No Implied Ratification Where Contract Required Express Written Consent

BPX Operating Company v. Strickhausen

Supreme Court of Texas, No. 19-0567 (June 11, 2021)

Justice Blacklock (opinion available here)

Justice Boyd Dissent (available here)

Kelli Hinson

        Ms. Strickhausen’s mineral lease with BPX prohibited pooling her tract with others without her “express written consent.” Nevertheless, BPX pooled several tracts, including Strickhausen’s property, to create a 320-acre unit. Unlike Strickhausen’s lease, her neighbors’ leases permitted pooling. BPX attempted to obtain Strickhausen’s written consent or ratification of the pooling, but Strickhausen consistently refused and repeatedly objected to BPX’s activity. As the parties continued to communicate and discuss a settlement or other resolution, BPX began paying Strickhausen pooled royalties rather than on a “tract participation basis.” When Strickhausen finally sued BPX for breach of contract, BPX alleged Strickhausen had ratified the pooling by cashing her royalty checks. The trial court granted summary judgment in favor of BPX, but the San Antonio Court of Appeals reversed.

        In a 5-4 decision, the SCOTX sided with the appellate court and Strickhausen. The Court acknowledged that acceptance of royalty checks can, in some circumstances, constitute implied ratification. But it noted that Strickhausen—unlike her neighboring lessors and the lessors in prior cases—bargained for a lease that strictly prohibited pooling “under any circumstances” without her “express written consent.” “[A]ll her subsequent actions should be examined in light of both parties’ knowledge of this element of their agreement. A party armed with a lease prohibiting pooling without express, written consent should have less reason to worry about mistakenly giving her implied, unwritten consent than does a party not protected by such a clause.” The communications between the parties also demonstrated that Strickhausen was not consenting to the pooling and was actively trying to reach a settlement agreement with BPX. Strickhausen’s acceptance of royalty checks held less weight than it might in other cases because Strichhausen was entitled to significant royalties with or without pooling. The Court held she reasonably could have viewed the checks as payment towards what she believed she was owed without pooling.

        The majority brushed off the dissent’s conclusion that “actions may speak louder than words,” holding that, on questions of contractual intent, “words matter a great deal—especially words in a written agreement that disavows implied unwritten agreements.”

        The dissent disagreed. It would have held that Strickhausen’s actions in accepting royalty payments that she should have known were calculated based on production from the pooled unit spoke louder than her words, despite the language of the contract and her prior protests.

SCOTX CLARIFIES IMMUNITY AND PRIVILEGE ISSUES FOR ATTORNEYS

Haynes and Boone, LLP v. NFTD, LLC

Supreme Court of Texas, No. 20-0066 (May 21, 2021)

Justice Bland (opinion available here)

Landry’s, Inc. v. Animal Legal Defense Fund

Supreme Court of Texas, No. 19-0036 (May 21, 2021)

Justice Blacklock (opinion available here)

Kelli Hinson

The SCOTX issued two long-awaited decisions clarifying the scope of important immunity protections for attorneys—attorney immunity and the judicial-proceedings privilege.

First, in Haynes and Boone v. NFTD, the Court expressly confirmed for the first time that the attorney-immunity doctrine applies outside the context of litigation. The doctrine, previously outlined and applied to litigation and “quasi-litigation” matters in Cantey Hanger v. Byrd and other cases, immunizes lawyers from claims by non-client third parties based on actions those lawyers take on behalf of their clients. In clarifying the scope of the doctrine, the Court has now held it operates “in all adversarial contexts in which an attorney has a duty to zealously and loyally represent a client, including a business-transactional context,” assuming the conduct at issue is the kind of conduct the doctrine is intended to protect—that is, “the provision of ‘legal’ services involving the unique office, professional skill, training, and authority of an attorney.”

The Court’s ruling was not unexpected, but will provide welcome certainty among non-litigation attorneys regarding the scope of their immunity. Questions remain, however, about whether the lawyer’s particular conduct on which a claim is based is the “kind of conduct” the doctrine should protect. The Court remanded the NFTD case for the court of appeals to consider whether any of the lawyer’s conduct at issue there was non-lawyerly in nature, so as to remove it from the scope of immunity in light of the other opinion issued by the Court on the same day, Landry’s v. Animal Legal Defense Fund.

