OFFICIAL PUBLICATION OF THE CONSUMER & COMMERCIAL … · 11-00503-CV, 2013 WL 2146833 (Tex. App.—Corpus Christi May 16, 2013, pet. denied) (mem. op.). An uninsured motorist provision

UNIVERSITY OF HOUSTON LAW CENTERCENTER FOR CONSUMER LAW

VOLUME 17, NUMBER 2, SPRING 2014Journal of

&Commercial LawConsumerOFFIC IAL PUBLICATION OF THE CONSUMER & COMMERCIAL LAW SECTION OF THE STATE BAR OF TEXAS

A N N U A L S U R V E Y O F T E X A S

INSURANCE LAW2 0 1 3

Recent Developments

Municipal Regulationof Payday &Title Loansin Texas

“Manifest Disregard”Alive and Well?

University of Houston Law Center2013-2014 Editorial Board

Student Editor-in-ChiefAdam Robertson

Chief Managing EditorAnthony Smith

Chief Articles EditorNiki Roberts

Chief Recent Developments EditorMili Gosar

Senior EditorsTimothy DyerAriel HardyJustine LinAlbrecht RiepenVarsha Shirhatti

Contributing EditorsJoshua CooperAshley EllerinArshin FaridifarViana HodgeJeff KirkBianca LopezBarira MunshiOlivia PeñaCharlie PendergraftLeigh ResslerKyle RaffertyMegan RoperSade SoetanJustin Wright

Editor-in-ChiefRichard M. AldermanInterim DeanDwight Olds Chair in LawUniversity of Houston Law Center713-743-2165713-743-2131 (Fax)[email protected]

State Bar of TexasConsumer & Commercial Law Section

OFFICERS COUNCIL

CHAIRPERSOND. Esther ChavezOffice of the Attorney GeneralConsumer Protection DivisionP.O Box 12548Austin, TX [email protected]

CHAIR-ELECTMelanie PhippsKustoff & Phipps, LLP4103 Parkdale St.San Antonio, TX 78229210-614-9444210-614-9464 (Fax)[email protected]

TREASURERMichael O’ConnerLaw Offices of Dean Malone, P.C.900 Jackson St, Ste. 730Dallas, TX 75202214-670-9989214-670-9904 (Fax)[email protected]

SECRETARYCaren K. LockRegional Vice President & Associate General CounselGovernment RelationsTIAA-CREF2850 Lake Vista Dr Ste 200Lewisville, TX 75067-4229 214-626-8311 [email protected]

IMMEDIATE PAST-CHAIRChad BaruchLaw Office of Chad Baruch3201 Main StreetRowlett, TX 75088972-412-7192972-412-4028 (Fax)[email protected]

EDITOR-IN-CHIEF OF THE JOURNAL OF CONSUMER & COMMERCIAL LAWProfessor Richard M. Alderman Dwight Olds Chair in LawUniversity of Houston Law Center100 Law Center Houston, Texas 77204-6060713-743-2165 713-743-2131 (Fax) [email protected]

TERMS EXPIRE 2014Mark FrenkelFrenkel & Frenkel, L.L.P.12700 Park Central Drive, Ste. 1900Dallas, TX 75251214-333-3333, (Fax) [email protected]

Chad PinsonBaker Botts, LLP2001 Ross Ave, Ste. 600Dallas, TX 75201-2980214-953-6621214-661-4621(Fax)[email protected]

Andrew E. SattlerJohn Dwyre & Associates, PLLC4207 Gardendale St Suite 104BSan Antonio, TX 78229210-736-1772201-736-5299 (Fax) [email protected]

TERMS EXPIRE 2015Philip K. Maxwell Law Offices of Philip K. Maxwell Plaza One, Suite 300 901 S. Mopac Expy Austin, TX [email protected]

David J. Fisher Kurowski Shultz 228 W. Pointe Dr. Swansea, TX 62226 618-277-5500618-277-6334 (Fax)[email protected]

S. David Smith McGlinchey Stafford1001 McKinney St, Suite 1500 Houston, TX 77002713-335-2136713-520-1025 (Fax)[email protected]

TERMS EXPIRE 2016Jessica LesserLesser & Jordan PLLC15443 Knoll Trail Dr. Ste. 100Dallas, TX [email protected]

Tracey WhitleyTexas Rio Grande Legal Aid4920 N IH 35Austin, TX [email protected]

Dana KarniKarni Law Firm, P.C.4635 Southwest Freeway, Suite 715713-552-0008713-454-7247 (Fax)Houston, [email protected]

Journal of Consumer & Commerical LawVolume 17, Number 2

Spring 2014

Journal of Consumer & Commercial Law 49

VOLUME 17, NUMBER 2, SPRING 2014

Journal of

&Commercial LawConsumer

The editors welcome unsolicited lead articles written by practicing attorney, judges, professors, or other qualified individuals. Manu-script length should be approximately 15-30 typed, double-spaced pages. Endnotes should conform to the Sixteenth Edition of A Uniform System of Citation, published by the Harvard Law Review Association.

Manuscripts should be forwarded to:Richard M. AldermanUniversity of Houston Law Center100 Law CenterHouston, Texas [email protected]

ArticlesAnnual Survey of Texas Insurance Law 2013By Mark L. Kincaid, Suzette E. Selden & Elizabeth von Kreisler 50

Municipal Regulation of Payday & Title Loansin TexasBy Olivia M. Peña 71

“Manifest Disregard” Alive and Well?By Timothy Dyer 82

Consumer News Alert-Recent Decisions 84

Consumer Credit 86

Debt Collection 88

Arbitration 90

Miscellaneous 92

The Last Word 96

Recent Developments

TERMS EXPIRE 2014Mark FrenkelFrenkel & Frenkel, L.L.P.12700 Park Central Drive, Ste. 1900Dallas, TX 75251214-333-3333, (Fax) [email protected]

Chad PinsonBaker Botts, LLP2001 Ross Ave, Ste. 600Dallas, TX 75201-2980214-953-6621214-661-4621(Fax)[email protected]

Andrew E. SattlerJohn Dwyre & Associates, PLLC4207 Gardendale St Suite 104BSan Antonio, TX 78229210-736-1772201-736-5299 (Fax) [email protected]

TERMS EXPIRE 2015Philip K. Maxwell Law Offices of Philip K. Maxwell Plaza One, Suite 300 901 S. Mopac Expy Austin, TX [email protected]

David J. Fisher Kurowski Shultz 228 W. Pointe Dr. Swansea, TX 62226 618-277-5500618-277-6334 (Fax)[email protected]

S. David Smith McGlinchey Stafford1001 McKinney St, Suite 1500 Houston, TX 77002713-335-2136713-520-1025 (Fax)[email protected]

TERMS EXPIRE 2016Jessica LesserLesser & Jordan PLLC15443 Knoll Trail Dr. Ste. 100Dallas, TX [email protected]

Tracey WhitleyTexas Rio Grande Legal Aid4920 N IH 35Austin, TX [email protected]

Dana KarniKarni Law Firm, P.C.4635 Southwest Freeway, Suite 715713-552-0008713-454-7247 (Fax)Houston, [email protected]

50 Journal of Consumer & Commercial Law

ANNUALSURVEY OF

TexasInsurance Law 2013


I. INTRODUCTION

This year’s survey reviews more than 150 insurance cases de-cided by Texas state and federal courts. This crop of cases presents many of the same themes as in prior years.

As usual, a significant number of cases addressed whether in-surers owed a duty to defend or indemnify their insureds. For instance, in one case the Fifth Circuit held that an insurer had a duty to defend a city whose city council members were sued. In another case, the Fifth Circuit held that an insurer had no duty to defend an insured in a suit claiming “property damage” where the facts alleged in the petition did not actually show any “property damage.”

ERISA actions continue to be a concern in federal courts. For example, the Fifth Circuit reversed a district court’s finding in favor of an ERISA claimant’s disability claim, concluding that an insurer had no duty to investigate or consider the source of evidence in its determination of benefits.

Several cases reviewed familiar issues, such as when an in-sured driver is entitled to UM coverage, how late in the game an insurer may invoke appraisal, and when a life insurer is entitled to interpleader relief. Many prop-erty insurance cases stemming from Hurricane Ike continue to percolate through the courts.

Like last year, many cases con-cerned insurers’ efforts to remove cases to federal court claiming that non-diverse parties were improperly joined, and the insureds’ efforts to remand the cases.

A few Stowers cases were decided during the survey period. For instance, the Fifth Circuit held in one case that insurers did not breach their Stowers duties by pay-ing policy limits to settle claims against one insured, thereby leav-ing no coverage remaining for another insured. In another case, a court of appeals applied Gandy to hold that a judgment that was not the result of a fully adversarial trial could not be evidence of damages in a Stowers suit against insurers that failed to settle.

In addition to retreading old ground, the courts considered some new issues of interest. For example, the United States Su-preme Court held that an insurer could remove a case to federal court under the Class Action Fairness Act, despite the class rep-resentatives’ stipulation that it would not seek damages in excess of the jurisdictional limit of $5 million, because the stipulation could not be binding on other class members prior to certifica-tion of the class. And, the Texas Supreme Court considered the issue of whether a liability policy provided coverage for a settle-ment agreement reached without the insurer’s consent. The court concluded that it did, because the insurer could not show any prejudice.

The Fifth Circuit concluded that a new exclusion in a re-newal policy was controlling and precluded coverage, rejecting the argument that all renewals should be on the same terms as the prior policy. And, in an issue of first impression, the court also decided whether late notice excused a liability insurer from its duty to defend where, even though judgment had been rendered against the insured, that judgment was later reversed. According to the court, the key factor is whether the insurer was prejudiced by the delay, and in this case it was.

By Mark L. Kincaid, Suzette E. Selden & Elizabeth von Kreisler*

Finally, in Mid-Continent Cas. Co. v. Eland Energy, Inc., the Fifth Circuit addressed whether an insured had claims for unfair settlement practices or breach of the duty of good faith and fair dealing when an insurer made a secret settlement offer to one party that undermined the insured’s defense of another lawsuit, and concluded that the insured had no actionable claims because he suffered no damages.

II. FIRST PARTY INSURANCE POLICIES & PROVI-SIONS

A. Automobile An insured sued her insurer for breach of contract and extra-contractual claims after she was hit by an uninsured driver. The trial court concluded that the diminished value of the car was not recoverable under the UM coverage. The appellate court reversed holding that UM coverage could allow an insured to recover for diminished value, in addition to the cost of repairs and loss of use. Noteboom v. Farmers Tex. Co. Mut. Ins. Co., 406 S.W.3d 381 (Tex. App.—Fort Worth 2013, no pet. h.).

An insured sued her insurer after being injured in an accident, but the jury found no damages for past physical pain. The appeals court reversed, holding that the jury’s find-ing was so against the great weight of the evidence as to be unjust, because experts for both sides conceded that part of the insured’s pain was caused by the accident. Schaffer v. Nationwide Mut. Ins. Co., No. 13-11-00503-CV, 2013 WL 2146833 (Tex. App.—Corpus Christi May

16, 2013, pet. denied) (mem. op.).An uninsured motorist provision did not cover injuries sus-

tained by an insured due to an assault committed by an uninsured passenger from another car after a rear-end collision. Home State County Mut. Ins. Co. v. Binning, 390 S.W.3d 696 (Tex. App.—Dal-las 2012, no pet.). The insured was rear-ended and then attacked and beaten by a passenger in the car at fault. The police were un-able to apprehend the attacker. The insured sued his insurer for uninsured motorist benefits, which the insurer denied. The policy stated that for coverage to apply, the damages “must arise out of the … use… of the uninsured motor vehicle.” The insured argued that the damages arose from use of the vehicle because, but for the collision, he would not have exited the car to exchange informa-tion with the driver, which put him in position to be assaulted. The court disagreed, reasoning that at the time of the collision the insured was pulling into a parking space at a convenience store and would have exited the vehicle to enter the store, and thus “the as-sault involved the vehicle only incidentally.” Further, the injuries were not caused by the vehicle itself but by the assailant striking the insured with a pistol. Because the assailant was not caught, the insured could not establish that the assault was an attempted carjacking, and no Texas law supported the theory that a carjacking constitutes a use of the uninsured vehicle.

A car dealership lost coverage under an auto policy when an excluded driver drove the insured’s car. Stadium Auto, Inc. v. Loya Ins. Co., No. 08-11-00301-CV, 2013 WL 3214618 (Tex. App.—El Paso Jun. 26, 2013, no pet.). An insured purchased a car from a car dealership, which also financed the purchase. The insurer is-

Texas Supreme Court consid-ered the issue of whether a liability policy provided cover-age for a settlement agreement reached without the insurer’s consent. The court concluded that it did, because the insurer could not show any prejudice.


sued a standard auto policy to the insured for the car. The policy included an exclusion of named driver endorsement and listed an individual as an excluded driver. That individual was operating the car without the insured’s permission when it was involved in a collision. The insured stopped making payments to the dealer-ship for the car, and she sought coverage under the policy for the car. The dealership made demand on the insurer under the loss payable clause of the policy, but the insurer refused to pay, based on the named driver exclusion. The dealership then sued the insurer for violations of section 541.060 of the Insurance Code and section 17.46(b) of the DTPA, arguing that the loss payable clause provided coverage to the loss payee (the dealership) despite the named driver exclusion.

The court found that the named driver exclusion unambigu-ously stated that no coverage applied when the excluded driver operated the vehicle and that the insured thus lost her coverage because an excluded driver was operating the car at the time of the accident. The court then examined the loss payable clause, which stated that coverage for the dealership would “not become invalid because of your fraudulent acts or omissions.” According to the court, the loss payable clause protected the dealership only from the insured’s fraudulent acts or omissions; it did not protect the dealership from any act or neglect of the insured. Here, the excluded driver took the insured’s keys without her permission, but there was no evidence of any omission on the insured’s part since she had no obligation under the policy to prohibit the ex-cluded driver from driving the car. Under these circumstances, the dealership lost coverage to the same extent as the insured when the excluded driver drove the car.

B. HomeownersA trial court granted summary judgment against an insured

because he failed to give a sworn examination as part of the in-surer’s investigation after his home burned. The appellate court reversed, holding that failure to comply with such a provision only supports abatement, not summary judgment. Shafighi v.

Tex. Farmers Ins. Co., No. 14-12-00082-CV, 2013 WL 1803609 (Tex. App.—Houston [14th Dist.] April 30, 2013, no pet.).

Another court denied an insurer’s motion for summary judg-ment related to an insured’s claim for damage to her home, where the insured showed by her expert homebuilder’s affidavit that there was evidence to support her statutory and bad faith claims. Lundgren v. Empire Indem. Ins. Co., No. G-10-351, 2013 WL 2385236 (S.D. Tex. May 30, 2013).

An insured sued his insurer to pay for water damage. The court denied the insurer’s motion for summary judgment on

breach of contract claim, holding that when experts have different theories – one which would allow coverage and one which would not – the jury will be left to decide which it believes. However, summary judgment denying breach of the duty of good faith and fair dealing was granted, because the insurer articulated a reason-able basis for denying the claim. Button v. Chubb Lloyds Ins. Co. of Tex., No. 4:11CV536, 2013 WL 394886 (E.D. Tex. Jan. 31, 2013).

Insureds lost their insurable interest in property following foreclosure. Rhine v. Priority One Ins. Co., No. 06-13-000390CV, 2013 WL 4428930 (Tex. App.—Texarkana, Aug. 20, 2013, no pet.). After the insured’s house was destroyed by fire, their in-surer denied coverage, arguing that the insureds lost any insurable interest in the property following a foreclosure that took place before the fire. The court agreed. The policy limited coverage to the insureds’ insurable interest. After the foreclosure, the insureds were merely tenants at sufferance. Also, the policy provided no coverage for property of “roomers or tenants,” and therefore pro-vided no coverage for the insureds’ personal property.

In a suit concerning claims for damage to a home following Hurricane Ike, a federal court granted a flood insurer’s motion for summary judgment and dismissed the case where the insurer had paid timely proofs of loss but not proofs submitted after the dead-line. Fiedler v. Fidelity Nat’l Property & Cas. Ins. Co., No. G-11-025, 2013 WL 5439543 (S.D. Tex. Sep. 27, 2013). No waiver of the deadline was granted by the Federal Insurance Administrator.

C. Commercial PropertyAn insured suffered a loss when a pipe froze and ruptured

during a winter storm causing damage to his commercial build-ing’s two interior units. The pipe that froze was located in the attic above the vacant unit. The other unit was occupied and heated. The insurer denied the claim, arguing that neither excep-tion to the exclusion for frozen plumbing applied. However, the appeals court held that one of the exceptions to the exclusion did apply, which was that the insured do their best to maintain heat

in the building. The court stated that the insured met this obligation by providing the heat source necessary to heat the occupied unit during the ice storm. Am. Nat’l Prop. & Cas. Co. v. Fredrich 2 Partners, Ltd., 408 S.W.3d 610 (Tex. App.—El Paso 2013, pet. filed).

A fire occurred in a commercial building that a tenant was leasing. The original lease required that the landlord be an additional insured under the poli-cy, but the current lease did not include that require-ment. The landlord sued the tenant and its insurer, as it was not listed as an additional insured on the policy. The insurer sought declaratory judgment that the landlord was not entitled to recover under the policy. The court concluded that the landlord was not a party to the policy and that the language of the policy did not demonstrate an intention by the tenant and insurer to contract for the direct benefit of the landlord. Therefore, the landlord lacked stand-ing to sue as a third-party beneficiary. Ostrovitz &

Gwinn, L.L.C. v. First Specialty Ins. Co., 393 S.W.3d 379 (Tex. App.—Dallas 2012, no pet.).

In XCoal Energy & Res. v. N.Y. Marine & Gen. Ins. Co., the insured coal company purchased coal but had it stored at the sell-er’s facility. The seller went bankrupt, and the insured coal com-pany never received delivery. The court denied the insured’s mo-tion for summary judgment asking the court to find that the coal was covered under the policy, stating that it is unclear whether the coal was actually stored or if it was still in the ground waiting to be mined. If no coal was stored, there were no “goods” insured


by the policy. No. H-11-0645, 2013 WL 1289998 (S.D. Tex. March 4, 2013).

An insured church suffered damage during a thunderstorm and disagreed with its insurer regarding the damage amount. Eventually an appraisal was conducted, but the insured filed suit against the insurer during that process. The insurer paid the ap-praisal award and moved for summary judgment on all of the insured’s claims. The court denied the summary judgment mo-tion, holding that a genuine dispute existed as to whether the parties contractually agreed to be bound by the appraisal award and whether the insured accepted the insurer’s post-appraisal pay-ments with the understanding that it was barred from pursuing claims regarding additional damages. The court also held that it could not say that the insured was precluded from asserting extra-contractual claims, because there had been no finding as to liability. Church on the Rock North v. Church Mut. Ins. Co., No. 3:10-CV-0975-L, 2013 WL 497879 (N.D. Tex. Feb. 11, 2013).

Endorsements concerning increased costs for demolition as a result of an ordinance did not provide coverage for an insured’s hurricane loss, even though the City of Galveston passed an ordi-nance requiring demolition of the insured’s property. Lexington Ins. Co. v. JAW The Point, LLC, No. 14-11-00881-CV, 2013 WL 3968445 (Tex. App.—Houston [14th Dist.] Aug. 1, 2013, pet. filed). An insured had insurance for its apartment complex that provided coverage for wind damage, but not flood damage. The policy also contained two endorsements: one that provided cover-age for demolition and increased building costs caused by ordi-nance (the ordinance endorsement), and another that provided coverage for demolition and increased cost of construction (the DICC endorsement).

After the apartment complex was damaged by Hurricane Ike, the insured sought coverage. During the claims processing, the City of Galveston passed an ordinance requiring demolition and rebuilding of structures when the damage was 50% of the value of the property, so that the structures would comply with new build-ing codes. The city required demolition of the insured’s complex. The insured thus sought coverage under the endorsements, but the insurer denied the claim.

The court of appeals held there was no coverage under the policy and neither endorsement applied. The court held that the endorsements had to be read in conjunction with a concurrent causation clause, which stated that a flood loss was not covered regardless of whether any other cause contributed to the loss. When read together, the court found that the terms provided that the insurer would pay for demolition and increased rebuilding costs that were caused by an ordinance when the loss resulted from a covered cause, but not a loss from an unsegregated combi-nation of covered and uncovered causes. Because the insured did not present any evidence at trial allocating the damages caused by wind, flood, or a combination of wind and flood, neither the ordinance endorsement nor the DICC endorsement applied.

Another insured sought coverage for damage to its business personal property as a result of Hurricane Ike. The policy had a 10% limit for business personal property at newly acquired locations, with policy limits of $100,000. An endorsement in-creased the limit to $250,000. But the endorsement stated that a limit “shown elsewhere in the policy … applies in addition to” the endorsement limit. The question on appeal was how to interpret the “in addition to” language. The insured argued it should get the initial 10% limit (not to exceed $100,000) plus another $250,000, not subject to the 10% limit. The insurer argued that the endorsement merely increased the $100,000 limit to $250,000, but maintained the 10% limitation, mean-ing coverage was capped at $25,000. The court agreed with the insurer, concluding that the policy set up a two-tiered limit – i.e.,

a percentage limit and a dollar limit – and while the endorsement modified the dollar limit, it did not modify the percentage limit. Thus, the policy unambiguously limited coverage to 10% of busi-ness personal property, up to $250,000. Shafaii Children’s Trust v. W. Am. Ins. Co., No. 14-12-00447-CV, 2013 WL 5530824 (Tex. App.—Houston [14th Dist.] Oct. 8, 2013, no pet. h.).

A commercial property policy did not provide coverage for the theft of copper from the insured’s storage facility. United Nat’l Ins. Co. v. Mundell Terminal Svcs., Inc., 915 F. Supp. 2d 809 (W.D. Tex. 2012). The policy stated that it did not cover property covered under another policy. Another policy issued to the owner of the copper also provided coverage. The insured and the owner had a bailment relationship. A bailee is authorized to insure bailed goods in its own name and, in the case of loss, re-cover their entire value, holding the excess over its own interest in the goods for the benefit of the bailor. The insured’s policy stated that its payment for loss of “personal property of others will only be for the account of the owner of the property.” Relying on this language, the court found that the insured’s policy provided cov-erage for the benefit of the owner of the property and covered the interests of the owner. Thus the insured’s policy and the owner’s policy insured the same interest – that of the owner. As such, the “other policy” exclusion applied.

D. Life insuranceThe Supreme Court held that the Federal Employees’ Group

Life Insurance Statute providing that benefits be paid to the named beneficiary preempted a conflicting state law that would require payment of the proceeds to the insured’s widow. Hillman v. Maretta, 133 S. Ct. 1943 (2013). Although the case involved a Virginia statute, it is relevant to Texas litigants. Texas has a similar statute that revokes a beneficiary designation when the insured divorces the beneficiary and does not re-designate them. See Tex. Fam. Code § 9.301(a). Presumably, the Texas statute would also be preempted.

A mother purchased a life insurance policy for her daugh-ter in the amount of $50,000, and when the daughter became disabled, the mother sued the insurer for failing to pay her a dis-ability benefit of $50,000. The insurer argued that the policy did not provide for a $50,000 payment in the event the purchaser of the policy became disabled, rather the premium payments are waived for a set time if the payor became disabled. The court up-held summary judgment in favor of the insurer. Hopes-Fontenot v. Farmers New World Life Ins. Co., No. 01-12-00286-CV, 2013 WL 4399218 (Tex. App.—Houston [1st Dist.] Aug. 15, 2013, no pet. h.).

A woman with a mortgage applied for mortgage-decreasing accidental death insurance, after receiving solicitation letters re-garding the product. She received a letter that her application was incomplete and more information was needed. She applied again for the insurance but this time applied jointly with her daughter. The first collection letter she received was for a different monthly premium than she had selected in the application, and was for an individual rather than joint. The woman made the payment, and later passed away. The insurance company argued that they were insuring her daughter but not her, and the daughter argued they were insuring her mother. The court held that it is possible that a reasonable finder of fact could conclude that the mother saw the letter stating a different monthly premium as a counter-offer and accepted it by tendering her first payment, and that it remained to be determined if there was actually a meeting of the minds. Therefore, it denied the plaintiff’s and defendant’s motions for summary judgment. Hines v. Liberty Life Ins. Co., No. EP-11-CV-545-KC, 2013 WL 310320 (W.D. Tex. Jan. 25, 2013).

An insured changed the beneficiary of her life insurance pol-


icy from her partner to her brother. After her death, the brother asked for the proceeds. However, the insurer only gave him half of the proceeds, because Texas is a community property state. The partner proved he had a common law marriage with the in-sured, so he was entitled to the other half of the proceeds. Gen-worth Life Ins. Co. v. Armendariz, No. SA-12-CV-00328-DAE, 2013 WL 8700092 (W.D. Tex. March 7, 2013).

A life insurer was entitled to interpleader relief in light of demand letters written to it from a prior-named beneficiary. Pat-terson v. American Gen. Life Ins. Co., No. 01-11-00528-CV, 2013 WL 1804494 (Tex. App.—Houston [1st Dist.] Apr. 30, 2013, no pet.). An insured named his father as beneficiary. He later designated his mother and sister as co-beneficiaries instead. After the insured died, all three filed claims. The insurer sought and received interpleader relief. The mother and sister appealed this decision, arguing there was no evidence of a “bona fide” rival claim. The court of appeals disagreed. Interpleader is within the trial court’s discretion. Although there was no transcript of the hearing, the insurer argued it had received three demand letters from the father.

A life insurer had no obligation to pay proceeds where the person who applied for the policies was not the same as the al-leged insured decedent. Mass. Mut. Ins. Co. v. Mitchell, No. H-11-3811, 2013 WL 1802861 (S.D. Tex. Mar. 4, 2013). A life insurer sued a beneficiary arguing that it had no obligation to pay the proceeds because its investigation revealed that the person who applied for the policies and presented for the medical exami-nations was not the same person as the decedent. The decedent was wheelchair bound and had an extensive medical history, and he could not have been “the healthy and ambulatory person” who appeared for medical examinations.

E. Flood insuranceFederal law did not preempt state law so as to preclude in-

sureds from bringing suit against their flood insurer. Spong v. Fidelity Nat’l Prop. & Cas. Ins. Co., No. G-10-228, 2013 WL 5563756 (S.D. Tex. Oct. 8, 2013). The insureds contracted to purchase a home that was within the John A. Chafee Coastal Bar-rier Resources System (CBRS). The insureds were unaware that the home was within the CBRS and was thus uninsurable under the National Flood Insurance Program. The insureds applied for flood insurance with an insurer that did know the home was within the CBRS. Nevertheless, it issued a policy. However, be-cause the home was uninsurable under the NFIP, the policy was void when issued. FEMA notified the insurer that the policy was invalid because of the property location. The insurer repeatedly challenged the FEMA determination, but neither FEMA nor the insurer notified the insureds of this issue or their dispute about it.

The insureds’ home was destroyed by Hurricane Ike. Only then did the insurer conclude that the property was within the CBRS, and on that basis denied the claim, cancelled the policy as void, and refunded the insureds’ premiums. The insureds sued in state court for state law tort and statutory violations; the insurer removed the case and sought summary judgment on grounds that federal law preempted all of the insureds’ claims. The district court was faced with conflicting authorities on the issue of FEMA preemption. In Campo v. Allstate Ins. Co., 562 F.3d 751 (5th Cir. 2009), the Fifth Circuit held that FEMA did not preempt state law. However, FEMA issued a memorandum critical of Campo within months of its publication, and the FEMA memorandum expressly stated that it intended for its regulations to preempt state law claims related to policy formation. While observing that the FEMA memorandum might ultimately persuade the Fifth Circuit to reverse its prior determination, the court held that Campo was binding on its decision. The court therefore

held that FEMA did not preempt state law and that the insureds’ claims could proceed. The court further noted that, given the in-surer’s negligence and the substantial harm it caused the insureds, it could not condone the result the insurer requested.

An insured filed an untimely fourth proof of loss, which the flood insurer refused to pay. The court held that absent a waiver from FEMA, a timely proof of loss is a condition precedent to the filing of suit against a carrier for additional benefits. Because the fourth proof of loss was untimely, the insurer’s motion for sum-mary judgment was granted. Jones v. Fidelity Nat’l Prop. & Cas. Ins. Co., No. G-10-289, 2013 WL 1572064 (S.D. Tex. April 12, 2013).

F. Other policiesA commercial crime insurance policy would cover a loss

caused by two company officers who obtained loans and subse-quently misappropriated funds, if they were acting within the scope of their apparent authority, even though they were not au-thorized to enter into the transactions. But the court concluded that apparent authority was a fact issue not resolved on summary judgment. BJ Services S.R.L. v. Great American Ins. Co., ___ F. App’x ___, 2013 WL 4779701 (5th Cir. Sept. 6, 2013).

A claimant sought workers’ compensation benefits after her husband died from a heart attack. The insurer argued that to be compensable the heart attack must occur during work hours. The appeals court held that to be compensable the heart attack must be identified as having occurred at a definite time and place, and caused by a specific event occurring in the course and scope of the employee’s employment, and there was proof that both of these requirements were met. New Hampshire Ins. Co. v. Allison, No. 01-12-00505-CV, 2013 WL 3947822 (Tex. App.—Houston [1st Dist.] Aug. 1, 2013, no pet. h.).

A title insurer included in house closing documents notice of a third party mineral lien on the property. Five years later, the homeowners discovered the lien and sued the insurer for viola-tions of the DTPA and Tex. Ins. Code. The court held that the injury arising from the third party lien was not inherently undis-coverable when the homeowners bought the home, and there-fore, there was no tolling of the statute of limitations. The court granted the insurer’s motion for summary judgment. Palmer v. Chicago Title Ins. Co., No. H-12-0297, 2013 WL 3049343 (S.D. Tex. June 17, 2013).

