Top 5 Business Cases from the Fifth Circuit, 3Q 2014

  1. General jurisdiction is not general.  “It is . . . incredibly difficult to establish general jurisdiction in a forum other than the place of incorporation or principal place of business.”  Monkton Ins. Servs. v. Ritter, __ F.3d ___ (5th Cir. Sept. 26, 2014) (applying Daimler AG v. Bauman, 134 S. Ct. 746 (2014)).
  2.  “Gateway” arbitration has a gate.   A party must only “arbitrate gateway questions of arbitrability if the argument that the dispute falls within the scope of the agreement is not wholly groundless.”  In Douglas v. Regions Bank, an agreement about a bank account did not control a later, unrelated embezzlement case.  757 F.3d 460 (5th Cir. 2014).
  3. “Based on” = Arbitration.  The contract said: “Terms and conditions are based on the general conditions stated in the [attached].”  While “based on” may have “multiple interpretations . . . in the abstract,” no such reading worked here, given the length and scope of the attachment compared to the contract.   Rushaid v. National Oilwell Varco, Inc., 757 F.3d 416 (5th Cir. 2014).
  4. No actual damages = No civil penalties.  Forte v. Wal-Mart Stores, ___ F.3d ___ (5th Cir. Aug. 25, 2014) (rehearing pending).
  5. Analytical GAAP.   An expert reviewed financial documents from A and tax returns from B.  His opinions about the finances of C and D were stricken: “It is by no means clear how a [CPA] can obtain personal knowledge of the effects of the actions of one entity on other parties without reviewing the latter’s financial documents . . . .”  Meadaa v. K.A.P. Enterprises LLC, 756 F.3d 875 (5th Cir. 2014).

BONUS: Lipan Apaches may use eagle feathers in religious rituals — for now at least.  McAllen Grace Brethren Church v. Salazar, ___ F.3d ___ (5th Cir. Aug. 20, 2014).

$39K car purchase does not create $50K controversy

Plaintiff bought a Nissan Murano, paying $39,289 in total.  She sued for breach of warranty and related state law claims, and the defendants removed.  The issue addressed on appeal was whether the claim fell within the $50,000 amount-in-controversy requirement of the Magnuson-Moss Warranty Act.    Scarlott v. Nissan North America, Inc., No. 13-20528 (Sept. 30, 2014).  The Fifth Circuit found it did not — the plaintiff’s invocation of a “Level One” Discovery Control Plan under the Texas Rules of Civil Procedure did not specify a claim amount, and the defendants did not offer sufficient evidence of dimunution of value, repair costs, or lost profits to bring the claim about the threshold.  Notably, under the Magnuson-Moss statute, in calculating the amount in controversy a court may not consider attorneys fees, personal injury damages, or damages associated solely with pendent state-law claims.

What’s new with personal jurisdiction in 2014? Read this case.

Ritter, a resident of Texas, owned an insurance company in the Cayman Islands. Litigation broke out, in Texas, between Ritter and the Cayman-based entity that managed the insurance company.  Ritter sought to join a Cayman-based bank to the Texas case, arguing that it failed to detect the manager’s wrongdoing.  The district court dismissed for lack of personal jurisdiction and the Fifth Circuit affirmed.  Monkton Ins. Servs. v. Ritter, No. 13-50941 (Sept. 26, 2014).  The case is notable as one of the first applications by the Circuit of two 2014 Supreme Court cases about personal jurisdiction.

First, as to general jurisdiction, applying Daimler AG v. Bauman, 134 S. Ct. 746 (2014), the Court observed: “It is . . . incredibly difficult to establish general jurisdiction in a forum other than the place of incorporation or principal place of business.”  The Court also reminded that a “sliding scale” analysis about the jurisdictional effect of a defendant’s website “is not well adapted to the general jurisdiction inquiry, because even repeated contacts with forum residents by a foreign defendant may not constitute the requisite substantial, continuous and systematic contacts required for a finding of general jurisdiction—in other words, while it may be doing business with Texas, it is not doing business in Texas.” (quoting Revell v. Lidov, 317 F.3d 467, 471 (5th Cir. 2002) (citing Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997)).

Second, as to specific jurisdiction, the Court noted that Walden v. Fiore, 134 S. Ct. 1115 (2014), emphasized that a plaintiff’s unilateral actions with respect to the forum cannot create personal jurisdiction.  Here, the bank transactions at issue were initiated by Ritter, running afoul of this principle.  The Court also found no abuse of discretion in denying jurisdictional discovery.

Can’t add nondiverse party after CAFA removal.

Plaintiff brought a class action in Louisiana state court on behalf of apartment owners and managers.  Defendant removed under CAFA.  Plaintiff then sought to add a local defendant and invoke the “local controversy” exception to CAFA jurisdiction. Cedar Lodge Plantation, LLC v. CSHV Fairway View I, LLC, No. 14-30735 (Sept. 29, 2014). Citing State of Louisiana v. American National Property & Casualty Co., 746 F.3d 633 (5th Cir. 2014), the Fifth Circuit rejected this argument, noting that CAFA defines a class action as the “civil action filed”   28 U.S.C. § 1332(d)(1)(B) (emphasis added).

The building fell down. Someone should pay.

Boxcars Properties, the operator of an apartment complex, sued its neighboring landowners West Hills Park and Home Depot in Texas state court, complaining about development activity that led to a “lack of lateral support” and made the complex uninhabitable. Williams v. Home Depot, Inc. (Sept. 22, 2014, unpublished).  Boxcars settled with Home Depot and obtained a $2.4 million verdict against West Hills, which then filed for bankruptcy.

West Hills sought indemnity from Home Depot, and the district court and Fifth Circuit rejected its request.  The indemnity provision contained an exclusion for “the tortious acts of . . . other parties” — such as West Hills.  Noting that “[t]he express negligence doctrine alone may be sufficient to deny [debtor's] claim,” the Court decided on the basis of issue preclusion, agreeing with the district court that “the negligence finding was essential to the judgment because only that finding allowed for the damages for improvements to land included in the state court verdict.”

Another week, another set of certified insurance law questions.

ExxonMobil sued US Metals, alleging over $6 million in damages from defects in a set of 350 “weld neck flanges.”  US Metals sought CGL coverage from Liberty.  U.S. Metals, Inc. v. Liberty Mutual Group, Inc., No. 1320433 (Sept. 19, 2014, unpublished). Liberty denied US Metals’s request, based on the “your product” and “impaired” property exclusions in the policy, which turned on the terms “physical injury” and “replacement” in those exclusions.   The Fifth Circuit noted a lack of Texas authority as to whether those terms are ambiguous in this context, and no clear answer in other opinions that have addressed them. Accordingly, the Court certified two questions to the Texas Supreme Court: (1) whether those terms, as used in these exclusions, are ambiguous; and (2) if so, whether the insured’s interpretation is reasonable.  The Court observed that the interpretation of these terms “will have far-reaching implications” and “affect a large number of litigants.”  That Court accepted the certification request today.

Texas state court: $3 million default taken at 10:15 AM.

In somewhat quirky language, the Texas Rules of Civil Procedure set this deadline to answer a lawsuit: “[O]n or before 10:00 a.m. on the Monday next after the expiration of twenty days after the date of service.”  Despite the specific time stated, attorneys often calendar only the answer day, reasoning that a default judgment is unlikely in the space of a few hours.  That practice failed in G&C Land v. Farmland Management Services, in which the plaintiff obtained a default judgment for over $3,000,000 at 10:15 on the critical Monday.  No. 14-10046 (5th Cir. Sept. 23, 2014).

Plaintiff alleged fraud claims about the costs of an agricultural lease on a West Texas farm; the judgment granted recovery on those claims and trebled the damages under the DTPA.  Two hours later, the defendant removed and then sought to set aside the default judgment.  The district court ultimately granted that motion, along with a summary judgment for the defendant on the merits, and the Fifth Circuit affirmed.

Whilte the Fifth Circuit’s opinion is short and unpublished, the district court opinion (page 31 of the attached) goes into substantial detail about the default judgment.  It found a lack of willfulness by the defendant, a lack of prejudice to the plaintiff, and meritorious defenses.  As to willfulness, the district court noted that “fault is attributed only to Farmland’s counsel,” and held: “There is no dispute that Farmland failed to file an answer or remove before the deadline to answer in state court, which failure is attributed to the negligence of Farmland’s counsel.  Yet, such negligence does not amount to willfulness . . . “   It also noted that while Farmland had timely answered after removal in accordance with the Federal rules, “this alone does not excuse Farmland’s failure to timely answer in state court.”

The federal courts’ decisions to set aside the default judgment are clearly correct – the (affirmed) summary judgment shows that the claim lacked merit, and plaintiff was not prejudiced by having to address the merits instead of resting on a 15-minute “gotcha.”  And as to the deadline, the opinions do not address Rule 5 of the Texas Rule of Civil Procedure, which provides:  “If any document is sent to the proper clerk by first-class United States mail in an envelope or wrapper properly addressed and stamped and is deposited in the mail on or before the last day for filing same, the same, if received by the clerk not more than ten days tardily, shall be filed by the clerk and be deemed filed in time (emphasis added).”  A serious argument says that the state court’s speedy grant of a default judgment did not allow Rule 5 a chance to function as intended.

Nevertheless, the district court faulted defense counsel for not answering before 10:00, and used the word “negligence” to describe what happened.  Had the facts been different – a stronger claim, a change of position in reliance on the judgment – the decision could have been closer and counsel’s situation would have become more awkward.  In light of the facts of this case, defense counsel should be mindful of the 10:00 AM deadline in the rules, and factor it into their calendaring system.

A similar article about this case appeared in a recent Texas LawBook.

Uncivil contempt

The district court ordered Glay Collier, a bankruptcy attorney, to stop advertising for “no money down” Chapter 7 services.  Despite efforts by Collier, some online ads remained. The district court found him in contempt and ordered him confined for 48 hours “[a]s a result of the violation of this Court’s order, without any reasonable excuse other than ‘I forgot[.]‘”  In re Glay Collier, No. 14-30887 (Sept. 19, 2014, unpublished).  The Fifth Circuit granted mandamus, finding that this order involved criminal rather than civil contempt, and thus triggered procedural safeguards that had not been invoked.  Among other considerations, the Court noted that “the sanction was for an unconditional term of imprisonment,” that Collier “could have taken additional steps to comply with the court’s order by the time he was remanded into custody,” and that the district court cited “‘the violation’ of [its] order (not the continued non-compliance) as the basis for its finding of civil contempt.”

Abstract Art, Clear Error.

Estate of Elkins v. Commissioner of Internal Revenue presented a dispute about the taxable value of a decedent’s fractional ownership in an extremely valuable art portfolio, including works by Picasso, Jackson Pollock, and Cezanne. No. 13-60742 (Sept. 15, 2014).  Before the U.S. Tax Court, the IRS “steadfastly maintained that absolutely no fractional-ownership discount was allowable.” The estate offered expert testimony that “any hypothetical willing buyer would demand significant fractional-ownership discounts in the face of becoming a co-owner with the Elkins descendants, given their financial strength and sophistication, their legal restraints on alienation and partition, and their determination never to sell their interests in the art.”

The Tax Court applied a “‘nominal’ discount of 10 percent only.”  The Fifth Circuit reversed: “[T]he Estate’s uncontradicted, unimpeached, and eminently credible evidence in support of its proferred fractional-ownership discounts is not just a ‘preponderance’ of such evidence; it is the only such evidence.  Nowhere is there any evidentiary support for the Tax Court’s unsubstantiated declaration” about the 10% discount (emphasis in original).  In reviewing the IRS’s “no discount” position at trial, the Court noted in footnote 7: “The Commissioner appears to have ignored, or been unaware of, the venerable lesson of Judge Learned Hand’s opinion in Cohan: In essence, make as close an approximation as you can, but never use a zero.”  Cohan v. Commissioner, 39 F.2d 540, 543-44 (2d Cir. 1930).


Two Louisiana insurance issues certified

Withdrawing an earlier panel opinion, the Fifth Circuit certified two insurance questions to the Louisiana Supreme Court:

1.  Whether an insurer can be liable for a bad-faith failure-to-settle claim when it never received a firm settlement offer.  (The Court noted that a revised statute imposed “an affirmative duty . . . to make a reasonable effort to settle claims,” drawing into question prior case law in the area.)

2.  Whether an insurer can be liable for “misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage” — namely, the status of a claim and related settlement negotiations.