In Landry’s, the Court analyzed the scope of attorney conduct subject to protection and held that the attorney-immunity doctrine and the “judicial-proceedings privilege” do not apply to or protect lawyers’ statements to the media about a pending or potential case, or to lawyers’ social media posts about those matters. There, the plaintiff’s counsel delivered a “60-day notice of intended suit” to the opposing party, as required by the applicable statute. But the attorney and his client went further, providing the pre-suit notice letter to the media and issuing a press release and social media posts about it. When Landry’s sued, alleging defamation and other claims, the trial court dismissed. But the Supreme Court reversed.

The judicial-proceedings privilege protects “communications in the due course of a judicial proceeding,” including communications “in serious contemplation of such a proceeding.” Providing the 60-day notice letter to the prospective defendant, as required by statute, therefore is fine and was protected, even if that letter contained defamatory statements. Repeating the allegations to the press and on Facebook, however, is not protected. Similarly, the Court held that providing the notice letter to the media and publicizing it through press releases and social media posts are not covered by the attorney-immunity doctrine either, because that is not the “kind of conduct” the doctrine was meant to protect. That is, “such statements, while sometimes made by lawyers, do not partake of ‘the office, professional training, skill, and authority of an attorney.’” If a publicist and a lawyer issue identical public statements to the press or on social media, why should the publicist be subject to a defamation claim, but not the lawyer? Even though many lawyers do resort to publicity, thinking it will aid their client’s cause, such conduct is not unique to lawyers or a product of legal training or skill. So, they are not protected in doing so by the attorney-immunity doctrine after Landry’s.

The Supreme Court noted that its ruling today falls in line with “the widely adopted rule in other American jurisdictions.” But not all Texas courts, much less all practitioners and commentators, shared that view up to now. The Landry’s ruling likely will prompt many attorneys to revisit their tactics in publicizing allegations made in lawsuits—or at least to think twice before taking to Twitter or Facebook.

SCOTx AGAIN TELLS INSURERS: WAITING FOR AN APPRAISAL CAN TRIGGER DELAYED-PAYMENT PENALTIES

State Farm Lloyds v. Hinojos

Supreme Court of Texas, No. 19-0280 (March 19, 2021)

Opinion by Justice Bland linked here.

Dissents by Justices Guzman and Blacklock linked here and here.

Lyndon F. Bittle

The Texas Supreme Court has once again rejected the argument that by eventually paying an appraisal award, an insurer can avoid liability under the Prompt Payment of Claims Act, chapter 542 of the Texas Insurance Code.

As discussed last April in this blog, linked here, the Court has in recent years addressed several scenarios involving an insurer’s payment of an appraisal award long after the deadline imposed by the Prompt Payment Act. In each case, the Court held the insurer was potentially liable for the penalties imposed by the Act, including interest at 18% under section 542.060(a). Hinojos presents a slight variation on the theme. Rather than rejecting the claim, State Farm accepted the claim and paid the amount it determined was due ($2000) within the time period required by the Act. Fifteen months after the policyholder filed suit, Start Farm invoked the policy’s appraisal process. Shortly after the appraisal award was issued—about two and a half years after Hinojos submitted his claim—State Farm paid an additional $23,000. State Farm sought summary judgment on the grounds that “timely payment of the appraisal award precludes prompt payment damages under Chapter 542.” The trial granted summary judgment, and the court of appeals affirmed.

The Texas Supreme Court reversed and remanded. Finding that its previous decisions, including Barbara Technologies Corp. v. State Farm Lloyds (2019) and Alvarez v. State Farm Lloyds (2020), applied to these facts, the Court reiterated, “State Farm’s payment of the appraisal award outside the statutory deadline does not relieve it of Chapter 542 liability.” The Court held the result was compelled by the text of the Act and supported by public policy: “Otherwise, an insurer could pay a nominal amount toward a valid claim to avoid the prompt payment deadline that the Legislature has imposed.”

