gump and Grant Thornton both advised Green that “its tax positions taken pursuant to the distressed debt strategy were strong and likely to be upheld as legal.” On their advice, Green rejected a 2005 settlement offer by the IRS. Following a period of “aggressive prosecution,” the IRS issued its Examiner’s Report and 30-Day Notice on December 18, 2008, disallowing the entire loss claimed by Green and imposing penalties substantially above what had been proposed in 2005.  Green appealed the 30-Day Notice, but the appellate conference with the IRS in November 2009 “did not go well.” Akin Gump and Grant Thornton began to back away from their position that Green would ultimately prevail, citing a much more “hostile environment.” Green ultimately settled with the IRS in March 2010 on terms significantly less favorable than those offered in 2005.

Green sued Akin Gump and Grant Thornton in January 2014. (It had previously sued the accountants who recommended the distressed debt strategy in the first place.) The trial court granted summary judgment to both defendants based on the two-year statute of limitations for legal malpractice and negligence claims. 

Green appealed, arguing that limitations did not begin to run until it became clear at the appellate conference that it would not be able to settle its tax liability in a more favorable manner. It also argued its claims were tolled by the Hughes Tolling Rule. The Dallas Court of Appeals disagreed, noting that “a cause of action accrues when a wrongful act causes some legal injury, even if the fact of injury is not discovered until later, and even if all resulting damages have not yet occurred.” Green tried to argue that it suffered separate legal injuries from the advice to participate in the distressed debt strategy on the one hand, and the advice that it would prevail against the IRS on the other, and that the latter injury could not have been discovered before the appellate conference in 2009. But the Court found a “single continuous injury,” which accrued no later than the date Green received the IRS 30-Day Notice and learned its strategy would be disallowed.

The Court also refused to give Green the benefit of the Hughes Tolling Rule, which tolls limitations in legal malpractice cases arising from the prosecution or defense of a claim that results in litigation until the litigation is resolved. The Court noted that it has previously declined to apply the Hughes Tolling Rule to cases arising out of administrative proceedings as opposed to litigation. Summary judgment on limitations was therefore affirmed.

“AS IS” AIN’T — AT LEAST NOT ALWAYS

Bishop v. Creditplex Auto Sales LLC
Dallas Court of Appeals, No. 05-15-00395-CV (June 23, 2016)
Justices Lang, Brown, and Whitehill (Opinion)

Ken Carroll

You know those “AS IS – NO WARRANTY” stickers dealers slap on the windshields of used cars? In the right circumstances, they may not be as bulletproof as dealers want you to think they are.

Bishop bought a used car from Creditplex. The car had an “AS IS – NO WARRANTY” sticker on it, which the sale documents incorporated. When Creditplex acquired the car at auction, it was told the car had “frame/unibody damage.” Creditplex didn’t pass that information on to Bishop. A Creditplex salesperson did, however, tell Bishop that this was a good car and that she could “trade the car in for something bigger ‘after paying on it for about a year or so.’” When Bishop tried to do just that, the dealership refused to take her car in trade because of the unibody damage. Bishop sued Creditplex, alleging failure to disclose and unconscionable conduct under the DTPA, but the trial court granted a directed verdict based on the “AS IS” sticker. The Dallas Court of Appeals reversed.

A contractual “as is” clause, important to the bargain and negotiated between sophisticated parties, can conclusively negate the element of causation and defeat DTPA, fraud, and negligence claims. Prudential Insurance Co. v. Jefferson Associates, Ltd., 896 S.W.2d 156 (Tex. 1995). Here, however, the Court explained, the “as is” disclaimer was boilerplate rather than negotiated, the parties were not equally sophisticated and did not occupy equal bargaining positions, and the meaning of the “as is” disclaimer was somewhat unclear. With its “NO WARRANTY – YOU WILL PAY ALL COSTS FOR ANY REPAIRS” appendage, did it disclaim any obligation by the dealer to disclose the true condition of the car, or just disclaim the obligation to make repairs? Further, the salesperson’s representations about the “good car” that could be traded in a year later—made without disclosure of the “frame/unibody damage” known to the dealership—created a genuine issue of fact regarding fraudulent representation, an established exception to “as is” insulation. So, given all the circumstances, the Court of Appeals reversed and remanded.

