Volume II, No. 2

The post Christmas blues must have affected the Supreme Court this last month. In two cases consolidated for argument the Supreme Court upheld a restrictive administrative procedure for contractors pursuing breach of contract claims against the State of Texas. The court continued its assault on attorneys and applied limitations on what an attorney can charge a client in a contingent fee contract. Finally, the court ruled against the insurance company in an uninsured motorist case.

MOLD AND MILDEW SEMINAR TO BE HELD IN CORPUS CHRISTI, TEXAS

We have received a positive response from our clients concerning our Mold and Mildew Seminar. This seminar is conducted in conjunction with Dick Poremba of Naismith Engineering. The seminar has been approved by the State Board of Insurance for 7 hours of continuing education credit for adjusters.

We will conduct the seminar in Corpus Christi on Tuesday, March 13, 2001. Please call Rhonda Petri at 361/881-9217 to advise us if you want to attend the seminar. The seminar will be held at the Community Room, First City Bank Tower II, 555 N. Carancahua, located on the second floor, starting at 9:00 a.m.

For our clients located in other cities please get in touch with Ed Barker or Rick Fancher at 1-800-804-6672 if you are interested in having this seminar presented in your office.

I. BREACH OF CONTRACT CLAIMS AGAINST THE STATE OF TEXAS (OR OTHER GOVERNMENTAL ENTITIES) ARE BARRED UNLESS SPECIFIC ADMINISTRATIVE PROCEDURES ARE FOLLOWED

The Supreme Court consolidated for decision two cases, General Services Commission v. The Little Tex Insulation Company and Texas A&M University v. Dalmac Construction Company (decided Feb. 1, 2001), both of which dealt with the procedures to be followed when suing the State of Texas or any governmental agency for breach of contract claims. The court held that any claims against a governmental entity for breach of contract are barred unless the specific statutory procedure for making such claims is followed.

A. FACTS OF CASE

The factual claims of each case will be discussed separately.

(1) Texas A&M University v. Dalmac Construction

Dalmac Construction had entered into a $30 million contract to build a recreational sports building and natatorium at Texas A&M University (TAMU). Dalmac submitted a claim to TAMU for an additional $2.4 million which Dalmac contended represented cost overruns due to several conflicting specifications in the bid documents. TAMU paid only $255,171 of this claim. Dalmac then exhausted its remedies pursuant to the terms of the contract and after the TAMU Board of Regents denied further payment, Dalmac sued TAMU for $3 million dollars. The trial court granted TAMU's plea to the jurisdiction of the court and dismissed the case. The court of appeals reversed the trial court.

(2) Little Tex Insulation Company, Inc. v. General Services Commission

Little Tex was awarded a contract for asbestos abatement for two floors of a State office building. The contract was awarded by the General Services Commission. The Commission eventually terminated the contract due to a dispute with Little Tex concerning alleged safety violations. Little Tex then submitted a claim to the Commission for payment. The Executive Director of the Commission denied the claim and as a result Little Tex sued in district court. The trial court granted the plea to the jurisdiction filed by the State and dismissed the case. The court of appeals reversed and remanded the case.

B. BREACH OF CONTRACT CLAIMS

(1) Existing law

The State of Texas and the subdivisions of the State are protected from lawsuits for damages, whether the damages are for personal injury or property damage, by the doctrine of sovereign immunity. Sovereign immunity involves two distinct legal principals: immunity from suit and immunity from liability.

Immunity from suit deprives a court of jurisdiction to rule on a suit against the State unless the legislature expressly gives consent to the suit (such as the provisions of the Texas Tort Claims Act giving consent to sue). However, even if the legislature has consented to suit, immunity from liability protects the State from judgments (under the Tort Claims Act, for instance, the liability of the State is limited).

When the State contracts with private citizens it waives its immunity from liability; nevertheless, legislative consent to sue is necessary in order to bring a breach of contract action. As a result, the contractors in both the Dalmac case and the Little Tex Insulation case were faced with an unfair result in that they incurred substantial expenses in excess of their contract but could not collect on such expenses without legislative authority to file suit.

(2) Administrative Procedure for handling claims

The Supreme Court noted that due to the inequity that resulted when a contractor had a valid claim against the State of Texas but did not have legislative permission to sue the State, the legislature passed what is now Chapter 2260 of the Texas Government Code, effective May 30, 1999. Chapter 2260 establishes an administrative procedure for contractors to pursue breach of contract claims against the State. This provision specifically retains the sovereign immunity of the State in breach of contract cases involving the sale of goods, services, or construction; however, the act provides a specific administrative procedure to follow if a party who has a contract with the State contends that the State has violated its contract.

First, a party who believes that the State has breached its contract must give notice of the breach within 180 days to the Chief Administrative Officer of the governmental agency or unit that is the party to the contract. The Chief Administrative Officer must then attempt to resolve the claim through negotiations or mediation. If the contractor is not satisfied with the results of the negotiations or mediation, the contractor may then request a contested case hearing before the State Office of Administrative Hearings. This procedure involves a hearing before an administrative law judge who is required to determine whether the contractor has a valid claim. If the administrative law judge determines that the contractor does have a valid claim for less than $250,000, the State is required to pay the claim, "if possible, with money previously appropriated for breach-of-contract claims." If the administrative law judge finds that the contractor has a valid claim for more than $250,000 the judge must then issue a written report recommending that the legislature either appropriate funds or deny consent to sue. The legislature may accept or reject this recommendation.

