Texas Law of Tortious Interference with Contract — What Is Good Faith? — Limits on Inherent Power Sanctions — Not Remedy for Underlying Misconduct or Conduct before Other Tribunals — Award Must Be ≤ Harm Caused

Symetra Life Ins. Co. v. Nat’l Ass’n of Settlement Purchasers, 2011 U.S. Dist. LEXIS 116966 (S.D. Tex. Oct. 11, 2011):

This dispute involves two participants in the structured-settlement payment industry and a trade association representing companies that purchase structured settlements. Symetra Life Insurance Co. and Symetra Assigned Benefits Co. (together, "Symetra"), sued Rapid Settlements, Ltd., seeking, among other relief, an injunction barring Rapid from using arbitration to obtain rights to payments from structured-settlement funds administered by Symetra. The National Association of Settlement Purchasers ("NASP") intervened and sought a similar injunction. This court permanently enjoined Rapid from using arbitration to effect a "transfer," as defined by 47 states structured-settlement protection acts, without obtaining the approval required by those Acts.*** The Fifth Circuit affirmed the injunction. *** NASP and Symetra now seek additional relief. ***

2. Rapid's and Symetra's Claims for Tortious Interference with Contractual Relations

Rapid and Symetra both assert claims for tortious interference with existing contractual relations. The parties address this claim under Texas law. To prove tortious interference with contract, "a plaintiff must prove: (1) the existence of a contract subject to interference; (2) a willful and intentional act of interference; (3) the act was a proximate cause of the plaintiff's damages; and (4) actual damage or loss." Tex. Beef Cattle Co., 921 S.W.2d at 210 (citing Holloway v. Skinner, 898 S.W.2d 793, 795-96 (Tex. 1995)); see also Nova Consulting Grp. v. Eng'g Consulting Servs. Ltd., 290 F. App'x 727, 737 (5th Cir. 2008); Butnaru v. Ford Motor Co., 84 S.W.3d 198, 207 (Tex. 2002). Justification is a defense to tortious interference with contractual relations. Tex. Beef Cattle Co., 921 S.W.2d at 210; see also Friends for Am. Free Enter. Ass'n v. Wal-Mart Stores, Inc., 284 F.3d 575, 577 (5th Cir. 2002). A defendant's interference with another's contract is justified if she has a legal right to interfere or she has "a good-faith belief claim to a colorable legal right, even though that claim ultimately proves to be mistaken." Tex. Beef Cattle Co., 921 S.W.2d at 211; see also Wal-Mart Stores, Inc. v. Sturges, 52 S.W.3d 711, 724 (Tex. 2001). "[I]f the trial court finds as a matter of law that the defendant had a legal right to interfere with a contract, then the defendant has conclusively established the justification defense." Id. "A jury question is presented only when the court decides that although no legal right to interfere exists, the defendant has nevertheless produced evidence of a good faith, albeit mistaken, belief in a colorable legal right." Id.

The Texas Supreme Court has not defined what it means for a right to be colorable in the tortious-interference context. In Bennett v. Computer Associates International, Inc., the court concluded that "a right is colorable if it appears, without further inquiry (that is, if it appears on its face), genuine, truthful, valid, or existing." 932 S.W.2d 197, 202 (Tex. App.--Amarillo 1996, no pet.). The court drew the definition from the term's use in other contexts. Id. (citing Cox v. Houston & T.C.R. Co., 4 S.W. 455, 457 (1887), Black's Law Dictionary, and Merriam-Webster's Third New International Dictionary). Other courts have followed Bennett's definition of "colorable." Am. Tech. Res., Inc. v. Network Staffing Servs., Inc., No. 05-00-01124-CV, 2001 WL 969210, at *6 (Tex. App.--Dallas Aug. 28, 2001, no pet.); Brown Servs., Inc. v. Brown, No. 01-98-00304-CV, 1999 WL 681964, at *11 (Tex. App.--Houston [1st Dist.] Sep. 2, 1999, pet. denied); Beard v. Whitaker, No. 05-96-01188-CV, 1998 WL 423453, at *3 (Tex. App.--Dallas July 29, 1998, pet. denied). Whether a claim is colorable may be decided as a question of law. Brown Servs., 1999 WL 681964, at *11 n.3.

