The owners of a self-storage company sued Morgan Stanley, alleging that it mishandled the negotiation of substantial insurance claims arising from Hurricane Katrina. An issue on appeal was whether, under federal common law, a communication between the company’s corporate counsel to Morgan Stanley was privileged. The Fifth Circuit noted that while “[s]everal courts — including lower courts in this circuit — have held that the [common interest] privilege extends to co-plaintiffs in litigation,” “this court has not expressly held that the privilege is inapplicable to co-plaintiffs. The Court did not need to address that issue, however, because it found that this communication was not made to “further a joint or common interest.” (emphasis in original) BCR Safeguard Holding, LLC v. Morgan Stanley Real Estate Advisor, Inc., No. 14-31068 (June 2, 2015, unpublished).
Waggoner owned a working interest in a carbon dioxide well that sold to Denbury Resources. He alleged that Denbury sold carbon dioxide to its subsidiaries at low prices, thereby decreasing the royalties it had to pay, and resulting in less money for Waggoner. The Court affirmed the dismissal of his claim, relying on Jebaco v. Harrah’s Operating Co., 587 F.3d 314 (5th Cir. 2009), which found no antitrust standing from the effect of casinos’ behavior on riverboat rentals, and Bailey v. Shell W. E&P, Inc., 609 F.3d 710 (5th Cir. 2010), which involved a similar royalty claim. “As with the decrease in per-patron [rental] fees in Jebaco, Waggoner’s decrease in royalties is the result of downstream conduct by the payor, in a market in which Waggoner is not a participant.” Waggoner v. Denbury Onshore, LLC, No. 14-60310 (May 20, 2015, unpublished).
A revised Templeton v. O’Cheskey did not alter the Fifth Circuit’s analysis about proof of a Ponzi scheme, but slightly clarified the scope of its holding about “good faith” under the fraudulent transfer provision of the Bankruptcy Code. That holding was that the “good faith test under Section 548(c) is generally presented as a “two-step inquiry” into (1) whether the transferee had “inquiry notice” of the transferor’s possible insolvency or possible fraud and (2) if so, whether the transferee then satisfied a “diligent investigation” requirement. No. 14-10563 (June 8, 2015). (The Fifth Circuit addressed the related “good faith” requirement under TUFTA in GE Capital v. Worthington National Bank, 754 F.3d 297 (5th Cir. 2014)).
In Texas v. United States, the high-profile challenge to the Obama Administration’s immigration policies, the oral argument panel has been announced for the “merits” argument on July 10 — Judges King, Smith, and Elrod. Of course, Judges Smith and Elrod were the two majority votes on the “preliminary stay” panel that ruled for the plaintiffs and denied a stay, strongly signalling how they will the view the issues presented in this phase of the case.
Three counties sued MERS (“Mortgage Electronic Registration Systems, Inc.”) for violations of various statutes related to the recording of deeds of trust (the Texas equivalent of a mortgage). In a nutshell, MERS is listed as the “beneficiary” on a deed of trust while the note is executed in favor of the lender. “If the lender later transfers the promissory note (or its interest in the note) to another MERS member, no assignment of the deed of trust is created or recorded because . . . MERS remains the nominee for the lender’s successors and assigns.” The counties argued that this arrangement avoided significant filing fees. The Fifth Circuit affirmed judgment for MERS, finding (1) procedurally, that the Texas Legislature did not create a private right of action to enforce the relevant statute and (2) substantively, that the statute was better characterized as a “procedural directive” to clerks rather than an absolute rule. Other claims failed for similar reasons. Harris County v. MERSCORP Inc., No. 14-10392 (June 26, 2015).
A set of “kaleidoscopic claims” about the Houston ISD’s contracting process produced several RICO holdings of note in Ramirez Group v. Houston ISD, No. 13-20753 (May 18, 2015):
- To show the requisite injury, “[a] plaintiff need not show that the other party would have been obliged to confer a benefit, only that the other party would have conferred the benefit.” This can be shown by a substantial drop in work assignments coupled with other suspicious activity.
- The Houston ISD is immune from suit under RICO, because a governmental entity cannot form the requisite criminal intent, and because municipal entities enjoy common law immunity from punitive damages.
- Official immunity does not extend to a school trustee accused of acting “wholly outside the legitimate scope” of his duties by allegedly accepting bribes.
