Opinion
Civil Action No. 3:01-CV-2615-D
October 4, 2002
MEMORANDUM OPINION AND ORDER
In this action by plaintiffs Danny J. Hawk and Mitchell R. Henson, defendant Lawyers Title Insurance Corporation ("LTIC") moves to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. Defendants Donna Lee H. Williams, Insurance Commissioner of the State of Delaware, in her capacity as Receiver ("the Receiver") for National Heritage Life Insurance Company, In Liquidation ("NHLIC"), and Mark J. Chmielarski, Esquire ("Chmielarski") move to dismiss under 12(b)(2) for lack of personal jurisdiction, under Rule 12(b)(3) for improper venue, under Rules 4(m) and 12(b)(5) for insufficiency of service of process, and under Rules 9(b) and 12(b)(6) for failure to state a claim upon which relief can be granted. The court denies LTIC's motion to dismiss. The court grants the Receiver and Chmielarski's motion to dismiss for failure to state a claim upon which relief can be granted and dismisses plaintiffs' claims against them without prejudice by Rule 54(b) judgment filed today.
Plaintiffs contend the Receiver and Chmielarski's April 30, 2002 motion is untimely because they filed it more than 20 days after April 9, 2002, the date on which plaintiffs contend the Receiver was served with the summons and complaint. See P. Br. (Receiver and Chmielarski Mot. to Dis.) at 2. Although plaintiffs do not cite the source of the 20-day time limitation upon which they rely, the court interprets their argument to refer to the requirement under Rules 12(a)(1)(A) and 12(b) that a defendant serve an answer or move under Rule 12(b) within 20 days after being served with the summons and complaint. Assuming arguendo that the joint motion to dismiss was filed more than days after the Receiver was served, plaintiffs' remedy would have been to move for entry of a default and a default judgment, which they did not do, not to contend the motion to dismiss is untimely.
I
This lawsuit originates from plaintiffs' purchase from the Receiver of two promissory notes and associated deeds of trust. The Receiver had previously obtained ownership of the promissory notes and deeds of trust pursuant to a November 21, 1995 liquidation and injunction order ("Order") issued by a Delaware chancery court. The chancellor directed the Receiver to take or maintain possession and title to all NHLIC property. Plaintiffs obtained the notes and deeds of trust from the Receiver in connection with the settlement of a state court lawsuit (the "State Case"). In the State Case, the Receiver, acting on behalf of NHLIC, sued James B. Johnson ("Johnson"), who had assumed the obligation to pay the notes, to recover the unpaid balance. The Receiver and Johnson executed a settlement agreement and release under the terms of which plaintiffs were third-party beneficiaries. In connection with the settlement agreement, plaintiffs agreed to pay $100,000 to the Receiver in exchange for the two notes, all the Receiver's rights, title, and interest therein, including all rights against the collateral securing the notes and all rights of action asserted or which could be asserted by the Receiver against Johnson. The notes were secured by deeds of trust on two pieces of real property. Plaintiffs subsequently foreclosed the deeds of trust and purchased the properties at foreclosure.
The court recounts the allegations of plaintiffs' amended complaint in the light most favorable to them for the purpose of deciding the motions to dismiss. See, e.g., Royal Bank of Can. v. FDIC, 733 F. Supp. 1091, 1094 (ND. Tex. 1990) (Fitzwater, J).
Following plaintiffs' purported purchase of the properties, a title dispute arose between plaintiffs and E. K. Arledge, Inc. ("Arledge"), a company that was using and collecting rent from the properties at the time of the foreclosure. Alan S. Trust, Esquire ("Trust"), an attorney who represented Arledge under a title policy that LTIC had issued to Arledge, filed a lawsuit on Arledge's behalf (the "Title Suit"). Arledge alleged in the Title Suit that plaintiffs had received no title to the properties at foreclosure because the deeds of trust had been previously extinguished by the judgment from an earlier tax case. The court entered judgment against Johnson for delinquent taxes and ordered foreclosure of the tax liens. Arledge's predecessor-in-interest purchased the properties at the Sheriff's sale.