The defendant must also show a good-faith belief in the legality of its actions. See Bennett, 932 S.W.2d at 204 (evaluating separately whether a defendant's exercise of a colorable right was in good faith). "The issue of 'good faith' is normally a question of fact." Buck v. Century 21 Beezley Real Estate, Inc., 907 S.W.2d 660, 664 (Tex. App.--Eastland 1995, no writ); see also Bennett, 932 S.W.2d at 204; Beard, 1998 WL 423453, at *4; Modular Tech. Corp. v. City of Lubbock, 529 S.W.2d 273, 276 (Tex. App.--Amarillo 1975, writ ref'd n.r.e.) Good faith, in this sense, means a good-faith belief in legality, not the absence of ill will toward the plaintiff. See Tex. Beef Cattle Co., 921 S.W.2d at 211-212 (holding that a jury's finding that the defendant had a good-faith belief in its right to interfere established justification, even though the jury also found that the defendant acted with "actual malice") (citing W. Page Keeton et al., Prosser & Keeton on the Law of Torts § 129, at 984 (5th ed. 1984) ("[W]here the defendant has a proper purpose in view, the addition of ill will toward the plaintiff will not defeat his privilege.")). Good faith means "something akin to having an objectively well grounded and justifiable belief of a right." Bennett, 932 S.W.2d at 203 (internal quotation marks and alteration omitted). ***

B. NASP Is Not Entitled to Attorney's Fees Under This Court's Inherent Powers

***A court's inherent power "is not a broad reservoir of power, ready at an imperial hand, but a limited source; an implied power squeezed from the need to make the court function." FDIC v. Maxxam, Inc., 523 F.3d 566, 591 (5th Cir. 2008) (quoting NASCO, Inc. v. Calcasieu Television & Radio, Inc., 894 F.2d F.2d 696, 702 (5th Cir. 1990)). "A court should invoke its inherent power to award attorney's fees only when it finds that 'fraud has been practiced upon it, or that the very temple of justice has been defiled.'" Boland Marine & Mfg. Co. v. Rihner, 41 F.3d 997, 1005 (5th Cir. 1995) (quoting Chambers, 501 U.S. at 46). In all cases, courts must be mindful that the inherent power is available "only if essential to preserve the authority of the court." In re FEMA Trailer Formaldehyde Prods. Liability, 401 F. App'x 877, 883 (5th Cir. 2010) (quoting Natural Gas Pipeline Co. of Am. v. Energy Gathering, Inc., 86 F.3d 464, 467 (5th Cir. 1996)).***

This court cannot invoke its inherent power to punish Rapid for repeated violations of the Acts. The "bad-faith exception to the American rule . . . is not a punitive award in the 'tort' sense of punishing the underlying conduct that gives rise to a plaintiff's claim." Guevara v. Maritime Overseas Corp., 59 F.3d 1496, 1503 (5th Cir. 1995), abrogated on other grounds by Atl. Sounding Co. v. Townsend, 129 S. Ct. 2561 (2009); see also Maxxam, 523 F.3d at 593 ("To the extent that the FDIC engaged in underlying conduct that the district court found distasteful, such as paying the OTS to bring a case in administrative court, it is not within the court's power to sanction such conduct." (footnote omitted)); Galveston Cnty. Navigation Dist. No. 1 v. Hopson Towing Co., 92 F.3d 353, 359 n.13 (5th Cir. 1996) (explaining that "it is clear that we are concerned only with the present defendants' alleged abuse of the litigation process, and not with the nature of the tort underlying this law suit," when considering an award of sanctions).

Footnote 12. Other circuits follow the same approach. Towerridge, Inc. v. T.A.O., Inc., 111 F.3d 758, 766-67 (10th Cir. 1997) (citing cases).

