LEGAL TRENDS

Appellate Court Rules on Calculating Prejudgment Interest,
In-house Counsel Fees

By Ben Westcott

In AMX Enterprises, L.L.P. v. Master Realty Corp., 283 S.W.3d 506 (Tex.App.—Forth Worth 2009) the Fort Worth Court of Appeals addressed three matters of first impression. For the first time a Texas appellate court ruled on whether: 1) a trial court has the equitable power to toll the accrual of prejudgment interest under the Prompt Payment to Contractors Act (“PPCA”); 2) whether a contractor who prevails under the PPCA is entitled to common law prejudgment interest in addition to the statutory interest under the PPCA; and 3) whether attorney’s fees for in-house counsel should be calculated under the market value method or the cost-plus approach.

The controversy in this case arose from $46,900 of deficient payments claimed by AMX Enterprises, L.L.P. (“AMX”), a contractor, for work performed on a hotel with flood damage. AMX brought claims against the hotel owner for breach of contract, violation of the PPCA, judicial foreclosure of its constitutional lien and attorney’s fees, most of which were attributable to the work of AMX’s in-house counsel. At trial, AMX was awarded $46,900 in contract damages and $18,758.43 for statutory interest under the PPCA, an amount which excluded interest for the 745 days attributable to litigation delay. The court did not award common law prejudgment interest or attorney’s fees.

On appeal, the Fort Worth court agreed with AMX’s argument that the trial court did not have the equitable power to toll the accrual of statutory interest under the PPCA for periods of delay in litigation. In its decision, the appellate court noted the PPCA contains “no provision for tolling the accrual of interest during periods of litigation delay” and the absence of case law affording a trial court such authority. Currently, in a time when delay in litigation is common, this decision was a substantial victory for the wrongfully unpaid contractor that seeks recovery under the PPCA. For example, in this case, the appellate court awarded $46,354.62 in statutory interest compared to the trial court’s award of $16,792.38.

On the second matter of first impression, the court of appeals rejected AMX’s argument it should have been awarded the 6 percent common law prejudgement interest on the $46,900 in contract damages in addition to the 18 percent statutory interest under the PPCA. The appellate court explained prejudgment interest is intended to compensate a claimant for the period of time their money was unavailable for use and to facilitate faster settlements of debts. The court further reasoned allowing a contractor to recover interest under the PPCA and the common law would “allow a double recovery of two kinds of interest designed to promote the same two goals.”

Additionally, for the first time a Texas appellate court rendered a decision on whether the market value method or the cost plus method is the appropriate approach for calculating attorney’s fees for work performed by in-house counsel. The market value method awards attorney’s fees for services of an in-house counsel calculated at a common hourly rate for attorneys of similar experience and skill. On the other the hand, the cost plus method calculates attorney’s fees for in-house counsel based on cost, plus over-head incurred by the prevailing party. In weighing its decision, the court surveyed other jurisdictions’ decisions in favor of both the market value and cost plus calculation methods. In the end the court was persuaded by the arguments in favor of the market value method. Particularly, the court noted the market value method provided a system that was easier to administer, that would prevent a windfall for a losing defendant that benefited from a winning party’s choice to be represented by in-house counsel, and that is consistent with other factors Texas courts currently employ to determine attorney’s fees. 

Ben Westcott (ben.westcott@lawamc.com) is a shareholder in the law firm of Andrews Myers Coulter & Hayes, PC. His practice focuses on transactional and dispute resolution aspects of construction law.

The Texas Supreme Court Elaborates on the Recovery of Damages for Legal Malpractice

ByPolly Graham

The Texas Supreme Court recently settled a debate among the intermediate appellate courts regarding recovery of attorney’s fees as damages for legal malpractice. The Court also addressed the “collectability” of a favorable judgment in a suit underlying a malpractice action. See Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. National Development and Research Corporation, -- S.W.3d --, No. 07-0818, 2009 WL 3494978 (Tex. 2009).

The case involved an appeal by Akin Gump from a malpractice suit brought against it by NDR. The malpractice jury awarded NDR over $922,000 in damages and the trial court rendered judgment on the verdict. The award included, inter alia: (1) attorneys’ fees that NDR paid to Akin Gump for representation in the underlying suit, and (2) the amount that would have been collectible from the underlying defendant if Akin Gump had properly prosecuted the underlying suit.

The Dallas Court of Appeals reversed the award of attorney’s fees, stating that attorney’s fees are not recoverable as damages for legal malpractice, and affirmed the remainder of the judgment. After both parties appealed, the Texas Supreme Court held that the Dallas Court erred in reversing the award of attorney’s fees and remanded the claim for fees back to the court of appeals. The Texas Supreme Court also rendered judgment that NDR take nothing on its claim for the damages it would have recovered in the underlying suit.

