Louisiana Supreme Court

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By Tyler Moore Kostal

The Texas Supreme Court recently handed down a decision in Forest Oil Corp. v. El Rucio Land & Cattle Co., Inc., 14-0979, 2017 WL 1541086 (Tex. Apr. 28, 2017), that at first glance, is reminiscent of the landmark Louisiana legacy cases Corbello and Magnolia Coal. Forest Oil, like Corbello, supports the landowner’s right to a judicial setting to resolve its claims while minimizing the role of the relevant state agency. And like Magnolia Coal, Forest Oil dispenses with the presumed exclusive or primary jurisdiction of the Texas Railroad Commission (RRC) over oilfield contamination claims by landowners. However, what is still to be considered by Texas courts is the viability of the claim and certain Louisiana legacy defenses. Since Corbello, the Louisiana Supreme Court has issued rulings on prescription (Marin) and subsequent purchaser (Eagle Pipe) that have reduced the force of legacy litigation. Further, similar to Louisiana’s Act 312, the Texas legislature will have an opportunity to enact legislative and regulatory changes. The bottom line is that the long-term impact of Forest Oil and the future of Texas oilfield litigation are far from certain.

In this case, Forest Oil (now known as Sabine Oil & Gas) produced natural gas on a 27,000-acre ranch in Hidalgo County, Texas, for over 30 years. Forest’s oil and gas leases covered about 1,500 acres, and Forest operated a gas processing plant on a 5-acre tract. In 2004, one of the landowners learned (from a former Forest employee) that Forest had contaminated the property. In 2005, the landowners filed suit alleging soil and groundwater contamination from various oilfield wastes, including naturally occurring radioactive material (NORM). One of the landowners also alleged that tubing, donated by Forest and used in the construction of rhinoceros pens, contained NORM that caused a cancerous growth resulting in amputation of his leg.

Forest eventually compelled arbitration pursuant to a 1999 settlement agreement signed by the landowners in a separate lawsuit over oil and gas royalties. See Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008) (holding that the arbitration clause in the settlement agreement was enforceable). That agreement also provided for the ongoing care and remediation of the surface estate by Forest. After a 17-day hearing, the arbitration panel awarded the landowners $15 million in property damages, $500,000 in personal injury damages (NORM cancer claim), $500,000 in punitive damages, and $5 million in attorney fees. The panel also granted declaratory relief for remediation under the 1999 agreement and ordered Forest to provide the landowners with a $10 million bond to assure its performance of a prior remediation agreement.

The landowners filed a motion to confirm the award in state court. Forest moved to vacate the award on several grounds, namely on the basis that the RRC had exclusive or primary jurisdiction over the landowners’ claims. Forest also argued that the damage awards violated Texas law. The trial court vacated the panel’s $10 million bond requirement but otherwise denied Forest’s motion. See Forest Oil Corp. v. EL Rucio Land, 2012 WL 10170451 (Tex. 55th Dist.). In confirming the award, the trial court incorporated the actual and punitive damages and awarded the landowners $6.7 million in attorney fees. The appellate court affirmed. See Forest Oil Corp. v. El Rucio Land & Cattle Co., Inc., 446 S.W.3d 58 (Tex. App. 1st Dist. 2014). The Texas Supreme Court granted Forest’s petition for review.

First, the court considered whether the RRC has exclusive jurisdiction over the landowners’ claims. Forest argued that the legislature intended the RRC to have exclusive jurisdiction over environmental oilfield disputes, such that the arbitration panel lacked jurisdiction to enter the award and the trial court lacked jurisdiction to confirm it. The court disagreed concluding that the legislature did not express a clear intent to abrogate a landowner’s common-law rights in favor of a statutory remedy.

Forest also argued that public policy necessitated the RRC’s exclusive jurisdiction over these matters. It argued that if landowners seek remediation both from the RRC and through the courts, they could recover twice for the same injury. Forest further argued that if a landowner does not spend a damage award on remediation, the RRC remains responsible to the public to order cleanup. The court rejected Forest’s policy considerations stating that it was “an argument for the Legislature.” Instead, the court offered a solution for Forest and other defendant operators: “By seeking an RRC determination of contamination allegations and complying with RRC cleanup orders, an operator can reduce or eliminate the landowners’ damages.”

Next, the court considered whether the RRC has primary jurisdiction over the claims. Forest argued that the RRC has primary jurisdiction because only the RRC can determine what the law requires for remediation. Forest argued that the parties’ 1999 settlement agreement, which required that Forest remove hazardous material only “if, as and when required by law,” obligated Forest to remediate only if required by the RRC. The court disagreed and stated: “But while RRC regulations and orders certainly inform the extent to which remediation of contamination is required by law, they do not supplant Forest’s common law duties, which are also required by law.” The court reasoned that the doctrine of primary jurisdiction does not apply to claims that are “inherently judicial in nature,” like trespass, negligence, fraud, and breach of contract—all claims brought by the landowners and all inherently judicial in nature. Because the landowners’ claims are inherently judicial and not dependent on the standards of regulatory compliance, the court concluded that the doctrine of primary jurisdiction does not apply.

Ultimately, the court concluded that the RRC has neither exclusive nor primary jurisdiction over the landowners’ claims. Therefore, the landowners were free to bring common law claims like negligence, trespass, and breach of contract in a judicial forum against Forest.

