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Amidst loss and devastation, Hurricane Harvey triggers timely consideration of property damages claims from “forces of nature” under Texas insurance policies.

With the widespread devastation wrought by Hurricane Harvey through a large swathe of South Texas, insurance companies will undoubtedly be on the receiving end of numerous policy claims from property owners. Although it may initially seem too soon or too insensitive to turn to concerns over property claims while the storm still rages, an important change in Texas law demands timely consideration of the issue.

A new Texas law governing insurance claims, House Bill 1774, becomes effective this Friday, September 1, 2017. This statute adds Chapter 542A to the Texas Insurance Code, titled “Certain Consumer Actions Related to Claims for Property Damage.” The statute specifically applies to claims regarding property damage or loss caused in any part by “forces of nature.” Although the initial focus of the bill was on lawsuit abuse from hailstorm litigation, its broad scope includes weather events such as earthquakes, wildfires, floods, tornados, lightning, and, of timely interest, hurricanes.

Importantly, changes to Texas insurance law include the imposition of stricter pre-suit notice requirements, inspection requirements, and limitations on attorneys’ fees and interest. Further, the new law will reduce penalties against insurance companies that are determined to have failed to pay valid claims, paid less than amounts due, or failed to timely pay claims. With respect to potential litigation, the new law imposes stricter notice requirements for plaintiffs’ attorneys and, in the event the policyholder ultimately prevails, reduces the amount of penalty interest for failing to promptly pay a claim from 18% to about 10% (5% above prejudgment interest established under Finance Code).

Insurance companies, therefore, face somewhat less liability exposure under the new law and there are elevated hurdles for plaintiffs to overcome in pursuing litigation.
Consequently, the timing of policyholder claims is critical to the law applicable to the insurance companies’ processing of those claims. That is, for a policyholder to take advantage of existing Texas law, and the enhanced penalties contained therein, the policyholder must file a claim in writing and advise the insurance company of the facts relating to the claim by this Thursday, August 31, 2017. Otherwise, House Bill 1774 will likely govern such claims filed on or after September 1st.

To the extent litigation arises relating to claims for property damage or loss caused in any part by “forces of nature,” including Hurricane Harvey, the timing of the policyholder’s claim will be key to how litigation proceeds and the insurance company’s liability exposure.

CO Supreme Court Upholds Developer’s Right to Demand Arbitration of Construction Defect Claims

Last Monday, the Colorado Supreme Court, affirming the lower court’s ruling, issued a decision essentially upholding condominium developers’ right to require arbitration of construction-defect disputes. See Vallagio at Inverness Residential Condo. Ass’n v. Metro. Homes, Inc., et al., Case No. 15SC508 (CO Sup. Ct.) (June 5, 2017). The Court’s 5-2 decision last week, combined with recent state legislation (House Bill 1279) requiring approval by a majority of condominium owners to pursue legal action against condominium developers, may reinvigorate what has been a dormant market for the better part of a decade.

The dispute presented to the Colorado Supreme Court concerned a so-called “right to consent” in which the condominium developer attempted to contractually retain a perpetual right to consent to any subsequent homeowners association’s proposed amendments to the community’s declarations regarding arbitration for construction-defects claims. In short, the condominium developer included contract language preventing homeowners associations from subsequently removing arbitration requirements without its consent (i.e., the original declaration required binding arbitration of construction-defect claims and prohibited any amendment to the binding arbitration provision without the developer’s consent).

The underlying litigation was the product of construction defect claims asserted by unit owners. Unable to resolve their claims informally, the unit owners voted to amend the property declaration to remove the arbitration provision and the homeowners association then filed a lawsuit against the developer. In response, the developer moved to compel arbitration, arguing that the arbitration provision deprived the district court of jurisdiction and that the unit owners’ attempt to amend the provision was invalid because they failed to secure its consent. The homeowners association asserted that the right to consent was invalid under the Colorado Consumer Protection Act (CCPA) and the Colorado Common Interest Ownership Act (CCIOA), the latter of which governs rules between developers and property owners in communities with shared walls.

The Colorado Supreme Court, however, concluded that developers can, in fact, retain a perpetual right to consent. In arriving at its decision, the Court reviewed the language of the CCPA and the CCIOA, as well as the legislative intent underlying each statute. The majority determined that although the CCIOA bars developers from requiring thresholds higher than 67 percent of residents to make changes to contracted declarations, nothing in either law prohibits a developer from including a provision perpetually requiring its consent for particular amendments. Indeed, according to the majority opinion, such an outcome is consistent with the CCIO language and Colorado public policy favoring alternative dispute resolution, including arbitration.

Consequently, according to the Court, the developer is entitled to binding arbitration of construction-defect claims arising from the development and the homeowners cannot modify or amend the associated provisions without the developer’s consent.

Texas Supreme Court Clarifies When Partners May Be Sued Individually for Partnership Obligations

Last week the Texas Supreme Court confirmed that a cause of action does not accrue against business partners for partnership debt unless and until the partnership fails to satisfy a judgment against it. In other words, the partnership itself really is a separate legal entity and individual partners cannot immediately be called upon to pay or perform in lieu of the partnership.