III. FIRST PARTY THEORIES OF LIABILITY

A. Breach of ContractBecause insureds did not pay their homeowner’s insurance

premium before a fire damaged their rent house, the policy ex-pired, and the insurer was not liable for breach of contract. Texas Farm Bureau Underwriters v. Rasmussen, No. 01-12-00992-CV, 2013 WL 3989145 (Tex. App.—Houston [1st Dist.] Jul 11, 2013, pet. filed). The insureds paid the first year’s premium, but did not pay for the following year. The insurer sent renewal no-tices, but the insureds never received them, and their agent never told them that the policy was cancelled. Afterwards, a fire de-stroyed rental property owned by the insureds. The insurer de-nied the claim because the insureds had failed to pay the premium due six months before the fire occurred. The court of appeals agreed that there was no policy in place at the time of the fire. The policy only provided coverage during the policy period, and coverage was conditioned on receipt of the premium. Therefore, the policy expired by its own terms six months before the fire. The policy was not automatically renewed under section 551.105 of the Texas Insurance Code, because the insureds did not pay the premium, even though they did not receive timely notice of


nonrenewal. The court also held that the insurer was not liable for improperly cancelling the policy, because the policy expired when the insureds failed to pay the premium, so the insurer did not cancel the policy.

B. Unfair Insurance Practices, Deceptive Trade Practices & Unconscionable Conduct

In Texas Farm Bureau v. Rasmussen, noted above, the insurer also was not liable for unfair settlement practices, because there were no covered claims. The insurer was not liable under section 541.061 because it did not misrepresent the terms or benefits of the policy, nor did it deny coverage that it previously represented would be covered.

An insured restaurant owner sued its agent for DTPA and Insurance Code violations for allegedly misrepresenting coverage for power outages in order to get the insured to switch from one carrier to another. The agent claimed the coverages were identi-cal. Following Hurricane Rita, the old carrier provided coverage, but following Hurricane Ike, the new carrier denied coverage. The insured argued that the old carrier would have covered the loss. The court examined the old policy, which contained an ex-clusion for power losses caused by damage to overhead transmis-sion lines. The court held that the evidence conclusively showed that this exclusion would have precluded coverage under the old policy, because the power failure was due to overhead transmission lines. Therefore, the old policy did not provide any more coverage than the new one. As such, the agent did not misrepresent the coverages as being the same. Houstoun, Woodard, Eason, Gentle, Tomforde & Anderson, Inc. v. Escalante’s Comida Fina, Inc., No. 01-11-00746-CV, 2013 WL 4680262 (Tex. App.—Houston [1st Dist.] Aug. 29, 2013, no pet.).

After denying summary judgment for the insurer on breach of contract, and granting it on bad faith, a district court also granted the insurer’s motion for summary judgment on the DTPA violation, because the insured failed to show injury independent of the injury re-sulting from wrongful denial of policy benefits. Button v. Chubb Lloyds Ins. Co. of Tex., No. 4:11CV536, 2013 WL 394886 (E.D. Tex. Jan. 31, 2013).

In this holding on the DTPA claim, the court erred by fol-lowing an erroneous holding from the San Antonio court of ap-peals. That court has held that a plaintiff suing under the DTPA must show that “she was injured by the alleged statements in any way other than the injury that would always occur when an in-sured is not promptly paid its demand.” Walker v. Fed. Kemper Life Assur. Co., 828 S.W.2d 442, 454 (Tex. App.—San Antonio 1992, writ denied). This goes directly against the supreme court’s holding that policy benefits are damages recoverable under the statutory cause of action and may even be damages as a matter of law. “We hold that an insurer’s unfair refusal to pay the insured’s claim causes damages as a matter of law in at least the amount of the policy benefits wrongfully withheld.” Vail v. Texas Farm Bureau Mut. Ins. Co., 754 S.W.2d 129, 136 (Tex. 1988).

C. Prompt Payment of Claims Hospitals could not sue a health insurer for prompt payment

penalties where they did not have a contract with the insurer but instead had contracted with another entity. Christus Health Gulf Coast v. Aetna, Inc., 397 S.W.3d 651 (Tex. 2013). The court held this conclusion was mandated by the plain language of the statute. Tex. Ins. Code §§ 843.336-.334.

Neither the prompt payment of claims statute nor the unfair settlement practices provisions of the Insurance Code applied to an insurer’s payment of a judgment against it. Doss v. Warranty Underwriters Ins. Co., No. 04-11-00776, 2012 WL 5874316 (Tex. App.—San Antonio Nov. 21, 2012, no pet.). An insured obtained a judgment against his insurer, which paid the judgment in full sixty-seven days after it was entered. Subsequently, the in-sured sued the insurer for violating the prompt payment of claims and unfair settlement practices statutes. The court held that those provisions did not apply because: (1) they applied only to the insurer-insured relationship, not the judgment creditor-judgment debtor relationship; and (2) they applied only to “claims,” and a claim reduced to final judgment is no longer a claim.

D. Breach of the Duty of Good Faith and Fair DealingAn owner of a condominium sued the condominium associa-

tion insurer for breaching the duty of good faith and fair dealing. The court held that even if the condo owner paid premiums for and was entitled to liability coverage under the policy, she was still a third-party claimant, and the insurer did not owe her the duty of good faith and fair dealing, as that would mean the insurer owed conflicting duties to its tortfeasor insured – the condominium as-sociation – and to the condo owner. Reule v. Colony Ins. Co., 407 S.W.3d 402 (Tex. App.—Houston [14th Dist.] 2013, no pet.).

An insured was injured in a car ac-cident. Her UM/UIM insurer offered to settle for a certain amount, but the in-sured denied the offer, instead suing the insurer for breach of the duty of good faith and fair dealing. A jury awarded $18,000 more than what the insurer of-fered. The court granted the insurer’s motion for summary judgment on the extra-contractual claim, holding that the jury’s award showed the insurer was being reasonable and an impasse was reached in negotiations because the plaintiff was un-

reasonable in asking for $450,000 for mental anguish and physi-cal pain. Quintana v. State Farm Auto. Ins. Co., No. H-11-007-A, 2013 WL 5495827 (S.D. Tex. Oct. 2, 2013).

An insured was injured when he hit an abandoned car. He sued his insurer for his UM/UIM benefits, and the jury found in the insured’s favor. Because the insurer identified evidence show-ing its reasonable basis for delaying payment of the insured’s de-mand because of a reasonable disagreement about the extent of the injuries, and because the insured failed to identify evidence showing that the disputes were unreasonable, the court held that the insurer did not breach its duty of good faith and fair dealing by delaying payment. However, the court disagreed with the in-surer’s argument that just by reserving a decision on a bad faith claim, the insurer is immunized from liability. Accardo v. Am. First Lloyds Ins. Co., No. H-11-0008, 2013 WL 4829252 (S.D. Tex. Sept. 10, 2013).

After he was injured by an uninsured motorist an insured brought suit against his UM/UIM insurer for breach of contract, breach of duty of good faith and fair dealing, and violations of the Tex. Ins. Code. The court granted summary judgment in favor of the insurer on all counts, holding: (1) the insurer’s contractual duty did not arise until the insured obtained a judg-ment, so the contract was not breached; (2) the jury awarded basically the same amount the insurer offered, so there was no breach of the duty of good faith and fair dealing; and (3) the insurer’s offer to settle by paying a certain amount, which was rejected by the insured, did not notify the insured that the in-surer would pay that amount and therefore did not trigger the

Following Hurricane Rita, the old carrier provided coverage, but following Hurricane Ike, the new carrier denied coverage. The insured argued that the old carrier would have covered the loss.


Tex. Ins. Code five-day payment provision. Terry v. Safeco Ins. Co. of Am., 930 F. Supp. 2d 702 (S.D. Tex. 2013); No. H-10-0340, 2013 WL 5214315 (S.D. Tex. Sept. 17, 2013).

The court in Bean v. Tex. Mut. Ins. Co., No. 09-11-00123-CV, 2012 WL 5450826 (Tex. App.—Beaumont Nov. 8, 2012, no pet.) (mem. op.), held that a worker’s compensation claimant has no cause of action against the compensation insurer under the Insurance Code for unfair settlement practices or for a breach of its duty of good faith and fair dealing. The Worker’s Com-pensation Act provides the exclusive remedy for the claimant’s compensation benefits, and a judicial remedy is not available for the statutory and common law claims.

The family of a deceased worker sued a worker’s compensa-tion insurer for fraud, negligent misrepresentation, breach of the duty of good faith, and violations of the DTPA and Insurance Code, contending that the insurer unreasonably delayed payment and made false representations that they weren’t entitled to cover-age. Hopper v. Argonaut Ins. Co., No. 03-12-00734-CV, 2013 WL 5853747 (Tex. App.—Austin Oct. 18, 2013, no pet.). The court held that Ruttiger precluded all of the plaintiffs’ claims. The court also held that section 541.061 of the Texas Insurance Code regarding misrepresentation of a policy was also precluded be-cause there was no evidence that the insurer misrepresented the terms of the policy. The alleged misrepresentations concerned statements about whether the worker’s death was due to compen-sable injury and whether the plaintiffs were beneficiaries, not the policy terms themselves. Although Ruttiger did not specifically involve common law claims of fraudulent and negligent misrep-resentation or unconscionability, the court held that these claims were also barred by Ruttiger because they concerned delays in pay-ment, claims handling, and entitlement to benefits.

E. FraudT. Boone Pickens, a supporter of Cowboy athletics at Okla-

homa State University, bought $10 million life insurance policies on twenty-seven OSU alumni. The agents marketed the poli-cies as an investment by claiming the ability to select individual insureds who were likely to die in a pattern that would beat the actuarial tables. When no one died soon enough, Pickens became dissatisfied with the investment and sued the insurers for fraud. The court held there was no evidence of misrepresentations. Un-der applicable Oklahoma law, representations about future events could not support claims of fraud, and the record established that the defendant’s disclosures and the plaintiff’s own due diligence apprised him of the inherent risk and assumptions underlying the investment program. Lincoln Nat. Life Ins. Co. v. Manage-ment Compensation Group Lee, Inc., ___ F. App’x ___, 2013 WL 3227223 (5th Cir. March 18, 2013).

An insured did not present evidence of damages to support a fraud action. Espinosa v. Allstate Ins. Co., No. 13-12-00509-CV, 2013 WL 593875 (Tex. App.—Corpus Christi Feb. 14, 2013, no pet.). The insured alleged that he bought two automobile policies he would not have otherwise purchased, because of the insurer’s fraud regarding its claims-handling policies. But he produced no evidence of economic loss related to the policies or the insurer’s claims-handling. No claims were made on one policy, and the claims made on the other were paid and resolved. The insured conceded that he received the benefit of coverage during the years he had the policies. Because the insured had no evidence of in-jury, the insurer was entitled to summary judgment.

F. ERISAThe Fifth Circuit reversed a district court’s finding in favor of

a disability claimant under ERISA in Truitt v. Unum Life Ins. Co. of America, 729 F.3d 497 (5th Cir. 2013). Truitt was an attorney

whose practice required her to travel extensively and carry files. She was found to be disabled from that job in 2003. Unum con-tinued to review her disability and took surveillance videos and had examinations that suggested her disability did not continue. Other evidence suggested that it did. In addition, an ex-compan-ion of Truitt’s provided to Unum extensive emails outlining much travel and many activities that were inconsistent with her claimed disability. However, there was evidence that the ex-companion had a questionable background, including admitting to assault-ing Truitt.

Based on this record, the district court held that Unum had substantial evidence to support its finding that Truitt was not dis-abled; nevertheless, the district court held that denying benefits was an abuse of discretion because Unum acted arbitrarily by fail-ing to further investigate and by failing to consider the question-able source of some of the evidence. The Fifth Circuit rejected both of these reasons. The appellate court held there was no duty to investigate further and there was no precedent for requiring the insurer to consider the source of the evidence. The Fifth Circuit found that the insurer reasonably considered all of the evidence and that supported its denial.

The court also held that Unum’s decision was not under-mined by the fact that it had a structural conflict of interest – be-ing the decider and the payor – or by Unum’s well-documented history of bad claims-handling. The court said that recent cases showed the Unum had improved.

The court reversed the district court’s award of benefits and remanded so that the district court could reconsider Unum’s fraud claim to recoup benefits already paid. The court of appeals held the district court erred by applying Texas fraud law, instead of federal common law under ERISA, to conclude Unum was not entitled to repayment.

A participant brought action under ERISA against the plan administrator and claims administrator challenging the calcula-tion of her long-term disability benefits. The court held that the record showed a reasonable basis to support the calculation of her annual benefits compensation and held that the lump sum pension benefits elected by the participant and rolled over into an IRA constituted benefits received by the participant for purposes of an offset to the monthly long term disability amount. Phillips v. Metro.Life Ins. Co., 405 S.W.3d 880 (Tex. App.—Dallas 2013, no pet.).

An ERISA claimant brought suit against his employer and the employee benefit plan for denial of benefits. The employer filed a motion to dismiss, arguing that the plan was the only ap-propriate defendant. The court disagreed, holding that when an employer has the ultimate decision-making authority as to wheth-er the plaintiff is entitled to benefits under the plan the employer is a proper party. The motion to dismiss was denied because the claimant asserted that the plan was self-administered by his em-ployer, and the employer sent the plan a letter stating the claimant was faking his injury, which constituted an act of control over plan administration. Vazquez v. AMO Enter., Inc., No. EP-12-CV-29-KC, 2013 WL 593457 (W.D. Tex. Feb. 14, 2013).

A doctor was insured by two disability insurance policies. Af-ter becoming disabled, he made claims under both policies. The court held the first policy was not preempted by ERISA because it was purchased by the doctor, who was the owner of his business, and it benefitted only him and no other employees. Even though other benefits were provided to other employees, that fact did not make his policy part of an ERISA plan. The court held the second policy was preempted by ERISA, because it was originally purchased by an employer. The second policy lapsed but was later continued by the doctor when he went into private practice. The court said that because the second policy was continued and


allowed for the same discount that his previous employer had negotiated, it was still part of an ERISA plan. Henderson v. Paul Revere Life Ins. Co., No. 3:11-CV-1992-D, 2013 WL 1875151 (N.D. Tex. May 6, 2013).

ERISA did not preempt claims against the broker of an em-ployer’s insurer. Kersh v. United Healthcare Ins. Co., No. SA:13-CV-00052-DAE, 2013 WL 2286078 (W.D. Tex. May 23, 2013). An employee’s widow sued a life insurer for denying her claim for supplemental life insurance. The widow’s claims for breach of contract and wrongful denial of insurance benefits were “related to” an ERISA plan and were preempted. However, ERISA did not preempt the widow’s claims for negligence and violations of the Texas Insurance Code against the broker of the employer’s insurer. The widow argued that the broker breached its duty of care by giving incorrect or misleading information about how to request supplemental life insurance. The broker argued that the claims were preempted because they were intertwined with and implicated the ERISA plan. The court disagreed, and held that the negligence claim was not subject to preemption because it did not address an area of exclusive federal concern, such as the distribution of benefits under an ERISA plan, but sought com-pensatory damages based on the broker’s failure to use reasonable diligence to procure the desired insurance. Moreover, the broker was not an ERISA entity. The widow’s claims under the Insur-ance Code also were not preempted. While some claims brought under the Code are preempted by ERISA, preemption is not au-tomatic. Here, the claims were not preempted because they were not premised on the right to recover benefits under the terms of the ERISA plan.

An ERISA plan participant was entitled to long-term dis-ability benefits in Mattson v. Aetna Life Ins. Co., 928 F. Supp. 2d 905 (S.D. Tex. 2013). A participant in a long-term disability plan brought an ERISA action against the claims administrator, challenging the termination of his benefits. The district court found that the participant should be awarded benefits under the plan because substantial evidence did not support the determina-tion that there were reasonable occupations he could perform. Although the evidence supported the conclusion that the par-ticipant could perform sedentary occupations, there was no evi-dence about whether the jobs he could perform that would per-mit him to earn “an income of more than 80% of [his] adjusted pre-disability earnings,” as the plan required. Consequently, the administrator abused its discretion in denying the participant’s application for benefits. Under the circumstances, the partici-pant was entitled to long-term disability benefits under the plan.

IV. AGENTS, AGENCY, AND VICARIOUS LIABILITY

A. Individual liability of agents, adjusters, and othersAn insurance agent had to return its commissions to an in-

surer as unearned after the insurer was forced to return the pre-miums it received from an insured due to the agent’s failure to ex-ercise his duty of honesty, good faith, and fair dealing in the sale of the policy. The term “unearned commission” in the agency agreement was not ambiguous, and the agent breached the agen-cy agreement by refusing to return the commissions received on the policy in question. American Gen. Life Ins. Co. v. Mickelson, No. H-11-3421, 2012 WL 6020339 (S.D. Tex. Dec. 3, 2012).

An agent who actually received commission checks and de-posited them into an account over which he had control was li-able to repay those commissions to the insurer when the policies were rescinded, even though he had an agreement assigning those commissions to another entity. The court held that quasi estoppel precluded the agent arguing that he was not liable, where he had asserted control over the money. American General Life Ins. Co.

v. Bryan, ___ F. App’x ___, 2013 WL 4082874 (5th Cir. Aug. 14, 2013).

V. THIRD PARTY INSURANCE POLICIES & PROVI-SIONS

A. Automobile liability insuranceA policy’s “reasonable-belief-of-entitlement exclusion” barred

coverage for the death of a passenger in the insured’s car. Seder-berg v. IDS Prop. Cas. Ins. Co., No. 05-11-01275-CV, 2013 WL 1646398 (Tex. App.—Dallas Apr. 17, 2013, no pet.). The in-sured owner of a car allowed her daughter to drive the car. The daughter borrowed the car one night to attend a party with her friend. After the party, the friend drove the car and, while driv-ing, drove off the side of the road. The daughter died as a result of her injuries from the accident. The insurer brought a declaratory judgment action against the daughter’s estate, arguing that it did not have a duty to defend or indemnify under the policy because there was no coverage for the friend and there was no uninsured motorist coverage for the daughter.

The court of appeals affirmed the trial court’s summary judg-ment in favor of the insurer. The policy excluded liability for per-sons “using a vehicle without a reasonable belief that that person is entitled to do so.” According to the court, this type of exclusion requires permission or consent to the use of the vehicle at the time and place in question and in a manner authorized by the owner, expressly or impliedly, and that such permission may be inferred from a course of conduct or relationship between the parties. Here, although the insured gave her daughter permission to use the car, the summary judgment evidence showed that the friend did not have the same permission. The insured did not know the friend, had never met him, did not give him permission to drive the car on the occasion in question, did not know he was driving the car, and had no prior relationship with him from which he could have reasonably believed he was authorized to drive the car. The insured’s affidavit statement that she “would have allowed him to drive” the car “since he was one of the coworkers” of the daughter was conclusory and subjective and insufficient to raise an issue of fact.

Failure to obtain a judgment against a driver does not make the driver an uninsured motorist. State Farm Mut. Auto. Ins. Co. v. Bowen, 406 S.W.3d 182 (Tex. App.—Eastland 2013, no pet.). An insured was involved in a collision with another driver, who had automobile insurance sufficient to cover his damages. How-ever, the insured did not file suit against the other driver within the limitations period, so that case was dismissed. The insured then sued his automobile insurer for uninsured/underinsured motorist benefits. The policy language defined an uninsured mo-tor vehicle to include a vehicle “to which a liability … policy ap-plies at the time of the accident but the … insuring company: a. denies coverage[.]” The insurer argued that the other driver was not uninsured, because her policy applied at the time of the accident. The insured argued that the other driver became an uninsured driver because her insurer ultimately denied his claim. Looking to similar cases for guidance, the court of appeals con-cluded that the other driver was not an uninsured motorist within the policy’s meaning, because she had liability coverage and there was no evidence that her insurer denied that she had coverage under her policy. The insured did not recover under the other driver’s policy because he was barred by limitations. This did not amount to a denial of coverage under the insured’s policy.

B. Comprehensive general liability insuranceA liability policy covered a homebuilder’s voluntary repairs

that were not consented to by the insurer, where the insurer could


not show prejudice. Lennar Corp. v. Markel American Ins. Co., ___S.W.3d ___, 2013 WL 4492800 (Tex. August 23, 2013). Lennar agreed to remediation of several hundred homes after dis-covering that the exterior insulation and finish system that had been applied would cause water damage if not replaced. Markel, the insurer, argued that it could not be liable for any settlement reached without its consent. The court rejected this, concluding that Markel could not escape liability without showing that the voluntary settlements prejudiced it. The court rejected Markel’s argument that it was necessarily prejudiced because there may have been fewer claims if the homebuilder had not acted vol-untarily. The court held this was a fact issue that was resolved against the insurer.

The court also held that the voluntary settlements were suf-ficient to establish the “ultimate net loss” under the policy even without the insurer’s consent – absent a showing of prejudice by the insurer.

The court also held that the cost to remove the exteriors of all the houses to locate those that were damaged and to find the damage was part of the loss “because of property damage” within the policy language. The court found that Lennar could not have located the damage, which was hidden, without removing the ex-teriors, and rejected the argument that these were preventative measures.

The court also held that the losses were covered by Markel’s policy even though they very likely started before and continued after that policy year. The court relied on its prior holding that when a loss triggers more than one policy covering different pe-riods, the insured may sue any insurer and it is up to the insurers to then allocate the loss among themselves according to their sub-rogation rights. The court rejected Markel’s invitation to change that rule and allow only pro-rata recovery by the insured.

A renewal policy that contained a new exclusion different from the prior year nevertheless precluded coverage. The insured’s 2002 policy provided coverage arising from an employee’s injuries arising from third–party contractual relationships, but the 2003 policy excluded this. The court held that the new exclusion ap-plied even though it changed the terms from the prior year. The new exclusion was listed on the face of the policy, a copy was attached as part of the policy, and the endorsement clearly pro-vided that it changed the terms of the policy. The court rejected the argument that all renewals must be on the same terms as the prior policy, absent evidence of a mutual mistake or a prior agree-ment that the terms would be the same. Materials Evaluation & Technology Corp. v. Mid-Continent Cas. Co., 519 F. App’x 228 (5th Cir. 2013).

In reaching its decision, the court discussed at length circum-stances where an insured’s failure to read the terms of the policy is excused, but held none of those instances applied.

C. Directors & officers liability insuranceAmbiguity in directors’ and officers’ liability policies had to

be resolved in favor of coverage for the insured. Gastar Explora-tion, Ltd. v. U.S. Specialty Ins. Co., No. 14-12-00118-CV, 2013 WL 3693603 (Tex. App.—Houston [14th dist.] Jul. 16, 2013, no pet.). Primary and excess D&O insurers denied coverage for a series of securities fraud lawsuits against their insured on grounds that the suits were related to other litigation that was filed prior to the policy periods. The policies were both claims-made poli-cies. They contained two provisions that limited coverage for a claim made that related to a claim prior to the policy period, one which would exclude coverage for the suits and one which would not. The first was “Condition C,” which excluded coverage of a claim initially made during the policy period that related to the facts or circumstances underlying another claim made prior to the

policy period. The second was “Endorsement 10,” which was a narrower exclusion because it only excluded claims made during the policy period but “arising out of, based upon or attributable to any pending or prior litigation as of 5/31/2000, or alleging or de-rived from the same or essentially the same facts or circumstances as alleged in such pending prior litigation.” The court found that Condition C rendered Endorsement 10 meaningless because any claims that would be excluded by Endorsement 10 would already be excluded by Condition C. The provisions thus conflicted or created an ambiguity, and the court found that Endorsement 10 controlled over Condition C, and that coverage existed for the suits.

VI. DUTIES OF LIABILITY INSURERS

A. Duty to defendAn insurer had a duty to defend a city whose council mem-

bers were sued for wrongful acts related to zoning of a shopping center. The policy contained an exclusion for liability arising out of “inverse condemnation.” One of the claims was for inverse condemnation, but the court found that the other three claims could be established even without inverse condemnation, so there was the potential for coverage and, therefore, the duty to defend. The other claims were for discrimination, arbitrary decisions that denied the plaintiff substantive due process, and conspiracy to tortiously interfere with the plaintiff’s contracts. City of College Station v. Star Ins. Co., __ F.3d ___, 2013 WL 6028315 (5th Cir. Nov. 14, 2013).

A complaint that alleged “property damage” but no facts that showed property damage did not trigger the insurer’s duty to defend. The facts alleged that drilling equipment was towed to the wrong location, resulting in wasted expense drilling a dry hole there, and damages for delay rentals at the proper location. Although the petition claimed “property damage” these facts did not show any. The court held it is the facts alleged that control, not the legal theories. PPI Technology Services, L.P. v. Liberty Mu-tual Ins. Co., 515 F. App’x 310 (5th Cir. 2013).

A complaint alleging that consumers were induced to pur-chase ineffective weight loss products by false misrepresentations did not allege “bodily injury,” because failing to achieve weight reduction means the body did not change, not that it was injured. CSA Nutraceuticals GP, L.L.C. v. Chubb Custom Ins. Co., 505 F. App’x 298 (5th Cir. Jan. 2, 2013) (per curiam).

A company sued its insurer seeking reimbursement for de-fense costs associated with asbestos litigation. The insurer argued on appeal that it was only required to indemnify the insured for defense costs that arose from the covered occurrences and that to be covered the insured must actually incur liability from a judg-ment or settlement. The court disagreed, holding that the insurer was required to reimburse the insured for defense costs that in-cluded dismissed claims. Certain Underwriters at Lloyd’s London v. Chicago Bridge & Iron Co., 406 S.W.3d 326 (Tex. App.—Beau-mont 2013, pet. denied).

Condo owners sued the residents’ association for failing to maintain the property. The association counterclaimed alleging that the owners had made significant alterations to the exteriors of their units without prior written consent. The trial court held the association’s insurer did not have a duty to defend the owners, be-cause the association’s counterclaim did not qualify as an “occur-rence” under the policy. The appellate court agreed because the counterclaim was premised on the owners’ intentional violation of the association’s bylaws. Brown v. Am. W. Home Ins. Co., No. 05-11-00561-CV, 2013 WL 873824 (Tex. App.—Dallas Jan. 3, 2013, no pet.) (mem. op.).

An employee of a store was murdered at work by men who


were able to enter the store through a vacant store next door. The shopping center landlord’s liability insurer paid a settlement to the employee’s family, and then sued the vacant tenant’s liability insurer, alleging it had a duty to defend and a duty to indemnify for the settle-ment. The court held that the vacant store’s insurer did owe a duty to defend in the underlying suit, as the landlord qualified as an additional insured under an en-dorsement. However, the court denied the landlord’s liability insurer’s motion for summary judgment as to the duty to indemnify, because the insurer did not estab-lish that the amount paid was reasonable. Fed. Ins. Co. v. Hanover Ins. Co., No. 3:11-CV-2661-D, 2013 WL 5339210 (N.D. Tex. Sept. 24, 2013).

The court’s conclusion on the duty to indemnify seems questionable. The supreme court has held that the amount of a settlement is presumed to be reason-able and is binding on the breaching insurer, when the settling party paid with its own money with no guaran-tee of repayment. Evanston Ins. Co. v. ATOFINA Petro-chemicals, Inc., 256 S.W.3d 660 (Tex. 2008).

A truck driver was injured while helping unload a concrete wall from his truck to the jobsite. He sued the business where he was delivering the wall. The business’s insurer sought summary judgment declaring that the injury was excluded under the policy, so there was no duty to defend or indemnify. The court granted the insurer’s motion, holding that the truck driver’s status as an independent contractor providing a product to the job site fell outside of coverage. Preferred Contractors Ins. Co. Risk Retention Group, L.L.C. v. Oyoque Masonry, Inc., No. 4:12-CV-1406, 2013 WL 3899332 (S.D. Tex. July 26, 2013).

A contractor’s negligent plumbing work resulted in a water leak that caused substantial damage to several condos. His insurer sought a declaration that it had no duty to defend or indemnify the contractor on the numerous claims filed. The court agreed, holding that the policy did not insure the contractor for plumb-ing work. Omega U.S. Ins., Inc. v. Jerry Heitzman Constr., No. G-12-317, 2013 WL 3208584 (S.D. Tex. June 24, 2013).

A contractor was sued for negligent work performed in con-structing a college building, specifically for problems with water penetration. The contractor sued several of the subcontractors’ insurers seeking a declaration that it was entitled to defense and indemnity. The contractor settled with all the defendants, except for Ace, the insurer for the security system subcontractor. The court held that Ace did not have a duty to defend or indemnify, because the property damage did not arise out of Ace’s work. Ad-ditionally, even if the damage did arise out of Ace’s work, the policy expressly stated that Ace had no defense obligations. Swin-erton Builders v. Zurich Am. Ins. Co., No. 4:10-CV-1791, 2013 WL 4483435 (S.D. Tex. Feb. 28, 2013).

An insured nursing home was sued by a deceased resident’s family for negligence related to his death. The insured sought a declaration that the insurer owed it a defense and indemnity. The court held that the policy’s prior knowledge exclusion did not apply to bar coverage for the underlying lawsuit. The exclu-sion applied if the insured had knowledge of the abuse, and the court held that the only person whose knowledge was imputable to the nursing home under the policy was the person who signed the policy application, the nursing home’s president, who did not have knowledge of the alleged negligence. Therefore, the insurer had a duty to defend the nursing home. The insurer’s motion for summary judgment on the duty to indemnify claim was denied, as genuine issues of material fact existed. Arboretum Nursing & Rehabilitation Ctr. of Winnie, Inc. v. Homeland Ins. Co. of N.Y., No. V-10-69, 2012 WL 6161115 (S.D. Tex. Dec. 11, 2012).