It is important to note that the Texas Supreme Court did not address the amount of the damages award. However, the appellate court found that, contrary to Forest’s claims, the arbitration panel’s view of the evidence, application of the law to the evidence, and ultimate decision, did not rise to the level of “gross mistake.” The landowners offered expert testimony valuing the ranch, “unimpaired by environmental contamination,” at $65.5 million. That expert determined that the diminished value of the ranch was $45.85 million. Therefore, he claimed that because of the environmental contamination, the value of the ranch had been diminished by $19.65 million. Recall that the arbitration panel awarded the landowners $15 million in property damages, and the appellate court affirmed.

louisiana

By Linda Akchin and Chris Dicharry

INTRODUCTION

Louisiana law imposes a sales tax on “sales at retail.”  “Sale at retail” is defined in the sales tax law, and the definition provides that the term does not include “sales of materials for further processing into tangible personal property for sale at retail.”    This provision is commonly referred to as the “further processing exclusion.”[1]  The most recent Louisiana Supreme Court’s decision interpreting this “further processing exclusion,” Bridges v. Nelson Indus. Steam Co., 2015-1439 (La. 5/3/16), 190 So.3d 276 (the “NISCO decision”), recently became final.  The decision is significant for all taxpayer-manufacturers.  It provides an excellent explanation of applicable legal principles relating generally to interpretation of the further processing exclusion and a comprehensive explanation of the three-prong jurisprudential test for application of the exclusion.  In response to the NISCO decision, and before it became final, the Legislature passed an Act amending the further processing exclusion.[2]  The purpose of this writing is to (i) provide some general information regarding applicable rules of law to be gleaned from the NISCO decision; and (ii) identify questions arising from the recent legislative amendment to the law.

THE SUPREME COURT DECISION

The further processing provision applies to byproducts.

The NISCO decision is the first in which the Supreme Court directly addresses the question of whether the further processing exclusion from tax applies to purchases of materials that are further processed into a byproduct of a manufacturing process.  The Supreme Court held that it does.  Noting that the exclusion applies to “tangible personal property,” and the sales tax regulation interpreting the exclusion provides that whether materials are further processed or simply used in the processing activity will depend entirely upon an analysis of the “end product,” the court reasoned that it found nothing in the law that requires the “end product” be the enterprise’s primary product, explaining:

“The plain language of the statute makes the exclusion applicable to articles of tangible personal property.  There simply is no distinction between primary products and secondary products. . . . At the end of the day, the ash [NISCO’s byproduct] is produced and sold . . . making it an ‘article of tangible personal property for sale at retail.’”[3]

The NISCO decision applies and interprets the long-established three-pronged test for application of the exclusion.

The Court applied the jurisprudentially-established three-pronged test for application of the further processing exclusion as it related to NISCO’s ash byproduct:  The test is:

(1) the raw materials become recognizable and identifiable components of the end products;

(2) the raw materials are beneficial to the end products; and

(3) the raw materials are materials for further processing, and as such, are purchased with the purpose of inclusion in the end products.[4]

In applying the test the Court clarifies and reinforces aspects of the application of the test that all taxpayers would be well-served to keep in mind.   Those clarifications include:

(1)       The further processing provision constitutes an “exclusion” not an “exemption” from tax, and as such, must be liberally construed in favor of the taxpayer;[5]

(2)       When the material purchased is processed into less than all of the end products produced, the analysis involves only consideration of the end product(s) into which the material is further processed, without regard to other end products.[6]

(3)       In order to satisfy the “benefit” prong of the test it is not necessary to conduct tests to determine the qualities of the material purchased or its beneficial impact on the end product.  It is sufficient that elemental components of the material purchased become integral components of the molecular makeup of the end product.  That “integration” is in and of itself of some benefit to the end product.[7]

(4)       The “purpose” prong of the test does not involve a primary purpose test; and the “purpose” test involves a “manufacturing purpose” inquiry, not a “business purpose” or “economic purpose” inquiry.  Only the manufacturing process and the physical and chemical components and the materials involved in the process are germane to the “purpose” test.[8]

(5)       There is no legal basis for an “apportionment” approach to the further processing exclusion, whether based upon the percentage of the material or some assigned value of the components that actually end up in the end product, and any such approach is impractical in application.[9]

The New Law

The 2016 Legislative amendment, effective June 23, 2016, amends the law to provide that “[t]he term ‘sale at retail’ does  not include sale of materials for further processing into articles of tangible personal property for sale at retail when all of the criteria in Subsubitem (I) of this Section are met.[10]  Those criteria consist of a re-statement of the three-pronged test:  (1) the raw materials become a recognizable and identifiable component of the end product; (2) the raw materials are beneficial to the end product; and (3) the raw materials are material for further process, and as such are purchased for the purpose of inclusion into the end product.

The amendment goes further, however, and adds a “Subitem II” to the definition of “sale at retail.”  This addition represents new law and provides, in short, that “[i]f the materials are further processed into a byproduct for sale, such purchases of materials shall not be deemed to be sales for further processing and shall be taxable.”  The term “byproduct” is defined to mean “any incidental product that is sold for a sales price less than the cost of the materials.”

QUESTIONS CREATED BY THE NEW LAW

Did the Legislature intend to overrule the NISCO decision?

The first question that arises is whether the clarifications to the three-prong jurisprudential test that are set forth in the NISCO decision may be applied under the amended law’s verbatim codification of the three-prong jurisprudential test.  It is a well-accepted rule of statutory construction that those who enact statutory provisions are presumed to act deliberately and with full knowledge of existing laws on the same subject, with awareness of court cases and well-established principles of statutory construction, with knowledge of the effect of their acts and a purpose in view; and that when the Legislature changes the wording of a statute, it is presumed to have intended a change in the law. [11]  Thus, legislative language will be interpreted based upon assumption that the Legislature was aware of judicial decisions interpreting those statutes, including among others, the NISCO decision.[12]  Because the amended law adopts the three-prong judicial test verbatim, we believe a strong argument may be made that there is no legislative intent to vary from the Supreme Court’s interpretations of that test, except to the extent the language of the amended law expressly varies from the Supreme Court’s prior interpretations.  The Legislature has never hesitated to expressly state its intent to legislatively overrule a Louisiana Supreme Court decision, when that is indeed its intent.  Here, no express statement of such intent was made, and we do not believe that the Louisiana Supreme Court will infer intent to overrule any aspect of the NISCO decision, except to the extent the language of the amendment is inconsistent with the court’s interpretation in NISCO.