The dissenting Justices argued the language of the Act and the cases on which the majority relied did not support the majority’s conclusion. While they acknowledged concern about giving insurers “an incentive to low-ball insureds and hope they will accept the initial offer,” the dissenters noted “statutory claims are available against insurers” acting in bad faith, and insisted the Court’s “job is to apply the statutory text, not to worry about whether the text wisely aligns the incentives.”

EIGHT-CORNERS RULE LIVES ON

Richards v. State Farm Lloyds
Supreme Court of Texas (March 20, 2020)
Opinion by Justice Blacklock (linked here)

Lyndon Bittle

The “eight-corners rule” for determining the duty to defend is well entrenched in Texas law: A liability insurer’s duty to defend a lawsuit against its insured is determined solely by reference to the facts alleged in the underlying complaint and the terms of the insurance policy, without reliance on extrinsic evidence. See, e.g., GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006). Efforts to weaken the rule’s grip, however, have continued unabated. Answering a question certified by the Fifth Circuit, the Texas Supreme Court in Richards held the eight-corners rule applies even where the operative insurance policy does not expressly promise a defense “even if the allegations of the suit are groundless, false or fraudulent.”

One of the strongest proponents of abandoning the eight-corners rule for most cases has been federal district judge John McBryde, now Senior Judge in the Fort Worth Division of the Northern District of Texas. He has relied on extrinsic evidence to negate coverage since at least 1991. In 2006 he held that the eight-corners rule arose from, and is dependent on, “groundless, false or fraudulent” language of older (pre-1996) CGL policies, and therefore does not apply to newer policies omitting that language. B. Hall Contracting, Inc. v. Evanston Ins. Co., 447 F.Supp.2d 634, 645 (N.D. Tex. 2006), rev’d on other grounds, 273 F.App’x 310 (5th Cir. 2008). The Fifth Circuit reversed the judgment in that case without mentioning the lower court’s holding on the eight-corners rule. Judge McBryde has reprised his B. Hall analysis in subsequent cases and expanded his discussion of the rule’s demise, most recently in Richards. That case arose out of the death of a ten-year-old boy in an ATV accident and a negligent-supervision lawsuit by his mother against his paternal grandparents. State Farm, which provided homeowner’s insurance to the grandparents, filed suit seeking a declaratory judgment that it had no duty to defend or indemnify them because the accident did not occur on their property and the claim triggered an “insured v. insured” exclusion. Judge McBryde granted summary judgment for State Farm, admitting and relying on extrinsic evidence over the insureds’ objections.

On appeal, the Fifth Circuit acknowledged that neither it nor the Texas Supreme Court had recognized the district court’s view of the eight-corners rule, and certified this question to the Texas court: “Is the policy-language exception to the eight-corners rule articulated in B. Hall … a permissible exception under Texas law?” The Texas Supreme Court’s answer was a resounding “No.” The Court confirmed that “parties can contract around the eight-corners rule,” but held State Farm did not do so merely by omitting the promise to “defend claims ‘even if groundless, false or fraudulent.’’’ The Court insisted the rule “is not a judicial amendment to the parties’ agreement,” but is grounded in the promise “to defend the policyholders if ‘a claim is made or a suit is brought against an insured because of bodily injury … to which this coverage applies.’” Moreover, the Court said “Texas courts have long interpreted contractual duties to defend” by applying the eight-corners rule, and noted, “If any party is familiar with the overwhelming precedent to that effect, it is a large insurance company.”

Finally, the Court acknowledged that the Fifth Circuit and some Texas courts have applied a more narrow exception to the eight-corners rule, which allows reliance on extrinsic evidence that “concerns discrete and independent coverage issues and does not touch on the merits of the underlying suit.” This exception traces its roots to dicta in Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523, 531 (5th Cir. 2004). The viability and scope of the so-called Northfield exception has been the subject of numerous cases and commentaries over the years, but, as it has done in several previous cases, the Court again declined to resolve that controversy. “The Fifth Circuit did not ask for our opinion on that practice, so we express none.”

Stay tuned.