With respect to the latter holding, the Court started from the established principle that when a malpractice claim rests upon improper representation of a plaintiff in an underlying suit, the plaintiff must prove and obtain findings as to the amount of damages that would have been recoverable and collectible if the underlying case had been properly prosecuted. The Court determined that the evidence was legally insufficient to support the jury’s finding that the underlying judgment would have been collectible. The Court’s holding rested upon two important conclusions. First, collectability is generally determined as of or after the date an underlying judgment is signed. Evidence of prejudgment collectability could be relevant only if accompanied by evidence demonstrating a reasonable probability that the underlying defendant’s financial condition did not deteriorate prior to the time the court signed the judgment. Second, the amount that would have been collectible in an underlying suit is the greater of (1) the fair market value of the defendant’s net assets subject to legal process for satisfaction of the judgment, or (2) the amount that would have been paid by the underlying defendant or another, such as a guarantor or insurer.

The Court next turned to the award of attorney’s fees, concluding that a malpractice plaintiff may recover damages for attorney’s fees paid in an underlying suit to the extent the fees were proximately caused by the defendant attorney’s negligence. In so holding, the Court rejected Akin Gump’s reliance on the American Rule—the well-established principle that a party cannot recover attorney’s fees absent a statute or contract allowing for recovery—because NDR did not seek fees incurred in prosecuting the malpractice suit. Rather, NDR sought only certain fees paid in the underlying suit—particularly fees incurred in having to appeal the underlying judgment—as a measure of compensatory damages. The Texas Supreme Court’s opinion signals that future malpractice disputes will focus on the difficult question of which fees were proximately caused by an attorney’s negligence.

Polly Graham, a Harvard Law graduate, is an associate in the appellate section of Haynes and Boone, LLP and recently completed a clerkship for Judge R. Lanier Anderson on the Eleventh Circuit Court of Appeals. .

Texas Supreme Court Denies Right to Search Opponent’s
Emails and Sets Standards for E-Discovery

By N. Jill Yaziji

In In re Weekley Homes, L.P., 295 S.W.3d 309 (Tex. 2009), HFG Enclave Land Interests, Ltd. (“HFG”) sued Weekley Homes, L.P. (“Weekley”) alleging that it fraudulently induced plaintiff to enter into a lot-purchase agreement with another defendant.1 During discovery, HFG requested email exchanges between Weekley and the other defendant and received 31 responsive emails—one of which referred to an engineering analysis discussing the existence of “multiple unsafe subdivision lots” that required “remedial measures.” While Weekley produced the engineering analysis itself, it did not produce any other emails discussing the analysis with the other defendant. This led HFG to suspect the existence of other relevant emails that were not produced, and to file a motion to compel requesting that Weekley search its employees’ files for responsive “emails stored on servers or back up tapes.” In a hearing on the motion, Weekley’s general counsel testified that it was company policy to delete emails periodically, and that while deleted emails were backed up on hard drives, these in turn were retained only for 30 days. In other words, the requested emails were not “reasonably available... in the ordinary course of business” to require their production pursuant to Texas Rule of Civil Procedure 196.4. The trial court denied HFG’s motion.

Next, HFG sought “limited access” to Weekley’s hard drives in search of the possibly relevant, but deleted emails. HFG’s experts proposed to create images of Weekley’s hard drives according to “forensically sound” methods. The experts would then search those images for deleted emails containing twenty-one specified terms. Weekley in turn complained about the intrusiveness, loss of confidentiality, disruption of business, and the ultimate feasibility of plaintiff’s proposed methodology to retrieve the deleted emails. This time, the trial court granted HFG’s motion. Weekly sought mandamus relief, which was denied by the court of appeals.

The Texas Supreme Court, which granted oral argument, held that the trial court abused its discretion by ordering Weekley’s employees to turn over their hard drives to HFG’s experts in search of deleted emails that may have discussed safety issues related to a sale of lots. A party seeking direct access to another’s electronic files must show that the benefits of directly granting access outweigh the burdens imposed on the defendant. In this instance, the plaintiff failed the benefit-burden test not only because it relied on conclusory statements as to the possible existence of the emails, but also because its highly intrusive proposed search failed to demonstrate that any deleted emails can be retrieved after two-and-half years of being created given Weekley’s deletion and overwriting methods.

In sum, this opinion discourages direct access to an opponent’s files. One seeking such access should be able to show: (1) the party resisting discovery defaulted in its obligation to search for the requested material, i.e. a more diligent search would likely yield the information requested; (2) the search can be done through qualified experts who can articulate a search methodology based on familiarity with the opponent’s filing method to assuage the court’s concern that it is not just a fishing expedition2; and (3) a close connection between the electronic storage device and the claim in controversy that warrants such an invasive method of discovery.

N. Jill Yaziji is the principal of the Yaziji Law Firm. She is a member of the Editorial Board of The Houston Lawyer..

Endnotes
1. Emails stored in an electronic form, including deleted emails, are “electronic data,” subject to the specificity requirement of Texas Rule of Civil Procedure 196.4. Therefore, a party seeking emails in electronic form should expressly request “deleted emails” in order to circumvent lengthy discovery battles. 2. Texas rules do not have a provision similar to those under Federal Rules of Civil Procedure 16(b) and 26(f). Nevertheless, the Texas Supreme Court expressly encourages “early discussions” and “discovery requests” to learn about an opposing party’s electronic systems and filing procedures..

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