What constitutes a “byproduct” for purposes of the new law?

In cases where a product is sold for a sales price less than the cost of its materials, questions will likely arise as to whether the product is an “incidental product.”  Because the term “incidental product” is not statutorily defined by the legislature, we must give the words their commonly-accepted meaning.  The word “incidental” means “being likely to ensue as a chance or minor consequence,” or “occurring merely by chance or without intention or calculation.”[13]  Many products sold for a sales price less than the cost of their materials are intentionally manufactured and sold.  They are not manufactured by accident; and they are not the result of chance.  Instead, a conscious decision is made to choose a process design that will in fact create certain byproducts, with the intention to sell all the products of the process – both “primary products” and “byproducts,” with an overall profit motive.  While any particular byproduct may be of minor consequence economically speaking, when viewed in a vacuum, it may not be of economic “minor consequence” to the overall finances of the taxpayer; or it may not be of minor consequence in terms of volumes manufactured and sold, or investment made to develop, manufacture, market and sell the byproduct.  In our opinion, the Legislature’s amendment – a clear intent to vary from the NISCO decision’s holding that the further processing exclusion applies to all end products – merely creates more uncertainty, resulting in many more sales and use tax disputes and consequent litigation.  The taxing authorities will undoubtedly argue that the intent of the amendment was to create a rule to be applied when a byproduct, viewed in a vacuum, is not profitable; but that is not what the Legislature said.  The Legislature adopted a rule to be applied to “incidental products,” without defining that term.  Thus, we believe a proper interpretation requires that a determination must first be made regarding whether the byproduct is an “incidental product;” and only if it is an incidental product, does the second part of the “test” – whether it is sold for a sales price less than the cost of its material – apply.

May the new law be applied retroactively?

Taxpayers may expect the taxing authorities to impose the new law going forward.  Serious questions arise, however, regarding the applicability of the new law to taxes already reported and paid, or incurred, before the new law became effective.

The new law expressly provides that it “shall not be applicable to any existing claim for refund filed or assessment of additional taxes due issued prior to the effective date of this Act for any tax period prior to July 1, 2016, which is not barred by prescription.”  If a taxpayer’s claim or dispute with the taxing authority falls within the language of this provision, the new law should not be applied by the taxing authorities.  It is not clear what is meant by the terminology “claim for refund filed.”  Does it mean the submission of a refund request or claim with the taxing authority, or a suit for refund, or both?  Likewise, it is not clear what is meant by “assessment of additional taxes due issued” – does it include notices of intent to assess (“proposed assessments”), notices of assessment (“final assessments”), petitions for redetermination of assessments, or suits to collect tax, or all four.  We recommend that taxpayers apply the most liberal interpretation of the language unless and until guidance is provided by regulation or judicial decision.

There will undoubtedly be cases in which no claim for refund has been filed or assessment issued before the effective date of the act, but involving tax periods prior to July 1, 2016.  In such cases, we believe a strong argument may be made that retroactive application of the new law to pre-amendment tax periods is unconstitutional.  The Legislature stated in the Act that it “is intended to clarify and be interpretive of the original intent and application of” the further processing exclusion, and that “[t]herefore, the provisions of this Act shall be retroactive and applicable to all refund claims submitted or assessments of additional tax due which are filed on or after the effective date of this Act.”  Despite this statement by the legislature, we believe that the amendment to the law is not merely clarifying and interpretive.  We believe the changes are substantive in nature.  Generally, substantive laws may be applied prospectively only.  And despite express legislative intent to the contrary, it is uniquely the province of the courts to determine if an Act is substantive, or merely clarifying and interpretive.  And, if the law is substantive, it will not be applied retroactively by the courts because to do so impinges upon the authority of the judiciary in violation of the constitutional doctrine of separation of powers and divests taxpayers of substantive rights and causes of action that accrued and vested in the taxpayer before the effective date of the Act, such that imposition of the new law would constitute a denial of due process.[14]

Was the amendment to the law constitutionally enacted?

In the case of an attempt by a taxing authority to apply the new law retroactively to pre-amendment tax periods, or in the case of a purely prospective application of the new law to post-amendment tax periods, a question still exists regarding the constitutionality of the law’s enactment.  The Louisiana Constitution provides that enactments levying a new tax or increasing an existing tax require a two-thirds vote of both houses of the Legislature to become law.[15]  Here, the Act at issue did not have a two-thirds vote of the House of Representatives.  A viable legal argument exists that because the law amends definitions in a manner that makes previously non-taxable transactions taxable, it constitutes either a “new tax” or an “increase in an existing tax,” thus requiring a two-thirds vote of both houses of the Legislature. [16]  Unless and until this issue is resolved in the courts, a taxpayer would be wise to seek legal counsel and consider its options before voluntarily paying tax on materials purchased for further processing into a byproduct.

__________________________________________________________

[1] La. R.S. 47:301(10)(c)(i)(aa), before amendment effective June 23, 2016; see La. Act No. 3 (2nd Extra. Sess. 2016) (“Act 3 of 2016”).

[2] Act 3 of 2016, supra.

[3] NISCO, pp. 8-9, 190 So.3d at 282.

[4] Id. at pp. 7-8, 190 So.3d at 281, quoting International Paper, Inc. v. Bridges, 2007-1151, p. 19 (La. 1/16/08), 972 So.2d 1121, 1134.

[5] Id. at pp. 5-6, 190 So.3d at 280-281.

[6] Id. at pp. 7-9, 190 So.3d at 281-282.

[7] Id. at pp. 9-10, 190 So.3d at 282-283.

[8] Id. at pp. 4, 10-13, 190 So.3d at 279, 283-285/

[9] Id. at pp. 13-15, 190 So.3d at 285-286.

