July 13, 2001We received a complaint last month that our newsletter is not "funny". We agree. We blame our lack of comic timing on the fact that the members of the judiciary are not known for their sense of humor. In fact, a couple of years ago the Supreme Court recommended that the grievance committee sanction an attorney who referred to the members of the Supreme Court as "nine nutty professors". We will strive more in the future to bring out a little humor from a humorless branch of the government. The Supreme Court issued several opinions in June in an attempt to reduce the Court's docket before the Court goes on vacation for the month of August. In Ernst & Young v. Specific Mutual Life Insurance, the Court found that privity is not required to maintain a claim for fraudulent misrepresentation. The Court held that the Tort Claims Act does not wave sovereign immunity on health care providers employed by the state who misdiagnose or mistreat patients (Texas Department of Criminal Justice v. Miller). To make sure that settlements are enforced, the Court held in Compania Financara Libano, S.A., et al v. Simmons, et ux, that written settlement agreements will be enforced even though the full terms of the agreement are not mentioned in an Order of Dismissal or Final Judgment. In M.D. Anderson Cancer Center v. Novac, the Court held that a plaintiff seeking to maintain a class action must have an individual claim against the defendant in order to bring a class action. Finally, the Court held that in certain situations state tort law claims are not preempted by federal regulations in automobile litigation cases (Great Dane Trailers, Inc. vs. Wells). I. INTENT-TO-INDUCE RELIANCE OF A FRAUD CLAIM DOES NOT DEPEND ON PRIVITY AND MAY BE ESTABLISHED BY A "REASON TO EXPECT" RELIANCE In Ernst & Young v. Pacific Mutual Life Insurance, decided on June 21, 2001, the Texas Supreme Court in a fraudulent misrepresentation case involving an accounting firm's audit report, considered whether the intent-to-induce-reliance element of a fraud claim required a direct relationship between the alleged fraud tortfeasor and a specific known person--commonly referred to in this context as "privity." Privity or the "reason to expect" standard is not required under the Restatement (Second) of Torts §531 that addresses fraudulent misrepresentation. The Court, while not needing to adopt §531 at this time, nevertheless held that §531's "reason to expect" standard was consistent with Texas fraud jurisprudence.
In 1982, InterFirst Corporation issued a series of notes due to mature in 1989. By 1986, InterFirst was in financial difficulty and merged in June 1987 with RepublicBank Corporation which appeared at the time to be a stronger, profitable bank. Pacific Mutual Life Insurance Company, an institutional investor, purchased some of these notes after InterFirst merged with RepublicBank Corporation. Pacific Mutual claimed that in purchasing the InterFirst notes it relied on an Ernst & Young audit report that confirmed RepublicBank's financial strength. Shortly after Pacific Mutual purchased the notes, RepublicBank disclosed serious financial problems with its real estate portfolio and filed for bankruptcy. Alleging that it had been misled in three prospectuses, Pacific Mutual sued Ernst & Young alleging that the accounting firm's audit opinions contained misrepresentations including statements that the audit complied with generally accepted auditing standards and that the financial statements fairly presented RepublicBanks' financial position as of December 31, 1986. Pacific Mutual alleged that in fact Ernst & Young did not accurately reflect RepublicBank's financial condition and actually understated its real estate liabilities and violated generally accepted auditing standards. Ernst & Young moved for summary judgment based in part that it did not specifically intend for Pacific Mutual to rely on representations made in the 1986 audit report. Pacific Mutual also moved for summary judgment claiming that, as a matter of law, Ernst & Young intended to induced its reliance. The trial court granted Ernst & Young's summary judgment and denied Pacific Mutual's motion. The Court of Appeals reversed applying §531 of the Restatement and holding that a fact issue existed as to whether Ernst & Young had "reason to expect." Ironically, the Supreme Court, while adopting the "reason to expect" standard of §531, reversed and rendered in favor of Ernst & Young because the accounting firm proved as a matter of law that it did not have a "reason to expect."
To prevail on a fraud claim, Pacific Mutual had to prove that: (1) Ernst & Young made a material representation that was false; (2) it knew the representation was false or made it recklessly as a positive assertion without any knowledge of its truth; (3) it intended to induce Pacific Mutual to act upon the representation; and (4) Pacific Mutual actually and justifiably relied upon the representation and thereby suffered injury. The issue presented by Ernst & Young was that Pacific Mutual had to demonstrate a direct intent to specifically induce its reliance in order to maintain the fraud claim.
