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LEGAL TRENDS Triple Threat– Texas Supreme Court Rejects the Economic Loss Doctrine, Favors Policyholders On August 31, 2007 the Texas Supreme Court issued an eagerly awaited opinion in Lamar Homes, Inc. v. Mid-Continent Casualty Company, No. 05-0832 (Tex. Aug. 31, 2007) in which it resolved a long-standing controversy between policyholders and insurance carriers as to whether commercial general liability (“CGL”) policies cover property damage resulting from defective workmanship. This case arises out of a dispute between homeowners Vincent and Janice DiMare and their homebuilder, Lamar Homes, Inc. Several years after purchasing their home, the DiMares encountered problems that they attributed to defects in their foundation. The DiMares sued Lamar and its subcontractor, complaining about these defects. Lamar forwarded the lawsuit to its insurer, Mid-Continent Casualty Company, seeking a defense and indemnification under its CGL policy. Mid-Continent refused to defend, prompting Lamar to seek a declaration of its rights in federal district court. Lamar also sought recovery under Article 21.55 of the Texas Insurance Code (recodified as § 542.051-061 of the Texas Insurance Code) for failing to promptly provide a defense. On cross motions, the federal court granted summary judgment in favor of Mid-Continent, concluding it had no duty to defend Lamar for construction defects that harmed only Lamar’s own product. Lamar Homes, Inc. v. Mid-Continent Cas. Co., 335 F. Supp. 2d 754 (W.D. Tex. 2004). The court reasoned that the purpose of a CGL policy is to “protect the insured from liability resulting from property damage (or bodily injury) caused by the insured’s product, but not for the replacement or repair of that product.” Id. at 759. The court was concerned that if an insurance policy were to be interpreted as providing coverage for construction defects, it would allow a contractor to receive initial payment for the work from the homeowner, then receive subsequent payment from the carrier to repair and correct defects to the contractor’s own work. Lamar appealed the federal district court’s decision to the U.S. Court of Appeals for the Fifth Circuit. Noting disagreement among Texas courts about the application of a CGL policy under these circumstances, the Fifth Circuit certified the following three questions to the Texas Supreme Court as the final authority on questions of Texas civil law:
Lamar Homes, Inc. v. Mid-Continent Cas. Co., 428 F.3d 193, 200-01 (5th Cir. 2005). Fortunately for policyholders, the Texas Supreme Court concluded that allegations of unintended construction defects may constitute an “accident” or “occurrence” under a CGL policy, and that allegations of damage to or loss of use of the home itself may also constitute “property damage” sufficient to trigger the duty to defend under a CGL policy. In coming to this conclusion, the Supreme Court rejected the insurer’s false assumption that construction defects resulting from a contractor’s failure to perform under contract are always intended or expected and thus, not an “accident” or “occurrence.” In addition, the Supreme Court rejected the notion that damage to the contractor’s own work is not “property damage” but rather a contractual, economic loss. In doing so, the Supreme Court noted that the economic loss rule is a liability defense or remedies doctrine, not a test for insurance coverage. Quite simply, whether a third-party’s claim lies in contract or tort is irrelevant to the existence of coverage. The Supreme Court did not address the duty to indemnify, because as the Court noted, that duty is not triggered by mere allegations, but rather proof at trial. With respect to the third and final question, the Supreme Court concluded that the prompt-payment statute, formerly Article 21.55, and now codified in Chapter 542 of the Texas Insurance Code, may be applied when an insurer wrongfully refuses to promptly pay a defense benefit owed to an insured. The prompt-payment statute provides that an insurer, who is “liable for a claim under an insurance policy” and who does not promptly respond to, or pay, the claim as the statute requires, is liable to the policyholder not only for the amount of the claim, but also for “interest on the amount of the claim at the rate of 18 percent a year as damages, together with reasonable attorney’s fees.” Tex. Ins. Code § 542.060(a). Not merely limited to the construction industry, this holding provides all general liability policyholders the leverage necessary to compel their insurers to provide a defense. The question has been raised, however, under what circumstances, if any, must a policyholder submit its legal bills to its insurer in order to “mature” its rights under the prompt-payment statute when the insurer has denied coverage? The Supreme Court seemed to suggest that the policyholder needs to submit legal bills as they accrue in order to trigger the protections of the Act. However, given that the carrier has already refused to pay the defense costs, is tendering the invoices an exercise in futility? More importantly, since the carrier is not assuming the defense, does tendering the invoices waive the privilege to any attorney-client privileged information that might be reflected in the invoices? W. Bryan Tate is an associate at Haynes and Boone, LLP. His practice is concentrated in the area of business litigation with an emphasis on insurance coverage analysis and litigation.