The case before the court involved an oil and gas investment dispute in which the plaintiff had litigated for about 15 years and won a breach of contract judgment against the partnership. The partnership, however, was undercapitalized and lacked the assets to satisfy the judgment. Two years later, the plaintiff sued the individual partners to pay the judgment. The trial court ruled that the suit against the partners was barred by the four-year statute of limitations for the partnership’s underlying breach of contract and a split appellate court affirmed.

The Texas Supreme Court disagreed. The starting point for the Court’s analysis was the simple proposition that in Texas a partnership is a legal entity distinct from its partners that can enter contracts in its own name, sue and be sued in its own name, and own property. Importantly, the partners’ derivative liability only arises once the partnership’s liability is established. “Considering the derivative and contingent nature of that liability, the only obligation for which a partner is really responsible is to make good on the judgment against the partnership, and generally only after the partnership fails to do so.” Therefore, because it was the partnership that was a party to and breached the contract and the partners are separate legal entities, they committed no wrongful act and caused no legal injury until the partnership failed to satisfy the judgment against it.

If a partnership obligates itself to pay money or perform services, the individual partners cannot be immediately sued to satisfy those commitments. Instead, the aggrieved party must first obtain a judgment as against the partnership and give the partnership 90 days to satisfy the judgment. If it fails to do so, then the aggrieved party may seek satisfaction from the individual partners.

What this also means is that the limitations period for the underlying claim against the partnership does not apply to the claims that may arise as to the partners if the partnership cannot ultimately satisfy a judgment against it. According to the Texas Supreme Court, “the limitations period against a partner generally does not commence until after final judgment against the partnership is entered.” So individual partners need not be included in the lawsuit against the partnership and face exposure to liability beyond the otherwise applicable statute of limitations relating to the claims against the partnership.

American Star Energy & Minerals Corp. v. Stowers, Case No. 13-0484 (Feb. 27, 2015) (Tex.)

Litigation Strategy, Be Careful What You Ask For … You May Get It. Just ask BP.

Confronted with claims by thousands of plaintiffs across the Gulf Coast seeking billions of dollars in damages, on the eve of the MDL trial in New Orleans on liability for the Deepwater Horizon oil spill in the Gulf of Mexico, BP settled with two classes of plaintiffs. BP estimated the value of that settlement at $9.2 billion.

Thereafter, with settlement and other costs mounting, BP reversed course, arguing that the settlement agreement was fatally flawed in allowing people who were not injured by the spill to collect payments. In particular, BP argued, the agreement’s settlement class violates Article III of the Constitution and Federal Rule of Civil Procedure 23 by including members who have not suffered an injury caused by the defendant. This despite the fact that (i) BP touted the agreed-upon standard of assumed causation when it originally sought the district court’s approval of the deal and (ii) others, like Halliburton, voiced this very concern with causation at the time.

In response to BP’s challenge, the plaintiffs suggested, among other things, that BP was merely suffering from buyer’s remorse from a deal to which it freely agreed. According to the plaintiffs, BP agreed to the deal, pushed for the district court to approve the deal, and never timely appealed any issue regarding the lack of a causation requirement.

On Monday, the US Supreme Court denied BP’s bid to overturn the deal it struck with the plaintiffs in 2012. It would seem BP is stuck with what it asked for, even though the pricetag turned out to be more than the $9.2 billion it predicted.

BP Exploration & Production, Inc. v. Lake Eugenie Land & Development, Inc. (Case No. 14-123)

Defamation, Another Company Concern in Conducting and Concluding Internal Investigations?

Through the normal course of business, it is not uncommon for a company to get wind of potential misconduct among its employees. Whether the issue is one of unlawful employment practices (e.g., discrimination or harassment), violations of securities laws, fraudulent conduct or corruption, the sound practice is often to conduct an internal investigation to get to the bottom of it. Once that investigation is complete and the company understands whether and to what extent its employees may have engaged in misconduct, it must decide how to proceed.

A company that determines its employees have engaged in misconduct, must respond accordingly. Many times, what seems to be the appropriate response includes self-reporting the misconduct to the governing/regulating entity (e.g., EEOC, SEC, Department of Justice). Indeed, companies are encouraged to self-report as a means by which to reduce the sanction that might otherwise be imposed on the company for engaging in the identified misconduct.

But in doing so, companies may also need to more closely consider potential defamation litigation by employees who are stated to have been involved in misconduct. In litigation involving Shell Oil Co., for example, an employee sued the oil company for defamation after its internal investigation report of FCPA violations to the Department of Justice included conclusions that the employee approved and facilitated the bribes at issue. The employee claims the assertions are not true and hurt his reputation.

Although the trial court initially agreed with Shell that its report was entitled to immunity as part of the government’s official investigation, the Houston appeals court reversed that decision, saying Shell issued the report voluntarily. Now the issue is before the Texas Supreme Court, which heard oral argument on the issue last month. Shell and other businesses contend that if there is no immunity for information provided in corruption investigations, companies will be less likely to voluntarily cooperate and self-report issues, thereby impeding investigations. Faced with the prospect of defamation litigation, companies may by necessity be less forthcoming in their reports.

