With its May 30, 2014 orders list, the Texas Supreme Court did not issue any opinions or choose any new cases for review.

With its May 23, 2014 orders list, the Texas Supreme Court issued one opinion. It did not grant any new cases for review.

“Evident partiality” when an arbitrator fails to fully disclose the nature of his conflict

TENASKA ENERGY, INC., TENASKA ENERGY HOLDINGS, LLC, TENASKA CLEBURNE, LLC, CONTINENTAL ENERGY SERVICES, INC., AND ILLINOVA GENERATING COMPANY v. PONDEROSA PINE ENERGY, LLC, No. 12-0789

Opinion of the Court

After the purchase of a power plant, Ponderosa (the buyer) sued Tenaska (the seller) to indemnify it for some liabilities that came with the property. The purchase agreement had an arbitration clause, and the parties went forward with a three-member, neutral arbitration panel in which each side would designate one of the arbitrators and the two would then choose a third.¹

Tenaska was represented by Nixon Peabody, which designated Samuel Stern as its arbitrator. It made at least a partial disclosure that Stern and the law firm had previous involvement, noting that one of Stern’s ventures (Lexsite) had tried to sell it litigation-discovery services. The disclosure also stated “Nixon-Peabody and Lexsite have done no business.”

The arbitration was structured as a “baseball arbitration,” and the two sides’ proposals were two orders of magnitude apart: Tenaka proposed $1.25 million and Ponderosa proposed $125,000,000. The panel chose Ponderosa’s figure.

Subsequently, Tenaska uncovered more details of the relationship between Nixon Peabody and the arbitrator, which suggested a much deeper relationship than had been revealed. The trial court vacated the award, but the court of appeals reversed on the ground that the initial disclosure was enough to put Tenaska on notice to investigate.

The Texas Supreme Court reversed again, holding that the award should be vacated for what the statute calls evident partiality. The test asks if “the arbitrator does not disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality.” Burlington Northern R.R. Co. v. TUCO, Inc., 960 S.W.2d 629, 630 (Tex. 1997)

As the opinion summarizes the situation here:

the arbitrator failed to disclose that all of his contacts at the 700-lawyer firm were with the two lawyers that represented the party to the arbitration at issue; he owned stock in the litigation services company that was
pursuing business opportunities with the firm; he served as the president of the company’s United States subsidiary; he conducted significant marketing in the United States for the company; he had additional meetings or contacts with the two lawyers in question to solicit business from the firm
for the company; and he allowed one of the two lawyers to edit his disclosures to minimize the contact.

The Court found that this met the standard. It rejected the argument that merely disclosing the existence of some relationship was enough, instead looking at the significance of the undisclosed portion of the information.

However, proving that the Court is not engaged in baseball arbitration, the Court rejected both sides’ framing of the standard of proof. Tenaska contended that all it needed to do was establish that the disclosure was intentionally misleading and then, as a matter of law, the inquiry ends. Ponderosa contended (based on some other States’ standards) that the Court should require heightened proof such that a “reasonable person would have to conclude” that there was partiality. The Court rejected both extremes, instead adhering to the framing of TUCO that the disclosures “might, to an objective observer, create a reasonable impression” of partiality.

With today’s orders list, the Texas Supreme Court issued opinions in four cases and granted one new case for review.

The opinions today involve home-equity lending, hospital liens in personal-injury cases, what level of litigation conduct waives a contractual right to arbitrate, and parental-termination appeals.

Restructuring a loan without extending new credit does not trigger Texas’s constitutional homeowner protections

FRANKIE SIMS, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED; AND PATSY SIMS, ON BEHALF OF HERSELF AND ALL OTHERS SIMILARLY SITUATED v. CARRINGTON MORTGAGE SERVICES, L.L.C., No. 13-0638

Opinion of the Court

In this certified question from the Fifth Circuit, the Texas Supreme Court holds that a loan restructuring that merely recapitalizes the current debt — without extending new credit, as the Court clarifies that concept today — does not implicate Texas’s onerous constitutional requirements for a new home-equity loan.

These loan modifications folded in (“recapitalized”) past due amounts including taxes and insurance premiums, adding those amounts to the principal balance. They simultaneously lowered the interest rate, leading to a schedule of lower monthly payments.

The borrowers here argued that any increase in principal is an impermissible “extension of credit.” The Court disagreed, noting that the particular amounts being recapitalized here were for repayment of taxes and insurance, items that the borrower was already obligated to pay under the original terms. The Court called this “a mechanism for deferring payment of obligations already owed in a way that allows the borrower to retain his home.”

Indeed, throughout Chief Justice Hecht’s opinion, the Court expressed concern that too strict a ruling about loan modifications would force lenders to foreclose in situations where the borrower could, otherwise, be accommodated.