[10] Act 3 of 2016, supra (emphasis added)

[11] Borel v. Young, 2007-0419, pp. 8-9 (La. 11/2/07), 989 So.2d 42, 48 (emphasis added).

[12] State v. Campbell, 2003-3035, pp. 8-9 (La. 7/6/04), 877 So.2d 112, 118.

[13] Merriam-Webster’s Collegiate Dictionary (11th ed. 2012) (emphasis added).

[14] See e.g. Mallard Bay Drilling, Inc. v. Kennedy, 2004-1089 (La. 6/29/05), 914 So.2d 533); Unwired Telecom Corp. v. Parish of Calcasieu, 2003-0732 (La. 1/19/05), 903 So.2d 392; and Bourgeois v. A.P. Green Indus., Inc., 2000-1528 (La. 4/3/01), 783 So.2d 1251; La. Const. Art. II, §§1-2; La. Const. art. I, §2; U.S. Const. Amend. XIV, §1.

[15] La. Const. Art. VII, §2.

[16] See e.g. Dow Hydrocarbons & Resources v. Kennedy, 1996-2471 (La. 5/20/97), 694 So.2d 215.

 

 

Cargo ship in the harbor at night

By Tod Everage

The application of the collateral source rule is a common dispute in personal injury litigation because it affects the amount of recoverable damages in the case. When it applies, the defendant is potentially on the hook for a higher amount of past medical expenses, typically, the amount invoiced by the medical providers. When it does not, the plaintiff’s recovery of past medical expenses is reduced, usually to the actual amount paid to the providers. Since its inception, Louisiana courts have regularly been called upon to decide whether certain outside payment sources fall under the the collateral source rule. Recently, Judge Morgan in the Eastern District of Louisiana ruled that employer-based benefits for Longshoreman are not covered by the rule.

The premise of the collateral source rule is that “a tortfeasor may not benefit, and an injured plaintiff’s tort recovery may not be reduced, because of monies received by the plaintiff from sources independent of the tortfeasor’s procuration or contribution.” Bozeman v. State, No. 03-1016 (La. 7/2/04); 879 So.2d 692, 698. The rule was meant to ensure that a tortfeasor was not able to benefit from the victim’s foresight in purchasing insurance and other benefits. It is applied to a variety of factual circumstances, although typically applies to tort cases involving insurance benefits.

There are two primary considerations for determining whether the collateral source rule applies: “(1) whether application of the rule will further the major policy goal of tort deterrence; and (2) whether the victim, by having a collateral source available as a source of recovery, either paid for such benefit or suffered some diminution in his or her patrimony because of the availability of the benefit, such that no actual windfall or double recovery would result from application of the rule.” Lockett v. UV Ins. Risk Retention Grp., Inc., No. 15-166 (La. App. 5 Cir. 11/19/15); 180 So.3d 557, 570 (citing Bellard v. Am. Cent. Ins. Co., 980 So.2d 654, 669 (La. 2008)); see also Hoffman v. 21st Century N. Am. Ins. Co., No. 14-2279, (La. 10/2/15); 2015 WL 5776131, at *3.

In Bozeman, the Louisiana Supreme Court held that Medicaid recipients cannot collect Medicaid “write-off” amounts as damages because no consideration is provided for the Medicaid benefit. In Bellard, the Louisiana Supreme Court also noted: “The purpose of tort damages is to make the victim whole. This goal is thwarted, and the law is violated, when the victim is allowed to recover the same element of damages twice.” In finding that the collateral source rule did not apply to workers’ compensation benefits, the Louisiana Supreme Court stated: “unlike sick leave, annual leave, or employer-provided health insurance, workers’ compensation benefits cannot be considered a fringe benefit in the nature of deferred compensation that would otherwise be available to the plaintiff but for his injury. To the contrary, workers’ compensation benefits are required by law, and that same law prohibits an employer from assessing an employee, either directly or indirectly, with the cost of workers’ compensation insurance.”

More recently, the Louisiana Supreme Court again addressed the collateral source rule, this time with regard to its application to the discounted rate negotiated by the plaintiff’s attorney. See Hoffman v. 21st Century N. Am. Ins. Co., No. 14-2279, (La. 10/2/15); 2015 WL 5776131. In that case, the Court declined to extend the collateral source rule, holding that an attorney-negotiated medical discount, or “write-off,” did not qualify as a diminution of the plaintiff’s patrimony. The court explained that “allowing the plaintiff to recover an amount for which he has not paid, and for which he has no obligation to pay, is at cross purposes with the basic principles of tort recovery in our Civil Code.” The Court then held that because the plaintiff suffered no diminution of his patrimony, “the defendant in this case cannot be held responsible for any medical bills or serves the plaintiff did not actually incur and which the plaintiff need not repay.” Conversely, in Lockett, the collateral source rule applied when the plaintiff personally negotiated a reduction of her medical bills.

The U.S. Fifth Circuit’s jurisprudence is in accord with Louisiana law on this issue. In Miciotto v. U.S., 270 F. App’x 301, 303 (5th Cir. 2008) the Fifth Circuit explained that “for the [collateral source] rule to apply to ‘write-off’ amounts of medical expenses that were billed but not paid because a third-party negotiated a lesser amount, the plaintiff must give some consideration for the benefit obtained or otherwise suffer a diminution of patrimony.”

Judge Morgan reviewed each of these cases in formulating her well-reasoned opinion in Thibodaux v. Wellmate, 2016 WL 2983950 (E.D. La. May 23, 2016). In that case, the Plaintiff had incurred $626,529.68 in past medical expenses, though his Longshore carrier had only paid $244,702.87. The remainder of the bills were not paid because the carrier had negotiated lower amounts, as is typical. The defendant filed a Motion in Limine to address whether the collateral source rule applied to Longshore benefits.

