Opinion
5-22-CV-00392-FB-RBF
08-09-2023
ANALIZA ALVARADO, Plaintiff, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant.
HONORABLE FRED BIERY UNITED STATES DISTRICT JUDGE
REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
RICHARD B. FARRER UNITED STATES MAGISTRATE JUDGE
This Report and Recommendation concerns Defendant State Farm Mutual Automobile Insurance Company's Motion for Summary Judgment. See Dkt. No. 14 (Mot.). All pretrial matters in this action have been referred for resolution pursuant to Rules CV-72 and 1 of Appendix C to the Local Rules for the United States District Court for the Western District of Texas. See Dkt. No. 4. Authority to enter this recommendation stems from 28 U.S.C. § 636(b)(1)(B).
This case presents a difficult issue with an underdeveloped record and superficial briefing. At issue is whether, under Texas law, an insured is foreclosed as a matter of law from recovering any uninsured- or underinsured-motorist benefits because the insured reached a nearpolicy-limits settlement with the at-fault driver without notice to or the consent of the insurer. An added wrinkle is that although the settled lawsuit with the at-fault driver was dismissed with prejudice, there is apparently no final judgment.
For the reasons set forth below, the most pertinent of which is the burden on State Farm as the summary judgment movant, the Motion for Summary Judgment, Dkt. No. 14, should be DENIED. The denial should be without prejudice to the filing of a further motion for summary judgment within the below-extended deadline for filing dispositive motions.
It is therefore ORDERED that the deadline to file dispositive motions is extended. The deadline to file dispositive motions shall be sixty (60) days from the date of this Report and Recommendation. The deadlines for filing a Response and Reply shall follow the deadlines set in the relevant rules governing deadlines for such briefing on dispositive matters.
Factual and Procedural Background
On January 13, 2020, Plaintiff Analiza Alvarado's car was rear-ended by another car driven by Christine Johnson. At the time of the accident, Alvarado had an insurance policy with State Farm that included underinsured-motorist coverage. The policy provides, in pertinent part and as follows, that coverage is provided for damages that an insured is legally entitled to recover from an underinsured driver:
We will pay compensatory damages for bodily injury or property damage an insured is legally entitled to recover from the owner or driver of an [underinsured] motor vehicle.Mot., Ex. 4. at 28 (Bates 0027) (emphasis altered). Under the policy, an insured like Alvarado is required to inform State Farm of any settlement offer received from an underinsured driver:
The insured must inform us of a settlement offer, if any, proposed by or on behalf of the owner or driver of the uninsured motor vehicle, and the insured must request our written consent to accept such settlement offer.Id. (emphasis removed). As explained, the insured must also obtain State Farm's written consent prior to accepting the settlement: “If we . . . consent in writing [to the settlement], then the insured may accept such settlement offer.” Id. The policy additionally provides that the insured and State Farm must agree that the insured is legally entitled to recover damages from the underinsured driver, and they must also agree on the amount of damages. See id. at 28-29 (Bates 0027-0028). If State Farm and the insured cannot reach such agreement, the policy directs the insured to file a lawsuit against State Farm, the owner and driver of the underinsured vehicle, and any other party potentially liable for the insured's damages. Id. at 29 (Bates 0028).
The policy uses the term “uninsured motor vehicle,” however it defines the term “uninsured motor vehicle” as including “underinsured motor vehicles.” See Mot, Ex. 4 at 22-23 (Bates 00260027).
A March 2, 2020, letter attached as Exhibit A to State Farm's Reply in support of summary judgment reflects that Alvarado had by then informed State Farm of her accident and invoked her underinsured coverage. The letter, which is from State Farm to Alvarado's counsel, requests additional information from Alvarado. The record doesn't reflect any reply to the March 2 letter or the initial correspondence from Alvarado to State Farm that prompted the March 2 letter.
On October 29, 2020, Alvarado sued Johnson in Texas state court, alleging that the accident and Alvarado's resulting injuries were caused by Johnson's negligence. See Mot., Ex. 2 (original petition). According to Alvarado, Johnson's insurance policy was insufficient to cover Alvarado's damages and Johnson lacked sufficient non-exempt assets to answer in damages for Alvarado's injuries. Dkt. No. 16 at 1 (Resp.). Alvarado's Response, citing its “Exhibit A,” urges that Alvarado then “notified Defendant [State Farm] of her invocation of coverage pursuant to Plaintiff's underinsured motorist provisions” of the State Farm policy. Id. at 2 (citing Exhibit A to the Response).