As a result, the Supreme Court held that suits against the State are not allowed unless all of the "traps" of Texas Government Code Section 2260 have been successfully accomplished:

Consequently, we conclude that there is but one route to the courthouse for breach of contract claims against the State, and that route is through the legislature. Chapter 2260's express language states that the administrative proceedings are a precursor to legislative consent to sue under Chapter 107. ....Apart from a special statute conferring consent, a party simply cannot sue the State for breach of contract absent legislative consent under Chapter 107. Compliance with Chapter 2260 therefore is a necessary step before a party can petition to sue the state.

The Supreme Court held that neither Little Tex Insulation Company or Dalmac Construction Company pursued their administrative remedies pursuant to Chapter 2260. As a result the courts did not have jurisdiction over the claims of either contractor.

Analysis of Opinion

Parties that contract with the State of Texas or any governmental agency must be aware that in pursuing any claims for breach of contract that specific administrative procedures must be followed. However, even if the administrative procedures are religiously followed, any claim in excess of $250,000 is still subject to legislative approval before suing the State. Contractors dealing with the State must therefore be aware that the legislature has only provided them with a restricted remedy for breach of contract claims.

II. LEVINE V. BAYNE, SNELL & KRAUSE, LTD (DECIDED FEB. 1, 2001): THE LIMITATIONS ON WHAT AN ATTORNEY CAN CHARGE A CLIENT IN A CONTINGENT FEE CONTRACT

This case deals with the question of how to determine the amount of recovery in order to calculate the attorney's fees on a contingency fee contract. The issue decided by the court was whether the contingency fee under the contract should be calculated based upon the full amount awarded to the Plaintiffs, or should be calculated on the amount awarded to the Plaintiffs after an off-set for the amount of a successful counter-claim is subtracted from the total award.

A. FACTS OF CASE

The Levines hired Bayne, Snell & Krause, Ltd. to sue the Smiths for the failure of the Smiths to inform them of foundation defects in the house that they sold to the Levines. The Smiths had financed the house purchased by the Levines. After the Levines found out about the alleged foundation defects, they stopped making mortgage payments to the Smiths. As a result, the Smiths filed a counter-claim for breach of the mortgage agreement in the suit filed against them by the Levines.

The case was tried to a verdict in which the trial judge awarded the Levines $243,644.00 in damages for the foundation defects, along with interest and attorney's fees. The court awarded the Smiths $161,851.38 for the balance due on the mortgage, accrued interest and attorney's fees. The result was a net judgment to the Levines for $81,792.62. The off-set extinguished the debt on the mortgage, giving the Levines clear title to the house. The court of appeals affirmed the trial court's judgment, whereupon the Smiths paid the Levines $104,110.31, which represented the verdict amount of $81,792.62 plus interest which had accrued during the appeal.

Bayne, Snell & Krause, Ltd. then sent the Levines a statement claiming $155,866.13 in attorney's fees. This represented one-third of the jury's award before the off-set, pre-judgment interest and costs, as well as court ordered attorney's fees, post-judgment interest and expenses. The Levines disputed the fee calculation, arguing that the fee calculation should have reflected the off-set for the counter-claim. Nonetheless, the Levines endorsed the check for $104,110.31 over to Bayne, Snell & Krause, Ltd. The Levines refused to pay the remainder of the fee, and Bayne, Snell & Krause, Ltd. sued.

Although the Levines did not state an amount that they felt was the appropriate amount to be paid to the law firm, they did argue that it should have been calculated on the difference between their total damages and the amount awarded to the Smiths on their counter-claim. The Supreme Court noted that although the $104,110.31 the Plaintiffs paid to their attorneys is greater than the amount that the Levines would pay under the net recovery method, they had not asked for a reimbursement from the firm.

B. THE ATTORNEY'S FEE IN A CONTINGENT FEE CONTRACT APPLIES TO THE NET RECOVERY AFTER APPLYING OFF-SETS FROM ANY COUNTER-CLAIMS

The Levines' contract with the law firm provided in part:

Client agrees to pay attorney as attorney's fees for such representation 33-1/3% of any amount received by settlement or recovery and to receive such payments, client assigns to attorney a 33-1/3% undivided interest in his cause of action.

Any attorney's fees awarded by any court shall go to my attorneys in addition to the above percentages of recovery.

The contingent attorney's fee contract in this case did not define "any amount received." The Supreme Court held that the term "any amount received" should refer only to the net amount of the client's recovery. In doing so, the court relied upon Section 35 of the Restatement (Third) of the Law Governing Lawyers. That section states that "when a lawyer has contracted for a contingent fee, the lawyer is entitled to receive the specified fee only when and to the extent the client receives payment.". Comment (d) of Section 35 of the Restatement (Third) of the Law Governing Lawyers states that in the absence of a prior agreement to the contrary, the amount of the client's recovery is computed net of any offset.