In her ruling, Judge Morgan noted that the Plaintiff “gave no consideration for the compensation” that his employer provided under the LHWCA. “Indeed, compensation benefits, including for medical services and supplies, are required by law.” Thus, because there was no evidence of any diminution of patrimony, the collateral source was inapplicable. Judge Morgan also found that forcing the defendant to pay for the plaintiff’s past medical expenses actually paid still served the policy goal of tort deterrence.

Concept of construction and design. 3d render of blueprints and designer tools on the panorama of construction site.

By Jessica Engler

On May 3, 2016, the Louisiana Supreme Court held that the notice and recordation requirements of the Louisiana Public Works Act do not bar a suit on contract by a subcontractor against the general contractor’s surety. The Court’s opinion is nuanced, and dependent on the meaning and word choice of certain terms in the Louisiana Public Works Act, but has important impacts for public works contractors in Louisiana.

Pierce Foundations, Inc. v. JaRoy Construction, Inc. arose out of a public works construction project in Terrytown, Louisiana from the Jefferson Parish Council (“Jefferson Parish”).[1] JaRoy Construction, Inc. (“JaRoy” or “contractor”) was contracted to serve as the general contractor on a project to construct a gymnasium. In compliance with the Louisiana Public Works Act, JaRoy furnished a bond to Jefferson Parish with Ohio Casualty Insurance Company (“OCIC”) as the surety. Thereafter, JaRoy entered into a written subcontract with Pierce Foundations, Inc. (“Pierce”) to provide and install pile drivings. On November 3, 2008, Pierce completed the pile drivings. JaRoy failed to pay Pierce certain funds Pierce contended were due under the subcontract.

Notably, Pierce did not file a sworn statement of claim (lien) into the mortgage records. Instead, in July 2009, Pierce filed suit against JaRoy and, in July 2010, amended the petition to add OCIC as a defendant. OCIC filed several affirmative defenses against Pierce, including that Pierce failed to comply with the requirements of the Public Works Act before filing a claim against a surety.[2]

On October 17, 2011, when the project was substantially completed, Jefferson Parish filed a notice of acceptance of the work with the Jefferson Parish mortgage records. This recordation was made over a year after Pierce had added OCIC to the lawsuit.

Once the notice of acceptance was filed, OCIC moved for dismissal of Pierce’s suit on the grounds that Pierce was required to comply with the notice and acceptance requirements of the Public Works Act and, because it failed to do so within 45 days of acceptance of the project, Pierce could not recover from OCIC under Revised Statute 38:2247. OCIC argued that the exclusive rights of action against a surety are as set forth in Revised Statute 38:2247, and Pierce’s failure to comply with the requirements of the Act (including the notice and recordation requirements) bar recovery against OCIC. Pierce countered that the permissive “may” of the Revised Statute 38:2242(B) could not be converted into a mandatory requirement, holding that a claimant who does not file the sworn statement is “deprived of all rights against the surety”—including those rights in contract. Pierce also argued that it had filed suit over a year before Jefferson Parish filed the notice of acceptance, so OCIC could not reasonably claim it did not have notice of the claim. The Louisiana Supreme Court granted the writ application to determine whether, under the Louisiana Public Works Act,[3] the notice and recordation requirements of the Act are necessary conditions for a claimant’s right of action against a bond furnished pursuant to Louisiana Revised Statute 38:2241.

The Louisiana Public Works Act was enacted in order to give persons who do not have privity of contract with the general contractor or with the governing authority a claim against the general contractor and his surety for claims on public works projects.[4] To achieve this goal, the Act imposes a number of requirements. First, when a public entity enters into a contract in excess of $25,000 for the construction, alteration, or repair of any public works, the contractor is required to post a bond “in a sum of not less than fifty percent of the contract price for the payments by the contractor or subcontractor to claimants as defined in [Revised Statute] 38:2242.”[5] To assert a claim against that bond under Revised Statute 38:2242(B):

Any claimant may after the maturity of his claim and within forty-five days after the recordation of acceptance of the work by the governing authority or of notice of default of the contractor or subcontractor, file a sworn statement of the amount due to him with the governing authority having work done and record it in the office of the recorder of mortgages for the parish in which work is done.[6]

The Act also addresses a claimant’s direct right of action on the bond against the general contractor and/or surety and the claimant’s ability to seek a separate right of action outside the parameters of the Public Works Act in Revised Statute 38:2247, which reads in pertinent part:

Nothing in this Part shall be construed to deprive any claimant, as defined in this Part and who has complied with the notice and recordation requirements of R.S. 38:2242(B), of his right of action on the bond furnished pursuant to this Part, provided that said action must be brought against the surety or the contractor or both within one year from the registry of acceptance of the work or of notice of default of the contractor except that before any claimant having a direct contractual relationship with a subcontractor but no contractual relationship with the contractor shall have a right of action against the contractor or the surety on the bond furnished by the contractor, he shall in addition to the notice and recordation required in R.S. 38:2242(B) give written notice to said contractor within forty-five days from the recordation of acceptance by the owner of the work or notice by the owner of default, stating with substantial accuracy the amount claimed and the name of the part to whom the material was furnished or supplied and for whom the material was furnished or supplied or for whom the labor or service was done or performed.[7]

The Louisiana Fifth Circuit Court of Appeals had previously agreed with OCIC that Pierce’s failure to comply with the notice and recordation requirements of the Act bar recovery against OCIC. The Louisiana Supreme Court overruled the Fifth Circuit Court of Appeal’s holding, finding instead that where a subcontractor fails to comply with the notice and recordation requirements of Revised Statute 38:2242(B), the subcontractor loses his privilege, or lien, against the funds in the hands of the public authority. However, the failure to comply will not affect the rights of a subcontractor, who is in contractual privity with the general contractor, from proceeding directly against the contractor and its surety. Accordingly, while it a contractor’s ability to file a lien for non-payment will expire if it fails to fulfill the Public Works Act’s notice and recordation procedure, a contractor’s claim in contract is still preserved. The Court noted that the Fifth Circuit’s decision was flawed because it rendered the permissive “may” in Revised Statute 38:2242(B) as mandatory in Revised Statute 38:2247. The Court then deemed that the Public Works Act created an additional remedy to persons contributing to the construction, alteration, or repair of public works—a “privilege against the unexpended fund in the possession of the authorities with whom the original contract had been entered into.”[8] The Act is not intended to affect rights between parties proceeding directly in contract. The Act is also silent on the question of parties that are in contract and file suit well before the notice of acceptance or default is filed. Consequently, the Court held that Pierce’s lawsuit was timely filed against the general contractor and surety, and that the failure of the plaintiff to perfect its privilege against the public authority does not defeat its right of action against the surety.