Kelly v. State Farm Fire & Casualty Co., No. 12-31064 (Sept. 10, 2014, unpublished)

Transfer in MA. Creditor in TX. Jurisdiction?

Plaintiffs, citizens of Texas, sued two citizens of Massachusetts and their companies, alleging violations of the Texas Fraudulent Transfer Act.  Dontos v. Vendomation NZ Ltd., No. 12-10986 (Sept. 16, 2014, unpublished).  The district court dismissed for lack of personal jurisdiction and the Fifth Circuit reversed.

Noting that it was “hesitant to make per se rules regarding fact-specific minimum contacts analysis,” the Court observed generally that “a debtor who is liable under TUFTA to a Texas resident is likely subject to suit in the creditor’s forum state because the debtor acted with actual or constructive fraudulent intent to expressly aim their conduct at a creditor in the forum, where the tort’s harm was felt.”  Similarly, while “a mere ‘passive transferee[]” is unlikely to be subject to jurisdiction in the creditor’s resident state,” if ” the transferee ‘precipitate[s] and direct[s] an alleged fraudulent transfer at the expense of a known . . . creditor in Texas,” jurisdiction is likely.  (reviewing and applying Mullins v. TestAmerica, Inc., 564 F.3d 386, 400 (5th Cir. 2009) (citing Calder v. Jones, 465 U.S. 783, 789-90 (1984)).

Applying those principles, and accepting the plaintiffs’ allegations as true, the Court found sufficiently detailed allegations to state a prima facie case for personal jurisdiction as to both the debtor and the initial transferees.

Oil well lien: Can an owner be a contractor?

Drillers asserted a subcontractors’ lien on Debtors’ oil well.  Endeavor Energy Resources, L.P. v. Heritage Consolidated, L.L.C., No. 13-10969 (Aug. 27, 2014). Debtors argued that when the general contractor acquired a 1% ownership interest in the lease, that interest related back to the time before Drillers began work, and voided any lien because a party cannot be both a contractor and an owner.

The Fifth Circuit rejected that argument and reversed the lower courts, finding that the Texas Supreme Court intended the relation-back doctrine in this context to expand the interest to which a valid lien can attach (applying Diversified Mortgage Investors v. Lloyd D. Blaylock General Contractor, Inc., 578 S.W.2d 794 (Tex. 1978)).  Noting that this interest was not acquired until after the Drillers had done their work, the Court observed that even an earlier acquisition would reach the same result: “If [GC] gained a 1% ownership interest in the lease at the time that Drillers performed their work, then Drillers may have gained an additional claim for contractors’ liens against [GC].  It would not, however, prevent Drillers from asserting separate subcontractors’ liens against [Debtors].”

Mortgage Servicing Basics

A borrower lost a summary judgment in a mortgage dispute in Langlois v. Wells Fargo Bank, N.A., No. 13-10914 (Sept. 8, 2014, unpublished).  In addition to a basic summary of problems that such cases can have, the opinion illustrates one in particular.  The stronger an alleged oral modification becomes, the weaker a corresponding fraud claim becomes, because “When oral promises are directly contradicted by express, unambiguous terms of a written agreement, the law says that reliance on those oral promises is not justified.”  (quoting Taft v. Sherman, 301 S.W.3d 452, 458 (Tex. App.–Amarillo 2009, no pet.)  The same phenomenon strengthens a Statute of Frauds defense as well.

The regulation, my friend, is blowin’ in the wind.

The Public Utilities Regulatory Policies Act (“PURPA”) directs the FERC to encourage alternative energy providers, called “Qualifying Facilities” under that statute.  In a novel arrangement that encourages flexibility but also can raise “troublesome” Tenth Amendment concerns, PURPA directs state agencies — such as the Texas PUC — to adopt rules that comply with FERC’s regulations and help implement PURPA.  Exelon Wind 1, LLC v. Nelson, No. 12-51228 (Sept. 8, 2014) (quoting Power Resource Group v. Public Utility Comm’n of Texas, 422 F.3d 231 (5th Cir. 2005), and FERC v. Mississippi, 456 U.S. 742 (1982)).

The Texas PUC, acknowledging this mandate as well as the vagaries of wind power generation in the Texas Panhandle, enacted a rule limiting the pricing benefits of PURPA to “Qualifying Facilities able to forecast when they will deliver energy to the utility.”  Exelon, a wind power producer, challenged the validity of this rule under PURPA.

The Fifth Circuit first rejected a jurisdictional challenge, finding that Exelon’s attack on the rule was an “as-applied” challenge — over which federal courts have jurisdiction – as opposed to a “facial” challenge reserved to state courts.  In so reasoning, the Court declined to give Chevron deference to a “Declaratory Order” by FERC.  On the merits, — again declining to give the FERC letter deference — the Court upheld the PUC regulation: “The PUC had the discretion to determine the specific parameters for ehwn a wind farm can form a Legally Enforceable Obligation, and . . . left open the possibility that other wind farms might be able to provide firm power . . . .”

A dissent, agreeing with the jurisdictional analysis, differed on the merits, finding that the PUC rule conflicts on its face with the applicable FERC regulation, and that deference was due to the “FERC’s reasonable interpretation of that regulation according to well-established principles of adminstrative deference.”

The bankruptcy estate has limits

Earlier this year, the Fifth Circuit ordered the remand to state court of litigation between Vantage Drilling and Hsin-Chi Su.  Vantage Drilling Co. v. Su, 741 F.3d 535 (5th Cir. 2014).  Meanwhile, several marine shipping companies, owned in whole or in part by Su, filed for Chapter 11 protection in the Southern District of Texas, and Vantage intervened in those proceedings.  TMT Procurement Corp. v. Vantage Drilling Co., No. 13-20622 (Sept. 3, 2014).  The district court entered several orders related to DIP financing and shares of Vantage stock, which Vantage appealed.

The Fifth Circuit rejected a mootness challenge, concluding that the DIP lender’s awareness of Vantage’s claim removed the appeal from certain Code provisions that limit appellate rights.  The Court then held that (1) the shares at issue were not estate property — even though the district court’s orders had tied them to the business affairs of the debtor, and (2) the ongoing state court litigation was not “related to” the estate because it was an action “between non-debtors over non-estate property.”  Accordingly, the lower courts lacked jurisdiction to enter the orders challenged by Vantage, and the Fifth Circuit vacated them.


Trying to set up a “Special Limited Investment Partnership” to reduce taxes, Dow Chemical contributed 73 patents to a partnership with several foreign banks, which licensed the patents back to Dow.  Chemtech Royalty Assocs. v. United States, No. 13-30887 (Sept. 10, 2014).  The Fifth Circuit affirmed the finding of a “sham partnership,” noting three points: (1) the transaction was structured to ensure the banks a fixed annual return on investment; (2) Dow agreed to bear all material risks arising from the transactions; and (3) the banks did not meaningfully share in any potential upside.  The Court dismissed several case citations by Dow as elevating form over substance.  The Court concluded by vacating and remanding as to penalty — the district court concluded that that “it could not impose a valuation-misstatement penalty when an entire transaction has been disregarded,” but since that ruling, the Supreme Court suggested that it was as least possible to do so in United States v. Woods, 134 S. Ct. 557 (2013).

Posted in Tax

Cleaning the Ponzian Stables

The Fifth Circuit affirmed liability under the Texas fraudulent transfer statute as to several investors who actually earned returns from the Ponzi scheme run by Allen Stanford.  Janvey v. Brown, No. 13-10266 et al. (Sept. 11, 2014).  First, the Court dismissed a choice-of-law issue as presenting a “false conflict,” since Antigua had no real interest in the application of its laws to the Stanford scheme when compared to Texas.  The Court then endorsed the district court’s approach to the situation, which found that the investors gave reasonably equivalent value to the extent they received back their principal, while requiring the return of interest: “allowing [them] to keep their fraudulent above-market returns in addition to their principal would simply further victimize the true Stanford victims, whose money paid the fraudulent interest.”

Bleak Haus

The Swareks and the Derrs disputed the ownership of a large farm in Issaquena County, Mississippi (at 1400 residents, the least populous county in that state, but also the home of its largest captured alligator).  Their litigation unfolded as follows:

  1. In 2005, Swareks sued Derrs in Issaquena County;
  2. In March 2009, the Derrs sued Swareks in the — somewhat unlikely — venue of the German Regional Court in Düsseldorf, Germany (population 600,000, and capital of the state of North Rhine-Westphalia);
  3. In November 2009, the Swareks voluntarily dismissed their claims in Mississippi;
  4. In 2010, the Derrs lost in Germany when that court recognized the dismissal of the Mississippi claims; but then,
  5. The Derrs ultimately won on appeal in Germany before the Higher Regional Court of Düsseldorf, obtaining judgment for $300,000 in costs.

The Derrs sought to domesticate the judgment in Mississippi, and the district court rejected their request, citing res judicata and characterizing the German action as an end run around the Mississippi state court.  On appeal, the Fifth Circuit affirmed with these three observations:

  1. “Filing a mirror-image lawsuit in a foreign court while domestic litigation is pending is not sufficient, on its own, to preclude recognition of a foreign judgment, and the district court erred in denying comity on this ground.”
  2. While dismissal for want of jurisdiction may not have preclusive effect, a voluntary dismissal does: “If the plaintiff chooses to extinguish his rights forever he is entitled to do so, and the defendant will reap the benefit of a res judicata bar to any attempt by the plaintiff
  3. As to the German appellate holding: “The German Higher Regional Court’s decision to sidestep the comity determination and re-adjudicate claims that had already been settled in the Chancery Court violated the Mississippi public policy of res judicata and the Swareks’ right to permanently terminate their claims.  Comity must be a two-way street.”

A dissent characterized the interplay between the Mississippi and German holdings differently, and thus would affirm.


Contract terminated, goods sold, no unjust enrichment.

In Ferrara Fire Apparatus, Inc. v. JLG Industries, Inc., the Fifth Circuit returned to ground surveyed by the American Law Institute’s Restatement (Third) of Restitution, which the Court recently visited in cases about a faithless employee and the payment of benefits to a seaman.  Here, Gradall Industries manufactured a specialized boom called the “Strong Arm,” designed for firefighting, and Ferrara Fire Apparatus contracted to serve as its exclusive sales representative.  The relationship soured, Gradall terminated the contract, and Ferrara sued.  Ferrara obtained judgment for unjust enrichment for $1 million.  The Fifth Circuit reversed, finding no evidence of “an absence of justification or legal cause for the enrichment” as required by Louisiana law: “Gradall was simply competing in the market, which it was entitled to do after ending its exclusive contract with Ferrara.”  No. 13-30600 (Sept. 9, 2014, unpublished).

Servicer’s records not good enough for MSJ

In loan-level litigation between borrowers and mortgage servicers, the servicer usually has the significant advantage of better record-keeping.  In Tielke v. Bank of America, however, the Fifth Circuit reversed a summary judgment for a servicer.  No. 13-20425 (Sept. 4, 2014, unpublished).  The Court observed, as to the servicer’s loan history statement, that “we are unable to decipher this document with any certainty.”  The main problem was whether the borrowers had truly fallen into default or the servicer was inaccurately carrying forward matters that should have been erased by their bankruptcy; compounded by confusion over the servicer’s handling of an escrow account for insurance.  In a conclusion that should encourage careful record-keeping by all parties, the Court found: “There are simply too many unanswered questions”

CLE September 9 at Belo with FIVE 5th Circuit judges

On September 9 at noon at the Belo Mansion in downtown Dallas, a panel consisting of Judges Gregg Costa, Jennifer Elrod, James Graves, and Stephen Higginson — and moderated by Judge Catharina Haynes — will offer tips about effective advocacy before the Fifth Circuit.  It is sponsored by the DBA’s Business Litigation Section; co-sponsored by the Appellate Law & Trial Skills Sections.  Terrific opportunity for advice that comes straight from the source.

Settlement agreement isn’t an arbitration award

The plaintiffs’ employment lawsuit in Arce v. Austin Industries was stayed in favor of arbitration.  No. 14-20098 (Aug. 28, 2014, unpublished).  While the parties then reached a settlement agreement, the district court would not dismiss the lawsuit without review and approval of the settlement.  The district court found the attorneys fees excessive and only dismissed the case after modifying that aspect of the settlement.  The plaintiffs appealed, noting the deference given to arbitration awards, and the Fifth Circuit rejected that argument: “The plaintiffs have not shown that the arbitrator imposed the terms of the settlement on the parties through any order or award.  Furthermore, the plaintiffs have cited no authority holding that a private settlement that happens to take place while the parties are in arbitration is tantamount to an arbitration award.”