Exhibit A to Alvarado's Response is a 279-page document. Pages one through six comprise a demand letter dated October 26, 2021-approximately a year after Alvarado sued Johnson. In the letter, Alvarado informed State Farm of the accident, detailed the extent of Alvarado's claimed injuries and damages, and referenced a settlement with a third-party motorist (presumably Johnson) and State Farm's supposed grant of permission to Alvarado to accept the settlement:
State Farm's Reply brief references a demand sent to State Farm in November of 2021. Presumably State Farm is referring to the October 26, 2021, letter. See Dkt. No. 18 at 1 (“In November 2021, Plaintiff sent State Farm a demand barely mentioning Ms. Johnson and did not ask for consent to settle with her.”).
My client is a beneficiary to a contract with STATE FARM INSURANCE for underinsured motorist benefits. Attached as Exhibit “D” to this demand are the settlement documents with the third-party motorists' carrier, including your permission to accept the settlement terms.Resp., Ex. A at 5 (emphasis in original). But there is no Exhibit D to the letter (which is itself Exhibit A to Alvarado's Response) included in the Court's record, at least as far as the Court can ascertain by paging through the 279-page document provided. This same October 26 demand letter further advised that if Alvarado's claims against State Farm were not resolved within 60 days, Alvarado would file suit against State Farm. Id. But the letter also concluded with a demand for payment and warning that “this demand will be withdrawn on November 23, 2021, at 5:00 p.m., unless additional information and/ or time is requested by you in writing.” Id. at 6 (emphasis in original). Alvarado alleges State Farm did not respond to this October 26 demand letter. Resp. at 2.
Adding further confusion to the timeline, Alvarado alleges that she and Johnson “reached a near policy limit settlement and the case [against Johnson] was nonsuited.” Id. at 1. According to Alvarado, she settled the case with Johnson on October 18, 2021. Id. at 5. This would be about a week before Alvarado apparently sent the aforementioned demand letter to State Farm. See Resp., Ex. A at 1-5 (letter dated Oct. 26, 2021). Then, on November 12, 2021, Alvarado filed in the state court action against Johnson a notice of non-suit with prejudice, advising the state court that she no longer desired to prosecute the case against Johnson. Mot., Ex. 3 (notice of non-suit with prejudice).
State Farm's motion states that Alvarado nonsuited her case against Johnson in October of 2022, see Mot. at 2, however the Notice of Non-Suit attached as Exhibit 3 to the motion shows a filing date of November 12, 2021. Alvarado's Response does not specify the date she nonsuited the case, although she alleges that she “settled her case with the third-party tortfeasor on October 18, 2021.” Resp. at 5.
On March 10, 2022, Alvarado commenced this action in state court against State Farm, alleging (1) breach of the duty of good faith and fair dealing, (2) violations of the Texas Deceptive Trade Practices Act, Tex. Bus. & Comm. Code, Article 17.41, et. seq. and violations of Texas Insurance Code, Article 541.061, (3) violations of Texas Insurance Code, Article 542, and (4) breach of contract, with relief requested under the Uniform Declaratory Judgments Act. See Orig. Pet. (Dkt. No. 1-2). State Farm removed the case on April 21, 2022.
State Farm filed the present Motion for Summary Judgment, requesting judgment as a matter of law on all claims. Alvarado filed a Response in opposition, which purports to include an “objection and motion to strike” State Farm's motion.
Analysis
A. The Court Declines to Strike the Summary Judgment Motion.
As an initial matter, the cursory four-sentence request in Alvarado's Response seeking to strike State Farm's motion and all exhibits is without merit. See Resp. at 2-3. The basis for the “objection to motion and motion to strike” is State Farm's purported mistaken reliance on cases about uninsured-motorist coverage. This case, Alvarado explains, involves underinsured- motorist coverage. It is a rare case in which an entire motion for summary judgment, and all exhibits, warrants the extreme treatment requested here by Alvarado. And this is not such a rare case, for procedural and substantive reasons.
Alvarado's request for relief is not properly before the Court and is denied as procedurally improper. Even if Alvarado had sought to strike targeted portions of the motion or specific exhibits, the appropriate course would have been to file a separate motion supported by legal authority. A request for an order from the Court should be made in a motion, not buried in a response. See Fed.R.Civ.P. 7(b).