- The requisite mental state for tortious interference can be shown “[w]here only a limited number of . . . contractors would be selected, [so] all of the participants in the scheme ‘knew the interference was substantially certain to occur as a result of the conduct.'”
1. Improper joinder when the acts of the nondiverse employee that allegedly tortiously interfered with the plaintiff’s contract were ratified by the employer. Denson v. Beavex, Inc., No. 14-20534 (May 22, 2015, unpublished).
2. No appellate jurisdiction when the district court administratively closed the case in favor of arbitration. “[A]n order by the district court administratively closing a case is tantamount to a stay, and bars appellate review.” Walker v. TA Operating, LLC, No. 14-41046 (May 22, 2015, unpublished).
3. “[A] district court cannot permissively abstain from exercising jurisdiction in proceedings related to Chapter 15 [cross-border bankruptcy] cases.” Firefighters’ Retirement System v. Citco Group Ltd., No. 14-30857 (June 5, 2015).
4. A lawyer who intervenes in a client’s case to protect a fee interest must independently establish diversity of citizenship and the requisite amount in controversy. Samuels v. Twin City, No. 14-31203 (May 18, 2015, unpublished).
After completing her Chapter 13 plan, Juliana Jett owed roughly $35,000 on her mortgage, with $0 past due. Her Experian credit report, however, erroneously showed it as discharged with a $0 balance, which Jett alleged caused her to be denied refinancing. She complained to Experian four times, who in turn sent an “automatic credit dispute verification form” to American Home Mortgage Servicing each time. She sued under the Fair Credit Reporting Act, alleging that “[i]n each instance, American Home tried to correct the information but returned a blank [Consumer Information Indicator] field so Experian did not process the updates.” The Fifth Circuit reversed a summary judgment for the servicer as to Jett’s negligence claim, noting that this evidence allowed an inference that “American Home knew that Jett’s information was being reported inaccurately and attempted to correct it.” The adequacy of the servicer’s procedures was an issue to be resolved at trial. Jett v. American Home Mortgage Servicing, Inc., No. 14-10771 (June 10, 2015, unpublished).
Building on In re Deepwater Horizon, ___ S.W.3d ___, 2015 WL 674744 (Tex. Feb. 13, 2015), in Ironshore Specialty Ins. Co. v. Aspen Underwriting, the Fifth Circuit addressed whether the following insurance policy provision limited the excess insurer’s obligations to a $5 million that the insured was obliged to provide under another contract: “The word ‘Insured,’ wherever used in this Policy, shall mean . . . any person or entity to whom [Insured] is obliged by a written ‘Insurance Contract’ entered into before any relevant ‘Occurrence’ and/or ‘Claim’ to provide insurance such as is afforded by this Policy.” The Court found that it did, even though the contract at issue in Deepwater Horizon had additional provisions that bore on this question. No. 13-51027 (June 10, 2015).
On rehearing, the Fifth Circuit vacated its earlier panel opinion in Wooten v. McDonald Transit Associates, 775 F.3d 689 (5th Cir. 2015), which reversed a default judgment because of inadequate underlying pleadings, and replaced it with an opinion affirming the default judgment. The new opinion holds that “[a]lthough Wooten’s complaint contained very few factual allegations, we conclude that it met the low threshold of content demanded by Federal Rule of Civil Procedure 8 because it provided McDonald Transit with fair notice of Wooten’s claims.” No. 13-11035 (June 10, 2015). The Court thus continues to reserve the question left open in Nishimatsu Construction Co. v. Houston Nat’l Bank, 515 F.2d 1200 (5th Cir. 1975): “We do not consider here the possibility that otherwise fatal defects in the pleadings might be corrected by proof taken by the court at a hearing.”
A business dispute about a telephone service provider’s billing system leads to 2 holdings of broad interest, one procedural and the other substantive:
1A. Waiver. “Although [defendant] moved for a directed verdict at the close of evidence, it did not argue in its motion that the Supply Contract was unenforceable.” Accordingly, under Fed. R. Civ. 50(b), that argument could not be raised post-trial. (Here, in fact, because defendant took the opposite position about the contract in the directed verdict motion, judicial estoppel also barred the later argument.)
1B. Waiver of Waiver. When defendant relied on a certain letter agreement in its Rule 50(b) motion, and plaintiff “did not argue waiver in its response . . . [plaintiff] has forfeited its right to raise the waiver issue on appeal.”