Injunction ended, so should the appeal.

Claimants in the compensation system created by BP after the Deepwater Horizon accident received an award in October 2013.  Lake Eugenie Land & Development v. BP Exploration & Production,  No. 14-30398 (Aug. 25, 2014, unpublished).  Unpaid by March 2014, they filed a “Motion to Confirm Award and Order Payment,” which the district court denied because an interim injunction had stayed the entire program while aspects of it were under legal challenge.  After appealing, the injunction lifted.  The Fifth Circuit dismissed for lack of jurisdiction, finding that the trial court’s ruling was neither an order that “vacates, modifies, or corrects” an arbitration award, nor an “interlocutory order . . . continuing . . . an injunction against an arbitration.”

Federal jurisdiction in labor dispute, somehow.

In Houston Refining, LP v. United Steel Workers, an arbitrator found that the suspension of a company’s 401(k) plan, after its bankruptcy filing, violated the company’s CBA with a union.  No. 13-20384 (Aug. 25, 2014).  Two judges agreed that the parties had not “clearly and unmistakably” allowed the arbitrator to decide arbitrability, noting this provision of the parties agreement: “At arbitration, the parties shall reserve all rights to present any and all arguments and advance any and all defenses to them including, without limitation, arguments concerning whether or not an applicable collective bargaining agreement was in effect at the time that a particular grievance arose.”  A dissent stressed other provisions of the agreement and the limited scope of review in the CBA context.  All three judges agreed that the court had subject matter jurisdiction, but differed on the rationales, in the specific context of an alleged breach of a contract controlled by federal labor law.

When does a preferential transfer happen?

In Flooring Systems, Inc. v. Chow, these events led to a dispute about whether a preferential transfer occurred:

  • June 2007: Flooring Systems, Inc. obtains a Texas state court judgment against Eric Poston.
  • October 26, 2007: State court appoints a receiver to collect assets to satisfy the judgment.
  • November 20, 2007: Flooring Systems serves Plain Capital Bank with a certified copy of the receivership order.
  • December 18, 2007: Bank turns over $22,923.05 check.
  • January 15, 2008: Receiver pays Flooring Systems $18,529.64
  • January 31, 2008.  Poston files for bankruptcy, Chow appointed as trustee.

If the transfer was made on October 26, it did not implicate the 90-day preferential transfer period in the Bankruptcy Code; if made on the 20th, it did.  Citing a Texas statute that provides: “[T]he rights of a receiver . . . do not attach until the financial institution receives service of a certified copy of the order of receivership . . . ,” the Fifth Circuit held that the transfer did not occur until the date of service on the bank, and affirmed.  No. 13-41050 (Aug. 28, 2014).

O brave new bankruptcy, which has such people in’t . . .

In Galaz v. Galaz, a bankruptcy debtor sued her ex-husband for the fraudulent transfer of a royalty interest in the works of the Ohio Players, a popular funk band in the 1970s. Nos. 13-50781, 50783 (Aug. 25, 2014).  Her ex-husband brought third-party claims against a music producer, who in turn brought counterclaims.  The resulting litigation produced judgments in favor of both the debtor and the producer against the ex-husband.  On appeal, in a landscape formed by the legacy of Stern v. Marshall, 131 S. Ct. 2594 (2011), the Fifth Circuit held:

1.  While the debtor’s fraudulent transfer claim was not the “paradigmatic” case where assets are transferred out of the estate, it could still “conceivably” affect the estate, and the bankruptcy court thus had statutory jurisdiction because these non-core claims related to her bankruptcy;

2.  The producer’s counterclaims, however, had no connection to the estate and the bankruptcy court had no statutory jurisdiction over them;

3.  Under Stern, in light of the present posture of cases from this Circuit and one awaiting Supreme Court review, the implied consent of the parties cannot confer constitutional jurisdiction on the bankruptcy court to enter final judgment such as the debtor’s claim here.

Accordingly, the Court reversed and remanded, hinting that the bankruptcy court could prepare proposed findings of fact and conclusions of law for the district court as to the debtor’s claims.  The Court also noted that the debtor had standing as a creditor under the Texas Uniform Fraudulent Transfer Act even though her personal interest in the royalties flowed through a business she partly owned.

Disbelief of the untruth

The bankruptcy debtor in McClendon v. Springfield had lost a defamation judgment for $341,000.  No. 13-41030 (Aug. 26, 2014, unpublished).  Because “the jury’s verdict could be sustained either on intentionality or recklessness,” the bankruptcy court held an evidentiary hearing to determine whether the claim resulted from a “wilful and malicious” injury.  Concluding that it did, the court denied discharge of that claim.  On appeal, the debtor argued that “a trial judge may not use his disbelief of a witness as affirmative support for the proposition that the opposite of the witness’s testimony is the truth.”  (citing Seymour v. Oceanic Navigating Co., 453 F.2d 1185, 1190-91 (5th Cir. 1972)) (Texas state practitioners are familiar with similar sufficiency principles from City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005)).  The Fifth Circuit rejected this argument, both in light of the entire record received by the bankruptcy court, and because:  “[H]here, the factual inquiry was binary, a question whether [the debtor] acted willfully and maliciously or not.  . . . [T]he bankruptcy court’s disbelief of [the debtor's] statements that he did not know the statements were false leaves only the alternative that he did know . . . .”

Payment excused, unambiguously

CAP agreed to sell a security to VPRO.  Their contract said: “The purchase price is $400,000 and this amount is to be paid to you within 10 business days from the date of transfer of the [security t]o: CITIBANK NY DTC 908 Account 089154 CSC73464, Further Credit to: [CAP], Beneficiary Deposit Account NR. 840 BSI SPA San Marino.” Collective Asset Partners, LLC v. Vtrader Pro, LLC, No. 13-20619 (Aug. 15, 2014, unpublished).

CAP hired a broker, who successfully transferred the security to the DTC account but, because the broker provided inaccurate information, failed to transfer it on to the San Marino account.  VPRO refused to pay.  CAP sold the security to another buyer for $175,069.41 and sued VPRO for the difference.

Applying Texas law, the Fifth Circuit agreed with the district court that VPRO unambiguously had no payment obligation until both transfers occurred, noting both the “Further Credit to” language in the contract, and the fact that the broker in fact tried to make both transfers.


Oil drilling, claims for waste, and Rule 12

Plaintiffs own and operate a mineral lease in the Gulf of Mexico; they allege that their neighbors drilled so as to deplete the value of their lease.  Specifically, they pleaded claims for “waste” and “unlawful drainage and trespass” under Louisiana law, as adopted by the Outer Continental Shelf Lands Act.  Breton Energy LLC v. Mariner Energy Resources Inc., No. 13-20307 (Aug. 12, 2014).   As to the waste claims, after a detailed review of the specific allegations and precedent, the Fifth Circuit found a cognizable waste claim pleaded against the defendant alleged to have perforated the relevant oil sands.  The Court affirmed, however, the dismissal of claims against the non-perforating defendants, finding “equivocat[ion]” in a key allegation that those defendants could have caused the Minerals Management Service to “take[] other steps to protect the correlative rights of adjacent lessees.”  The Court also rejected claims for drainage losses and trespass, describing the interplay of those claims with a waste claim under Louisiana law.

On wings of eagles . . .

McAllen Grace Brethren Church v. Salazar presents a fascinating conflict between Native American religious practice and the preservation of endangered eagle species.  No. 13-40326 (Aug. 20, 2014)  Robert Soto, a member of the Lipan Apache Tribe, sought to use eagle feathers in a tribal religious ritual.  All parties agreed that his beliefs were sincere and that the lack of the feathers would substantially burden his ministry.  The Lipan Apaches, while recognized by Texas authorities since the 1838 Live Oak Treaty between the Tribe and the Republic of Texas, are not a “federally recognized tribe” as understood by the Interior Department.  Accordingly, under the Department’s regulations that implement various statutes about the protection of eagles, he was not entitled to the feathers.

Assuming that the Department’s stated goals — eagle protection and protection of federally-recognized tribes — served compelling interests, the Fifth Circuit held that the record did not show that the regulations used the least-restrictive means to advance those interests.  The Court found the Department’s evidence of harm to be inconclusive and subject to more than one interpretation, and also found inadequate consideration of potential alternative approaches.  Acknowledging that other courts have accepted similar arguments by the Department, the Court observed: “Soto does not seek to make the practice of his religion ‘easier,’ he seeks to avoid roadblocks of the government’s own making which have made the practice of his religion not just ‘not easier’” but impossible.”  Accordingly, it reversed a summary judgment for the Department and remanded.

Phantom Guaranty

The Fifth Circuit, which in recent years has shown a healthy skepticism about suits to enforce guaranty obligations, again reversed a judgment against a guarantor in JRG Capital Investors I, LLC v. Doppelt, No. 13-20418 (Aug. 5, 2014, unpublished).  The underlying note was “generally a nonrecourse debt, meaning that the borrower could not be held personally liable for any deficiency.”  While the note had several exceptions that triggered personal liability, the parties agreed that none had occurred.  The Court found that the guaranty was only for “the prompt, complete and full payment and performance when due . . . of Borrower’s Recourse Obligations,” and contrasted language involving similar guaranty documents in other cases that was not so limited.


Keep an eye on the proposed amendments to the FRCP, which will be considered by the Judicial Conference in September and then forwarded on to the Supreme Court and Congress if approved.  Two major features are:

  • –A redefined scope for permissible discovery in Fed. R. Civ. P. 26(b)(1) [page 10 of the linked document above]
  • –Revised sanctions rules about the spoliation of electronic evidence in Fed. R. Civ. P. 37(e)(1) and (2) [page 37 of the above]

The Advisory Committee notes, while lengthy, are particularly informative about the reasons for these revisions and how they are intended to work in practice.

Personal Jurisdiction 101

Two classic jurisdictional issues were presented in Special Industries, Inc. v. Zamil Group Holding Co., No. 13-20231 (Aug. 5, 2014, unpublished), which affirmed a dismissal on personal jurisdiction grounds in a forum dispute between Texas and Saudi Arabia.

First, citing Moncrief Oil Int’l, Inc. v. OAO Gazprom, 481 F.3d 309 (5th Cir. 2007), the Fifth Circuit emphasized the importance of the “hub” of contract performance, finding: “The foreseeability that [plaintiff] would perform part of its obligations under the contract in Texas, and that the parties did in fact engage other Texas companies for work on the project, is not enough for a finding of specific jurisdiction over the . . . defendants.  The contracts were formed outside of Texas, did not expressly provide for work to be done in Texas, the [plaintiff] individuals performing work under the contract did not do so solely from Texas, Texas was not the hub of the parties’ activities, the contracts’ choice of law provisions did not provide for Texas law, and payments under the contract were not made to Texas.”

Second, as to an “alter ego” theory of jurisdiction over another defendant, the Court held: “We find no authority allowing for the assertion of general jurisdiction over a foreign parent corporation premised only on the foreign corporation’s ownership of subsidiaries in the forum and representations by the foreign parent of its ‘unified’ corporate structure. The assertion of jurisdiction must be premised either on sufficient minimum contacts of the foreign parent with the forum or on some evidence demonstrating the parent company’s actual control over the internal business operations and affairs of the subsidiary.” (distinguishing Daimler-Benz AG v. Olson, 21 S.W.3d 707 (Tex. App.–Austin 2000, pet. dism’d w.o.j.)

Civil penalties capped at — zero.

In Forrte v. Wal-Mart Stores, Inc., the Fifth Circuit affirmed a finding of liability under the Texas Optometry Act, based on dealings between Wal-Mart and optometrists who leased space in its stores.  No. 12-40854 (revised, Aug. 25, 2014).  While the plaintiff optometrists did not claim actual damages, they obtained judgment for over $1,000,000, plus attorneys fees, based on mandatory statutory penalties.  Noting that the Act used the phrase “civil penalty,” the Fifth Circuit found that the damages fell within the cap set by Section 41.008(b) of the Civil Practice & Remedies Code  — “two times the amount of economic damages [plus] economic damages.”  In this case, that was zero, since the plaintiffs sought no other recovery.  The Court distinguished Vanderbilt Mortgage v. Flores, 692 F.3d 358 (5th Cir. 2012), based on the terms of the statutes at issue.  As the Texas Lawbook notes, this opinion has the potential to introduce uncertainty into other “Private Attorney General” statutes in Texas.