NUISANCE LAW RESTATED

Lyndon F. Bittle

Ensuring Texas lawyers have summer reading material, the Texas Supreme Court issued a 53-page opinion to restate and clarify the law of private nuisance in Texas. The case will be required authority for any brief or opinion concerning this area of the law, which has been variously described as a “morass,” a “garbage can,” and an “impenetrable jungle.”

Crosstex North Texas Pipeline, L.P. v. Gardiner
Supreme Court of Texas (June 24, 2016)
Opinion by Justice Boyd

The case arose from Crosstex’s constructing a natural gas compressor station on property adjacent to the Gardiners’ ranch, and the Gardiners’ dissatisfaction with the company’s efforts to mitigate the noise created by the compressor. The Supreme Court affirmed the appeals court’s holdings that there was legally sufficient, but factually insufficient, evidence to support the jury’s verdict awarding damages, and remanded the case to the trial court. The facts were the backdrop for the Court’s “attempt to provide a more comprehensive . . . explanation of the circumstances in which Texas law may hold a party liable for causing a private nuisance.”

The Court conducts an exhaustive review of its own precedents back to 1856, as well as different iterations of nuisance law by Deans Prosser and Keeton, successive Restatements, and other commentary and cases. Sooner or later you know you will have to read the opinion, so why not take it to the beach with you? But if you can’t wait for the denouement, here’s the crib sheet version: “[T]he term ‘nuisance’ refers not to a defendant’s conduct or to a legal claim or cause of action but to a type of legal injury involving interference with the use and enjoyment of real property. . . . [A] defendant can be liable for causing a nuisance if the defendant intentionally causes it, negligently causes it, or—in limited circumstances—causes it by engaging in abnormally dangerous or ultra-hazardous activities.”

TEXAS SUPREME COURT HOLDS PAYMENTS OUTSIDE THE CHILD-SUPPORT REGISTRY MAY BE CONSIDERED IN DETERMINING CHILD-SUPPORT ARREARAGE AMOUNT

Carmen E. Eiker

The Supreme Court addressed a matter of vital concern for many parents in the state of Texas—whether payments other than to a child-support registry will count toward discharging a court-ordered child-support obligation. The Court held that on the facts of this case, in a child-support enforcement proceeding, payments made directly to a child’s school, rather than to the court-ordered registry, will count in the determination of arrearages. This critical family law issue yielded four separate opinions—the majority, a concurrence, and two dissents. What follows will focus on the key takeaways from the majority ruling. But there will be much discussion of all the opinions among the family law bar.

Ochsner v. Ochsner
Supreme Court of Texas, No. 14-0638 (June 24, 2016)
Justice Willett (Opinion): Justice Guzman (Concurring); Justice Johnson (Dissent); Justice Boyd (Dissent)

JUDICIAL ERROR BREAKS CHAIN OF CAUSATION IN LEGAL MALPRACTICE CLAIM

Ken Carroll

“Attorneys should be responsible for harm they actually cause—not harm caused by judicial error.” The Supreme Court of Texas has held for the first time that, in the right circumstances, “judicial error can constitute a new and independent cause” or “superseding cause” that “destroys any causal connection” between an attorney-defendant’s alleged negligence and a client-plaintiff’s harm, precluding that client’s recovery on a legal malpractice claim. “If an attorney does not contribute to the judicial error itself and the judicial error is not otherwise reasonably foreseeable in the particular circumstances of the case, the error is a new and independent cause of the plaintiff’s injury if it ‘alters the natural sequence of events’ and ‘produces results that would not otherwise have occurred.’”