The Supreme Court disagreed with the direct privity argument that Ernst & Young was advancing. The Court noted that Texas fraud jurisprudence had traditionally focused not on whether a misrepresentation was directly transmitted to a known person alleged to be in privity with the fraud tortfeasor, but on whether the misrepresentation was intended to reach a third person and induce reliance. Under Restatement §531, a person who makes a misrepresentation is liable to the person or class of persons the maker intends or "has reason to expect" will act in reliance upon the misrepresentation. Texas jurisprudence, which focuses on the defendant's knowledge and intent to induce reliance, is consistent with the Restatement.
Despite the Supreme Court's rejection of Ernst & Young's position not to expand fraud's boundaries into the non-privity arena, it was a pyrrhic victory for Pacific Mutual. Pacific Mutual carried the day on the law of the case, but lost the case because Ernst & Young proved that it did not have reason to expect Pacific Mutual to rely on their audit reports. Pacific Mutual used affidavits of experts that stated that the general industry practice or knowledge was that institutional investors like Pacific Mutual relied on audit reports before making investments. While such industry practice could establish foreseeability to show negligence, it was not probative of fraudulent intent. Pacific Mutual had to prove that Ernst & Young had information that would lead a reasonable person to conclude that there was a likelihood that such information would reach those persons and influence their conduct. Pacific Mutual did not prove this and lost the case. II. STATE'S MISUSE OF MEDICATIONS AND MEDICAL EQUIPMENT THAT MASKED THE DIAGNOSABLE SYMPTOMS OF MENINGITIS OF PRISON INMATE WAS NOT MISUSE OF PROPERTY UNDER THE TEXAS TORT CLAIMS ACT In Texas Department of Criminal Justice v. Miller, decided on June 21, 2001, the Texas Supreme Court considered whether the alleged medical malpractice by a prison physician and his staff in improperly administrating pain medication and improperly using medical equipment that masked the symptoms of meningitis that killed a prison inmate demonstrated a waiver of sovereign immunity under the misuse of property provision of the Texas Tort Claims Act. The Supreme Court held that it did not come within the statutory waiver for personal injury or death caused by a condition or "use" of tangible property and reversed the judgment of the lower court.
In August 1994, while imprisoned at the Texas Department of Criminal Justice (TDCJ) facility in Huntsville, Clyde Miller began suffering from nausea and severe headaches. Dr. Martin Chaney and the on-site staff administered pain medications, intravenous fluids, electrolytes, anti-nausea medications, and ice-packs to alleviate some of Miller's symptoms. After 15 days of this regimen, Miller was hospitalized at Texas Medical Branch at Galveston with a diagnosis of cryptococcal meningitis which caused his death on September 28, 1994. Meningitis is a progressive disease with symptoms becoming worse as the disease runs its course. The medication regimen implemented by Dr. Chaney reduced the headaches, nausea and other symptoms while the meningitis progressed to its fatal stage.
Miller's widow, Jeannie Miller, and his children alleged that the TDCJ was negligent in its treatment of Mr. Miller by failing to diagnose meningitis. The specific provision under the Texas Tort Claims Act that the plaintiffs claimed waiver provides that "[a] governmental unit in the state is liable for ...personal injury and death so caused by a condition or use of tangible personal or real property if the governmental unit would, were it a private person, be liable to the claimant according to Texas law." Tex. Civ. Prac. & Rem. Code § 101.021 (2). The Texas Tort Claims Act does not waive sovereign immunity for all negligence claims against governmental units. Therefore, plaintiffs sought to bring their claim within the "personal injury or death so caused by a condition or use of tangible property" waiver by alleging misuse of various medications and medical equipment.
Texas cases have distinguished claims involving the failure to use or the non-use of property which do not waive sovereign immunity from claims involving a "condition or use" of tangible personal property that causes injury, which do effect a waiver. For example, failure to prescribe medications has been found to be non-use while furnishing a football uniform lacking proper protective devices for a player's knee was found to be misuse within the waiver. "Use" means to either put or bring into action or service, to employ for or apply to a given purpose. The TDCJ did bring into service and employ various drugs and medical equipment while treating Miller. That some property was merely involved was not enough; use of the property must have actually caused the injury. The property used on Miller did not cause his death. The treatment relieved his symptoms. It was the doctor's misjudgment that resulted in his demise.
