Claims and Bad Faith Law Blog

Nevada Bad Faith Lawsuit Provides Example of Bad Faith Litigation.

    In a Nevada Bad Faith Lawsuit, a U.S. Magistrate Judge made these observations recently:

   This case has been extremely contentious, and the Parties have filed many, many motions seeking the court's intervention in resolving their discovery disputes, and have had multiple emergency telephonic dispute resolution conferences with the court.

* * *

   Each side accuses the other of engaging in obstructive and abusive discovery tactics. Both sides ask for sanctions. The court has neither the time nor resources to parse through the parties' voluminous moving and responsive papers and make detailed factual findings, and will not do so here.

Download Barrera v. Western United Insurance Co. (D. Nev. Case No. 2.09cv02289, 04.20.11 Order of USMJ Filed 04.21.11) PUBLIC ACCESS, also published as 2011 WL 1541362 *2, *3 (D. Nev. April 21, 2011)(authorized password required to access Westlaw).

   These observations are equally true of many Bad Faith Lawsuits, not just those in Nevada.  Bad Faith Litigation is not for the faint of heart.  Take it from one who has been involved with Bad Faith Lawsuits since the 20th Century.
 

For another look at this topic generally, and with a Nevada perspective in particular, see the May 26, 2009 post, "Plain Vanilla Nevada Bad Faith," on Nevada Coverage and Bad Faith Law Blog.

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"Is Fraud in the Inducement Waived by a Standard Merger or Integration Clause?"

Texas Says "No."

   A Commercial Lease of real property in Dallas, Texas led to a 6-to-3 vote for a negative answer to this question by the Texas Supreme Court in Italian Cowboy Ptrs., Ltd. v. Prudential Insurance Co. of Am., PUBLIC ACCESS, also published as 2011 WL 1445950 (Tex. April 15, 2011).  There were several areas of contention between the Justices in the majority and the Justices in dissent.  Empathy was not among them; it is clear from reading both the majority and the dissenting opinions that all the Texas Justices understood the plight of the Plaintiffs and the position of the Defendants in the case before them.

   However, the facts of this case did not seem to affect how either group reached out to the single legal issue which would decide this particular case.  The real issue that divided the Justices was whether fraud in the inducement is waived whenever a tenant signs a standard commercial lease.  This contract ruling has implications of course for all contracts, including insurance contracts and bonds of all kinds.

     The law of Texas and other jurisdictions clearly answers "no" to the question of whether fraud in the inducement is waived whenever a person signs a standard commercial lease or other standard contract.  Any dispute which the dissenters in this 2011 decision have with that legal rule began when the legal rule began.  The majority opinion pointed out that in 1957 Texas followed a 1941 Massachusetts case to announce that fraud in the inducement is not waived every time a tenant signs a standard commercial lease.  Id. at *1 ("We recognized decades ago that agreeing to a merger clause does not waive the right to sue for fraud should a party later discover that the representations it relied upon before signing the contract were fraudulent.").

   The majority in Italian Cowboy purported to follow this rule and to repeat that the answer to it was still in the negative in 2011.  There is no waiver of fraud in the inducement in Texas, the majority in this case held, in a standard commercial lease.  However, fraud in the inducement can be waived, the majority held, but only by a non-standard contract manuscripted or specially written for the occasion.  That non-standard, manuscript contract would have to have what the majority called a clear "waiver-of-reliance" clause in it, in order for a Texas Court to hold that a contracting party waived the right to "rely" on representations made to that party before entering into the contract.  See id. at *4-*9.