More mortgage reminders

Chavez v. Wells Fargo Bank, N.A., No. 13-11325 (Aug. 13, 2014, unpublished) reminds of 2 black-letter principles in mortgage servicing litigation:

1.  A claim under section 392.304(a)(19) of the Texas Finance Code requires proof of a misleading affirmative statement.  “Chavez does not allege that Wells Fargo ever affirmatively represented that he qualified for the modification program.  Here, even assuming that Wells Fargo told Chavez ‘not to worry’ about whether he qualified, this is not an affirmative statement.”

2.  As to negligent misrepresentation, “Chavez argues that Wells Fargo made negligent misrepresentations that it would not foreclose on Chavez during the loan modification process and that it he should not make payments during the process.  However, ‘representations regarding future loan modifications and foreclosure constitute promises of future action rather than representations of existing fact.”  .

Home Alone

The Baptists bought a home insurance policy from Nationwide in 2006.  In 2008, they lost their home to foreclosure.  They remained in the house, however, until December 2011 — before a court-ordered eviction date of January 13, 2012, but after fire did serious damage to the house in December.  They made a claim on the Nationwide policy, which discovered that they no longer owned the house as part of its post-loss investigation. Nationwide Mut. Ins. Co. v. Baptist, No. 13-60726 (Aug. 7, 2014).  While Nationwide won a summary judgment about coverage on the ground that the Baptists no longer had an insurable interest by the time of the fire, the Fifth Circuit affirmed because the Baptists’ “renewals of their policy constituted their affirmations to Nationwide of their initial application for insurance, material portions of which were no longer true.”  Those misstatements allowed Nationwide to rescind the policy under Mississippi law.

Tax shelter case, featuring a cameo by Oliver Wendell Holmes

The question in Salty Brine I, Ltd. v. United States was whether a complicated transaction involving an oil and gas project was an inappropriate assignment of income to avoid income tax.  No. 13-10799 (July 31, 2014).  Reviewing the basic principles of the “assignment of income” doctrine, the Fifth Circuit found no clear error in the district court’s findings that the taxpayers “were in control of the entire transaction.”  In summarizing the doctrine, the Court quoted a metaphor from a 1930 opinion by Justice Holmes — that income tax may not be avoided through an “arrangement by which the fruits are attributed to a different tree from that on which they grew.”  The court also found that the transaction lacked economic substance, again noting the taxpayer’s control of the entities and money flow.

Posted in Tax

“Public disclosure” defeats qui tam case

Relators, displeased with their treatment by the City of Dallas in connection with the redevelopment of a downtown office building, “embarked on a fifteen-month investigation that involved compiling data and performing analyses of DHA properties, Low-Income Housing Tax Credit project locations, and City plans and reports.”  United States ex rel Lockey v. City of Dallas, Nos. 13-10884 & 14-10063 (Aug. After proceedings before HUD, they filed a qui tam lawsuit, alleging that the City and the Dallas Housing Authority submitted false claims that were not in compliance with their obligations under civil rights and fair housing laws.  The Fifth Circuit affirmed dismissal, noting that “[t]he overwhelming majority of the complaint is . . . based, not on the Relators’ personal experiences with the City, but on their research of publicly disclosed information.”  (applying United States ex rel. Reagan v. East Texas Medical Center, 385 F.3d 168, 177-78 (5th Cir. 2004)).

Jurisdiction Here About Jurisdiction There.

A bankruptcy court entered judgment against Defendants, who the filed a new federal lawsuit for a declaratory judgment that the bankruptcy court lacked jurisdiction.  Jacuzzi v. Pimienta, No. 13-41111 (August 5, 2014).  The district court found that it lacked jurisdiction over that suit, and the Fifth Circuit reversed.  Noting that as a general matter, it is procedurally proper to attack a judgment for lack of jurisdiction in a collateral proceeding, the Court found that the lawsuit raised federal questions about due process rights and compliance with the federal rules for service of process.  Accordingly, there was federal jurisdiction to hear the challenge to the bankruptcy court judgment.

Trifecta for Mortgage Servicers

1.  No “split-the-note” claims — we mean it.  Echoing recent opinions about efforts to revisit Priester v. JP Morgan Chase, 708 F.3d 667 (5th Cir. 2013), in Paulette v. Lozoya the Fifth Circuit declined to distinguish, rehear, or certify the holding of Martins v. BAC Home Loans Servicing, LP, 722 F.3d 249 (5th Cir. 2013).  No. 14-50111 (Aug. 6, 2014, unpublished).

.2.  Plead fraudulent lien claims correctly — we mean it.  In Reece v. U.S. Bank, N.A., the Fifth Circuit reiterated, and this time published, a holding from a previous unpublished opinion — that a claim based on the Texas fraudulent lien statute requires “inten[t] to cause the plaintiff physical injury, financial injury, or mental anguish.” No.14-10176 (Aug. 5, 2014).  [Cf. rejection of such a claim for other reasons in Kramer v. JP Morgan Chase Bank, No. 13-50920 (June 25, 2014, unpublished)].

3.  Priester is here to stay.  And, at the district court level, sanctions were recently imposed for failure to acknowledge the Fifth Circuit’s holding in Priester.  Some years ago, this blog’s author co-wrote an article, with Professor Wendy Couture of the University of Idaho Law School, about how courts warning litigants about continuing to press arguments perceived as weak — a topic definitely raised by these recent cases. Loud Rules34 Pepperdine L. Rev. 715 (2007).

Can’t remove issues about workers compensation

The issue does not come up every day, but it can be critical when it surfaces.  “A civil action in any State court arising under the workmen’s compensation laws of such State may not be removed to any district court of the United States.”  28 U.S.C. § 1445(c).  The defendant argued for removal based on common-law bad faith claims — an argument that once worked — but amendments to Texas law meant that “claims of bad faith no longer arise outside of the workers’ compensation laws.”  Trahan v. Liberty Mutual Ins. Co., No. 13-20717 (June 10, 2014, unpublished) (citing Tex. Mut. Ins. Co. v. Ruttiger, 381 S.W.3d 430 (Tex. 2012)).  Accordingly, the case returned to state court.

Defense win affirmed on billion-dollar bankruptcy trustee claim

The trustee of a litigation trust formed from the bankruptcy of Idearc, Inc. sued its former parent, Verizon, alleging billions of dollars in damages in connection with its spinoff.  After a bench trial and several other orders, the district court ruled in favor of defendants, and the Fifth Circuit affirmed in U.S. Bank, N.A. v. Verizon Communications, No. 13-10752 (revised Sept. 2, 2014).

The opinion, while lengthy, still only hints at the complexity of the case, and much of its analysis is fact-specific.  Some of the issues addressed include:

1.  A bankruptcy litigation trust does not have a right to jury trial on a fraudulent transfer claim, when the defendant creditor has filed a proof of claim in the bankruptcy, and the bankruptcy court must resolve whether a fraudulent transfer occurred to rule on that claim (analyzing and applying Langemkamp v. Culp, 498 U.S. 42 (1990), in light of Stern v. Marshall, 131 S. Ct. 2594 (2011)).

2.  In the context of determining whether the district court reviewed an earlier ruling correctly, on pages 26-27, the Court provided crisp definitions of the basic concepts of dictum and holding.

3.  In the course of rejecting an argument about the refusal to admit several pieces of evidence, the Court noted that the trustee “does not discuss how each specific piece of evidence was likely to affect the outcome of the trial, in light of all the evidence presented.”

4.  A defense expert, without experience in the particular industry, was still qualified to speak to valuation methodology in the bench trial, and “we cannot reverse the district court for adopting one permissible view over the other.”

5.  The Court thoroughly reviewed the fiduciary duties owed from a parent to a subsidiary under Delaware law, while affirming the district court’s conclusions about causation associated with their alleged breach.



Did emails about payment modify the settlement agreement?

One party to a settlement made the last installment payment several weeks late, triggering an acceleration clause that led to more liability.  Celtic Marine Corp. v. James C. Justice Co., No. 13-30712 (July 29, 2014).  The parties had this email exchange after the last payment was due and before it was made, which the party in default said modified the agreement:

A (1-5-2013):  Are we being paid the $91,666.66 to settle this once and for all?  I have lost faith in the agreement from your side.

A (1-7-2013): Are you paying us the $91,666.66 today?

B(1-7-2013): Fri

A (1-7-2013): o/n check correct and can’t u do it Thurs for Friday devl?

The Fifth Circuit held that this exchange did not modify the agreement, for several reasons: (1) the parties had not agreed to conduct transactions by electronic means [citing Louisiana's version of the Uniform Electronic Transactions Act], (2) prior contracts had been “typed agreements physically signed,” and (3) factually, the email that talks about payment “to settle this for once and for all” was 1 of 15 demands for payment in a “one-sided” set of communications.

ERISA can irritate ya.

The Fifth Circuit sees many challenges to decisions under ERISA about benefits.  In McCorkle v. Metropolitan Life Ins. Co., the Court reminded that “district courts hearing complaints from disappointed ERISA plan members or their beneficiaries for the administrative denial of benefits are not sitting, as they usually are, as courts of first impression.  Rather, they are serving in an appellate role.”  No. 13-30745 (July 3, 2014). After summarizing the deferential standard of review in that capacity, the Court then emphasized: “We had thought that by now this was understood and accepted by all district judges of this circuit.  But, as this case demonstrates that we were wrong, at least as to one of them, we try yet again to drive that message home.”

2 dismissals = 0 lawsuit.

A little-known but powerful part of Fed. R. Civ. P. 41(b) provides: “[I]f the plaintiff previously dismissed any federal- or state-court action based on or including the same claim, a notice of dismissal operates as an adjudication on the merits.”   The Fifth Circuit affirmed a dismissal under this rule in Cabot Golf CL-PP 1, LLC v. Nixon Peabody, No. 13-40912 (July 7, 2014, unpublished).  It began by noting that, in this context, the distinction between Rule 12 and Rule 56 was immaterial, where “the material facts are undisputed, and we address a pure question of law.”  On the merits, Plaintiff had filed a state lawsuit, filed a federal lawsuit, dismissed the state action, and then dismissed the federal case with a unilateral notice.  Plaintiff argued that the 2-dismissal rule “should apply only to serial litigation (i.e., suits which are filed after the earlier suits were dismissed), not to parallel/tandem litigation as in this case (i.e., suits which were already pending when the earlier suits were dismisssed).”  The Court rejected that argument as unsupported by case law or the plain terms of the Rule.

Door swings shut on a “gateway arbitration”

1.  In 2002, Douglas opened a checking account with Union Planters Bank and signed a signature card with an arbitration provision.  That clause included a “delegation provision,” delegating the question of a dispute’s arbitrability to an arbitrator.  She closed the account a year later.  Douglas v. Regions Bank, No. 12-60877 (July 7, 2014).

2.  In 2007, Douglas was injured in a car accident, after which she brought suit against her lawyer and his bank for allegedly embezzling her settlement funds.  That bank – Regions Bank – had acquired Union Planters in a 2005 transaction.

3.  Regions Bank moved to compel arbitration.  The district court denied the motion on a “successor-in-interest” theory that Douglas did not defend on appeal.  She argued that the delegation provision was not relevant to this dispute, and the Fifth Circuit agreed, adopting a standard under which Douglas would “only . . . bind herself to arbitrate gateway questions of arbitrability if the argument that the dispute falls within the scope of the agreement is not wholly groundless.”  A dissent argued that this test was foreclosed by recent Supreme Court authority on related issues about an arbitrator’s authority.

Compulsory Coverage Counterclaim

A vessel sank while in the harbor for repairs.  Afterwards, the insurer sued its insured (the harbor operator) and the vessel owner, to dispute coverage.  National Liab. & Fire Ins. Co. v. R&R Marine, Inc., No. 10-20767 (June 30, 2014).  The insurer argued that the vessel owner had no standing under Texas law when it made a claim against the insurer, as there was no final judgment establishing the insured’s liability at that time.  The plaintiff countered that it was “forced” to assert its claim as a compulsory counterclaim under the Federal Rules.  The Fifth Circuit concluded that — although Texas state law barred the timing of the vessel owner’s counterclaim, it arose out of the same occurrence as and had a logical relationship to the coverage dispute.  Accordingly, the counterclaim was compulsory.  Treating it as such also “permitted the district court to efficiently address all disputes arising from the litigation” and was consistent with the Rules’ goal of only “alter[ing] the mode of enforcing state-created rights.”

