No duty to defend insured - Summary judgment for insurer affirmed

Robert Trotter Gift Fund for Thomas U/A/D 5-3-81, a/k/a Robert Trotter Gift Trust for Thomas U/A/D 5-3-82, and Thomas S. Trotter v. Trinity Universal Insurance Company, No. (Tex.App.- Sep. 12, 2007)(insurance law, duty to defend, indemnify)(Opinion by Justice Pemberton)(Before Chief Justice Law, Justices Pemberton and Waldrop)
Appeal from 353rd District Court of Travis County

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT
NO. GN304871, HONORABLE MARGARET A. COOPER, JUDGE PRESIDING

M E M O R A N D U M O P I N I O N

This appeal arises from an insurance coverage dispute under a Commercial General Liability (CGL) policy. After he was sued by several lot owners in a subdivision he had developed, appellant Thomas S. Trotter, who had acted through the Robert Trotter Gift Fund for Thomas U/A/D 5-3-81 (collectively, "Trotter"), requested a defense and indemnity under his CGL policy with Trinity Universal Insurance Company. Trinity declined, in the view that "the plaintiff does not seek to recover damages for Bodily Injury or Property Damage caused by an occurrence or Personal Injury or Advertising Injury caused by an offense as defined." Trotter ultimately incurred liability and litigation expenses in this underlying lawsuit. (1)

Trotter sued Trinity, asserting that the carrier breached the insurance contract by refusing to defend and indemnify him and that Trinity's failure to defend him violated the insurance code. Trotter sought actual damages, additional damages, and attorney's fees. Trinity counterclaimed for declaratory judgment that it had no duty to defend Trotter under the CGL policy and for attorney's fees. On cross-motions for summary judgment, the district court granted Trinity's motion, denied Trotter's, and rendered judgment that Trotter take nothing.

Trotter appeals, bringing five issues challenging (1) the district court's summary judgment on Trinity's declaratory claim that the carrier had no duty to defend Trotter; and (2) the court's denial of summary judgment on Trotter's claims that Trinity (3) breached the CGL policy contract by failing to defend him, (4) violated the insurance code, and (5) breached the policy contract by failing to indemnify him. For the reasons explained below, we affirm the district court's judgment.

We review the district court's summary judgment de novo. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005); Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex. 2003). Summary judgment is proper when there are no disputed issues of material fact and the movant is entitled to judgment as a matter of law. Tex. R. Civ. P. 166a(c); Shell Oil Co. v. Khan, 138 S.W.3d 288, 291 (Tex. 2004) (citing Knott, 128 S.W.3d at 215-16). Where, as here, both parties move for summary judgment and the district court grants one motion and denies the other, we should review the summary-judgment evidence presented by both sides, determine all questions presented, and render the judgment the district court should have rendered. Texas Workers' Comp. Comm'n v. Patient Advocates of Tex., 136 S.W.3d 643, 648 (Tex. 2004); FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000). We must affirm the summary judgment if any of the summary-judgment grounds are meritorious.
Patient Advocates, 136 S.W.3d at 648; FM Props., 22 S.W.3d at 872.

The central question in this appeal is whether, as a matter of law, Trinity had a duty under the CGL policy to defend Trotter against the underlying suit. To determine whether Trinity had a duty to defend Trotter, we look to the "eight corners" of the petition in the underlying suit and the insurance policy (the "four corners" of each instrument), comparing the facts alleged in the petition with the policy language to determine whether the petition alleges acts within the policy's scope of coverage. See Allstate Ins. Co. v. Hallman, 159 S.W.3d 640, 643 (Tex. 2005); National Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997). When applying this rule, we are to focus on the factual allegations that show the origins of the alleged damages rather than on the legal theories pleaded, give a liberal interpretation to the factual allegations, and resolve doubts in favor of coverage. Hallman, 159 S.W.3d at 643; Merchants Fast Motor Lines, Inc., 939 S.W.2d at 141. Where the petition does not state facts sufficient to clearly bring the case within or without the policy's coverage, the insurer is obligated to defend if there is, potentially, a case under the complaint within the coverage of the policy. Merchants Fast Motor Lines, Inc., 939 S.W.2d at 141 (quoting Heyden Newport Chem. Corp. v. Southern Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965)). Further, we are not concerned with the truth or falsity of the pleadings. See Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 821 (Tex. 1997) (duty to defend is triggered solely by factual pleadings and language of policies, without regard to truth or falsity of pleadings). If an insurer owes a duty to defend any of the claims against its insured, that duty extends to the entire suit. See Utica Nat'l Ins. Co. v. American Indem. Co., 141 S.W.3d 198, 203 (Tex. 2004); CU Lloyd's v. Main St. Homes, Inc., 79 S.W.3d 687, 692 (Tex. App.--Austin 2002, no pet.).

We begin our analysis by reviewing the factual allegations in the underlying lawsuit. See Cowan, 945 S.W.2d at 821. The plaintiffs were a group of individuals who had purchased lots in the Thurman Bend Estates subdivision on Lake Travis (the "underlying plaintiffs"). The defendants included Trotter, the developer of Thurman Bend Estates. The underlying plaintiffs alleged that:

At various times beginning in 1994 through 1996, Plaintiffs solicited information about Thurman Bend Estates . . . . Defendants . . . represented to Plaintiffs that a one-acre homeowners' lakeside park would be conveyed by [Trotter] to the Thurman Bend Owners' Association for the benefit of all of the owners of lots in Thurman Bend Estates. It was represented that the park could have facilities consistent with those found in other lakeside parks, including, but not limited to, boat trailer and automobile parking, recreational areas, barbeque pit(s), picnic facilities, a boat launch and space to build a boat dock and/or swim platform. Plaintiffs were led to believe that a true park for the benefit of Thurman Bend lot owners would be conveyed by Defendant Trust.
"Substantiating this representation," the underlying plaintiffs added, "a Declaration of Covenants, Conditions, and Restrictions for Thurman Bend Estates Subdivision ("Declaration") was signed and filed by Defendant Trotter . . . in July, 1995, which represented that [Trotter] would convey to the Thurman Bend Owners' Assn. a 'lake side park area easement and an access easement for the usage by all Owners.'"

The underlying plaintiffs further alleged that "[b]ased upon and in reliance upon these representations, in 1994 through 1996, Plaintiffs paid substantial amounts of money to purchase lots in Thurman Bend Estates . . . ." However, the underlying plaintiffs pled, Trotter and the other defendants ultimately failed to provide the represented easement. They alleged that defendants "failed to disclose the true nature of the 'park'" and that "[t]his failure to disclose and false representations were very material facts which induced Plaintiffs to agree to purchase their Thurman Bend lots."

Specifically, the underlying plaintiffs elaborated, Trotter "sold Lot Number 18 to Defendant [Robert L.] Haug in February 1996" and "signed a Grant of Easements dated February 26, 1996 . . . to Thurman Bend Estates Owners' Association for the benefit of all of the [lot] owners" on Lot 18. The easement, whose terms were negotiated "without any input or knowledge of the current Thurman Bend Estates property owners," "created a 'Boat Launch Easement' which could be used 'only for ingress and egress from Lake Travis.'" Further, the grant of easement prohibited "'[a]ctivities of extended duration'" within the areas of the easement outside of a 20-foot strip. "The twenty (20) foot easement strip is land reserved by the Lower Colorado River Authority for the rise and fall of Lake Travis" that "is on a relatively severe incline with a very rocky surface making it unsuitable for most recreational activities."

The underlying plaintiffs added that, "Prior to July, 1998, the Plaintiffs not knowing about the 'Boat Launch Easement' used the property as a park, [with] such activities as, parking vehicles and boat trailers, recreating and picnicking." In July 1998, at the first meeting of the Thurman Bend Owners' Association, Haug "stated that the easement was solely for ingress and egress," but "those Plaintiffs that heard him thought that he was referring to the access easement only, not the park easement." However, "on April 5, 2000, it was made clear when Defendant Haug sent a letter to all Thurman Bend lot owners" explicitly prohibiting "'parking, fishing, picnicking, loitering, camping, including fires, [or] swimming'" on his lot, and that, "because the easement did not allow doing anything of extended duration, unattended vehicles would be towed." At this juncture, "Plaintiffs learned for the first time that the park which had been previously represented was in fact merely an easement to launch a boat. There was no park." They added that, "Needless to say, the Plaintiffs wondered what happened to the one-acre homeowners' park that was represented by Defendants . . . ."

The underlying plaintiffs alleged, under the heading of "Actionable Conduct,"
Defendants' representations concerning the nature of the "park" and their failure to disclose and false explanations were very material facts which induced Plaintiffs to purchase their Thurman Bend lots. Had the true nature of the Boat Launch Easement "park" been fully disclosed, Plaintiffs would not have purchased the lots.