   The majority examined the legal effects of clauses used in contracts to recite purported waivers, in two past decisions of the Texas Supreme Court in which waivers were recognized:  Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997) and Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008).  The majority illustrated this distinction by placing the clauses in both of those cases, in which the Texas Supreme Court recognized the efficacy of "waiver-of-reliance" clauses, side-by-side with the clauses at issue in the Italian Cowboy case before it (formatting provided by the Supreme Court of Texas via Westlaw):

We have repeatedly held that to disclaim reliance, parties must use clear and unequivocal language. See Forest Oil, 268 S.W.3d at 62; Schlumberger, 959 S.W.2d at 179–80. This elevated requirement of precise language helps ensure that parties to a contract—even sophisticated parties represented by able attorneys—understand that the contract's terms disclaim reliance, such that the contract may be binding even if it was induced by fraud. Here, the contract language was not clear or unequivocal about disclaiming reliance. For instance, the term “rely” does not appear in any form, either in terms of relying on the other party's representations, or in relying solely on one's own judgment. This provision stands in stark contrast to provisions we have previously held were clear and unequivocal:

 

Schlumberger	Forest Oil	Italian Cowboy
[E]ach of us ... expressly warrants and represents ... that no promise or agreement which is not herein expressed has been made to him or her in executing this release, and that none of us is relying upon any statement or representation of any agent of the parties being released hereby. Each of us is relying on his or her own judgment....	[We] expressly represent and warrant ... that no promise or agreement which is not herein expressed has been made to them in executing the releases contained in this Agreement, and that they are not relying upon any statement or representation of any of the parties being released hereby. [We] are relying upon [our] own judgment....	Tenant acknowledges that neither Landlord nor Landlord's agents, employees or contractors have made any representations or promises ... except as expressly set forth herein.

 

Forest Oil, 268 S.W.3d at 54 (emphasis added); Schlumberger, 959 S.W.2d at 180 (emphasis added).

 

We decline to extend our holdings in Schlumberger and Forest Oil—each of which included clear and unequivocal language expressly disclaiming reliance on representations, and representing reliance on one's own judgment—to the generic merger language contained in the contract at issue in this case. As a matter of law, the lease agreement at issue does not disclaim reliance, and thus does not defeat Italian Cowboy's claim for fraudulent inducement.

Id. at *9.

    The dissenting opinion in Italian Cowboy approved the concept of a waiver of fraud in the inducement to sign a contract with the provisions contained in the Italian Cowboy restaurant lease.  Id. at *21.  The provisions which motivated the dissent and repelled the majority when answering whether fraud in the inducement was waived in the Italian Cowboy restaurant lease, read as follows:

 14.18 Representations. Tenant acknowledges that neither Landlord nor Landlord's agents, employees or contractors have made any representations or promises with respect to the Site, the Shopping Center or this Lease except as expressly set forth herein.

 14.21 Entire Agreement. This lease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no subsequent amendment or agreement shall be binding upon either party unless it is signed by each party....

Id. at *1-*2.  The Justices did not appear to disagree with the assessment of Paragraphs 14.18 and 14.21, quoted above, as collectively constituting a "merger clause" or "integration clause" stating that the document in which the clause is found contains the entire contract and that no representations which are not written in the contract were made.

     The majority addressed many other issues, too lengthy to mention here, including:

      1.   Breach of Implied Warranty of Suitability, id. at *12-*17.  The Court "rendered judgment in favor of Italian Cowboy as to this claim," id. at *16, and remanded to the court of appeals accordingly.

      2.   Damages, id. at *17-*19.  The majority held as follows, without visible dissent in this case, as to damages awardable in Texas for rescission of a lease, which the Plaintiff requested in this case:

 When rescission of a lease is appropriate for breach of the implied warranty of suitability, a tenant is entitled to be restored to the position it would have been in had it not leased the premises that turned out to contain a latent defect rendering the premises commercially unsuitable....  Thus, by electing rescission, Italian Cowboy did not need to prove that its damages were caused by the latent defect; it needed only to prove what amount would restore it to its original position.

 Id. at *18.  [Emphasis by the Texas Supreme Court.]

     All this discussion of legal issues may leave a person exhausted.  Not too exhausted to consider now the facts upon which this case rested, I hope.