After a contractor was sued for work done on apartments that were later converted to condos, the contractor’s insurer sought de-claratory relief that another insurer was also obligated to defend the contractor. However, there was an exclusion in that policy that did not allow coverage for work done to apartments that were later converted to condos. Therefore, the second insurer’s motion for summary judgment was granted. Am. Empire Surplus Lines Ins. Co. v. Nat’l Fire Ins. Co. of Hartford, No. H-12-2313, 2013 WL 1194866 (S.D. Tex. March 21, 2013).

An insured sued its liability insurer over a delay in provid-ing independent counsel of the insured’s own selection. Marquis Acquisitions, Inc. v. Steadfast Ins. Co., No. 05-11-01663-CV, 2013 WL 4083614 (Tex. App.—Dallas Aug. 14, 2013, no pet.). The underlying suit concerned a fire at an apartment complex the in-sured co-owned with others. The insured repeatedly sought to have the insurer hire the attorney of the insured’s choosing and sent several letters claiming that a conflict of interest existed, but did not identify what the conflict was. In response, the insurer sought clarification of the conflict. After several months, the in-sured provided information showing a potential future conflict between the owners and managers of the apartment complex. The insurer then hired independent counsel for the insured, but did not hire the particular lawyer the insured desired. In response, the insured filed suit. The court held that the insurer did not breach its contract by failing to employ separate counsel in a timely manner, explaining, “We see nothing in Segerstrom [247 F.3d 218 (5th Cir. 2001)] or any other Texas law that would require an insurance company to immediately hire separate coun-sel for insured defendants based on an insured’s unspecified and unsubstantiated allegations of a conflict of interest.” Further, the insured suffered no damages as a result of any delay. The damages paid in the underlying suit were covered by the policies. The only damages sought by the insured were the fees it paid to the lawyer it wanted for his efforts to force the insurer to hire him. The court found these fees were not recoverable because they were attorney’s fees standing alone without any additional actual damages. The court also concluded that the insurer’s delay in providing the in-sured with separate counsel was not actionable as an unfair insur-ance practice. The delay also did not breach the insurer’s duty of good faith and fair dealing since the delay was the result of a bona fide dispute over the existence of a conflict of interest that the insurer “continuously attempted to resolve.”

A commercial general liability insurer owed a duty to defend its insured in a suit brought by a homeowner’s association alleging


that the insured, the subdivision developer, had built inadequate roads. Mid-Continent Cas. Co. v. Krolczyk, 408 S.W.3d 896 (Tex. App.—Houston [1st Dist.] 2013, pet. filed). The insurer denied any duty to defend, based on two exclusions: the “your work” exclusion and the “earth movement” exclusion. The court held that neither exclusion abrogated the insurer’s duty to defend. The “your work” exclusion did not preclude coverage because, under the allegations, while one “particular part” of the insured’s work was allegedly defective, other parts of the road construction were not defective, and a liberal reading of the petition required a find-ing of coverage.

The “earth movement” exclusion also did not apply. The homeowner’s association alleged that the road was damaged be-cause the base washed out due to exposure to the elements. There was no allegation that this was due to movement of “land, earth, or mud,” and the court would not interpret the exclusion to in-clude movement of concrete or manmade materials. Therefore, the insurer owed a duty to defend to its insured.

Neither the insured nor the insurer was entitled to summary judgment on the question of whether the insurer owed a duty to defend, in Olesky v. Farmers Ins. Exchange, No. 01-110—545-CV, 2013 WL 3894890 (Tex. App.—Hous-ton [1st Dist.] Jul. 30, 2013, pet. filed). An insured sought a defense from his homeowner’s insurer. The underlying suit arose from a snowmobile accident that occurred in New York. The insured resided in Texas. The policy excluded coverage for bodily injury arising out of use of a motor vehicle, but an excep-tion to that exclusion applied where the vehicle was not subject to motor vehicle registration and was not owned by the insured, among other requirements. The insured and insurer filed cross-mo-tions for summary judgment, in which they primarily argued about whether the snowmobile had to be registered. The insured argued that Texas law applied and that Texas law did not require registration. The insurer argued that New York law applied and that New York law required registration. The court held that neither state’s law required registration. Although the insurer was thus not entitled to summary judgment on this ground, the court would not ren-der judgment in favor of the insured, either. The court held that it could not render judgment for the insured because he did not argue in his motion for summary judgment in the trial court that New York law also did not require registration.

This is an odd result, as the dissent pointed out. The major-ity essentially refused “to construe and apply either statute or to determine whether the exception applies and thus whether the policy covers the [underlying] claims and whether [the insurer] is required by the terms of the [insured’s] policy to provide a defense to the … claims. And it refuses to enter judgment in favor of [the insured], even though it declares the law to be such that [he] must necessarily be the beneficiary of its reading.”

A first party insurer had no duty to defend or indemnify its insured and was entitled to judgment as a matter of law on that point. United Nat’l Ins. Co. v. Mundell Terminal Svcs., Inc., 915 F. Supp. 2d 809 (W.D. Tex. 2012).

B. Duty to indemnifyA homeowner sued her homebuilder’s insurer for indemnity

for an arbitration award in favor of the homeowner related to construction defects. Mid-Continent Cas. Co. v. Castagna, No. 05-12-00383-CV, 2013 WL 4432353 (Tex. App.—Dallas Aug.

20, 2013, no pet. h.). The court held that the insurer had a duty to indemnify under the policies in place at the time the damage occurred, the 2001-2003 policies, but there was no duty to in-demnify under the 2006-2007 policies, because the homebuilder was not a named insured for those years. The court also held the contractual liability exclusion did not bar coverage for the homeowner’s property damage, because the homebuilder did not assume any contractual obligation in addition to the “general law” of implied warranty of good workmanship.

An insured roofing company was sued by a property owner for negligence and breach of contract. The roofing company’s insurer agreed to defend it in the underlying case, but then sought a declaration that it had no duty to indemnify the roofing com-pany. The court denied the request, holding that there had been no briefing as to whether the insurer had a duty to defend, and no finding that the same reasons that negated the duty to defend negated any possibility the insurer would ever have a duty to in-demnify. Therefore, the court held the issue was not ripe for deci-sion. First Mercury Ins. Co. v. Horizon Roofing, Inc., No. 3:12-CV-03393-O, 2013 WL 1481988 (N.D. Tex. April 9, 2013).

A contractor made a demand for defense and indemnity to its subcontractor’s insurer. The court held that the contractor was limited to indemnification coverage for certain claims brought by third-parties for per-sonal injury or property damage, but that coverage did not extend to litiga-tion for enforcement of the indemni-fication right. One Beacon Ins. Co. v. Crowley Marine Servs., Inc., No. H-08-2059, 2012 WL 6201202 (S.D. Tex. Dec. 12, 2012).

A court held that an insurer did not have a duty to defend the insured because the claims in the underlying action fell outside of the “insured ser-vices” as defined in the policy. How-

ever, the court denied the insurer’s motion for summary judg-ment on the duty to indemnify, because liability had not been established, holding that, “unlike the duty to defend, which turns on the pleadings, the duty to indemnify is triggered by the actual facts establishing liability in the underlying suit, and whether any damages caused by the insured and later proven at trial are cov-ered by the terms of the policy.” Axis Surplus Ins. Co. v. Halo Asset Mgm’t, L.L.C., No. 3:12-CV-2419-G, 2013 WL 5416268 (N.D. Tex. Sept. 27, 2013).

A federal court denied an insurer’s motion for summary judgment on the issue of whether it had a duty to indemnify its insureds for a judgment. Encompass Ins. Co. v. Hill, No. 6:09-CV-460, 2013 WL 530280 (E.D. Tex. Feb. 12, 2013). Plaintiffs in the underlying suit obtained a judgment against the insureds for violations of the DTPA, breach of contract, and breach of war-ranty claims arising out of the sale of a home that had a number of defects. The insureds sought indemnity coverage from their homeowners policy, which denied the claim on grounds that the damages did not result from an “occurrence,” were economic rather than property damage, were intentional acts precluded by an exclusion, and resulted from a business activity. The district court determined that a fact question existed as to whether the damages were the result of an “occurrence” because DTPA, con-tract, and warranty violations could be accidental rather than in-tentional. Similarly, because the underlying judgment made no finding regarding whether the insured’s actions were intentional, the intentional act exclusion could not be found applicable as a matter of law. The court also found that a fact question existed on

The court also held the con-tractual liability exclusion did not bar coverage for the homeowner’s property damage, because the home-builder did not assume any contractual obligation in ad-dition to the “general law” of implied warranty of good workmanship.


whether the damages were economic rather than property dam-age, because the underlying causes of action are not determina-tive of this distinction. Finally, the fact that one of the insureds was a builder and contractor did not mean that the business ac-tivities exclusion automatically applied to preclude coverage.

C. Settlements, assignments, and covenants not to execute An underlying judgment that was not the result of a fully adversarial trial was no evidence of damages in the Stowers suit against the insurers that failed to settle. Yorkshire Ins. Co. v. Seger, 407 S.W.3d 435 (Tex. App.–Amarillo, 2013, pet. filed). The Segers filed suit over the wrongful death of their son. Two of the insurers for the defendant, Diatom, refused to defend and refused to settle. The Segers then went to trial and obtained a judgment for $15 million each.

After the insurers refused to pay, Diatom assigned its claims to the Segers who then filed suit against the insurers. They then obtained findings that the insurers were negligent and received judgments for $35 million each.

The court of appeals had to consider the validity of the as-signment and whether the underlying judgment was evidence of Diatom’s damages, under the holdings in State Farm Fire & Ca-sualty Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996), and Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008).

First, the Seger court held that Gandy applied so that the un-derlying judgment was not any evidence of damages unless it was rendered after a fully adversarial trial. The court reasoned that the assignment implicated Gandy’s concerns because it extended the litigation and distorted the litigation because Diatom had no financial exposure and no incentive to contest its liability or at-tempt to limit the assessment of damages.

The court then found that the award of damages in the un-derlying suit was not the result of a fully adversarial trial. A rep-resentative of Diatom appeared as a witness, but Diatom was not represented by counsel, did not announce ready, made no open-ing or closing statements, offered no evidence, and did not cross-examine any of the Segers’ witnesses. As a result, the underlying judgment was not a fair determination of Diatom’s damages and was no evidence of those damages. Because the Segers did not offer any other evidence of Diatom’s damages, the court reversed and rendered judgment that the Segers take nothing.

The Seger court’s holding appears to be unavoidable in light of Gandy’s requirement of a fully adversarial trial. However, the court does shed a little light on what parties may do in the future, by noting that the Segers could have presented other evidence. It seems that when the underlying trial does not fairly determine the insured defendant’s damages, the plaintiff should be able to establish those damages in a fully adversarial trial against the in-surer. This would satisfy Gandy’s requirement and seems neces-sary to avoid the insurer reaping a windfall by failing to provide the necessary defense in the underlying case that would have al-lowed a fully adversarial trial.

Another court held that an injured party could not sue the tortfeasor’s insurer directly until the tortfeasor’s liability has been finally determined by agreement or judgment. The court stated that a settlement agreement that contained an unconditional release of a company from all liability and a covenant by the plaintiff not to execute on the forthcoming state court judgment, relieved the company’s insurer of its obligation to reimburse its insured. The court concluded that the unconditional release was in fact an unconditional release, despite language in the settle-ment agreement providing that nothing in the release would prevent the party from pursuing their claim against the insurer. Empire Indem. Ins. Co. v. N/S Corp., No. 4:11-CV-166, 2013 WL

1103061 (E.D. Tex. March 15, 2013).These two cases illustrate the problems facing insured defen-

dants and plaintiffs when the insurer defaults and the defendant seeks protection by trying to give its insurance claim to the plain-tiff. A fuller discussion of “the Gandy problem” and possible solu-tions can be found in Mark L. Kincaid, “Settlements, Assignments, and Agreements Between Plaintiffs and Insured Defendants: What Can and Can’t Be Done,” Ins. Law Section, State Bar of Texas, 6th Ann. Adv. Insurance Law Course (2009). One other approach is for the plaintiff to acquire the insured’s rights by a turnover order, as in the next case.

A court of appeals held that an insured’s unasserted claim against its liability insurer was subject to turnover relief to the insured’s judgment creditor. D&M Marine, Inc. v. Turner, No. 02-12-00399-CV, 2013 WL 4106365 (Tex. App.—Fort Worth Aug. 15, 2013). Although an insured’s cause of action against its insurer is not subject to a turnover order when the insured is satisfied with its insurer’s representation, there was no evidence in this case that the insured did not want to be indemnified through its coverage. The judgment creditors had the same interest as the insured would to pursue any bad faith or failure to indemnify claims against the insurer to maximum recovery. Therefore, the trial court did not abuse its discretion in ordering the insured to transfer its claims against the insurer that could have the pos-sibility of satisfying the judgment creditors’ judgment against the insured.

In another case, the injured party won a judgment against a construction company for injuries sustained in a car accident caused by the company’s employee. Before the construction com-pany’s insurer paid the damages, the employee who caused the accident assigned to the injured party any claims he had against the insurer. The insurer paid the damage award after an appeal upheld the judgment. The injured party sued the insurer for fail-ing to pay when the judgment was final, and asked for attorney’s fees for pursuing the claim. However, the court of appeals held that once the insurer complied with the terms of the insurance policy and fulfilled its obligation to pay, the injured party’s abil-ity to enforce the agreement and compel the insurer to pay was exhausted. Bisland III v. Financial Indemnity Co., No. 03-11-00228-CV, 2013 WL 3186192 (Tex. App.—Austin June 21, 2013, pet. denied) (mem. op.).

VII. THIRD PARTY THEORIES OF LIABILITY

A. Stowers duty & negligent failure to settleLiability insurers did not breach their Stowers duties to settle

by paying policy limits to settle claims against one insured, leav-ing no coverage remaining for another insured. Pride Transp. v. Cont’l Cas. Co., 511 F. App’x 347 (5th Cir. 2013). An injured plaintiff sued the truck driver and trucking company for inju-ries suffered in a collision. The plaintiff offered to settle with the driver for the combined policy limits of $5 million, which the insurers accepted. That left no money to cover the claims against the trucking company, Pride. The court rejected Pride’s argument that the insurer violated its duties by settling only on behalf of one insured.

The court relied on the holding in Farmers Ins. Co. v. So-riano, 881 S.W.2d 312 (Tex. 1994), that an insurer has the right to settle a demand within policy limits and will not be liable to the other insured, unless the settlement was unreasonable. The court found, based on the severity of the injuries and aggravated liability facts showing that the driver falsified her driving logs so she could drive longer than allowed, the settlement on the driver’s behalf was reasonable as a matter of law. The Fifth Circuit distin-guished the lower court decision in Am. W. Home Ins. Co. v. Tris-


tar Convenience Stores, Inc., No. H–10–3191, 2011 WL 2412678 (S.D.Tex. June 2, 2011), where that court held the reasonableness of a settlement presented a fact issue. In the Tristar case, the ini-tial offer would have released both defendants but was rejected, and the second offer, which was accepted, only included one de-fendant. The Tristar court held that the reasonableness of reject-ing the first demand was a disputed question of fact. In contrast, in this case there never was an offer to settle with or release Pride.

The court also did not decide whether the Stowers demand was defective because it left the driver exposed for indemnity claims by Pride. The court noted that a proper Stowers demand must offer to completely release the defendant, but did not decide whether that changed the outcome. The settlement was still rea-sonable, and there was no coverage under the policy for any liabil-ity the driver might have to the company. The court noted that the insurer does not have to consider non-covered claims when deciding whether to accept the settlement.

B. NegligenceA contractor was supposed to be named as an additional in-

sured on the subcontractor’s insurance policy, but was not. The contractor cross-claimed against the subcontractor’s brokerage agency for negligence. However, the court held that the contrac-tor was not a client of the brokerage agency, so a duty of profes-sional care was not owed to the contractor regarding the procure-ment of insurance as an additional insured. Brannan Paving GP, LLC v. Pavement Markings, Inc., Nos. 13-11-00005-CV, 13-11-00013-CV (Tex. App.—Corpus Christi July 25, 2013, pet. filed).

C. Unfair insurance practicesIn Mid-Continent Cas. Co. v. Eland Energy, Inc., 709 F. 3d

515 (5th Cir. 2013), the Fifth Circuit addressed whether an in-sured could recover for unfair settlement practices and misrepre-sentations based on the insurer’s conduct in secretly negotiating with and offering a settlement to a claimant, which the insured contended prejudiced its defense of a pending class action. The jury found that the insurer failed to give a prompt and reasonable explanation for making the settlement offer and made four mis-representations of material facts. Specifically, the jury found the insurer: (1) misstated the law to its insured when it denied that a conflict of interest was created by its reservation of rights letter; (2) misrepresented that it did not pay more than $200 an hour for attorneys and hence would not pay more for the insured’s separate counsel; (3) misstated that there was no coverage for costs to the insured’s facility unless the insured obtained a written order; and (4) misstated the law when it maintained that it had an unavoid-able duty to investigate the other claim. The district court and Fifth Circuit both held that none of these practices were shown to have caused any damages. The Fifth Circuit found no evidence of any causal nexus between any of the misrepresentations or the de-layed notice and the amount the insured ultimately paid to settle the class action case.

The Fifth Circuit also addressed whether the insured had a common law cause of action and concluded it did not. This is discussed post.

The court in Pride Transportation v. Continental Cas. Co., 511 F. App’x 347 (5th Cir. 2013), noted above, also held that the in-surer’s settlement on behalf of one insured that left no money for the other insured did not violate the unfair insurance practices statute. The court noted that the Stowers standards have been overlaid on the statute by Rocor Int’l, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 77 S.W.3d 253, 255 (Tex. 2002). Thus, un-der both standards, the insured must establish that the terms were such that an ordinarily prudent insurer would accept them. The court found that Pride offered no evidence that the insurers failed

to effectuate a prompt, fair, and equitable settlement. The court noted that, unlike many jurisdictions, “in Texas the common law imposes no duty on an insurer to accept a settlement demand in excess of policy limits or to make or solicit settlement proposals.”

D. Deceptive trade practices & unconscionable conductA subcontractor who won a lawsuit filed against it was not

entitled to attorney’s fees under the DTPA because those dam-ages are expressly excluded as a sole ground for recovery under the DTPA. Brannan Paving GP, LLC v. Pavement Markings, Inc., Nos. 13-11-00005-CV, 13-11-00013-CV (Tex. App.—Corpus Christi July 25, 2013, pet. filed).

E. Breach of the duty of good faith and fair dealingThe Fifth Circuit addressed whether an insurer breached its

duty of good faith and fair dealing by making a secret settlement offer to one party which undermined the insured’s defense of an-other lawsuit in Mid-Continent Cas. Co. v. Eland Energy, Inc., 709 F. 3d 515 (5th Cir. 2013). The insured argued that an insurer may be liable in the circumstances, based on language in earlier Texas Supreme Court cases. In State Farm Mut. Auto Ins. Co. v. Traver, 980 S.W.2d 625, 629 (Tex. 1988), the court suggested that an insurer might be liable if it “consciously undermined the insured’s defense.” In Republic Ins. Co. v. Stoker, 903 S.W.2d 338, 341 (Tex. 1995), the court stated that “as a general rule there can be no claim for bad faith when an insurer has promptly de-nied a claim that is in fact not covered” but the court did “not exclude, however, the possibility that in denying the claim, the insurer may commit some act, so extreme, that will cause injury independent of the policy claim.” The insured argued that these two statements justified allowing a cause of action in the present case, based on the insurer’s conduct. The Fifth Circuit rejected this argument, concluding that the statements were dicta that had not been followed in subsequent cases.

The insured also relied on the Fifth Circuit’s decision in North-winds Abatement, Inc. v. Employers Ins. of Wausau, 258 F.3d 3445 (5th Cir. 2001), where the court said that a reasonable jury could have found the defendant’s “successful efforts to persuade the [insurer] to sue [its insured] baselessly” were sufficiently extreme and caused the insureds to pay significant defense costs. The Fifth Circuit distin-guished the prior decision, because the judgment in that case arose from breach of statutory provisions, and the court stated there had been no breach of the duty of good faith and fair dealing.

The Fifth Circuit concluded that the insured failed to show that the insurer’s mishandling of the claim under the policies and its motive to minimize its costs associated with the policies caused any injury independent from the policy claim.

In PPI Technology Services, L.P. v. Liberty Mut. Ins. Co., 515 F. App’x 310 (5th Cir. 2013), the Fifth Circuit rejected a claim for breach of duty of good faith and fair dealing by a liability insurer after determining that there was no coverage. While this conclu-sion was correct, based on the absence of coverage, the Texas Su-preme Court has held that the duty of good faith and fair dealing does not apply to liability insurers. See Maryland Ins. Co. v. Head Indus. Coatings and Services, Inc., 938 S.W.2d 27 (Tex. 1996).

The court in Chartis Specialty Ins. Co. v. Tesoro Corp. held that the insured business failed to allege that its insurer commit-ted any act so extreme as to cause the insured some injury separate and apart from the denial of coverage under the policy. Therefore, the insured failed to state a bad faith claim upon which relief could be granted. 930 F. Supp. 2d 653 (W.D. Tex. 2013).

F. FraudThere was no fraud in attaching an exclusion to a renewal

policy that changed the coverage, where that exclusion was listed


on the face of the policy, a copy was included with the policy, and the endorsement stated that it changed the terms of the policy. Materials Eval. & Technology Corp. v. Mid-Continent Cas. Co., 519 F. App’x 228 (5th Cir. 2013).

VIII. DAMAGES & OTHER ELEMENTS OF RECOVERY

A. Lost profitsAn insured could only recover market value damages, and

not lost profits, for the total loss of his insured property. Tex-as Farm Bureau Mut. Ins. Co. v. Wilde, 385 S.W.3d 733 (Tex. App.—El Paso 2012, no pet.). An insured sued its insurer for breach of contract and other causes of action after the insurer denied his claim for the fire loss of his cotton-stripper. The trial court awarded damages for the market value of the cotton strip-per, lost profits, attorney’s fees, and treble damages. The court of appeals reversed, holding that the trial court’s award of market value damages was error because no evidence of the cotton-strip-per’s market value immediately after the fire was presented at trial.

The court of appeals further held that, because the insured sought to recover the market value of the destroyed cotton-strip-per, he was not also entitled to recover for the loss of its use or for lost profits. A plaintiff whose property is totally destroyed is limited to seeking market-value damages; whereas, a plaintiff whose property is not totally destroyed may elect to recover either market value, or cost-of-repair and loss-of-use damages, but not both. Because the insured was limited to seeking only market value damages for his cotton-stripper, the award of lost profits was an impermissible double recovery.

B. Attorney’s feesThe trial court awarded attorneys’ fees to an insurer in con-

nection with a subrogation action related to property damage that occurred during the interstate shipment of equipment. The appellate court reversed, holding the Carmack Amendment pre-empted claims for attorneys’ fees in state law claims involving in-terstate transportation of goods by a common carrier. Daybreak Express, Inc. v. Lexington Ins. Co., No. 14-09-01032-CV, 2013 WL 5629813 (Tex. App.—Houston [14th Dist.] Oct. 15, 2013, no pet. h.).

An insured sued his insurer after it did not pay for damage to his property after a hurricane. The jury awarded the insured $7,833.01 in damages for breach of contract and $3,133.20 for attorney’s fees. The insured appealed regarding the amount of at-torney’s fees, arguing that the reasonable fees were over $100,000. The insured had a contingent fee contract with his attorney, but argued that he could pursue an award of attorney’s fees based on contingent fee or “per diem” basis. Although the amount of the fees requested was reflected in time sheets and affidavits, the court held that the fees were excessive and unreasonable, and the ap-pellate court saw no abuse of discretion by the trial court. Ware v. United Fire Lloyds, No. 09-12-00061-CV, 2013 WL 1932812 (Tex. App.—Beaumont May 9, 2013, no pet.).

IX. DEFENSES & COUNTERCLAIMS

A. Misrepresentation or fraud by insuredThe Fifth Circuit held that a new contestability period be-

gins when a life insurance policy is reinstated and that two years must pass while the insured is alive. Cardenas v. United of Omaha Life Ins. Co., ___ F.3d ___, 2013 WL 5433487 (5th Cir. Sept. 30, 2013). Cardenas sued to recover benefits under a life insur-ance policy on her daughter. The policy had lapsed but was then reinstated, but the daughter made a number of misrepresenta-tions regarding her health in the reinstatement application. The

court construed § 1101.006 of the Tex. Ins. Code and Tex. Ad-min. Code § 3.104(a) together to hold that a new contestability period started when the policy was reinstated, that the insured had to be alive for two years, and the reinstatement could only be challenged based on new misrepresentations made during the reinstatement period.

An insurer had to prove that its insured intended to deceive it in order to avoid the policy. Medicus Ins. Co. v. Todd, 400 S.W.3d 670 (Tex. App.—Dallas 2013, no pet.). A medical malpractice insurer brought a declaratory judgment action against its insured, alleging that the policy was void due to the insured’s material mis-representations in the application. After a jury decided that the insurer failed to prove that the insured made a material false rep-resentation with intent to deceive, the insurer appealed, arguing that it did not need to prove intent to deceive. The insurer argued that section 705.004 of the Texas Insurance Code did not require proof of intent. The court of appeals rejected this argument, holding that the insurer had to prove intent to deceive. Citing Mayes v. Massachusetts Mutual Life Insurance Co., 608 S.W.2d 612 (Tex. 1980), and other cases, the court held that, although section 705.004 “has never expressly required the insurer to prove the in-sured intended to deceive the insurer with a misrepresentation in the policy application, the courts of Texas have consistently held that an insurer may not rescind a policy due to a misrepresenta-tion in an insurance application unless the insurer proves the in-sured intended to deceive the insurer with the misrepresentation. We cannot vary from this long history of case law imposing this duty upon insurers.”

The Medicus court rejected the theory that statutory changes had overturned a century of case law to no longer require that the insurer show intent to deceive. This argument has been in vogue with certain insurance practitioners. See Andrew Whitaker, Rescis-sion of Life Insurance Policies in Texas – Time to Correct Some Old Errors, 59 Baylor L. Rev. 139 (2007).

B. Late NoticeIn a case of first impression, the Fifth Circuit decided wheth-

er late notice excused a liability insurer from its duty to defend where, even though judgment had been rendered against the in-sured, that judgment was later reversed. Jamestown Ins. Co., RRG v. Reeder, 508 F. App’x 306 (5th Cir. 2013). Reeder sued several business partners who counterclaimed against him. The partners were successful in getting judgment against Reeder, but he ulti-mately got that judgment reversed by the Texas Supreme Court, which rendered a take nothing judgment in his favor.

The Fifth Circuit held that Reeder’s delay in tendering notice to the insurer until fifty-six months after the first counterclaim was filed and thirty-one months after final judgment was ren-dered against him breached the notice provision as a matter of law. However, the court recognized that the insurer was excused from performance of its duty to defend only if it was actually prejudiced by Reeder’s delayed notice.

The court recognized that failing to notify an insurer until af-ter a default judgment has become final and non-appealable prej-udices the insurer as a matter of law, but the Texas Supreme Court has not directly addressed whether an insured’s failure to notify an insurer of an appealable final judgment is also prejudicial.

In this case, the court concluded that Reeder’s delay did prej-udice the insurer, even though the judgment was reversed. If the insurer had received notice while the suit was pending in the trial court, it could have undertaken Reeder’s defense and minimized its insured’s liability. Although Reeder ultimately minimized his liability by obtaining a reversal in the Texas Supreme Court, the insurer lost the opportunity “to form an intelligent estimate of its rights and liabilities before it is obliged to pay.” The court


reasoned that Reeder’s choice to litigate for more than four years before notifying the insurer prevented the insurer from making such an estimate, from helping Reeder prevail in the trial court, and from exercising its option to settle with the other parties – perhaps for less than the cost of Reeder’s attorney’s fees.

By noting higher fees as one type of prejudice, the court’s reasoning indirectly suggests the answer to whether an insured can recover pre-notice attorney’s fees. The prevailing rule is that the insurer is not liable for attorney’s fees incurred before it re-ceives notice. However, that principle was set before the more recent cases holding that late notice excuses the insurer from its duty to defend only if the insurer is prejudiced. It thus seems reasonable that an insurer should be freed of its obligation to pay pre-notice fees only to the extent it is prejudiced. For example, the insurer could show that it would have paid lower hourly rates and might be relieved of paying to that extent. This supports the idea that to show prejudice from late notice, an insurer must show that earlier notice would have made a difference.

X. PRACTICE & PROCEDURE

A. PartiesA worker was injured on the job when a Caterpillar excava-

tor machine struck him in his lower back. The worker’s insurer filed suit against Caterpillar as subrogee of the worker, and then Caterpillar filed a motion to designate the worker and his em-ployer as responsible third parties. Caterpillar argued that the damage was caused by the worker’s inadvertent manipulation of the machine or his employer’s failure to properly train him. The court granted Caterpillar’s motion. Liberty Ins. Corp. v. Caterpil-lar, Inc., No. SA-13-CV-83-XR, 2013 WL 3166616 (W.D. Tex. June 20, 2013).

An insurer sought a declaration that it owed no duties to its insured because it learned that the insured was not operating a nail salon as represented in the insurance application. The insured filed a motion to dismiss for failure to join indispensable parties, the insurance agent and agency. The court held that whether the insured made material misrepresentations on its application was a completely separate cause of action from a suit for negligence on the part of the broker. However, the court held that the insurer failed to show that a claim actually existed and ordered that the insurer either amend its complaint to state a controversy or show cause why the case should not be dismissed. Penn-Am. Ins. Co. v. Pampered Nails & Skin Care, L.L.C., No. H-12-1564, 2012 WL 5387200 (S.D. Tex. Nov. 1, 2012).

