      TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                          ON MOTION FOR REHEARING EN BANC


                                       NO. 03-04-00813-CV



                   Appellants, Dr. Phillip Osborne and Deborah Osborne //
                             Cross-Appellant, State Farm Lloyds

                                                 v.

   Appellee, Jauregui, Inc. // Cross-Appellees, Dr. Phillip Osborne and Deborah Osborne


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



                               DISSENTING OPINION


                Because I would hold that the Osbornes are entitled to attorney’s fees as prevailing

parties under the DTPA and that State Farm’s claim for subrogation rights should be remanded to

the trial court for reconsideration in light of Fortis Benefits v. Cantu, 234 S.W.3d 642 (Tex. 2007),

I respectfully dissent.

                                         Attorney’s Fees

                The majority correctly states 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.” See 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, however, ruled on whether the reasoning in

McKinley would apply in a situation where the damages owed by one defendant 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. The majority 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).

The court ruled in Allstate that 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



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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 for $835,000 in damages, while Jauregui reaped the benefits of its refusal to settle by

offsetting the entire judgment with settlement funds paid by other defendants.

               I 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. As a result, I would hold that the Osbornes qualify as prevailing

parties under the DTPA and therefore should be awarded attorney’s fees, subject to the requirement

in Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 313-14 (Tex. 2006), that such fees be

segregated between recoverable and unrecoverable claims.

               The majority’s holding that the Osbornes are not prevailing parties under the DTPA

essentially rewards Jauregui for refusing to negotiate a settlement. The Osbornes made a settlement

offer to Jauregui prior to filing suit 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 refused to make an offer of settlement within a reasonable range of that

demand and responded with a counter-offer of only $12,810, forcing the Osbornes to incur an




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additional $1,127,641.30 in attorney’s fees.1 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.

               Awarding attorney’s fees to the Osbornes before applying the settlement credit would

be 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 I would hold that the Osbornes are prevailing parties under the DTPA, I dissent from the

majority’s holding that the Osbornes are not entitled to attorney’s fees.



                                            Subrogation

               The majority holds that State Farm’s contractual right of subrogation displaces any

equitable considerations regarding whether the Osbornes have been “made whole” for their damages,

and further holds that even under an equitable determination of subrogation rights, State Farm is

entitled to the settlement proceeds because the Osbornes have already been “made whole” by

insurance payments totaling $1,874,687.28.

               The majority cites the Texas Supreme Court’s recent holding in Fortis Benefits,

234 S.W.3d at 650, that contract-based subrogation rights trump equitable considerations, which are



       1
         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).

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to be used by default in the absence of a contractual right to subrogation. 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 645 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. at 650-51.

               However, the subrogation provision in the Osbornes’ homeowners’ insurance policy

with State Farm does not contain the type of precise and unambiguous language found in the Fortis

subrogation provision. The subrogation provision found in the Osbornes’ policy 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.” Id. at 645 n.11 (original emphasis removed, emphases added).




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                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 never had an opportunity to evaluate and interpret the subrogation

clause in the Osbornes’ homeowners’ policy. Therefore, the appropriate remedy would be to 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, in light of

the Texas Supreme Court’s holding in Fortis.

                If the Osbornes’ contractual subrogation provision was found to be too vague and

ambiguous to displace equitable considerations, I would point out that the trial court did not abuse

its discretion in denying subrogation rights to State Farm, in light of the deference afforded to a trial

court’s equitable determination. In a determination of subrogation based purely on equitable factors,

“[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).

                The trial court may have considered, for example, that 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.




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                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

asserts on appeal that the Osbornes’ damages are limited to the amount of the jury verdict. Allowing

this drastic change in State Farm’s damages assessment would create an environment in which

insured parties are unable to accept insurance payments from an insurer without fear that in the

future, the insurer will claim that it had overpaid and that the excess should be used to offset




                                                   7
settlement payments for mental anguish or other uncovered damages. These factors support the trial

court’s equitable decision to deny subrogation to State Farm.

                Even in light of the majority’s holding that State Farm’s contractual right to

subrogation controls over equitable considerations, the fact remains that State Farm failed to allocate

the settlement funds to covered versus uncovered losses. The subrogation provision in the Osbornes’

policy states that an assignment of rights may be required “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 v. Great S. Fire & Cas. Ins. Co., 597 S.W.2d 342, 344 (Tex. 1980). 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.

                While State Farm failed to allocate the settlement funds to covered versus uncovered

losses, we can assume that there was ample opportunity to make such an allocation because State

Farm asserts in its brief that it assisted “vigorously” in securing the settlements. There is no


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evidence that the remaining settlement amounts are allocable to covered damages, rather than

uncovered damages such as mental anguish or attorney’s fees. State Farm’s failure to allocate

settlement funds is another issue that should be reviewed by the trial court on remand to determine

whether the settlement funds at issue actually reflect payments made by State Farm, as necessary to

qualify for assignment under the contractual subrogation provision.

                Because I would reverse the trial court’s denial of attorney’s fees to the Osbornes and

remand State Farm’s claim for subrogation rights to the trial court for reconsideration in light of

Fortis, I respectfully dissent.



                                               __________________________________________

                                               Diane Henson, Justice

Before Chief Justice Law, Justices Patterson, Puryear, Pemberton, Waldrop and Henson

Filed: April 17, 2008




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