The plaintiffs pled causes of action for DTPA violations (based on misrepresentations, failure to disclose, and unconscionability), breach of the sales contract, breach of the Declarations, statutory and common-law fraud, negligent misrepresentation, tortious interference, and civil conspiracy. The plaintiffs also pled that the defendants were equitably estopped from prohibiting the use of Lot 18 as a park and also sought a declaration construing the Declarations to permit certain recreational activities on Lot 18. Finally, the plaintiffs sought reformation of the grant of easement based on mutual or unilateral mistake. The plaintiffs sought unspecified actual damages, additional damages, and the declaratory and equitable relief already noted.
The Thurman Bend Owners' Association intervened as plaintiffs, citing "the same basis as the Plaintiffs' suit." It sought relief including reformation of the Declarations and grant of easement or, in the alternative, monetary damages.

We now compare the underlying plaintiffs' factual allegations to the CGL policy provisions. Trotter contends that the pleadings invoked a duty to defend under both Coverage A and Coverage B of the policy.

Coverage A, Bodily Injury and Property Damage Liability, provides that Trinity "will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies. [Trinity] will have the right and duty to defend any 'suit' seeking those damages. . . ." However, Coverage A also provides: "This insurance applies to 'bodily injury' or 'property damage' only if the 'bodily injury' or 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory.'" "Property damage" is defined in the policy as either "[p]hysical injury to tangible property, including all resulting loss of use of that property," or "[l]oss of use of tangible property that is not physically injured." "Occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

Trotter argues that the underlying plaintiffs alleged a "loss of use of tangible property that is not physically injured"--specifically, the plaintiffs' inability to use Lot 18 (indisputably a piece of "tangible property") as a lakeside park. (2) Trotter first relies on the underlying plaintiffs' allegations that the defendants "represented to Plaintiffs that a one-acre homeowners' lakeside park would be conveyed" consistent with prior representations or understandings, yet the grant of easement ultimately conveyed only a twenty-foot rocky strip, and "the Plaintiffs wondered what happened to the one-acre homeowners' park that was represented by Defendants." Trinity responds that while Lot 18 is "tangible property"--property "capable of being handled or touched" or that "may be seen, weighed, measured, and estimated by the physical senses," see Lay v. Aetna Ins. Co., 599 S.W.2d 684, 686 (Tex. Civ. App.--Austin 1980, writ ref'd n.r.e.)--the underlying plaintiffs alleged only that Trotter failed to grant them the promised right to use Lot 18, not a loss of use of that property.

We agree with Trinity. "Loss of use of tangible property" in the policy plainly contemplates some preexisting interest in using the "tangible property" (here, Lot 18) whose deprivation would constitute "loss of use." The underlying plaintiffs alleged instead that the defendants' actions caused the absence of such an interest. Without an interest in Lot 18 that would allow the underlying plaintiffs to use it, the underlying plaintiffs necessarily could not state a claim for the loss of that use.

Trotter also argues that the underlying plaintiffs stated a "loss of use" of Lot 18 through their allegations that, "Prior to July 1998, the Plaintiffs not knowing about the 'Boat Launch Easement' used the property as a park, [with] such activities as parking vehicles, and boat trailers, recreating and picnicking," but that "on April 5, 2000, it was made clear when Defendant Haug sent a letter to all Thurman Bend lot owners" explicitly prohibiting "parking, fishing, picnicking, loitering, camping, including fires, swimming," and that unattended vehicles would be towed. In other words, as Trotter puts it, "[t]he plaintiffs alleged they were using the property as a park and for parking, among other things, and then they could no longer use the property for picnicking, parking vehicles, and other activities--i.e., they lost the use of that property."

Trinity counters that even if such prior use is assumed to have been by permission, license, or "that the Underlying Plaintiffs somehow possessed an easement to use Lot 18 as a lakeside park," the deprivation of these sorts of non-possessory interests would not constitute a "loss of use of tangible property." Pointing to decisions from other jurisdictions, Trinity urges that "loss of use of tangible property" contemplates a possessory rather than intangible interest in that property. See Kazi v. State Farm Fire & Cas. Co., 15 P.3d 223, 229 (Cal. 2001); cf. Mid-Continent Cas. Co. v. Camaley Energy Co., 364 F. Supp.2d 600, 606 (N.D. Tex. 2005) (allegations of constructive evictions from leaseholds stated claim for "loss of use of tangible property"). In sum, Trinity argues that the "alleged impairment of a license [or easement] to use non-owned property for recreational purposes evidences a connection to the property that is simply too tenuous to constitute loss of use of tangible property."

Trotter replies that under the plain language of the CGL policy, the "loss of use of tangible property" is not limited to possessory interests. He emphasizes that the "eight corners rule" does not permit courts to read language into policies that is simply not there. See Gehan Homes, Ltd. v. Employers Mut. Cas. Co., 146 S.W.3d 833, 843 (Tex. App.--Dallas 2004, pet. filed).
We agree with Trinity that these allegations did not state a covered claim for loss of use of tangible property. Whatever rights the underlying plaintiffs conceivably alleged they obtained in Lot 18 through prior usage, their alleged subsequent "loss of use" was caused by conduct that is not an "occurrence" under the policy. The "loss of use" on which Trotter relies here was caused, according to the pleadings, by Haug's actions in April 2000, "sen[ding] a letter to all Thurman Bend lot owners" explicitly prohibiting "parking, fishing, picnicking, loitering, camping, including fires, [or] swimming" on his lot, and stating that, "because the easement did not allow doing anything of extended duration, unattended vehicles would be towed." An "occurrence" under the policy, by contrast, is "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." "Accident" is not defined in the policy, but the supreme court has held that an injury is accidental "if from the viewpoint of the insured, [it is] not the natural and probable consequence of the action or occurrence which produced the injury; or in other words, if the injury could not reasonably be anticipated by the insured, or would not ordinarily follow from the action or occurrence which caused the injury."
Mid-Century Ins. Co. v. Lindsey, 997 S.W.2d 153, 155 (Tex. 1999) (quoting Republic Nat'l Life Ins. Co. v. Heyward, 536 S.W.2d 549, 557 (Tex. 1976)). "[B]oth the actor's intent and the reasonably foreseeable effect of his conduct bear on the determinations of whether an occurrence is accidental." Id. The allegation that Haug deliberately sent this letter to enforce his rights relative to the actual easement is not susceptible to being construed as an "accident."
We hold that the underlying plaintiffs did not allege a "loss of use of tangible property" caused by an "occurrence" within Coverage A. We express no opinion regarding other issues briefed by the parties concerning the scope and meaning of "loss of use of tangible property" or "occurrence" and the application of these terms to the underlying pleadings. (3)

Trotter also argues that the underlying pleadings allege claims within Coverage B of the CGL policy. Coverage B, "Personal and Advertising Injury Liability," provides:
[Trinity] will pay those sums that the insured becomes legally obligated to pay as damages because of "personal injury" or "advertising injury" to which this insurance applies. [Trinity] will have the right and duty to defend any "suit" seeking those damages.

The policy defines "personal injury," in relevant part, as "[t]he wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies by or on behalf of its owner, landlord, or lessor." Trotter argues that the claims asserted against him were potentially covered as an "invasion of the right of private occupancy of . . . premises." He relies again on the allegations that the plaintiffs had begun to use Lot 18 as a park and that their access to the property was later restricted.

Trinity responds that the underlying plaintiffs did not allege any "right of private occupancy" in Lot 18 that could have been "invaded." It adds that the term "right of private occupancy" in the "personal injury" definition has been held by Texas courts to refer to the rights "associated with an individual's acts of inhabiting the premises, and not to the rights associated with the individual's rights to use and enjoy the inhabited premises." See Decorative Ctr. of Houston v. Employers Cas. Co., 833 S.W.2d 257, 261 (Tex. App.--Corpus Christi 1992, writ denied). The Corpus Christi court also held that coverage for any "'other invasion of the right of private occupancy' does not apply outside the landlord-tenant scenario, or when the occupier has a vested interest in the occupancy of the premises." Id. at 263. It reasoned that, under ejusdem generis principles, the policy's reference to "other right of private occupancy" was immediately preceded by "wrongful eviction" and "wrongful entry," and must have been intended to encompass actions of the same general type or refer to an similar invasion of interests. Id. at 261-62. See also id. at 261 n.4 (collecting cases).

Trotter attempts to distinguish Decorative Center of Houston and similar cases on the basis that the policies at issue defined "personal injury" as "wrongful eviction from, wrongful entry into, or other invasion of the right of private occupancy of a room, dwelling or premises," while his CGL policy with Trinity omitted the word "other." Some courts have deemed that distinction significant. See New Castle County v. National Union Fire Ins. Co., 243 F.3d 744, 751-53 (3d Cir. 2001) (holding, in a case involving claims arising from zoning and permitting decisions, that "invasion of the right of private occupancy" under policy with similar language was ambiguous). On the other hand, a Texas federal court rejected a similar argument in a suit involving claims by a hotel tenant against the hotel owner, "finding the slight difference in the wording of the two policies has no practical effect." Patel v. Northfield Ins. Co., 940 F. Supp. 995, 1000 (N.D. Tex. 1996). Relying on Decorative Center of Houston, the Patel court held that "[w]ithout a landlord-tenant relationship or vested property right, there is no duty to defend for an 'invasion of the right of private occupancy.'" Id. at 1002 ("in this case there was no interference with the rights of private occupancy" by a third party's sexual assault of a hotel guest, but instead "interference with the right to use and enjoy the property").

