Opinion
1:22-CV-1328-ADA
07-25-2023
CHRISTA TAYLOR, Plaintiff, v. ROOT INSURNACE COMPANY, Defendant.
HONORABLE ALAN ALBRIGHT UNITED STATES DISTRICT JUDGE
REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
MARK LANE, UNITED STATES MAGISTRATE JUDGE
Before the court is Defendant Root Insurance Company's Motion to Dismiss Plaintiff's Class Action Complaint (Dkt. #15) and all related briefing. After reviewing the pleadings and the relevant case law, and determining that a hearing is unnecessary, the undersigned submits the following Report and Recommendation to the District Court.
The motion was referred by then-presiding United States District Judge Lee Yeakel to the undersigned for a Report and Recommendation as to the merits pursuant to 28 U.S.C. § 636(b), Rule 72 of the Federal Rules of Civil Procedure, and Rule 1(d) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas. Dkt. #19.
I. Background
Christa Taylor, proceeding individually and as a representative of a putative class, is suing Root Insurance Company (“Root”) for claims related to an auto insurance policy (“Policy”). Dkt. #1 at 3. The facts giving rise to this lawsuit are straightforward.
Taylor purchased an auto insurance policy (the “Policy”) from Root to cover her vehicle. Id. at 8. Taylor's vehicle was damaged severely by a hailstorm, and Root determined the vehicle was a total loss under the Policy. Id. at 9. Pursuant to the Policy, Root paid Taylor the actual cash value of the vehicle. Id. Taylor contends that on top of the value of the car, which was paid, Root owes her the amount of Texas sales tax-6.25% of the vehicle's value. Id. at 8, 9. Taylor alleges breach of contract and violation of the Texas Prompt Payment of Claims Act (“PPCA”). Dkt. #1 at 18.
Root now moves to dismiss this action under Federal Rule of Civil Procedure 12(b)(6). Dkt. #15 at 1.
II. Legal Standard-MOTION to Dismiss Under Rule 12(b)(6)
When evaluating a motion to dismiss for failure to state a claim under Rule 12(b)(6) the complaint must be liberally construed in favor of the plaintiff and all facts pleaded must be taken as true. Leatherman v. Tarrant Cnty. Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164 (1993); Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996). Although Federal Rule of Civil Procedure 8 mandates only that a pleading contain a “short and plain statement of the claim showing that the pleader is entitled to relief,” this standard demands more than unadorned accusations, “labels and conclusions,” “a formulaic recitation of the elements of a cause of action,” or “naked assertion[s]” devoid of “further factual enhancement.” Bell Atl. v. Twombly, 550 U.S. 544, 555-57 (2007). Rather, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” Id. at 570.
The Supreme Court has made clear this plausibility standard is not simply a “probability requirement,” but imposes a standard higher than “a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The standard is properly guided by “[t]wo working principles.” Id. First, although “a court must ‘accept as true all of the allegations contained in a complaint,' that tenet is inapplicable to legal conclusions” and “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. at 678. Second, “[d]etermining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679. Thus, in considering a motion to dismiss, the court must first identify pleadings that are no more than legal conclusions not entitled to the assumption of truth, then assume the veracity of well-pleaded factual allegations and determine whether those allegations plausibly give rise to an entitlement to relief. If not, “the complaint has alleged-but it has not ‘show[n]'-‘that the pleader is entitled to relief.'” Id. at 679 (quoting FED. R. CIV. P. 8(a)(2)).
III. Analysis
Root moves to dismiss Taylor's Complaint under Rule 12(b)(6), arguing Root was not contractually obligated by the Policy to pay Taylor sales tax when it took title of her vehicle as part of an insurance settlement when the vehicle was a total loss. Taylor counters that Root's Motion “rests on an incorrect interpretation and application of the Texas Administrative Code” and that her claims for breach of contract and violation of the Texas PPCA are “plausibly and sufficiently pled.” Dkt. #17 at 4.
A. Breach of Contract
Root argues that the Policy is clear that payment is to include only “applicable sales tax” and that because no sales tax applies, Taylor is not owed additional payment. Dkt. #15 at 3. Taylor responds that the Policy “expressly provided for the payment of sales tax in the event of a total loss to [Taylor's] insured Vehicle.” Dkt. #17 at 7.
Texas courts apply the ordinary rules of contract interpretation to insurance policies. Allied World Nat'l Assurance Co. v. Old Republic Gen. Ins. Corp., No. 22-10107, 2023 U.S. App. LEXIS 12564, at *4 (5th Cir. 2023) (citing Don's Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 23 (Tex. 2008)). Under those interpretive rules, a policy's “words and phrases” are “given their plain and ordinary meaning.” Aggreko, LLC v. Chartis Specialty Ins. Co., 942 F.3d 682, 688 (5th Cir. 2019). “An interpretation that gives each word meaning is preferable to one that renders one surplusage.” U.S. Metals, Inc. v. Liberty Mut. Grp., Inc., 490 S.W.3d 20, 23-24 (Tex. 2015). “No one phrase, sentence or section [of a contract] should be isolated from its setting and considered apart from other provisions.” RSUI Indem. Co. v. The Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015). Instead, courts must interpret the policy as whole. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994).