As a substantive matter, Alvarado is misguided in asserting that all cases cited by State Farm are inapplicable because they relate to uninsured-motorist coverage. Many of State Farm's cited cases deal with underinsured-motorist coverage. And there is, in any event, undoubtedly at least some overlap in the case law for underinsured- and uninsured-motorist coverage. Accordingly, even assuming for argument's sake that Alvarado's purported objection and motion to strike were properly before the Court, which they are not, they would warrant denial on substantive grounds as well.
B. Familiar Summary Judgment Standards Apply.
Judgment as a matter of law is warranted when there is no genuine dispute of material fact as to each element of a claim. The party moving for summary judgment bears the burden of establishing a lack of dispute of material fact. Fed.R.Civ.P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Where the moving party bears the ultimate burden of proof at trial, such as a plaintiff seeking summary judgment on a claim or a defendant seeking summary judgment on an affirmative defense, then “he must establish beyond peradventure all of the essential elements of the claim or defense to warrant judgment in his favor.” Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986) (emphasis in original). But where the moving party does not bear the burden of proof, summary judgment may be obtained “simply by disproving the existence of any essential element of the opposing party's claim,” or by pointing to a “complete absence of proof of an essential element of the other party's case,” provided there has been sufficient time for discovery. Id. at 1194-95; Adams v. Travelers Indem. Co. of Connecticut, 465 F.3d 156, 164 (5th Cir. 2006) (“A failure on the part of the nonmoving party to offer proof concerning an essential element of its case . . . mandates a finding that no genuine issue of fact exists.”).
State Farm sets forth three arguments to support its request for summary judgment: (1) that the non-suit with prejudice means Alvarado cannot, as a matter of law, establish legal entitlement to recover from Johnson, and therefore the predicate for her underinsured-motorist claim is destroyed, (2) that collateral estoppel bars the claims, and (3) that Alvarado cannot show State Farm breached the contract because Alvarado materially breached first by failing to obtain State Farm's consent to settle and failing to join State Farm to the lawsuit. Weighing these arguments, the Court must “draw all reasonable inferences” in favor of Alvarado. Davis v. Fort Bend Cnty, 765 F.3d 480, 484 (5th Cir. 2014). Here, State Farm has not met its burden. Judgment as a matter of law is not warranted at this juncture.
C. Fact Issues Are Underdeveloped, Confused, and Disputed.
Key issues of fact remain murky and largely undiscussed by the parties' briefing. To start, it is not clear when State Farm first became aware of Alvarado's underinsured-motorist claim. This information is not provided in any coherent fashion in either State Farm's Motion or Alvarado's Response. A letter attached as Exhibit A to State Farm's Reply seems to indicate that Alvarado informed State Farm of the claim for underinsured coverage before March 2, 2020, and in response State Farm requested more information. See Dkt. No. 18-1. But it is not clear when, if ever, Alvarado complied with State Farm's request for information, if State Farm ever followed up, or if there was any other communication between the parties between that March of 2020 State Farm request and the filing of the lawsuit against Johnson in October of that same year.
It's also not clear whether State Farm approved or even knew of the settlement between Alvarado and Johnson. State Farm's motion asserts that Alvarado failed to get State Farm's permission before settling with Johnson. Mot. at 9. Yet in her Response, Alvarado claims the letter from October 26, 2021, “reflect[ed] the fact that [Alvarado's] counsel believed it had obtained permission to accept the near policy limits settlement terms.” Resp. at 5. This letter is not mentioned in State Farm's motion. But when citing the letter, Alvarado's Response doesn't explain much about it. There's no information about whether Alvarado actually notified State Farm prior to the settlement or whether Alvarado's counsel was mistaken in implying that State Farm had consented. So, on one hand, Alvarado invokes a fleeting, unsupported reference in a letter to imply that she actually obtained permission to settle. At the same time, Alvarado elsewhere claims that she obtained permission due to State Farm's silence, which is to say there wouldn't have been an actual grant of permission consistent with Alvarado's implication. Tellingly, Alvarado's brief doesn't argue she actually obtained State Farm's permission to settle; it instead argues that her counsel seemed to have believed she had permission, and that State Farm's failure to respond to the letter denying they had given permission entitled Alvarado to conclude she actually had permission. See Resp. at 5 (stating in the same paragraph that (1) the demand included language “reflecting the fact that Plaintiff's counsel believed it had obtained permission” to accept the settlement terms, and (2) “State Farm had time to evaluate or question the settlement but wholly failed to respond . . . Plaintiff relied on State Farm's silence as consent to the third-party settlement terms.”).