2. Speculative damages. A “strained business relationship” between the parties supported a holding that plaintiff’s $10 million lost profits award, assuming six years of business dealings, was not proven with “reasonable certainty.”
During the 1980s, the Jefferson Group failed to pay both a large loan and its property taxes. The lender failed and the RTC/FDIC acquired the deed of trust for the loan, which it later assigned to another entity. The local school district foreclosed on the property in 1990. Many years later, a dispute arose between the entity who acquired the deed of trust, who asserted a lien on the (now-developed) land, and the owners who traced title to the foreclosure sale. The district court dismissed on limitations grounds. The Fifth Circuit concluded that if the RTC had not effectively consented to the foreclosure sale, then it violated 12 U.S.C. § 1825(b)(2), which meant that the sale “is, without qualification, ‘null and void.'” This would mean that the current owners could not assert a limitations defense. The Court remanded to consider whether a violation had occurred, in light of this conclusion about the effect of a violation. CAP Holdings, Inc. v. Lorden, No. 14-50397 (June 22, 2015).
Adler, the distributing agent for a bankrupt business, sought to sue a law firm for allegedly mishandling its affairs and causing its financial problems. The business’s Third Amended Plan of Reorganization had a provision that retained its standing to pursue avoidance and fraudulent transfer actions against a list of named defendants (which did not include the law firm). The Plan also had a provision reserving “[a]ny and all other claims and causes of action which may have been asserted by the Debtor prior to the Effective Date.” The Fifth Circuit held that this was “exactly the sort of blanket reservation that is insufficient to preserve the debtor’s standing.” (citing Dynasty Oil & Gas LLC v. Citizens Bank, 540 F.3d 551 (5th Cir. 2008)). On waiver grounds, he Court declined to consider whether such a reservation would be sufficient if “(1) the defendant is a non-creditor [and thus not entitled to vote on the plan] and (2) the reorganization plan clearly identifies how the proceeds of the claim will be distributed.” Adler v. Frost, No. 14-31109 (June 11, 2015, unpublished).
Pal-Con, a manufacturer of “regenerators” for gas turbine engines (right), sued a pilot car service for causing a truck wreck that severely damaged one of its products. The service argued that the economic loss rule precluded Pal-Con’s claim. The Fifth Circuit disagreed, citing Chapman Custom Homes, Inc. v. Dallas Plumbing Co., 445 S.W.3d 716, 718 (Tex. 2014). “Here, a manufacturer contracted with a shipper, who subcontracted with a trucking company, who subcontracted with a negligent pilot car service provider . . . [T]he harm suffered by Pal-Con extended beyond the mere economic loss of a contractual benefit from [pilot car service] with [trucking company.]” Pal-Con, Ltd. v. Wheeler, No. 14-10615 (June 22, 2015, unpublished).
The plaintiffs in Owens v. Jastrow sued officers of Guaranty Bank for securities fraud, alleging that their SEC filings and public comments misstated the vulnerability of the bank’s mortgage-related holdings. No. 13-10928 (June 12, 2015). The Fifth Circuit affirmed dismissal in a detailed opinion, holding, procedurally, that:
- “A district court may best make sense of scienter allegations by first looking to the contribution of each individual allegation to a strong inference of scienter, especially in a complicated case such as this one. Of course, the court must follow this initial step with a holistic look at all the scienter allegations”; and
- “Group pleaded” allegations were properly disregarded, although the Court declined to adopt “a strict rule requiring outright dismissal for any group or puzzle pleading[.]”
And on the merits:
- Knowledge of undercapitalization showed motive and opportunity, but does not by itself establish scienter;
- “Defendants’ disclosure of the ‘red flags’ [cited by Plainitiffs] and candidness about the uncertainly underlying its models neutralize any scienter inference from ‘red flags'”; and
- “An inference of severe recklessness is more likely when a statement violates an objective rule than when GAAP permits a range of acceptable outcomes.”
Therefore: “Considered holistically, plaintiffs’ allegations of knowledge of Guaranty’s undercapitalization, a large misstatement, red flags, and ignorance of internal warnings, do not raise a strong inference of severe recklessness that is equally as likely as the competing inference that [Defendants] negligently relief on the AAA ratings and believed that Guaranty’s internal models were accurate.”