Three counties sued MERS (“Mortgage Electronic Registration Systems, Inc.”) for violations of various statutes related to the recording of deeds of trust (the Texas equivalent of a mortgage). In a nutshell, MERS is listed as the “beneficiary” on a deed of trust while the note is executed in favor of the lender. “If the lender later transfers the promissory note (or its interest in the note) to another MERS member, no assignment of the deed of trust is created or recorded because . . . MERS remains the nominee for the lender’s successors and assigns.” The counties argued that this arrangement avoided significant filing fees. The Fifth Circuit affirmed judgment for MERS, finding (1) procedurally, that the Texas Legislature did not create a private right of action to enforce the relevant statute and (2) substantively, that the statute was better characterized as a “procedural directive” to clerks rather than an absolute rule. Other claims failed for similar reasons. Harris County v. MERSCORP Inc., No. 14-10392 (June 26, 2015).
Building on In re Deepwater Horizon, ___ S.W.3d ___, 2015 WL 674744 (Tex. Feb. 13, 2015), in Ironshore Specialty Ins. Co. v. Aspen Underwriting, the Fifth Circuit addressed whether the following insurance policy provision limited the excess insurer’s obligations to a $5 million that the insured was obliged to provide under another contract: “The word ‘Insured,’ wherever used in this Policy, shall mean . . . any person or entity to whom [Insured] is obliged by a written ‘Insurance Contract’ entered into before any relevant ‘Occurrence’ and/or ‘Claim’ to provide insurance such as is afforded by this Policy.” The Court found that it did, even though the contract at issue in Deepwater Horizon had additional provisions that bore on this question. No. 13-51027 (June 10, 2015).
Disputes between borrowers and mortgage servicers are common; jury trials in those disputes are rare. But rare events do occur, and in McCaig v. Wells Fargo Bank, 788 F.3d 463 (5th Cir. 2015), a servicer lost a judgment for roughly $400,000 after a jury trial.
The underlying relationship was defined by a settlement agreement in which “Wells Fargo has agreed to accept payments from the McCaigs and to give the McCaigs the opportunity to avoid foreclosure of the Property; as long as the McCaigs make the required payments consistent with the Forbearance Agreement and the Loan Agreement.” Unfortunately, Wells’s “‘computer software was not equipped to handle’ the settlement and forbearance agreements meaning ‘manual tracking’ was required.” This led to a number of accounting mistakes, which in turn led to unjustified threats to foreclose and other miscommunications.
In reviewing and largely affirming the judgment, the Fifth Circuit reached several conclusions of broad general interest:
- The “bona fide error” defense under the Texas Debt Collection Act allows a servicer to argue that it made a good-faith mistake; Wells did not plead that defense here, meaning that its arguments about a lack of intent were not pertinent to the elements of the Act sued upon by plaintiffs;
- The economic loss rule did not bar the TDCA claims, even though the alleged misconduct breached the parties’ contract: “[I]f a particular duty is defined both in a contract and in a statutory provision, and a party violates the duty enumerated in both sources, the economic loss rule does not apply”;
- A Casteel – type charge issue is not preserved if the objecting party submits the allegedly erroneous question with the comment “If I had to draft this over again, that’s the way I’d draft it”;
- The plaintiffs’ lay testimony was sufficient to support awards for mental anguish; and
- “[A] print-out from [plaintiffs’] attorney’s case management system showing individual tasks performed by the attorney and the date on which those tasks were performed” was sufficient evidence to support the award of attorneys fees.
A dissent took issue with the economic loss holding, and would find all of the plaintiffs’ claims barred; “[t]he majority’s reading of these [TDCA] provisions specifically equates mere contract breach with statutory violations[.]”
Dan Peterson sued his former employer, Bell Helicopter Textron, for age discrimination under the TCHRA. The jury found that age was a motivating factor in his termination, but also found that Bell would have terminated him even without consideration of his age. The district court awarded no damages, but imposed an injunction on Bell about future age discrimination, and awarded Peterson attorneys fees of approximately $340,000. The Fifth Circuit reversed. Noting that the TCHRA allowed an injunction even in light of the unfavorable causation finding, the Court found that plaintiff’s request came too late, as Fed. R. Civ. P. 54(c) “assumes that a plaintiff’s entitlement to relief not specifically pled has been tested adversarially, tried by consent, or at least developed with meaningful notice to the defendant.” Here, Bell showed that it would have tried the case differently had it known an injunction was at issue. Accordingly, the fee award was also vacated. Peterson v. Bell Helicopter Textron, Inc., No. 14-10249 (June 4, 2015). A revised opinion honed the opinion’s analysis as to a potential alternative ground of fee recovery; the same day it issued, the full Court denied en banc review over a lengthy dissent.
1. Whether an insurer can be liable for a bad-faith failure-to-settle claim when it never received a firm settlement offer. (The Fifth Circuit 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.) The Louisiana Supreme Court said: “Having determined that the plain language supports the existence of a cause of action in favor of the insured under [the revised statute], we answer this question affirmatively.”