Sovereign Immunity on Quantum Meruit Claims Recent changes to Local Government Code Chapter 271, Subchapter I, have resulted in numerous questions regarding its application. A central issue is whether governmental entities are now subject to liability for quantum meruit claims. In a case of first impression, the First Court of Appeals concluded that Chapter 271 did not waive local governmental units’ immunity from claims in quantum meruit. City of Houston v. Swinerton Builders, Inc., No. 01-06-00870-CV, 2007 WL 1775989 (Tex. App.—Houston[1st Dist.] June 21, 2007, no pet. history). In Swinerton, the City of Houston entered into a construction contract for the expansion of the George R. Brown Convention Center. Swinerton claimed time was of the essence to the contract and that he had incurred significant additional expenses above the original contract price. He filed claims with the City’s engineers for payment of these expenses, which were subsequently denied. Swinerton then filed suit against the city for breach of contract and quantum meruit under Texas Local Government Code § 271.151 – 160. The City filed a plea to the jurisdiction on the quantum meruit claim, arguing that there was no legislative waiver of immunity in this regard. The 165th District Court of Harris County denied the City’s plea and the City appealed. Swinerton argued that section 271.152 allowed a quantum meruit claim against the City as it was “mutually exclusive” to a breach of contract claim, and that the legislature intended to waive immunity for claims “arising from” or “arising under” a contract. Swinerton pointed to the subchapter title, “Adjudication of Claims Arising Under Written Contracts with Local Governmental Entities,” as evidence that the Legislature intended to waive immunity for all suits relating to contract claims. The First Court of Appeals, however, disagreed. The court looked to the plain language of section 271.152 as well as “the terms that the legislature chose not to use” in determining that sovereign immunity is not waived for quantum meruit claims. The court relied upon the Code Construction Act to discount Subchapter I’s title, finding that the heading did not expand the statute’s meaning. SeeTex. Gov’t Code Ann. § 311.024 (Vernon 2005). Further, Section 271.152 expressly states that it “waives sovereign immunity to suit for the purpose of adjudicating the claim for breach of the contract” and lists no others. The legislative history, the court reasoned, explicitly indicated that breach of contract claims were the only ones subject to waiver of immunity. In reviewing the bill history, the court determined that the Legislature did not intend to include all claims “arising under” a contract, but rather specifically chose to exclude this language. Although the First Court of Appeals adopted an unequivocal interpretation of the statute, it left some ambiguity regarding the definitiveness of its findings. The court noted that in June 2006, the Texas Supreme Court remanded several cases for a determination of whether claims for quantum meruit were covered by the Subchapter I waiver of immunity. The Texas Supreme Court, therefore, did not expressly dismiss the notion that immunity from quantum meruit claims is waived under Chapter 271, thus leaving the question up for review. Casey T. Wallace is of counsel in the business litigation section of Haynes and Boone, LLP. Sandy D. Hellums is an associate in the business litigation section of Haynes and Boone, LLP.
