Arizpe v. Principal Life Insurance Co.

          MEMORANDUM OPINION AND ORDER

          A. JOE FISH, SENIOR UNITED STATES DISTRICT JUDGE.

         Before the court are the counterclaims of the defendant Principal Life Insurance Company (“Principal”). See Defendant's Answer and Counterclaim to Plaintiffs' Second Amended Complaint (“Answer and Counterclaim”) (docket entry 31) at 12. For the reasons stated below, the court concludes that Principal is not entitled to relief on its counterclaims and thus they are DENIED.

         I. BACKGROUND

         A full statement of the factual and procedural background of this case may be found in the court's previous memorandum opinion and order granting Principal's motion for summary judgment. See Memorandum Opinion and Order (docket entry 68). Although the court granted summary judgment in Principal's favor and ordered that the plaintiffs take nothing on their claims, see Judgment (docket entry 69), Principal did not seek summary judgment on its counterclaims, which therefore remained pending in this case. See Motion for Summary Judgment (docket entry 26) at 2, n. 3. Thus, to expedite the resolution of Principal's counterclaims, on July 25, 2019, the court ordered a status conference regarding Principal's counterclaims. See Order Setting Status Conference (docket entry 70). Five days later, on July 30, 2019, Principal filed its motion to establish procedures for resolving its counterclaims. See Motion to Establish Procedures for Resolution of Counterclaims (“Motion to Establish Procedures”) (docket entry 71). The plaintiffs filed their response to this motion on August 5, 2019. See Response to Motion to Establish Procedures (docket entry 73). On August 7, 2019, Principal filed its reply. See Reply to Motion to Establish Procedures (docket entry 74).

         Also on August 7, 2019, the court presided over the previously ordered status conference regarding Principal's counterclaims. See Electronic Minute Entry for Status Conference (docket entry 76). As a result of the status conference, on August 8, 2019, the court ordered an evidentiary hearing regarding Principal's counterclaims to. See Order Setting Evidentiary Hearing (docket entry 75). On August 12, 2019, the parties appeared before the court for an evidentiary hearing. See Electronic Minute Entry for Evidentiary Hearing (docket entry 77).

         At the conclusion of the hearing, the court gave the parties the opportunity to submit briefs regarding Principal's counterclaims. See Electronic Transcript of Evidentiary Hearing Proceedings (“Transcript”) (docket entry 80) at 119-21. On August 16, 2019, Principal submitted its brief regarding the plaintiffs' liability on the defendant's counterclaims. See Trial Brief (docket entry 81). On August 21, 2019, the plaintiffs submitted their response brief. See Response to Trial Brief (docket entry 82). On August 23, 2019, Principal filed its reply brief. See Brief/Memorandum in Support of Trial Brief (docket entry 83). Because the parties have concluded their briefing as to the question of the plaintiffs' liability on Principal's counterclaims, the court concludes that this question is now ripe for decision.

         II. ANALYSIS

         A. Legal Standard for Principal's Counterclaims

         In its answer, Principal raises counterclaims against the plaintiffs for attorney's fees and court costs under the Texas Insurance Code and the Deceptive Trade Practices Act (“DTPA”). See Answer and Counterclaim at 12. In particular, Principal contends that pursuant to section 541.153 of the Texas Insurance Code, Principal is entitled to recover its reasonable and necessary attorney's fees and court costs since the plaintiffs' claims under the Texas Insurance Code were groundless and brought in bad faith or for the purpose of harassment. Id. Moreover, Principal avers that under section 17.50(c) of the DTPA, it is entitled to recover its reasonable and necessary attorney's fees and court costs because the plaintiffs' DTPA claims were groundless in fact or law, or brought in bad faith, or brought for the purpose of harassment. Id.

         Texas Insurance Code § 541.153 provides that “[a] court shall award to the defendant court costs and reasonable and necessary attorney's fees if the court finds that an action under this subchapter is groundless and brought in bad faith or brought for the purpose of harassment.” See Texas Insurance Code § 541.153 (emphasis added). Section 17.50(c) of the DTPA provides that “[o]n a finding by the court that an action under this section was groundless in fact or law or brought in bad faith, or brought for the purpose of harassment, the court shall award to the defendant reasonable and necessary attorneys' fees and court costs.” See Texas Business & Commerce Code § 17.50(c) (emphasis added).

