March 6, 2015

Today, the Texas Supreme Court released 4 opinions and accepted a certified question from the U.S. Court of Appeals for the Fifth Circuit related to issues of punitive damages.

KCM Financial LLC et al v. Bradshaw; Case No. 13-0199

http://www.txcourts.gov/media/885307/130199.pdf

In the present case, which involves an oil and gas lease on nearly two-thousand acres of land in north Texas, the non-participating royalty interest holder (non-executive) contends that the executive-right holder (executive) breached its duty by executing a mineral lease on terms that included a sub-market royalty rate, which the executive and non-executive would share equally, in exchange for an above-market bonus payable only to the executive. The non-executive further alleges that the lessee acted in concert with the executive in facilitating the breach and that the executive's ill-gotten gains were fraudulently transferred to third parties.

The trial court granted a take-nothing summary judgment on all claims, but the court of appeals reversed the judgment in significant part based on the existence of fact issues. Before the Texas Supreme Court, the parties sought a definitive articulation of the executive's duty as it pertains to any obligation to maximize the royalty terms in a mineral lease.

The Court reaffirmed its prior jurisprudence that an executive owes a duty of utmost good faith and fair dealing, however, it also reaffirmed that this relationship is not the paradigmatic fiduciary relationship in that an executive is not required to place the non-executive's interests over its own. Instead, the Court affirmed its prior articulation of the standard "as requiring the executive to acquire for the non-executive every benefit that he exacts for himself." Because of the various bundle of rights involved in a mineral lease, the court engaged in a balancing of the various rights to which the executive is entitled but that the non-executive is not. The subject transaction must be viewed as a whole in determining whether the terms of a mineral lease, including the negotiated royalty, reflect the executive's utmost good faith and fair dealing vis-à-vis the non-executive. While sometimes the issue of whether this duty has been breached can be determined as a matter of law, the Court determined in the subject transaction fact issues remained for determination. However, the Court determined as a matter of law there was no conspiracy between the executive and lessee. Further, the Court determined as a matter of law there was no violation of the Texas Uniform Fraudulent Transfer Act and a constructive trust was not warranted.

The Court affirmed the court of appeals on its reversal of the grant of summary judgment on the breach of fiduciary duty claim but reversed the court and rendered judgment on the conspiracy, TUFTA, and constructive trust claims.

The Fredricksburg Care Company, LP v. Perez et al, Case 13-0573

http://www.txcourts.gov/media/885314/130573.pdf

Fredricksburg operates a nursing home. A patient died and her beneficiaries sued for negligent care and wrongful death. Fredricksburg moved for arbitration under the arbitration clause in her pre-admission agreement. Plaintiffs argued the clause failed to meet Texas Civil Practice and Remedies Code Section 74.451(a)'s requirement that an agreement to arbitrate a health care liability claim must contain a written notice in bold-type, ten-point font that conspicuously warns the patient. Fredricksburg argued that Federal Arbitration Act (FAA) pre-empted Section 74.451. Plaintiffs argued the McCarran-Ferguson Act (MFA), 15 U.S.C. §§ 1011-1015 barred application of the FAA to the healthcare claim because Section 74.451 regulates the insurance industry within the state. Both the trial court and the court of appeals on an interlocutory judgment agreed with Plaintiff.

The Texas Supreme Court, applying U.S. Supreme Court case law, applied the 3 part federal test for application of the MFA: whether: "(1) the federal statute does not specifically relate to the 'business of insurance,' (2) the state law was enacted for the 'purpose of regulating the business of insurance,' and (3) the federal statute operates to 'invalidate, impair, or supersede' the state law." Finding the first and last prongs of the test were met, it first focused its analysis on whether Chapter 74 as a whole--as opposed to merely Section 74.451 as argued by Fredricksburg--was enacted for the purpose of regulating the business of insurance.

The Court, reviewing the legislative history of and its jurisprudence discussing the purpose of Chapter 74, found it was a law enacted for the purpose of imposing tort reform to further the goal of making health care more affordable in Texas. However, based upon federal case law, this goal, even if resulting in lowering cost for insurers in providing care and in lowering premiums for policyholders, was too broad for purposes of the MFA.

Similarly, the Court concluded that Section 74.451 does not govern the business of insurance but regulates the relationship between patient and medical provider. Thus, it held that the Plaintiffs failed to show that Section 74.451 was aimed at protecting or regulating the performance of an insurance contract.

The Texas Supreme Court therefore reversed the court of appeals and remanded the case to the trial court.

The Williamsburg Care Company, L.P. v. Acosta et al, Case 13-0576

http://www.txcourts.gov/media/885309/130576.pdf

This case involved the same issue as in The Fredricksburg Care Company, LP v. Perez and the Court determined it was controlled by its opinion in that case, discussed immediately above.

The Fredricksburg Care Company, LP v. Lira et al, Case 13-0577

http://www.txcourts.gov/media/885314/130573.pdf

This case involved the same issue as in The Fredricksburg Care Company, LP v. Perez and the Court determined it was controlled by its opinion in that case.

Wal-Mart Stores, Inc. v. Forte et al, Case 15-1046

The Fifth Circuit in a case involving application of Chapter 41 of the Texas Civil Practice and Remedies Code to a civil penalty certified the 2 following questions:

1. Whether an action for a "civil penalty" under the Texas Optometry Act is an "action in which a claimant seeks damages relating to a cause of action" within the meaning of Chapter 41 of the Texas Civil Practice and Remedies Code. In other words, are civil penalties awarded under Tex. Occ. Code § 351.605 "damages" as that term is used in Tex. Civ. Prac. & Rem. Code § 41.002(a).

2. If civil penalties awarded under the Texas Optometry Act are "damages" as that term is used in Tex. Civ. Prac. & Rem. Code §41.002(a), whether they are "exemplary damages" such that Tex. Civ. Prac. & Rem. Code § 41.004(a) precludes their recovery in any case where a plaintiff does not receive damages other than nominal damages.

Conclusion:

This week, the Court provided guidance on whether or not the Federal Arbitration Act was pre-empted by Texas Civil Practice and Procedure Section 74.451 as well as provided guidance on the parameters of the duty of utmost good faith and fair dealing between a the executive-right holder and non-participating royalty interest holder under a mineral lease. Further, the Court accepted a certified question from the Fifth Circuit requesting guidance on issues related to judgments for civil penalties under Chapter 41 of the Texas Civil Practice and Remedies Code. We hope that the summary of these matters is of interest to you and is useful to your practice.

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