This holding is important for construction subcontractors because it confirms their ability to still pursue claims against the surety and other persons in contractual privity with them on contract claims, even if the subcontractor failed to perfect its claim under the Louisiana Public Works Act. As stated by the Court, the remedies under the Public Works Act are an additional remedy, not an exclusive remedy. Last, the Court has indicated that the additional notice in the Public Works Act may be unnecessary when suit has been filed prior to issuance of the notice of acceptance for contract claims. However, notice and recordation is still required should the contractor wish to bring a claim under the Public Works Act. Consultation with an attorney is recommended for assessment of the claims that a contractor may have under both contract and the Public Works Act and guidance in taking the right steps to protect those claims.

[1] Case No. 2015-C-0785, Louisiana Supreme Court (May 3, 2016) (J. Crichton; J. Knoll, dissenting; J. Guidry, dissents and assigns reasons).

[2] JaRoy later filed for bankruptcy in December 2010, and the suit proceeded solely against OCIC.

[3] La. R.S. 38:2241, et seq.

[4] Wilkins v. Dev Con Builders, Inc., 561 So. 2d 66, 70 (1990).

[5] La. R.S. 38:2241(A)(2).

[6] La. R.S. 38:2242(B).

[7] La. R.S. 38:2247.

[8] Wilkins v. Dev Con Builders, Inc., 561 So. 2d 66, 70 (1990).

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By Gibbons Addison

On December 8, 2015 the Louisiana Supreme Court attempted to clarify the manifest error appellate review standard. Hayes Fund for the First United Methodist Church of Welsh, LLC v. Kerr McGee Rocky Mountain, LLC, 2014-2592 (La. 12/8/15); — So. 3d –, pitted plaintiff mineral royalty owners against mineral lessee and working interest owner defendants in a dispute over whether the defendants mismanaged and improperly operated two oil and gas wells, causing the plaintiffs lost royalties. The case centered on the testimony and opinions of the experts, with the plaintiffs presenting a single expert to prove that defendants’ actions in drilling and operating the two wells prematurely caused production of water, rather than oil and gas, and therefore resulted in millions of dollars in lost royalties. The defendants called nine witnesses, including five experts, to establish that the water production was not the result of unreasonable or imprudent practices. The district court, after hearing twenty-five days of testimony and receiving hundreds of pages of post-trial memoranda, ruled in favor of the defendants. The district court relied on defendants’ experts in concluding that the plaintiffs failed to prove the defendants’ actions caused diminished oil and gas production.

Whether the defendants’ actions caused the plaintiffs damages is a question of fact, only to be reversed in the event of manifest error. The Louisiana Third Circuit Court of Appeal found such error, reversed the district court’s judgment, and rendered a judgment of $13,437,895 for plaintiffs. The Supreme Court reversed the Third Circuit, and exhaustively explained in a sixty-eight page decision why the manifest error standard was not met. The main takeaways from the Supreme Court opinion are as follows: the manifest error standard precludes setting aside a trial court’s finding of fact unless the finding is clearly wrong in light of the record reviewed in its entirety. Accordingly, a reviewing court’s decision is not to be based on whether it merely would have found the facts differently. The question is whether the fact-finding conclusion was reasonable, not whether the trial judge or jury was right or wrong. When two permissible views exist, the fact-finder’s selection between them is not clearly wrong or manifestly erroneous.

The Supreme Court undertook an extensive review of the trial court record to determine whether it reasonably supported the district court’s factual findings and the determination that plaintiffs failed to prove their case. The record reasonably supported the district court’s conclusion, and the record did not show clear error in the district court’s choice of defendants’ experts as more credible than plaintiffs’ expert. The function of the court of appeal is to correct errors, not to pick one of many permissible views of the evidence. By making its choice of evidence, the Third Circuit wrongly applied the manifest error standard.

Through its Hayes Fund opinion, the Supreme Court invited the intermediate appellate courts and litigators to properly apply the manifest error standard. Satisfaction of Hayes Fund’s precepts will be crucial to success in appealing and defending trial court fact determinations going forward.

 

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By David K. Nelson*

Parties involved in the construction industry have long been familiar with mandatory arbitration as a dispute resolution procedure.

Originally arbitration was said to be more efficient and less expensive than litigation. Over time, experience has shown that arbitration is not necessarily more efficient or more timely.

Regardless of its potential benefits, one fact remains absolute – an arbitration ruling is almost always final and therefore not subject to appeal or review.  The Louisiana Supreme Court recently confirmed this fact in the case of Crescent Property Partners, LLC v. American Manufacturers Mutual Insurance Company, et al; 158 So.3d 798, 2014-C-0969 c/w 2014-C-0973 (La. 1/28/15).  In Crescent, the general contractor and its subcontractors filed motions for summary judgment with the arbitration panel alleging that plaintiff’s claims were preemptive because they were not filed within five years of the issuance of the Certificate of Occupancy.  The arbitration panel, relying upon the case of Ebinger v. Venus Construction Corporation, 10-2516 (La. 7/1/11), 65 So. 3d 1279, found that Ebinger dictated the retroactive application of the 2003 amendment to La. R.S. 9:2772 and ruled that plaintiff’s claims were untimely asserted outside the preemptive period.  The defendants filed suit in district court to confirm the arbitration ruling.  Plaintiffs opposed the filing and moved to vacate the award on the grounds that the arbitration panel ruling was not in accordance with law. The district court denied plaintiff’s application to vacate the award and confirmed the arbitration ruling the judgment of the district court.