The Supreme Court was not persuaded by plaintiff's attempt to distinguish the non-use cases from their "misuse" of medications claim. There cannot be a waiver of sovereign immunity in every case in which medical treatment is provided by a public facility. Doctors in state medical facilities use some form of tangible personal property nearly every time they treat a patient. If there was waiver in all of those cases, the waiver of immunity would virtually be unrestricted which was not the Legislative intent behind the Texas Tort Claims Act. III. WRITTEN SETTLEMENT AGREEMENTS WILL BE ENFORCED In Compania Financiara Libano, S.A. et al v. Simmons et. ux., decided on June 21, 2001, the Supreme Court held that a settlement agreement, if written, is enforceable, even if not included in a subsequent agreed judgement.
This case arises from a law suit filed by Compania Financiara Libano, S.A. and Armando Fong Najarro, hereinafter referred to as "Compania", against William H. Simmons and Mary Simmons Hensley, hereinafter referred to as "Simmons". The original lawsuit by Compania alleged the fraudulent transfer of certain property interests by Simmons. The two sides agreed to settle the case. They entered into a written settlement agreement which stated that Simmons was to transfer certain property interests to Compania. The parties were also to enter into an agreed judgement that Compania recover $25,000.00 from Simmons. The written settlement agreement stated that Simmons would take nothing against Compania and that the parties would execute mutual releases. The settlement agreement was filed with the trial court pursuant to Rule 11 of the Texas Rules of Civil Procedure. An agreed judgement was entered in compliance with the terms of the settlement agreement reflecting the payment of the $25,000.00. The judgement did not include language concerning the property transfers or the mutual releases. The agreed judgment contained a Mother Hubbard clause stating that any relief not expressly granted was denied. Compania subsequently filed a timely motion to modify the judgement to include the other provisions of the settlement agreement. The Court never ruled on the motion and it was therefore denied by operation of law. Less than a year later Compania sued Simmons to enforce compliance with the settlement agreement. The trial court granted Compania a partial summary judgment. After a bench trial, judgement was rendered for Compania on the other claims, ordering specific performance of the terms of the settlement agreement, and awarding attorney's fees. On appeal, Simmons argued that Compania's suit was an impermissible collateral attack on the prior agreed judgement. The Court of Appeals held that Compania's suit was barred by the prior agreed judgement under the doctrine of res judicata.
The Supreme Court pointed out that the doctrine of res judicata, relied upon by the Court of Appeals, bars a party and those in privity with it from bringing a second suit "not only on matters actually litigated, but also on causes of action or defenses which arise out of the same subject matter, and which might have been litigated in the first suit." Barr v. Resolution Trust Corp., 837 S.W.2d 627, 630 (Tex. 1992). However, res judicata only precludes litigation of claims or causes of action in existence at the time of the prior law suit. In the instant case, Compania's causes of action were for breach of the settlement agreement. At the time the agreed judgement was entered into, there had been no breach of the settlement agreement. As a result, res judicata, or merger, did not bar Compania's suit to enforce the settlement agreement.
Section 154.071 of the Texas Civil Practice and Remedies Code deals with the enforcement of written settlement agreements. Section 154.071(a) states that a written settlement agreement between parties disposing of a dispute is enforceable in the same manner as any other written contract. Section 154.071(b) goes on to state that a court, in its discretion, may choose to incorporate the terms of a written settlement agreement into a final decree. The Supreme Court noted that while it is permissible to incorporate settlement terms into a final judgement or decree, it is not necessary. As such, the Supreme Court held that §154.071 allows parties to enforce a written settlement agreement regardless of whether the terms have been incorporated into a judgment. As a result, the Supreme Court granted Compania's petition for review, and affirmed the judgment of the trial court.
This case will assist in enforcing written settlement agreements. The Supreme Court shows a continued willingness to allow parties to agree, in writing, to a resolution of their differences. The Court also appears to take a jaundiced view of any attempts to avoid complying with the terms of a written agreement. IV. EXHAUSTION OF ADMINISTRATIVE REMEDIES IS NECESSARY TO CONFER JURISDICTION IN CASES ALLEGING RETALIATION FOR FILING A WORKER'S COMPENSATION CLAIM In Wilmer-Hutchins Independent School District v. Sullivan, decided on June 21, 2001, the Supreme Court held that a plaintiff's failure to exhaust her administrative remedies denied the trial court jurisdiction over a suit for retaliatory discharge.