Mortgage Servicing Reminders

Recent Fifth Circuit cases have curtailed many arguments employed by plaintiffs in litigation with mortgage servicers, and the most recent opinions in the area tend to simply refer back to those cases.  Here are a handful that make useful reminders or address variations of the older arguments:

1.  While potentially viable as legal theories, unsupported allegations of “forgery” and a “false lien” do not survive Rule 12.  And, because a party in breach of a contract may not itself sue for breach, a failure to allege that the plaintiff has performed or tendered performance does not survive Rule 12 either.  Ybarra v. Wells Fargo Bank, No. 13-50881 (July 21, 2014, unpublished).

2.  The restructuring of a Texas home equity loan is a modification, not a refinancing, and thus does not implicate the substantial protections for home equity borrowers provided by the Texas Constitution.  Green v. Wells Fargo Bank No. 14-10254 (July 11, 2014, unpublished) (applying Sims v. Carrington Mortgage Services, LLC, ___ S.W.3d ___, No. 13-0638 (Tex. May 16, 2014)).

3.   Under Texas law, a co-owner who is not a borrower is not entitled to notice of default; a claim of unfair debt collection fails when “there is no evidence that [the servicer] phoned outside of regular business hours or that [its] debt collection efforts included any threats of violence against the [borrowers]“; and an an alleged misrepresentation about future activity by a debt collector is not actionable absent intent not to perform at the time of speaking. Robinson v. Wells Fargo Bank, No. 13-11236 (July 28, 2014, unpublished).

Limit to the FCA’s reach

Characterizing the False Claims Act as “a statute that shadows every aspect of the administrative state,” the Fifth Circuit decided in United States ex rel. Shupe v. Cisco Systems, Inc. this issue: “[W]hen the Government ‘provides any portion of’ requested money” so as to trigger its protections.  No. 13-40807 (July 7, 2014).  After an extensive review of the statute and precedent, the Court concluded: “[That the FCC maintains regulatory supervision over the E-Rate program does not affect the Congress’ decision, embodied in the program’s independent structure, to externalize the cost of administering the program to a private entity.  Because there are not federal funds involved in the program, and USAC [an independent nonprofit charged with its administration] is not itself a government entity, we agree that the Government does not ‘provide[] any portion of’ the requested money under the FCA.”

Return to Royalties

After recently reviewing the phrase “computed at the mouth of the well,” the Fifth Circuit returned to oil royalties in Potts v. Chesapeake Exploration LLC, No. 13-10601 (July 29, 2014).  The lease fixed the royalty as a percentage of “the market value at the point of sale,” and would be “free and clear of all costs and expenses related to the exploration, production and marketing of oil and gas production . . . ”  Since Chesapeake’s sales of gas occured at the wellhead, this language allowed it to deduct a reasonable post-production cost for delivering the gas from the wellhead under Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996).  The Court said that its conclusion was not affected, under the terms of this lease, by the fact that Chesapeake sold to an affiliate.  The Court also rejected a procedural argument about whether Heritage was binding precedent after the Texas Supreme Court’s 4-4 vote on rehearing.   


In Department of Texas, Veterans of Foreign Wars v. Texas Lottery Commission, the en banc Fifth Circuit reversed a 2013 panel opinion and reinstated a permanent injunction against the Texas Bingo Enabling Act, which “allow[ed] charitable organizations to raise money by holding bingo games on the condition that the money is used only for the organizations’ charitable purpose.”  No. 11-50932 (July 28, 2014).  The Court found that this restriction imposed an unconstitutional condition on those organizations’ First Amendment rights, and distinguished Rust v. Sullivan on the grounds that “the government  may attach certain speech restrictions to funds linked to the public treasury — when either granting cash subsidies directly from the public coffers or approving the withholding of funds that would otherwise go to the public treasury. . . . The bingo program in Texas is wholly distinguishable . . . simply because no public monies or ‘spending’ by the state are involved.”  (citations omitted).

A “federal question,” but not a federal question.

“The central issue in this case is whether a district court has jurisdiction over an inventorship dispute where the contest patent has not yet issued.”  Camsoft Data Systems v. Southern Electronics Supply, Inc., No. 12-31013 (June 19, 2014).  After a removal based on patent jurisdiction, the plaintiff amended to add federal antitrust and RICO claims.  The Fifth Circuit held: “where — as here — a plaintiff [timely] objects to jurisdiction at removal, that plaintiff does not waive her jurisdictional arguments via post-removal amendment to her complaint.”  Then, as to patent jurisdiction — acknowledging some uncertainty in the law on this specific topic — the Court found that the Patent & Trademark Office had “sole discretion” over a pending patent, not the federal courts. Returning to the other federal claims, because those claims had not proceeded to trial, a potential argument against remand based on Caterpillar, Inc. v. Lewis, 519 U.S. 61, was unavailable.  Accordingly, the district court’s order of remand to state court was affirmed.

Declaratory judgment appeal not ripe

A large group of Dallas firefighters and police officers, involved in class action litigation against the City, filed a declaratory judgment action in the bankruptcy case of a law firm that had once represented them.  They sought a declaration that neither the firm, nor the bankruptcy trustee, continued to represent them in their litigation or was entitled to any fee in that litigation.  Caton v. Payne, No. 13-41182 (July 16, 2014, unpublished).  After reminding in a lengthy footnote one that the final judgment rule for bankruptcy appeals is viewed “in a practical, less technical light,” the Fifth Circuit nevertheless agreed that the appeal from the ruling on that declaration was not ripe: “It is undisputed that the Class Action Lawsuits remain pending, that no recovery has been made, and that there may never be a recovery, which would preclude any contingent fee award as to which [bankrupt firm] (through the Trustee) may or may not be entitled to a share.  Moreover, the Trustee has not yet demanded a fee, or threatened legal action to recover a fee.”

Remand to arbitration panel not appealable, dissent warns of “mischief”

In Muchison Capital Partners, L.P. v. Nuance Communications, Inc., the district court remanded a case to an arbitration panel for further consideration of damages, making clear that it was not vacating the award.  No. 13-10852 (July 25, 2014).  Appeal ensued. Acknowledging that an order vacating an award and remanding is final, the majority concluded that this order was not final (and thus not appealable) as a matter of precedent and the general policy favoring arbitration and discouraging piecemeal appeals.  A dissent warned that “mischief will come of this error,” pointing out that the district judge closed the case, issued a final judgment, and did not stay or retain jurisdiction over the case after the remand.  The dissenting judge would take the appeal, reach the merits, and affirm the award.  A main point of difference between the majority and dissent was the holding of of Green Tree Financial Corp. v. Randolph, 531 U.S. 79 (2000).

Arbitrator authority

The Fifth Circuit revisited the issue of an arbitrator’s authority to fashion a remedy — nominally an issue of labor union law, but of broader general interest — that it recently addressed in Albermarle Corp. v. United Steel Workers, 703 F.3d 821 (5th Cir. 2013). Observing that the parties’ CBA “did not establish criteria for determining cause to discharge,” it found that the arbitrator’s decision to suspend rather than discharge was within the bounds of an arguable construction of the contract.  United Steel v. Delek Refining, Ltd., No. 12-41119 (July 14, 2014, unpublished).

Be careful settling claims covered by insurance.

A 1404(a) dispute was affirmed in Empire Indemity Ins. Co. v. N-S Corp., where “almost all non-party witnesses and all sources of proof needed to determine whether damages were covered by Empire’s policy are in, or around, Texas, and subject to the district court’s compulsory subpoena power.”  No. 13-40426 (June 12, 2014, unpublished).  On the merits, an aggrieved car wash operator sued its parts supplier and won a verdict for over $3 million.  Several months later, the parts supplier and its primary carrier settled with the plaintiff, all parties mutually released all claims against each other, and the parts supplier assigned its claims against its excess carrier to the plaintiff.  The excess carrier won summary judgment and the Fifth Circuit affirmed: “Following a release, the releasor cannot sue the releasee’s insurer ‘because the release precludes the prerequisite determination of [releasee’s liablity.'”  (quoting Angus Chem. Co. v. IMC Fertilizer, Inc., 939 S.W.2d 138 (Tex. 1997)).

What ends a malicious prosecution?

In Lemoine v. Wolfe, the Fifth Circuit certified an important question of malicious prosecution law to the Louisiana Supreme Court; namely, whether dismissal of a prosecution constitutes a “bona fide termination in his favor” as required by that tort.  No. 13-30178 (July 18, 2014, unpublished).  “For example, in a case such as this one, the dismissal served almost as a determination of the merits.  The dismissal of [the] cyberstalking charge was expressly based on the fact that the district attorney had determined that there was ‘insufficient credible, admissible, reliable evidence remaining to support a continuation of the prosecution.'”

When is title insured?

“It would . . . be an unreasonable interpretation of the policies to say that they provide for valuation as of the date of . . . discovery since no loss occurs at that point.  The most appropriate date to use in calculating [plaintiff's] losses is that date of the foreclosure sales, as that is when [plaintiff] incurred covered losses.”  First American Bank v. First American Transportation Title Ins. Co., No. 13-30888 (July 16, 2014)

167 plaintiffs + 1 oil well = remand to state court.

The defendants in Rainbow Gun Club, Inc. v. Denbury Onshore, LLC removed to federal court under CAFA, arguing that the 167 plaintiffs’ claims based on mineral leases were a “mass action.”   No. 14-30514 (July 23, 2014).  The dispute centered on whether those claims, which alleged negligent operation of the relevant well, arose from “an event or occurrence in the State” within the meaning of that statute.  The Fifth Circuit concluded that the ordinary meaning of those terms, CAFA’s legislative history, and case law from other circuits supported the plaintiffs’ position that “the exclusion applies to a single event or occurrence, but the event or occurrence need not be constrained to a discrete moment in time.”  Drawing an analogy to the Deepwater Horizon accident, the Court also rejected an argument based on allegations of multiple acts of negligence, as such an incident “was the event that resulted from a number of individual negligent acts related to each other . . . .”  Accordingly, the Court affirmed the remand of the case to Louisiana state court.

Settlement Credit Twofer

The Fifth Circuit addressed the Texas rules about settlement credits in two cases this summer:

1.   Credit.  An employee stole a number of checks by endorsing them to himself.  The Court found “that the one satisfaction rule obtains  . . ., for while there are multiple checks at issue, there is but a single injury.”  Coastal Agricultural Supply, Inc. v. JP Morgan Chase Bank, N.A., No. 13-20293 (July 21, 2014).  It then remanded for analysis of the appropriate allocation; a dissent would have dismissed this interlocutory appeal into a complex area of Texas law.  The Court also affirmed that section 3.405 of the UCC — the “padded payroll” defense — provided an affirmative defense for the relevant bank to a common law claim for “money had and received.”

2.  No credit.  The victim of a fraudulent scheme sued the seller of the relevant business for breach of warranty, and the participants in the scheme for a fraudulent transfer.  It settled with the seller and recovered a multi-million dollar judgment against the bank that participated in the transfer.  Held, no credit for the bank: “Citibank’s alleged contractual breach and the TUFTA action against Worthington may share common underlying facts—the three fraudulent transfers from CitiCapital to Worthington totaling $2.5 million, induced by Wright & Wright. But such factual commonality does not suffice to count the contractual dispute’s settlement against TUFTA’s limit on recovery for a single avoidance ‘claim,’ Tex. Bus. & Comm. Code § 24.009(b), or to render Citibank a joint tortfeasor for one-satisfaction rule purposes.”  GE Capital Commercial, Inc. v. Worthington National Bank, No. 13-10171 (June 10, 2014).  The Court also held that Texas would apply an objective “good faith” test under its fraudulent transfer statute rather than a subjective test referred to in an older Texas Supreme Court opinion.  (LTPC and this blog’s author represented the successful plaintiff/appellee in this case.)

PSLRA satisfied

Plaintiffs sued for securities fraud, alleging misrepresentations about a company’s capabilities and plans about drilling for oil.  Spitzberg v. Houston American Energy Corp.. No. 13-20519 (July 15, 2014).  Emphasizing the plaintiffs’ arguments about “the industry definitions of . . . terms” and the timing of events giving rise to an inference of scienter, the Fifth Circuit reversed the dismissal of their claims under the PSLRA,.  The Court also found adequate pleading of loss causation.  (The significance of industry terminology echoes the reversal of a Rule 12 dismissal about the sale of a loan in Highland Capital Management LP v. Bank of America, although that claim ultimately lost at the summary judgment stage.)