  The trial court found for the Plaintiffs on all counts of all claims they pled against Prudential in this case.  Id. at *4.  The Plaintiffs were Mr. and Mrs. Francesco and Jane Secchi, the owners and operators of several restaurants including Italian Cowboy.  They sued Prudential -- which acted only as a landlord here, and which was not sued because it is an insurance company nor for any other reason -- for rescission, and to recover damages for alleged fraud and breach of the implied warranty of suitability.  Id. at *1.

     Making a long story short, the trial court found as facts in this nonjury case that the Secchis repeatedly brought the existence of a noxious odor (which turned out to be sewer gas) to the attention of the landlord's agent, both before and after the Secchis signed the Italian Cowboy Restaurant lease.  Each and every time, or so the trial court seems to have found as facts, the landlord's agent represented to the Secchis that everything was just fine, in sum and in substance.  In fact, although the trial court found from the evidence at trial that the same agent had smelled the sewer gas odor herself at a previous restaurant operated at the same location by a previous tenant but told the Secchis that she had never smelled such an odor there.  See id. at *1-*4.

     On the whole, these findings of fact by the trial court did not get a lot of "air time" in the dissenting opinion, and the majority's opinion in contrast probably paid more attention to them than did the dissenting opinion.  But that is why I have saved this summary of the facts for last.  The law clearly appeared to determine the outcome of this case.  As the majority opinion put it early on concerning the language of the lease actually in front of the Court:

 The principal issue in this case is whether disclaimer-of-representations language within a lease contract amounts to a standard merger clause, or also disclaims reliance on representations, thus negating an element of the petitioner's claim for fraudulent inducement of that contract.  We conclude that the contract language in this case does not disclaim reliance or bar a claim based on fraudulent inducement.

 Id. at *1.

   I encourage you to also take a look at this independent post from April 27 on the Italian Cowboys decision on ContractProfs Blog which offers a different point of view on this case and its impact.

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Standard Poor Credit Rater: It "Might" Make U.S. Rating, "Possible".

   Standard & Poor's Credit Rating Corporation never predicted the default of Orange County, California.

   Standard & Poor's Credit Rating Corporation did not foresee the collapse of Enron.

   Standard & Poor's Credit Rating Corporation failed to predict the Great Collapse of our national economy.

   With this rich record, before 2011 Standard & Poor's could have been expected, no, would have been expected, to go and hide its face.  Instead, the Very Serious People are continuing to pay attention to Standard & Poor's for some reason.  They are in a tizzy that Standard & Poor's has actually made a prediction, which is that there is a 1/3 chance or less that it, Standard & Poor's, will downgrade the Credit Rating of the United States.   See generally John Waggoner, "S&P Lowers its Outlook:  Could U.S. Default on its Debt?" (USA Today); Michael Hiltzik, "S&P Should Avoid Political Predictions / The Credit Ratings Firm, Which Warned That it Might Downgrade its Assessment of U.S. Government Debt Because Politics Could Hinder Efforts to Control the Deficit, Lacks Credibility in its Forecasts" (Los Angeles Times Online, Saturday, April 23, 2011).

   Is this not the same Standard & Poors that is a named Defendant in quite a few lawsuits filed by people and companies that lost lots of money in the Great Collapse?

   And, for that matter, is this not the same S&P which is the target of a great deal of focus by the United States Government of S&P's actions and omissions before and during the Great Collapse?

   Be governed accordingly.

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Fraud in the Investment?

   From Florida comes a report of a Florida investor who claimed fraud in the investment in a lawsuit he filed in Alabama.  See  Robert Trigaux, "Venture Blog/As Investor, Tampa Philanthropist Kiran Patel Sues Struggling Superior Bank for Claims it Was Stable" (Post April 4, 2011).  The report intimates the possibility of fault on the part of the claimant-investor.  It seems that the investment target stock was openly and publicly sliding before investments were induced.  See id.

Postscript for Easter Sunday, 2011:

Happy Easter! 

Are you at work today?  What are you doing?

Again, Happy Easter!

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FDIC to Sue Failed Bankers to Recover Lost Deposits.