Joyce Sullivan was employed as a custodian for Wilmer-Hutchins Independent School District. She sustained an on the job injury for which she received worker's compensation benefits. She was released to return to work ten months after her injury. When she attempted to return to work she was advised that she had been terminated as part of a reduction in personnel for budget reasons. She contacted the school district's attorney who told Sullivan that she could not help her. The school district's attorney did not advise Sullivan that she should seek legal counsel or that she could file a grievance under the grievance procedure for the school district. Sullivan subsequently sued the district for retaliatory discharge. The school district filed a plea to the jurisdiction. The school district argued that Sullivan had not exhausted her administrative remedies, and as a result, the court had no jurisdiction to hear the law suit. The trial court granted the plea to the jurisdiction.
Sullivan conceded that she did not exhaust her administrative remedies prior to filing suit. It is also clear that exhaustion of remedies is a pre-requisite to conferring jurisdiction on the trial court. Nonetheless, Sullivan argued that the school district should be estopped from asserting a lack of jurisdiction since the district did not advise her of the availability of administrative remedies. The Supreme Court held that a court cannot acquire subject matter jurisdiction of a case against a school district based on estoppel. In doing so, the Supreme Court followed the Court of Appeals' holdings in Daniel v. Dallas Independent School District, 351 S.W.2d 356 (Tex. App.- El Paso 1961, writ ref'd n.r.e.), Washington v. Tyler Independent School District, 932 S.W.2d 686 (Tex. App. - Tyler 1996, no writ), and Janik v. Lamar Consolidated Independent School District, 961S.W.2d 322 (Tex. App.- Houston [1st Dist.] 1997, pet. denied). In all three of these cases involving a plaintiff's termination from employment with a school district the courts held that jurisdiction cannot be waived by estoppel where the lack of jurisdiction was caused by the failure to exhaust administrative remedies. As such, the Supreme Court found that the failure to exhaust the administrative remedies was fatal to the plaintiff's cause of action.
The Supreme Court makes it clear that exhaustion of administrative remedies is mandatory to confer jurisdiction on a trial court. Failure to show that administrative remedies have been exhausted will require a dismissal of the law suit for lack of jurisdiction. V. A PLAINTIFF WHO IS SEEKING TO PURSUE A CLASS ACTION MUST HAVE AN INDIVIDUAL CLAIM AGAINST THE DEFENDANT TO BE A REPRESENTATIVE OF A CLASS The Supreme Court once again restricted the use of class actions in M.D. Anderson Cancer Center, et al v. Henry Novac (decided on June 14, 2001). The Court held that a plaintiff must have a claim against a defendant in order to maintain a class action. If the plaintiff does not have a claim against the defendant then the Court must dismiss the entire lawsuit, including the class action allegations, due to the lack of standing to sue by the plaintiff.
Suit was brought by Mr. Novac, an attorney, who was complaining about a letter he received soliciting donations to the M. D. Anderson Cancer Center. The M.D. Anderson Cancer Center has an international reputation for both state of the art cancer treatments as well as state of the art cancer research. Mr. Novac claimed that the letter he received soliciting donations contained the representation that "well over 50% of people with cancer who were cared for at the University of Texas M.D. Anderson Cancer Center return home cured." Mr. Novac did not contribute money in response to this letter. He instead filed suit seeking a declaratory judgement that the representation of the cancer cure rate constituted mail fraud. He claimed that any money obtained in response to the letter soliciting donations was obtained through false and fraudulent means. Novac requested that the M. D. Anderson Cancer Center return all donations made in response to this letter. After some initial legal maneuvering which included removing the case to federal court, the state district court ultimately dismissed Novac's suit. The Court of Appeals conceded that Novac did not have a claim for fraud as he never contributed money in response to the solicitation letter. Nevertheless, the Court of Appeals remanded the case to the trial court on the basis that Novac could maintain a suit on behalf of the alleged class of persons who contributed money due to the representation contained in the solicitation letter.
The Supreme Court had no problem holding that Novac could not maintain a claim for common law fraud because he did not sustain an actual injury. Novac's failure to contribute money in response to the solicitation letter prevented him from maintaining a claim for fraud: Even if Novac was an intended victim of a "completed" mail fraud for purposes of governmental prosecution, he was not actually defrauded. His lack of any actual or threatened injury prevents him from being "personally aggrieved" such that he has any personal stake in the litigation. As a result, the Court concluded that Novac could not maintain an individual claim for fraud. More importantly, Novac's lack of standing to bring an individual claim prevented him from pursuing a class action based on the alleged false representation of the cancer cure rate in the letter soliciting donations. The Court held that "...a plaintiff who lacks individual standing when suit is filed cannot maintain a class action." If the plaintiff does not have an individual claim, the trial court must dismiss the plaintiff's claims as well as the class action claims.