Plaintiffs, thereafter, sought review in the Court of Appeal. The Court of Appeal reversed the trial court finding that the arbitration panel had incorrectly concluded the 2003 amendment reducing the time limitation from seven years to five years could be retroactively applied to preempt plaintiff’s claims. The general contractor and subcontractor thereafter requested the Louisiana Supreme Court to consider the issue.  The Supreme Court granted the writ “to determine whether the Court of Appeal ruling vacating the arbitration panel decision was proper.”

The Supreme Court recognized that the grounds for vacating an arbitration award are very narrow, and are limited to the exclusive grounds set forth in La. R.S. 9:4210, which provides:

In any of the following cases the court in and for the parish wherein the award was made shall issue an order vacating the award upon the application of any party to the arbitration.

  1. Where the award was procured by corruption fraud or undue means.
  2. Where there was evident partiality or corruption on the part of the arbitrators or any of them.
  3. Where the arbitrators were guilty of misconduct and refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced.
  4. Where the arbitrators exceeded their powers or so imperfectly executed them that a mutual, final and definitive award upon the subject matter submitted was not made.

The Supreme Court ruled that the Court of Appeal erred in vacating the arbitration panel’s award stating: “The upshot of both the Court of Appeal’s reasoning and the arguments of Crescent is that the panel just got it wrong on the law. We reiterate our long line of jurisprudence that an error of fact or law will not invalidate an otherwise fair and honest arbitration award.” Crescent at 808.

The takeaway from this ruling is that absent proof of dishonesty, bias, bad faith, willful misconduct, on the part of an arbitrator, the arbitration ruling will be final and not subject to appeal—even if the arbitrator gets it wrong on the law and/or facts.

* Mr. Nelson serves as the Chair of the Construction and Commercial Litigation practice group of the Louisiana Association of Defense Counsel.

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By J. Eric Lockridge

The Louisiana Supreme Court recently determined that there is no tort liability for negligent spoliation of evidence.  “Regardless of any alleged source of the duty, whether general or specific, public policy in our state precludes the existence of a duty to preserve evidence.  Thus, there is no tort.”  Reynolds v. Bordelon, No. 2014-2362, — So.3d — , 2015 WL 3972370 (La. 6/30/2015).

The lawsuit that led to the Reynolds decision was filed as a result of multi-vehicle accident that occurred in 2008.  Reynolds filed suit against the other driver and against Nissan North America, the manufacturer of his own car, based on the allegation that his airbag did not deploy as it should have.  The petition also alleged that his insurer and his insurer’s custodian for his vehicle were liable for damages relating to their failure to preserve his vehicle for inspection after he specifically put them on notice that the vehicle needed to be preserved.  The trial court eventually sustained the insurer and storage company’s exceptions of no cause of action, which means that the facts stated in the petition, accepted as true, did not entitle the plaintiff to any legal relief against them.

After reviewing the foundation of tort liability under Louisiana law, the history of negligence and intentional spoliation-based claims in Louisiana and other states, and considering many duty and policy-related factors, the Louisiana Supreme Court concluded that “Louisiana law does not recognize the duty to preserve evidence in the context of negligent spoliation.”  While the factual scenario presented in the Reynolds case dealt with third-party negligence, the logic could be applied to situations where a party to a litigation negligently allowed spoliation to occur, particularly if it occurred before that party was on notice of a potential claim.  This decision offers no comfort to litigation parties who allow or encourage spoliation.  The Court specifically noted that discovery sanctions and criminal sanctions are available for first-party spoliators, and that Louisiana recognizes an adverse presumption against litigants who had access to evidence and did not make it available or destroyed it.

For more information on spoliation and how it can affect Louisiana litigation, please click here.

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On May 5, 2015, in Kelly v. State Farm Fire & Cas. Co., 14-1921 (La. 5/5/15); 2015 WL 2082540, the Louisiana Supreme Court, in response to certified questions from the U.S. Fifth Circuit Court of Appeal, issued a unanimous decision reaffirming and clarifying the duties owed by insurers to their insureds.  The Kelly Court concluded that:

  1. An insured has a cause of action against its insurer for a generalized breach of the duty of good faith and fair dealing; and
  2. An insurer has a duty to make a reasonable effort to settle claims with an insured and claimant before the insurer receives a “firm settlement offer”; and
  3. An insured has a cause of action against its insurer where its insurer misrepresents or fails to disclose facts that are not related to the insurance policy’s coverage.

Kelly is a significant win for insureds, as insurers have typically argued that extra-contractual liability to their insureds was only for knowingly (a) misrepresenting insurance policy provisions; (b) failing  to timely pay a settlement; (c) denying coverage or attempting to settle a claim on the basis of an altered application; (d) misleading a claimant as to the applicable prescriptive period; (e) failing to timely pay the amount of any claim within sixty days after receipt of satisfactory proof of loss when such failure is arbitrary, capricious, or without probable cause; and (f) failing to pay claims when such failure is arbitrary, capricious, or without probable cause.

Kelly held that an insurer can be liable when it fails to reasonably explore settlement opportunities on behalf of its policyholder.  Moreover, under Kelly, insurers can no longer claim that they can misrepresent pertinent facts outside of their insurance policy’s language with impunity.  Thus, under a logical extension of Kelly, an insurer may also be liable to its insureds in multiple other instances, such as disregarding information in its own files so as to mischaracterize a claim; threatening to void or rescind an insurance policy without any reasonable basis therefor, or in retaliation for filing a claim; retaliating by increasing premiums; and compelling policyholders to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds.