In the Title Suit, Chmielarski, as counsel for the Receiver, testified by deposition that the Receiver, the former owner of the notes and deeds of trust that plaintiffs had purchased, was aware of and consented to the tax sale. Based on Chmielarski's testimony, Arledge moved for and obtained partial summary judgment clearing its title to the properties.
Plaintiffs allege that the Receiver's consent was necessary to effect the tax sale under 12 U.S.C. § 1825(b)(2). See Am. Compl. ¶ 11.
Plaintiffs later filed the present suit against the Receiver, Chmielarski, LTIC, and Donald C. McDougal, Jr. ("McDougal"). They allege that the Receiver's consent to the tax sale — a fact to which Chmielarski testified in his deposition in connection with the Title Suit — was not disclosed to them before they purchased the promissory notes, and that they would not have purchased the notes had these facts been disclosed. Plaintiffs assert claims against the Receiver for failing to comply with and breach of express promise, agreement, and warranty; against the Receiver and Chmielarski for violation of Tex. Rev. Civ. Stat. Ann. art. 581-33(A)(2) (Vernon Supp. 2002), and 18 U.S.C. § 1341 ; and against the Receiver, Chmielarski, and LTIC for interference with rights under contract, conversion, and conspiracy to convert, injurious falsehood-disparagement of property, and fraud on the court. See Am. Compl. ¶¶ 27-36.
Plaintiffs later voluntarily dismissed McDougal as a defendant.
No private cause of action exists for mail fraud under 18 U.S.C. § 1341. See Bell v. Health-Mor, Inc., 549 F.2d 342, 346 (5th Cir. 1997).
II
The court first considers whether LTIC is entitled to dismissal of plaintiffs' action on the ground of failure to state a claim upon which relief can be granted.
"[T]he motion to dismiss for failure to state a claim is viewed with disfavor and is rarely granted." Kaiser Aluminum Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d 1045, 1050 (5th Cir. 1982) (quoting Charles A. Wright Arthur R. Miller, Federal Practice and Procedure § 1357, at 598 (1969)). "[D]ismissal of a claim on the basis of barebones pleadings is a "precarious disposition with a high mortality rate.'" Id (quoting Barber v. Motor Vessel "Blue Cat," 372 F.2d 626, 627 (5th Cir. 1967)). "The court may dismiss a claim when it is clear that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Jones v. Greninger, 188 F.3d 322, 324 (5th Cir. 1999) (per curiam) (Rule 12(c) decision) (citing Fee v. Herndon, 900 F.2d 804, 807 (5th Cir. 1990)). "In analyzing the complaint, [the court] will accept all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff." Id. (citing Doe v. Hillsboro Indep. Sch. Dist., 81 F.3d 1395, 1401 (5th Cir. 1996)). "The issue is not whether the plaintiff will ultimately prevail, but whether he is entitled to offer evidence to support his claim." Id (citing Doe, 81 F.3d at 1401). "Thus, the court should not dismiss the claim unless the plaintiff would not be entitled to relief under any set of facts or any possible theory that he could prove consistent with the allegations in the complaint." Id (citing Vander See v. Reno, 73 F.3d 1365, 1368 (5th Cir. 1996)).
A
Plaintiffs and LTIC analyze this motion under Texas law, and the court will do so as well. LTIC argues that it cannot be held liable to plaintiffs for any of Trust's conduct in connection with the Title Suit because an insurer is not liable for the actions of the attorney it selects to represent its insured. See LTIC Br. at 3-4. LTIC asserts that no attorney-client relationship existed between it and Trust. See id LTIC also posits that an insurer cannot be vicariously liable for the actions of a lawyer for the insured, even when the lawyer is provided by the insurer. See Cont'l Cas. Co. v. Pullman, Comley, Bradley Reeves, 929 F.2d 103, 108 (2d Cir. 1991).