We conclude that any property interest alleged by the underlying plaintiffs is not one whose alleged infringement would constitute an "invasion of the right of private occupancy." Trotter does not direct us to any case holding that an easement constitutes a "right of private occupancy" whose "invasion" gives rise to a covered claim under a CGL policy, and the sole cases nationwide of which we are aware have held to the contrary. Liberty Mut. Ins. Co. v. East Cent. Okla. Elec. Coop., 97 F.3d 383, 390-91 (10th Cir. 1996); see also Evergrow Indus. Co., Inc. v. The Travelers Ins. Co., 37 Fed. Appx. 300, 301-02 (9th Cir. 2002). We are persuaded that this is the correct conclusion under Texas law as well. The CGL policy's reference to "invasion of right of private occupancy" is immediately preceded by references to wrongful eviction and wrongful entry. Under the contract construction principles of ejusdem generis, this would ordinarily imply intent to limit the scope of the following term--"invasion of right of private occupancy"--to the same general type or nature as wrongful eviction and wrongful entry. Decorative Ctr. of Houston, 833 S.W.2d at 261-62. Without exhaustively addressing the precise parameters of a CGL policy's "right of private occupancy" under Texas law, we conclude that the claimed nonpossessory interests made the basis of the underlying suit are so clearly distinguishable from the general type or nature of property interests implicated by wrongful eviction or wrongful entry that their alleged infringement could not potentially be a covered "invasion of right of private occupancy." Patel, 940 F. Supp. at 1002; see also East Cent. Okla. Elec. Coop., 97 F.3d at 390-91.

We conclude that Trinity did not have a duty to defend Trotter. As this holding is decisive of all of Trotter's issues, we overrule them. (4)

CONCLUSION

Having overruled Trotter's issues on appeal, we affirm the judgment of the district court.
Bob Pemberton, Justice
Before Chief Justice Law, Justices Pemberton and Waldrop
Affirmed

Filed: September 13, 2007

1. See Haug v. Carter, No. 03-03-00476-CV, 2004 Tex. App. LEXIS 6817, at *31 (Tex. App.--Austin July 29, 2004, pet. denied) (mem. op.) (affirming the district court's judgment for the plaintiffs).
2. Trotter does not assert that the underlying plaintiffs alleged either "bodily injury" or "physical injury to tangible property, including all resulting loss of use of that property" under Coverage A.
3. Among other contested issues, the parties dispute the extent to which this Court should consider our judgment and opinion in the underlying suit when resolving the coverage issue. See Haug, 2004 Tex. App. LEXIS 6817. This Court affirmed the district court's judgment reforming the grant of easement to provide a "Lake Side Park Area Easement" in which activities such as "picnicking, swimming, sunbathing, [and] fishing" were expressly permitted. Id. The district court based its judgment on findings of unilateral mistake by Trotter's attorney coupled with Haug's fraud and mutual mistake. Id. at *8-9. When rejecting Haug's sufficiency challenge to these findings, this Court reached only the unilateral mistake issue. Id. at *18-19.
Trinity objects to any consideration of Haug in our determination of whether it had a duty to defend Trotter, emphasizing that our scope of review is limited to the pleadings. Trotter responds that "[t]he underlying outcome is not cited as extrinsic evidence to show the claim was covered [but] . . . to show that the pleading in the case below--i.e., four of the eight corners--was broad enough to allow evidence of a covered claim"--specifically, mistake. Ultimately, for the reasons we explain above, Haug and the question of whether the underlying plaintiffs pled a mistake that constituted a covered "occurrence" have no bearing on the decisive issues in our coverage analysis.
4. In his fifth issue, Trotter suggests that the fact findings in the underlying suit may implicate Trinity's duty to indemnify him even if it had no duty to defend. See Utica Nat'l Ins. Co. v. American Indem. Co., 141 S.W.3d 198, 203 (Tex. 2004) (duty to indemnify for losses covered under a policy is separate and distinct from the duty to defend); Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 821-22 (Tex. 1997) (in contrast to the duty to defend, whose existence is controlled by whether the pleaded factual allegations, liberally construed, potentially assert a covered claim, the existence of a duty to indemnify depends upon the true facts underlying a claim); but see GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 310 (Tex. 2006) (noting that the duty to defend under a CGL policy is often defined more broadly than the duty to indemnify); State Farm Lloyds v. C.M.W., 53 S.W.3d 877, 889 (Tex. App.--Dallas 2001, pet. denied) ("The duty to defend is broader than the duty to indemnify, and where there is no duty to defend under the terms of the policy, there can be no duty to indemnify."). Trotter cites the following findings:
Trotter represented orally and in writing that the Thurman Bend Estates lot owners would have the use of a park on Lake Travis.
Trotter intended the Grant of Easement for Lot 18 would include a lakeside park.
The Grant of Easement for Lot 18 failed to set forth the intentions of Trotter.
The failure of the Grant of Easement to set forth the full agreement was a mutual mistake by all the parties. Alternatively, the failure to set forth the full agreement regarding the park was a unilateral mistake by Trotter.
Trotter was liable for 25% of the plaintiffs' attorneys' fees, based on his contributory fault.
None of these findings could give rise to a duty to indemnify where, as we have determined, the underlying plaintiffs did not allege a "loss of use of tangible property." We overrule Trotter's fifth issue.

Osborne v. Jauregui, Inc. (Tex.App. - Austin, Aug. 29, 2007)

Austin, TX - Third Court of Appeals reverses denial of attorney's fees in home owners' DTPA suit against builder and remands for fee segregation. Also remands homeowner insurance subrogation claim for re-evaluation in light of new Texas Supreme Court precedent. Trial court had denied subrogation claim prior to release of supreme court's opinion in Fortis Benefits v. Cantu, No. 05-0791 (Tex. Jun. 29, 2007)(Opinion by Justice Willett).

Appellants, Dr. Phillip Osborne and Deborah Osborne// Cross-Appellant, State Farm Lloyds vs. Appellee, Jauregui, Inc. // Cross-Appellees, Dr. Phillip Osborne and Deborah Osborne, No. (Tex.App.- Austin, August 29, 2007)(residential construction defect, mold claim, equitable and contractual subrogation rights of homeowner's insurance carrier, attorney's fees entitlement of prevailing party in DTPA suit)(Opinion by Justice Henson) (Before Justices Patterson, Puryear and Henson)
Appeal from 353rd District Court of Travis County
Disposition: Reversed and remanded
Also see dissenting opinion by Justice Puryear

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT
NO. 99-08727, HONORABLE SUZANNE COVINGTON, JUDGE PRESIDING

OPINION BY JUSTICE DIANE HENSON

This appeal arises from a dispute between appellants and cross-appellees Dr. Phillip Osborne and Deborah Osborne and appellee Jauregui, Inc. Jauregui was the architect and builder of the Osbornes' house, which turned out to contain numerous defects that eventually led to mold contamination, among other problems. State Farm provided the Osbornes' homeowners' insurance.

After mold was discovered in the house, the Osbornes brought suit against Jauregui and various subcontractors, seeking damages in excess of $2,000,000. State Farm intervened, asserting a subrogation claim for the amount it paid the Osbornes under their homeowners' policy. All parties other than Jauregui settled prior to trial for a total settlement amount of $1,260,500.

After the jury returned a verdict finding that the Osbornes had suffered approximately $835,000 in damages, the trial court applied a settlement credit in Jauregui's favor and entered judgment that the Osbornes should take nothing on their claims. The trial court declined to award the Osbornes attorney's fees and further declined to grant State Farm any of the proceeds from the Osbornes' settlement with the subcontractors under its subrogation claim.

The Osbornes and State Farm both appealed. We reverse the denial of the Osbornes' request for attorney's fees and the denial of State Farm's subrogation claim. We remand to the trial court for a calculation of attorney's fees and a reconsideration of State Farm's claim for subrogation rights against the settlement proceeds.

BACKGROUND

In 1997, the Osbornes bought a house from Jauregui for slightly more than $1 million. Shortly
after moving in, the Osbornes noticed flaws in the construction. They later learned that the house had serious mold problems due to various construction errors. The Osbornes also noticed that because the house was built along a golf course, golf balls frequently hit and damaged the house, although Jauregui and its realtor had assured them there would be no "golf ball problem." (1)

Prior to filing suit, the Osbornes provided Jauregui with a demand letter, offering to settle for the amount of $866,000, but Jauregui refused, responding with a counter-offer of $12,810. (2) In July 1998, the Osbornes sued Jauregui and its owner, Jose Luis Jauregui, asserting causes of action under the Texas Deceptive Trade Practices Act (DTPA) and for breach of contract, negligence, breach of warranty, real-estate fraud, and negligent misrepresentation.

