Palma v. Verex Assur., Inc., 95-20034

• Decision Date: 16 April 1996
• Docket Number: No. 95-20034,95-20034
• Citation: 79 F.3d 1453
• Parties: Nancy Abshire PALMA, Plaintiff-Appellant, v. VEREX ASSURANCE, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1453

79 F.3d 1453

Nancy Abshire PALMA, Plaintiff-Appellant, v. VEREX ASSURANCE, INC., Defendant-Appellee.

No. 95-20034.

United States Court of Appeals, Fifth Circuit.

April 16, 1996.

Jerry L. Bryan, II, Houston, TX, Thomas Mason Whiteside, Houston, TX, for plaintiff-appellant.

William Louis Kirkman, Bourland, Kirkman and Seidler, Fort Worth, TX, Jacalyn D. Scott, Houston, TX, for defendant-appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before DAVIS and PARKER, Circuit Judges, and BUNTON ¹, District Judge.

ROBERT M. PARKER, Circuit Judge:

I. FACTS

On November 28, 1983, plaintiff-appellant Nancy Palma ("Palma") borrowed $121,300 from City Federal Savings & Loan ("City Federal") to purchase a condominium. As a condition of the loan, Palma was required to purchase mortgage insurance to protect City Federal from a loss in the event she defaulted on the loan. The mortgage insurance was purchased by City Federal from defendant-appellee Verex Assurance, Inc. ("Verex"). The premiums were paid with Palma's money, which had been placed in an escrow account.

Palma lived in the condominium until November of 1986, when she moved out of the property and used it as rental property. In 1988, Palma defaulted on her obligation to repay the note. After the default City Federal foreclosed on the condominium. On May 3, 1988, the property was sold at public auction for $30,800 to City Federal, the mortgage holder. After the foreclosure there remained a principal balance of $115,825.14 due and owing to City Federal under the terms of the note. On June 23, 1989, Verex paid City Federal $51,122.47 pursuant to the mortgage insurance policy and received an assignment of the entire deficiency due on Palma's note.

On April 1, 1991, Verex, as subsequent assignee of City Federal, demanded that Palma repay $117,521.98 as the "deficiency balance due." This amount included accrued interest and costs of foreclosure, as well as a credit for the proceeds received from the foreclosure of the condominium. The amount demanded did not include a credit for the proceeds Verex paid to City Federal under the mortgage guarantee insurance policy.

We have had difficulty in sorting out the record concerning the economic facts of the claims in this litigation and have been unable to resolve some apparent inconsistencies. However, we believe we can at least get in the ballpark with a summary that approaches accuracy.

Palma paid $121,300 for the house. She made mortgage payments and payments for the mortgage insurance for approximately four years. However, after four years of mortgage payments and a $30,800 credit to her balance from the foreclosure proceeds, she still owed $115,825.14. The difference apparently was attributable to charges assessed against Palma by City Federal's attorneys. To state it another way, Palma was assessed foreclosure costs that in effect wiped out the $30,800 credit from the foreclosure proceeds. However, the story is far from over. By the time the court granted Verex's motion for summary judgment and ruled against Palma on her wrongful foreclosure claim she was assessed additional attorneys' fees for Verex's lawyers in the astonishing amount of $225,750. This additional amount raised the judgment against Palma to a total of $419,898.12.

II. PROCEEDINGS BELOW

Palma filed suit in state district court alleging that Verex's pursuit of the deficiency was in violation of the terms of the mortgage insurance policy. Based upon diversity jurisdiction Verex removed the suit to the Southern District of Texas and filed a counterclaim for the deficiency and attorneys' fees.

Palma then sought to have her claims against Verex certified as a class action. The case was referred to a magistrate judge for pretrial management. The magistrate initially recommended that some of Palma's claims be certified in a class action but set aside that recommendation after reconsidering Palma's standing. The magistrate found Palma was not a third-party beneficiary of the insurance contract and recommended that class certification be denied as to any and all claims based upon an assertion of third-party beneficiary status. The magistrate then recommended that Verex's motion for summary judgment be granted and recommended the dismissal of all of Palma's claims except those alleging debt collection violations, violations of the Deceptive Trade Practices Act ("DTPA"), and wrongful foreclosure. The district court adopted the magistrate's recommendations thereby denying class certification of the dismissed claims and granting Verex's motion for summary judgment of all claims, except wrongful foreclosure.