The opinion stopped short, however, of adopting the lender’s proposed rule. The lender argued that all that mattered was that “the borrower’s note is not satisfied and no new money is extended.” The Court called those aspects necessary, but refused to say they were sufficient. The Court gave an example that would fail the test: using the refinancing to cover another unrelated debt or obligation (such as credit card debt). “The test should be whether the secured obligations are those incurred under the original loan.” Here, the obligations being secured were payment of property tax and insurance premiums.

There is some room for future parties to argue about the contours of this test, on a closer set of facts. But refinancing narrowly tailored to save a house from foreclosure seems likely to fit the bill.

Hospital liens are not discharged until the insurer received payment; a joint payment to the insured is not enough

MCALLEN HOSPITALS, L.P. D/B/A MCALLEN MEDICAL CENTER v. STATE FARM COUNTY MUTUAL INSURANCE COMPANY OF TEXAS, No. 12-0983

Opinion of the Court

Under chapter 55 of the Texas Property Code, hospitals that treat an injured patient can assert a lien against that person’s personal-injury cause of action. By statute, the hospital charges must be “paid” before the underlying claim can be settled.

Here, the insurer made a check out jointly to the injured person and to the hospital. The injured person deposited the check without obtaining the hospital’s endorsement.

The hospital then sued the insurer, which asserted that it had completed its obligation under the law by issuing the check. The court of appeals agreed. The Texas Supreme Court did not.

Trying to resolve whether this constituted a payment, the Court turned to the UCC’s general principles about negotiable instruments. This check was drafted so that either copayee could endorse (“alternative copayees”) rather than requiring the signature of both (“nonalternative copayees”). For that reason, the Court held, the better view was that this did not constitute payment to discharge the insurer’s obligation to the hospital.

Does this mean that the hospital can now sue the insurer directly (a defendant much more likely to be able to easily satisfy a judgment)? The Court questions whether the statute creates such a cause of action but does not answer, because this was not a ground raised in the summary judgment motion. (The Court noted that the question had been discussed during the appeal and was “briefly discussed at oral argument.” That did not substitute for preservation of error.)

The Court therefore remanded the case to the trial court for further proceedings.

Litigation conduct that does not waive arbitration

KENNEDY HODGES, L.L.P. v. VENTURA GOBELLAN, JR. AND PAULA GOBELLAN, No. 13-0321

Per Curiam

In this dispute between a law firm and its former client over a contingency agreement, the question is whether the law firm has substantially invoked the litigation process so as to waive its right to arbitrate.

The first asserted waiver was that the law firm had, previously, sued a former associate over the same general subject matter — litigation in which the client became tangentially involved and was subjected to discovery. The firm did not, however, even have an arbitration clause with that former associate. The Court held this was not enough to waive the firm’s right to arbitrate against the client.

The second asserted waiver was that the law firm filed suit against the client and (eventually) moved for a no-answer default judgment before later moving for arbitration. Even this invocation of the court system was not enough to waive arbitration. The opinion characterized this as “filing limited pleadings” that “did not substantially invoke the litigation process.”

The Court therefore reversed the court of appeals and remanded for trial court grant the motion to compel arbitration.

An appellate court need only provide details of its factual sufficiency analysis when reversing a parental-termination judgment, not when affirming

IN THE INTEREST OF A.B. AND H.B., CHILDREN, No. 13-0749

Opinion of the Court

In 2005, the Texas Supreme Court held that if a court of appeals holds a jury finding in a parental-termination case to be factually insufficient, its opinion must detail the reason why. The current petition asked the Texas Supreme Court to extend that same requirement to appellate decisions that affirm a jury’s finding of parental termination, given the high stakes.

The Texas Supreme Court declined to do so.

It explained that the “detail” requirement was to ensure that the court of appeals was according deference to the jury as fact-finder, an interest not implicated when the court of appeals affirms. Instead, all that is required is that the court of appeals actually apply the right standard, whether or not it details all the specific facts.

To determine whether the right standard was applied here, the Texas Supreme Court observed that the court of appeals panel that first heard this case “cited the correct standard … and subsequently devoted six pages of its opinion to articulating evidence presented at trial,” analysis attached to a dissent to the later en banc opinion. This is enough to signal “that the en banc court of appeals, though it did not specifically detail all evidence favorable … did in fact comply with the standard [of review].”

Grant: How to value billboards in condemnation cases

In State of Texas v. Clear Channel Outdoor, Inc., No. 13-0053 , the State (supported by some local governments) challenges how billboards were valued in condemnation. The landowners contend that the installed billboards are part of the realty warranting compensation for their lost income. The State argues that they should, instead, be seen as a type of personal property that can be relocated.

