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Siwell, Inc. v. Leverage Financial LLC

United States District Court, N.D. Texas, Lubbock Division

April 18, 2017




         Following a jury trial and verdict in its favor, plaintiff Siwell, Inc. d/b/a Capital Mortgage Services (“Siwell”) moves for attorney's fees and costs under Tex. Civ. Prac. & Rem. Code Ann. § 38.001 (West 2017). Defendant Leverage Financial, LLC (“Leverage”) moves under Fed.R.Civ.P. 50(b) for judgment as a matter of law, or, alternatively, for a new trial, contending that Siwell submitted insufficient evidence of damages. For the reasons that follow, the court denies both motions.


         Siwell purchased a home mortgage loan (“Bozeman Loan”) from Leverage, which it later sold to the Federal National Mortgage Association (“Fannie Mae”). Fannie Mae determined that the Bozeman Loan had been materially misrepresented because Bozeman did not live in the property as her primary residence. Fannie Mae first demanded that Siwell repurchase the loan, but later required that Siwell make Fannie Mae whole by compensating Fannie Mae for the difference between the purchase price and the ultimate sale price.

         Siwell sued Leverage for breach of contract.[1] At trial, the jury found that the purchase agreement between Siwell and Leverage required that Leverage repurchase the loan if the loan did not meet the requirements for Fannie Mae delivery. Leverage did not repurchase the Bozeman Loan, and the jury found that Siwell suffered damages as a result. Following the verdict, Leverage moved for judgment as a matter of law, which the court denied. Leverage now renews its motion, contending that Siwell failed to submit sufficient evidence to prove that it incurred damages of $87, 025.14. Siwell moves for an award of attorney's fees. Both motions are opposed.



         In a breach of contract action under Texas law, “[a] person may recover reasonable attorney's fees from an individual or corporation, in addition to the amount of a valid claim and costs[.]” Tex. Civ. Prac. & Rem. Code Ann. § 38.001.[2] “Generally, the party seeking to recover attorney's fees carries the burden of proof.” Smith v. Patrick W.Y. Tam Trust, 296 S.W.3d 545, 547 (Tex. 2009). Section 38.001(8) applies to a valid claim for “an oral or written contract.” Siwell has recovered from Leverage on a valid claim for a written contract. The question presented is whether Leverage, a limited liability company (“LLC”), is “an individual or corporation” within the meaning of § 38.001.


         As a threshold matter, Siwell contends that the court should not consider whether Texas law allows recovery of fees against an LLC because Leverage failed to raise this argument until its response to Siwell's motion for attorney's fees. In Siwell's amended reply, it contends that Leverage is raising an affirmative defense because it is asserting “an independent reason (unrelated to the merits) why the plaintiff should not recover.” P. Am. Reply ¶ 15 (citing MAN Engines & Components, Inc. v. Shows, 434 S.W.3d 132, 137 (Tex. 2014)). And Siwell concludes that, because affirmative defenses are waived if not pleaded, see Rule 8(c), the court cannot consider Leverage's argument. The court disagrees.

         Because Siwell bears the burden of proving that it is entitled to attorney's fees, it must establish each element of the statute under which it seeks fees. See Smith, 296 S.W.3d at 547. If Siwell does not prove that Leverage is an entity that, by statute, can be liable for such fees, Siwell is not entitled to such fees as a matter of law. This is not an affirmative defense. See Seminole Pipeline Co. v. Broad Leaf Partners, Inc., 979 S.W.2d 730, 759 (Tex. App. 1998, no pet.) (holding as to statutory cap on damages: “If an intentional tort and/or malice is not pled and proven by the plaintiff, the cap automatically applies. Thus, we do not view the statutory cap as an affirmative defense.”). Leverage therefore is not asserting an affirmative defense that is waived if not pleaded or otherwise asserted.[3] Rather, Leverage is relying on Siwell's failure to establish an essential element of its attorney's fees claim: that Siwell is seeking to recover from an individual or corporation. “Because [Leverage] has nothing to prove, [it] had nothing to plead” or raise before Siwell's motion for attorney's fees, and its argument is properly before the court. Id.


         Where, as here, the court is exercising diversity jurisdiction, it is Erie-bound[4] to apply the law as would a Texas court. See, e.g., Allstate Ins. Co. v. Shelby, 672 F.Supp. 956, 958 (N.D. Tex. 1987) (Fitzwater, J.). The Supreme Court of Texas has not yet addressed whether § 38.001 permits the recovery of attorney's fees from an LLC. When there is no binding decision of the Supreme Court of Texas on the question, this court must make an “Erie-guess, ” i.e., a prediction of how that court would resolve the issue if presented with the same case. See, e.g., Chaney v. Dreyfus Serv. Corp., 595 F.3d 219, 229 (5th Cir. 2010) (citing Six Flags, Inc. v. Westchester Surplus Lines Ins. Co., 565 F.3d 948, 954 (5th Cir. 2009)). “While decisions of intermediate state appellate courts provide guidance, they are not controlling. If a state's highest court has not ruled on the issue in question, a federal court must determine, to the best of its ability, what the highest court of the state would decide.” United Teacher Assocs. Ins. Co. v. Union Labor Life Ins. Co., 414 F.3d 558, 565-66 (5th Cir. 2005) (citations omitted).

         This court recently considered this question in Hoffman v. L &M Arts, 2015 WL 1000838 (N.D. Tex. Mar. 6, 2015) (Fitzwater, J.), aff'd in part, rev'd in part on other grounds, 838 F.3d 568 (5th Cir. 2016).[5] It concluded that,

based on the plain meaning of the terms “individual” and “corporation, ” the history of § 38.001 and its predecessor, Article 2226, and the construction given to § 38.001 by Texas courts of appeals and federal courts (including judges of this court), the court makes an Erie prediction that the Supreme Court of Texas would hold that an LLC is neither an “individual” nor a “corporation” within the meaning of § 38.001, and that a party with a valid claim cannot recover attorney's fees from an LLC under § 38.001.

Id. at *10. On appeal, the Fifth Circuit declined to consider this court's interpretation of § 38.001 because the panel had held that there was no compensable breach of contract. But the panel “note[d] that an intervening decision by the Court of Appeals of Texas support[ed] [this] court's Erie guess that an LLC like [the defendant] is not ‘an individual or corporation' under section 38.001(8).” Hoffman v. L &M Arts, 838 F.3d 568, 583 n. 14 (5th Cir. 2016) (citing Choice! Power, L.P. v. Feeley, 501 S.W.3d 199, 214 (Tex. App. 2016, no pet.)). And at least one Texas court of appeals has cited Hoffman approvingly, see Alta Mesa Holdings, L.P. v. Ives, 488 S.W.3d 438, 455 (Tex. App. 2016, pet. ...

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