State Farm does acknowledge the October 26, 2021, letter in its Reply, but in doing so only adds to the confusion. State Farm complains the letter “barely mentioned Ms. Johnson, and State Farm told Plaintiff that it was investigating.” Reply at 3-4 (citing Resp., Ex. C). But in support of this statement, State Farm cites a letter dated July 14, 2022, after this case was removed to federal court. See Resp., Ex. C. That letter explicitly states it is a response to a different demand made June 14, 2022. Id. Elsewhere in the Reply, State Farm acknowledges that it did not respond to the October letter. See Reply at 1.
The timeline as presented by the parties is even further muddled because it is unclear whether Alvarado sent the October 26 demand letter to State Farm before or after finalizing the settlement with Johnson. This may or may not be relevant, depending on whether State Farm gave Alvarado permission to settle, or whether Alvarado could and actually did rely on State Farm's silence as permission. See Mot., Ex. 4 at 23 (Bates 0027) (insurance policy requiring notification of a settlement offer and written consent to accept, but also stating the insured may not accept offer if State Farm informs the insured of non-consent in writing). Alvarado at one point indicates she settled the case with Johnson on October 18, 2021 (which is before the demand letter was sent), Resp. at 5, but then elsewhere, as discussed above, Alvarado implies that she informed State Farm of an offer to settle and failed to get a timely response from State Farm, leading her to infer she had permission to settle. See Resp. at 5. This makes scant sense in light of Alvarado's allusion to an alleged express consent from State Farm supposedly enclosed in the October 26 demand letter. The Notice of Non-Suit with Prejudice, meanwhile, is dated November 12, 2021.
Ultimately, the Court is unable to determine when a settlement offer between Johnson and Alvarado was made, when any resulting settlement was finalized, when State Farm first became aware of either the offer to settle or settlement, and whether or when State Farm granted permission to settle or failed to timely respond to a request for permission. Neither party addresses the fact that the October 26 demand letter claimed to enclose the settlement documents and permission to settle in Exhibit D but then does not appear to have an Exhibit D, or indeed an Exhibit A through C either.
The Court is disappointed by the parties' inattentive briefing of the facts and development of the record. Neither party's briefing provides a clear picture of the record or a coherent timeline. Moreover, the briefs ignore evidence or arguments pertinent to clarifying the factual story. Plaintiffs attach to their briefing hundreds of pages of documents the Court is apparently expected to sift through without the benefit of pinpoint citations, specifically with regards to the referenced “Exhibit D” allegedly included somewhere within the hundreds of pages. That practice is not appreciated. The vast expenditure of judicial time and resources required to sift through the briefing and record in this straightforward case is unacceptable. Ultimately, however, this issue resolves against State Farm, as it bears the burden at summary judgment to demonstrate entitlement to judgment as a matter of law; an incoherent timeline does not assist State Farm in that regard.
D. State Farm Has Not Met Its Summary Judgment Burden.
1. State Farm's Cascio argument fails. In its first unsuccessful attempt to show entitlement to judgment as a matter of law State Farm cites and relies on U.S. Fidelity & Guaranty Co. v. Cascio, 723 S.W.2d 209 (Tex. App.-Dallas 1986, no writ), and its progeny. None of these cases are from the Texas Supreme Court, however. In any event and according to this argument, Alvarado's nonsuit with prejudice of claims against Johnson necessarily means Alvarado cannot establish “legal entitlement” to recovery from Johnson. And because “legal entitlement” to recovery from the at-fault driver is a necessary predicate to obtaining underinsured-motorist benefits, State Farm's argument continues, Alvarado's effort to recover under the policy fails as a matter of law. Taking it a step further, if there is no entitlement to recover under the policy, the argument presumably continues, all claims for extracontractual damages must fail as well because there can be no bad faith in refusing to pay a claim that is not covered. See Mot. at 10.
See, e.g., Essman v. Gen. Acc. Ins. Co. of Am., 961 S.W.2d 572, 573 (Tex. App.-San Antonio 1997, no pet.) (finding an agreed order of dismissal with prejudice that settled all controversies between Plaintiff and other drivers barred plaintiff from establishing predicate for recovery of uninsured-motorist benefits, and citing Cascio); Huttleston v. Beacon Nat. Ins. Co., 822 S.W.2d 741, 746 (Tex. App.-Fort Worth 1992, writ denied) (finding prior settlement and dismissal with prejudice of at-fault party without notice to insurer removed predicate for recovery, and citing Cascio).