The Court has further limited class action litigation. It appears that the Court is attempting to limit class actions by plaintiffs who are actively looking for potential cases to pursue as class actions. VI. COMMON LAW STATE CLAIMS ARE NOT PRE-EMPTED BY FEDERAL NATIONAL TRAFFIC AND MOTOR VEHICLE SAFETY ACT AND FEDERAL MOTOR VEHICLE SAFETY STANDARD 108 In Great Dane Trailers, Inc. vs. Wells, (decided on June 14, 2001), the Texas Supreme Court found that the plaintiffs' cause of action against the manufacturer of an 18 wheeler trailer was not preempted by federal law which dictated the number of reflectors to be placed on the side of the trailer.
In October of 1990, Garland Wells and his family were involved in a night time automobile accident with an 18 wheeler trailer. The tractor-trailer had previously jack-knifed. The Wells' vehicle then struck the trailer. Mr. Wells was killed in the accident. The Wells brought suit against the manufacturer of the trailer (Defendant Great Dane) alleging that the trailer was defectively manufactured because it did not have enough reflectors or reflective equipment on the trailer to make it appropriately conspicuous. The trailer was manufactured in 1986. At that time, the National Traffic and Motor Vehicle Safety Act and Federal Vehicle Safety Standard 108 required a three-light, three-reflector configuration on each side of the trailer. Great Dane equipped its trailers with these required lights and reflectors. Plaintiffs' cause of action was essentially that Great Dane should have placed additional reflective equipment on the trailer rather than just complying with the federal minimum standard. Great Dane moved for summary judgment, asserting that the Safety Act and Standard 108 expressly and impliedly preempted the common-law conspicuity claims. Great Dane's summary-judgment evidence showed that its trailer complied with Standard 108's requirements when Great Dane manufactured it and when it left Great Dane's possession. The trial court granted Great Dane's summary-judgment motion and dismissed the plaintiffs' claims. The appellate court found that federal law did not expressly or impliedly preempt the Welles' claims and remanded the case back to the trial court.
In addressing whether plaintiffs' "conspicuity" claim was preempted by federal law, the Texas Supreme Court held that state law claims can be either expressly or impliedly preempted. In regards to whether the state law claims were expressly preempted, the Court noted that the United States Supreme Court had previously found in Geier v. American Honda Motor Co., 529 U.S. 861 (2000), that the Safety Act did not expressly preempt "nonidentical state standards established in tort actions covering the same aspect of performance as an applicable federal standard." Therefore, the question to be decided by the Texas Supreme Court was whether federal law impliedly preempted plaintiffs' causes of action. Federal law or federal regulations may impliedly preempt state law or state regulations if the statute's scope indicates that Congress intended federal law or federal regulations to exclusively occupy the field. Furthermore, if state law actually conflicts with federal law or regulations then state law is preempted. State law presents an actual conflict with federal law when: (1) it is impossible for a private party to comply with both state and federal requirements; or (2) state law obstructs accomplishing and executing Congress' full purposes and objectives. In this case, Great Dane tried to argue that by allowing the Welles to pursue their cause of action their common law claims would actually conflict with the Standard 108 and would stand as an obstacle to the accomplishment and execution of the full purposes and objective of Congress. The Supreme Court rejected Great Dane's allegations by noting that Standard 108 established minimum conspicuity standards that states are free to strengthen through tort law. In essence, the Court followed the Welles argument that their claims were not about replacing the reflective lights but rather that additional lights or reflective material should have been placed on the trailer. Therefore the Court found that federal law did not impliedly preempt the plaintiffs' state law claims. The Court, however, admitted the problem with its decision by noting: We recognize that our holding that the Wellses' state tort claims are not impliedly preempted may seem counterintuitive; a manufacturer could have complied with Standard 108 as it existed in 1986 but still be exposed to state tort claims. Nevertheless, Geier's implied preemption analysis, together with the federal standard that existed in 1986, dictate our conclusion.
The Texas Supreme Court gave a rare victory to the plaintiffs' bar by finding federal law did not preempt state law claims. It should be noted that the implied preemption analysis should be done on a case by case basis given the date of the manufacture of a product and the law that applied at the time of manufacturing. 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. |
- Insurance Defense and Litigation
- Commercial Trucking Accidents Defense and Litigation
- Professional Malpractice
- Healthcare Malpractice
- Employment Law
- Constitutional Torts and Civil Rights
- Environment and Toxic Torts - Medical Devices
- Construction Defects
- Oilfield and Offshore Platform Accidents
- Business and Commercial Litigation
Volume II, No. 7
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