         Notably, while both statutes feature the same three elements, their requirements differ. While under Texas Insurance Code § 541.153 a defendant, to be entitled to attorney's fees and court costs, must establish that the plaintiff's claims were (1) groundless and brought in bad faith, or (2) groundless and brought for the purpose of harassment, under DTPA § 17.50(c) a defendant need only show that the plaintiff's DTPA claims were either groundless, or brought in bad faith, or brought for the purpose of harassment. Compare Texas Insurance Code § 541.153 with Texas Business & Commerce Code § 17.50(c); see also McClung v. Wal-Mart, 866 F.Supp. 306, 310 (N.D. Tex. 1994) (Belew, J.) (analyzing previous version of § 17.50(c) of the DTPA which was worded similarly to the current § 541.153 of the Texas Insurance Code and determining that a court may award attorney's fees “if it finds that the plaintiff's suit is groundless and brought in bad faith, or it finds the suit was brought to harass the defendant.”); Schott v. Leissner, 659 S.W.2d 752, 754 (Tex. App. - Corpus Christi 1983) writ ref'd n.r.e., 668 S.W.2d 686 (Tex. 1984).

         Despite the slight difference between DTPA § 17.50(c) and Texas Insurance Code § 541.153, Texas courts and federal courts interpreting these two statutory provisions have determined that “whether an action is groundless, brought in bad faith, or brought for the purpose of harassment is a question to be determined by the trial court.” Knoderer v. State Farm Lloyds, 515 S.W.3d 21, 45 (Tex. App. - Texarkana 2017, pet. denied); Donwerth v. Preston II Chrysler-Dodge, Inc., 775 S.W.2d 634, 637 (Tex. 1989) (“The court, not the factfinder, must determine the existence of groundlessness, bad faith and harassment under section 17.50(c).”); Alcan Aluminum Corp. v. BASF Corp., 133 F.Supp.2d 482, 506 (N.D. Tex. 2001) (Lindsay, J.) (“A claim for attorneys' fees . . . ‘requires the court to determine the existence of groundlessness, bad faith, and harassment. . . .'”) (quoting McDuffie v. Blassingame, 883 S.W.2d 329, 335 (Tex. App. - Amarillo 1994, writ denied)).

         Additionally, both Texas courts and federal courts interpreting these statutory provisions have determined that “[a] groundless action is defined as one having no basis in law or fact and not warranted by a good faith contention for modification, reversal, or extension of existing law.” Alcan Aluminium Corp., 133 F.Supp.2d at 506 (quoting McDuffie, 833 S.W.2d at 335); see also Donwerth, 775 S.W.2d at 637. In particular, courts have established that “[t]he standard for determining whether an action is groundless is ‘whether the totality of the tendered evidence demonstrates an arguable basis in fact and law for the consumer's claim.'” In re Frazin, No. 02-32351-BJH-13, 2017 WL 7050632, Adversary No. 08-3021-BJH, at *26 (Bankr. N.D. Tex. Dec. 22, 2017) (Houser, Chief Bankruptcy J.) (quoting Kang v. Keen, 2005 WL 1704840, at *3 (Tex. App. - Houston [1st Dist.] July 21, 2005)). Courts have also explained that “[a] case is not groundless ‘simply because a plaintiff failed to convince a jury of the truth of her allegations.'” Id. (quoting Rutherford v. Riatta Cadillac Co., 809 S.W.2d 535, 538 (Tex. App. - San Antonio 1991)).

         Similarly, Texas courts and federal courts have explained that “[t]o establish bad faith, it must be shown that the claim was motivated by a malicious or discriminatory purpose.” Alcan Aluminum Corp., 133 F.Supp.2d at 506 (quoting McDuffie, 883 S.W.2d at 335). “[M]alice may be inferred from the proof that the consumer did not have a good faith belief that there was a basis for his claim.” Knebel v. Port Enterprises, Inc., 760 S.W.2d 829, 832 (Tex. App. - Corpus Christi 1988, writ denied). But, ...