Stanfield v. Neubaum
Supreme Court of Texas (June 24, 2016)
Justice Guzman (Opinion); Chief Justice Hecht (Concurring)

The Neubaums were sued for usury. They lost at trial but prevailed on appeal. When that case ended, they sued their trial lawyers, seeking to recover the fees and other costs of their appeal. They argued that if their trial lawyers had not made certain mistakes at trial, they would not have suffered the adverse judgement or incurred the expenses of an appeal. While denying any malpractice, the lawyers argued that the adverse trial judgment was the result of judicial error—a fact established by the reversal on appeal—that constituted a “new and independent” cause of the Neubaums’ harm, destroying the proximate causation necessary for recovery on a legal malpractice claim. The Supreme Court agreed, and rendered judgment for the attorneys. Relying on “established negligence and proximate-cause principles,” the Court distinguished “superseding cause”—which breaks the chain of causation—from “concurring cause”—which does not. In a malpractice action, judicial error “can constitute a new and independent cause that relieves the attorney of liability,” the Court said, when that error is not “reasonably foreseeable” and the attorney does not contribute to it. But if the error “is reasonably foreseeable at the time of the defendant’s alleged negligence, the error is a concurring cause as opposed to a new and independent cause.” Here, the Court found, this particular judicial error was not reasonably foreseeable, the trial attorneys did not contribute to it, and that error therefore was “a superseding cause of the adverse judgment and the Neubaums’ resulting appellate litigation costs.”

BEWARE THE OVERBROAD RELEASE

Peterson v. Farmers Texas County Mutual Insurance Co.
Dallas Court of Appeals, No. 05-14-01235-CV (June 22, 2016)
Justices Lang (Opinion), Brown, and Whitehill

Ken Carroll

Peterson was killed when the 2007 GMC Sierra in which he was riding crashed into a tree. Peterson’s airbag did not deploy, and his seatbelt failed to restrain him. Counsel for Peterson’s estate wrote to Farmers, the driver’s insurer, demanding that it preserve the Sierra as evidence. Farmers responded, acknowledging it had possession of the truck and offering the opportunity for inspection. Peterson’s estate sued the driver and Farmers. That case settled. In the settlement agreement, Peterson’s estate released Farmers from “all past, present, or future claims … Releasor now has, or which hereafter may accrue [and] which … may in any way grow out of” the accident. Later, when Peterson’s estate attempted to sue the manufacturer and seller of the truck, Farmers disclosed that the truck had been “parted out” and was no longer available. Peterson then sued Farmers for having allowed the truck to be destroyed, alleging, among other things, breach of contract and “breach of bailment.” Farmers defended on the basis of the broad language of the release, arguing the claims for the truck’s destruction “grew out of” the accident that caused it to be in Farmers’ custody, and the trial court granted its motion for summary judgment.

The Dallas Court of Appeals affirmed. Peterson’s estate argued that the recitals in the settlement—which arguably restricted the settlement and release to personal injury claims that could have been brought in the original lawsuit against the driver—at least created an ambiguity. The Court rejected that argument, finding the broad language of the release unambiguous and observing, “Recitals do not control over operative phrases unless there is an ambiguity” in those operative phrases.

Moral: Think twice, and critically, before including or agreeing to broad “stock” language in a settlement agreement or release.

GENERAL CONTRACTOR NOT A “SELLER” UNDER CPRC CHAPTER 82

Lyndon F. Bittle

A general contractor is not a “seller” with statutory indemnity rights against a manufacturer of component parts, where the sale of the component is “incidental” to the contractor’s services, says the Texas Supreme Court.

Centerpoint Builders GP, LLC v. Trussway, Ltd.
Supreme Court of Texas (June 17, 2016)
Opinion by Justice Lehrmann; Dissent by Justice Boyd

Centerpoint Builders was the general contractor for an apartment construction project. One component of the construction was roofing trusses, which Centerpoint purchased from Trussway, the manufacturer, for installation by a subcontractor. A worker was severely injured while walking on trusses that had not yet been installed, and sued the owner, Centerpoint, Trussway, and the subcontractor. Centerpoint cross-claimed against Trussway, asserting that as an innocent seller it was entitled to indemnification from the manufacturer under the Products Liability Act, chapter 82 of the Civil Practice and Remedies Code. The trial court granted partial summary judgment for Centerpoint on that issue, and certified its order for an agreed interlocutory appeal under CPRC § 51.014(d). The court of appeals reversed, and Centerpoint sought review by the Texas Supreme Court.