Programming note: I am regrettably behind on some recent orders. When I have added those historical summaries to the site, I’ll post a link in a new blog post to let you know.

The Texas Supreme Court did not issue any opinions or choose new cases for oral argument with today’s orders list.

The Court’s calendar for next week shows an internal conference. The following week, the Court will hear oral argument in a parental-rights termination case.

With today’s orders list, the Texas Supreme Court agreed to answer the Fifth Circuit’s certified question about a fuzzy intersection between Texas employer-employee law and Texas premises liability law. The Court will now receive merits briefs, with oral argument likely to be held in the fall.

Certified question about what duty an employer owes to an employee over a premises defect

This is a slip-and-fall case with a twist: The injured person was an employee who was cleaning up the spill:

Kroger’s Safety Handbook provided that store management should “make certain that the Spill Magic Spill Response Stations [were] adequately supplied at all times” and available in numerous places throughout the store. Spill Magic allows an employee to clean a liquid spill with a broom and dustpan, and — according to Kroger’s Safety Handbook — reduces the likelihood of a slip-and-fall by 25 percent. Because there was no Spill Magic on premises that day, Austin cleaned the spill with a dry mop instead. When Austin moved on to the men’s restroom, he saw that the same substance covered about 80 percent of the floor. Austin placed “Wet Floor” signs inside and outside of the room, and proceeded to mop the spill for about thirty to thirty-five minutes. Austin took “baby steps” in and out of the restroom to change out the mop head numerous times, and successfully removed about thirty to forty percent of the liquid.

At about 10:30 a.m., while continuing to remedy the spill, Austin fell. He sustained a left femur fracture and severely dislocated his hip. He spent nine months in the hospital and underwent six surgeries, and his left leg is now two inches shorter than his right.

The employer did not subscribe to the Texas Workers Compensation system, so the claim falls through to common law.

The federal court decided that at least part of the case — a conventional negligence theory based on failure to provide the employee with “a necessary instrumentality” (the Spill Magic) — should be remanded to the federal district court for further proceedings. What it did not know was whether the premises liability theory was also viable — or whether that theory is precluded under Texas law.

So, it has certified the question:

Pursuant to Texas law, including §406.033(a)(1)–(3) of the Texas Labor Code, can an employee recover against a non-subscribing employer for an injury caused by a premises defect of which he was fully aware but that his job duties required him to remedy? Put differently, does the employee’s awareness of the defect eliminate the employer’s duty to maintain a safe workplace?

The Fifth Circuit detailed its analysis of the underlying “tension” within these branches of Texas tort law in its opinion certifying the questions.

With this week’s orders list, the Texas Supreme Court issued two opinions and chose six more cases for oral argument this fall.

Opinions

Liquidated damages clause: Not as “liquidated” as you might think

FPL ENERGY, LLC, FPL ENERGY PECOS WIND I, L.P., FPL ENERGY PECOS WIND II, L.P., AND INDIAN MESA WIND FARM, L.P. v. TXU PORTFOLIO MANAGEMENT COMPANY, L.P. N/K/A LUMINANT ENERGY COMPANY, LLC, No. 11-0050

Opinion of the Court

In a technical case about renewable-energy credits in the (somewhat) deregulated electricity market, the most interesting (and widely applicable) holding is likely to be the Court’s treatment of liquidated damages. Here, the parties had agreed to a liquidated damages formula that led to a $29 million figure, while the evidence suggested that a true after-the-fact figure would have been closer to $6 million.

So, does the parties’ agreement about damages hold, or does a later court refuse to enforce the provision?

The Texas Supreme Court began with a two-part test, looking at (1) whether the harm is difficult of estimation and (2) whether the measure of liquidated damages is a reasonable forecast of just compensation. (Slip op. at 18) The Court stated that it “evaluate[s] both prongs of this test from the perspective of the parties at the time of contracting.”

Even so, the evidence of actual damages is not irrelevant. Rather, if they are “much less than the amount contracted for,” that can be evidence that the original estimate was (in hindsight) unreasonable.

Here, the Court found that the contract “on its face, reasonably forecast[s] damages,” but that was not enough. The Court looked at how the business relationships here, and the regulatory environment, evolved in the decade after the contract was entered. It noted that (by administrative rule) some of the possible “damage” was discharged when the contract was assigned to a different kind of energy company. It noted that a different provision was pegged to either $50 or twice the market value as determined by the PUC. The PUC, however, declined to announce such a price — so the parties fell back to the $50 figure.

The Court held that where there is “an unbridgeable discrepancy between liquidated damages provisions as written and the unfortunate reality in application, we cannot enforce such provisions.”