A contractor who was sued in an underlying suit filed a de-claratory judgment against all of the subcontractors’ insurers seek-ing a ruling that they owed a duty to defend in the underlying suit. One of the insurers sought leave to file a third-party com-plaint, to bring claims for contribution and subrogation against three insurance companies to allocate the costs of defending the contractor. The court held this impleader was proper as the third-party defendant’s potential liability is dependent on the outcome of the main claim. Shiloh Enter., Inc. v. Republic-Vanguard Ins. Co., No. SA-12-CV-00670-DAE, 2013 WL 5201232 (W.D. Tex. Sept. 13, 2013).

A court held that a motion to intervene filed by the estate of a man who was murdered at work was appropriately filed. The estate filed the motion to intervene in the declaratory judgment action filed by the employer’s insurer who was asking for a rul-ing that it had no duty to defend the employer in the underlying lawsuit brought by the estate. First Mercury Ins. Co. v. Rosenboom Welding & Fabrication, L.L.C., No. 3:12-CV-4374-L (BF), 2013 WL 4804494 (N.D. Tex. Sept. 9, 2013).

B. StandingA federal court granted an insurer’s motion to dismiss be-

cause the insurer had no contractual relationship with the plain-tiff. Rather, the insurer insured the tortfeasor who had allegedly damaged the plaintiff’s home. The plaintiff did not plead any facts allowing him to bring a claim directly against the tortfeasor’s insurer. Pena v. American Residentia Services, LLC, No. H-12-2588, 2013 WL 474776 (S.D. Tex. Feb. 7, 2013).

A mortgagee lacked standing to sue an insurer. Pak-Petro, Inc. v. Am. W. Home Ins. Co., No. 1:12-CV-247, 2013 WL 5356898 (E.D. Tex. Sep. 9, 2013). The policy language did not show any intent of the parties to grant the mortgagee status as either an insured or a third party beneficiary. The declarations page did not name the mortgagee as an insured or an additional insured on the policy. After the claim was made, the mortgagee was named retroactively as a mortgagee in an endorsement. However, under the policy language, the rights of a mortgage holder only encom-passed those of another loss payee. As such, there was no contract between the insurer and the mortgagee, and the mortgagee had no standing to sue on the policy. The “equitable lien doctrine” did not give the mortgagee the same rights as an additional in-sured under the policy.

C. Choice of lawTexas law applied to claims against an insurer for its miscon-

duct in handling liability claims against its insured and did not al-low recovery for breach of the duty of good faith and fair dealing. Mid-Continent Cas. Co. v. Eland Energy, Inc., 709 F. 3d 515 (5th Cir. 2013). The court declined to apply Louisiana law, which would have allowed such a claim. The court reasoned that Texas law applied because the insured was a Texas business, the policies were governed by Texas law, the relationship between the parties was centered in Texas, the agent prepared the notice of claim in Texas, and payments under the policies were sent to the insured in Texas. The fact that the claims arose because of hurricanes Katrina and Rita partly in Louisiana, did not tip the balance in favor of applying Louisiana law.

D. Abatement or stay of parallel suitA party injured in a car accident sued the driver and won.

The driver assigned his rights against his insurer to the plaintiff. The insurer filed suit in federal court seeking a declaration that the injured party’s demand was not a proper Stowers demand. Five days later, before the injured party was served with the fed-eral suit, she sued the insurer in state court. The insurer filed a plea in abatement, which the trial court denied, and then filed a petition for writ of mandamus, which the appellate court denied. The appeals court held the proper motion should have requested a stay and not an abatement, but even the requirements for a stay were not met. The court held that the injured party’s suit sought broader relief that went beyond the insurer’s pleadings in federal court and looked to state law as grounds for her claims. Therefore, the court stated that it could not say the trial court abused its discretion in declining to stay its proceedings in favor of the federal suit. In re Old Am. County Mut. Fire Ins. Co., No. 03-12-00588-CV, 2012 WL 6699052 (Tex. App.—Austin Dec. 20, 2012, no pet.) (mem. op.).

A food manufacturer hired a company to package the food. The manufacturer required the packaging company to carry a general liability policy that named the manufacturer as an ad-ditional insured. The manufacturer later sued the packaging company for damages resulting from negligence in packaging the food. The insurer filed suit in Travis County seeking a declaratory judgment that no coverage existed under the policy for the manu-facturer’s claims. A few days later, the manufacturer sued the in-


surer in Smith County, and the insurer filed a plea in abatement requesting that the Smith suit be abated. The trial court denied the plea, and the appeals court affirmed holding that the insurer had not provided proper evidence in the record to establish the need for abatement, as neither petition was offered or admitted into evidence. In re Truck Ins. Exch., No. 12-12-00183-CV, 2013 WL 1760793 (Tex. App.—Tyler April 24, 2013, no pet.).

E. Declaratory judgments, Abstention, and Anti-Injunction Act

Insurers sued their insured seeking declaration of the rights and obligations of the parties in underlying litigation. The court granted the insured’s motion to dismiss holding that the Anti-Injunction Act prohibited the court from proceeding to consider the declaratory judgment, as none of the exceptions listed in the Act applied to this case, and granting declaratory relief would have the same effect on the pending state court suit as an injunc-tion. Ins. Co. of the State of Penn. v. Sabre, Inc., 918 F. Supp. 2d 596 (N.D. Tex. 2013).

A federal court abstained from exercising jurisdiction and dismissed a suit for declaratory judgment brought by an insurer against its insured. AIX Specialty Ins. Co. v. Western States Asset Mgmt., No. 3:12-CV-4342-M, 2013 WL 4603775 (N.D. Tex. Aug. 29, 2013). The insurer’s federal suit was filed first and involved many of the same parties and issues as were involved in the insured’s subsequent state court suit. However, the rel-evant factors favored abstention. The insured sued some addi-tional non-diverse defendants that were not named as parties in the federal suit, but all of the issues and parties in the federal suit were included in the state suit. Also, the insurer filed its suit in anticipation of the insured’s state court action. This “reac-tive” litigation constituted improper forum shopping. The state court action could fully resolve the issues in the federal suit, and maintaining concurrent proceedings risked duplicative and in-consistent rulings. The forums were equally convenient, since they were in the same city, and no substantive motions had been presented in the federal suit. In light of these factors, abstention and dismissal were proper.

The Northern District of Texas conducted a similar absten-tion analysis in Continental Ins. Co. v. Gifford-Hill & Co., Inc., and reached the same conclusion, dismissing an insurer’s suit for declaratory judgment so that another insurer’s suit, filed in Cali-fornia state court, could proceed. No. 3:12-CV-0925-D, 2013 WL 1875930 (N.D. Tex. May 6, 2013).

F. Removal and remandInsurance companies continue to remove cases to federal

court on the basis of diversity jurisdiction, alleging that nondi-verse parties, such as agents or adjusters, have been fraudulently joined. More often than not, courts have granted the insured’s motion to remand. See, e.g.:

• Yeldell v. Geovera Specialty Ins. Co., No. 3:12-CV-1908-M, 2012 WL 5451822 (N.D. Tex. Nov. 8, 2012);

• Gutierrez v. Companion Prop. & Cas. Ins. Co., No. M-12-326, 2012 WL 5943617 (S.D. Tex. Nov. 27, 2012);

• Espinoza v. Companion Commercial Inc. Co., No. 7:12-CV-494, 2013 WL 245032 (S.D. Tex. Jan 22, 2013);

• Chandler Mgmt. Corp. v. First Specialty Ins. Corp., No. 3:12-CV-2541-L, 2013 WL 395577 (N.D. Tex. Jan. 31, 2013);

• Boze Mem’l, Inc. v. Travelers Lloyds Ins. Co., No. 3:12-CV-4363-M, 2013 WL 775362 (N.D. Tex. Feb. 28, 2013);

• Ross v. Nationwide Prop. & Cas. Ins. Co., No. H-12-3495, 2013 WL 1290225 (S.D. Tex. March 26, 2013);

• Fantroy v. Dallas Area Rapid Transit, No. 3:13-CV-0345-K, 2013 WL 2284879 (N.D. Tex. May 23, 2013);

• Los Cucos Mexican Café, XXII, Inc. v. Allied Prop. & Cas. Ins. Co., No. H-13-1314, 2013 WL 3166339 (S.D. Tex. June 19, 2013);

• W. States Asset Mgmt., Inc. v. AIX Specialty Ins. Co., No. 3:13-CV-00234-M, 2013 WL 3349514 (N.D. Tex. July 3, 2013);

• Pena v. Geovera Specialty Ins. Co., No. 7:13-CV-255, 2013 WL 3779385 (S.D. Tex. July 16, 2013);

• Riverview Mgmt. v. Int’l Ins. Co. of Hannover, Ltd., No. H-13-1099, 2013 WL 4401431 (S.D. Tex. Aug. 13, 2013);

• Ridgeview Presbyterian Church v. Phila. Indem. Ins. Co., No. 3:13-CV-1818-B, 2013 WL 5477166 (N.D. Tex. Sept. 30, 2013);

• Apex Golf Properties, Inc. v. Allstate Ins. Co., No. 2:13-CV-250, 2013 WL 5724523 (S.D. Tex. Oct. 21, 2013);

• De Leon v. Travelers Lloyds of Tex. Ins. Co., No. 7:13-CV-468, 2013 WL 5744456 (S.D. Tex. Oct. 23, 2013).

This is appropriate. Since the removal statute is construed in favor of remand, the court must evaluate the factual allegations in the light most favorable to the plaintiff and engage in a Rule 12(b)(6)-type analysis, and the burden of proof to demonstrate jurisdic-tion and fraudulent joinder is on the defendant.

But in some cases, the courts have denied the insured’s mo-tion to remand and have dismissed claims against the nondiverse parties. See, e.g.:

• Wolf Horn Inv., L.L.C. v. Allied Prop. & Cas. Ins. Co., No. 2:12-CV-00244, 2012 WL 6738758 (S.D. Tex. Dec. 30, 2012);

• Castlebrook at Ridgeview Homeowners Ass’n v. Starr Sur-plus Lines Ins. Co., No. 4:12CV652, 2013 WL 949860 (E.D. Tex. Jan. 30, 2013);

• Landing Council of Co-Owners v. Fed. Ins. Co., No. H-12-2760, 2013 WL 530315 (S.D. Tex. Feb. 11, 2013);

• Waldrop v. Guarantee Trust Life Ins. Co., No. 3:12-CV-02579, 2013 WL 664705 (N.D. Tex. Feb. 25, 2013);

• Holmes v. Acceptance Cas. Ins. Co., No. 1:12-CV-584, 2013 WL 1819693 (E.D. Tex. Apr. 29, 2013);

• Weber Paradise Apartments, LP v. Lexington Ins. Co., No. 3:12-CV-5222-L, 2013 WL 2255256 (N.D. Tex. May 23, 2013);

• Bedford Internet Office Space, L.L.C. v. Travelers Cas. Ins. Co., No. 3:12-CV-4322-N-BN, 2013 WL 3283719 (N.D. Tex. June 28, 2013);

• Lakewood Baptist Church v. Church Mut. Ins. Co., No. 3:12-CV-5111-M, 2013 WL 3487588 (N.D. Tex. July 11, 2013);

• Guerrero Inv., L.L.C. v. Am. States Ins. Co., No. 7:12-CV-430, 2013 WL 5230718 (S.D. Tex. Sept. 17, 2013);

• Jana Food Servs., Inc. v. Depositors Ins. Co., No. 4:13-CV-497-A, 2013 WL 5574433 (N.D. Tex. Oct. 9, 2013).

In these cases, the courts generally denied remand because the factual allegations against the non-diverse parties were not spe-cific and individualized. For example, in Guerrero Investments, L.L.C., the only reference to the non-diverse defendant was so vague that the plaintiff failed to identify a reasonable basis for recovery against it.

In Jana Food Servs., Inc., the court held that the plaintiff did


not show any basis that the adjuster had any duty to plaintiff to deliver the insurance check, which he failed to do. The adjuster was entrusted by the insurer to deliver the check to plaintiff, so any failure to do that was not a duty he violated to plaintiff but rather a duty he violated to the insurer. Moreover, while the plaintiff might be able to bring a breach of contract claim against the insurer for miss-delivery of the check, there was no basis un-der Texas law for assertion of a negligence claim against the in-surer, much less the adjuster, for miss-delivery of a check.

And in Landing Council of Co-Owners, the insured failed to specify how the non-diverse defendant, an agent, could be liable for breaching the policy or wrongfully denying coverage, leading the court to conclude that references to “Defendants” was “merely improperly lumping [the agent] in with the insurer in its list of legal causes of action without providing any factual basis for [the agent’s] individual responsibility.” Further, the misrepresentation claims in that case were not stated with enough particularity to satisfy Rule 9(b) because the petition did not indicate what spe-cific statements were fraudulent.

A stipulation in a state court petition that damages were less than $75,000 precluded federal diversity jurisdiction. Williams v. Companion Property & Cas. Ins. Co., No. A. H-13-733, 2013 WL 2338227 (S.D. Tex. May 27, 2013).

A court granted a defendant insurer’s motion to remand where no federal question was presented in the insured’s com-plaint. Although the insured alleged that his “causes of action involve questions of federal law,” the causes of action were all Texas law claims. Walter v. Old Am. County Mut. Fire Ins. Co., No. H-12-2581, 2012 WL 5818227 (S.D. Tex. Nov. 13, 2012).

G. DismissalA court amended its prior dismissal with prejudice of a Stow-

ers claim. The claim was dismissed because it was not ripe, but the court dismissed the claim with prejudice. On motion to re-consider, the court concluded that the claim should have been dismissed without prejudice so that it could be repled when it became ripe. OneBeacon Ins. Co. v. T. Wade Welch & Assocs., No. H-11-3061, 2012 WL 5456111 (S.D. Tex. Nov. 7, 2012).

H. VenueA Texas insured sued its insurer after it denied a claim. The

insurer sought to transfer the case to New York, where it and the agent were residents. The court looked at several factors, but honed in on the fact that the agent did not meet Texas’s licensing requirements at the time the policy was issued. The court stated that Texas has a strong policy in favor of maintaining jurisdic-tion over actions involving unauthorized insurers doing business in Texas. Therefore, the motion to transfer was denied. Jetpay Merchant Servs., L.L.C. v. Chartis Specialty Ins. Co., No. 3:13-CV-0401-M, 2013 WL 3387517 (N.D. Tex. July 8, 2013).

I. Default judgmentA federal court denied the plaintiff’s motion for default judg-

ment in a suit concerning who was the rightful beneficiary of life insurance proceeds because the plaintiff was not prejudiced by the defendant’s delay in answering the suit. Metropolitan Life Ins. Co. v. Johnson, No. 4:12cv630, 2012 WL 3363117 (E.D. Tex. Jul. 3, 2013).

The appeals court found a final default judgment against an insurer for $20 million was void, as the insurer had never been served with process in the suit. The underlying lawsuit was against foster parents whose homeowner policy was with the in-surer, and the foster parents had been sued for negligence related to the death of a child in their care. In re Farmers Ins. Exch., No. 02-13-00144-CV, 2013 WL 2249186 (Tex. App.—Fort Worth

May 23, 2013, no pet.).

J. Pleadings An insured filed suit against its insurer and adjuster for

breach of contract and violations of the Texas Insurance Code. The defendants filed a motion to dismiss the complaint for failure to state a claim. The court allowed the insured to amend the complaint twice. Although the insured added additional factual allegations, the majority of those pertained to errors by the ap-praisal board, an entity not part of this action. The court held the insured just alleged legal conclusions and recited the elements of the cause of action as to violations of the Texas Insurance Code, and that the insured had several opportunities to correct this de-fect and did not. The defendants’ motion to dismiss was granted as to the statutory violations. Springcrest Partners, L.L.C. v. Admi-ral Ins. Co., No. 4:12-CV-457-A, 2013 WL 1197780 (N.D. Tex. March 25, 2013).

A federal court denied a life insurer’s motion for a more defi-nite statement, finding that the complaint was not so vague as to preclude a responsive pleading. Waldrop v. Guarantee Trust Life Ins. Co., No. 3:12-cv-02579-M, 2013 WL 2389875 (N.D. Tex. May 31, 2013).

K. DiscoveryA discovery dispute occurred in a case where an insured sued

his insurer for failing to adhere to multiple aspects of his home-owner’s insurance policy. The insurer argued that the insured had no insurable interest in the case because he acquired the property through identity theft, a crime for which he was imprisoned. The insured wanted to conduct discovery on what the insurer knew or should have suspected regarding his misrepresentations when they decided to issue the policy. However, the court denied this request, as the court stated that failure to use due diligence to sus-pect or discover someone’s fraud will not act to bar the defense of fraud to the contract. Benbow v. Liberty Mut. Fire Ins. Co., No. A-12-CV-1164-LY, 2013 WL 5771172 (W.D. Tex. Oct. 24, 2013).

L. ExpertsAfter settling with Direct TV regarding a fire that destroyed

their home, the insureds sued their insurance company for lack of cooperation for not allowing the insureds access to the insurer’s cause and origin fire expert in the case against Direct TV. The insureds argued they could have recovered more money from Di-rect TV if they had access to that expert. The appellate court upheld the trial court’s summary judgment ruling in favor of the insurer. Hennen v. Allstate Ins. Co., No. 13-12-00645-CV, 2013 WL 4773245 (Tex. App.—Corpus Christi Sept. 5, 2013, no pet. h.) (mem. op.).

In Cox Operating, L.L.C. v. St. Paul Surplus Lines Ins. Co., the suit revolved around whether certain activities undertaken by the insured were covered under the insurance policy. The in-sured hired an expert to testify. The court held that the expert’s opinions on what was required by the law, what types of recovery would have been required or prevented by the law, and how the law would categorize the damage caused by the storm, were not relevant because it would invade the purview of the court. His opinions on the behavior of hydrocarbons in water and the prac-ticalities of oil spill clean-up were allowed as they were relevant regarding the effect on the insured’s ability to repair flowlines and vessels in place. No. H-07-2724, 2013 WL 1752405 (S.D. Tex. April 23, 2013).

M. Class actionsThe Supreme Court held that a class representative’s stipu-

lation that the class would not seek damages exceeding $5 mil-


lion was not effective to prevent application of the Class Action Fairness Act (CAFA), which gave the federal court jurisdiction over the case. Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345 (2013). The plaintiff filed the proposed class action in state court, arguing that the insurer improperly failed to include gen-eral contractor fees on homeowners’ insurance losses. The in-surer removed the case to federal court under CAFA, 28 U.S.C. § 1332(d)(2). The statute provides federal court shall have juris-diction when the matter in controversy exceeds the value of $5 million dollars and shall determine that value by aggregating the claims of the individual class members.

Knowles sought to avoid federal court jurisdiction by stipu-lating that he and the class would not seek more than $5 mil-lion. The court held this stipulation was not effective because it could not be binding. The plaintiff could not bind the other class members prior to certification of the class. In addition, the court foresaw circumstances where a later court might disre-gard the stipulation as unfair, or some other class representative might seek to represent the class without such a limitation. The court held that the district court had jurisdiction based on the aggregate amount of the claims and should have ignored the pur-ported stipulation.

In another case, plaintiffs sought to certify a class, and the in-surer removed the case to federal court. The court held the insurer proved by a preponderance of the evidence that there was more than $5 million in controver-sy, so the burden shifted to the plaintiffs to present evidence that the class claim fell below the jurisdictional amount, which they failed to do. Therefore, plaintiff’s motion to remand was denied. Magnum Minerals, L.L.C. v. Homeland Ins. Co. of N.Y., No. 2:13-CV-103-J, 2013 WL 4766707 (N.D. Tex. Sept. 5, 2013).

An insured sued TWIA for damage to his home sustained by Hurricane Ike. The court dismissed the suit because there was a slab claim class action which the insured was a member of, as he had not opted out. The insured claimed he had not received proper notice of the class action. The court required that notice be sent by first class mail to potential class members, and there was no evidence that the notice sent to this insured was not re-ceived. The insured argued that due process required sending no-tice by certified mail. The court disagreed, and held that proper notice was given by first class mail, and the insured did not timely opt-out of the class. Barkley III v. Tex. Windstorm Ins. Ass’n, No. 14-11-00941-CV, 2013 WL 5434171 (Tex. App.—Houston [14th Dist.] Sept. 26, 2013, no pet. h.) (mem. op.).

N. ArbitrationResidents in a nursing facility filed suit against the nursing

facility for negligence. The nursing facility filed a motion to com-pel arbitration based on written admission agreements signed by the residents that contained an arbitration clause. The residents argued that the clause did not apply because it did not comply with Tex. Civ. Prac. & Rem. Code section 74.451. The court held that section 74.451 is a law enacted for the purpose of regu-lating the business of insurance within the meaning of the federal McCarran-Ferguson Act, and is thus exempted from preemption by the Federal Arbitration Act. Therefore, the trial court was cor-rect in denying the nursing facility’s motion to compel arbitra-tion. Fredericksburg Care Co. v. Perez, No. 04-13-00111-CV, 406 S.W.3d 313 (Tex. App.—San Antonio June 26, 2013, pet. filed).

A reinsurer sued an insurer for declaratory relief. The insurer

moved to compel arbitration as allowed for in the Reinsurance Agreement. In prior litigation between the insurer and reinsurer, the insurer convinced the court that the scope of the proceedings did not involve the Reinsurance Agreement. The appellate court determined that these suits have always been about the Rein-surance Agreement, and thus the insurer was judicially estopped from compelling arbitration, as it argued against arbitration in the prior suit. New Hampshire Ins. Co. v. Magellan Reinsur-ance Co., Ltd., No. 02-12-00196-CV, 2013 WL 1830349 (Tex. App.—Fort Worth May 2, 2013, no pet.).

O. AppraisalAn error by the umpire in excluding undisputed damage to

a building’s HVAC did not justify setting aside the entire award. TMM Investments, Ltd. v. Ohio Cas. Ins. Co., 730 F.3d 466 (5th Cir. 2013). The court held that the umpire had no authority to exclude from the award an amount for HVAC damage that the two appraisers agreed on. The umpire only has the authority to act when there is a disagreement. Thus, the umpire erred in excluding HVAC damage. But the court joined the majority rule in holding that acceptable portions of the award should continue to bind the parties, despite an error in other parts of the award.

The court of appeals also held that the trial court erred by setting aside the award, because the ap-praisers had not exceeded their authori-ty by determining causation. There was a dispute over what caused the damage and there was a dispute over damages to different parts of the roof, which the appraisers resolved. Although the court recognized that liability is for the court to determine and causation is related to liability, it is also related to damages, which the appraisers are to decide. Un-der the authority of State Farm Lloyds v. Johnson, 290 S.W.3d 886 (Tex. 2009),

the court concluded that the appraisers acted within the scope of their authority.

Because the appraisal award was binding, that meant the in-sured was not the prevailing party and the insurer did not breach its contract, so the insured was not entitled to recover attorney’s fees.

An insured sued TWIA for recovery for property damage under an insurance policy. TWIA moved to compel appraisal under the policy, but the trial court denied its motion. The ap-pellate court directed the trial court to grant TWIA’s motion to compel appraisal, finding that TWIA had not waived its right to appraisal, as it had demanded appraisal seven days after receiving notice that the insured intended to sue. The court stated the ap-praisal provision could not be disregarded simply because cover-age or causation issues about whether the storm caused the roof damage may overlap with issues about the amount of the loss and repair costs. In re Tex. Windstorm Ins. Ass’n, No. 14-13-00632-CV, 2013 WL 4806996 (Tex. App.—Houston [14th Dist.] Sept. 10, 2013, no pet. h.) (mem. op.).

After a motel roof was damaged in a storm, the owners sued the insurer. The insurer filed a motion to compel arbitration as allowed for in the policy. The appellate court said the trial court should have granted the motion to compel arbitration, and that it could not be disregarded simply because coverage or causation issues about which storm caused the damage may overlap with issues about the amount of the loss and repair costs. In re Pub. Serv. Mut. Ins. Co., No. 03-13-00003-CV, 2013 WL 692441 (Tex. App.—Austin Feb. 21, 2013, pet. denied) (mem. op.).

An insured suffered property damage, and hired Treider to

Because the appraisal award was binding, that meant the insured was not the prevailing party and the insurer did not breach its contract, so the insured was not entitled to recover attorney’s fees.


provide services in inspecting the claim. Treider recommended expert witnesses and gave advice to the insured on when to ask for an appraisal and how to proceed with the appraisal process. Tre-ider specifically told the insureds not to refer to him as an expert as that may cause the insurer to object to him as an appraiser. An appraisal occurred, and the insured appointed Treider as its im-partial appraiser. The appraisal award was over $300,000, and the insurer filed a motion to set aside the award because Treider was not an impartial appraiser. The court denied the insurer’s motion to set aside the award, and found that the insurer failed to raise a fact issue that the award was a result of fraud, mistake, or acci-dent. However, the court held the insurer did raise a fact issue on whether or not there was compliance with the policy with respect to the impartiality of an appraiser, and was allowed to conduct a trial on this one limited issue. Amtrust Ins. Co. of Kan., Inc. v. Starship League City, L.P., No. 4:11-CV-672, 2013 WL 1222329 (E.D. Tex. March 25, 2013).

In Culpepper III v. U.S. Fire Ins. Co., an insured’s property was damaged in a hailstorm. An appraisal was completed, but the insured disagreed with the umpire’s award and argued that the umpire exceeded his authority by deciding causation and cover-age. The court held that appraisal is appropriate when the cau-sation question involves separating loss due to a covered event from a property’s pre-existing condition. Therefore, the court dismissed the case. No. 3:12-CV-01381-L, 2013 WL 1294086 (N.D. Tex. March 31, 2013). An insurer did not waive appraisal by waiting to invoke it two months before the trial setting. Nor did the insurer’s delay prejudice the insured. The insured did not show what expenses or fees would not have been incurred if appraisal had been invoked sooner. In re GuideOne Mut. Ins. Co., No. 09-12-00581-CV, 2013 WL 257371 (Tex. App.—Beaumont Jan. 24, 2013, orig. proceeding).

P. Motions for summary judgmentAn insured’s hearsay statements about what an alleged expert

said concerning her property damage could not defeat an insurer’s no-evidence motion for summary judgment. McGhan v. Farmers Ins. Exchange, No. 13-11-00433-CV, 2012 WL 5944947 (Tex. App.—Corpus Christi Nov. 21, 2012, no pet.). An insured sued her insurer for denying her claim for storm damage to her roof without adequately inspecting her roof. The insurer obtained a no-evidence summary judgment, which was affirmed on appeal. The only evidence the insured presented was her own deposition, in which she testified that she did not know if there was storm

damage to the roof because she did not get on the roof. She testified that a metal roof expert told her there was storm-related damages, but that expert was not designated, and the insured did not present his testimony by either affidavit or deposition. The insured’s testimony about what the expert might have said was hearsay and it was not determined that he was an expert or that his testimony would be reliable.

Stipulated facts and 650 pages of evidence could not defeat summary judgment in Bich Ngoc Nguyen v. Allstate Ins. Co., 404 S.W.3d 770 (Tex. App.—Dallas 2013, pet. denied). A life in-surance beneficiary sued the insurer and agent, asserting various theories, arising out of the insurer’s rescission of the policy due to the insured’s alleged misrepresentations in the application about her health. The beneficiary sued the agent based on the insurer’s rescission. The agent moved for summary judgment, to which the beneficiary responded with nearly 650 pages of evidence. The agent objected that the beneficiary did not specifically identify where an issue was addressed in the evidence. Sustaining the ob-jection, the trial court granted the agent’s motion. The court of appeals affirmed, holding that merely citing generally to volumi-nous summary judgment evidence is not sufficient to raise an is-sue of fact to defeat summary judgment. The court further held that the stipulations of the parties did not raise a genuine issue of material fact on any of the elements of the causes of action presented on summary judgment, even if they were relevant as to other causes of action.

Q. Severance & separate trialsAfter being hit by an uninsured motorist, the injured par-

ty sued her insurer for breach of contract and extra-contractual claims for violations of the Texas Ins. Code and breach of the duty of good faith and fair dealing. The insurer filed a motion to sever and abate the extra-contractual claims from the contract claim for the uninsured motorist benefits, which the trial court denied. The appellate court reversed, holding that Texas case law establishes that severance and abatement of extra-contractual claims is required in many instances in which an insured asserts a claim to uninsured or underinsured motorist benefits, and that in this instance the facts of the case required a severance to prevent manifest injustice. In re Old Am. County Mut. Fire Ins. Co., No. 13-12-00700-CV, 2013 WL 398866 (Tex. App.—Corpus Christi Jan. 30, 2103, no pet.).