LTIC essentially argues that the court should view its liability as solely derived from the actions of Trust. While its assertions regarding Trust's liability and the lack of an attorney-client relationship between LTIC and Trust may be accurate, they are irrelevant to the question whether LTIC is liable. This is so because Hawk does not allege derivative, secondary, vicarious liability. LTIC's arguments do not show beyond doubt (in fact, they do not show at all) that a claim could not be brought against it.
B
LTIC also maintains that, even if an attorney-client relationship exists between it and Trust, a party to a prior lawsuit does not have a cause of action against attorneys who represented the opposing party, where the party's relationship to the opposing party's attorneys was adversarial. See White v. Bayless, 32 S.W.3d 271, 276 (Tex.App. 2000, pet. denied); Renfroe v. Jones Assocs., 947 S.W.2d 285, 288 (Tex.App. 1997, writ denied) (citing Taco Bell Corp. v. Cracken, 939 F. Supp. 528, 532 (N.D. Tex. 1996) (Fitzwater, J.)). Texas adheres to this rule because the public has an interest in obtaining from the legal profession representation that is loyal, faithful, and zealous, and an attorney is charged with the duty of representing his clients zealously within the bounds of the law. See Renfroe, 947 S.W.2d at 288 (citing Bradt v. West, 892 S.W.2d 56, 71 (Tex.App. 1994, writ denied)).
Plaintiffs acknowledge these arguments and agree that Trust cannot be held liable for his litigation-related conduct. They argue, however, that "[t]he mere fact that there may be no recognized cause of action against an opposing attorney for independently tortious conduct [on] behalf of a party does not necessarily mean that there is no cause of action against that attorney's client." P. Br. at 7.
Plaintiffs allege wrongdoing by LTIC, not liability derived solely from allegedly illegal acts by Trust. They aver in their amended complaint ("complaint") that "Chmielarski, Lawyers Title Insurance Corporation, and McDougal conspired together to have such statements made, and did so with malice toward Hawk and Henson." Am. Compl. ¶ 36. Moreover, plaintiffs allege that
[LTIC and McDougall began to intentionally attack, disparage, and damage the Lange notes and Lange deeds of Trust, the rights, titles and interests therein which Hawk and Henson had purchased from the Receiver for [NHLIC], Hawk and Henson's rights as third-party beneficiaries under the aforesaid agreement between the Receiver for [NHLIC], and the substitute trustee's deeds to the subject lands which Hawk and Henson had purchased.Id ¶ 21. These allegations are made against LTIC, not Trust.
Although plaintiffs assert that LTIC disparaged the notes and deeds of trust "act[ing] through its agents and attorneys, one of whom was Alan S. Trust," id., that "[t]he actions of Trust were ratified by [LTIC], who was billed therefor by Trust and paid Trust therefor," and that the fraud on the court was committed when Chmielarski gave damaging testimony "in collaboration with Trust and Defendant McDougal," id. ¶ 25, these allegations do not negate the fact that the complaint, viewed liberally, asserts liability directly against LTIC. Plaintiffs' theory does not require that Trust himself be liable for his actions as LTIC's attorney. Even if plaintiffs may later be unable prove that LTIC is primarily liable in this case, dismissal for that reason cannot be based on the complaint alone.
The court therefore denies LTIC's motion to dismiss for failure to state a claim.
III
The court next considers the Receiver and Chmielarski's motion to dismiss for failure to state a claim upon which relief can be granted. They contend inter alia that the injunction order enjoins plaintiffs from bringing suit against them outside of the Delaware chancery court for conduct undertaken in connection with their duties related to the receivership of NHLIC.
A
Article IV, § 1 of the United States Constitution requires that a properly proved foreign judgment be recognized and given effect coextensive with that to which it is entitled in the rendering state. See Barber v. Barber, 323 U.S. 77, 79-80 (1944). The Full Faith and Credit Clause requires that a valid judgment from one state be enforced in other states regardless of the laws or public policy of the other states. Underwriters Nat'l Assurance Co. v. North Carolina Life Accident Health Ins. Guar. Ass'n, 455 U.S. 691, 715 (1982). Full faith and credit is not required, however, when a decree is interlocutory or subject to modification under the law of the rendering state. Barber, 323 U.S. at 81.