The case proceeded to trial on Palma's wrongful foreclosure claim. After a one day bench trial the district court issued its findings of facts and conclusions of law and entered final judgment in favor of Verex. The judgment awarded Verex $419,898.12. Palma appealed.

III. ANALYSIS

A. STANDING & ART. 21.21

The district court granted Verex's motion for summary judgment as to Palma's claims based upon alleged violations of the Texas Insurance Code after concluding that Palma did not have standing to assert those claims under art. 21.21(16) of the Texas Insurance Code. ² We review the district court's grant of summary judgment de novo. Thomas v. Price, 975 F.2d 231, 235 (5th Cir.1992).

The district court's jurisdiction in this case was based on diversity of citizenship and it correctly held that it was bound to apply the substantive law of the State of Texas. Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938). We begin our review of the district court's decision by examining the applicable law.

Art. 21.21(16) of the Texas Insurance Code provides:

Any person who has sustained actual damages as a result of another's engaging in an act or practice declared in § 4 of this Article ... [to be] unfair or deceptive acts ... in the business of insurance or in any practice defined by § 17.46 of the Business and Commerce Code ... as an unlawful trade practice may maintain an action against the person ... engaging in such acts. (emphasis added).

Although "any person" would appear to be sufficiently broad to permit Palma to have standing, it appears to have been narrowly construed. This court, interpreting the laws of Texas, has held that "absent privity of contract or some sort of reliance by the person bringing the claim on the words or deeds of the insurer, a suit will not lie under art. 21.21." Warfield v. Fidelity and Deposit Co., 904 F.2d 322, 327 (5th Cir.1990). In reaching this holding the court analyzed two decisions from the Texas courts of appeal that had addressed standing under art. 21.21. The first case was Chaffin v. Transamerica Ins. Co., 731 S.W.2d 728, 731 (Tex.App.--Houston [14th Dist.] 1987, writ ref'd n.r.e.). The court, discussing Chaffin, stated that the Texas court "held that the term 'person' in art. 21.21 means either an insured or a beneficiary of the policy." Warfield, 904 F.2d at 326. The second case was Hermann Hosp. v. National Standard Ins. Co., 776 S.W.2d 249, 252 (Tex.App.--Houston [1st Dist.] 1989, writ denied). The court noted that Hermann broadened standing under art. 21.21 to include persons who had relied on representations of the insured. Warfield, 904 F.2d at 327. Despite expressly recognizing that Chaffin extended standing to beneficiaries of insurance policies, Warfield limited standing to those with privity of contract or those who had relied on the words or deeds of the insurer. This analysis was later recognized as "the new test" for determining standing under art. 21.21. In Re Burzynski, 989 F.2d 733, 741 (5th Cir.1993).

The Texas Supreme Court recently addressed standing under art. 21.21 in the context of a claim asserted under an automobile liability policy by a third-party claimant in a direct action against an insurer arising out of an accident with the insured. In that type of action, the court held that third-party claimants are not entitled to standing under art. 21.21. Allstate Ins. Co. v. Watson, 876 S.W.2d 145, 150 (Tex.1994). The court found that the following factors weighed against granting standing to the third-party claimant:

A third-party claimant has no contract with the insurer or the insured, has not paid any premiums, has no legal relationship to the insurer or special relationship of trust with the insurer, and in short, has no basis upon which to expect or demand the benefit of the extra-contractual obligations imposed on insurers under art. 21.21 with regard to their insureds.

Id. at 149. The court then noted that although it had previously extended standing to third-party beneficiaries of automobile insurance policies, it refused to extend standing to third-party claimants of those policies under art. 21.21. Id. at 150 (citing Dairyland County Mut. Ins. Co. v. Childress, 650 S.W.2d 770 (Tex.1983)). ³

Due to the unique nature of the mortgage insurance policy in the instant case, Palma unlike the third-party claimant in Watson, satisfies most of the the factors discussed by the Texas Supreme Court that weighed against standing in that case. Palma had a contract with the insured, City Federal, in the form of a mortgage. Palma paid the premiums for the mortgage insurance. Additionally, Palma is designated by name in the certificate of insurance issued by Verex to City Federal. The considerations that weighed against standing in Watson weigh in favor of granting Palma standing in the instant case. However, because the court did not expressly state that these factors were to be used when deciding whether a party was entitled to standing under art. 21.21 we must determine what the Texas Supreme Court would do if it were presented with the issue before us.

"When presented with an unsettled point of state law, our role under Erie is to determine how the [Texas] Supreme Court would resolve the issue if presented with...