Drug claims preempted.

Various products liability claims against both generic and brand-name drug manufacturers were found to be preempted in Johnson v. Teva Pharmaceuticals, No. 12-31011 (July 11, 2014).  The Court relied on recent Circuit precedent after the Supreme Court’s opinion in Pliva, Inc. v. Mensing, 131 S. Ct. 2567 (2011).  As to the brand defendants, the Court declined to certify “the question of whether a brand-name manufacturer can be held liable for injuries caused by a plaintiff’s ingestion of a generic product that was neither manufactured nor distributed by the brand-name manufacturer, reviewing several relevant considerations and authorities.  A dissent would certify, seeing the issue as having “potentially grave ramifications” and taking a different view of the strength of the relevant authority.

ERISA resurrection

After the Deepwater Horizon disaster, BP’s share price declined and several employee benefits sustained major losses. An ERISA lawsuit on behalf of the beneficiaries was dismissed, noting that an ERISA fiduciary’s to maintain an investment in company stock receives a “presumption of prudence,” sometimes referred to as the Moench presumption. Whitley v. BP, P.L.C., No. 12-20670 (July 15, 2014, unpublished).  In June 2014, the Supreme Court eliminated that presumption and held that ERISA fiduciaries managing a plan invested in company stock are subject to the same duty of  prudence as any other ERISA fiduciary, “except that they need not diversify the fund’s assets.” Fifth Third Bancorp v. Dudenhoeffer, No. 12-751 (U.S. June 25, 2014).   Accordingly, the Fifth Circuit vacated the district court’s dismissal and remanded the appeal for reconsideration in light of that opinion.

Wrong kind of negligence

The coverage dispute in Wiszia Co. v. General Star Indemnity Co. involved a lawsuit in which “Jefferson Parish essentially asserted Wisznia improperly designed a building and did not adequately coordinate with the builders during its construction.” No. 13-31125 (July 16, 2014).  Reviewing the allegations under Louisiana’s eight-corners rule, and summarizing the extensive Louisiana jurisprudence on the topic, the Fifth Circuit found that the claim fell within the policy’s professional services exclusion.   Under those authorities, mere use of the word “‘negligence’ is insufficient to obligate a professional liability insurer to defend the insured,” and “the factual allegations in the Jefferson Parish petition here do not give rise to an ordinary claim for negligence—such as an unreasonably dangerous work site.”

Expensive royalties

Chesapeake’s lease obliged it to pay the Warrens a royalty based on “the amount realized by Lessee, computed at the mouth of the well.”  A lease addendum said the royalty “shall be free of all costs and expenses related to the exploration, production, and marketing . . . including, but not limited to, costs of compression, dehydration, treatment and transportation.”  Warren v. Chesapeake Exploration LLC, No. 13-10619 (July 16, 2014).

The addendum went on to say that “Lessor will, however, bear a proportionate part of all those expenses imposed upon Lessee by its gas sales contract to the extent incurred subsequent to those that are obligations of Lessee.”  The Warrens contended that this sentence defined certain shared expenses which should not have been deducted from the royalty.  The Fifth Circuit disagreed and affirmed the Rule 12 dismissal of their complaint, finding that the sentence only referred to “the cost of delivering marketable gas to a sales point other than the mouth of the well.”  (distinguishing Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (Tex. 1996)).

The Court reversed, however, as to another pair of plaintiffs with a different lease addendum.  Noting simply that it was different, the Court found that their claim should not have been dismissed, as “[i]t is not apparent from the face of the complaint or its attachments that they could not conceivably state a cause of action.”

Hindsight is 330.

A law firm appealed the partial denial of its bankruptcy fee application.  The bankrupty court said “its ruling was informed by the bad conduct of the Debtors themselves, which should have lead [the firm] to withdraw from the case sooner than it ultimately did.”  The district court said the record showed that “this bankruptcy proceeding was doomed at the outset, and arguably could not have been filed in good faith under Chapter 11.”   Barron & Newburger, P.C. v. Texas Skyline, Ltd., No. 13-50075 (July 15, 2014).  The Fifth Circuit affirmed, noting that its earlier opinion of  In re: Pro-Snax Distributors, Inc., 157 F.3d 414 (5th Cir. 1998) rejected a “reasonableness” test in the application of Bankruptcy Code § 330 — which would have asked “whether the services were objectively beneficial toward the completion of the case at the time they were performed” — in favor of a “hindsight” approach, asking whether the professionals’ work “resulted in an identifiable, tangible, and material benefit to the bankruptcy estate.”  That said, all three panel members joined a special concurrence asking the full Court to reconsider Pro-Snax en banc, observing that its outright rejection of forward-looking reasonableness “appears to conflict with the language and legislative history of § 330, diverges from the decisions of other circuits, and has sown confusion in our circuit.”

“Unsupported . . . irrelevant . . ., and legalistic gibberish”

Appellant did not fare well in Bell v. Bell Family Trust, where the Fifth Circuit observed: “The inadequacy of her briefing on appeal does not fall far from her pleadings below, upon which the magistrate judge reflected: ‘The undersigned spent a significant amount of time parsing through the morass of Bell’s voluminous, rambling, and unintelligible pleadings, which proved to be a substantial waste of time and resources. They contain a “hodgepodge of unsupported assertions, irrelevant platitudes, and legalistic gibberish.” As succinctly stated by the late Judge Alvin B. Rubin: “[t]he ability to fill more than 36 pages with no more than legal spun sugar does not make an argument substantial.”’  Construing liberally Bell’s continued hodgepodge of assertions, we discern only one issue for review . . . . .”  No. 13-31219 (July 8, 2014, unpublished)

A double-header win for bankruptcy creditors

1.  Creditors get the money.  Debtor filed for Chapter 13 personal bankruptcy.  He made payments to the Trustee for some time.  He then converted to Chapter 7, leaving the Trustee holding money paid under the Chapter 13 plan.  “[W]ages paid to the trustee pursuant to the Chapter 13 plan should be distinguished from the debtor’s other property acquired after the date of filing.”  Viegelahn v. Harris, No. 13-50374 (July 7, 2014)

2.  Creditors get the money.  The stay lifted.  Secured Creditor foreclosed.  Under federal law, its attorneys fees were subject to the customary review under the Bankruptcy Code.  Under state law, its attorneys fees were fixed by contract.  Held: federal law controls, and the case was remanded for review under federal standards.  In re 804 Congress LLC, No. 12-50382 (June 23, 2014)

Race is a difficult issue.

On Monday the 14th, a 2-1 Fifth Circuit opinion affirmed the free speech rights of the Sons of Confederate Veterans.  On Tuesday the 15th, a 2-1 Fifth Circuit opinion rejected a constitutional challenge to the “top ten percent” admissions policy of the University of Texas: “[T]he backdrop of our efforts here includes the reality that accepting as permissible policies whose purpose is to achieve a desired racial effect taxes the line between quotas and holistic use of race towards a critical mass. We have hewed this line here, persuaded by UT Austin from this record of its necessary use of race in a holistic process and the want of workable alternatives that would not require even greater use of race, faithful to the content given to it by the Supreme Court.”  Fisher v. University of Texas, No. 09-50822.  Both opinions — and the dissents — offer thoughtful analyses of the institutional, historical, and precedential structure of the law governing highly sensitive issues of race, in the geographic area that was once the western portion of the Confederacy. Ideological sound bites will fly about both cases, as the First Amendment allows and encourages, but their reasoning deserves respect and study.

A corporation, by any other name, would be as diverse.

While resolved on other grounds, a part of the diversity-of citizenship question in Tewari De-Ox Systems, Inc. v. Mountain States-Rosen, LLC was whether a business entity — charted as a corporation in Wyoming — should nevertheless be treated as an unincorporated association because it called itself a “cooperative.”  No. 13-50956 (July 9, 2014).  On that point, the Court noted: “Other circuits have rejected similar arguents: ‘For purposes of diversity jurisdiction, the Cooperative is to be treated as a corporation simply because it has been incorporated under [state] law, regardless of the Cooperative’s individual structure, purpose, operations, or name.”  (quoting Kuntz v. Lamar Corp., 385 F.3d 1177, 1183 (9th Cir. 2004), and also citing Pastor v. State Farm Mut. Auto Ins. Co., 487 F.3d 1042, 1048 (7th Cir. 2007)).

To license plate in Dixie . . .

“We understand that some members of the public find the Confederate  flag offensive. But that fact does not justify the Board’s decision; this is exactly what the First Amendment was designed to protect against.”  Accordingly, the Fifth Circuit found that the Texas Department of Motor Vehicles Board violated the free speech rights of the Texas Sons of Confederate Veterans when the Board denied the group’s application for a specialty license plate featuring the Confederate battle flag.  Texas Division, Sons of Confederate Veterans, Inc. v. Vandergriff, No. 13-50411 (July 14, 2014).  The Court rejected a jurisdictional challenge under the Tax Injunction Act, finding that the plaintiff organization was not a taxpayer raising taxation issues.  A dissent found the matter controlled by a Supreme Court case about public monuments.  Initial coverage of the case has appeared in the Dallas Morning News and Times-Picayune.

How taxing is it to enter the Ritz?

The unfortunate taxpayer in Whitehouse Hotel Limited Partnership v. Commissioner of Internal Revenue lost a multi-million dollar dispute about the value of an easement, related to the spectacular Ritz-Carlton on Canal Street in New Orleans, and as a result faced a substantial penalty.  No. 13-60131 (June 11, 2014).  The Fifth Circuit affirmed the Tax Court on the merits but reversed as to the penalty, noting: “We are particularly persuaded by [Taxpayer's] argument that the Commissioner, the Commissioner’s expert, and the tax court all reached different conclusions” on the core valuation issue.  Acknowledging that this area is fact-specific, the Court held as to the taxpayer’s conduct: “Obtaining a qualified appraisal, analyzing that appraisal, commissioning another appraisal, and submitting a professionally-prepared tax return is sufficient to show a good faith investigation as required by law.”

Only consider parol evidence when you consider it.

In Bluebonnet Hotel Ventures, LLC v. Wells Fargo Bank, N.A., the Fifth Circuit considered whether there had been an “[e]rror that vitiates consent” because of a “failure of cause” about an interest rate swap agreement, so as to allow its cancellation under Louisiana contract law.  No. 13-30827 (June 6, 2014).  In the course of affirming summary judgment for the bank, the Court declined to consider emails written around the time of contracting, noting: “Under Louisiana law, courts may only consider parol evidence when a contract is ambiguous.” To illustrate the sharp edge that separates holdings in the area of extrinsic evidence, cfFruge v. Amerisure663 F.3d 743 (5th Cir. 2011) ( applying Louisiana law and holding: “Parol evidence is admissible to show mutual error even though the express terms of the policy are not ambiguous.”) (citations omitted).

Insurance Twofer

1.  No conflict-of-interest.  In Graper v. Mid-Continent Casualty Co., No. 13-20099 (June 24, 2014), the Fifth Circuit revisited the potential conflict-of-interest issues relating to counsel selected by an insurance carrier, previously addressed in Downhole Navigator LLC v. Nautilus Insurance686 F.2d 325 (5th Cir. 2012).  Reminding that a problematic conflict would only arise if “the facts to be adjudicated in the underlying lawsuit are the same facts upon which coverage depends,” the Court found no disqualifying conflict in either: (a) the facts of when a claim accrued for limitations purposes, as opposed to when it occurred under the policy, or (b) the facts about an alleged willful copyright infringement occurs, as opposed to a “knowing” act for coverage purposes.  

2.  No exhaustion.  The excess carriers in Indemnity Ins. Co. of N. Am. v. W&T Offshore, Inc. contended that they had no coverage obligation when the underlying policies had been exhausted.  No. 13-20512 (June 23, 2014).  Distinguishing Westchester Fire Ins. Co. v. Stewart & Stevenson Services., Inc., 31 S.W.3d 654 (Tex. App.–Houston [1st Dist.] 2000, pet. denied), the Court disagreed, finding that the policy “merely outlines what will happen if the underlying insurance is entirely exhausted by claims covered under the policy; it says nothing about what will happen if the Retained Limit is exhausted by non-covered claims.” A deftly-written footnote 5 explains how the excess carriers’ argument relies on the logical fallacy of “affirming the consequent.”