The Court stated that it was not making new law, but it also offered no guidance to parties about how to draft liquidated damages provisions in complex transactions that can be accurate enough. I don’t have a clear answer to that, either.

The most obvious reading of the holding is that, on these facts, a ratio of nearly 5:1 is simply too much to bear, no matter what risks the parties may have been allocating. Liquidated damages provisions are then a sort of presumption that can be defeated with proof of a competing measure of damages so low as to be “unbridgeable.”

A different reading of “unbridgeable discrepancy” would focus on the two specific factors the Court discussed in its analysis — both of which related to regulatory assumptions made by the parties that proved unfounded. In this view, the situation is more akin to mutual mistake, in which the parties did not mean to allocate those two regulatory risks at all. The question then would be whether there is a logical bridge, rather than a quantitative one.

You can take your pick. Or you can do what I’m likely to do: argue from both approaches.

Contractual subrogation clauses squeeze out possible equitable subrogation claims

GOTHAM INSURANCE COMPANY v. WARREN E&P, INC. F/K/A PETROLEUM DEVELOPMENT CORPORATION D/B/A PEDECO, INC., WARREN RESOURCES, INC., AND OIL TECHNOLOGY FUND 1996 - SERIES D, L.P., No. 12-0452

Opinion of the Court

The Court applied its reasoning from Fortis Benefits v. Cantu that language about subrogation in an insurance contract prevented the insurer from relying on equitable remedies covering the same ground.

This case involved a subrogation clause, but also included clauses that imposed duties on an insured to make regular reports, to use due diligence, and not to make misrepresentations in applying for the policy, among others. The Court held that the insurer was bound to its contract language for these, and could not rely on equitable analogues to these defenses covering the same ground.

Rehearing Grant

The Court granted rehearing of a petition it had denied last year, Allen Mark Dacus, Elizabeth C. Perez, and Rev. Robert Jefferson v. Annise D. Parker and City of Houston, No. 13-0047 . The case is back on the petition docket; the Court has not yet chosen to grant the case on its merits.

The challenge is to a recent City of Houston ballot item, raising questions about what standards to use in evaluating whether voters were adequately informed (by the ballot language or otherwise) about the contents of what they were being asked to approve.

Grants for Oral Argument

• Robert Wayne Sneed, James H. Tichenor, Fred Wolgel... v. Lloyd P. Webre, Jr., individually and Derivatively on behalf of Texas United Corporation and United Salt Corporation, No. 12-0045 : This petition raises several questions about shareholder suits in closely held corporations. Does the business judgment rule apply to closely held corporations? If so, does it preclude suits other than for fraud and self-dealing? And does this plaintiff even have standing as a shareholder because his interest is indirect?

• Genie Industries, Inc. v. Ricky Matak, Belinda Matak and Misty Sonnier, As Representative of the Estate of Walter Pete Logan Matak..., No. 13-0042 : This a design-defect products liability case, involving questions of what is needed to show a safer alternative design.

• Nabors Well Services, Ltd. f/k/a Pool Company Texas, Ltd. and Lauro Bernal Garcia v. Asuncion Romero, individually and as Representative of the Estate of Aydee Romero, Deceased..., No. 13-0136 : The petition asks the Court to permit juries to hear evidence of whether a plaintiff in an automobile case was wearing a seatbelt.

• University of Texas at Arlington v. Sandra Williams and Steve Williams, No. 13-0338 : A spectator for a girl’s soccer game was injured due to a defect in the stands. Does the Recreational Use Statute provide immunity to the landowner (university)?

• American Star Energy and Minerals Corporation v. Richard “Dick” Stowers, Richard W. Stowers, Frank K. Stowers and Linda Sue Jasurda, No. 13-0484 : When suing general partners for a liability owed by the partnership, does the statute of limitations run from the time of the partnership’s underlying debt, or does it start only when a judgment against the partnership has been secured?

• The Fredericksburg Care Company, L.P. v. Juanita Perez, Virginia Garcia, Paul Zapata..., No. 13-0573 : Section 74.451 of the Civil Practice and Remedies Code restricts arbitration agreements between health providers and patients. Is that preempted by the Federal Arbitration Act? Or is it saved from preemption as a regulation of insurance by the federal McCarran-Ferguson Act?

It’s no surprise that the Court’s orders are light during what passes for Spring Break in Austin. There were no opinions issued and no cases chosen for argument with this week’s orders list.

The Court’s next internal conference is scheduled for March 17 and 18.

With its March 7 orders list, the Texas Supreme Court issued no opinions and chose no new cases for review.

The Court’s next internal conference is scheduled for March 17 and 18.