The sole issue on appeal was whether Centerpoint was a seller, defined in chapter 82 as “a person who is engaged in the business of distributing or otherwise placing, for any commercial purpose, in the stream of commerce for use or consumption a product or any component part thereof.” Under Government Code § 22.225, the Supreme Court’s jurisdiction to hear the case was predicated on Centerpoint’s argument that the challenged decision “holds differently from a prior decision of” the Supreme Court, specifically, Fresh Coat, Inc. v. K-2, Inc., 318 S.W.2d 893 (Tex. 2010). Although the Court found the two decisions were not in conflict, it held jurisdiction was established by “a genuine dispute about whether the court of appeals correctly applied Fresh Coat, revealing uncertainty to be clarified.”

On the merits, the Court focused on the phrase “engaged in the business of” distributing a product, and held it does not encompass providing a product that “is incidental to selling services.” The Court distinguished Fresh Coat, in which it had held that a subcontractor installing synthetic stucco on exterior walls was a “seller” of the product and thus entitled to indemnity from the manufacturer, by noting several factual differences. Relying instead on “more factually similar” cases addressing strict-liability claims, the Court affirmed the court of appeals.

Justice Boyd, joined by Justice Johnson, filed a lengthy dissent, saying the Court’s statutory analysis “strays from the statute’s plain language.” The dissent found “the Court’s attempt to distinguish Fresh Coat to be both incomplete and unconvincing,” and criticized the Court’s reliance on common-law principles concerning “seller” status for strict-liability purposes as “unnecessary and imprudent.”

TRUTH: IN OFFICIAL PROCEEDINGS, IT’S WHAT THE RECORD SAYS. PERIOD.

Ken Carroll

A divided Supreme Court of Texas has held that, in a defamation case covered by the “official-proceedings” privilege, “the truth of a media report of official proceedings of public concern must be measured against the proceedings themselves, not against information outside the proceedings” —i.e., not against the “actual facts,” whatever they may be. The media must be free to accurately report the results and developments in an official proceeding, the Court said, without having to first independently confirm that the underlying evidence or findings are themselves correct.

KBMT Operating Co., LLC v. Toledo
Supreme Court of Texas (June 17, 2016)
Chief Justice Hecht (Opinion); Justice Boyd (Dissent)

KBMT, a Beaumont TV station, reported that Toledo, whom it identified as a pediatrician from nearby Port Arthur, had been disciplined by the Texas Medical Board for unprofessional conduct—specifically, that she “engaged in sexual contact with a patient,” among other things. Toledo sued, claiming the report had defamed her. By describing her as a pediatrician and omitting that the patient in question was her 60-year-old boyfriend, KBMT had portrayed her as having engaged in sex with a child, she alleged. The majority disagreed, observing that “any ordinary listener” would not interpret the report as a whole as Toledo suggested. More importantly, the station had accurately reported what was in the public record: The Medical Board’s order identified Toledo as a pediatrician (she was), but nothing posted by the Board reported the patient’s age. Because the station had accurately reported the proceeding, if not all the underlying facts, the “gist” of its report was substantially true and Toledo’s claim should be dismissed. “Requiring the media to independently investigate the facts before reporting on official proceedings,” the Court reasoned, “would ill serve the public’s interest in government activities.”

The dissent disagreed with the majority’s characterization of the “gist” of the report as being substantially true, believing the issue should have been left to a jury. It also criticized the majority’s application of the official-proceedings privilege as an oversimplification of a “complex issue” that the Court need not, and should not, have decided.

LAWYERS—WE’RE BASICALLY FUNGIBLE, RIGHT?

Estate of David Anthony Toarmina, Deceased
Dallas Court of Appeals, No. 05-15-00073-CV (June 13, 2016)
Justices Lang, Brown (Opinion), and Whitehill

Neil R. Burger

This appeal examined whether a party’s new attorney could testify about attorney’s fees when the only witness designated on the issue was the party’s former attorney. The party had requested attorney’s fees from the onset of the litigation and timely designated his original attorney to testify in support of that request. After the original attorney was replaced shortly before trial, there was no unfair surprise under Texas Rule of Civil Procedure 193.5(a), and therefore no abuse of discretion by the trial court, when the new attorney was allowed to testify about attorney’s fees at trial, despite never having been disclosed by name as an expert witness.