Does “based on the attached” mean “we agree to arbitration”?

The parties’ contract said: “Terms and conditions are based on the general conditions stated in the enclosed ORGALIME S200.”  The ORGALIME, in turn, had an arbitration clause.  The Fifth Circuit found that the above language incorporated the arbitration clause into the contract, acknowledging that “multiple interpretations of ‘based on’ might be possible in the abstract,” the length and scope of the ORGALIME compared to the contract showed the parties’ intent to incorporate its terms.  Rushaid v. National Oilwell Varco, Inc., No. 13-20159 (July 2, 2014).  The Court also rejected a waiver argument, finding that the acts of the party’s co-defendants could not be imputed to it absent a reason to pierce the corporate veil.  Here, “there is no evidence in the record that [the party] has abused its corporate form.  It merely declined to become a party to litigation without being formally served.”  The Court also rejected an argument, based on equitable estoppel, to stay the ongoing litigation until the conclusion of the arbitration.

Limitations for home equity loan claims in Texas — a wrinkle

The Fifth Circuit held in Priester v. JP Morgan Chase Bank, 708 F.3d 667 (5th Cir. 2013), that the Texas “residual” 4-year statute of limitations applied to claims based on the home equity loan provisions of the state Constitution, running from the time the loan closed.  Various requests to reconsider, certify, or otherwise retreat from that holding have been uniformly rejected.  Kramer v. JP Morgan Chase Bank presented a fresh attack on Priester, arguing that the discovery rule applied to a claim based on the Texas statute against the filing of false liens, and citing Vanderbilt Mortgage v. Flores, 692 F.3d 358 (5th Cir. 2012).  No. 13-50920 (June 25, 2014, unpublished).  The Court sidestepped this argument by finding the issue moot because plaintiff did not seek damages based on this statute before the district court.

Out of the frying pan of Rule 12, into the fire of Rule 56

First case: Highland Capital sued Bank of America for the alleged breach of an oral contract to sell a $15.5 million loan.  After the Fifth Circuit reversed the dismissal of this claim under Rule 12(b)(6), it affirmed summary judgment for the defendant in Highland Capital Management LP v. Bank of America, No. 13-11026 (July 3, 2014). Highland relied upon standard terminology promulgated by an industry association, while the Bank pointed to evidence showing that, in this specific transaction, the Bank was not familiar with that terminology and not want it to control.  “Although industry custom is extrinsic evidence a factfinder can use to determine the parties’ intent to be bound, its value is substantially diminished where, as here, other evidence overwhelmingly shows that the persons involved in the dealings were unaware of those customs.”    The Court also rejected an alternative theory that a prior transaction that involved the terminology continued to govern the parties’ relationship, noting: “Whether a prior contract had a binding effect on the procedures available for future contract-formation is a legal question.”

Second case:  As with the previous case, WH Holdings LLC v. Ace American Ins. Co. was remanded for development of a factual record, this time for extrinsic evidence about a contract ambiguity.  No. 13-30676 (June 26, 2014, unpublished).   And as with the previous case, the Fifth Circuit affirmed a summary judgment, finding that seven pieces of extrinsic evidence were either not relevant to the specific contract issue, or “equally consistent with both” readings.

The rain, in main, did not fall on the cranes

Aransas Project v. Shaw presented a challenge to an injunction against the Texas Commission on Environmental Quality, prohibiting the TCEQ from issuing new permits to withdraw water from rivers that feed the estuary where whooping cranes live.  No. 13-40317 (June 30, 2014).  The whooping crane, described in the opinion as a “majestic bird that stands five feet tall,” is an endangered species, and the only known wild flock lives in Texas during winter.

The Fifth Circuit first rejected an argument for Burford abstention, finding that this case presented a “broader grant of administrative and judicial authority by state law to remedy environmental grievances” than a prior opinion where it allowed abstention in a similar sort of environmental dispute.  Cf. Sierra Club v. City of San Antonio, 112 F.3d 789 (5th Cir. 1997).

The Court then reversed the injunction, finding no causation “in the face of multiple, natural, independent, unpredictable and interrelated forces affecting the cranes’ estuary environment.”  While couched in language about proximate causation and environmental law, the Court’s analysis is a classic illustration of the recurring Daubert problem of excluding alternate causes.  (In the course of this discussion, the butterfly effect theory makes a cameo appearance in footnote 10.)

Construction work and CGL coverage, redux –

The plaintiffs in Crownover v. Mid-Continent Casualty Co. won an arbitration claim based on the “breach of the express warranty to repair” in their contract with an HVAC installation company.  No. 11-10166 (June 27, 2014).  The Fifth Circuit, applying Gilbert Texas Construction LP v. Underwriters of Lloyd’s London, 327 S.W.3d 118 (Tex. 2010) and the recent response to a certification request in Ewing Construction Co. v. Amierisure Ins. Co., 420 S.W.3d 30 (Tex. 2014), concluded that CGL coverage was not available: “Whereas contractually agreeing to repair damage resulting from a failure to exercise reasonable care in performing the work or agreeing to perform work in a good and workmanlike manner would mirror a contractor’s duty under general law . . . contractually agreeing to repair damage resulting from a failure to comply with the requirements of the contract would not.”  Law360 has a good article about the development of this important insurance coverage issue over the last several months.

Analytical GAAP

At issue in Meadaa v. K.A.P. Enterprises LLC was the relative liability of three defendants for a $3.5 million claim.  No. 12-30918 (July 1, 2014).  In a summary judgment affidavit, an expert opined that transactions of Defendant 1 had not resulted in unfair advantage to Defendants 2 and 3, and had kept its affairs separate from those of Defendant 4.  The expert had reviewed financial documents from Defendant 1 and tax returns from Defendant 4.  The Fifth Circuit found no clear error in the district court’s striking of this affidavit for a lack of personal knowledge.  Because “[i]t is by no means clear how a [CPA] can obtain personal knowledge of the effects of the actions of one entity on other parties without reviewing the latter’s financial documents,” it was “incumbent upon him to explain how he acquired such knowledge.”  As a procedural matter, the Court also found that a notice of appeal from a final judgment encompassed a later ruling on a Rule 59 motion.

3 Fifth Circuit cases to know from 2Q 2014

In the second quarter of 2014, the Fifth Circuit said how to . . .

1. . . . enforce an Agreed Protective Order.  Two judges, finding “written notice” ambiguous, found that Ford did not waive confidentiality designations by having a lengthy email exchange rather than moving for protection.  The dissent would construe the ambiguity against Ford and faults the majority for encouraging “vague, non-responsive answers.”  Moore v. Ford Motor Co., ___ F.3d ___ (June 20, 2014).

2. . . . . remove based on federal question jurisdiction.  A petition raised a sufficient federal question for removal when it incorporated this allegation from an EEOC complaint: “I have been and continue to be discriminated against, in violation of Title VII of the 1964 Civil Rights Act, as amended, [and] the Texas Commission on Human Rights Act, as amended, because of my national origin (Iranian).”   Davoodi v. Austin ISD, ___ F.3d ___ (June 16, 2014).

3.  . . . protect in-house counsel’s attorney-client privilege.  Addressing the common question of “business or legal advice?” the court found a memo privileged because it “deal[t] with any legal liability that may stem from under-disclosure of data, hedged against any liability that may occur from any implied warranties during complex negotiations.”  Exxon Mobil Corp. v. Hill, 751 F.3d 379 (2014).

How to (not) litigate “CONFIDENTIAL” designations under an agreed protective order

The agreed protective order said:  “At any time after the delivery of documents designated ‘confidential,’ counsel for the receiving party may challenge the confidential designation of any document or transcript (or portion thereof) by providing written notice thereof to counsel for the opposing party.”  The producing party then has 15 days to seek protection; if it does not do so, “then the disputed material shall no longer be subject to protection as provided in this order.”  Moore v. Ford Motor Co., No. 13-40761 (June 20, 2014).

Pursuant to the order, Ford produced four boxes of documents related to Volvo safety issues.  These communications ensued:

  • On May 11, 2004, plaintiffs’ counsel emailed to challenge the confidentiality designations of several documents.
  • On June 4, Ford’s counsel asked for Bates numbers.
  • On June 23, plaintiffs’ counsel responded, expanded on the confidentiality argument, and said it “will begin passing them out to any and everyone that is interested”
  • In July, plaintiffs’ counsel asked: “what’s the word . . . on confidentiality?”
  • The next day, Ford’s counsel withdrew its designations as to some documents, said it was “evaluating your claims” as to others, and “expects you to abide by the terms of the Protective Orders in the meantime”
  • Plaintiffs’ counsel responded: “I gave Ford adequate time.  I am sending the materials out.  Thanks for trying.”  (He did not specify what “materials”)
  • On February 22, 2005, plaintiffs’ counsel asked for an update on the “confidentiality issue”
  • On March 8, 2005, Ford responded that “in the spirit of cooperation” it would “officially de-designate from the Protective Order” specified other documents.

In 2012, documents surfaced in other litigation that Ford had produced pursuant to the above protective order; while the opinion does not specify what they were, it seems clear that they were documents which Ford had not formally “de-designated.”  Ford moved to enforce the protective order and the district court agreed, finding no “clear written notice . . . challenging the confidential designation of these documents.”

On appeal, plaintiffs argued that the 15-day period ran from the first email, and Ford thus waived its designations by not moving for protection.  The Fifth Circuit disagreed, finding the protective order ambiguous on this issue, and stating: “This interpretation may well be the better reading without more, but the parties understanding of these agreed orders bears upon the interpretation, and the actions of both parties strongly suggest” otherwise, noting the lengthy dialogue between the parties.    Noting that “[a]lthough on de novo review a different outcome may obtain,” the Court found the district court’s conclusion that no waiver occurred to not be clearly erroneous.

A dissent, among other arguments, noted that (1) the 15-day provision only requires that confidentiality be “in dispute,” (2) Ford drafted the agreement so any ambiguity should be construed against it, and (3) Ford had the burden to establish confidentiality.  The dissent concluded the majority opinion undermined “efficient resolution of discovery disputes” by allowing “Ford . . . to undermine this purpose through vague, non-responsive answers.”

Law school exam on diversity . . .

  1. Thompson sued Defendants in Arkansas in 2011, alleging he was a citizen of Arkansas.  That lawsuit was dismissed for improper venue.
  2. Thompson sued Defendants again in Florida in 2012, and voluntarily dismissed that action after the magistrate concluded that diversity was lacking.
  3. Thompson sued Defendants again in Alabama in 2012, alleging that he was a citizen of Arkansas.  That action was transferred to Mississippi.   It was then dismissed for lack of jurisdiction because Thompson and one of the citizens were both Florida citizens at the time of filing in 2012.

Thompson argued that the relevant facts related to the original 2011 filing, not the 2012 re-filing.  HELD: “[T]he [Alabama] complaint does not relate back to the [Arkansas] complaint because the second complaint was not an amendment, but rather the commencement of a separate action.”  Dismissal affirmed.

No fact issue

A subtle Erie issue flashed by when Andrews alleged premises liability claims against BP, and the Fifth Circuit affirmed summary judgment for BP under a Texas statute. Terry v. BP Amoco, No. 12-40913 (June 27, 2014, unpublished).  BP won summary judgment: “Exhibits C and D are the only evidence that Andrews identified as raising a material issue of fact as to BP’s responsibility for the explosion. Those exhibits are a Safety Bulletin issued by the United States Chemical Safety and Hazard Investigation Board (CSB) and a CSB press release discussing the bulletin. The statute creating the CSB, however, prohibits Andrews from using the documents as evidence in this case.  Additionally, both CSB documents also likely constitute inadmissible hearsay under the Federal Rules of Evidence.”  The question not raised is how much substantive effect this type of federal statute must have in a state law tort claim, removed to federal court under diversity jurisdiction, so as to raise an Erie issue.

How to get hit with punitive damages

Plaintiff recovered $12,200 in actual damages and $40,000 in punitives on his claim for race discrimination, and the Fifth Circuit affirmed in all respects.  Rhines v. Salinas Construction Technologies, Ltd. (June 25, 2014, unpublished).  On the punitive damages award, the Court noted this evidence: (1) the employer falsely told the EEOC that plaintiff had not complained about the workplace; (2) an employee admitted at trial that he signed a false affidavit about the use of racial slurs in the workplace; and (3) “the person who allegedly performed the [employer's] investigation testified before the jury that he did not investigate.”  As the Court dryly summarized: “There was sufficient evidence to support the jury’s award of punitive damages.”