LEGAL MALPRACTICE CLAIMS AGAINST CRIMINAL-DEFENSE ATTORNEYS: SCOTX CLARIFIES LIMITATIONS AND THE “EXONERATION” REQUIREMENT OF PEELER v. HUGHES & LUCE

Gray v. Skelton
Supreme Court of Texas, No. 18-0386 (February 21, 2019)
Opinion by Justice Devine (linked here), dissent by Justice Blacklock (linked here)

Ken Carroll

About 25 years ago, a plurality of the Supreme Court of Texas declared in Peeler v. Hughes & Luce that a party who had been convicted of a criminal offense had to be “exonerated” on direct appeal or otherwise in order to bring a malpractice claim against the attorney who represented that party in the criminal case. But what did it mean to be “exonerated”? “Legal” innocence—i.e., just having the conviction set aside? “Actual” innocence? For more than two decades, the Court did not revisit the issue. Or specify how and when such a party could obtain or demonstrate “exoneration.” Or explain how the statute of limitations operates with respect to such a malpractice claim. In its 6-3 decision in Gray v. Skelton, the Court reaffirmed and solidified Peeler and answered those questions, providing needed clarification but likely expanding the prospect for legal malpractice claims to be brought against criminal-defense attorneys.

When Skelton, an estate planning attorney, found the original of a client’s will to be water-damaged and illegible, she printed a new copy from her electronic files and then cut and pasted onto that copy the signature portions of the water-damaged original, made a copy, and filed that copy with the probate court. For that, she was convicted of criminal forgery in 2007. Her appeal failed. Meanwhile, in a will contest in probate court, a jury found the composite will filed by Skelton was an accurate copy of the original and also found she did not intend to defraud or harm anyone by the filing of that composite. In the wake of these findings, Skelton sought to have her conviction set aside through habeas corpus, based in part on the ineffective assistance of Gray, her lawyer in her criminal case. The Fourth Court of Appeals granted Skelton the requested habeas relief, vacating her conviction because “the fundamental fairness of her trial was tainted by the ineffective assistance of her trial counsel,” without addressing her “actual” guilt or innocence.

Skelton then filed a legal malpractice lawsuit against Gray. The trial court dismissed Skelton’s claim, finding she had not proven “exoneration” as required by Peeler—apparently because she had not secured a ruling that she was “actually innocent” rather than “legally innocent” of the charge on which she had been convicted. The Fourth Court of Appeals, however, reversed that dismissal. It held that, because Skelton’s conviction had been vacated by the time she sued Gray, Peeler simply did not apply. And it went on to rule that her claim was not barred by limitations, which had been tolled until her conviction was vacated on habeas appeal (because it would have been barred by Peeler until then), and remanded the case for trial.

The Supreme Court affirmed, with a twist. It reaffirmed Peeler’s requirement that a former criminal defendant must be “exonerated” before he or she can recover against his or her criminal-defense attorney for legal malpractice. The Court then filled in the gap left by Peeler, explaining that “exoneration” has two parts. First, the former criminal defendant must have his or her conviction vacated on appeal or otherwise, e.g., through a habeas petition. But then, second, the former criminal defendant must also establish his or her “actual innocence”—not merely “legal innocence” (i.e., having the conviction vacated). This second criterion can be satisfied in the criminal appeal or habeas proceeding, if the conviction is set aside on grounds of actual innocence. But the Court rejected arguments both (1) that the presumption of innocence alone, restored after a conviction is vacated suffices to prove “actual innocence,” and (2) that actual innocence must be established in the criminal or habeas proceeding, before the claimant can initiate a malpractice lawsuit. Instead, the Court said, former criminal defendants may commence their malpractice lawsuits once their convictions are set aside, but “must obtain a finding of their innocence as a predicate of the submission of their legal malpractice claim.” That is, “[s]ubmission of the traditional elements of legal malpractice to the factfinder should … be conditioned on an affirmative finding that the malpractice plaintiffs are innocent of the crime of which they were formerly convicted.” The Court placed the burden on the claimant to prove innocence by a preponderance of evidence. This, of course, is the opposite of the situation in the criminal case, where the State had to prove guilt beyond a reasonable doubt, and it diverges from the approach taken by some other states that allow the criminal-defense lawyer to raise the former client’s guilt as a defense, thereby placing the burden for this issue on the lawyer rather than the claimant.

