Blown Back to State Court

Lawyers entertained by tortured fights over the meaning of words need look no further than pleadings in the average insurance coverage dispute. That’s because counsel seem to deconstruct every syllable in an insurance policy, then put them all back together again, in the name of client advocacy. Dennis Horn; Mary Horn v. State Farm Lloyds, a recent decision from the 5th U.S. Circuit Court of Appeals, is a good example of that kind of fight — except the parties are fighting over the meaning of words in an agreement they had amongst themselves. The background, according to the 5th Circuit’s Dec. 21 decision in Horn, is as follows. After Hurricane Ike, hundreds of homeowners, many of them represented by Beaumont’s the Mostyn Law Firm (which the court refers to as the firm), filed claims against State Farm Lloyds (which the court refers to as State Farm) in Texas state court. In many of those cases, homeowners sued individual insurance adjusters in their personal capacities. State Farm removed several of those cases to federal court on diversity grounds. In 2009, the firm and State Farm entered into an agreement whereby the firm promised to abandon its clients’ claims against individual adjusters and forgo suing them in the future in exchange for State Farm’s promise not to remove “any Hurricane Ike cases” to federal court. A year later, the opinion continues, Dennis and Mary Horn, who were represented by the firm, filed an insurance-coverage suit against State Farm in a Galveston state court. Eleven months later, the Horns restyled their case as a class action by amending their complaint to add a putative class of more than 100,000 Texas residents and property owners. State Farm then removed the case to a U.S. District Court for the Southern District of Texas on diversity grounds. The Horns moved to remand to state court on the basis of the agreement. U.S. Magistrate Judge John Froeshner wrote an opinion, later adopted by U.S. District Judge Kenneth Hoyt, which concluded that the phrase “any Hurricane Ike cases” unambiguously encompassed a class. State Farm appealed to the 5th Circuit. In an opinion sprinkled with nearly as many references to dictionaries as to case law, the 5th Circuit concluded that it should affirm the trial court’s decision sending the case back to state court. “The district court concluded, and we agree, that the negotiated contract, apparently drafted by State Farm, covers all past, present, and future lawsuits filed by the Firm against State Farm on behalf of homeowners, as individuals or part of a class, whose properties were damaged by Hurricane Ike,” wrote Judge Stephen Higginson, joined by Judges E. Grady Jolly and Ed Prado. Mitchell A. Toups, a partner in Beaumont’s Weller, Green, Toups & Terrell who represents the Horns on appeal, did not return a call seeking comment. Phil Supple, a spokesman for State Farm, says: “We don’t have any plans to appeal the 5th Circuit decision. And we look forward to vindicating our rights in the Texas state courts.”

IOLTA Insurance Cap Looms

Starting on Jan. 1, lawyers need to take extra steps to protect clients’ money in their Interest on Lawyers Trust Accounts (IOLTA). Lawyers holding more than $250,000 for a client in such an account need to research the bank to ensure it won’t fail or consider depositing the cash in multiple IOLTA accounts at separate banks. For the past two years, the Federal Deposit Insurance Corp. (FDIC) has insured an unlimited amount of money in IOLTA accounts, but starting in the New Year, the FDIC will only insure up to $250,000 per client per bank, says Betty Balli Torres, executive director of the Texas Access to Justice Foundation, the administrator of the IOLTA program in Texas. “You have a fiduciary duty to take care of the client’s money. Now, you have to look at — if you have an excess of that 250 — what it is you are going to do to protect the client’s money?” says Balli Torres, who served as president of the National Association of IOLTA Programs in 2011 and helped lobby Congress for the unlimited FDIC coverage. She explains that the Dodd-Frank Wall Street Reform and Consumer Protection Act included a provision that allowed unlimited FDIC protection for IOLTA accounts, but the provision expires Dec. 31. The accounts are now subject to the same $250,000 insurance cap as other types of bank accounts. For example, if a lawyer held $300,000 in an IOLTA account for a client and the bank failed, the federal government would only insure up to the $250,000 cap, and the client would lose $50,000. “What lawyers will do is make sure the bank is in good position to minimize any damage,” she says. If the lawyer deposits $300,000, he may not be concerned if he knows it’s a good bank and he knows he’ll withdraw the money shortly thereafter, she says. Another option is to keep multiple IOLTA accounts at separate banks: Deposit $249,000 in one account, and deposit the rest at another bank, says Balli Torres. “For many firms, they are already set up that way in the past,” she says. She notes that, before passage of the Dodd-Frank Act, the FDIC only insured $100,000, but the act increased the cap to $250,000. “More money is protected is the bottom line,” Balli Torres says. “We had hoped a bill would pass that would keep it unlimited, but it doesn’t look like it’s going to happen. So, now, we are in a position we want to educate lawyers to let them know this is happening.”