State Farm's conclusory assertion that “all claims for extra-contractual damages under common law, the Texas Insurance Code, or the Texas Deceptive Trade Practices Act fail as a matter of law” is insufficient to carry State Farm's burden as the party moving for summary judgment. See Reply at 10. State Farm must address and sufficiently brief each claim for which it believes it is entitled to summary judgment. See Local Rule CV-7(c) (“All motions must state the grounds therefor and cite any applicable rule, statute, or other authority justifying the relief sought.”); see also, e.g., Sindhi v. Raina, 905 F.3d 327, 334 (5th Cir. 2018) (explaining, matters not raised in an opening brief are waived).
Although Alvarado fails to engage on Cascio-she doesn't cite Cascio in her Response- she appeals primarily to In re USAA Gen. Indem. Co., 629 S.W.3d 878 (Tex. 2021), to support her argument that her nonsuit of claims against Johnson doesn't preclude her from trying Johnson's liability and the extent of Alvarado's damages directly against State Farm. See Resp. at 4. Plaintiffs in underinsured motorist cases, according to the Supreme Court of Texas, are generally permitted to pursue their claims either by “(1) su[ing] the insurer directly to establish the [third-party] motorist's fault and the insured's damages without suing the motorist; (2) su[ing] the underinsured motorist with the insurer's written consent, making the negligence judgment binding against the insurer for purposes of the insurer's liability under the [underinsured-motorist] policy; or (3) su[ing] the underinsured motorist without the insurer's written consent and then relitigat[ing] the issues of liability and damages in a suit for benefits under the [underinsured-motorist] policy.” In re USAA Gen. Indem. Co., 629 S.W.3d at 880-81. According to State Farm's argument, when an insured like Alvarado opts for the third USAA option above, the insured cannot settle and nonsuit claims against the third-party driver without first obtaining permission from State Farm. But in making this argument and discussing USAA, State Farm advocates that “under In re USAA, plaintiffs preserve their [underinsured] motorist coverage by . . . making certain that the presiding judge does not enter a final judgment against the other driver.” Reply at 3. In other words, to prevail on summary judgment according to its own argument, State Farm must provide this Court with a final judgment against Johnson. But there is no such final judgment in the record before this Court. There is only a notice of nonsuit with prejudice. Notably, USAA involved a with-prejudice dismissal but no final judgment. In re USAA Gen. Indem. Co., 629 S.W.3d at 884.
State Farm addressed USAA only in its Reply; it unaccountably did not cite or discuss USAA in its Motion. The Court cannot fathom how State Farm justifies that omission, given USAA's facts and holding, and given State Farm's duty of candor to the Court. See Tex. R. Disc. Prof'l Cond. 3.03(a)(4) and comments. Any additional briefing going forward must cite and discuss, in the first instance, any and all relevant Texas Supreme Court decisions, whether favorable to a party's position or not. Cherry-picking authorities by citing a 1986 intermediate court of appeals decision without discussing or citing an obviously relevant subsequent decision from the state supreme court is a highly disfavored practice in this Court.
State Farm's own argument interpreting USAA is consistent with a situation in which there is a settlement followed by a dismissal of claims with no entry of a final judgment. In such a scenario, according to State Farm, “plaintiffs preserve their [underinsured] motorist coverage.” Reply at 3; see also Resp. at 4 (“Absent a judgment establishing the motorist's liability and the amount of the insured's damages, insureds are permitted to try those issues directly against the insurer, regardless of whether they can or want to sue the motorist.”) (emphasis removed and citing In re USAA Gen. Indem. Co., 629 S.W.3d at 886 n.27). Thus, for State Farm to prevail at summary judgment, it must demonstrate that Alvarado cannot establish her legal entitlement to recover as a matter of law, and to do so, State Farm must point the Court to a final judgment against Johnson that was secured without State Farm's consent. Otherwise, under USAA and as State Farm admits, Alvarado is permitted to establish her legal entitlement to recover by directly litigating the issues of liability and damages against State Farm, as she is attempting to do now. Having failed to include any final judgment in the record before this Court, State Farm has failed to meet its summary judgment burden on its argument that Alvarado' nonsuit with prejudice removed any predicate for recovering underinsured motorist benefits, in light of its own interpretation of current state law as articulated in USAA. It is the summary judgment movant's burden to show entitlement to relief as a matter of law; the Court will not connect dots that a movant must connect in its briefing and evidence. See, e.g., Fuller v. State Farm Mut. Auto. Ins. Co., 971 F.Supp. 1098, 1100 (N.D. Tex. 1997) (failure to comply with conditions precedent in insurance policy is an affirmative defense under Texas law that defendant must establish).