Mandamus to Prevent Mass Tort Discovery Abuse The Supreme Court of Texas reaffirms its willingness to intervene and compel discovery in complex mass tort cases where the circumstances otherwise would deprive the defendants of a reasonable opportunity to prepare for trial in In re Allied Chemical Corporation, et. al. ___ S.W.3rd ___, No. 04-1023 (Tex. June 15, 2007). Approximately 1,900 plaintiffs sued 30 defendants for injuries allegedly sustained from exposure to chemical fumes and leaks from various pesticide storage and mixing facilities. The plaintiffs failed to identify any specific incidents of exposure or products, but rather, merely alleged exposure to a “toxic soup” of emissions over the course of several decades. After the suit had been pending for five years, the trial court consolidated five of the plaintiffs’ claims, despite a drastic lack of commonality between them, and scheduled the first trial setting for roughly six months later. Defendants protested to the trial court that the plaintiffs had failed to adequately respond to certain of the defendants’ discovery requests seeking identification of the medical experts that could causally link plaintiffs’ alleged diseases to defendants’ products, but to no avail. The trial court refused to disturb the trial setting even in the face of In re Van Waters & Rogers, Inc., 145 S.W.3d 203 (Tex. 2004), where the Supreme Court reversed a similar order issued in a similar case and in the same county. The Thirteenth Court of Appeals similarly upheld the trial court’s order. The Texas Supreme Court granted a stay of the trial court’s docket control order. Shortly thereafter, the plaintiffs requested that the trial court withdraw the consolidation order and allow only one plaintiff to proceed to trial. The trial court granted this request ordering the personal injury claims of one plaintiff to proceed to trial on the stated date. Ultimately, the Supreme Court granted a conditional writ of mandamus directing the trial court to vacate its order setting any of the plaintiffs’ claims for trial until the defendants had a reasonable opportunity to prepare for trial after the identification of who would connect their products to plaintiffs’ claimed injuries. The court recognized the situation as nearly identical to that of Able Supply Co. v. Moye, 898 S.W.2d 766 (Tex. 1995). Able Supply involved over 3,000 plaintiffs and almost 300 defendants, again concerning toxic exposure. After that case had continued for eight years, the plaintiffs still had failed to identify experts to connect the products to the injuries. Instead, each plaintiff had responded merely that such persons had not been determined but that its responses would be supplemented at a later date. In that case, the Texas Supreme Court held that the trial court’s denial of the defendants’ motion to compel this information amounted to a clear abuse of discretion with no adequate remedy by appeal. The defendants in Allied Chemical sought the same information. Although the plaintiffs provided supplemental answers after the Supreme Court stayed the docket control order listing chemicals to which they were “potentially exposed” and providing literature suggesting such chemicals could have contributed to their diseases, the court ruled that after five years, plaintiffs’ failure to list any expert who could draw a causal connection effectively constituted as insufficient a response as in Able Supply. Without such information, the court remarked, “no one can prepare for trial.” Admittedly, the Court generally refuses to consider interlocutory complaints concerning trial settings. However, in both Able Supply and Allied Chemical, the court cites three specific reasons for such action. First, the court held that the discovery order imposed a burden far outweighing any benefit. In short, the burden of forcing 30 defendants to prepare “in the dark” for 1,900 claims is grossly out of proportion with the benefit of giving the plaintiffs additional time to decipher who or what caused their injuries. Secondly, the court ruled that mandamus is appropriate where denial of discovery goes to the very heart of a party’s case. By denying meaningful discovery concerning a vital element of the plaintiffs’ claims, mandamus must preserve the defendants’ ability to prepare for trial. Finally, the court granted mandamus because the trial court’s docket control order severely compromised the defendants’ ability to present any defense at all. The court noted that late disclosure especially compromises a defendant’s ability to mount a defense to such major complaints or such imprecise causal connection as chemical fumes and plaintiffs’ various injuries, not to mention similar cases that may arise in the future. Adam D. Pollock is a trial associate in the Houston office of Gardere Wynne Sewell LLP, where he practices commercial litigation and personal injury defense.