The Osbornes also sued a number of subcontractors and suppliers of construction materials, alleging negligence, breach of warranty, DTPA violations, and products liability. (3) In March 2003, State Farm intervened as the Osbornes' subrogee. Shortly before trial, the Osbornes settled with all the defendants except Jauregui and its owner. The settling defendants paid a total of $1,260,500--$1,120,500 of which remains after the payment of expert-witness fees.

The Osbornes, who put on evidence at trial that they suffered a minimum of $2,418,153 in damages, excluding damages for mental anguish, bodily injury, and attorney's fees, went to trial to pursue its claims against Jauregui and its owner, the remaining defendants.

The jury found that Jauregui was negligent and breached warranties made to the Osbornes. The jury found that the Osbornes suffered damages totaling $835,158.78: $250,000 for repairs necessary to bring the house to the condition reasonably expected when they bought it; $220,000 for lost or damaged clothing and non-furniture personal effects; $70,000 for non-clothing items that were condemned due to mold contamination; $28,000 for repairs actually made by the Osbornes; $1,000 for damaged furniture; $95,158.78 for alternate living expenses; and $171,000 for moving, storage, and cleaning of their belongings. (4)

The jury found that Jauregui was responsible for 48% of the Osbornes' damages and that the subcontractors and suppliers were responsible for the remaining 52%. The jury determined that Jauregui did not engage in unconscionable conduct, deceptive practices, fraud, or negligent misrepresentation. The jury did not find Jauregui's individual owner responsible for any of the Osbornes' damages.

Jauregui elected a dollar-for-dollar credit of the settlement funds against the damages awarded by the jury, and after applying that credit to the jury award, the trial court entered a judgment that the Osbornes should take nothing against Jauregui and refused to award attorney's fees against Jauregui. The trial court also denied State Farm's claim that it was entitled to any settlement funds through subrogation.

The court made findings of fact and conclusions of law in which it found that there was evidence that the Osbornes had incurred $1,149,641.30 in attorney's fees, (5) but concluded that they were not entitled to attorney's fees because they did not obtain a net recovery from Jauregui and because they did not segregate the fees among the various claims and parties. Finally, the court found that because State Farm did not pay for any of the Osbornes' attorney's fees, the fees were "an uncompensated expense of collection," and that State Farm did not meet its burden to present evidence showing what portions of the settlement credits were "allocated to the items State Farm paid for . . . as opposed to other items of damage and expenses of collection alleged by [the Osbornes] in their petitions that State Farm had not paid for, such as mental anguish, bodily injury, repairs and attorney's fees." The court concluded that State Farm was not entitled to the settlement proceeds because it had not shown that the proceeds were payments for losses it had covered.

On appeal, the Osbornes argue that they were "prevailing parties" under the DTPA and were not required to segregate their attorney's fees. In its cross-appeal against the Osbornes, State Farm argues that the trial court abused its discretion in denying State Farm's subrogation claim because that denial grants the Osbornes a double recovery. State Farm also argues that any money received from Jauregui would be subject to State Farm's subrogation rights and that the trial court properly denied the Osbornes' request for attorney's fees.

STANDARD OF REVIEW

The availability of attorney's fees under a particular statute is a question of law to be reviewed de novo. Holland v. Wal-Mart Stores, Inc., 1 S.W.3d 91, 94 (Tex. 1999); see Johnson v. City of Fort Worth, 774 S.W.2d 653, 656 (Tex. 1989) ("Matters of statutory construction are questions of law for the court to decide."). The extent to which attorney's fees can or cannot be segregated is a mixed question of law and fact. Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 313 (Tex. 2006). Where segregation of fees is possible, remand is required. Id. at 314.

In the absence of an unambiguous contractual provision regarding subrogation, the right to subrogation is grounded in equitable principles, and "[a] trial court's balancing of the equities should not be disturbed on appeal unless a showing is made that it would be inequitable to allow the judgment to stand." Esparza v. Scott & White Health Plan, 909 S.W.2d 548, 552 (Tex. App.--Austin 1995, writ denied).

DISCUSSION

Attorney's Fees

The trial court determined that the Osbornes were not eligible to recover attorney's fees because they were not "prevailing parties" under the DTPA. The trial court also found that the Osbornes could not recover attorney's fees because they had not segregated their attorney's fees among the various claims and defendants. The Osbornes argue on appeal that they should recover attorney's fees as prevailing parties under the DTPA and that they were not required to segregate their attorney's fees because the fees were based on inextricably intertwined claims derived from the same set of facts.

Under the DTPA, a "consumer who prevails shall be awarded court costs and reasonable and necessary attorneys' fees." Tex. Bus. & Com. Code Ann. § 17.50(d) (West Supp. 2006). The Texas Supreme Court has held that a plaintiff "who is awarded actual damages under the DTPA should also be awarded attorney's fees, even though the damage award is entirely offset by an opposing claim." McKinley v. Drozd, 685 S.W.2d 7, 10 (Tex. 1985). While McKinley involved a DTPA claim offset by a counterclaim rather than settlements from other defendants, the court emphasized the "legislative mandate to liberally construe the [DTPA] to protect consumers from deceptive practices, and the legislative intent to provide consumers with an efficient and economical means to seek redress for those deceptive practices." Id. at 9.

The Texas Supreme Court has not ruled on whether the reasoning in McKinley would apply in a situation where the damages owed by one defendant, such as Jauregui in the present case, were entirely offset by settlement amounts from other defendants. The appellate courts have been split in determining whether a plaintiff "prevails" under the DTPA where settlement amounts from other defendants exceed the judgment. Jauregui relies primarily on Hamra v. Gulden, 898 S.W.2d 16, 19 (Tex. App.--Dallas 1995, writ dism'd w.o.j.), which held that a plaintiff who sued two defendants jointly and severally did not prevail on a DTPA claim where the settlement credit from one defendant exceeded the damages found at trial, citing only Blizzard v. Nationwide Mutual Fire Insurance Co., 756 S.W.2d 801, 806 (Tex. App.--Dallas 1988, no writ), to support this holding.

The payments made to the plaintiff prior to trial in Blizzard, however, constituted insurance payments from her insurer. Id. at 806-07. The plaintiff sued her insurance company, but the amount of damages found by the jury at trial did not exceed the total amount of insurance payments paid to the plaintiff by the defendant prior to trial. These pretrial payments, made by the defendant subject to the judgment rather than a settling party, resemble the insurance benefits paid prior to trial by the defendant in Allstate Insurance Co. v. Bonner, 51 S.W.3d 289, 292 (Tex. 2001), where the plaintiff could not recover attorney's fees under the insurance code because the judgment amount owed by a defendant insurance company was entirely offset by benefits previously paid by that defendant. In cases where the amount of damages found by the jury at trial is lower than payments previously paid to the plaintiff by the defendant to compensate for such damages, it is reasonable to view the plaintiff as not having prevailed on a claim.

In the present case, however, the jury did not find that Jauregui owed less in damages than some amount that Jauregui had already paid to the Osbornes. Instead, the jury found Jauregui responsible and assessed damages in the amount of $835,000, while Jauregui reaped the benefits of its refusal to settle by offsetting the entire judgment with settlement funds paid by other defendants.

We find the facts in the instant case to more closely resemble those in Roberts v. Grande, 868 S.W.2d 956, 962 (Tex. App--Houston [14th Dist.] 1994, no writ), in which the plaintiff was allowed an award of attorney's fees even though the judgment was entirely offset by settlement amounts. "[A]pplying an offset from a previous settlement should not deprive a consumer of its attorney's fees." Id.

The Osbornes made a settlement offer to Jauregui prior to trial in the amount of $866,000, which proved to be a reasonable demand in light of the subsequent jury award, at a time when the Osbornes' attorney's fees had only reached $22,000. Jauregui responded with a counter-offer of only $12,810, forcing the Osbornes to incur an additional $1,127,641.30 in attorney's fees. (6) The Osbornes should not be penalized for proceeding to trial when their good-faith attempt to negotiate a settlement prior to filing suit was refused.

The dissent maintains that the Osbornes should not be awarded attorney's fees because they were fairly compensated for their damages before trial and that they should not continue to "litigate a claim after being made whole." However, the dissent assumes that the Osbornes were fairly compensated for their damages, ignoring the fact that the Osbornes put on evidence at trial that they suffered at least $2,418,153 in damages, excluding damages for mental anguish, bodily injury, and attorney's fees. Before litigation began, State Farm's experts had estimated that the Osbornes' damages exceeded their homeowners' insurance policy limit of $1,874,687, which left an uninsured deficit of approximately $600,000, not including uncovered damages such as mental anguish, bodily injury, and attorney's fees. Meanwhile, shortly before trial, the Osbornes were able to negotiate settlement amounts with certain defendants, but only after incurring substantial attorney's fees. The settlement amounts totaled $1,260,500 and were placed in trust because of State Farm's subrogation claim. Thus, prior to trial it was unclear whether the Osbornes would actually receive any of the settlement funds due to State Farm's subrogation interest. In light of the damage estimates produced by both the Osbornes and State Farm, it was highly unlikely that the Osbornes could have predicted that a jury would find that they suffered only $835,158.78 in damages.