In the instant case, since the contract did not define "any amount received", the court construed that contract provision against the attorneys.

ANALYSIS OF OPINION

As a general rule, it is never a good thing when an attorney has to sue a client to recover fees. A review of the court's opinion seems to indicate that had the Levines asked for a reimbursement of the amount in excess of one-third of the net recovery, the Supreme Court would have granted it. The thrust of the case is that if a disagreement arises between an attorney and a client concerning the amount of fees recoverable under a contract, ambiguities in the contract will be construed against the attorney, and in favor of the client.

III. RES JUDICATA AND COLLATERAL ESTOPPEL DID NOT APPLY IN CASE WHERE INSURED PREVIOUSLY SUED REINSURER AND THEN SUED INSURANCE COMPANY FOR VIOLATIONS OF DECEPTIVE TRADE PRACTICES ACT AND EXTRA-CONTRACTUAL CLAIMS

State and County Mutual Fire Insurance Company v. Miller, 44 Supreme Court Journal 335, 2001 WL 40324, (Tex. January 18, 2001), involved a claim made by Walter Miller against his insurance company State and County Mutual Fire Insurance as the result of a car accident with an underinsured motorist. The Texas Supreme Court issued its per curiam opinion without hearing oral argument

A. FACTS OF CASE

State and County Mutual, the primary insurer of Miller's insurance policy, had a separate reinsurance agreement with Windsor Insurance Co. covering Miller's policy. In reaching a settlement with the underinsured motorist's insurance carrier, Miller dealt directly with Windsor Insurance Co. to obtain permission to settle. Miller settled with the underinsured motorist and then submitted a written demand to Windsor on behalf of himself, his wife, and their two minor children, for the total sum of $300,000 (the full per-occurrence limit of the policy). Windsor felt that Miller was only entitled to $100,000.00 under the policy and later filed an interpleader action in Tarrant County (the "Windsor suit"), seeking a declaration that the policy only entitled Miller to $100,000. In the Windsor declaratory judgment action, Windsor was the plaintiff and State and County Mutual and Miller were defendants. As a result, Miller and State and County Mutual were co-parties in the Windsor suit. The trial court in Tarrant County granted summary judgment in favor of Windsor.

While the Windsor suit was in the trial court in Tarrant County, Miller filed this suit in Nueces County against State and County Mutual, asserting various theories such as delay in payment and DTPA violations. The Nueces County suit was abated because of the pending Windsor suit. After the trial court rendered judgment in the Windsor suit, the trial court in the Nueces County case granted summary judgment for State and County Mutual based on res judicata and collateral estoppel. The court of appeals reversed, holding that (1) any claims Miller could have filed against State and County Mutual in the Windsor suit would have been permissive cross-claims, not compulsory counterclaims, and therefore neither res judicata nor collateral estoppel barred Miller's claims in this case; and (2) the "law of the case" doctrine prevented the court from considering whether Windsor was State and County Mutual's reinsurer on this policy.

B. RES JUDICATA DOES NOT APPLY IN A CASE INVOLVING CO-DEFENDANTS WHERE PERMISSIVE CROSS CLAIMS WERE NOT FILED AGAINST OR BY EITHER CO-DEFENDANT

The Texas Supreme Court found that in this case, res judicata, also known as claim preclusion, would not prevent the litigation of extracontractual and deceptive trade practices claims against State and County Mutual by Miller. In particular, the court noted that in the Windsor suit, Miller and State and County Mutual were cast as co-defendants and as such were not adversaries. Neither party filed cross claims (as distinguished from counter-claims) against each other in that suit. The court noted that the types of claims that Miller could file against State and County Mutual were permissive rather than compulsory cross-claims, pursuant to rule 97 of the Texas Rules of Civil Procedure. Consequently, res judicata did not apply as to the extra-contractual and deceptive trade practices claims made against State and County Mutual.

(1) Collateral estoppel bars the relitigation of breach of contract claims, but did not bar litigation of extracontractual claims.

The Supreme Court further noted that the issue of collateral estoppel (otherwise known as claim preclusion) did bar the issues that were the focus of the Windsor suit in Tarrant County: the extent to which Windsor - the reinsurer of the policy - was obligated to pay under the terms of the policy.

The court stated that

Because Windsor's liability to Miller was derivative of and coexisted with State and County Mutual's liability to Miller, to the extent that obligations under the policy were litigated in the Windsor suit, Miller is now collaterally estopped from relitigating those issues. 44 Texas Supreme Court Journal 335.

However, the Supreme Court pointed out that Miller had also asserted extra-contractual claims against State and County Mutual that did not directly involve the question of liability under the policy. Consequently, the Supreme Court found that collateral estoppel did not bar the litigation of those claims and remanded the case back to the trial court for litigation on the claims of misrepresentation.

ANALYSIS OF OPINION

The moral of the story is: If you want to avoid going to court with a co-defendant after the resolution of an underlying case, file all viable cross actions against that co-defendant while still in the underlying case.

Please feel free to call any of our partners or associates with any questions that you may have at 361-881-9217 or fax us at 361-882-9437.