Once the Texas Supreme Court renders its decision, companies in Texas should have a clearer sense of direction, at least with respect to FCPA claims. But a question may still remain as to internal investigations conducted as to other types of wrongdoing and reports to other agencies. Companies should tread carefully both in the conduct of internal investigations and with the preparation and dissemination of the ensuing reports.

Writt v. Shell Oil Co., Case No. 01-11-00201-CV

BP, a Victim of its Own Trial Strategy, Fails to Curtail Liability

Yesterday, the federal judge in New Orleans who is handling the BP oil spill MDL litigation rejected BP’s effort to set aside its liability finding. BP has already stated its intent to appeal to the 5th Circuit. In the meantime, however, it still faces as much as $18 billion in Clean Water Act penalties.

On September 4, 2014, Judge Barbier issued his liability determination. At that time, he determined that BP was grossly negligent and apportioned 67% of the responsibility for the oil spill to BP. On October 2, 2014, BP filed a motion to set aside the finding or grant a new trial, contending that the liability finding improperly relied on excluded evidence of a casing breach theory proffered by Halliburton and its expert, Dr. Gene Beck. Both Halliburton and the Department of Justice responded to BP’s motion, arguing that BP actually solicited the evidence on cross-examination of Dr. Beck, thereby opening the door.

On November 13, 2014, Judge Barbier denied BP’s motion to amend the findings, alter or amend the judgment or for new trial. In doing so, he agreed with Halliburton and the DOJ that the testimony at issue was, at least in part, elicited by BP’s own cross-examination, as well as Halliburton’s re-direct examination after BP opened the door. According to the ruling, “BP was not, as it claims, a ‘victim of surprise.’ . . . Rather, it seems BP was a ‘victim’ of its own trial strategy.” The ruling also observed that the casing-breach theory at issue was corroborated by multiple pieces of other evidence.

In re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, Case No. 2:10-md-02179 (E.D. LA)

Billions of dollars in liability potentially at issue in oil spill evidence dispute.

On September 4, 2014, U.S. District Judge Carl J. Barbier rendered his ruling on liability for the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. In that ruling, Judge Barbier found BP grossly negligent and apportioned 67% of the fault for the oil spill to BP (leaving 30% for Transocean and 3% to Halliburton). Separate and apart from any other civil liability it may face, if the ruling stands, BP may confront as much as $18 billion in Clean Water Act penalties.

In response, on October 2, 2014, BP asked the Court to set aside its finding or grant a new trial, arguing that the ruling improperly relied on evidence that was excluded. In particular, BP contended that because it was not included in the expert report, the judge could not rely on certain testimony from Halliburton’s expert about BP subjecting the production casing to 140,000 pounds of compressive force, which the Court found led to a breach in the production casing below the float collar and caused the cement to be improperly placed.

Last Thursday, both Halliburton and the U.S. Department of Justice responded to BP’s motion, basically arguing that BP waived its objection to the evidence and opened the door to its consideration by exploring the bases for the expert’s opinion on cross-examination. They suggest that BP re-introduced the evidence on cross-examination, permitting Halliburton then to follow up on re-direct examination and entitling the Court to rely on the expert’s trial testimony.

While the ultimate outcome remains uncertain, the ongoing dispute emphasizes the potentially significant impact of evidentiary determinations and trial strategy on a company’s bottom line.

In re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, Case No. 2:10-md-02179 (E.D. LA)

Texas Supreme Court Limits Spoliation Instructions

When evidence is lost in litigation, intentionally or otherwise, that loss – or spoliation – oftentimes becomes the subject of more attention than the underlying issues involved in the parties’ dispute. Indeed, this summer the Texas Supreme Court observed that a “fundamental tenet of our legal system is that each and every trial is decided on the merits of the lawsuit being tried” and that “the imposition of a severe spoliation sanction, such as a spoliation jury instruction, can shift the focus of the case from the merits of the lawsuit to the improper conduct that was allegedly committed by one of the parties during the course of the litigation process.”

Attempting to address this situation, in Brookshire Brothers v. Aldridge, the Texas Supreme Court clarified when spoliation occurs and the scope of a trial court’s discretion to impose sanctions as a remedy. First, spoliation occurs when a party has a duty to reasonably preserve evidence but (intentionally or negligently) fails to do so. Second, the trial court has broad discretion to impose a proportionate remedy for that spoliation; the key considerations for which are the level of the spoliating party’s culpability and the degree of prejudice suffered from the spoliation.

Importantly, the Texas Supreme Court noted that “the harsh remedy of a spoliation instruction is warranted only when the trial court finds that the spoliating party acted with the specific intent of concealing discoverable evidence, and that a less severe remedy would be insufficient to reduce the prejudice caused by the spoliation.”

“Merits determinations are significantly affected by both spoliation instructions and the conduct that gives rise to them.” As such, the Texas Supreme Court attempted to craft a mechanism by which trial courts can properly sanction spoliation without unduly impacting resolution of companies’ underlying disputes.

Brookshire Bros., Ltd. v. Aldridge, 2014 Tex. Lexis 562 (Tex. July 3, 2014)