While it is true that the Osbornes had received $1,874,687 from State Farm in insurance payments prior to trial and even assuming that they would receive all of the $1,260,500 in settlement amounts for a total of $3,135,187, the Osbornes were also relying on evidence that they had suffered at least $2,418,153 in damages and incurred almost $1,149,641 in attorney's fees for a total of $3,567,794. Therefore, unless the Osbornes went to trial, they would still have had at least $432,607 in uncompensated damages. If the jury had agreed that the Osbornes suffered $2,418,153 in damages as a result of Jauregui's conduct, and the trial judge had awarded the Osbornes their full $1,149,641 in attorney's fees, the Osbornes would have recovered $2,307,294 at trial, taking into account the dollar-for-dollar settlement credit. Assuming the Osbornes would then have been "made whole," and assuming State Farm properly asserted its subrogation claim to $1,874,687, the Osbornes would have been left with the $432,607 they needed to be fully compensated. Faced with these circumstances prior to trial, it was not at all unreasonable for the Osbornes to continue to pursue their claims against Jauregui.

Awarding attorney's fees to the Osbornes before applying the settlement credit is consistent with the reasoning in McKinley and the purpose of the DTPA. The Texas legislature determined that the DTPA "shall be liberally construed and applied to promote its underlying purposes, which are to protect consumers against false, misleading, and deceptive business practices, unconscionable actions, and breaches of warranty and to provide efficient and economical procedures to secure such protection." Tex. Bus. & Com. Code Ann. § 17.44(a) (West 2002).

Because we find that the Osbornes were prevailing parties under the DTPA, we conclude that the trial court erred by holding that the Osbornes were not entitled to attorney's fees because they did not prevail under the DTPA. However, the trial court also held that the Osbornes were not entitled to attorney's fees because they failed to segregate the fees among the various claims and parties. The Osbornes contend that they are not required to segregate their attorney's fees by claim or defendant because the fees are related to inextricably intertwined claims that are based on a common set of facts.

Generally, a party seeking attorney's fees has a duty to segregate the fees incurred in pursuing claims or defendants for which fees are recoverable from those in which they are not, and a trial court may refuse to award attorney's fees in the absence of segregation. West Beach Marina, Ltd. v. Erdeljac, 94 S.W.3d 248, 267 (Tex. App.--Austin 2002, no pet.). However, there has historically been an exception to this rule when claims "are dependent upon the same set of facts or circumstances and thus are 'intertwined to the point of being inseparable.'" Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1, 11 (Tex. 1991) (quoting Gill Sav. Ass'n v. Chair King, Inc., 783 S.W.2d 674, 680 (Tex. App.--Houston [14th Dist.] 1989), modified, 797 S.W.2d 31 (Tex. 1990)). The Osbornes argue that they are subject to this exception because the facts necessary to prove that the various subcontractors and suppliers performed defective work or supplied defective products are the same facts necessary to prove that Jauregui failed to construct the house in a good and workmanlike manner.

The Texas Supreme Court recently curtailed the Stewart Title exception, stating that intertwined facts do not make fees recoverable and that "it is only when discrete legal services advance both a recoverable and unrecoverable claim that they are so intertwined that they need not be segregated." Chapa, 212 S.W.3d at 313-14. However, the Osbornes' failure to segregate fees does not mandate a denial of all attorney's fees because "an unsegregated damages award requires a remand." Id. at 314.

We find that the Osbornes have a duty to segregate their attorney's fees into recoverable and nonrecoverable claims. While the claims against Jauregui and the various settling defendants may arise from the same set of facts, this exception no longer applies. We remand for purposes of determining the amount of attorney's fees incurred by the Osbornes on the DTPA claim against Jauregui in a manner consistent with Chapa. See id.

Subrogation

The trial court determined that State Farm did not have subrogation rights against the settlement proceeds because State Farm did not meet its burden to present evidence allocating the settlement amounts to losses covered by insurance payments. State Farm argues that its contractual right of subrogation displaces any equitable considerations regarding whether the Osbornes have been "made whole" for their damages. State Farm further argues that even under an equitable determination of subrogation rights, it is entitled to the settlement proceeds because the Osbornes have already been "made whole" by insurance payments totaling $1,874,687.28. State Farm contends that it is entitled to the settlement funds without being required to show which settlement amounts were allocated to damages covered by insurance payments.

The principle of subrogation provides that an insurer that has paid its insured for losses covered by an insurance policy is entitled to the insured's rights and remedies against a third party for the covered losses. Harris v. American Prot. Ins. Co., 158 S.W.3d 614, 622 (Tex. App.--Fort Worth 2005, no pet.). Texas courts are "particularly hospitable" to the concept. Id. (quoting Interfirst Bank Dallas, N.A. v. United States Fid. & Guar. Co., 774 S.W.2d 391, 397 (Tex. App.--Dallas 1989, writ denied)).

In the absence of a contractual subrogation provision, subrogation rights are "firmly granted in" and "not easily detached from" equity. Esparza v. Scott & White Health Plan, 909 S.W.2d 548, 552 (Tex. App.--Austin 1995, writ denied). If either an insured or an insurer "must to some extent go unpaid, the loss should be borne by the insurer for that is a risk the insured has paid it to assume." Ortiz v. Great S. Fire & Cas. Ins. Co., 597 S.W.2d 342, 344 (Tex. 1980) (quoting Garrity v. Rural Mut. Ins. Co., 253 N.W.2d 512, 514 (Wis. 1977)). An insurer is not entitled to an equitable right of subrogation until the insured is "made whole" for his loss. Ortiz, 597 S.W.2d at 343; Esparza, 909 S.W.2d at 552.

In determining equitable subrogation rights, "[t]o avoid injustice, the equities must still be balanced in deciding what amount, if any, the subrogee is entitled to receive in a given case . . . . A trial court is not cast adrift on the sea of equity without guidance, however. Various rules and considerations offer moorings for the trial court in applying equity." Esparza, 909 S.W.2d at 552. Such considerations include the prevention of a double recovery by the insured, the parties' conduct during settlement or before the court, and evidence of damages. Id. at 552-553.

In a determination of subrogation based purely on equitable factors, the trial court did not abuse its discretion in denying subrogation rights to State Farm. For example, State Farm, by arguing at trial and on appeal that the Osbornes are not entitled to attorney's fees under the DTPA, asserted a position that was adverse to the very parties whose interests State Farm, as an insurer, was expected to protect. The fact that State Farm attempts to compromise the Osbornes' efforts to achieve the fullest possible recovery suggests that equity should not favor State Farm in a determination of subrogation rights.

Furthermore, State Farm's statements at trial directly conflict with its argument on appeal that the Osbornes were "made whole" because the jury returned a judgment of $835,158.78 in damages, and the total insurance payments received by the Osbornes exceed this amount. For example, State Farm stated in its third amended petition in intervention that the Osbornes suffered damages at least in the amount of $1,902,247.44. A judicial admission is conclusive upon the party making it, relieves the opposing party's burden of proving the admitted facts, and bars the admitting party from disputing it. Mendoza v. Fidelity & Guar. Ins. Underwriters, Inc., 606 S.W.2d 692, 694 (Tex. 1980). State Farm also put on an expert, Buddy Henderson, to testify that $1,477,351 was a reasonable cost of repairs for the house and that he relied on this amount in determining that State Farm should pay the full policy limits to the Osbornes. A party's testimony at trial will be treated as a judicial admission if (1) the statement is deliberate, clear, and unequivocal, (2) the statement is contrary to an essential fact embraced in the theory of recovery asserted by the party giving the testimony, (3) the statement is not also destructive of the opposing party's theory of recovery, and (4) it would be unjust to permit a party to recover after he has sworn himself out of court by clear and unequivocal testimony. Id. Each of these factors is satisfied with reference to Henderson's expert testimony that the cost of repairs alone could reasonably be $1,477,351.

However, State Farm now asserts that the Osbornes' damages are limited to the amount of the jury verdict. As a policy matter, allowing this drastic change in State Farm's damages assessment would mean that insured parties could not accept insurance payments from an insurer without fear that in the future, the insurer would claim that it had overpaid and that the excess should be used to offset settlement payments for mental anguish or other uncovered damages. These factors support the trial court's equitable decision to deny subrogation to State Farm. Based on longstanding Texas law regarding equitable subrogation at the time the trial court's judgment was issued, the trial court did not abuse its discretion.