The same result was reached in another UIM case. The in-sured was injured in a car accident with an underinsured motorist. The insured’s UIM insurer offered to settle the claim for $850 and

later $1,000. The insured sued his insurer for breach of contract, breach of the duty of good faith and fair dealing, violations of the Insurance Code, violations of the DTPA, and common law fraud. The insurer moved to sever the insured’s breach of contract claim from his extra-contractual claims, which the trial court denied. The appeals court granted mandamus relief and ordered the trial court to sever the claims, holding that when the insurer has made an offer to settle the contract claim, a severance of the tort and contract claims is required to avoid undue prejudice to the insurer in its defense of the coverage dispute. The appeals court held that the insured’s argument that the insurer made just a small offer in order to sever the claim was a fact question, on which man-damus will not issue. In re Allstate Prop. & Cas. Ins. Co., No. 14-12-00867-CV, 2012 WL 5987580 (Tex. App.—Houston [14th Dist.] Nov. 29, 2012, no pet.).R. Court’s charge

In Brannan Paving GP, LLC v. Pavement Mark-


ings, Inc., Nos. 13-11-00005-CV, 13-11-00013-CV (Tex. App.—Corpus Christi July 25, 2013, pet. filed), a contractor sued a subcontractor for breach of contract by failing to name the contractor as an additional insured on its liability policy. A death occurred because of the work done, and the contractor found out at that time that the subcontractor had not named it as an additional insured. The court allowed a waiver instruction following the first jury question about whether there was a breach of contract. The jury answered no, in response to the question whether the subcontractor failed to comply with its agreement with the contractor.

The appeals court held that the waiver instruction was im-proper because, although the facts may indicate a lack of en-forcement by the contractor in ensuring that the subcontrac-tor complied with the contract, that inaction did not show an intent to yield the right. One important fact the court looked to was that the contractor did not discover the failure to obtain additional insured coverage until after the accident occurred, and the accident occurred just two months after hiring the sub-contractor.

The court also held that the trial court’s inclusion of a valid theory of liability and an improper af-firmative defense instruction in the same question with only one answer blank created the type of confusion that the Casteel presumed-harm analy-sis was designed to address.

Questions in a jury charge con-cerning agency were properly submit-ted to the jury in Fire Ins. Exchange v. Kennedy, No. 02-11-00437-CV, 2013 WL 441088 (Tex. App.—Fort Worth Jan. 31, 2013, pet. denied). An in-sured homeowner sued her insurer in connection with its handling of her property claim, complaining about a vendor the insurer hired to perform re-pairs. The case proceeded to trial, and the jury returned a verdict in favor of the insured on her breach of contract, DTPA, and breach of the duty of good faith and fair dealing claims. On appeal, the insurer argued that the jury questions asking if the vendor was the agent of the insurer and if the vendor’s negligence caused the damage were improperly submitted.

The court held that these questions were properly submitted because the pleadings and some evidence supported their submis-sion. Even if their submission were improper, it was harmless because the jury found that the vendor’s negligence did not cause the occurrence and did not reach the question regarding damages based on the vendor’s negligence.

The court also rejected the insurer’s argument that the in-sured failed to segregate her covered damages from her non-cov-ered damages under the doctrine of concurrent causation. While noting that insureds are only entitled to recover the portion of damage caused solely by a covered peril, the court concluded that the insured’s damages were adequately segregated because the court’s charge expressly instructed the jury to award damages “caused solely by a covered peril.”

XI. OTHER ISSUES

A. Excess & primary coverageA federal court determined that excess policies were not trig-

gered because the applicable retained limits were not exhausted. Indemnity Ins. Co. of N. Am. v. W&T Offshore, Inc., No. 4:12-CV-

02469, 2013 WL 4483473 (S.D. Tex. Aug. 12, 2013).An insured business lost over 150 offshore platforms dur-

ing Hurricane Ike. The court held that the underlying insurance could only be exhausted by claims that were also covered by the excess liability policies. Therefore, because the insured’s physical damage and operators extra expense claims were not insured by the Excess Liability policies, they could not be used to reduce or exhaust the underlying insurance. The court granted the excess insurer’s summary judgment motion, holding that since the un-derlying insurance was not exhausted, coverage under the excess policies was not triggered, and there was no coverage for the costs for removal of debris. Indem. Ins. Co. of N. Am. v. W&T Offshore, Inc., No. 4:12-CV-2469, 2013 WL 4039594 (S.D. Tex. July 31, 2013).

A company had four barges that transported cutter stock that contained contaminants that were not detected. Before the contaminants were discovered, the barges made multiple deliver-ies. There were several insurance policies that would be triggered, depending on the definition of an “occurrence.” The court held that after the barges became contaminated, each loading and de-livery resulting in contamination – i.e. each shipment and de-

livery of the contaminated bunkers to each customer – created liability for the company. Therefore, each instance of loading, transporting, and delivering a customer’s bunkers was a separate oc-currence. Each separate occurrence triggered a separate policy limit un-der the primary policies, and thus the excess insurer’s motion for summary judgment was granted. Axis Ins. Co. v. Buffalo Marine Servs., Inc., No. H-12-0178, 2013 WL 5231619 (S.D. Tex. Sept. 12, 2013).

B. SubrogationAfter a nursing center discovered

water damage and mold in its newly-constructed facility, it sued the contractor and recovered $3 mil-lion in damages from the contractor’s insurer. The contractor then assigned its contract rights against the subcontractors to the insured. The subcontractors argued that it was not the contrac-tor’s right to assign, but the contractor’s insurer’s right. The ap-pellate court held that the subrogation provision in the policy did not preclude the contractor from assigning its claims against subcontractors, and reversed the trial court’s summary judgment ruling in favor of the subcontractors. Concierge Nursing Centers, Inc. v. Antex Roofing, Inc., 2013 WL 1912342 (Tex. App.—Hous-ton [1st Dist.] May 9, 2013, no pet.).

An insured’s insurer had standing, as subrogee of insured, to bring an equitable subrogation suit against the insured’s subcon-tractor. The insurer was stepping into the insured’s shoes in pur-suit of the insured’s claims against the subcontractor and others for its involuntary payment of a debt on the insured’s behalf for which the subcontractor could be liable because of its negligence. Further, the subcontractor failed to argue in its motion for sum-mary judgment that the insurer’s payment was voluntary, so that could not be grounds for reversal. Stico Mut. Ins. Co., RRG v. Advanced Polymer Coatings, Inc., No. 08-12-00011-CV, 2013 WL 4854311 (Tex. App.—El Paso Sept. 11, 2013, no pet.).

C. Surplus lines & Unauthorized insuranceA company marketed, sold, and administered a collateral

protection coverage program for “buy here, pay here” car dealers. Under the program, a portion of the fee was used to purchase

While noting that insureds are only entitled to recov-er the portion of damage caused solely by a covered peril, the court concluded that the insured’s damages were adequately segregated because the court’s charge expressly instructed the jury to award damages “caused solely by a covered peril.”


stop-loss coverage, and the remainder of the fee was placed in a bank account of a Producer Owned Insurance Company wholly owned by the car dealer. The company filed suit against the Tex. Department of Insurance and two of its competitors, seeking in-junctive relief concerning the legality of the program and argu-ing that it was not regulated by TDI as it was not an insurance product. The court held that the collateral protection insurance program was subject to regulation by TDI. Sidecars, Inc. v. Tex. Dept. of Ins., No. 03-10-00720-CV, 2013 WL 2395189 (Tex. App.—Austin May 30, 2103, pet. filed).

D. Public AdjustersAfter a hurricane damaged condos, the condo owners hired

a public insurance adjuster to handle its claim. The claims were only partially paid by the insurer, so the condo owners hired a law firm to obtain an additional recovery. The law firm was able to obtain a substantial recovery, but the public adjuster main-tained that it was also entitled to a percentage fee on that re-covery. The condo owners filed suit against the public adjuster, seeking declaratory relief that the public adjuster was not entitled to any more money under the contract. The condo owners ar-gued that because the contract with the public adjuster did not list his license number, as required by the state, the contract was void. The appellate court reversed summary judgment in favor of the insured, stating that the deficiency in the contract can be addressed administratively rather than by avoidance and that the evidence raised a fact issue as to whether the contract violated public policy. Therefore, the trial court erred in concluding as a matter of law that the contract was against public policy. Int’l Risk Control, L.L.C. v. Seascape Owners Ass’n, Inc., 395 S.W.3d 821 (Tex. App.—Houston [14th Dist.] 2013, pet. denied).

E. LiensAfter a settlement was obtained in a car accident case, the

insurer paid the plaintiffs, making the checks out to the indi-vidual plaintiffs and the hospital, jointly. The plaintiffs’ banks both negotiated the checks, allowing the plaintiffs to cash them without obtaining the hospital’s endorsement. The hospital filed suit against the insurer, alleging that it violated the Texas Hospital and Emergency Medical Services Lien statutes for settling with-out resolving the hospital’s liens. The trial court granted sum-mary judgment for the insurer, holding that the insurer fulfilled its obligations under the hospital lien statute by issuing and deliv-ering co-payable settlement drafts, as joint-payees with the hos-pital. The appeals court agreed. McAllen Hospitals, L.P. v. State Farm Co. Mut. Ins. Co. of Tex., No. 13-11-00330-CV, 2012 WL 5292926 (Tex. App.—Corpus Christi-Edinburg Oct. 25, 2012, pet. granted) (mem. op.).

* Mark L. Kincaid is a partner with George Brothers Kincaid & Horton, L.L.P. in Austin. He graduated from the University of Texas Law School and teaches Texas Insurance Litigation there as an adjunct professor. He is co-author of West’s Texas Practice Guide on Insurance Litigation, and has written and spoken frequently on insurance and consumer issues. Suzette E. Selden is an associate with George Brothers Kincaid & Horton, L.L.P. She graduated with highest honors from Brigham Young University with a B.A. (2002), and with honors from the University of Houston Law Center (2006). Elizabeth von Kreisler is an associate with George Brothers Kin-caid & Horton, L.L.P. She graduated from Reed College with a B.A. (2002), and with high honors from the Texas Tech University School of Law (2007).


Municipal Regulation

An Exemplary & Constitutional Good for a Necessary & Predatory Evil

in Texas

Payday & Title Loans

of

By Olivia M. Peña*


Introduction Before law school, I knew little about payday and title loans. I had heard family and friends talk about their trips to the “financiera,”1 but I was unfamiliar with the nature of their transactions. I delved into the subject while working at the Consumer Dispute Resolution Center (CDRC) at the University of Houston Law Center. At the CDRC, I spoke with Ms. Garcia2—victim of the payday loan industry. Ms. Garcia, a 45 year-old Hispanic female, had a middle school education and did not speak English. Desperate, yet hopeful, she said, “Mija,3 I have a problem and really need someone to give me some guidance. Can you please help me?” I could not make any assurances, but I said I would try my best. In order to help her, I needed to know the facts. Ms. Garcia was a single mother of three who worked as a waitress at a Mexican restaurant. She barely made enough money to cover the monthly expenses; therefore, after her car broke down, Ms. Garcia felt compelled to get a payday loan. She knew it was easy and fast, and she needed to fix her car without missing work. Ms. Garcia got a $625 payday loan and had already made payments totaling that amount. During our first conversation, she answered the following questions:

1) Did you sign a contract? “Yes.”2) Did you read it? “No. The lady told me where to sign.”3) Was it in English or Spanish? “English.”4) Do you speak, read, or write English? “I do not, but I

can understand the basic words.”5) Did she tell you the total cost of the loan? “No. She just

told me the monthly payment.”6) What numbers do you see in the contract? “I see the

loan amount of $625 and a total amount of $1250.”7) Did you see these numbers before you signed? “No. I

was desperate and really needed the money.”Additionally, I learned that the business representative had demanded payment and threatened Ms. Garcia with jail time. Then, I realized that payday loans are not consumer friendly. Frustrated and in disbelief, I told Ms. Garcia I would return her call to inform her of any available legal recourse.

Ms. Garcia was the first of a long list of consumers who called the CDRC searching for help regarding payday and title loan issues. Some scholars argue that payday and title loans provide a benefit for consumers,4 while others argue that these loans prey on vulnerable consumers who face unfortunate situations.5 Due to minimal federal and state regulation, consumer advocates cry out for more appropriate consumer protection. How protected are consumers from these predatory lending practices? Do disclosures actually prevent consumers from getting payday or title loans? Apparently, disclosures did not make a difference for Ms. Garcia when she had an unexpected emergency.

A payday loan is a short-term cash loan made at a store or online.6 In order to get the loan, a consumer either writes a check including the principal amount and the finance charge or gives the lender access to his or her bank account.7 The lender cashes the check or accesses the bank account on the consumer’s next payday.8 The consumer pays a finance charge to renew or rollover the loan if repayment is impossible; so, full payment is deferred and the principal amount owed remains the same. 9 To get a payday loan, lenders require a form of identification, a bank account, and, sometimes, a proof of income.10 Lenders charge extremely high interests rates even though these loans are usually for small amounts.11 Industry supporters argue that payday loans are necessary to help consumers get through unexpected emergencies. Also, they argue that banning these loans will limit consumers’ access to credit.12

A title loan is a short-term cash loan where a consumer’s car title is used as collateral.13 In title pledging, the lender may,

but is not required to, verify a consumer’s employment status or income.14 Similar to a payday loan, a consumer renews or rollovers a title loan for additional months by paying only the interest fee.15 If default is unavoidable, the lender may repossess the consumer’s car and sell it.16

In this article, I argue that state law does not preempt city ordinances that regulate payday and title loans, and that the ordinances are ideal to minimize the loans’ predatory nature. Therefore, the Texas Legislature should adopt a similar regulatory scheme. In Part I, I briefly summarize the laws enacted by the federal and state legislatures that regulate payday and title loans. I also discuss in detail how the ordinances enacted by Austin, Dallas, El Paso, and San Antonio regulate these loans. In Part II, I engage in a legal discussion to show that state law does not preempt the ordinances, and that, therefore, they are constitutional and should be enforced. In this discussion, I incorporate the lawsuit brought by Consumer Service Alliance of Texas (CSAT) against the City of Dallas. In Part III, I talk about the benefits of these ordinances and praise the cities’ attempt to police predatory short-term lending. Additionally, I incorporate two proposed but un-enacted bills matching the ordinances.

Payday and title lenders will continue their abusive practices without meaningful regulation from the Texas Legislature. The legislature should look closely at the ordinances and adopt similar laws to ensure statewide compliance. Only then will predatory lenders stop trapping disadvantaged and uneducated consumers in never-ending cycles of debt.

I. The Current Regulation of Payday and Title LoansThe popularity and demand of payday and title loans has

rapidly increased.17 A greater number of consumers have easy and unlimited access to these loans. In this context, more is not merrier. In the following section, I briefly discuss the laws enacted by the federal and state legislatures. I then summarize in detail what the Austin, Dallas, El Paso, and San Antonio ordinances do to specifically control payday and title loans. Notwithstanding the ordinances’ substantial similarities, I note that some cities do offer additional protections.18

A. Federal Regulations Provide Limited Consumer ProtectionAmong the federal laws regulating payday and title loans

are the Truth In Lending Act19 (TILA), the Talent-Nelson Amendment Act20 (Talent-Nelson Amendment), and the Dodd-Frank Wall Street Reform and Consumer Protection Act21 (Dodd-Frank Act).22 TILA “applies to any advertisement to aid, promote, or assist directly or indirectly any consumer credit sale, loan, or other extension of credit.”23 Under TILA, lenders are required to make several disclosures including the loan’s repayment terms and the annual percentage rate.24 At first, lenders claimed TILA was inapplicable to payday loans, but the Federal Reserve Board denied those claims.25 Pursuant to TILA, consumers are not only informed, but also are able to sue lenders for noncompliance of the Act.26 Under the Talent-Nelson Amendment, a lender who issues loans to service members and their dependents “may not impose an annual percentage rate of interest greater than 36 percent.”27 The Department of Defense recognized the predatory nature of payday and title loans and decided that the “cycle of debt represents a more significant concern to the Department than the high cost of credit.”28 Recently, the Talent-Nelson Amendment increased consumer protection, imposed civil liability on lenders for violations of the Act, and defined “dependents.”29 The Dodd-Frank Act created the Bureau of Consumer Financial Protection (CFPB) “which [regulates] the offering and provision of consumer financial products or services under the Federal consumer financial laws.”30 Additionally, CFPB requires lenders to comply


with “federal consumer financial law” and prevents them from engaging “in any unfair, deceptive, or abusive act or practice.”31

B. Texas’ Regulations Focus on Disclosures and Registration but Not on Loan Restriction

The Texas Constitution grants power to the Legislature “to define interest and to fix maximum rates of interest.”32 “In the absence of legislation fixing maximum rates of interest, “all contracts [with an annual interest rate greater than ten percent (10%)] shall be deemed usurious.”33 Unfortunately, Texas’ usury law does not affect payday and title lenders because they operate through the credit services organizations (CSO) model.34 There are three parties involved in the CSO model: the consumer/borrower, the lender who is subject to Texas’ usury law, and the credit services organization also known as a credit access business (CAB).35A CAB “provides the storefront, interacts with the borrower, and charges a fee without a legal limit.”36 CABs “are governed by Chapter 393 of the Texas Finance Code (CSO Act)37 and Chapter 74 of the Texas Administrative Code.”38

The CSO Act applies to CABs who “for the payment of valuable consideration” (1) [improve] a consumer’s credit history or rating; (2) [obtain] an extension of consumer credit39 for a consumer; or (3) [provide] advice or assistance to a consumer regarding (1) and (2).40 In 2011, the Texas Legislature enacted two bills that amended the CSO Act—H.B. 2592 and H.B. 2594.41 H.B. 2592 places “notice and disclosure requirements.”42 H.B. 2594 deals with “the licensing and regulation” of CABs.43

C. Municipal Regulations Fill in the Gaps Left By the Federal and State Legislatures

Federal and state licensing and disclosure laws are not sufficient consumer protection. Therefore, four Texas cities enacted ordinances specifically regulating payday and title loans. These ordinances build on the laws enacted by the federal and state legislatures to provide greater consumer protection. The Austin,44 Dallas,45 El Paso,46 and San Antonio47 ordinances place several requirements on CABs including registration, recordkeeping, consumer understanding, referral services, and loan limitations. Moreover, the ordinances provide penalties for CABs in violation of the ordinances. In this section, I discuss the ordinances and their provisions in detail. The ordinances are substantially the same; however, some provide additional consumer protection.

1. CABs Must Have a Certificate of Registration In Austin, Dallas, El Paso, and San Antonio, a person

may operate or conduct a CAB only if he or she obtains a valid certificate of registration for each location.48 Failure to obtain a certificate of registration results in a criminal offense.49 The directors of the department assigned to enforce these ordinances provide the application form.50 The application should include the applicant’s and the business’ name, street and mailing address, and contact numbers.51 Additionally, a CAB must provide the personal information of its owners and others with a financial interest in it.52 A CAB must give copies of a “current and valid” state license as well as a certificate of occupancy demonstrating compliance with the city’s development code.53 Also, a non-refundable fee must be submitted with every application.54 A CAB must advise the department’s director of any changes to the information provided in the application form within 45 days.55

After the application is received, the director issues the certificate of registration.56 A CAB must conspicuously display the certificate of registration and present it for examination upon request by the director or any peace officer.57 The certificate of registration expires “on the earlier of one year after date of issuance; or the date of expiration, revocation, or other termination of the registrant’s state license.”58 Finally, a CAB’s certificate of registration is nontransferable.59

2. CABs Must Have Complete Loan Records A CAB must keep a “complete set of records” of all loans

“arranged or obtained by the [CAB].”60 Essentially, a CAB must have a record of the consumer’s personal information, the principal amount of the loan issued, and “the documentation used to establish the consumer’s income.”61 A CAB ought to keep copies of every written agreement between the CAB and the consumer that proves the issuance of a loan.62 Additionally, a CAB must maintain “copies of all quarterly reports” provided to the Texas Consumer Credit Commissioner (OCCC).63 All the records required under the ordinances “must be retained for at least three years” and “ made available for inspection by the cities upon request.”64 Moreover, Austin, El Paso, and San Antonio require a CAB to keep information regarding the amount of fees charged per loan and the duration of each loan.65

3. CABs Must Ensure Consumer Understanding and Provide Referral Services

A CAB in Austin, El Paso, and San Antonio must provide to the consumer a form containing information regarding the CAB’s loans.66 The form should also refer the consumer to “non-profit agencies that provide financial education or training and agencies

with cash assistance programs.”67 The El Paso and San Antonio forms include specific information about a consumer’s loan agreement and, if “the director has prescribed a form in the consumer’s language of preference, the form must be provided to the consumer in the consumer’s language of preference.”68 Moreover, El Paso and San Antonio mandate a CAB to make sure that the consumer

understands the loan agreement before signing it.69 Every written agreement between a consumer and a CAB “evidencing a loan, including but not limited to refinancing and renewals, must be written in the consumer’s language of preference.”70Additionally, a CAB must provide loan agreements in English and Spanish, whichever is the consumer’s preferred language.71 If the consumer cannot read, the disclosures and the loan agreement must be read to the consumer, in his or her preferred language, before signing the agreement.72

4. CABs’ Penalties and Defenses A violation of the ordinances provisions is a criminal offense.73

There is a “separate offense for each day or portion of a day” that the ordinances are violated.74 A violation is punishable with a fine of up to $500, and no culpable mental state is required.75 The penalties are in addition to any other penalty provided by other city ordinances and state law.76 Furthermore, it is a “defense to prosecution under the [ordinances] if at the time of the offense the person was not required to be licensed by the state as a CAB.”77

5. CABs Must Comply with Loan Restrictions Under the ordinances, a payday loan “may not exceed twenty

percent (20%) of the consumer’s gross monthly income.”78 A

In Austin, Dallas, El Paso, and San Antonio, a person may operate or conduct a CAB only if he or she obtains a valid certificate of registration for each location.


title loan “may not exceed the lesser of three percent (3%) of the consumer’s gross annual income or seventy percent (70%) of the retail value of the motor vehicle.”79 Additionally, a CAB must consider the consumer’s ability to repay by using a “paycheck or other documentation establishing income.”80 The City of Austin suggests the CAB use a “bank statement, an IRS Form W-2 from the previous year, a previous year’s tax return, or a signed letter from an employer.”81

Moreover, an installment loan “may not be payable in more than four installments.”82 The “proceeds from each installment must be used to repay at least twenty five percent (25%) of the principal amount of the loan.”83 Installment loans “may not be refinanced or renewed.”84 If a consumer gets a loan seven days after paying off a previous loan, such action is considered a refinance or renewal.85

Furthermore, a loan “that provides for a single lump sum repayment may not be refinanced or renewed more than three times.”86 The “proceeds from each refinancing or renewal must be used to repay at least twenty five percent (25%) of the principal amount of the original [loan].”87 Dallas, San Antonio, and El Paso include a savings clause stating that the terms and provisions of their ordinances are severable.88

The four ordinances provide a tailored regulatory scheme to protect their citizens from predatory lending. Soon after the cities’ councils approved the ordinances, CSAT, “a trade association that represents the interests of consumers and CABs,”89 decided to take action. CSAT sued the cities of Austin90 and Dallas91 seeking declaratory and injunctive relief to stop the regulation of CABs. CSAT’s petitions are very similar in both lawsuits, but only the City of Dallas provided access to the legal documents filed.92 I chose to incorporate the lawsuit brought against the City of Dallas to elaborate on the arguments brought by both parties. In Part II, I refute CSAT’s arguments and show that the CSO Act does not exclusively regulate CABs. Therefore, the ordinances are neither preempted nor inconsistent with state law and hence constitutional.

II. The Ordinances’ Constitutionality and the Preemption of Home-Rule Cities

Under the Home-Rule Amendment of 1912, cities with a population of more than five thousand (5000) may, by a majority of votes, “adopt or amend their charters.”93 The adoptions or amendments are “subject to such limitations [prescribed] by the Legislature, and no…ordinance passed…shall contain any provision inconsistent with the [Texas Constitution], or the general laws enacted by the [Texas Legislature].”94 The cities of Austin, Dallas, El Paso, and San Antonio are home-rule cities, because all of the cities adopted a charter by which the ordinances at issue were created.

Home-rule cities “possess the full power of self-government and look to acts of the legislature not for grants of power, but only for limitations on their powers.”95 Accordingly, “legislative intent to limit the broad powers of home-rule cities must appear with unmistakable clarity.”96 This “intent should not be implied.”97 “If the Legislature chooses to preempt a subject matter usually encompassed by the broad powers of a home-rule city, it must do so with unmistakable clarity.”98

A. The ordinances are not preempted because the Texas Legis-lature does not limit with unmistakable clarity the cities’ pow-ers to regulate CABs

In Dallas Merchs. & Concessionaires Ass’n v. City of Dallas,99 the court held that the Texas Alcohol and Beverage Code (TABC) preempted an ordinance that prohibited the sale of alcohol within 300 feet of a non-residential area.100 Under the TABC,

cities may limit the sale of alcohol within residential areas,101 but they may not impose stricter standards on alcohol businesses.102 Furthermore, the Legislature stated that “it [was their] intent that [TABC] shall exclusively govern the regulation of alcoholic beverages.”103 Because the Legislature’s intent was unmistakably clear; therefore, TABC preempted the ordinance.104

Dallas Merchs. & Concessionaires Ass’n v. City of Dallas is distinguishable from the lawsuits brought by CSAT. Contrary to TABC, the CSO Act does not prevent these cities from imposing stricter standards on CABs. The Legislature does not manifest their intent to exclusively regulate CABs. On the contrary, the Act states that “a [CAB] is permitted to charge amounts allowed by other laws, as applicable.”105 This language indicates that the regulation of CABs is not exclusively governed by the Legislature. Furthermore, “the mere fact that the legislature has enacted a law addressing a subject does not mean the complete subject matter is completely preempted.”106

Moreover, in Houston Ass’n of Alcoholic Beverage Permit Holders v. City of Houston,107 the court held that TABC did not preempt an ordinance that banned smoking in public places.108 TABC “fails to mention regulation of tobacco or smoking;109 therefore, the court found “the ordinance was not preempted with “unmistakable clarity.”110 Additionally, the court noted that the ordinance “was enacted to…protect the citizens’ public health and welfare.”111 Similar to TABC, the CSO Act fails to mention caps or rollover limitations on payday and title loans, it only mentions fees; therefore, courts should find that the ordinances are not preempted with unmistakable clarity.

CSAT may argue that the Legislature had an implied intent to prohibit municipal regulation of CABs. However, the “intent to preempt home-rule cities’ ordinances should not be implied.”112 The Austin, Dallas, El Paso, and San Antonio ordinances are not preempted unless CSAT proves that the Legislature with unmistakable clarity limited these cities’ powers to regulate CABs. After all, the “purpose of the Home-rule Amendment [was] to bestow upon cities [the] full power of local self-government.”113

Additionally, the Texas Finance Commission asked the Legislature to “consider amending the Texas Finance Code to more clearly articulate its intent for uniform laws and rules [governing] CABs.”114 This request suggests that there is not an unmistakably clear intent from the Legislature to prohibit municipal regulation of CABs. The Legislature could have stated that it was their intent that the CSO Act will exclusively govern the regulation of CABs in Texas, but it did not; therefore, the ordinances are not preempted.

B. The ordinances are not inconsistent with the CSO Act be-cause CABs can comply with both

The Texas Constitution makes it clear that “no charter or any ordinance passed…shall contain any provision inconsistent with the [Texas Constitution], or [with] the laws enacted by the [Texas Legislature].”115 In Texas, an ordinance is presumed to be valid, and courts cannot interfere unless the ordinance “clearly appears to be arbitrary, unreasonable, and an abuse of the police power.”116 The party attacking an ordinance carries the burden of proving the ordinance’s invalidity.117 “A home-rule city’s ordinance that attempts to regulate a subject matter preempted by a state statute is unenforceable to the extent it conflicts with the state statute.”118 Essentially, “a general law and a city ordinance will not be held repugnant to each other if any other reasonable construction leaving both in effect can be reached.”119

In City of Richardson v. Responsible Dog Owners,120 the court held that an animal control ordinance was not inconsistent with Section 42.12 of the Texas Penal Code.121 Section 42.12 applied to dogs that had previously engaged in vicious behavior, and


the ordinance applied “to any animal which [presented] a threat to the safety and welfare of the City’s citizens.”122 The court acknowledged the city’s power to adopt a more comprehensive animal control ordinance; and also found that a “small area of overlap” was not fatal.123 Ultimately, the court held that the ordinance was not repugnant or inconsistent with Section 42.12 and that “a reasonable construction of each can give effect to both.”124

Similarly, in RCI Entm’t (San Antonio), Inc. v. City of San Antonio,125 the court held that an ordinance “that [prohibited] nudity and semi-nudity in public places was not inconsistent with the Texas Penal Code.126 The ordinance made it unlawful to “intentionally or knowingly” appear in a state of nudity at a public place.127 The court found that “none of the [Texas Penal Code provisions explicitly expressed] the Legislature’s intent [to exclusively govern] the criminalization of an intentional or knowing” appearance in a state of nudity.128 The ordinance overlapped with one of the provisions; nevertheless, the court found the ordinance to be “comprehensive attempt to address a specific type of public conduct—appearing in a state of nudity.”129 Because the ordinance “supplemented and addressed a different subject matter,” the court held the ordinance was not preempted or inconsistent with the Texas Penal Code.130

The ordinances in the Responsible Dog Owners and RCI Entm’t (San Antonio), Inc. are analogous to the Austin, Dallas, El Paso, and San Antonio lending ordinances. Just like the ordinance in City of Richardson regulated all animals and not just dogs, these ordinances regulate several aspects of CAB loans and not just their fees. Similarly to the ordinances in those two cases, these ordinances provide a “comprehensive attempt to address a specific type of public conduct”—acquiring payday and title loans. Like the ordinance in RCI Entm’t (San Antonio),Inc., these ordinances supplement and address different areas not covered by the CSO Act. The ordinances are neither repugnant nor inconsistent with the CSO Act; and despite any overlap, the courts should find that both could be given effect.