The Supreme Court also held the two-year statute of limitations for malpractice claims would not bar Skelton’s lawsuit. The Court ruled that under the “Hughes tolling rule”—which tolls limitations on legal malpractice claims until all appeals have ended in the case in which the alleged malpractice occurred—limitations for malpractice claims of this sort are to be tolled during all direct appeals and during the pendency of all habeas proceedings (sort of a “chess-clock” approach, where the limitations clock stops during the direct appeals, starts again when those appeals end, then stops again during any habeas proceeding(s)).

Justice Blacklock, joined by Justices Green and Bland, dissented on the limitations issue, finding the extension of the Hughes tolling rule to include habeas proceedings to be an unwise expansion of this judge-made doctrine. The dissent noted that, because a criminal defendant may file multiple habeas petitions in both state and federal courts, “a litigious convict can keep the habeas corpus ball in the air almost indefinitely, leaving criminal defense lawyers under the shadow of potential malpractice claims for many years beyond the two-year period envisioned by the Legislature.” Because the dissenting justices would have reversed on limitations grounds, they expressly declined to address the “exoneration” issue and procedures.

In sum, Skelton has satisfied the first prong of the “exoneration” requirement and will now have the chance to try to meet the second, actual-innocence prong, and then perhaps to pursue her legal malpractice claim on the merits

IN A DERIVATIVE SUIT, CAN THE SAME LAWYERS REPRESENT THE LLC AND MEMBERS ACCUSED OF BEING ADVERSE TO THE LLC? MAYBE.

In re Murrin Brothers 1885, Ltd.
Supreme Court of Texas, No. 18-0737 (December 20, 2019)
Opinion by Justice Blacklock (linked here)

Ken Carroll

“Gone are the days when a family feud over a dance hall and saloon in the Fort Worth Stockyards would be solved by six-shooters. These days, we use lawyers instead of lead.” Still, the process can be unpleasant, if not deadly, for the lawyers as well as the parties.

Almost by definition, a derivative lawsuit pits a group of stakeholders who do not control an entity against other stakeholders or officers who do. Frequently, especially during the early rounds of these complex cases, the same lawyers are engaged to represent both the “inside” stakeholders and the entity itself—which is named as a plaintiff but also joined as a “nominal defendant” in such cases. In this particular derivative case—arising from a struggle for control of Billy Bob’s, the legendary Fort Worth honkytonk—the Texas Supreme Court was asked to decide whether attorney-conflicts rules and public policy prohibit a law firm from pursuing such a dual representation of both the entity and the controlling insiders. Its answer? Dual representation is okay this time, the Court decided, but maybe not in every case.

The Texas Supreme Court announced “no categorical rule governing dual representation in derivative litigation,” even though some jurisdictions have done so. The mere labels applied to the entity as both plaintiff and nominal defendant are not determinative, the Court said. Instead, the Supreme Court held “the proper inquiry is to look to whether the substance of the challenged representation requires the lawyer to take conflicting positions or to take a position that risks harming one of his clients”—i.e., a case-specific, functional analysis to decide “[w]hether a company and the individual defendants are ‘opposing parties’ for purposes of [Disciplinary] Rule 1.06(a).” This lawsuit, the Court observed, “is a fairly straightforward case about which ownership group controls the company’s decisions.” The true adversity, therefore, was between the “warring ownership factions,” rather than between either faction and the entity, so there was no disqualifying conflict. In fact, the Court said, in situations like this, involving a closely held entity, a trial court could simply treat the case “as a direct action” brought by one stakeholder against another, leaving the entity out of the conflicts equation entirely. Of course, if the derivative allegations in a case raised true questions of injury to the corporation purportedly caused by the insiders (for example, allegations of self-dealing or stripping corporate assets), the analysis of the propriety of dual representation of the entity and insiders might yield a different outcome. But that’s a question for another day.