However, the Texas Supreme Court recently held in Fortis Benefits v. Cantu, No. 05-0791, 2007 Tex. LEXIS 603, at *18-19 (Tex. June 29, 2007), that contract-based subrogation rights trump equitable considerations, which are to be used by default in the absence of a contractual right to subrogation. As a result, equitable considerations such as the "made whole" doctrine are to apply "only in the absence of contrary reimbursement language in the contract." Id. at *18.

The contract at issue in Fortis established a right of subrogation, stating, "Upon payment of benefits, We will be subrogated to all rights of recovery a Covered Person may have against any person or organization. . . . Such right extends to the proceeds of any settlement or judgment; but is limited to the amount of benefits We have paid." Id. at *5 n.11. The Texas Supreme Court noted that because the provision was "not imprecise or ambiguous" and it gave Fortis "an unfettered right to recover the proceeds from the settlement," equitable considerations must give way to the language of the contract. Id.

State Farm, in its petition for intervention, stated that "State Farm is equitably entitled to seek recovery for such damages against Defendants as a real-party-in-interest, and is authorized to pursue this claim in the name of its insured. [The Osbornes] have assigned their rights and interest to the extent of such benefits paid to them by State Farm." This language reflects both equitable and contractual subrogation principles. In addition, State Farm claims in its October 20, 2004 motion to modify, correct, or reform the judgment that the trial court's judgment is in error "in that it denies State Farm Lloyds the right to apply settlement funds received from third parties in satisfaction of State Farm Lloyds [sic] contractual and equitable subrogation claim." (7)

The subrogation provision in the Osbornes' homeowners' insurance policy with State Farm reads in its entirety:

Subrogation. An insured may waive in writing before a loss all rights of recovery against any person. If not waived, we may require an assignment of rights of recovery for a loss to the extent that payment is made by us.
If an assignment is sought, an insured must sign and deliver all related papers and cooperate with us.

This provision, which merely states that State Farm "may" require an assignment of rights, is significantly more ambiguous than the provision at issue in Fortis, which states that the insurer "will be subrogated to all rights of recovery," including "the proceeds of any settlement or judgment." Fortis, 2007 Tex. LEXIS 603, at *5 n.11 (original emphasis removed, emphases added).

Even if State Farm's contractual right to subrogation controls over equitable considerations, State Farm may be prevented from recovering settlement funds due to its failure to allocate the funds to covered versus uncovered losses. The subrogation provision in the Osbornes' policy states that an assignment of rights may be required "for a loss to the extent that payment is made by [State Farm]." In a claim for subrogation where settlement amounts are at issue, an insurer bears the burden of showing what amount, if any, of the settlement amounts correspond to amounts paid by it. Ortiz, 597 S.W.2d at 344.

Subrogation should not be awarded if it is not clear what portion of the settlement is intended to compensate for covered losses. Id. "In true subrogation cases, where the insurer is bringing the action against the third party, or is participating in the insured's action against the third party, recovery by the insurer is generally limited to the same elements as those for which it has made payment." Lee R. Russ & Thomas F. Segalla, 16 Couch On Insurance § 226-52 (3d ed. 2000).

It is not clear from the record which types of losses were meant to be covered by the amounts that the Osbornes received from the settling parties. "[T]he mere fact that an insured receives a recovery from another source may not establish that the amounts recovered correspond to the same elements of loss for which the insured has already recovered from the insurer." Id.

State Farm failed to allocate the settlement funds to covered versus uncovered losses. We can assume that because State Farm asserts in its brief that it assisted "vigorously" in securing the settlements, there was ample opportunity to make such an allocation. There is no evidence that the remaining settlement amounts are allocable to covered damages, rather than uncovered damages such as mental anguish, attorney's fees, or any reduction in the house's market value due to the "golf ball problem."

Because the trial court's order denying subrogation rights to State Farm was issued prior to Fortis and thus before specific contractual subrogation rights were deemed controlling over equitable principles, the trial court did not have an opportunity to evaluate and interpret the subrogation clause in the Osbornes' homeowners' policy. Therefore, we remand to the trial court for a review of the subrogation provision in order to determine whether the language is sufficiently precise and unambiguous to control over equitable subrogation principles and to evaluate the effect of State Farm's failure to allocate the settlement funds, in light of the Texas Supreme Court's holding in Fortis.

In the event that Fortis is applicable to the Osbornes' homeowners' policy, the contractual subrogation provision must control over equitable considerations. In the alternative, if the trial court finds that Fortis does not apply to the present case because the contractual subrogation provision is not sufficiently precise and unambiguous, the determination of State Farm's subrogation rights must be based on the "trial court's balancing of the equities." Esparza, 909 S.W.2d at 552. Based on an evaluation of equitable factors, the trial court did not abuse its discretion in denying subrogation rights to State Farm. However, we find it significant that at the time such rights were denied, the Osbornes were also denied their attorney's fees. We have since determined that the Osbornes should be awarded attorney's fees. As a result, the factors that may be taken into account by the trial court in balancing the equities to determine subrogation rights have changed. Where the facts have changed, the trial court's equitable determination may change as well because "[e]quity is inextricably tied to facts" and "the conflict of interests in subrogation . . . cannot be resolved by a bright-line test that curtails a trial court's discretion to apply equity based on the facts of the case." Id. at 553. In light of the fact that this case has been remanded to the trial court for purposes of segregating the Osbornes' attorney's fees and to allow for a review of the contractual subrogation provision and the applicability of Fortis, the trial court, if it finds Fortis to be inapplicable, may also wish to revisit its equitable determination of State Farm's subrogation rights.

We reverse the trial court's denial of State Farm's subrogation claim and remand to the trial court for purposes of reviewing the contractual subrogation provision in light of Fortis and, if necessary, revisiting its equitable determination of State Farm's subrogation rights as a result of our award of attorney's fees to the Osbornes and remand for the purpose of calculating the fee award.

CONCLUSION

Because the Osbornes were prevailing parties under the DTPA, they are entitled to reasonable and necessary attorney's fees from Jauregui. We reverse the trial court's denial of the Osbornes' attorney's fees. Because we find that the Osbornes were required to segregate their attorney's fees, we remand for the purposes of segregation.

Because the Texas Supreme Court's recent decision in Fortis Benefits v. Cantu requires that precise and unambiguous contractual language regarding subrogation controls over equitable considerations, we reverse the trial court's denial of State Farm's subrogation claim and remand for a determination of State Farm's subrogation rights in light of the contractual subrogation provision in the Osbornes' homeowners' policy and, if Fortis is deemed inapplicable, a determination of State Farm's equitable subrogation rights after any award of attorney's fees to the Osbornes.

Diane Henson, Justice
Before Justices Patterson, Puryear and Henson;
Dissenting Opinion by Justice Puryear
Reversed and Remanded
Filed: August 29, 2007

1. Any reduction in the house's market value due to the "golf ball problem" is one example of a loss suffered by the Osbornes that would generally not be covered by a homeowners' insurance policy.
2. A pre-suit demand letter is required in order to pursue a claim under the Texas Deceptive Trade Practices Act. Tex. Bus. & Com. Code Ann. § 17.505(a) (West 2002). This statutory notice requirement is designed to afford parties the opportunity to negotiate and settle prior to suit, potentially avoiding lengthy and costly litigation. Star Houston Inc. v. Kundak, 843 S.W.2d 294, 297 (Tex. App.--Houston [14th Dist.] 1992, no writ). If a defendant tenders an offer during settlement negotiations that is refused by the plaintiff, and the amount tendered turns out to be equal to or greater than the damages found at trial, the plaintiff's attorney's fee award is limited to the amount of fees incurred at the time the rejected settlement offer was made. Tex. Bus. & Com. Code Ann. § 17.5052(h) (West 2002).
3. The Osbornes also sued Jauregui's realtor, but those claims are not before us on appeal.
4. No questions were submitted to the jury regarding the measure of damages for items such as permanent reduction in market value of the home or the loss of time spent by the Osbornes in attempting to correct problems with the house. See Ludt v. McCollum, 762 S.W.2d 575, 576 (Tex. 1988) (holding that permanent reduction in market value after repair is recoverable in DTPA claim); Village Mobile Homes, Inc. v. Porter, 716 S.W.2d 543, 549-50 (Tex. App.--Austin 1986, writ ref'd n.r.e.) (holding that damages for lost time may be recoverable in DTPA claim).
5. The Osbornes have since received $17,606.01 from one of the defendants and state that if they prevail, the fees should be reduced to $1,132,035.29. They also seek $50,000 in appellate fees.
6. It is not uncommon for an attorney's fee award to exceed the damages recovered. Hoover Slovacek L.L.P. v. Walton, 206 S.W.3d 557, 563 n.8 (Tex. 2006).
7. State Farm further states in its November 12, 2004 motion to modify, correct, or reform the amended final judgment that "because State Farm Lloyds has already paid $1,874,687.28 to the Plaintiffs, and the Plaintiffs' damages were only $835,158.78, State Farm Lloyds is both equitably and contractually entitled to subrogation."