On the other hand, CSAT could argue that these lending ordinances are similar to the ordinance in Combined Am. Ins. Co. v. City of Hillsboro,131where the court held that an ordinance that regulated insurance companies’ solicitation practices was inconsistent with Article 4.06 of the Texas Insurance Code.132 The ordinance made it unlawful for a person to engage in any solicitation practices “without having applied for and obtained a license to do so from the City Secretary.”133 Additionally, the ordinance required individuals to post a bond, to pay several licensing fees, and to pay a fine for any violations.134 The court found that the insurance company had complied with state law and was able to conduct business in the State of Texas. Therefore, the city had no authority to restrict their solicitation practices.135 By analogy, CSAT may argue that CABs are only required to comply with state law and that the Legislature did not explicitly grant these cities the power to regulate CABs. Therefore, the ordinances are inconsistent with the CSO Act.

CSAT’s reliance on Combined Am. Ins. Co. would be misplaced, however, because the ordinance was inconsistent with the Texas Insurance Code, which expressly limited the city’s power to impose occupational taxes on insurance companies.136 Contrary to what CSAT may argue, CABs must comply with

the CSO Act and any other applicable laws, including city ordinances. Even though the restrictions placed by the ordinance in Combined Am. Ins. Co. are similar to the restrictions placed by Austin, Dallas, El Paso, and San Antonio, the CSO Act does not prevent these cities from imposing additional restrictions on CAB loans. The ordinances loans restrictions are not inconsistent with the CSO Act, because the CSO Act fails to place any loan restrictions on CABs. Thus, there is no

contradictory language. The CSO Act grants the Texas Finance Commission the power to enforce the Act, but also constraints the Commission’s power to limit the fees charged by CABs.137 The Legislature could have used similar language to constrain the cities’ powers to limit the loans provided by CABs. CSAT’s argument regarding the Legislature’s failure to explicitly grant these cities the power to regulate CABs will fail, because “silence on the part of the state does not give rise to an inference that the state has prohibited localities from enacting ordinances further regulating an area.”138 Moreover, the cities of Austin, Dallas, El Paso, and San Antonio have broad powers to regulate lending practices that potentially harm the welfare their citizens.139

C. The constitutional analysis in the light of Consumer Service Alliance of Texas, Inc., v. City of Dallas

In the lawsuit brought against the City of Dallas, CSAT argued that the Dallas ordinance conflicted with the CSO Act.140 This argument ignores that courts consistently hold that “the mere fact that the Legislature has enacted a law addressing a subject does not mean the complete subject matter is completely preempted.”141 Moreover, the CSO Act does not preempt the ordinances because the ordinances’ language does not contradict the language used in the CSO Act. No court has found that the Legislature intended to exclusively occupy the field of CAB regulation142

CSAT also argued that the “[Dallas] ordinance and [its] credit restrictions are preempted and unenforceable, because they amount to a virtual prohibition against CABs operating in the [C]ity of Dallas.”143 In its response, the City of Dallas challenged CSAT’s organizational standing to bring such claim.144 Consequently, CSAT dropped the virtual prohibition claim, and Title Max of Texas Inc. and ACE Cash Express Inc. intervened in order to sustain it.145 The interveners’ virtual prohibition claim shows the ambitious and predatory nature of payday and titles lending. Ultimately, the City of Dallas’ pleas to the jurisdiction were granted, and the case was dismissed with prejudice.146 As a result, CSAT and the intervenors appealed to the Fifth Court of Appeals in Dallas, Texas.147 The Fifth Circuit should affirm the district court’s judgment, because the ordinances are not preempted or inconsistent with the CSO Act.

Will CABs go out of business due to loan caps and limited rollovers? Would it be impossible to restructure CABs to comply with the ordinance? In states with similar restrictions as those im-posed by the ordinances, CABs continue to operate.148 Essentially, the intervenors concede that CABs are only profitable when they are able to loan unlimited amounts and allow unlimited rollovers; however, the features that ensure a CAB’s profitability also ensure consumers’ indebtedness.149 Unfortunately, CABs predatory lend-ing practices will continue to harm consumers, since the Texas


Legislature refuses to enact specific regulations attacking the loans’ abusive features. As a result of this inaction, Austin, Dallas, El Paso, and San Antonio realized that regulation of payday and title loans was imperative. In the following section, I discuss the cities’ attempt to address these abusive features, and argue that these ordinances are beneficial.

III. How Do the Ordinances Serve a Good Purpose?Payday and title lenders make money from consumers

with little repayment leeway.150 Lenders are aware not only of consumers’ inability to repay, but also of consumers’ propensity to get trapped in cycles of debt.151 One could argue that getting a payday or title loan is a mistake. Consumers, in turn, should learn from their mistakes. Lenders, however, should not capitalize on consumers’ mistakes and further exacerbate their financial distress.152 When desperate consumers face financial problems, they do not stop and consider the future consequences of their borrowing. Instead, consumers focus on the loan’s present benefits, while being optimistic about repayment.153 Lenders promote the beneficial side of payday and title loans because they are aware of consumers’ over optimism.154 The framing principle—“the offsetting of small-perceived losses with the illusion of substantial gains”—could be applied to the short-term lending industry just as it applies to the mortgage industry.155

Additionally, the loans’ design is abusive and unreasonable. Consumers’ indebtedness, therefore, is largely attributed to the loans’ features.156 One scholar argues that payday loans are substantively and procedurally unconscionable.157 Substantive unconscionability relates to the abusive loan terms and the consumer’s inability to repay.158 Procedural unconscionability deals with the lender’s inadequate disclosures and the consumers’ financial need and lack of understanding.159 Unfortunately, the traditional contract defense of unconscionability is not the consumers’ best remedy because of the uncertainty of the unconscionability standard and the court’s reluctance to apply it to consumer credit contracts.160

The ordinances discussed in Part II are a response to the Legislature’s reluctance to specifically regulate CABS. This reluc-tance may be attributed to the Legislature’s unfamiliarity with the negative impact that payday and title loans have on consumers. Austin, Dallas, El Paso, and San Antonio are aware that payday and title loans adversely affect consumers’ lives.161 When con-sumers are faced with these issues, city councils are the first to hear their consumers’ complains.162 Despite federal and state regulations, these cities felt compelled to protect consumers from abusive lending practices.163 In this section, I discuss the provi-sions that prevent consumers from getting caught in cycles of debt. Additionally, I incorporate two proposed bills that emulate the ordinances. Unfortunately, neither bill was enacted into law. The Legislature, however, should consider passing similar bills in the future.

A. Obligate Lenders to Consider Ability to Repay and Limit the Amount of the Loan

CABs rely on their loan recovery methods and are not compelled to consider a consumer’s ability to repay.164 Payday lenders allow consumers to rollover repeatedly and thereby recover the loan’s full amount without diminishing the principal amount owed.165 Payday lenders’ profitably mainly derives from the consumer’s inability to repay. Therefore, there is no incentive

to verify the consumer’s income.166 Lenders are aware that consumers are unprotected and at a disadvantage. The ability to repay requirement balances out this inequality. By limiting the amount of a payday loan to twenty percent (20%) of the consumer’s monthly gross income, the consumer will not over borrow and is likely repay the loan.167 Also, limiting the amount of the loan could benefit lenders by ensuring fewer defaults. 168

In title lending, the consumer’s ability to repay is not considered because lenders have the consumer’s car title as collateral.169 Most consumers are not willing to lose their car; and unlimited rollovers sound like a good option. By repeatedly rolling over the loan, the lender makes a substantial profit.170 If the consumer defaults, the title lender is able to make additional profit from reselling the consumer’s car.171 The impact of losing

a car compares to that of losing a home.172t Title lenders, therefore, should be required to consider the consumers’ ability to repay.173 It has been argued that loan caps on title loans are not beneficial for poor consumers with inexpensive cars. Instead, title lenders should be encouraged to lend a higher

percentage of the consumer’s equity in the vehicle.174 Another scholar argues, however, that title loans are usually for a third of the car’s retail price, which makes these loans over-secured.175 By limiting the amount of a title loan to the “lesser of three percent (3%) of the consumer’s gross annual income or seventy percent (70%) of the retail value of the car,”176 the consumer is more protected and less likely to lose his car.177

Recently, Texas State Senator Wendy Davis introduced S.B. 1716,178 and Texas House Member Joe Farias introduced H.B. 1886.179 S.B. 1716 and H.B. 1886 placed the same payday and title loan caps as the ordinances.180 Additionally, S.B. 1716 re-quired title lenders to refund to the consumer any excess amount from the sale of his car.181

B. Eliminate Single-Lump Sum Repayment Despite the industry’s attempt to market payday and title

loans as easily repaid, one study shows that a significantly low percentage of these loans are actually repaid on time.182 The loans’ structure guarantees that consumers will not be able to make ends meet at the end of the month; therefore, consumers are forced to rollover, refinance, or take out a new loan.183 Scholars recognize the loans’ faulty design and promote partial payments and amortization to ease the burden on consumers.184 By giving consumers the opportunity to repay in more than one single lump sum consumers will not need to neglect other financial obligations such as utility bills.185 Moreover, the Legislature should adopt provisions similar to those of S.B. 1716, because it mandated CABs to provide extended payment plans after consumers have rolled over three times.186

C. Limit Rollovers and Diminish the Principal Amount Rollovers are common and excessive, because consumers are

not given enough time to repay. The Consumer Credit Research Foundation (CCRF) adamantly claims that it is unrealistic and unlikely for a consumer to rollover a loan for a year. However, the CCRF also acknowledges that the annual interest rate is higher than 300% if a consumer does rollover for a year.187 Addition-ally, the CCRF claims that unlimited rollovers do not benefit consumers or lenders, because unsecured lenders will not lend money to individuals who are not likely to repay.188 Despite claims that these loans are short-termed,189 the structure of the loan and the consumers’ inability to repay promote rollovers and

Unfortunately, neither bill was enacted into law. The Legislature, however, should consider passing similar bills in the future.


refinances for long terms.190 A supporter of the industry claims that these loans help consumers cover emergencies, including monthly utilities.191 Consumers, however, do not see these as short-term emer-gency loans, and instead keep rolling them over to pay these recurring expenses.192 By lim-iting the amount of rollovers, the ordinances attack the most abusive feature of payday and title loans;193 therefore, con-sumers receive more adequate protection.

Just like the ordinances, H.B. 1886 limited repayment of installment loans to four installments, and required that pro-ceeds from each installment be used to repay at least twenty-five percent (25%) of the principal amount.194 Additionally, the bill provided that a loan that requires repayment in a single lump sum “may not be refinanced or renewed more than three times, and proceeds from each refinancing and renewal must be used to repay at least twenty-five percent (25%) of the principal amount.”195 Moreover, H.B. 1886 prohibited the issuance of a new loan seven days after the consumer has paid off a previous loan.196 This bill would have been very effective if a statewide database were created. Ultimately, CABs profitability is largely attributed to the consumer’s inability to repay on time.197 There-fore, the Legislature should try to balance out this inequality by adopting provisions such as those of H.B. 1886, which emulated the ordinances.

D. Promote Consumer Understanding and Referral ServicesDisclosures have played a major role in state and federal

regulations. The effectiveness of disclosures, however, is question-able. Often consumers will read disclosures without understand-ing them. Also, understanding loan agreements and price terms can be very difficult.198 By providing too much information, consumers feel overwhelmed and choose not to place enough ef-fort in good decision-making.199 Lenders take advantage of this lack of knowledge, and influence consumers by promoting loans with low monthly interest rates instead of using an annual per-centage rate.200 Despite arguments to the contrary, payday and title loans are not transparent and easily understood. These loans target “financially unsophisticated and vulnerable” consumers who often overestimate their repayment ability.201

For most consumers, it might take several readings to fully grasp what disclosures or agreements say. Therefore, consumers rarely know what the transaction entails. So, what happens when a consumer cannot read English? What happens when a consumer cannot read? The San Antonio and El Paso ordinances answer these questions, and include a consumer-understanding requirement. These cities are aware that a significant amount of their population does not speak English, and do not have the appropriate education to fully understand disclosures or loan agreements.

Similar to these ordinances, S.B. 1716 required CABs to provide loan agreements and disclosures in the consumer’s pre-ferred language; and, if the consumer cannot read the documents and disclosures must be read to the consumer in the consumer’s preferred language.202 Not only are CABs required to disclose information specific to the consumer’s loan, but also are required to refer the consumer to credit counseling agencies that provide financial education and cash assistance.203 The Legislature should

promote statewide consumer understanding of disclosures and loan agreements, because this will “support the free mar-ket by providing consumers with informed choices with-out banning [payday and title loans].”204

E. Require Lenders to Main-tain a “Complete Set of Re-cords”

CABs may argue that the ordinances’ recordkeeping re-quirements negatively impact businesses from a structural

and financial standpoint. Currently, CABs require consumers to fill out an application, and to sign an agreement containing the consumers’ general information and the principal amount of the loan. Arguably, CABs must maintain a filing system with client information in order to keep track of the loans issued in order to comply with the OCCC reporting requirements. Requiring CABs to keep a complete set of records should not be substantially burdensome. Moreover, the expense of maintaining these records should not be significantly higher, because most of their clients are repeat borrowers.205 According to the Consumer Financial Service Association (CFSA), “payday lenders are less likely than secured lenders to make loans they believe will not be repaid from the bor-rower’s cash flow;”206 therefore, keeping a complete set of records is not only beneficial to the consumer, but also to the lenders.

ConclusionRemember Ms. Garcia, the Hispanic lady who barely made

enough to support her three children, and who called CDRC searching for help? Well, I promised I would call her back, and I did. Unfortunately, what I had to say was not what Ms. Garcia wanted to hear, and she refused to believe it. I told her that the loan agreement was binding, and that she had to pay in full unless she wanted to default. During our second conversation, I answered the following questions:

1) Is it legal for them to do this? “Yes.” 2) What happens if I stop paying? “The lender may take you

to court and try to get a judgment against you.” 3) If I stop paying will they keep calling me? “Yes, and they

may call the people you placed as references in an attempt to get the money.”

4) If I go to court, can you represent me? “No, but I can refer you to organizations that may be able to provide legal assistance.”

Ms. Garcia felt helpless, and I felt powerless. Nevertheless, she thanked me for calling her back and for listening to her story. That is exactly what the Legislature needs to do; it needs to listen to helpless consumers like Ms. Garcia who are not able to protect themselves.

Although any form of credit can be “abused and misused,” CABs make abuse and misuse easier, and they disregard consum-ers’ best interests.207 When obtaining a loan, consumers ignore future costs and get lured in by CABs’ convenient locations and quick approval process.208 If these loans were actually well-regulat-ed and transparent, they would serve their main purpose—help-ing distressed consumers in emergency situations.209 Unfortunate-ly, there are minimal federal and state regulations of payday and title loans.

People in favor and against short-term loans agree that CABs provide a useful service to consumers in emergency situations;


however, consumer advocates argue that these loans are not in the consumers’ best interests.210 Applying strict usury laws to CABs, however, is not the solution because it would do away with the business completely.211 The Legislature should focus not only on regulating CABs with disclosures and licensing requirements,212 but also on regulating the loans’ abusive features.213

Municipal regulations provide “effective solutions” to preda-tory lending;214 however, CABs circumvent these ordinances by advising consumers to get loans in other cities.215 Clearly, the short-term lending industry does not want to be regulated. Their attempts to evade federal, state, and local regulations demonstrate their ambitious and vicious lending practices.

A non-profit policy and research organization argues that payday loan reform is threatened, because the industry makes large campaign contributions to lawmakers and political action committees.216 Are industry-financed lawmakers willing to regulate the payday loan industry?217 “Consumers are helpless against the combined power of lenders [which are] enhanced by their superior resources and their single-minded focus on credit-related issues.”218 Unfortunately, consumers do not have the power and money to hire lobbyists. They cannot make hefty campaign contributions, but they can vote. How can consumers trust lawmakers who fund their campaigns with payday and title loan profits?

The Legislature can regain consumers’ trust by letting them know that predatory lending practices will not be tolerated. With-out specific regulations such as the ones established by the ordi-nances and the proposed bills, consumers like Ms. Garcia will suffer the negative consequences of payday and title lending. The ordinances serve a good purpose and are neither unconstitu-tional nor inconsistent with state law; therefore, instead of adopt-ing laws limiting these cities’ regulatory powers, the Legislature should adopt bills similar to the ordinances. Providing the ordi-nances’ protection to every consumer in Texas should be one of the Legislature’s main goals.

* Olivia M. Peña is a third-year law student at the University of Houston Law Center.

1 “Financiera” is a commonly used Spanish term for finance company. 2 “Garcia” is a fictitious last name, but the facts are not. 3 “Mija” is a Spanish nickname for daughter. 4 See Todd J. Zywicki, Consumer Use and Government Regulation of Ti-tle Pledge Lending, 22 Loy. Consumer L. Rev. 425, 461 (2010) (stating that title loans help consumers avoid “utility shutoffs, eviction, and the need to forego necessary goods and services such as medical care). See also William M. Webster, IV, Payday Loan Prohibitions: Protecting Financially Challenged Consumers or Pushing Them over the Edge?, 69 Wash. & Lee L. Rev. 1051, 1055 (2012) (illustrating that payday loans help consumers “deal with unexpected or unbudgeted expenses”). 5 Nathalie Martin & Ernesto Longa, High-Interest Loans and Class: Do Payday and Title Loans Really Serve the Middle Class?, 24 Loy. Consumer L. Rev. 524, 526 (2012).6 Leah A. Plunkett & Ana Lucia Hurtado, Small-Dollar Loans, Big Problems: How States Protect Consumers from Abuses and How the Federal Government Can Help, 44 Suffolk U. L. Rev. 31, 33–34 (2011).7 Id.8 Id. at 34.9 Id. 10 Karen E. Francis, Rollover, Rollover: A Behavioral Law and Econom-ics Analysis of the Payday-Loan Industry, 88 Tex. L. Rev. 611, 611–612 (2010).11 Id.12 Webster, supra note 4, at 1051.

13 Zywicki, supra note 4, at 433.14 Id.15 Jim Hawkins, Credit on Wheels: The Law and Business of Auto-Title Lending, 69 Wash. & Lee L. Rev. 535, 541 (2012). 16 Plunkett & Hurtado, supra note 6, at 35. 17 Patrick M. Aul, Federal Usury Law for Service Members: The Talent-Nelson Amendment, 12 N.C. Banking Inst. 163, 165 (2008). 18 The City of Houston drafted a similar, but more lenient, ordinance that has not been enacted; therefore, it will not be discussed in detail. Hous. Tex., Consumer Protection, ch. 28, art. XIV, §§ 28- 451–92 (not enacted). 19 15 U.S.C. § 1664 (2006). 20 10 U.S.C. § 987 (2006).21 12 U.S.C. § 5311 (2012).22 Hawkins, supra note 15, at 572. 23 15 U.S.C. § 1664 (2006).24 Id. See Katherine Houren, Achieving the American Dream in Debt? Why the USA Patriot Act Puts Undocumented Immigrants at Risk for Abuse by the Payday Loan Industry, 15 Wash. & Lee J. Civil Rts. & Soc. Just. 561, 575 (2009) (discussing the existing federal legislation of payday loans).25 Shane M. Mendenhall, Payday Loans: The Effects of Predatory Lending on Society and the Need for More State and Federal Regulation, 32 Okla. City U. L. Rev. 299, 315–16 (2007).26 Id. at 316.27 10 U.S.C. § 987 (2006).28 Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 Fed. Reg. 50,580, 50,582 (Aug. 31, 2007) (to be codified at 32 C.F.R. pt., 232).29 National Defense Authorization Act for Fiscal Year 2013, Pub. L. No. 112–239,126 Stat. 1632.30 12 U.S.C. § 5491 (2012). 31 12 U.S.C. § 5536 (2012). See Hawkins, supra note 15, at 572 (stat-ing that the Dodd- Frank Act prohibits title lenders from engaging in unfair, abusive, and deceptive practices).32 Tex. Const. art. XVI, § 11.33 Tex. Const. art. XVI, § 11. 34 Sealy Hutchings & Matthew J. Nance, Credit Access Businesses: The Regulation of Payday and Title Loans in Texas, 66 Consumer Fin. L.Q. Rep. 76, 79 (2012).35 Id.36 Id.37 Tex. Fin. Code Ann. §§ 393.001–628 (West 2006 & Supp. 2012).38 1 Tex. Admin. Code §74.1 (West, Westlaw through March 31, 2013). See also Frequently Asked Questions for Credit Services Organi-zations, Texas Secretary of State John Steen, http://www.sos.state.tx.us/statdoc/faqs/2008.shtml (last visited Mar. 26, 2013) (informing con-sumers of the law regulating CABs).39 Essentially, an extension of consumer credit is a loan, so I will refer to it as such throughout this article.40 Tex. Fin. Code Ann. § 393.001 (West 2006).41 Hutchings & Nance, supra note 34, at 84.42 Act of June 17, 2011, 82nd Leg. R.S., ch. 1301, §1, 2011 Tex. Sess. Law Serv., (West) (to be codified at Tex. Fin. Code Ann. §§ 393.221–24).43 Act of June 17, 2011, 82nd Leg. R.S., ch. 1302, §2, 2011 Tex. Sess. Law Serv., (West) (to be codified at Tex. Fin. Code Ann. §§ 393.601–28). .44 Austin, Tex., Bus. Regulations & Permit Requirements ch. 4-12, art. 2, § 4-12-10 (2011).45 Dall. Tex., Consumer Affairs ch.50, art. XI, §§ 50-144–151.3 (2011).46 El Paso, Tex., Bus. License & Permit Regulations tit.5, ch. 5.17, §§ 5.17.010–130 (2013).47 San Antonio, Tex., Licenses & Bus. Regulations ch. 16, art.

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XVI, §§ 16- 901–13 (2012).48 Austin, Tex., Bus. Regulations & Permit Requirements, §4-12-10.; Dall. Tex., Consumer Affairs, § 50-147.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.050.; San Antonio, Tex., Li-censes & Bus. Regulations, § 16-905. 49 See supra note 48 (illustrating the registration requirements for CABs). 50 Id.51 Austin, Tex., Bus. Regulations & Permit Requirements, § 4-12-11.; Dall. Tex., Consumer Affairs, § 50-149.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.060; San Antonio, Tex., Licenses & Bus. Regulations,§ 16-906.52 Id.53 Id.54 Id.55 Id. 56 Austin, Tex., Bus. Regulations & Permit Requirements, § 4-12-12.; Dall. Tex., Consumer Affairs, § 50-150.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.070; San Antonio, Tex., Licenses & Bus. Regulations,§ 16-907.57 See supra note 56 (discussing the registration requirements after cer-tificate is issued). 58 Austin, Tex., Bus. Regulations & Permit Requirements, § 4-12-13.; Dall. Tex., Consumer Affairs, § 50-151.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.080; San Antonio, Tex., Licenses & Bus. Regulations, § 16-908.59 Austin, Tex., Bus. Regulations & Permit Requirements, § 4-12-14.; Dall. Tex., Consumer Affairs, § 50-151.1.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.090; San Antonio, Tex., Licenses & Bus. Regulations, § 16-909.60 Austin, Tex., Bus. Regulations & Permit Requirements, § 4-12-20.; Dall. Tex., Consumer Affairs, § 50-151.2.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.100; San Antonio, Tex., Licenses & Bus. Regulations, § 16-910.61 See supra note 60 (presenting the ordinances’ recordkeeping re-quirements).62 Id.63 Id.64 Id.65 Austin, Tex., Bus. Regulations & Permit Requirements, § 4-12-20.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.100.; San Antonio, Tex., Licenses & Bus. Regulations, § 16-910.66 Austin, Tex., Bus. Regulations & Permit Requirements, § 4-12-22.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.130.; San Antonio, Tex., Licenses & Bus. Regulations, § 16-913.67 See supra note 66 (discussing the ordinances’ referral requirements).68 El Paso, Tex., Bus. License & Permit Regulations, § 5.17.130.; San Antonio, Tex., Licenses & Bus. Regulations, § 16-913.69 El Paso, Tex., Bus. License & Permit Regulations, § 5.17.120.; San Antonio, Tex., Licenses & Bus. Regulations, § 16-912.70 See supra note 69 (discussing El Paso and San Antonio requirement of consumer understanding).71 Id.72 Id.73 Austin, Tex., Bus. Regulations & Permit Requirements, § 4-12-23.; Dall. Tex., Consumer Affairs, § 50-146.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.030.; San Antonio, Tex., Licenses & Bus. Regulations, § 16-903.74 See supra note 73 (discussing penalties for violations of the ordi-nances’ provisions).75 Id.76 Id.77 Austin, Tex., Bus. Regulations & Permit Requirements, § 4-12-24.; Dall. Tex., Consumer Affairs, § 50-147.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.040.; San Antonio,

Tex., Licenses & Bus. Regulations, § 16-904.78 Austin, Tex., Bus. Regulations & Permit Requirements, § 4-12-21.; Dall. Tex., Consumer Affairs, § 50-151.3.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.110.; San Antonio, Tex., Li-censes & Bus. Regulations, § 16-906.79 See supra note 78 (illustrating the ordinances loan restrictions). 80 Id.81 Id.82 Id.83 Id.84 Id. 85 Id.86 Id. 87 Austin, Tex., Bus. Regulations & Permit Requirements, § 4-12-21.; Dall. Tex., Consumer Affairs, § 50-151.3.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.110.; San Antonio, Tex., Li-censes & Bus. Regulations, § 16-906.88 Dall. Tex., Consumer Affairs, § 50-151.3.; El Paso, Tex., Bus. License & Permit Regulations, § 5.17.110.; San Antonio, Tex., Li-censes & Bus. Regulations, § 16-906.89 Consumer Service Alliance of Texas, http://consumerserviceal-lianceoftexas.org, (last visited Mar. 28, 2013).90 Consumer Serv. Alliance of Texas Inc., v. City of Austin, No. D-1-GN-11-003142 (250th Jud. Dist. Ct., Travis County, Tex. June 2012) (During a telephone conversation, an employee from the Travis County District Clerks’ informed that the case was closed as of June 2012.)91 Consumer Serv. Alliance of Texas Inc., v. City of Dallas, No. 11-08739-A (14th Jud. Dist. Ct., Dallas County, Tex. Feb. 5, 2013).92 The Travis County District Clerk’s Office does not have free pub-lic access to records. In order to view the legal documents filed, an in-dividual must subscribe to idocket and pay a monthly subscription. CSAT’s original petition against the City of Austin was found at the Legislative Reference Library of Texas while researching H.B. 2592 and H.B. 2594. Legal Documents, Legislative Reference Library of Texas, http://www.lrl.state.tx.us/currentissues/clips/resultsLink.cfm?clipID=202213&headline=More%20protection%20needed%20from%20predatory%20payday-loan%20practices (last visited April 19, 2013). 93 Tex. Const. art. XI, § 5. 94 Id.95 MJR’S Fare of Dallas, Inc. v. City of Dallas, 792 S.W.2d 569, 573 (Tex. App.—Dallas 1990, writ denied).96 City of Dallas v. Dallas Merchs. & Concessionaires Ass’n, 823 S.W.2d 347, 353 (Tex. App.—Dallas 1991) rev’d sub nom. Dallas Mer-chs. & Concessionaires Ass’n v. City of Dallas, 852 S.W.2d 489 (Tex. 1993).97 Id. 98 Dallas Merchs. & Concessionaires Ass’n. v. City of Dallas, 852 S.W.2d 489, 491 (Tex. 1993). 99 Id.100 Id. at 490. 101 Tex. Alco. Bev. Code Ann. § 109.31 (West 2007). 102 Tex. Alco. Bev. Code Ann. § 109.57 (West 2012).103 Id.104 Dallas Merchs., 852 S.W.2d at 491–92. 105 Tex. Fin. Code Ann. §393.602 (West 2012). 106 Id. 107 Houston Ass’n of Alcoholic Beverage Permit Holders v. City of Houston, 508 F. Supp. 2d 576, (S.D. Tex. 2007).108 Id.109 Id. 110 Id. at 583. 111 Id. at 580–581.112 City of Dallas v. Dallas Merchs. & Concessionaires Ass’n, 823 S.W.2d 347, 353 (Tex. App.—Dallas 1991) rev’d sub nom. Dallas Mer-