    Newspapers report that the Federal Deposit Insurance Corporation is poised to sue Bankers to recoup lost profits of people who invested in their Banks.  See, e.g., Suzanne Kapner & Paul Davies, "U.S. Watchdogs to Sue Executives of Failed Banks" (Financial Times Online, published April 10, 2011).

   It seems likely that any lawsuits filed by the FDIC in this regard will or should include claims for Breach of Fiduciary Duties, and alleged Bad Faith, as well as Recoupment and Restitution.  See, e.g., posts here in the Category of "Recoupment and Restitution" on April 15, 2009,  May 13, 2010, and July 30, 2010.  

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Educating the ... Magistrate Judge?

   It is a view held by many lawyers.  Some lawyers who hold this view represent Defendants, some represent Plaintiffs.  Those who hold the view tend to be convinced of its validity even when it does not produce the desired results.  The view is that even if a motion is destined to be denied, sometimes for various reasons it "needs to be filed."  One reason is that in the act of denial the Judge who tries your case must consider the motion.  As she or he considers the motion in question, you as counsel have the opportunity to "educate" her or him on some issue important to your client's case.

   This view seems to have been one factor in Download Lane v. Endurance Am. Specialty Ins. Co. (W.D.N.C. Case No. 3.10cv.401, Order Filed by Keesler, USMJ on April 8, 2011) PUBLIC ACCESS, also published as 2011 WL 1343201 (W.D.N.C. April 8, 2011)(authorized subscription required to access Westlaw).  In that case, a Policyholder under an unspecified Liability Insurance Policy sued a Liability Insurance Company for alleged Bad Faith, among other things.  The Plaintiff-Policyholder is Nations Title Agency of the Carolinas, Inc., which suffered a Judgment against it in an underlying case.  Defendant Endurance American Specialty Insurance Company's attorneys filed a motion to strike portions of Plaintiff's First Amended Complaint which alleged claims of breach of insurance contract, tortious breach-bad faith refusal to settle, and unfair and deceptive trade practices.  The First Amended Complaint also contained a prayer for punitive damages or treble damages, apparently in the alternative.  Lane v. Endurance American Specialty Insurance Co., 2011 WL 1343201 at *1.

   The gist of the motion to strike was that certain allegations in the First Amended Complaint violated Federal Rule of Evidence 408 which bars the admission of evidence concerning "settlement negotiations".  Endurance's attorneys tried to make it clear that they were not attacking evidence of settlement negotiations in the underlying case, but only the question of admissibility of "settlement negotiations" under the Rule in this case, the bad faith case.  The crux of their argument, in turn, was that the Court could not, should not permit the Plaintiff to introduce evidence of "litigation conduct" which takes place during the litigation of the bad faith case.  Id. at *3.

   If one reason for this motion to strike was to "educate the Trial Judge" on an unsettled point of law in that Court, filing a motion to strike may have foreordained the result from the start.  This motion to strike was assigned for disposition to the United States Magistrate Judge.  The Trial Judge may never see it.

   Second, the chosen vehicle -- a motion to strike under Federal Rule of Civil Procedure 12(f) -- was admittedly unfamiliar to the Magistrate Judge in this case.  See id. at *3 ("This court has rarely been called upon to interpret Rule 12(f) ...."). 

   Third, the standard for filing and disposition of a motion to strike under Fed. R. Civ. P. 12(f) is written in the Rule.  A motion to strike may be filed to address, in part here pertinent, "any redundant, immaterial, impertinent, or scandalous matter."  If the motion to strike is granted, the matter is stricken from the case.  In this case, however, after filing the motion to strike, according to the Magistrate Judge, there was no argument that the standard applied by the Court was met in this case.  "Notably, Defendant has not argued that the text it wishes to strike is redundant, impertinent, or scandalous pursuant to Fed.R.Civ.P. 12(f)."  Id. at *3.

   Rather, Endurance's lawyers argued that "evidence of its conduct in this action" should not be admitted into evidence.  This is not the purpose of a motion to strike, the Court held.  "The issue before the Court on a Rule 12(f) motion is not whether evidence is admissible, but whether it is immaterial, impertinent, and scandalous."  Id.