Consumer's time-barred DTPA suit dismissed as frivolous

Court of Appeals affirms dismissal of suit in which plaintiff alleged that a sandwich she bought from Jack in the Box made her sick; holds that negligence and DTPA claims were barred by two-year statute of limitations, and that trial court's dismissal of her claims as lacking an arguable basis in law was proper.

Cynthia Ulett Lynch v. Jack in the Box, No. (Tex.App.- Austin, Aug. 9, 2007)(Opinion by Justice Pemberton)(Before Justices Patterson, Pemberton and Waldrop)
Appeal from 146th District Court of Bell County

FROM THE DISTRICT COURT OF BELL COUNTY, 146TH JUDICIAL DISTRICT
NO. 217,739-B, HONORABLE RICK MORRIS, JUDGE PRESIDING

M E M O R A N D U M O P I N I O N

Cynthia Ulett Lynch appeals from the dismissal of her personal injury lawsuit against Jack in the Box. In a single issue on appeal, Lynch challenges the district court's finding that her suit was "frivolous and malicious because her claim has no arguable basis in law or in fact." We affirm the judgment.

BACKGROUND

On June 26, 2006, Lynch filed what she styled a "Motion for Request for Permission to File a Late Claim." In the motion, Lynch asserted various claims against Jack in the Box, including "deception," "false statements," and "product liability based on misrepresentation." Although Lynch did not explain the basis of these claims in her pleadings, in her appellate brief she explains that on May 17, 2004, she ordered a chicken sandwich from Jack in the Box but was instead given a ham and egg sandwich. Lynch alleges that she "got sick approximately eighty minutes after eating [the] sandwich."

Lynch also filed a "Motion for Request for Permission to Pay Filing Fees in Installments." In this motion, Lynch stated the following:

Applicant is filing herewith a voluntary petition.
I am unable to pay the filing fees because I have no income.
I propose to pay my filing fees on the date of settlement.
Wherefore applicant prays that she be permitted to pay the filing fees on the date of settlement. (1) The district court interpreted this motion as a statement of inability to pay costs. In accordance with chapter 13 of the Texas Civil Practice and Remedies Code, the district court then found that Lynch's suit was frivolous and malicious and had no arguable basis in law or in fact and, without a hearing, dismissed Lynch's suit without prejudice. This appeal followed.

DISCUSSION

The only issue in this case is whether the district court abused its discretion in dismissing Lynch's suit pursuant to section 13.001 of the civil practice and remedies code, which provides:

(a) A court in which an affidavit of inability to pay under Rule 145, Texas Rules of Civil Procedure, has been filed may dismiss the action on a finding that:

(1) the allegation of poverty in the affidavit is false; or
(2) the action is frivolous or malicious.

(b) In determining whether an action is frivolous or malicious, the court may consider whether:

(1) the action's realistic chance of ultimate success is slight;
(2) the claim has no arguable basis in law or in fact; or
(3) it is clear that the party cannot prove a set of facts in support of the claim.
(c) An action may be dismissed under Subsection (a) as frivolous or malicious either before or after service of process.

Tex. Civ. Prac. & Rem. Code Ann. § 13.001 (West 2002).

We must first determine if chapter 13 applies to this case. Chapter 13 only applies to lawsuits in which an affidavit of inability to pay court costs under rule of civil procedure 145 has been filed. Id. § 13.001(a).

Rule 145 provides that a "party who is unable to afford costs" must file an affidavit with the trial court. See Tex. R. Civ. P. 145(a). A "party who is unable to afford costs" is defined as a person who is presently receiving a governmental entitlement based on indigency or any other person who has no ability to pay costs. Id. Rule 145 also provides that the affidavit "must contain complete information" as to the party's identity and income, including any debts and monthly expenses. See Tex. R. Civ. P. 145(b). The affidavit shall also contain the following statements: "I am unable to pay the court costs. I verify that the statements in this affidavit are true and correct." Id. In her motion, Lynch did not verify her statements or provide complete information about her income. Thus, Lynch's motion did not comply with the affidavit requirements of rule 145.

Nonetheless, the mere fact that Lynch's statement of inability to pay costs fails to comply with rule 145 does not mean that her suit is not subject to chapter 13. In Johnson v. Texas Department of Criminal Justice, 71 S.W.3d 492 (Tex. App.--El Paso 2002, no pet.), the El Paso court of appeals faced a similar situation involving chapter 14, the counterpart to chapter 13 that applies specifically to inmate litigation. (2) Johnson sued the Texas Department of Criminal Justice, alleging that the department destroyed two pairs of his sunglasses. Id. at 492. Attached to his petition was a "declaration to pay cost," in which Johnson stated that he was able to pay court costs. Id. However, Johnson never paid the filing fees or service fees associated with his lawsuit. Id. Noting that the government code requires that the district clerk collect fees at the time the suit or action is filed, see Tex. Gov't Code Ann. § 51.317(a) (West Supp. 2006), the court reasoned that, because Johnson did not pay costs, the trial court was justified in concluding that Johnson was actually attempting to proceed in forma pauperis. Johnson, 71 S.W.3d at 493. Thus, the trial court did not abuse its discretion in applying chapter 14 of the civil practice and remedies code to Johnson's lawsuit. Id. The court explained:

Johnson's position, however, is that his suit does not fall within Chapter 14 because he never filed a declaration of inability to pay costs in the trial court. We cannot hold that simply stating an ability to pay costs, without ever paying them, exempts a prisoner from the requirements of Chapter 14. To do so would clearly thwart the legislature's intent to control the number of frivolous lawsuits being filed by prison inmates, consuming judicial resources with little offsetting benefit. Id. (citing Hickson v. Moya, 926 S.W.2d 397, 398 (Tex. App.--Waco 1996, no writ)).

While chapter 14 applies only to lawsuits brought by inmates, see Tex. Civ. Prac. & Rem. Code Ann. § 14.002(a) (West 2002), we conclude that the reasoning in Johnson can also be applied to chapter 13. The purpose of chapter 13 is to prevent abusive litigation by litigants who "lack[] an economic incentive to refrain from filing frivolous, malicious, or repetitive lawsuits." Spellmon v. Sweeney, 819 S.W.2d 206, 210 (Tex. App.--Waco 1991, no writ). To hold that trial courts cannot dismiss such suits simply because the indigent litigant, who may often be proceeding pro se, did not comply with all of the procedural requirements of rule 145 would defeat the purpose of the statute and could actually reward noncompliance with rule 145 by creating an incentive for litigants to file affidavits of indigence that do not meet the rule's requirements.

Although Lynch's motion did not comply with rule 145, Lynch clearly stated that she was "unable to pay the filing fees" because she had "no income." Lynch's "proposal" to pay the filing fees "on the date of settlement" is irrelevant, as the government code requires the district clerk to collect the fees at the time the suit or action is filed. See Tex. Gov't Code Ann. § 51.317(a). On this record, we hold that the district court did not abuse its discretion in concluding that Lynch was attempting to proceed in forma pauperis and thus in applying the procedures of chapter 13 to her lawsuit.

Having determined that chapter 13 applies to Lynch's lawsuit, we must now determine whether the district court abused its discretion in dismissing Lynch's suit as frivolous and malicious. The district court stated that it was dismissing Lynch's suit because it had "no arguable basis in law or fact." See Tex. Civ. Prac. & Rem. Code Ann. § 13.001(b)(2). Because the district court dismissed Lynch's suit without a hearing on factual issues, the only possible reason for the district court's dismissal is that there was no basis in law for the suit. See Moore v. Collins, 897 S.W.2d 496, 499 (Tex. App.--Houston [1st Dist.] 1995, no writ).

We review dismissal under chapter 13 for abuse of discretion. Jones v. CGU Ins. Co., 78 S.W.3d 626, 628 (Tex. App.--Austin 2002, no pet.). The test for determining whether the court abused its discretion is whether it acted without reference to any guiding rules or principles and whether it acted arbitrarily and capriciously. McDaniel v. Yarbrough, 898 S.W.2d 251, 253 (Tex. 1995); Jones, 78 S.W.3d at 628. A trial court's clear failure to properly analyze and apply the law constitutes an abuse of discretion. McDaniel, 898 S.W.2d at 253.

Construing Lynch's pleadings liberally, she alleged possible causes of action for negligence and product liability under the DTPA. There is a two-year statute of limitations for negligence and DTPA claims. See KPMG Peat Marwick v. Harrison County Hous. Fin. Corp., 988 S.W.2d 746, 749-50 (Tex. 1999) (citing Tex. Bus. & Com. Code Ann. § 17.565 (West 2002) (DTPA claims); Tex. Civ. Prac. & Rem. Code Ann. § 16.003 (West Supp. 2006) (negligence claims)). Lynch's causes of action arose on May 17, 2004, the day that she allegedly bought her sandwich from Jack in the Box and became sick. She did not file suit until June 26, 2006. Thus, because Lynch's negligence and DTPA claims were not filed within the two-year statute of limitations, they have no arguable basis in law.