Paid in Full? The Eastland Court of Appeals affirmed a trial court’s ruling, awarding summary judgment in favor of a credit card company that brought an action against a credit card holder to collect on the unpaid balance on card holder’s account – despite restrictive language placed by the card holder on the back of a proposed settlement check and the card company’s stamp, “paid in full.” See Petty v. Citibank (South Dakota) N.A., 218 S.W.3d. 242, (Tex. App.--Eastland, 2007). The case involved cardholder Leon Petty, who obtained an “AT & T Universal Platinum MasterCard” from Citibank (South Dakota) N.A. in 2001. As of February 2005, the unpaid balance of his account exceeded $11,000. Petty contends that in a telephone conversation with an employee of Citibank in January 2005, he advised that he could not pay the full amount of the credit card debt, but could pay $5,900.00 in full settlement of the debt, to which Citibank agreed. Petty sent Citibank a cashier’s check in the amount of $5,900.00, and placed a restrictive endorsement on the check. The back of the check contained the following restrictive endorsement: “Do not deposit unless for full settlement amount.” Citibank cashed the check with the endorsement, and according to Petty, thereby accepted the terms of the restriction without objections. Someone wrote “paid in full” and the account number of the credit card account on the front of the cashier’s check. There were two issues on appeal, one being a procedural issue regarding the admissibility of documents attached to a summary judgment affidavit as competent summary judgment evidence under the business records exception to the hearsay rule. The issue for which Petty will likely be cited from here forward, however, relates to accord and satisfaction. Specifically, the Eastland Court of Appeals held that the card holder established neither a statutory nor a common law defense of accord and satisfaction. The accord and satisfaction issue on appeal and resolved by the opinion, involved three different legal arguments advanced by Citibank. Citibank argued that Petty’s affidavit was insufficient to raise a fact question on the defense of accord and satisfaction on three legal grounds. First, Citibank pointed to a provision in the credit card agreement that allows the company to accept partial payments, payments marked “paid in full” and/or payments with other restrictive endorsements, without losing any of its rights under the card holder agreement to pursue the full balance owing on the account. While this contractual provision would appear to dispose of the case as a matter of law, the Court of Appeals did not affirm summary judgment on this ground. The Court explained:
The second legal ground that Citibank relied upon was statutory. Citibank relied on TEX. BUS. & COM.CODE ANN. § 3.311 (Vernon 2002), which provides that a claim may be discharged by the debtor tendering a partial payment if the payment instrument or accompanying written communication contains a conspicuous statement to the effect that the instrument is tendered as full satisfaction of the claim; however, the claim must be either unliquidated or subject to a bona fide dispute. See Section 3.311(a) (2). As the Court noted, there was no evidence or allegation that the amount of the debt that Petty owed Citibank was unliquidated or subject to a bona fide dispute. Thus, Petty was not able to establish the defense of accord and satisfaction under Section 3.311. Nonetheless, the Court still allowed Petty an escape clause, noting that “Petty’s inability to rely on Section 3.311 does not forbid him from asserting an accord and satisfaction under common law.” Common law, however, also requires that Petty show that the debt be disputed. Citibank’s third legal ground, based in common law, asserted that the accord and satisfaction that Petty relied upon was not supported by consideration. The Court of Appeals agreed, holding that, “[t]he mere payment of part of a debt which is undisputed is not a sufficient consideration to support a promise to accept the same in full payment of the debt, and does not bar the creditor’s suit to recover the balance.” While the decision was a win for Citibank, is the decision really a win for credit card companies in the long run? Here, there was no dispute regarding the amount that Petty originally owed to Citibank, so the Court found no accord and satisfaction under Section 3.311(a) (2) and no consideration to support the agreement under common law. But the Eastland Court of Appeals essentially provided a road map to card holders, laying out the proper way to bring a summary judgment-proof case in the future: (1) dispute the balance; (2) offer payment in full; and (3) provide payment to the credit card company with the restrictive endorsements. While Citibank may be celebrating this victory, the next decision may bring more accord and satisfaction to the card holder. Sara B. Keegan is an associate in the trial practice group of Jones Day’s Houston office. Her practice is concentrated in complex commercial and multi-jurisdictional litigation, with an emphasis on government investigations, securities litigation and corporate criminal matters.