   In conclusion, the Magistrate Judge denied the motion to strike in this case.  Unsettled questions of evidence law would have to remain unsettled, for the time being.  "In short, neither party has cited caselaw that squarely addresses the issue before the Court.  Moreover, the undersigned is not persuaded that Defendant has satisfied its burden ....  The better course at this stage is to leave the Complaint as is, without prejudice to Defendant to raise its arguments in a later dispositive motion, or perhaps at an evidentiary hearing."  Id. at *5.

A post on Insurance Claims And Issues Weblog addresses the same issue apparently arising in a different case on the part of plaintiff-policyholder attorneys in a post on Monday, April 18, 2011.

The Courts' admission of evidence of litigation conduct in Bad Faith cases is examined in Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" §9:6 (Shepard's/McGraw-Hill Second Edition; West Publishing Company 2010 Supplement and Third Edition in process).

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Serving Hidden Masters.

   This is the right moment for my first post on Bad Faith since February.  The author's initial manuscript of my Third Edition of "Litigation and Prevention of Insurer Bad Faith" has been sent to West Publishing Company, my Publisher.  Page proofs are weeks away.  Current events present many opportunities to address Bad Faith issues in the meantime.

    No more so than this week.  To put the events of this past week into perspective, the Courts in the United States have without any exceptions required Fiduciaries to serve the interests of the ones who put their trust in the Fiduciaries, and on whose behalf the Fiduciaries exist to act.  Fiduciaries are never, however, required to eliminate their own interests or the interests of others, only to subordinate their own interests to the interests of those trusting souls for whom the Fiduciaries are supposed to act.

   And not to serve hidden masters instead.

   Members of the U.S. Congress are fiduciaries.  They act on behalf of the people, and the people put their trust in the Members so to act (they may have no choice).  This week, the U.S. Congress with the President's approval passed a law they called a "budget bill".  What was released to the newspapers was a story that the "budget bill" was about spending and revenue; basically, about cutting spending and not raising certain people's taxes.  However, that was not all.  See Julie Mianecki, "Gray Wolves, Abortion Funding and Other Policy Changes in the Budget Bill" (Los Angeles Times Online, posted Friday night, April 15, 2011).  There were also these earmarks which were hidden, with other earmarks, until after the "budget bill" was signed into law:

• Parents of school-age children in Washington, D.C. who send their children to public schools, most having no choice, will find that funds intended to improve schools, classrooms, and public education in general have been switched to paying for vouchers for people who can afford to send their children to private schools.
• Certain animals were removed from the endangered species list in certain States.  This is the first time in history that the U.S. Congress removed any animals from the endangered species list.
• Guantanamo Bay prisoners cannot be tried in U.S. Courts (where most have been convicted) but instead must be tried in Guantanamo by members of the U.S military, since a provision in the "budget" law prohibits their transfer.

 Here are two items in the law that might actually end up cutting the Federal budget down, at least a little:

•  Cutting or eliminating Federal funding available to poor women in the District of Columbia to have abortions.  Unable to enact restrictions on abortion procedures which would apply to women who can afford to pay for abortions, the U.S. Congress and the President decided to require poor women to go to unsafe providers of abortions as they were forced to do back in the day.  I am personally opposed to abortions.  But this is not addressing abortions, nor is it about budget reformation. 
• Cutting or eliminating funding for the Climate Service, a branch of the Federal Government.  The Service, a recent addition to the National Oceanic and Atmospheric Administration ("N.O.A.A."), was supposed to gather information regarding climate change.  Perhaps the more cherished purpose of Congress and the President in this "budget" provision is to bar information regarding climate change in their belief or hope that this will bar climate change itself.

 Fiduciaries are not supposed to serve a hidden master.  In enacting this law, they have not just saved money (assuming that they have done that). 

 They have acted in Bad Faith with the people, for whose interests they hold office to act.

 Please Read The Disclaimer.