Michael deBarros, Mark Mese, and Todd Rossi, of Kean Miller’s Insurance Coverage and Recovery Team represented United Policyholders, as amicus curiae in Kelly.  United Policyholder’s amicus brief can be found here.  Michael deBarros argued on behalf of United Policyholders.

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By Tyler Moore Kostal

As previously reported, the Louisiana Supreme Court heard oral argument in Oleszkowicz v. Exxon Mobil Oil Corporation, et al. and Chauvin v. Exxon Mobil Corporation, et al., regarding the dispute as to whether claims for punitive damages are barred by res judicata. The court recently issued opinions in these cases.

To recap, a jury awarded the plaintiff in the initial Oleszkowicz case compensatory damages for the increased risk of cancer but specifically denied punitive damages. The denial was based on the jury’s express finding that that the defendant had not engaged in wanton or reckless conduct. Soon after that suit, plaintiff actually developed cancer and filed suit again, claiming that his cancer was caused by the same exposure and conduct as the first suit. He sought compensatory damages and renewed his claim for punitive damages. Contrary to the verdict in the first suit, the jury awarded plaintiff $10 million in punitive damages. The defendant appealed, and the court of appeal reduced the punitive damages award but rejected defendant’s argument of res judicata. Instead, the court of appeal found that an exception to res judicata applied, as “the complexity of and convoluted circumstances” of the case constituted “exceptional circumstances.” However, the Louisiana Supreme Court concluded that res judicata bars any re-litigation of the punitive damages claim and that no “exceptional circumstances” exist to justify an exception to res judicata. The court found it undeniable that the plaintiff’s right to bring a future cancer claim in his initial case did not change the fact that he fully prosecuted his punitive damages claim, and the jury, in deciding whether to award such damages, found that the defendant had not engaged in wanton or reckless conduct. While the court noted that the facts are unusual, the case does not involve a complex procedural situation or an unanticipated quirk in the system to which an exception to the general rules of res judicata applies. Because it found that the plaintiff’s punitive damages claim must be dismissed, the court reversed the judgment of the court of appeal.

In Chauvin, the defendant settled the plaintiff’s fear/increased risk claim and received a release from all future claims, except for future cancers. Plaintiff later developed cancer and filed another lawsuit, including a claim for punitive damages. The defendant sought dismissal of all claims barred by plaintiff’s prior settlement. The trial court agreed and granted defendant’s exception of res judicata as to all claims, including punitive damages, other than damages for future cancer. Plaintiff appealed, and the court of appeal reversed the trial court’s judgment as it pertained to punitive damages, finding an exception to res judicata. The Louisiana Supreme Court held that punitive damages relate to conduct and are separate and distinct from compensatory damages related to a specific injury. Because the plaintiff released all punitive damages arising out of the defendant’s alleged misconduct resulting in his exposure to NORM, res judicata bars his subsequent claim for punitive damages and no exception to res judicata applies. The court reversed the decision of the court of appeal and reinstated the trial court’s judgment. The plaintiff sought rehearing from the Louisiana Supreme Court. The court denied rehearing on February 6, 2015.

In sum, the Louisiana Supreme Court held that a jury’s prior finding of no punitive damages, or a prior release of punitive damages, prevents the same plaintiff from later pursuing punitive damages against the same defendant in a subsequent case for the same exposure.

 

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By Tyler Moore Kostal

The Louisiana Supreme Court recently heard oral argument in two cases, Oleszkowicz v. Exxon Mobil Oil Corporation, et al. and Chauvin v. Exxon Mobil Corporation, et al., both involving a plaintiff’s damages for potential exposure to naturally occurring radioactive material (NORM). This is the second lawsuit for both plaintiffs against the same defendant, for the same exposure to NORM as in the first suit. Both plaintiffs initially sued (in other matters) for fear/increased risk of cancer and then later sued for developing cancer due to the same potential NORM exposure. The fact that the plaintiffs can bring separate lawsuits for the same exposure is not in dispute. What is in dispute is whether the plaintiffs are entitled to punitive damages for each claim.

In the initial Oleszkowicz case, a jury awarded plaintiff compensatory damages for the increased risk of cancer but specifically denied punitive damages. The denial was based on the jury’s express finding that that the defendant had not engaged in wanton or reckless conduct. Soon after that suit, plaintiff actually developed cancer and filed suit again, claiming that his cancer was caused by the same exposure and conduct as the first suit. He sought compensatory damages and renewed his claim for punitive damages. Contrary to the verdict in the first suit, the jury awarded plaintiff $10 million in punitive damages. The defendant appealed. The court of appeal reduced the punitive damages award but failed to eliminate it entirely, rejecting defendant’s argument of res judicata. Instead, the court of appeal found that “the complexity of and convoluted circumstances” of the case constituted “exceptional circumstances,” thereby relieving plaintiff of the preclusive effect of the final judgment in his first suit. The Louisiana Supreme Court granted defendant’s writ of review, limiting the argument to the issue of res judicata.

The Chauvin case involves essentially the same issue except that, rather than a jury verdict in the first instance, the parties entered into a settlement agreement. The defendant settled plaintiff’s fear/increased risk claim and received a release from all future claims, except for future cancers. Plaintiff later developed cancer and filed another lawsuit, including a claim for punitive damages. The defendant sought dismissal of all claims barred by plaintiff’s prior settlement. The trial court agreed and granted defendant’s exception of res judicata as to all claims, including punitive damages, other than damages for future cancer. Plaintiff appealed, and the court of appeal reversed the trial court’s judgment as it pertained to punitive damages, finding an exception to res judicata. The Louisiana Supreme Court granted defendant’s supervisory writ.

Oral argument was heard in both cases on Monday, October 13, 2014.