The Court is unpersuaded by State Farm's argument that a nonsuit with prejudice is equivalent to an actual take-nothing final judgment in these circumstances. See Mot. at 7; Reply at 2-3. Nothing in State Farm's briefing explains why this argument doesn't run afoul of USAA, as interpreted by State Farm itself. Indeed, USAA appears to address this argument and reject it:
Even assuming the dismissal functioned as a judgment, as the dissent does, that judgment established only that [the insurerd] cannot bring another negligence claim against [the third-party motorist] based on the accident. If the dissent were correct that the dismissal established [the insured] is “legally entitled to recover” nothing from [the third-party motorist] for purposes of determining [the insurance company's] UIM liability, insureds could never settle and dismiss their claims against underinsured motorists without eviscerating the contractual right to recover from their own insurer any unrecovered actual damages within policy limits. Cf. Knutson v. Morton Foods, Inc., 603 S.W.2d 805, 808 (Tex. 1980) (holding settlement with, and release of claim against, tortfeasor did not bar plaintiff from pursuing respondeat superior claim against tortfeasor's employer for same automobile accident).In re USAA Gen. Indem. Co., 629 S.W.3d at 886 n.27. See also Allstate Ins. Co. v. Irwin, 627 S.W.3d 263, 267 (Tex. 2021), reh'g denied (Sept. 3, 2021) (discussing Brainard v. Trinity Universal Ins. Co., 216 S.W.3d 809, 818 (Tex. 2006), in which the Court “noted that the insured is not required to litigate these issues [of liability and underinsured status of the driver] against the third-party tortfeasor, but may instead settle the tort claim and litigate UIM coverage with the insurer.”).
2. State Farm's collateral estoppel argument fails. According to State Farm, Alvarado is collaterally estopped from litigating Johnson's negligence and the amount of Alvarado's damages because Alvarado nonsuited her claims against Johnson with prejudice. The Court is immediately struck by this argument's tension with USAA's third option for an insured seeking underinsured coverage; that option expressly contemplates “relitigat[ing] the issues of liability and damages” after an initial lawsuit is resolved against the third-party driver. In re USAA Gen. Indem. Co., 629 S.W.3d at 880-81. Presumably in such a situation the insured will have prevailed against the third-party driver, leaving this Court to wonder, under State Farm's view, what exactly would be “relitigate[d]” and whether State Farm would concede that it could not obtain a different result on the third-party driver's negligence and the insured's damages in a subsequent suit under the underinsured-motorist policy. And once again, USAA seems to expressly reject the argument State Farm is advancing here:
To the extent the dismissal with prejudice functioned as a sort of judgment, as the dissent suggests, it has not become final. Because there is no final judgment, collateral estoppel is inapplicable here.Id. at 884; see also id. at 884 n.13 (noting that although the dissent interpreted the dismissal with prejudice as a judgment, it “concede[d], as it must, that collateral estoppel [did] not apply because there [was] no final judgment.”). Additionally, USAA explicitly distinguished the case on which State Farm primarily relies for its collateral estoppel argument, Forbis v. Trinity Universal Ins. Co. of Kansas, Inc., 833 S.W.2d 316 (Tex. App.-Fort Worth 1992, writ dism'd). Forbis dealt with a different scenario, the USAA Court explained, because in that case there was an agreed judgment determining the amount of damages, which the Court then entered “as an agreed judgment, which had become final.” See In re USAA Gen. Indem. Co., 629 S.W.3d at 883-84. This record, however, contains no similar evidence of a final judgment, as far as the Court can tell.
Regardless, applying Texas law on collateral estoppel as the parties do in their briefing, “[c]ollateral estoppel bars relitigation of an issue if a party seeking the benefit of a judgment proves ‘(1) the facts sought to be litigated in the second action were fully and fairly litigated in the first action; (2) those facts were essential to the judgment in the first action; and (3) the parties were cast as adversaries in the first action.'” In re USAA Gen. Indem. Co., 629 S.W.3d at 883 (emphasis in original) (quotation omitted). “For the purposes of collateral estoppel, an issue was ‘actually litigated' when it was properly raised, by the pleadings or otherwise, and it was submitted for determination, and determined.” Rexrode v. Bazar, 937 S.W.2d 614, 617 (Tex. App.-Amarillo 1997, no writ) (citations omitted). The party relying on collateral estoppel has the burden of establishing that it applies. Tex. Capital Sec. Mgmt., Inc. v. Sandefer, 80 S.W.3d 260, 264 (Tex. App.-Texarkana 2002, pet. struck). Here, without more information about the litigation and settlement between Alvarado and Johnson, the Court is unable to determine if the issues of damages and liability were actually litigated. Moreover, State Farm's argument, as mentioned, appears to contradict the holding in USAA. See In re USAA Gen. Indem. Co., 629 S.W.3d at 886 n.27 and quotation and discussion in note 8 supra; see also id. at 883-84. State Farm has failed to meet its burden on the issue of collateral estoppel.