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chs. & Concessionaires Ass’n v. City of Dallas, 852 S.W.2d 489 (Tex. 1993).113 Barnett v. City of Plainview, 848 S.W.2d 334, 338 (Tex. App.—Amarillo 1993, no writ).114 Resolution Supporting Uniformity of Laws Governing Credit Access Businesses, Finance Commission of Texas, (Dec. 2012) http://www.fc.texas.gov/resolutions/04-20-12r.html. 115 Tex. Const. art. XI, § 5. 116 City of Weslaco v. Melton, 308 S.W.2d 18, 21 (Tex. 1957).117 Id.118 Dallas Merchs., 852 S.W.2d at 491.119 City of Richardson v. Responsible Dog Owners of Texas, 794 S.W.2d 17, 19 (Tex. 1990).120 Id.121 Id.122 Id.123 Id.124 Id.125 RCI Entm’t (San Antonio), Inc. v. City of San Antonio, 373 S.W.3d 589 (Tex. App.—San Antonio 2012, no pet.).126 Id. at 593–596.127 Id.128 Id. at 596.129 Id. at 597.130 Id.131 Combined Am. Ins. Co. v. City of Hillsboro, 421 S.W.2d 488 (Tex. Civ. App.—Waco 1967, writ ref ’d n.r.e.).132 Id. 133 Id. at 490.134 Id.135 Id. at 491.136 Id. at 490.137 Tex. Fin. Code Ann. § 393.622 (West 2012).138 RCI Entm’t (San Antonio), Inc., 373 S.W.3d at 597.139 See Christopher L. Peterson, “Warning: Predatory Lender”-A Proposal for Candid Predatory Small Loan Ordinances, 69 Wash. & Lee L. Rev. 893, 948 (2012) (“courts have consistently held that, in the absence of express or field preemption, local authority to regulate for the general welfare includes authority to regulate consumer finance”).140 Plaintiff’s Original Petition & Application for Temporary Injunction at 7–8, Consumer Serv. Alliance of Texas Inc., v. City of Dallas, No. 11-08739-A (14th Jud. Dist. Ct., Dallas County, Tex. Feb. 5, 2013).141 Dallas Merchs., 852 S.W.2d at 491.142 See Peterson, supra note 139 at 948 (a “state statute preempts municipal ordinances when either the language in the ordinance contradicts the language in the statute or when [the judiciary finds that] the [l]egislature has intended to thoroughly occupy the field [of regulation]”).143 Plaintiff’s Original Petition & Application for Temporary Injunction at 8, supra note 139. 144 Defendant City of Dallas’ Original Pleas to the Jurisdiction, Special Exceptions, Answer, Counterclaim, and Request for Disclosure at 6, Consumer Serv. Alliance of Texas Inc., v. City of Dallas, No. 11-08739-A (14th Jud. Dist. Ct., Dallas County, Tex. Feb. 5, 2013).145 Petition in Intervention at 6, Consumer Serv. Alliance of Texas Inc., v. City of Dallas, No. 11-08739-A (14th Jud. Dist. Ct., Dallas County, Tex. Feb. 5, 2013).146 Order Granting Defendant’s Plea to the Jurisdiction at 1, Consumer Serv. Alliance of Texas Inc., v. City of Dallas, No. 11-08739-A (14th Jud. Dist. Ct., Dallas County, Tex. Feb. 5, 2013).147 Plaintiff’s Notice of Appeal at 1, Consumer Serv. Alliance of Texas Inc., v. City of Dallas, No. 11-08739-A (14th Jud. Dist. Ct., Dallas County, Tex. Feb. 5, 2013).148 For example, New Mexico limits payday loans to twenty five per-cent (25%) of the consumer’s gross monthly income, prohibits lend-

ers from charging interest on the outstanding principal amount, and requires an extended payment plan. Additionally, a “licensee shall not charge a consumer interest on the outstanding principal owed on a pay-day loan product.” N.M. Stat. Ann. § 58-15-5 (West, Westlaw through 2012 legislation). By the end of 2011, there were still 121 active payday locations that were registered in the statewide database, and 83,022 pay-day loans were issued that resulted in advance fees totaling $4.7 million. Payday Loan Annual Report 2011, New Mexico Regulation and Li-censing Department, available at http://www.rld.state.nm.us/uploads/files/FID%202011%20Payday%20Loan%20Report.pdf149 See discussion infra Part III.C.150 Charles A. Bruch, Taking the Pay Out of Payday Loans: Putting an End to the Usurious and Unconscionable Interest Rates Charged by Payday Lenders, 69 U. Cin. L. Rev. 1257, 1288 (2001).151 Id. at 1288.152 Oren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. Pa. L. Rev. 1, 58–59 (2008).153 Peterson, supra note 139, at 913–14.154 Id. at 910.155 See Patricia A. McCoy, A Behavioral Analysis of Predatory Lending, 38 Akron L. Rev. 725, 731–32 (2005) (discussing the framing principle as applied to homeownership). 156 Bar-Gill & Warren, supra note 152, at 55–56. See Deena Reynolds, A Look at Payday Loans & Current Regulation in Texas, 8 Tex. Tech Admin. L.J. 321, 325 (2007) (discussing the balloon payment and rollover characteristics of payday loans). 157 Bruch, supra note 150, at 1278–84.158 Id. at 1278–79.159 Id. at 1282.160 Pearl Chin, Payday Loans: The Case for Federal Legislation, 2004 U. Ill. L. Rev. 723, 746 (2004). See Bar-Gill & Warren, supra note 152, at 71 (discussing the courts’ reluctance to apply unconscionability to credit contracts).161 Diane Hellwig, Exposing the Loansharks in Sheep’s Clothing: Why Re-Regulating the Consumer Credit Market Makes Economic Sense, 80 Notre Dame L. Rev. 1567, 1577–78 (2005).162 Peterson, supra note 139, at 942–43. 163 Id. at 932. 164 Kelly J. Noyes, Comment, Get Cash Until Payday! The Payday Loan Problem in Wisconsin, 2006 Wis. L. Rev. 1627,1635.165 Tiffany S. Lee, No More Abuse: The Dodd-Frank and Consumer Financial Protection Act’s “Abusive” Standard, 14 J. Consumer & Com. L. 118, 122 (2011).166 Id. at 124.167 Richard J. Thomas, Rolling over Borrowers: Preventing Excessive Refinancing and Other Necessary Changes in the Payday Loan Industry, 48 Wm. & Mary L. Rev. 2401, 2432 (2007).168 Id. 169 Nathalie Martin & Ozymandias Adams, Grand Theft Auto Loans: Repossession and Demographic Realities in Title Lending, 77 Mo. L. Rev. 41, 42 (2012).170 Lee, supra note 165, at 122.171 Id.172 Martin & Adams, supra note 169, at 86. See Jean Anne Fox, Tom Feltner, Delvin Davis, & Uriah King, Driven to Disaster: Car Title Lending and Its Impact on Consumers, 9, Consumer Federation of America & Center for Responsible Lending (Feb. 28, 2013), http://www.responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/CRL-Car-Title-Report-FINAL.pdf (discussing asset-based lending in the mortgage industry, and it’s negative effects on consumers ).173 Martin & Adams, supra note 169, at 88. See Hawkins, supra note 15, at 602 (“the better solution is to encourage lenders to evaluate ability to repay through disallowing deficiencies”).174 Hawkins, supra note 15, at 601–02.175 Lynn Drysdale & Kathleen E. Keest, The Two-Tiered Consumer Fi-

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http://www.fc.texas.gov/resolutions/04-20-12r.html

http://www.responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/CRL-Car-Title-Report-FINAL.pdf




nancial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking About the Role of Usury Laws in Today’s Society, 51 S.C. L. Rev. 589, 598 (2000).176 See supra Part I.C.5.177 Fox et. al, supra note 172, at 10. 178 Tex. S.B. 1716, 83rd Leg., Reg. Sess. (2013).179 Tex. H.B. 1886, 83rd Leg., Reg. Sess. (2013).180 Tex. S.B. 1716, 83rd Leg., Reg. Sess. (2013).181 Id.182 Uriah King & Leslie Parrish, Springing the Debt Trap: Rate Caps Are Only Proven Payday Lending Reform, Center for Responsible Lending (Dec. 13, 2007). http://www.responsiblelending.org/payday-lending/research-analysis/springing-the-debt-trap.pdf.183 Id. 184 Thomas, supra note 167, at 2412. See Alan M. White, Credit and Human Welfare: Lessons from Microcredit in Developing Nations, 69 Wash. & Lee L. Rev. 1093, 1136 (2012) (“[O]verborrowing risk may be mitigated through credit-product design (e.g., requiring amortization) and requirements for lenders to assess repayment ability properly.”).185 Uriah King & Leslie Parrish, Payday Loans, Inc.: Short on Credit, Long on Deb, Center for Responsible Lending (Mar. 2011), http://www.responsiblelending.org/payday-lending/research-analysis/payday-loan-inc.pdf. 186 Tex. S.B. 1716, 83rd Leg., Reg. Sess. (2013).187 William O. Brown & David W. Findlay, Payday Lending Factbook, Consumer Credit Research Foundation (Dec. 2004), http://www.creditresearch.org/editor/assets/files/PaydayLendingFinal_woTitle.pdf. Contra Christopher L. Peterson, Usury Law, Payday Loans, and Statutory Sleight of Hand: Salience Distortion in American Credit Pricing Limits, 92 Minn. L. Rev. 1110, 1159 (2008) (illustrating how repeat consumers do use payday loans for years).188 Brown and Findlay, supra note 187, at 8. But see Noyes, supra note 164, at 1637 (stating that evidence shows rollovers and concurrent loans are abundant). See Houren, supra note 24, at 568 (stating that the industry’s profitability is due to repeat borrowers).189 Paige Marta Skiba, Regulation of Payday Loans: Misguided?, 69 Wash. & Lee L. Rev. 1023, 1042 (2012). 190 Peterson, supra note 187 at 1126. 191 Zywicki, supra note 4, at 425.192 Benjamin D. Faller, Payday Loan Solutions: Slaying the Hydra (and Keeping It Dead), 59 Case W. Res. L. Rev. 125, 134 (2008). See Plunkett & Hurtado, supra note 6, at 34 (describing back to back borrowing as “churning”). 193 Bar-Gill & Warren, supra note 152, at 55. 194 Tex. H.B. 1886, 83rd Leg., Reg. Sess. (2013).195 Id. 196 Id.197 Peterson, supra note 187, at 1126–27. See also Reynolds, supra note 156, at 322 (stating that “the payday loan industry’s success is achieved through the enormous cost to its customers”).198 Peterson, supra note 139, at 916. See Ronald J. Mann & Jim Hawkins, Just Until Payday, 54 UCLA L. Rev. 855, 881 (2007) (discussing how normal individuals might not really understand the lending transaction).199 Peterson, supra note 139, at 916. 200 Id. at 917–918. But see Webster, supra note 4, at 1075 (describing payday loans as “one of the most transparent financial product[s] on the market”). 201 Lee, supra note 165, at 122. 202 Tex. S.B. 1716, 83rd Leg., Reg. Sess. (2013). 203 Id. See Tex. H.B. 1886, 83rd Leg., Reg. Sess. (2013) (providing the same amendments to the CSO Act).204 Dee Pridgen, Putting Some Teeth in TILA: From Disclosure to Sub-stantive Regulation in the Mortgage Reform and Anti-Predatory Lending Act of 2010, 24 Loy. Consumer L. Rev. 615, 616 (2012).

205 Mann & Hawkins, supra note 198, at 865. 206 Myth v. Reality, Consumer Financial Services of America, available at http://cfsaa.com/aboutthepaydayindustry/myth-vs-reality.aspx (last visited April 2013). 207 But see Webster, supra note 4, at 1052 (describing payday loans as a “sound choice” and an “effective financial tool” for consumers’ short-term needs).208 Francis, supra note 10, at 619. See Michael A. Garemko III, Texas’s New Payday Lending Regulations: Effective Debiasing Entails More Than the Right Message, 17 Tex. J. C.L. & C.R. 211, 222 (2012) (describing “unrealistic optimism” as one of consumers’ cognitive problems when obtaining payday loans). 209 But see Webster, supra note 4, at 1052 (states that “our company, [Advance America], offers low-cost, transparent, and convenient credit with meaningful consumer protections).210 Bruch, supra note 150, at 1287. 211 Thomas, supra note 167, at 2402–03.212 Hawkins, supra note 15, at 595–96.213 Thomas, supra note 167, at 2402–03.214 Id. at 2414.215 Credit Access Business Bulletin City Ordinances, Office of Con-sumer Credit Commissioner (Dec. 2012) available at http://www.occc.state.tx.us/pages/Legal/CAB_advisory/CAB%20City%20Ordi-nances%20Dec%2012.pdf (last visited Apr. 2013).216 Loan-Shark Financed Campaigns Threaten Payday Loan Reform, Texans for Public Justice (Mar. 2011) available at http://info.tpj.org/reports/pdf/PaydayReport.mar2011.pdf (last visited Apr. 2013). 217 Bar-Gill & Warren, supra note 152, at 85.218 Id.

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http://cfsaa.com/aboutthepaydayindustry/myth-vs-reality.aspx

http://cfsaa.com/aboutthepaydayindustry/myth-vs-reality.aspx

http://info.tpj.org/reports/pdf/PaydayReport.mar2011.pdf

http://info.tpj.org/reports/pdf/PaydayReport.mar2011.pdf


n Dewan v. Walia the Fourth Circuit Court of Appeals recently addressed the reversal of arbitration awards based on “manifest disregard of the law”, a subject over which US Circuit Courts are split.1 In Dewan, the court held that the decision of an arbitrator should be vacated on grounds of the arbitrator’s blatant failure to employ prop-

er jurisprudential principles in rendering her determinations, and this failure constituted one such “manifest disregard.”2

The Case Appellant Dewan, an accounting firm, signed Appellee Wa-lia, a Canadian national, to a three-year employment agreement culminating in 2006; Dewan secured a U.S. work visa for Walia as part of the hiring process.3 The parties signed an extension of Walia’s employment agreement in 2006 but under circumstances that remain in dispute, the parties parted ways in 2009. Upon his de-parture, Walia signed an agreement (the Release) to “release and dis-charge” Dewan from claims related to his employment in exchange for $7,000, with a provision allowing for binding arbitration in the event of a dispute regarding the Release itself.4 After execution of the Release, Dewan initiated arbitration proceedings against Walia alleging breach of both the Release and Walia’s earlier employment con-tract.5 Walia asserted counterclaims on several grounds, and pur-suant to the terms of the Release, the claims were subsequently arbitrated. Following an inquiry, the arbitrator not only ruled in Walia’s favor, but also awarded him over $450,000 in compensa-tory and punitive damages.6 Dewan challenged the award in the district court, and although the court denied his petition to vacate, his subsequent appeal to the Fourth Circuit proved more fruitful. The appellate court focused on the “expansive breadth and scope” of certain clauses in the Release’s language. For example, one clause stated, “Employee promises never to file a lawsuit or assist in or commence any action asserting any claims, losses, li-abilities, demands, or obligations released hereunder.”7 The court held that this and other similar provisions in the Release prevented Walia from bringing forth his counterclaims in any forum, in-cluding arbitration, and that the arbitrator’s decision must thus be vacated in its entirety because of her “manifest disregard of the law” in awarding damages where none – under the express terms of the Release – were permissible.8

“Manifest Disregard” Alive and Well?

By Timothy Dyer*

IThe Law “Manifest disregard of the law” as a means for dissolving arbitration decisions remains in wide dispute, with circuits split on its permissibility. The Fourth Circuit, however, has generally allowed its use.9 Nonetheless, considerable confu-sion remains even within individual circuits as to how the law should be applied. In Dewan, both parties and the district court believed the Maryland Uniform Arbitration Act con-trolled the resolution of the dispute.10 The Fourth Circuit, however, disagreed, holding instead that the Federal Arbitra-tion Act (“FAA”) was controlling. In the court’s view, the FAA did not merely supply a procedural framework applica-ble in federal courts; it also called for the application, in both federal and state courts, of federal substantive law regarding arbitration.11

Under the FAA, the four grounds under which a review-ing court can vacate an arbitra-tion award are: “(1) where the award was procured by corrup-tion, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct . . . ; or (4)

where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”12 The Fourth Circuit contends there are permissible common-law grounds upon which an award may be vacated as well, including “cir-cumstances where an award fails to draw its essence from the contract, or the award evidences a manifest disregard of the law.”13

This conclusion, however, has been called into considerable doubt following a series of U.S. Supreme Court decisions sug-gesting the contrary. These decisions have held that a reviewing court’s exclusive means to vacate an arbitration award are the FAA’s four statutory grounds.14 As the Fourth Circuit noted in Dewan:

In the wake of the Supreme Court’s decision in Hall Street . . ., this court has recognized that consider-able uncertainty exists “as to the continuing viabil-ity of extra-statutory grounds for vacating arbitration awards.” Nevertheless, we have recognized that “mani-fest disregard continues to exist” as a basis for vacating

“Manifest disregard of the law” as a means for dissolving arbitration decisions remains in wide dispute, with circuits split on its permissibility.


an arbitration award, either as “an independent ground for review or as a judicial gloss” on the enumerated grounds for vacatur set forth in the FAA.15

In a strongly worded dissent, Judge Wynn pointed out that a court’s review of an arbitration award should be so “severely cir-cumscribed” that it is “among the narrowest known at law,” and suggested that the case offers insufficient grounds for overturning the arbitrator’s award.16 The dissent also disputed the majority’s interpretation of the Release as prohibiting both legal and arbi-trational recourse; only the former was expressly excluded from the dissenter’s perspective.17

Conclusion “Manifest disregard” as a basis for vacating arbitration

awards remains shaky at best. While the Fourth Circuit continues to issue rulings on this basis, as do the Second, Sixth, Ninth and Tenth Circuits, the First, Fifth, Seventh, Eighth and Eleventh Circuits have determined that the tenet is no longer a viable form of recourse for challenging arbitration awards.18 Although the Su-preme Court has yet to issue a decisive opinion regarding these extra-statutory grounds for negating arbitration awards, its recent history – encompassing a strong embrace of federalist principles and a rejection of lower courts’ attempts to circumvent FAA mandates– suggests that the Fourth Circuit’s stance on “manifest disregard” may soon be manifestly disregarded.

* University of Houston Law Center, Class of 2014.

1 Dewan v. Walia, ___ F.3d ___, 2013 WL 5781207 (4th Cir. 2013).2 Id., at *7.3 Id., at *1. 4 Id., at *5-6.5 Id., at *2.6 Id., at *3.7 Id., at *6.8 Id., at *7.9 See id., at *5 n.5, wherein the court stated:

In the wake of the Supreme Court’s decision in Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008), this court has recognized that considerable uncertainty exists “as to the kkkkcontinuing viability of extra-statutory grounds for vacating arbitration awards.” Raymond James, 596 F.3d at 193 n.13. Nevertheless, we have recognized that “manifest disregard continues to exist” as a basis for vacating an arbitration award, either as “an independent ground for review or as a judicial gloss” on the enumerated grounds for vacatur set forth in the FAA. Wachovia Secs., LLC v. Brand, 671 F.3d 472, 483 (4th Cir. 2012).

10 Id., at *3-4.11 Id., quoting Preston v. Ferrer, 552 U.S. 346, 349 (2008).12 9 U.S.C. §10(a) (2002).13 Dewan, 2013 WL 5781207, at *5. The court stated:

The permissible common law grounds for vacating such an award “include those circumstances where an award fails to draw its essence from the contract, or the award evidences a manifest disregard of the law.” MCI Constructors, 610 F.3d at 857 (citation omitted). Under our precedent, a manifest disregard of the law is established only where the “arbitrator understand[s] and correctly state[s] the law, but proceed[s] to disregard the same.” Patten v. Signator Ins. Agency, Inc., 441 F.3d 230, 235 (4th Cir. 2006) (citation omitted). Merely misinterpreting contract language does not constitute a manifest disregard of the law. Id. An arbitrator may not, however, disregard or

modify unambiguous contract provisions. Id. “Moreover, an award fails to draw its essence from the agreement if an arbitrator has ̀ based his award on his own personal notions of right and wrong.’ . . . In such circumstances, a federal court has `no choice but to refuse enforcement of the award.’

14 See, e.g., Hall Street Assoc. v. Mattel, Inc., 552 U.S. 576 (2008).15 Dewan, 2013 WL 5781207, at *5 n.5 (citations omitted).16 Id., quoting Apex Plumbing Supply, Inc. v. U.S. Supply Co., 142 F.3d 188, 193 (4th Cir. 1998)(footnote omitted).17 Dewan, 2013 WL 5781207, at *9. Dewan was not selected for publication in the Federal Register, and per the Fourth Circuit’s rules, unpublished opinions are not binding within the circuit. Therefore, the case may be repetitious of the court’s former holdings or may not be intended to gain precedential traction.18 See Liz Kramer, “Manifest Disregard Of The Law” Has Circuit Courts in Disarray, Arbitration Nation (Mar. 4, 2012), http://arbitrationnation.com/manifest-disregard-of-the-law-has-circuit-courts-in-disarray/; see also Citigroup Global Mkts., Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009) (holding FAA statutory provisions are the exclusive means for vacatur).


Consumer News AlertRecent Decisions

Since October 2006, the Center for Consumer Law has published the “Consumer News Alert.” This short newsletter contains everything from consumer tips and scam alerts, to shopping hints and financial calculators. It also has a section just for attorneys, highlighting recent decisions. The alert is delivered by email three times a week. Below is a listing of some

of the cases highlighted during the past few months. To view the full opinion, click on the link; or if that does not work, copy the link and paste it to your browser. To subscribe and begin receiving your free copy of the Consumer News Alert in your mailbox, visit the Center for Consumer Law, www.uhccl.org.

CIRCUIT COURTS

Failure to renew credit card is not a “significant change” in terms. The Third Circuit held that a credit card company’s decision to not re-new a credit card was not a significant change within the scope of the Credit CARD Act or regulation Z. Therefore, cardholder was not entitled to 45-days notice. Dieffenbach v. RBS Citizens, N.A., 514 F. App’x 125 (3d Cir. 2013). http://www2.ca3.uscourts.gov/opinarch/123102np.pdf

Letter sent by attorney in bankruptcy proceeding was a communi-cation, actionable under FDCPA. In a complicated opinion, the Third Circuit held that an attorney who sent a letter and notice requesting an examination and offering to settle a debt, could be sued for violations of the Fair Debt Collection Practices Act. Simon v. FIA Card Servs., N.A., 732 F.3d 259 (3d Cir. 2013). http://scholar.google.com/scholar_case?case=8694616855064421376&q=Simon+v.+FIA+Card+Services,+N.A.&hl=en&as_sdt=6,44&as_vis=1

Fifth Circuit overturns NLRB’s ruling that class-action bans are un-fair labor practices. The Fifth Circuit held that the National Labor

Relations Board overstepped its authority when it ruled that an employer violated federal labor law by requiring its employees to sign an arbitration agreement containing a class-action ban. The National Labor Relations Board held that D.R. Horton, Inc. had violated the National Labor Relations Act by requiring its em-ployees to sign an arbitration agreement that, among other things, prohibited an employee from pursuing claims in a collective or class action. The court disagreed and concluded that the Board’s decision did not give proper weight to the Federal Arbitration Act. The court held that the NLRB’s ruling could not be reconciled with the Supreme Court’s decision in AT&T Mobility v. Concep-cion: “Like the statute in Concepcion, the Board’s interpretation prohibits class- action waivers.” As to the second point, the court held that nothing in the text or legislative history of the NLRA “contains a congressional command to override the FAA.” Judge Grave dissented. D.R. Horton, Inc. v. N.L.R.B., 12-60031, 2013 WL 6231617 (5th Cir. Dec. 3, 2013). http://www.employment-classactionreport.com/dr%20horton.pdf

Law school tuition was not paid for personal, family or household purpose. The Sixth circuit held that the Michigan Consumer Pro-tection Act did not apply to law school graduates action against law school. The court relied on the students’ complaint that stat-ed they intended to use their law degrees to better themselves, “through the attainment of full-time employment in the legal sector.” MacDonald v. Thomas M. Cooley Law Sch., 880 F. Supp. 2d 785 (W.D. Mich. 2012) aff’d, 724 F.3d 654 (6th Cir. 2013). http://www.ca6.uscourts.gov/opinions.pdf/13a0198p-06.pdf

Arbitration agreement providing for NAF rule is still enforceable. The Seventh Circuit compelled arbitration even though the parties’ loan agreement provided for “binding arbitration by one arbitrator by and under the Code of Procedure of the National Arbitration Forum [NAF],“notwithstanding that the NAF had not accepted consumer cases since July of 2009. The district court had refused

http://scholar.google.com/scholar_case?case=8694616855064421376&q=Simon+v.+FIA+Card+Services,+N.A.&hl=en&as_sdt=6,44&as_vis=1



http://www.employmentclassactionreport.com/dr%20horton.pdf

http://www.employmentclassactionreport.com/dr%20horton.pdf


to compel arbitration, finding the NAF was an “integral part of the agreement” and without it the arbitration agreement was void. Noting a circuit split in which the 3d and 11th Circuits have com-pelled arbitration, despite selection of the NAF, while the 5th Cir-cuit has declared agreements calling for the NAF unenforceable, the 7th Circuit sided with those compelling arbitration. The deci-sion engaged in a lengthy analysis suggesting that the line of cases finding one aspect of an arbitration clause “integral” contradicts Section 5 of the FAA and does not come from a general state law principle allowable under Section 2. Green v. U.S. Cash Ad-vance Ill., LLC, 724 F.3d 787 (7th Cir. 2013). http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2013/D07-30/C:13-1262:J:Easterbrook:aut:T:fnOp:N:1176840:S:0

Seventh Circuit allows class action with individual damages, rejecting strict reading of Comcast Corp. v. Behrend. The Seventh Circuit re-jected the notion that a class action cannot proceed if there might be individualized damages. The court stated: “It would drive a stake through the heart of the class action device, in cases in which damages were sought rather than an injunction or a declaratory judgment, to require that every member of the class have identi-cal damages. If the issues of liability are genuinely common is-sues, and the damages of individual class members can be readily determined in individual hearings, in settlement negotiations, or by creation of subclasses, the fact that damages are not identical across all class members should not preclude class certification. Otherwise defendants would be able to escape liability for tortious harms of enormous aggregate magnitude but so widely distributed as not to be remediable in individual suits. Butler v. Sears, Roebuck & Co., 702 F.3d 359 (7th Cir. 2012) cert. granted, judgment va-cated, 133 S. Ct. 2768 (U.S. 2013) and judgment reinstated, 727 F.3d 796 (7th Cir. 2013). http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2013/D08-22/C:11-8029:J:Posner:aut:T:fnOp:N:1191460:S:0

TILA requires plaintiff seeking rescission must file suit within three-year limitation period. The Eight Circuit held that a plaintiff seeking rescission must do more than merely give notice within the three years; he must file suit. Keiran v. Home Capital, Inc., 720 F.3d 721 (8th Cir. 2013). http://media.ca8.uscourts.gov/opndir/13/07/113878P.pdf

STATE COURTS

Hawaii Supreme Court Says No Arbitration Without Meaningful Consent. The trial court enforced an arbitration clause that would have required the plaintiff to pay substantial costs to arbitrate, had sharp limitations on the plaintiff’s ability to take discovery, and had onerous secrecy provisions. The Hawaii Supreme Court reversed, finding that there had been no mutual assent or meeting of the minds. The court noted that the burden was on Kaiser, as the party moving to compel arbitration, to demonstrate that the patient had assented to arbitration. The court held that to form an agreement to arbitrate, a contract must be unambiguous as to the intent of the parties to submit disputes to arbitration. Siopes v. Kaiser Found. Health Plan, Inc., 130 Haw. 437, 312 P.3d 869 (2013), as corrected (Sept. 26, 2013). http://www.courts.state.hi.us/docs/opin_ord/sct/2013/September/SCAP-12-0000361.pdf

Three-year period for rescission contained in Truth in Lending Act runs from consummation of loan. The Court of Appeals of Ken-tucky held that in a Truth in Lending suit, the three year period for rescission is not a statute of limitations but rather a bar to the right of rescission. The court also noted that a claim for actual

damages must be based on evidence directly relating to the non-disclosure. Finally, the court affirmed a substantial reduction in the award of attorney’s fees based on the limited success achieved. Marema v. First Fed. Sav. Bank of Elizabethtown, Inc., 405 S.W.3d 512 (Ky. Ct. App. 2012), reh’g denied (Dec. 14, 2012). http://scholar.google.com/scholar_case?case=3899477972294201468&q=Marema+v.+First+Fed.+Sav.+Bank+of+Elizabethtown,+Inc.,&hl=en&as_sdt=6,44&as_vis=1

Unfair and hidden arbitration clause is unenforceable. A U.S. dis-trict court in Nevada refused to enforce an arbitration clause in a privacy/security breach class action. The arbitration clause pro-vided, “Accessing, browsing or otherwise using the site indicates your agreement to all the terms and conditions in this agreement, so please read this agreement carefully before proceeding.” The court noted, “Very little is required to form a contract nowadays–but this alone does not suffice.” It continued, “the Internet has not changed the basic requirements of a contract, and there is no agreement where there is no acceptance, no meeting of the minds, and no manifestation of assent.” In re Zappos.com, Inc., Customer Data Sec. Breach Litig., 893 F. Supp. 2d 1058 (D. Nev. 2012). http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?article=1152&context=historical

Housekeeper bound by arbitration agreement. The Virginia Supreme Court has enforced an arbitration agreement against a housekeep-er who sought to sue her former boss, after he physically assaulted her. The live-in housekeeper signed a one-page agreement to ar-bitrate that was presented to her by her employer, sometime after she started working. It contained no other agreement about her pay, hours, or other terms of employment. A unanimous Virginia Supreme Court sent the dispute to arbitration. Schuiling v. Harris, 747 S.E.2d 833 (2013). http://www.courts.state.va.us/opinions/opnscvwp/1121582.pdf

Arbitration agreement in employee handbook is enforceable. The West Virginia Supreme Court found an employee handbook was sufficient to create an arbitration agreement between the employee and employer, and that the arbitration agreement was enforceable. The primary argument from the employee was that the agreement was unconscionable because the employer could change it at any time. The arbitration agreement provided that employer “may from time to time modify or discontinue [its dis-pute resolution program] by giving covered employees thirty (30) calendar days notices any such modifications shall be applied pro-spectively only. The court found that the 30-day notice require-ment, and the fact that existing disputes would proceed under the terms existing when they were submitted, meant the agreement was not unconscionable. New v. Gamestop, Inc., No. 12–1371, 2013 WL 5976104 (W. Va. Nov. 6, 2013). http://www.courtswv.gov/supreme-court/docs/fall2013/12-1371.pdf

Very little is required to form a contract nowadays–but this alone does not suffice. The Internet has not changed the basic require-ments of a contract, and there is no agreement where there is no acceptance, no meeting of the minds, and no manifestation of assent.

http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2013/D07-30/C:13-1262:J:Easterbrook:aut:T:fnOp:N:1176840:S:0



http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2013/D08-22/C:11-8029:J:Posner:aut:T:fnOp:N:1191460:S:0



http://media.ca8.uscourts.gov/opndir/13/07/113878P.pdf

http://media.ca8.uscourts.gov/opndir/13/07/113878P.pdf

http://www.courts.state.hi.us/docs/opin_ord/sct/2013/September/SCAP-12-0000361.pdf



http://scholar.google.com/scholar_case?case=3899477972294201468&q=Marema+v.+First+Fed.+Sav.+Bank+of+Elizabethtown,+Inc.,&hl=en&as_sdt=6,44&as_vis=1




http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?article=1152&context=historical

http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?article=1152&context=historical

http://www.courts.state.va.us/opinions/opnscvwp/1121582.pdf

http://www.courts.state.va.us/opinions/opnscvwp/1121582.pdf


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CONSUMER CREDIT

ATTORNEY’S FEES IN AMOUNT OF $125,000 UPHELD WHEN FCRA CONSUMER RECOVERD $1,700

Haberman v. PNC Mortg. Co., 915 F. Supp. 2d 800 (E.D. Tex. 2013).