The decedent’s ashes, Louisiana process servers, and personal jurisdiction

Defendant was personally served in Louisiana; the question was whether the plaintiffs fraudulently induced her to come there.  Gatte v. Dohm (June 23, 2014, unpublished). More specifically, Defendant (part owner of a Mexican clinic where the plaintiffs’ relative had died) alleged she had been duped into travelling to Louisiana to return the decedent’s ashes and personal effects to family members, as they were too distraught to travel themselves.  The district court found fraudulent inducement; the Fifth Circuit reversed, noting a conflict between the affidavits submitted by the parties and applying the principle: “Conflicts between the facts contained in the parties’ affidavits must be resolved in the plaintiff’s favor for purposes of determining whether a prima facie case for personal jurisdiction exists.”  (citing D.J. Investments, Inc. v. Metzeler Motorcycle Tire Agent Gregg Inc., 754 F.2d 542, 546 (5th Cir. 1985).

No “sign-off mid-litigation” to “tinker with ongoing cases” . . .

In Tetra Technologies, Inc v. Continental Ins. Co., the district court ruled on several key issues in an insurance coverage dispute, declined to certify the rulings for immediate appeal under 28 U.S.C. § 1292(b) because it found no substantial ground for difference of opinion, and entered judgment on those matters pursuant to Fed. R. Civ. P. 54(b).  No. 13-30516 (June 10, 2014).  The Fifth Circuit found that judgment improper, and thus dismissed on jurisdictional grounds for lack of a final and appealable order. Rather than sounding the “death knell” of claims as required by Rule 54, the Court concluded that the rulings would allow “Tetra and Maritech to prevail completely nor not at all on their indemnification claim against Continental, depending on the resolution of certain ‘factual issues.'”  “Thus, what we are presented with here is a request by the district court for us to sign off mid-litigation on legal questions it considers non-contentions.  Since the inception of the federal judiciary, however, our role has been to review final decisions of trial courts, not to tinker with ongoing cases through piecemeal appeals . . . “

Federal question? Where to look . . .

In the published opinion of Davoodi v. Austin ISD, the Fifth Circuit revisited the recurring question of how substantial a federal question must be to create jurisdiction (and thus, allow removal). No. 13-50823 (June 16, 2014).  Notably, the Court did not analyze whether the plaintiff stated a claim under federal law in the causes of action alleged in his pleading.  Rather, the decision turns on how much the pleaded facts involved violation of federal law.  This focus contrasts with the framework of Howery v. Allstate Ins. Co., which rejected jurisdiction because “[f]rom its context, it appears that Howery’s mention of federal law merely served to describe types of conduct that violated the DTPA, not to allege a separate cause of action under the FCRA,” and because a violation of federal law was not an “essential element” of Howery’s state law claims.  243 F.3d 912, 918-919 (5th Cir. 2001).  

Davoodi sued in Texas state court, alleging state law claims for “national origin discrimination” and intentional infliction of emotional distress, and a claim for “retaliation” without a specified basis in state or federal law. The first of the two paragraphs in the “Facts” section of the petition said:

“On or about June 2, 2011 Plaintiff filed a Charge of Discrimination with the EEOC and the Texas Human Rights Commission.  (See Charge attached as Exhibit ‘A’ and fully incorporated herein).  This charge alleged that Defendant discriminated against Plaintiff based on his National Origin (Iranian).  On February 3, 2012 the EEOC issued a Dismissal and Notice of Rights.  The Texas Human Rights Commission did not issue a dismissal/right to sue.”  

The Court noted that the incorporation of the Charge made it “part of [plaintiff's] complaint for all purposes,” and created federal jurisdiction because the Charge contained the averment and claim: “I have been and continue to be discriminated against, in violation of Title VII of the 1964 Civil Rights Act, as amended, [and] the Texas Commission on Human Rights Act, as amended, because of my national origin (Iranian).”  The Court remanded as to the Rule 12 dismissal of the case, however, to allow the plaintiff a chance to replead under Lozano v. Ocwen Federal Bank, 489 F.3d 636 (5th Cir. 2007).

The movant’s Rule 12 arguments, as reflected in the appellate record excerpts, address whether the plaintiff’s pleading stated a claim for “retaliation” under either state or federal law.  The Fifth Circuit did not engage the basis for that claim in its analysis of federal question jurisdiction, focusing entirely on the fact allegations described above and the statement made to the EEOC.  Allstate can be reconciled with Davoodi  because the mention of federal law in the Allstate pleading is substantially smaller, as a percentage of the overall allegations.  That analytical framework — different than Allstate‘s focus — may invite new removals based on a “percentage-based” analysis of a pleading’s factual allegations.

When does an administrative action trigger the duty to defend?

A company received “PRP” (Potentially Responsible Party) letters from the EPA, followed by a “Unilateral Administrative Order” requiring the company to do remedial work.  Its CGL insurer denied coverage, contending that these administrative communications under CERCLA were not a “suit” that triggered the duty to defend.  McGinnes Industrial Maintenance Corp. v. Phoenix Ins. Co., No. 13-20360 (June 11, 2014, unpublished).  The insured argued that the word “suit” was ambiguous and thus led to coverage; the insurer argued that a broad reading of “suit” was inconsistent with the word “claim” in the policy and the word “petition” in the usual phrasing of the Texas “eight corners” rule.  Finding the issue important and that “the parties each make reasonable arguments” about it, the Fifth Circuit certified this question to the Texas Supreme Court: “Whether the EPA’s PRP letters and/or unilateral administrative order, issued pursuant to CERCLA, constitute a ‘suit’ within the meaning of the CGL policies, triggering the duty to defend.”

TILA and the “no good deed goes unpunished” principle

The Leas joined a wholesale membership club, and made a $100 payment that day as part of the down payment.  Their contract did not include the starting date, interval, or date of the month when their installment payments would be due over the next 3 years for the $4,000 membership fee.  Lea v. Buy Direct LLC, No. 13-20281 (June 12, 2014).  The Fifth Circuit found that TILA applied because the Leas had entered a credit transaction, even if they had not bought any goods yet.  Then, recognizing that “[Defendant's] decision to leave the contract blanks unfilled was, at least in part, an accomodation to the Leas,” the Court nevertheless reversed the district court’s summary judgment for the club on the Leas’ TILA claim.  “Perhaps our reversal falls into the category of letting no good deed go unpunished.  Another perspective, though, is that TILA provides an unvarying set of rules that protect consumers who might otherwise voluntarily waive what they should not.”  Thus, although “[w]e do not perceive any harm here . . . harm is not a prerequisite for [TILA] relief.”

What to consider under Rule 12(b)(6)

Adding to an April opinion about the proper scope of review for a Rule 12(b)(6) motion, the Fifth Circuit reminded that — In addition to the pleading itself — a court may consider “the documents attached to the complaint, the documents attached to the motion to dismiss which were referred to in the complaint and central to Plaintiffs’ claim, as well as taking judicial notice of matters of public record.”  Mitchem v. Fannie Mae, No. 13-10904 (June 9, 2014, unpublished).  Mitchem provides citations to published Fifth Circuit authority for each of these points.

Preservation Twofer

1.  Request a limiting instruction to help preserve evidentiary error:  “Moreover, even if there is merit to this distinction, [Defendant] never requested a limiting instruction during trial that would have enabled the jury to consider the evidence regarding insurance only for permissible purposes. Where ‘counsel never requested a more complete limiting instruction,’ the district court ‘cannot [be] fault[ed] . . . for failing to give one spontaneously.” Eagle Suspensions, Inc. v. Hellmann Worldwide Logistics, Inc. (June 9, 2014, unpublished).

2.  Renew earlier issues to help preserve charge error: “Essentially, [Defendant] now argues that the district court should have recalled [Defendant's] federal preemption argument from January and February 2013 when drafting the final jury instructions on March 20, 2013, even though [Defendant] itself never referenced this federal preemption argument in [Defendant's] objections to the proposed jury instructions. . . . [A]  party cannot merely rely on ‘‘the fact that the court is already aware of its position as an excuse for a failure to make a specific, formal objection at the charge conference.’  Rule 51 specifically requires parties to make their objections after the proposed jury charge has been drafted and distributed for comment.”  Id. (quoting Jimenez v. Wood County, 660 F.3d 841, 845-46 (5th Cir. 2011) (en banc)).

Any port in a storm

Two boats collided.  The district court dismissed the resulting tort litigation in favor of Mexico on forum non conveniens grounds.  Cotemar S.A. de C.V. v. Hornbeck Offshore Services, No. 13-20230 (May 21, 2014, unpublished).  After that dismissal, the plaintiff seized the offending vessel in Louisiana (still there at the time of this writing).  The Fifth Circuit reversed and remanded for further analysis.  The first point dealt with a potential time bar in the Mexican system.  “If access to relief in the Mexican courts has become time-barred for reasons not of Appellants’ ‘own making,’ then the Mexican courts are no
longer an available alternative forum.”  (citing Veba-Chemie AG v. M/V Getafix, 711 F.2d 1243, 1248 n.10 (5th Cir. 1983)).   Second, the “supervening change of circumstances” arising from the vessel seizure may affect the balancing of private and public factors, because a transfer to Mexico would now likely result in duplicative proceedings.

600 Camp Goes Seriously High-Tech

At the recent University of Texas Conference on State and Federal Appeals, Fifth Circuit Clerk Lyle Cayce gave a  presentation about the Court that included a demonstration of a remarkable new technology.  After an attorney files a brief, the Court has software that quickly adds hyperlinks for all case and record citations (which is the reason for the recent local rule change to standardize the form for record references).  Those links are then available to the judges and staff on their computers and tablets.  Among other implications, this new technology means that pre-argument, review of the record is no longer limited to the parties’ record excerpts.

Texas garnishment: unchanged after 112 years

The district court held that under Texas law, a creditor may not garnish on a judgment, after entry of judgment but prior to the filing of an appeal.  The Fifth Circuit affirmed, relying upon Waples-Platter Grocer Co. v. Texas & Pacific Railway Co., 68 S.W. 265 (Tex. 1902) [a case from the court of Chief Justice Reuben Gaines and the governorship of Joseph Sayers, a period "notable for the number of disasters that the state faced" such as the Galveston Hurricane and the invasion of the boll weevil].  JGM Holdings LLC v. T-Mobile USA, Inc., No. 13-10678 (May 19, 2014, unpublished).  The Fifth Circuit rejected an argument that the later overruling of a holding in Waples about res judicata implicitly overruled this holding about garnishment.

Known unknowns

Placid Oil filed for bankruptcy and the claim bar date, published in the Wall Street Journal, passed in 1987. “By the early 1980s, Placid was aware, generally, of the hazards of asbestos exposure and, specifically, of Mr. Williams’s exposure in the course of
his employment. Prior to the Plan’s confirmation, no asbestos-related claims
had ever been filed against Placid, and the Williamses did not file any proof of
claim.”  Williams v. Placid Oil Co., No. 12-11120 (May 27, 2014).  Applying In re: Crystal Oil, 158 F.3d 291 (5th Cir. 1998), the Fifth Circuit affirmed summary judgment in the Williamses subsequent tort suit against Placid: “Although Placid knew of the dangers of asbestos and Mr. Williams’s exposure, such information suggesting only a risk  to the Williamses does not make the Williamses known creditors. Here, Placid had no specific knowledge of any actual injury to the Williamses prior to its bankruptcy plan’s confirmation.”  (Donald Rumsfeld’s 2002 discussion of the broader philosophical point is reviewed here.)

Trade secret grab bag

Aspen Technology Inc v. M3 Technology Inc. affirmed an $11 million judgment in a suit to enforce a noncompetition agreement.  Nos. 12-20388 & 13-20268 (May 29, 2014, unpublished).  Most of the grounds are fact-specific and substantially influenced by spoliation matters.  On a key copyright issue, the Court held: “Aspen’s registration of its derivative materials permits Aspen to bring a claim that M3 had infringed preexisting versions of its software,” aligning the Fifth Circuit with several other courts that have addressed the point.  The Court removed roughly $500,000 in attorneys fees arising in prior litigation from the award for tortious interference, noting that the opposing party in that litigation was also a party in this case, removing the fee claim from the “equitable exception” to the rule that a contract or statute must allow recovery of fees.