Defendants have cited instances in which the Texas Supreme Court and federal courts have accorded full faith and credit to liquidation and injunction orders highly analogous to the one at issue. See, e.g., Argon Fin. Group v. Marro, 897 F. Supp. 568, 569 (D.D.C. 1995) (holding that liquidation and injunction order issued by Delaware chancery court was entitled to full faith and credit in District of Columbia); Bard v. Charks R. Myers Ins. Agency, Inc., 839 S.W.2d 791, 794-95 (Tex. 1992) (holding that liquidation and injunction order issued by Vermont superior court was entitled to full faith and credit in Texas). This court must give the Delaware Order full effect.
Plaintiffs do not dispute this legal premise. Instead, they interpret the scope of the Order more narrowly than do defendants, arguing that it precludes only claims against the Receiver and her agents for acts that transpired before the Delaware chancery court issued the injunction. Plaintiffs cite paragraphs 18, 27, and 28 of the Order to support this argument. Ps. Br. at 2-3. This reading may stem from the policy consideration that injunction orders are entered in liquidation proceedings in order to freeze the current state of affairs and allow the proper, equitable distribution of the party's assets. Such a reading is reasonable given the time limitations for claims and liens against NHLIC, see Order ¶ 28, and the requirement that the Receiver provide notice to those who likely have claims against NHLIC, see id ¶ 27. This analysis does not, however, take into account other policy considerations before the chancery court.
Delaware courts are also concerned with allowing for the proper functioning and protection of Receivers in insurance liquidation situations. The instant Order was entered pursuant to chapter 59 of the Delaware Insurance Code, Del. Code Ann. tit. 18, § 5901 et seq. (2002); see Order at 1 ("[The Receiver) has filed with the court a petition seeking a Liquidation and Injunction Order concerning [NHLIC] pursuant to Title 18 Del. C. § 5901, et seq."); id ¶¶ 2, 4, 9, 14, 28. Section 5904 of that chapter provides that "[t]he court may at any time during a proceeding under this chapter issue such other injunctions or orders as may be deemed necessary to prevent interference with the Commissioner or the proceeding." Del. Code Ann. tit. 18, § 5904. That is exactly what the court did when, in paragraphs 17 and 18, it enjoined persons "from instituting or further prosecuting any action at law or in equity or in other proceedings against National Heritage [or] the Commissioner as Receiver . . . or in any way interfering with the Receiver, the Special Deputy Receiver(s) or the Designees." Id ¶¶ 17, 18 (enjoining claims "except insofar as such claims are brought in the liquidation proceedings"). The Order also eliminates the Receiver's and her agents' "personal liability for . . . acts or omissions in connection with their duties during the rehabilitation and liquidation periods, provided that such acts or omissions are or were undertaken in good faith and without willful misconduct, gross negligence, or criminal intent." Id. ¶ 10 (emphasis added).
These parts of the Order are intended to prevent interference with the duties and responsibilities of the Receiver and her agents. The Order freezes claims against NHLIC in order to distribute properly the assets in the liquidation proceeding (as evidenced by ¶¶ 27 and 28) and to eliminate lawsuits that would interfere with the Receiver's proper functioning (as evidenced by ¶¶ 10, 17, and 18). The latter policy consideration informs the court's reading of the claim-barring sections of the Order. Precluding only claims for prior wrongs would not advance the State's and the chancellor's policy of preventing interference with the Receiver's duties. The court therefore holds that these sections are intended to bar claims stemming from actions after the Order was entered. Giving full faith and credit to the Order, the court dismisses plaintiffs' claims against Chmielarski and the Receiver, without prejudice to their being brought in the Delaware chancery court.
The court denies LTIC's motion to dismiss for failure to state a claim. The court grants the Receiver and Chmielarski's motion to dismiss and dismisses the action against them without prejudice to plaintiffs' bringing suit against them in the Delaware chancery court.