3. State Farm fails to establish that Alvarado's claims fail as a matter of law due to a prior material breach. State Farms next urges Alvarado materially breached the insurance policy by suing Johnson without joining State Farm, and then settling that litigation without State Farm's written consent. That material breach of the policy, says State Farm, excuses State Farm from performing.
Insurance policies are governed by principles of contract law. Hernandez v. Gulf Grp. Lloyds, 875 S.W.2d 691, 692 (Tex. 1994). To prevail on a breach of contract claim, a party must show “(1) a valid contract existed between the plaintiff and the defendant; (2) the plaintiff tendered performance or was excused from doing so; (3) the defendant breached the terms of the contract; and (4) the plaintiff sustained damages as a result of the defendant's breach.” Atrium Med. Ctr., LP v. Houston Red C LLC, 546 S.W.3d 305, 311 (Tex. App.-Houston [14th Dist.] 2017), aff'd, 595 S.W.3d 188 (Tex. 2020) (citation omitted). If one party does not perform, the other party can be excused from performing if the first non-performance constitutes a material breach. Hernandez, 875 S.W.2d at 692.
In the context of consent provisions in underinsured-motorist cases, when a failure to obtain consent extinguishes a subrogation right that has no practical value, the failure to obtain consent is a non-material breach. Id. at 693. The burden is on the insurer to show that the insured's breach was material by showing that the insurer was prejudiced by the insured's settlement. See Lennar Corp. v. Markel Am. Ins. Co., 413 S.W.3d 750, 756 (Tex. 2013) (“Under Hernandez, an insurer establishes prejudice from a settlement to which it did not agree by showing that the insured's unilateral settlement was a material breach of the policy-that is, that it significantly impaired the insurer's position.”); Fin. Indus. Corp. v. XL Specialty Ins. Co., 285 S.W.3d 877, 878-79 (Tex. 2009) (holding “an insurer must show prejudice to deny payment” based on failure to fully comply with prompt-notice provision, and discussing the “reasons for requiring the insurer to demonstrate prejudice”); PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630, 634 (Tex. 2008) (discussing prejudice requirement and favorably citing the Fifth Circuit's interpretation of Hernandez as “requiring proof of prejudice”); Davis v. State Farm Lloyds, Inc., No. 05-18-00969-CV, 2019 WL 5884405, at *2 (Tex. App.-Dallas Nov. 12, 2019, pet. denied) (discussing Hernandez, and concluding “[t]hus, State Farm had the burden of conclusively proving that [the insured's] settlement [without consent] prejudiced State Farm and thus constituted a prior material breach.”). This is consistent with the general principles of contract law, where the party invoking a prior material breach to justify its own non-performance bears the burden of proof. O'Brien's Response Mgmt., L.L.C. v. BP Expl. & Prod., Inc., 24 F.4th 422, 434 (5th Cir. 2022). Because the Court has no information about the terms of the settlement except that it was a near-policy-limit settlement, State Farm must demonstrate that every settlement for less than the full policy amount is necessarily prejudicial and therefore a material breach, which it fails to do.
See Hanson Prod. Co. v. Americas Ins. Co., 108 F.3d 627, 631 (5th Cir. 1997).
Moreover, State Farm's attempt to flip the burden to Alvarado by requiring her to show a lack of prejudice, see Reply at 5, is mistaken, and its reliance on Gonzalez v. Philadelphia Indem. Ins. Co., 663 Fed.Appx. 302 (5th Cir. 2016) to support this argument is misplaced. Gonzalez reiterated that “Texas law requires a showing of prejudice in order to raise breach of a notice requirement as a defense against claims on automobile insurance policies,” and then held that a failure to provide the required notice caused the insurer prejudice as a matter of law based on the facts in that case. Id. (cleaned up). In Gonzalez, the insured did not provide notice to the insurer until 16 months after the execution of the settlement. Id. at 306. Here, as explained in more detail above, the Court has not been provided a clear timeline of events. It thus remains unclear whether State Farm had notice of a settlement offer and failed to respond, or if it was first notified of the settlement sufficiently after it had already been finalized.