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. The answer: ” An insurer can be found liable under [the statute] for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage; the statute prohibits the misrepresentation of ‘pertinent facts,’ without restriction to facts ‘relating to any coverages.'”
Accordingly, the Fifth Circuit remanded for further proceedings in Kelly v. State Farm, No. 12-31064 (May 29, 2015, unpublished).
The same week as the en banc vote in the whooping crane litigation, the Fifth Circuit analyzed “Whoomp! (There It Is).” The unfortunate song has been mired in copyright infringement litigation for a decade; the district court entered judgment for the plaintiff for over $2 million, and it was affirmed in Isbell v. DM Records, Inc., Nos. 13-40787 and 14-40545 (Dec. 18, 2014). [The opinion notes: “The word “‘Whoomp!’ appears to be a neologism, perhaps a variant of ‘Whoop!,’ as in a cry of excitement.”]
The main appellate issue was a variant of a frequently-litigated topic — the role of extrinsic evidence in contract interpretation. The assignment in question was governed by California law, which the Court found to “employ a liberal parol evidence rule” with respect to consideration of extrinsic evidence. The appellant argued that the district court erred “in interpreting the Recording Agreement without asking the jury to make any findings on the extrinsic evidence.” The Court disagreed, finding that the record did not present “a question of the credibility of conflicting extrinsic evidence” (emphasis in original): “The only dispute is over the meaning of the Recording Agreement and the inferences that should be drawn from the numerous undisputed pieces of extrinsic evidence. This is a question of law for the court, not for a jury.”
In tour de force reviews of Louisiana’s Civil Code and civilian legal tradition, a plurality and dissent — both written by Louisiana-based judges — reviewed whether a 1923 deed created a “predial servitude” with respect to a right of access. The deed at issue said: “It is understood and agreed that the said Texas & Pacific Railway Company shall fence said strip of ground and shall maintain said fence at its own expense and shall provide three crossings across said strip at the points indicated on said Blue Print hereto attached and made part hereof, and the said Texas and Pacific Railway hereby binds itself, its successors and assigns, to furnish proper drainage out-lets across the land hereinabove conveyed.”
The analysis involved citation to the Revised Civil Code of Louisiana of 1870 (the Code in effect at the time of conveyance), the 1899 treatise Traité de Droit Civil-Des Biens, and the 1893 work, Commentaire théorique & pratique du code civil. Despite the arcane overlay, the opinions turn on practical observations. The plurality notes that the deed uses “successors and assigns” language only with respect to drainage — not access — while the dissent observes that a “personal” access right, limited only to the parties to the conveyance and that does not run with the land, is impractical. Franks Investment Co. v. Union Pacific R.R. Co., No. 13-30990 (Dec. 2, 2014).
Dawna Casey’s family sued Toyota, alleging that the airbag in a 2010 Highlander did not remain inflated for six seconds and caused her death in an accident. The district court granted judgment as a matter of law and the Fifth Circuit affirmed. Casey v. Toyota Motor Engineering & Manufacturing, No. 13-11119 (Oct. 20, 2014).
As to the claim of manufacturing defect, the Court observed: “Casey . . . established only that the air bag did not remain inflated for six seconds,” and relied on alleged violations of Toyota’s performance standards to prove a defect (rather than a technical explanation of the bag’s performance). The Court rejected those allegations under Texas law and precedent from other jurisdictions: “Each piece of evidence submitted by Casey on this point is result-oriented, not manufacturing-oriented, and provides no detail on how the airbag is constructed.”
As to the claim of design defect, Casey relied primarily on a patent application for an allegedly superior design, which the Court rejected as not having been tested under comparable conditions, and as lacking a real-world track record as to feasibility, risk-benefit, and other such matters. Law360 has written a summary of the opinion.
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.
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.”
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.'”
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.)
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.”
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.
The plaintiffs in Garziano v. Louisiana Log Home, Inc. made 88 percent of the installment payments for a build-it-yourself log cabin kit, and then defaulted. No. 13-60291 (May 29, 2014, unpublished). The log cabin company won summary judgment against several contract and tort claims by the purchasers. Before final judgment was entered, however, it came to light that the company had resold several of the logs and actually was ahead on the transaction overall. The district court denied a Rule 59(e) motion about this information and entered judgment. The Fifth Circuit reversed, finding that the district court should not have focused on plaintiffs’ erroneous characterization of the issue as “unjust enrichment,” and by doing so, “essentially granted LLH an impermissible double recovery—making the earnest money provision an unenforceable penalty.” The Court remanded “with instructions for the district court to make findings on the amount of actual damages that LLH suffered and to amend the judgment to remit to the Garzianos any monies paid to LLH under the contract that were in excess of LLH’s actual damages.” (The defendant offers several packages for log homes, all of which look elegant and cost-effective to this author.)