GENERAL PARTNER’S PRESIDENT AND GUARANTOR OWES NOTHING TO LIMITED PARTNERSHIP AFTER FORECLOSURE

Lyndon F. Bittle

Resolving important issues of appellate jurisdiction as well as substantive issues of fiduciary relationships and guaranty agreements, the Dallas Court of Appeals rejected claims by investors in two failed construction projects.

Rainier Income Fund I, Ltd. v. Gans
Dallas Court of Appeals (June 7, 2016)
Justices Francis (Opinion), Lang-Miers, and Myers

At the heart of this case are two limited partnerships (collectively, “R-75”) created for office construction projects in Allen, Texas. Two Rainier Funds (collectively, “Rainier”) were limited partners in R-75, to which they made loans and capital contributions. FNS Holdings was another limited partner, and Star Creek Construction was the general partner in R-75. Fred Gans was the president of Star Creek and a co-owner of FNS; he also personally guaranteed the Rainier loans to R-75. The construction projects were funded by bank loans to R-75. The projects failed, and the bank foreclosed, leaving nothing for the investors.

When Gans refused to pay under the guaranty agreements, Rainier sued him for breach of contract and breach of fiduciary duty. After litigating over two years, the parties agreed to submit their dispute to a “Trial by Special Judge” under Chapter 151 of the Texas Civil Practice and Remedies Code. By agreement, the special judge adjudicated the case on stipulated facts, exhibits, and affidavits. He ultimately determined Gans did not owe fiduciary duties to Rainier and had breached his guaranty on some grounds but not others, and entered a judgment awarding damages, interest, and attorneys’ fees to Rainier. On Rainier’s motion, the trial court signed an order adopting the special judge’s final judgment. Seven days later, Gans filed a motion for new trial. Rainier filed a notice of appeal within 30 days of the trial court’s order, and Gans filed a notice of cross-appeal 64 days after that order was signed.

Appellate Jurisdiction

Appellate jurisdiction depends, in part, on timely filing of a notice of appeal. After asking the parties to brief jurisdictional issues it had raised sua sponte, the Court addressed two related issues. First, it agreed with the parties that under Chapter 151 the time for appealing a special judge’s judgment does not begin to run until the referring court adopts or incorporates it into a final judgment. Rainier’s notice of appeal, filed 27 days after the referring court’s order, was therefore timely. Gans’s cross-appeal, filed 46 days after the trial court’s order, was untimely— unless its motion for new trial extended the deadline. Although the Court acknowledged that the referring court had no authority to grant a new trial under Chapter 151, it held a new-trial motion can properly be filed solely for the purpose of extending the appeal deadline. The Court therefore decided it had jurisdiction to reach the merits.

No Fiduciary Duty

Rainier argued that Gans, as president of the general partner of the partnership and co-owner of the other limited partner, owed fiduciary duties to the partnership and Rainier, and breached those duties by not declaring the partnerships were dissolved and liquidated (which would have triggered Gans’s payment obligations under the guaranty). The Court, however, summarily rejected the premise that an officer of a general partner owes a formal fiduciary duty to the partnership. And without a prior relationship between the parties, no informal fiduciary duties could have arisen.

No Breach of Guaranty

Rainier alleged two breaches of the guaranty: (1) failure to repay Rainier’s loans and capital contributions following the bank’s foreclosure; and (2) failure to pay accrued interest and investment preferences during the partnerships’ existence. The lower court found for Gans, and the Court of Appeals affirmed, on the first claim because the foreclosure sale was not a sale “by the Partnership” and thus not an event of liquidation triggering the guaranty repayment obligations. On the second claim, the lower court held for Rainier and awarded damages. Addressing Gans’s cross-appeal, the Court of Appeals parsed the language of the partnership agreements and the guaranty, concluding that “while the partnerships were required to make distributions, regardless of cash flow, Gans did not guarantee those payments.” The Court therefore reversed the judgment on this claim, resulting in a take-nothing judgment.