NASP argues that inherent power allows this court to punish Rapid for misrepresentations to other courts. That conduct is also beyond the reach of this court's inherent authority. Because the "purpose of a court's sanctioning power is to enable it to ensure its own proper functioning," Conner v. Travis Cnty., 209 F.3d 794, 800 (5th Cir. 2000), "[i]nherent power must arise from the litigation before that court," id. (quoting In re Case, 937 F.2d 1014, 1024 (5th Cir. 1991)). A court's power to sanction behavior before other courts is strictly limited. A court's inherent power allows sanctions for "actions taken in another forum" only if they are "'in direct contravention of the [court's] orders.'" Id. (quoting Chambers, 501 U.S. at 57). This is true even when "the substantive issues in [other] proceeding[s are] the same." Id. (quoting In re Case, 937 F.2d at 1024).

The Fifth Circuit has repeatedly enforced this rule. It has invalidated sanctions imposed by a bankruptcy court for actions taken in state-court proceedings that were "completely collateral to the proceedings in the bankruptcy court," even though the state-court action involved the same parties as the proceedings in bankruptcy court. Case, 937 F.2d at 1023. It has rejected a district court's imposition of sanctions for a frivolous appeal, holding that the power to do so rests with the court of appeals. Conner, 209 F.3d at 799-802. It has overturned a court's sanctions of an expert witness for exaggerating her role in the litigation to another court. FEMA Trailer, 401 F. App'x at 883-84. It has vacated sanctions against a participant in an underlying arbitration involving the same dispute as the district court litigation. Positive Software Solutions, Inc. v. New Century Mortg. Corp., 619 F.3d 458, 461 (5th Cir. 2010) (reasoning that arbitration is a separate proceeding, not "annex" to litigation). Consistent with these cases, this court cannot invoke its inherent authority to punish Rapid's actions before other courts because that did not violate this court's order or otherwise impair proceedings before this court.

NASP finally cited this court's finding of contempt for Rapid's violation of the preliminary injunction as a basis for imposing fees. (Docket Entry No. 148). A violation of a court's order can support an award of attorney's fees under the court's inherent power. Chambers, 501 U.S. at 45 (citing Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 258 (1991)); see also In re Bradley, 588 F.3d 254, 265 (5th Cir. 2009) ("[C]ivil contempt remains a creature of inherent power."). NASP appears to acknowledge that it cannot recover all of its fees if this court is limited to awarding fees actually spent as a result of Rapid's contempt. Citing Chambers, NASP argued that "the Supreme Court has expressly held that such an award is not limited to the amount of fees incurred as a direct result of the contemptuous conduct." (Docket Entry No. 282, at 17).

In some cases, an award of attorney's fees for the entire cost of litigation is appropriate. But that is only the case when the entire litigation is vexatious. A primary purpose of awarding attorney's fees under inherent powers is to "mak[e] the prevailing party whole for expenses caused by his opponent's obstinacy." Chambers, 501 U.S. at 46 (quoting Hutto v. Finney, 437 U.S. 678, 689 n.14 (1978)). Courts awarding fees either for a violation of an order or vexatious litigation appear to limit the award to the fees incurred as a result of the misconduct. Halderman ex rel. Halderman v. Pennhurst State Sch. & Hosp., 49 F.3d 939, 941 (3d Cir. 1995) ("An award of fees and expenses in this case is permissible . . . under the court's inherent power to reimburse a party for outlays incurred in securing an adjudication of contempt. . . . [T]he innocent party is entitled to be made whole for the losses it incurs as the result of the contemnors' violations, including reasonable attorneys' fees and expenses."); Lance v. Plummer, 353 F.2d 585, 592 (5th Cir. 1965) ("As to appellant's contention that the part of the order requiring the payment of the attorney's fee and the costs of bringing the proceedings were punitive, we think it plain that these requirements were permissible in a civil contempt proceeding. They are clearly compensatory to the injured party."); Gregory P. Joseph, Sanctions: The Federal Law of Litigation Abuse § 28(B)(2), at 4-40 (4th ed. 2008) (noting that the amount of fees "may be less — but should never be more — than the amounts expended as a result of the misconduct" when awarding fees under the court's inherent power).

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