FACTS: Plaintiff, Steven Haberman, prevailed in his suit against defendant, PNC Mortgage Company (PNC), for violating the Fair Credit Reporting Act (FCRA). Haberman was awarded $1,700 in statutory damages and attorney’s fees. Haberman filed a motion for attorney’s fees and reimbursement of litigation ex-penses totaling $130,000.HOLDING: Granted in part.REASONING: The court explained that it could award reason-able attorney’s fees for any successful action in enforcing liability under the FCRA. The court’s determination of reasonable attor-ney’s fee was done under a two-step process. First, the court used the lodestar method to calculate a reasonable amount of attorney’s fees. Lodestar is the number of hours reasonably expended on a case, multiplied by the prevailing hourly rate in the commu-nity for similar work. Second, the court considered the lodestar amount against the twelve Johnson balancing factors. The Johnson factors include the: (1) time and labor required; (2) novelty and difficulty of issues; (3) skill required; (4) loss of other employment in taking the case; (5) customary fee; (6) whether the fee is fixed or contingent; (7) time limitations imposed by client or circum-stances; (8) amount involved and results obtained; (9) counsel’s experience, reputation, and ability; (10) case undesirability; (11) nature and length of relationship with the client; and (12) awards in similar cases. After considering these factors a court may adjust the lodestar upward or downward. Lodestar, however, is presumed reasonable and should only be modified in exceptional cases. Under lodestar, the court found that counsel expended an unreasonable number of hours. The court found hours charged by two attorneys were duplicative, and thus, were reduced the hours accordingly. Based on the reduced number of hours, the new lodestar amount was approximately $125,000. Under the Johnson factors, the court found the requested attorney’s fees were unreasonable, but the reduced fee under lodestar was reasonable. The court briefly addressed the Johnson factors, giving the most emphasis in its analysis to the eighth fac-tor; the degree of successful results obtained by counsel. Though Haberman only recovered $1,700, the court was not required to make a proportional reduction to the fees. Instead the court focused on Haberman’s success of prevailing on all eight of his FRCA claims. Following the lodestar analysis and balancing test against the Johnson factors, the court awarded Haberman a re-duced amount of attorney’s fees totaling $125,000.

FAILURE TO RENEW CREDIT CARD IS NOT A “SIGNIF-ICANT CHANGE” IN TERMS

Dieffenbach v. RBS Citizens, N.A., 514 F. App’x 125 (3rd Cir. 2013).

FACTS: Appellee, RBS Citizens, N.A. (“Bank”), issued a credit

card to appellant, Paul Dieffenbach, Jr. Dieffenbach subsequently received a detailed letter from the Bank informing him that the Bank would not be renew-ing his credit card because his account failed to satisfy the minimum account re-quirements for renewal. In response to Dieffenbach’s inquiry, the Bank sent a sec-ond letter that reiterated the Bank’s reasons for not re-newing Dieffenbach’s credit card. The Bank also referred Dieffenbach to the Credit Card Agreement that detailed the Bank’s right not to renew. Dieffenbach filed suit alleging that the Bank violated the no-tice requirement of the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) by not sending him a 45-day advance written notice of a “significant change” to his credit account terms. The district court granted the Bank’s cross-motion for summary judgment and held that the 45-day notice require-ment to a cardholder’s agreement does not apply to a creditor’s decision not to renew a credit card. Dieffenbach appealed.HOLDING: Affirmed.REASONING: The court first explained that the Credit CARD Act requires a creditor to send a written notice 45 days before any significant change to the terms of credit service. The term “sig-nificant change” is not separately defined in the Act but the court noted that the term includes any increase in any fees or finance charges. Dieffenbach argued that the Act required an expansive reading but he failed to point to any specific provision in either the Act or its implementing regulation, Regulation Z. The court found no support for Dieffenbach’s argument in either case law or statutory text. Although several examples of a significant change were provided in the Act and Regulation Z, none addressed a creditor’s decision not to renew a credit card. Therefore, the court held that a 45-day notice was not required because failure to re-new a credit card does not constitute a significant change in terms.

TILA REQUIRES PLAINTIFF SEEKING RESCISSION MUST FILE SUIT WITHIN THREE-YEAR LIMITATION PERIOD

Keiran v. Home Capital, Inc., 720 F.3d 721 (8th Cir. 2013).

FACTS: Appellants, home mortgagers (Mortgagers), refinanced their mortgages with appellees, loan-servicing companies (Loan Companies). At closing, Mortgagers acknowledged receipt of re-quired notices: (1) right to rescind notice; and (2) a TILA disclo-sure statement. A few months before the third anniversary of clos-ing, Mortgagers sent notices of rescission to the Loan Companies claiming Mortgagers had not received the required TILA notices. The Loan Companies denied the requests stating there was no basis for rescission. Mortgagers consequently filed suits. Both suits were filed more than three years after closing had occurred. The court grant-

The Credit CARD Act requires a creditor to send a written notice 45 days be-fore any significant change to the terms of credit service.


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ed the Loan Companies’ summary judgments, holding the suits were barred because the three-year TILA statute of repose had passed when the suits were filed. Mortgagers appealed.HOLDING: Affirmed.REASONING: The court addressed whether TILA requires a mere notice of intent to rescind within three years of closing, or the filing of an actual suit seeking rescission within that time frame. The court examined the circuit split on the matter in reach-ing its decision.

The Third and Fourth Circuits have found mere notice is sufficient. These courts found Regulation Z, the implementing statute in TILA, required the consumer notify the creditor of re-scission by mail, telegram or other means of written communica-tion to exercise the right of rescission. According to this line of reasoning, the consumer exercised his right to rescind simply by filing notice. In the instant case, the court noted Regulation Z stated a requirement, but it did not provide every necessary step to accomplish rescission.

The court refused to adopt the view of the Third and Fourth Circuits, instead adopting the Ninth and Tenth Circuits analysis, which held filing suit was necessary to exercise the right to rescis-sion. Relying on the Supreme Court’s interpretation of TILA, the court found Congress intended to bar rescission under TILA after the three-year period had run. The mere request for rescission via written letter, without more, was not enough to preserve a court’s ability to effectuate a rescission claim after the three-year period had run.

The court also turned to public policy for support. If a plain-tiff could only notify the lender of his “intent” to rescind, at some uncertain future date, the plaintiff may or may not take action upon that intent. This uncertainty would serve as a cloud on the bank’s title if the property proceeded to foreclosure. Also, allow-ing suit to be filed after the three-year statute of repose expired contravened the purpose of a statute of repose, which is concerned with a defendant’s peace.

ADVERSE ACTION UNDER THE ECOA INCLUDES EVEN AN INVALID AND UNENFORCEABLE ATTEMPT TO RE-VOKE CREDIT

Schlegel v. Wells Fargo Bank, N.A., 720 F.3d 1204 (9th Cir. 2013).

FACTS: Appellants, John and Carol Schlegel fell behind on their home mortgage payments and filed a petition for bankruptcy. The loan was reassigned to appellee, Wells Fargo Bank, N.A. (“Wells Fargo”), which offered a loan modification extending the Schlegels’ mortgage term to 40 years with the bankruptcy court’s approval. The Schlegels did not miss any subsequent payments. Wells Fargo

failed to update its records and erroneously sent the Schlegels a default notice threatening acceleration and possible foreclosure if payment was not received a month later. The Schlegels called Wells Fargo regarding the letter and were told no modification agreement was in effect.

After receiving no satisfactory explanation for the bank’s fail-ure to acknowledge their loan modification, the Schlegels filed suit, requesting relief under the Fair Debt Collection Practices Act (FDCPA) and Equal Credit Opportunity Act (ECOA). One week after filing, Wells Fargo again threatened foreclosure pro-ceedings unless full payment was received. After the fifth notice, Wells Fargo acknowl-edged the modification agreement and the in-correct default notices. The District Court dis-missed the complaint for failure to state a claim. The Schlegels appealed.HOLDING: Affirmed in part, reversed in part, and remanded.REASONING: First, the court noted that a debt collector under the FDCPA is an entity (1) that used any instrumentality of inter-state commerce for the principal purpose of debt collection; or (2) that regularly collected or attempted to collect, directly or indi-rectly, debts owed. The court found that Wells Fargo did not meet the first definition and addressed the validity of the second defini-tion. It found here was no factual basis that Wells Fargo regularly collected debts owed to an entity other than Wells Fargo. Because Wells Fargo was not principally engaged in collecting debt, the court held that Wells Fargo did not fall under the definition of a debt collector, and dismissed the FDCPA claim.

Second, under the ECOA, when a creditor takes adverse ac-tion, such as a revocation of credit, the debtor is entitled to a state-ment of reasons for the action under the statute’s notice require-ment. The appellate court concurred with the Schlegels’ rationale that Wells Fargo’s acceleration of their mortgage debt constituted a revocation of credit under the ECOA, and that such credit revo-cation was to be considered as adverse even when undertaken in a mistaken and/or unenforceable context. Even though the default notices did not alter the loan modification agreement and had no binding effect, the letters prima facie revoked the prior agree-ment. Because both parties agreed that Wells Fargo sent no valid adverse action notice, its failure to adhere to ECOA requisites was sufficient to survive the bank’s original motion to dismiss. The dismissal of the ECOA claim was reversed and remanded.

Under the ECOA, when a creditor takes ad-verse action, such as a revocation of credit, the debtor is entitled to a statement of rea-sons for the action


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DEBT COLLECTION

FDCPA REQUIRES DEBT BE OWED OR DUE TO SOME-ONE OTHER THAN THE COLLECTOR

Schlegel v. Wells Fargo Bank, N.A., 720 F.3d 1204 (9th Cir. 2013).

FACTS: Appellants, John and Carol Schlegel fell behind on their home mortgage payments and filed a petition for bankruptcy. The loan was reassigned to appellee, Wells Fargo Bank, N.A. (“Wells Fargo”), which offered a loan modification extending the Schlegels’ mortgage term to 40 years with the bankruptcy court’s approval. The Schlegels did not miss any subsequent payments. Wells Fargo failed to update its records and erroneously sent the Schlegels a default notice threatening acceleration and pos-sible foreclosure if payment was not received a month later. The Schlegels called Wells Fargo regarding the letter and were told no modification agreement was in effect.

After receiving no satisfactory explanation for the bank’s fail-ure to acknowledge their loan modification, the Schlegels filed suit, requesting relief under the Fair Debt Collection Practices Act (FDCPA) and Equal Credit Opportunity Act (ECOA). One week after filing, Wells Fargo again threatened foreclosure pro-ceedings unless full payment was received. After the fifth notice, Wells Fargo acknowledged the modification agreement and the incorrect default notices. The District Court dismissed the com-plaint for failure to state a claim. The Schlegels appealed.HOLDING: Affirmed in part, reversed in part, and remanded.REASONING: First, the court noted that a debt collector un-der the FDCPA is an entity (1) that used any instrumentality of interstate commerce for the principal purpose of debt collection; or (2) that regularly collected or attempted to collect, directly or indirectly, debts owed. The court found that Wells Fargo did not meet the first definition and addressed the validity of the second definition. It found here was no factual basis that Wells Fargo regularly collected debts owed to an entity other than Wells Far-go. Because Wells Fargo was not principally engaged in collecting debt, the court held that Wells Fargo did not fall under the defini-tion of a debt collector, and dismissed the FDCPA claim.

Second, under the ECOA, when a creditor takes adverse ac-tion, such as a revocation of credit, the debtor is entitled to a state-ment of reasons for the action under the statute’s notice require-ment. The appellate court concurred with the Schlegels’ rationale that Wells Fargo’s acceleration of their mortgage debt constituted a revocation of credit under the ECOA, and that such credit revo-cation was to be considered as adverse even when undertaken in a mistaken and/or unenforceable context. Even though the default notices did not alter the loan modification agreement and had no binding effect, the letters prima facie revoked the prior agreement. Because both parties concurred that Wells Fargo sent no valid adverse action notice, its failure to adhere to ECOA requisites was sufficient to survive the bank’s original motion to dismiss. The dismissal of the ECOA claim was reversed and remanded.

MERS WAS NOT A DEBT COLLECTOR UNDER THE FD-CPA

McLaughlin v. Chase Home Fin. LLC, 519 F. App’x 904 (6th Cir. 2013).

FACTS: Appellant, John McLaughlin, obtained a property loan and granted the first appellee, Mortgage Electronic Registration Systems (MERS), a mortgage in the property as security for the loan. When McLaughlin defaulted, the bank foreclosed on the property. McLaughlin filed suit against MERS alleging FDCPA violations. MERS moved to dismiss the complaint contending that it was not a debt collector according to the FDCPA. The district court granted the motion. McLaughlin appealed.HOLDING: Affirmed.REASONING: The FDCPA excludes from the definition of “debt collector” any “person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity [. . .] concerns a debt which was not in default at the time it was obtained by such person.” In order for a party to fall under the category of debt collector, the party must have received the rights to collect on the debt after default. MERS was not a debt collector because it “obtained” the right to collect when McLaughlin granted MERS the mortgage as security for the property loan at a time when the debt was not in default.

ATTORNEY DID NOT “REGULARLY” ENGAGE IN DEBT COLLECTON FOR PURPOSES OF FDCPA

James v. Wadas, 724 F.3d 1312 (10th Cir. 2013).

FACTS: Defendant, Wadas, was hired as an attorney in a debt collection action against plaintiff, James. Wadas improperly tried to collect attorney’s fees as part of the collection effort. James sued for violations of the Fair Debt Collection Practices Act (FDCPA). The district court granted summary judgment in favor of Wadas after determining that the attorney was not a debt collector under the FD-CPA because the attorney did not “regularly” engage in debt collection activities. James ap-pealed.HOLDING: Affirmed.REASONING: Under the FDCPA, debt collection sta-tus exists when: (1) engag-ing in debt collection as the principal purpose of business, or (2) engaging in debt collection “regularly.” The court defined “regularly” as “fixed and certain in-tervals, regular in point in time” [. . .] “in accordance with some consistent or periodical rule or practice.” A person may regular-ly render debt collection services, even if these services are not a principal purpose of the business. Indeed, if the volume of a person’s debt collection services is great enough, it is irrelevant

The court defined “regularly” as “fixed and certain inter-vals, regular in point in time” [. . .] “in accordance with some consistent or periodical rule or practice.”


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that these services only amount to a small fraction of the total business. The determination of whether or not debt collection oc-curred regularly was found to be on a case-by-case basis in light of certain factors. These factors included: (1) the absolute num-ber of debt collection communications issued, and/or collection-related litigation matters pursued over the relevant periods; (2) the frequency of such communications and/or litigation activity, including whether any patterns of such activity are discernible; (3) whether the entity has personnel specifically assigned to work on debt collection activity; (4) whether the entity has systems or contractors in place to facilitate such activity; and (5) whether the activity is undertaken in connection with ongoing client relation-ships with entities that have retained the lawyer or firm to assist in the collection of outstanding consumer debt obligations. In light of these factors, the court found that Wadas’s debt collection activity was minimal because Wadas engaged in only six to eight debt collection cases out of a total of 1,789 over the course of a decade. Furthermore, although Wadas had an ongo-ing business relationship with a creditor, it did not provide any significant business. Lastly, Wadas did not have any personnel or systems specifically assigned to work on debt collection.

LETTER SENT BY ATTORNEY IN BANKRUPTCY PRO-CEEDING WAS A COMMUNICATION UNDER FDCPA

BANKRUPTCY CODE DOES NOT PRECLUDE FDCPA CLAIMS

Simon v. FIA Card Servs. N.A., 732 F.3d 259 (3rd Cir. 2013).

FACTS: Appellants, Stacey and Robert Simon, filed for bank-ruptcy identifying a debt owed to appellee, FIA Card Services, N.A. FIA’s attorneys sent the Simons’ bankruptcy counsel a let-

The court held that express demand for payment is unneces-sary for a communica-tion to constitute an attempt to collect a debt, so long as the communication con-veyed information about a debt.

ter containing FIA’s intent to challenge the ability to discharge the debt and a Notice of Examination, sub-poenaing the Simons to a proceeding. The Simons filed a mo-tion in bankruptcy court to quash the Notice of Exami-nation, alleging improper compliance with subpoena requirements. The court granted the motion. The Si-mons also filed an adversary proceeding under the FD-CPA against FIA. The District Court granted FIA’s motion to dismiss, holding: (1) the Simons did not state claims under the FDCPA; and (2) the Bankruptcy Code precluded the FDCPA claims. Simons appealed. HOLDING: Reversed and remanded.REASONING: In response to FIA’s argument that no commu-nication to collect a debt occurred because the letter did not de-mand payment, the court held that express demand for payment is unnecessary for a communication to constitute an attempt to collect a debt, so long as the communication conveyed informa-tion about a debt. The court then addressed whether the FDCPA claims were precluded by the Bankruptcy Code. Looking to fellow circuits for guidance, the court adopted the Seventh Circuit’s view that the proper inquiry was whether the claims raised a direct conflict between the Bankruptcy Code and FDCPA. If no conflict was found, no preclusion of FDCPA claims under the Bankruptcy Code or Rules occurred.


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ARBITRATION

UNFAIR AND HIDDEN ARBITRATION CLAUSE IS UN-ENFORCEABLE

In re Zappos.com, Inc., 893 F. Supp. 2d 1058 (D. Nev. 2012).

FACTS: Plaintiffs, customers of Zappos.com (Customers), filed a class-action lawsuit for damages caused by hackers attempting to steal sensitive information stored on the server of defendant, Zappos.com (Zappos). Zappos attempted to stay litigation by compelling arbitration pursuant to the Terms of Use found on Zappos’ website. The Terms of Use were accessible by clicking on a link at the bottom of each page. The Terms of Use stated that “accessing, browsing or otherwise using the site indicates your agreement to all the terms and conditions in this agreement.” One such term was an arbitration agreement.HOLDING: Denied.REASONING: The court first looked to the language of the Fed-eral Arbitration Act (FAA), which states that arbitration agree-ments are valid, irrevocable, and enforceable, unless grounds in law or equity required revocation. Despite the presumption in favor of arbitration, arbitration is a matter of contract and the FAA does not require parties to arbitrate where no agreement ex-isted. In the instant case, the necessity to arbitrate rested on two prongs: (1) whether a valid agreement to arbitrate existed; and (2) if it did, whether it encompassed the dispute at hand.

As to the first prong, the court determined that the Cus-tomers did not agree to the website’s Terms of Use. The Zappos website used a “browsewrap” agreement for its Terms of Use, in which the website owner attempted to bind users to its terms and conditions by posting them somewhere on the website, usually accessible through a hyperlink. By contrast, a “clickwrap” agree-ment required website users to expressly consent to terms and conditions by clicking on a pop-up box or checking the “I ac-cept” button. Because the “browsewrap” method did not require any affirmative action on behalf of the website user, its validity turned on: (1) whether the user had actual or constructive knowl-edge of a website’s terms and conditions; and (2) whether the website provided reasonable notice of the terms of the contract.

In this case, the hyperlink to the agreement was the same size, font, and color as most other non-significant links, and con-sequently was inconspicuous. In addition, the website did not direct users to the Terms and Conditions when the Customers created an account or completed a purchase. Without direct evidence that the Customers had accepted the terms, the court found no acceptance by the Customers, no meeting of the minds, no manifestation of assent, and as a result, no contract.

HAWAII SUPREME COURT SAYS NO ARBITRATION WITHOUT MEANINGFUL CONSENT

Siopes v. Kaiser Found. Health Plan, Inc., ___ P.3d___, (Haw. 2013).

FACTS: Plaintiff, Michael Siopes, filed suit against Defendant, Kaiser Foundation Health Plan, Inc. (Kaiser), for breach of con-tract. Siopes sought a declaration that the mandatory arbitration

clause in Kaiser’s group agreement was unenforceable because of a lack of mutual assent. Siopes, a full time teacher employed at a public school in Hawaii, signed a one-page enrollment form enrolling in a Kaiser Health plan offered by his employer through the Hawaii Employer Union Health Benefits Trust Fund. At the bottom of the enrollment form, a signature box provided that “…the enrollee agrees to abide by the terms and conditions of the selected benefits plan…” The enrollment form Siopes signed did not contain any reference to the group agreement, which con-tained an arbitration provision stating that all claims would be resolved through arbitration.

Siopes later developed cancer and Kaiser denied the request to cover the costs of his treatment. Siopes filed suit in district court, arguing that the group agreement containing the arbitra-tion clause was unenforceable because it was an unconscionable adhesion clause favoring Kaiser, which Siopes had no bargain-ing power to challenge. Kaiser argued that the terms and con-ditions mentioned in the enroll-ment plan referred to the group agreement, which contained an arbitration clause that mandated arbitration for any legal claim incident to the health plan. Be-cause Siopes had signed the en-rollment form, Kaiser claimed he was bound to arbitrate. The circuit court held that the arbi-tration provision was enforce-able and compelled arbitration. Siopes appealed. HOLDING: Vacated and re-manded.REASONING: For a valid and enforceable arbitration agree-ment to exist, the agreement must be in writing, unambiguous, and supported by bilateral consideration. The court held that the third element was not present because Siopes did not assent or even have knowledge of the arbitration agreement Kaiser claimed was present in the group agreement. Kaiser argued that the enroll-ment form, stating that “…the enrollee agree[d] to abide by the terms and conditions of the selected benefits plan…” provided sufficient notice to Siopes of the arbitration provision contained in the Group Agreement. Rejecting this argument, the court found that even though Siopes signed the enrollment form, the arbitration provision was not contained in the enrollment form, nor was it made available to Siopes at the time of his enrollment. There was no evidence on the record that Siopes was aware of the existence of a group agreement or the arbitration clause therein. Because of Siopes’ lack of knowledge of the arbitration clause, the court vacated and remanded the earlier holding.

ARBITRATION AGREEMENT PROVIDING FOR APPLI-CATION OF NAF RULES IS STILL ENFORCEABLE

Green v. U.S. Cash Advance Ill., LLC, 724 F.3d 787 (7th Cir. 2013).

Even though Si-opes signed the enrollment form, the arbitration provision was not contained in the enrollment form, nor was it made available to Siopes at the time of his enrollment.


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FACTS: Plaintiff, Joyce Green (Green), filed suit against defen-dant, U.S. Cash Advance, for violating the Truth in Lending Act (TILA) by misstating the annual percentage rate on a loan. U.S. Cash Advance requested, per the loan agreement, all disputes be resolved by arbitration under the rules and procedures of the Na-tional Arbitration Forum (NAF). However, the NAF stopped ac-cepting new cases for arbitration in July 2009. The district court

declined to appoint an alternative arbitra-tor under 9 U.S.C. §5, holding that the arbi-tration clause was void because the NAF men-tioned in the arbitration clause formed an inte-gral part of arbitration clause and was no lon-ger taking cases. Given

the voided arbitration clause, the court held that the dispute was to be resolved in court. U.S. Cash Advance appealed.HOLDING: Vacated and remanded. REASONING: The court reasoned that the plain meaning of the arbitration agreement called for the use of the NAF’s code of procedure, not for the forum itself to conduct proceedings. Although the agreement did not appoint the NAF as the exclu-sive arbitrator and failed to name any alternates, the court stated that the arbitration clause was to remain enforceable in spite of such lapse. It was the fact that the parties agreed to arbitrate that was important. The court directed the lower court to appoint a substitute arbitrator who could administer the arbitration per the NAF rules and procedures.

ARBITRATION AGREEMENT FOUND ILLUSORY

Scudiero v. Radio One of Texas II, L.L.C.,___ F.3d ___ (5th Cir. 2013).

FACTS: Appellees, Vince Scudiero and Christel Thornton (Scud-iero), were employees of Appellant, Radio One of Texas II, L.L.C. (Radio One). Radio One’s employee handbook contained an ar-bitration clause, stating: “any controversy or claim recognized by law arising out of or relating to this Employee Handbook proce-dures delineated in it, or the employment relationship, shall be settled by arbitration . . . .” The employee handbook also pro-vided that Radio One could unilaterally “supersede, modify, or eliminate existing policies.” Scurdiero signed both provisions.

Scudiero filed suit based on claims arising from the employ-ment relationship with Radio One. Radio One moved to dismiss and compel arbitration. The court denied the motion because the arbitration agreement was illusory, and thus, unenforceable. Radio One appealed.HOLDING: Affirmed.REASONING: On appeal, the court held that if an arbitration provision in an employee handbook was illusory, it was invalid. The court stated that an arbitration agreement is illusory if one party could avoid its promise to arbitrate by amending the provi-sion or terminating it altogether.

The court reasoned that because the arbitration agreement was not a stand-alone contract, the provision allowing the em-

ployer’s unilateral modification of the employee handbook in-cluded modification of the arbitration agreement. The court found that because the employer had the ability to avoid its promise to arbitrate, the arbitration agreement was illusory and unenforceable.

AVAILABILITY OF CLASS ARBITRATION IS GATEWAY ISSUE TO BE DECIDED BY COURT

Reed Elsevier, Inc. ex rel. LexisNexis Div. v. Crockett, ___ F.3d ___(6th Cir. 2013).

FACTS: Appellee, LexisNexis, sued appellant, Craig Crockett, alleging that the arbitration clause in the LexisNexis Subscription Plan did not authorize class arbitration. Crockett’s law firm signed a contract with LexisNexis that contained an arbitration clause. Several years after signing up for the Plan, Crockett complained to LexisNexis that the company was charging additional fees without any warning. After Lexis-Nexis allegedly insisted on payment, Crockett filed an arbitration demand on behalf of himself and two putative classes; one class comprised of law firms that were charged additional fees and the other of clients onto whom such fees were passed. In response, LexisNexis filed suit against Crockett seeking a declaration that the plan’s arbitration clause does not authorize class arbitration and an injunction barring Crockett from proceeding with his claim.The district court granted summary judgment in favor of Lexis-Nexis on its declaratory claim and dismissed the injunctive claim without prejudice. Crockett appealed.HOLDING: AffirmedREASONING: The court sought to determine whether class ar-bitration was a gateway question or a subsidiary one. Gateway questions are fundamental to the manner in which the parties will resolve their dispute. Subsidiary questions concern details. Absent language to the contrary, the law reversed the presump-tion for gateway issues, assuming the parties would have agreed to have an arbitrator resolve subsidiary questions.

The court reasoned that determining whether the parties agreed to class arbitration was fundamental. Therefore the ques-tion of whether an arbitration agreement permitted class-wide arbitration was a gateway matter, which was reserved for judicial determination unless the parties unequivocally provided other-wise.

The plain meaning of the arbitration agree-ment called for the use of the NAF’s code of procedure, not for the forum itself to conduct proceedings.


RECENT DEVELOPMENTS

MISCELLANEOUS

“ACTUAL DAMAGES” IN A STATUTORY FRAUD CASE MEANS THOSE DAMAGES RECOVERABLE AT COM-MON LAW

Rhey v. Redic, 408 S.W.3d 440 (Tex. App.—El Paso 2013).

FACTS: Appellee, Carolyne and John Redic, sued appellant, Rhey Properties, alleging statutory fraud after Rhey failed to repair a roof. The district court rendered judgment in favor of Redic on statutory fraud. Rhey appealed, arguing Redic was only entitled to a measure of damages limited to the benefit of the bargain because only actual damages can be recovered in a statu-tory fraud case.HOLDING: Affirmed.REASONING: The court examined what constituted “actual damages” in a statutory fraud case. The court first looked to the Texas Business and Commerce Code, which provids damages stemming from statutory fraud are “actual damages.” The statute does not define actual damages, so the court turned to the com-mon law. With no statutory definition, the court found actual damages in statutory fraud cases were damages recoverable under common law. At common law, actual damages were either direct or consequential. Two measures for direct damages existed under common law fraud—benefit of the bargain and out of pocket measures. Therefore, applying common law, actual damages for statutory fraud included both benefit of the bargain and out of pocket measures.


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THE LAST WORD

H

Richard M. AldermanEditor-in-Chief

appy New Year.

This issue of the Journal is a great way to start a new year. The lead article for the first issue of 2014 is our annual “Insurance Law Update.” This year’s article highlights more than 150 cases, dealing with almost every aspect of Texas insurance law. As usual, Mark, Suzette and Elizabeth have done a great job collecting and reviewing a substantial body of law.

For those wondering what is new with the regulation of payday and title loans in Texas, you will find that third year student Olivia Pena has done a great job discussing local ordinances, and attempts to enact state wide regulation. And, of course, there are short articles and case digests discussing all the latest developments in consumer and commercial law.

Finally, with the start of a new year I have a resolution for you. Why don’t you resolve to try and write an article for this year’s Journal? It can be long or short, in almost any format. The only guideline is, “will this article be of interest to consumer and commercial lawyers.” Please send me your finished product, in Word format, to [email protected].

mailto:[email protected]