Deputy Constables Cannot Be Discharged Without Just Cause, Are Entitled to Due Process In County of Dallas v. Wiland, 216 S.W.3d 344 (Tex. 2007), the Texas Supreme Court held that that several discharged deputy constables, as covered employees in Dallas County’s civil service system, had a property interest in their continued employment that is protected by procedural due process, and they could not be discharged without just cause. Before taking office on January 1, 2001, newly-elected Dallas County Constable Mike Dupree sent letters to deputy constables Stanley Gaines, Jimmie Gilliand and Sonia Vaina, informing them that their services would not be required in his administration. The letters provided no explanation for the decision. After taking the oath of office, Constable Dupree refused to administer the oath to the three deputies and collected their badges and weapons. The three deputies timely filed grievances, complaining that they had been wrongfully terminated. The civil service commission determined that the deputies’ grievances could not be presented under the County’s civil service system because the new constable’s refusal to appoint the deputies was not a dismissal subject to provisions of the Dallas County Administrative Policies and Procedures Manual, and that therefore no employment action had occurred of which the deputies could complain. The commission did not consider whether there was just cause for dismissing the deputies. The deputies did not appeal the commission’s decision but sued the County under 42 U.S.C. § 1983, alleging that the County had denied them substantive and procedural due process in violation of the Fourteenth Amendment. The deputies moved for partial summary judgment, arguing that they had been denied procedural and substantive due process, resulting in their loss of employment. The County responded that the deputies’ employment ended automatically when the previous constable’s term expired and that the refusal to reappoint was not a dismissal. The trial court granted the deputies’ motion and later rendered judgment on the jury’s verdict awarding them a combined total of more than $2 million in damages, interest, attorneys’ fees and costs. The Fifth Texas Court of Appeals affirmed, agreeing with the trial court that Constable Dupree’s failure to swear in the deputies was “tantamount to a dismissal” that was covered by the Manual. The Texas Supreme Court agreed that the deputies had been discharged, but further held that because the deputies were covered employees of the Dallas County’s civil service system, they could not be discharged without just cause and a hearing before the County’s civil service commission. Specifically, the Court found that various provisions in the Manual, taken as a whole, provide that covered employees are not to be discharged without being given a reason they can contest, thereby creating an expectation in continued employment except for just cause. The Court explained that an entitlement to procedures for hearing and deciding grievances alone does not alter an employee’s at-will status to create a property interest, but an expectation in continued employment, while not a contractual right as the Manual expressly disavows, creates a property interest of which the employees may not be deprived without procedural due process. The Court concluded that the deputies have a property interest in their continued employment which did not expire when the new constable took office, and that the County had discharged the deputies and denied them procedural due process when it failed to grant them a hearing before the civil service commission to determine whether just cause existed for the discharge. The Court held that the deputies could recover damages for denial of procedural due process for injuries resulting from the loss of their employment only if just cause did not exist for their discharge. The Court found that the trial court erred in holding that the deputies established an absence of just cause as a matter of law because the County took the position that the deputies were never dismissed at all. The Court determined that the trial court had not established that there was cause to dismiss the deputies and remanded the deputies’ claims based on denial of procedural due process for further proceedings. Justice Brister, joined by Chief Justice Jefferson, Justice O’Neill, and Justice Medina, concurred in part and dissented in part. The justices agreed with the majority to remand the case for a new trial, but only on the damages issue because the deputies sought and obtained damages far beyond their wages. They disagreed that the County should be given a second chance to deny the deputies everything if the evidence establishes on remand that there was just cause for their dismissal. Linhuyen Pham practices with the firm of Heard & Medack, P.C. She is a member of The Houston Lawyer editorial board.
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