Lynch's petition also referred to "fraud." Fraud is subject to a four-year statute of limitations. See Shannon v. Law-Yone, 950 S.W.2d 429, 433 (Tex. App.--Fort Worth 1997, pet. denied). Thus, this cause of action is not barred as a matter of law by the applicable limitations period. However, to state a claim for fraud, a plaintiff must allege that: (1) the defendants made a material representation that was false; (2) they knew that the representation was false or made it recklessly as a positive assertion without any knowledge of its truth; (3) they intended to induce the plaintiff to act upon the representation; and (4) the plaintiff actually and justifiably relied upon the representation and thereby suffered injury. See Ernst & Young, L.L.P. v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001).

These elements are entirely absent from Lynch's petition. There is no allegation about what material misrepresentations were made, whether Jack in the Box knew that they were false or made them recklessly, whether Jack in the Box intended to induce Lynch to act on the representations, or whether Lynch actually and justifiably relied upon the representations.

While pleadings are to be construed liberally, liberal construction does not mean that we imply claims that are not alleged. See Toles v. Toles, 113 S.W.3d 899, 911 (Tex. App.--Dallas 2003, no pet.). Although Lynch included the term "fraud" in her petition, her petition cannot reasonably be construed as raising that claim.

We conclude that the only causes of action that can reasonably be construed from Lynch's petition, negligence and product liability under the DTPA, are barred by the two-year statute of limitations. Therefore, we hold that the district court did not abuse its discretion in determining that Lynch's lawsuit had no arguable basis in law and thus in dismissing Lynch's suit as frivolous and malicious.

CONCLUSION

We affirm the judgment of the district court.
___________________________________________
Bob Pemberton, Justice
Before Justices Patterson, Pemberton and Waldrop
Affirmed
Filed: August 9, 2007

1. Lynch attached to her motion a letter from an elder at her church, in which the elder explains that the church is unable to provide her with financial assistance. Lynch apparently attached this letter to her motion as "evidence of hardship."

2. See Tex. Civ. Prac. & Rem. Code Ann. § 14.002 (West 2002). Prior to the enactment of chapter 14 in 1995, chapter 13 applied to lawsuits filed by both inmates and non-inmates. See Hickson v. Moya, 926 S.W.2d 397, 398 (Tex. App.--Waco 1996, no writ). Chapter 13 no longer applies to inmate litigation. See Tex. Civ. Prac. & Rem. Code Ann. § 13.004 (West 2002).

Statute of Limitations Defense Was Waived By Failure to Plead It

Winkle v. Vallejo (Tex.App.- Austin, July 10, 2007)(Patterson)(op. on r'hrg)(restricted appeal, default judgment, statute of limitations defense)
AFFIRMED ON REHEARING: Opinion by Justice Patterson
Before Justices Patterson, Pemberton and Waldrop

FROM THE DISTRICT COURT OF WILLIAMSON COUNTY, 277TH JUDICIAL DISTRICT
NO. 04-1104-C277, HONORABLE KEN ANDERSON, JUDGE PRESIDING

M E M O R A N D U M O P I N I O N BY PATTERSON

Upon consideration of appellant's motion for rehearing, we deny the motion; however, we withdraw our opinion and judgment of June 12, 2007, and substitute the following.

This is a restricted appeal from the trial court's entry of a default judgment in favor of appellees Blanca Vallejo and Juan R. Vallejo. Barry S. Winkle appeals, contending that the lawsuit was barred by the statute of limitations and that the trial court abused its discretion in holding the trial four days earlier than the date on which the trial was noticed. For the reasons that follow, we affirm the judgment.

A restricted appeal is available to a party who did not participate, either in person or through counsel, in a proceeding that resulted in a judgment against the party. Tex. R. App. P. 30. It constitutes a direct attack on a default judgment. Id.; General Elec. Co. v. Falcon Ridge Apartments Joint Venture, 811 S.W.2d 942, 943 (Tex. 1991).

A party filing a restricted appeal must demonstrate that (1) he appealed within six months after the judgment was rendered, (2) he was a party to the suit, (3) he did not participate in the actual trial of the case, and (4) error appears on the face of the record. See Tex. R. App. P. 30; Quaestor Invs., Inc. v. Chiapas, 997 S.W.2d 226, 227 (Tex. 1999). The face of the record includes all papers on file in the appeal, including the clerk's record and any reporter's record. DSC Fin. Corp. v. Moffitt, 815 S.W.2d 551, 551 (Tex. 1991). Otherwise, a restricted appeal affords an appellant the same scope of review as an ordinary appeal. Norman Commc'ns v. Texas Eastman Co., 955 S.W.2d 269, 270 (Tex. 1997).


In 1999, the Vallejos offered their home for sale after they fell behind in paying their property taxes. In exchange for the Vallejos placing their home in trust with Bentley Capital LLC, Winkle, a licensed real estate agent, offered to pay their back taxes and mortgage payments, rent the house for two years, and then sell the house. Winkle immediately began renting the home to James and Leah Benton, but convinced them he was selling the home. (1) When the Vallejos attempted to buy another home in 2003, they discovered that the mortgage on their former home was still in their name and that Winkle had ceased to make the mortgage payments as agreed.

The mortgage company eventually foreclosed on their home.


The Vallejos sued Winkle for deceptive trade practices, fraud, and breach of contract. Citation was served on Winkle in state prison on January 20, 2005. By his answer, February 10, 2005, Winkle sought the appointment of an attorney or, in the alternative, a continuance. Trial was scheduled for September 26, 2005. Winkle was served with notice of the trial date on August 2, 2005. A trial was held on September 26, 2005. Winkle did not attend or participate in the trial. The trial court rendered judgment in favor of the Vallejos. This appeal followed.


Winkle first asserts that the four-year statute of limitations for the conveyance of real estate and fraud or the two-year statute of limitations for deceptive trade practices bars the Vallejos' lawsuit because they did not file the lawsuit until November 2004. See Tex. Civ. Prac. & Rem. Code Ann. § 16.004(1), (4) (West 2002) (conveyance of real estate and fraud); Tex. Bus. & Com. Code Ann. § 17.565 (West 2002) (deceptive trade practices). Limitations, however, is an affirmative defense that is waived if not pleaded. G.R.A.V.I.T.Y. Enters. v. Reece Supply Co., 177 S.W.3d 537, 544 (Tex. App.--Dallas 2005, no pet.); see Tex. R. Civ. P. 94 (listing statute of limitations as affirmative defense that party "shall set forth affirmatively"); Frazier v. Havens, 102 S.W.3d 406, 411 (Tex. App.--Houston [14th Dist.] 2003, no pet.) ("A party waives the affirmative defense of statute of limitations if it is not pleaded or tried by consent.").

Here, Winkle did not plead a limitations defense at any point in the proceedings. Accordingly, we conclude that Winkle has waived any limitations defense, and the trial court did not err in entering a default judgment. See Reece Supply Co., 177 S.W.3d at 544 (holding that limitations defense was waived because, once party's pleading was struck, "it had no pleading asserting the affirmative defense of limitations"); Phifer v. Nacogdoches County Cent. Appraisal Dist., 45 S.W.3d 159, 173 (Tex. App.--Tyler 2000, pet. denied) (rejecting appellant's argument that trial court erred in allowing appellee to recover on claim that was barred by statute of limitations, since appellant had failed to plead limitations defense). We overrule Winkle's first issue.


In his second issue, Winkle complains that the trial occurred on September 22, four days earlier than the notice date of September 26, 2005. Winkle contends that the trial court abused its discretion in changing the date of the hearing without informing Winkle. The original judgment was signed on September 26, 2005. The reporter's record reflects that the hearing occurred on September 26; the docket sheet shows that the hearing occurred on September 26.

Any confusion as to the date of the hearing appears to arise from a handwritten entry on the original judgment that a hearing was held on September 22. Winkle appears to attribute this error to deceit on the part of the Vallejos' counsel. This error appears to be a clerical error; there is no showing that any proceeding occurred on September 22 or any date other than the date for which the trial was properly noticed. The record does not reflect that the trial judge abused his discretion. We overrule Winkle's second issue.


Having overruled Winkle's issues on appeal, we affirm the trial court's judgment.
__________________________________________
Jan P. Patterson, Justice
Before Justices Patterson, Pemberton and Waldrop
Affirmed on Motion for Rehearing
Filed: July 10, 2007

1. The Bentons also sued Winkle. See Winkle v. Benton, No. 03-05-00684-CV, 2006 Tex. App. LEXIS 8450 (Tex. App.--Austin 2006, no pet.) (mem. op.).

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Case cite and link to docket: Winkle v. Vallejo, No. (Tex.App.- Austin, Jul. 10, 2007)(Patterson)(opinion on motion for rehearing)
Full case style: Barry S. Winkle v. Blanca Vallejo and Juan R. Vallejo

Appeal from 277th District Court of Williamson County