Gonzalez in turn relies on Berkley Reg'l Ins. Co. v. Philadelphia Indem. Ins. Co., 600 Fed.Appx. 230 (5th Cir. 2015), which was not an underinsured motorist case. In Berkley, the Fifth Circuit similarly held that “because notice . . . was insufficient and [the insurer] did not receive notice until after the jury verdict . . . [the insurer] was prejudiced as a matter of law.” Id. at 237.
Further, the terms of a settlement likely play into whether a lack of notice is prejudicial. The Court remains skeptical of State Farm's argument that pursuant to Gonzalez, lack of notice alone is sufficient to establish prejudice as a matter of law in any and every case. This standard is difficult to square with the discussion of prejudice in Hernandez, or the methods of pursuing underinsured motorist benefits endorsed in USAA. Notably, an opinion from the Texas Fifth Court of Appeals in Dallas specifically rejected this interpretation of Gonzalez. See Davis, 2019 WL 5884405, at *3-4, *4 n.5 (finding that under the standard set forth in Hernandez, State Farm had not established prejudice as a matter of law based only on the uncontested fact that the insured had settled his claim with the underinsured motorist without State Farm's permission, and noting “to the extent Gonzalez conflicts with our opinion, we believe it interpreted Texas law incorrectly.”).
It is for State Farm to explain, for example, how a policy-limits settlement between an insured and the third-party motorist would prejudice its subrogation rights, and how and whether a de minimus or relatively small difference between the policy limits and settlement amount would justify a finding of prejudice to the insurer as a matter of law. The Court makes these observations with USAA's statements in mind, in which the Supreme Court of Texas indicated that insureds have a legitimate route to preserving their rights under this type of insurance policy by “su[ing] the underinsured motorist without the insurer's written consent and then relitigat[ing] the issues of liability and damages in a suit for benefits under the [underinsured-motorist] policy.” In re USAA Gen. Indem. Co., 629 S.W.3d at 880. That statement is at odds with State Farm's insistence that breach of notice and consent provisions are necessarily prejudicial to an insurer as a matter of law. And even if Gonzalez advances that proposition, as State Farm seems to argue, the Court declines to rely on an unpublished Fifth Circuit opinion from 2016 to reach a conclusion that would be contrary to a 2021 opinion of the Texas Supreme Court.
Conclusion and Recommendation
For the reasons discussed above, it is recommended that Defendant's Motion for Summary Judgment, Dkt. No. 14, be DENIED without prejudice to refiling before the expiration of the extended dispositive motions deadline.
It is further ORDERED that the deadline to file dispositive motions is extended. The deadline to file dispositive motions is sixty (60) days from the date of this Report and Recommendation. The deadlines for filing a Response and Reply shall follow the deadlines set in the relevant rules governing deadlines for such briefing on dispositive matters.
Instructions for Service and Notice of Right to Object/Appeal
The United States District Clerk shall serve a copy of this report and recommendation on all parties by either (1) electronic transmittal to all parties represented by attorneys registered as a “filing user” with the clerk of court, or (2) by mailing a copy by certified mail, return receipt requested, to those not registered. Written objections to this report and recommendation must be filed within fourteen (14) days after being served with a copy of same, unless this time period is modified by the district court. 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b). Objections, responses, and replies must comply with the same page limits as other filings, unless otherwise excused by the district court's standing orders. See Rule CV-7. The objecting party shall file the objections with the clerk of the court, and serve the objections on all other parties. A party filing objections must specifically identify those findings, conclusions, or recommendations to which objections are being made and the basis for such objections; the district court need not consider frivolous, conclusory, or general objections. A party's failure to file written objections to the proposed findings, conclusions, and recommendations contained in this report shall bar the party from a de novo determination by the district court. Thomas v. Arn, 474 U.S. 140, 149-52 (1985); Acuna v. Brown & Root, Inc., 200 F.3d 335, 340 (5th Cir. 2000). Additionally, failure to timely file written objections to the proposed findings, conclusions, and recommendations contained in this report and recommendation shall bar the aggrieved party, except upon grounds of plain error, from attacking on appeal the unobjected-to proposed factual findings and legal conclusions accepted by the district court. Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en banc).
IT IS SO ORDERED.