If a contract is unambiguous, it will be enforced as written. Don's Bldg. Supply, 267 S.W.3d at 23. A contract provision is not ambiguous just because the parties disagree about its scope. ACE Am. Ins. Co. v. Freeport Welding & Fabricating, Inc., 699 F.3d 832, 842 (5th Cir. 2012). But when “a contract is susceptible to more than one reasonable interpretation,” courts “resolve any ambiguity in favor of coverage.” Don's Bldg. Supply, 267 S.W.3d at 23.
To begin, the court concludes that the Policy is unambiguous as a matter of law. Indeed, the parties do not seem to disagree about its meaning, nor are the basic underlying facts contested. The parties do not dispute that Root owed payment to Taylor under the Policy. And the parties do not dispute that Root paid Taylor the “actual cash value of her Vehicle.” Dkt. #1 at 10.
The dispute is whether, under the Policy, Root had to pay Taylor the applicable sales tax because it paid for her “loss in money.” Taylor contends: Plaintiff purchased the “Policy from Root, which expressly provided for the payment of sales tax in the event of a total loss.” Dkt. #17 at 7. Taylor argues that paying for the loss in money triggered Root's obligation to pay the amount of sales tax to Taylor. Id.
Root's position is that the “Policy's payment of loss section is clear that a payment in money will [] include ‘applicable' sales tax.” Dkt. #15 at 3. Root then argues that when it takes title to a vehicle that is a total loss as part of a settlement, Texas law is clear that sales tax is not owed. Id. at 4 (citing 34 TEX. ADMIN. CODE § 3.62). Thus, the parties dispute what sales tax is “applicable.”
The Policy does not define “applicable.” “Because it is undefined in the contract, ‘we presume that the parties intended its plain, generally accepted meaning.'” Flagship Credit Corp. v. Indian Harbor Ins. Co., 481 Fed.Appx. 907, 911 (5th Cir. 2012) (quoting Epps v. Fowler, 351 S.W.3d 862, 866 (Tex. 2011)). “Dictionaries are often helpful to find the generally accepted meaning.” Id. (citing Epps, 351 S.W.3d at 866). Thus, the applicable sales tax is what sales tax is capable of being applied, is suitable for being applied, or relates to the parties' circumstances or is appropriate or can be applied in this situation. With these plain, accepted meanings in mind, the court will look to Texas law to determine what sales tax rate applies to Taylor's insurance settlement.
Applicable, OXFORD ENGLISH DICTIONARY (2023)
Applicable, MERRIAM-WEBSTER DICTIONARY (2023)
Applicable, CAMBRIDGE ADVANCED LEARNER'S DICTIONARY & THESAURUS (2023); and Applicable, CAMBRIDGE BUSINESS ENGLISH DICTIONARY.
Applicable, BALLENTINE'S LAW DICTIONARY (2010).
Id.
The Policy provides under the “Payment of loss” heading: “We may pay for loss in money or repair or replace the damaged . . . property.... If we pay for loss in money, our payment will include the applicable sales tax for the damaged . . . property.” Dkt. #1-2 (Policy number VZXLVR) at 23 (emphases added).
Under Texas law, as Taylor points out, Dkt. #1 at 4 n.2 (citing Retail Sales Tax provision of Texas Tax Code), “tax is imposed on every retail sale of every motor vehicle sold in this state.” TEX. TAX CODE § 152.021(a). A “‘Retail sale' means a sale of a motor vehicle ....” Id. § 152.001(2). The tax rate to be applied to such a sale is 6.25% of consideration. Id. § 152.021(b). So far, so good for Taylor.
“[T]he law . . . existing at the time a contract is made becomes a part of the contract and governs the transaction.” Tex. Nat'l Bank v. Sandia Mortg. Corp., 872 F.2d 692, 698 (5th Cir. 1989) (quoting Wessely Energy Corp. v. Jennings, 736 S.W.2d 624, 626 (Tex. 1987); G4 Tr., Grover Gibson v. Consol. Gasoline, Inc., No. 02-10-00404-CV, 2011 Tex.App. LEXIS 7158, at *6 (Tex. App.-Fort Worth Aug. 31, 2011, pet. denied) (citing Wessely, 736 S.W.2d at 626).
Based on the facts alleged, Root's purchase of Taylor's vehicle did not fall into one of the exceptions contained in the statutory definition of a retail sale. TEX. TAX CODE § 152.001(2)(A-D).
But the Administrative Code contains an important limitation:
The motor vehicle sales and use tax is not due where an insurance company takes title to a motor vehicle as a result of a total loss settlement or a stolen vehicle which was later recovered, because the transaction in which an insurance company obtains title to a motor vehicle in return for an insurance settlement is not considered a sale. The motor vehicle sales and use tax is due when the insurance company purchases a replacement motor vehicle for the insured on a total loss or stolen vehicle claim.TEX. ADMIN. CODE § 3.62 (emphasis added).
Taylor contends that § 3.62 is neither here nor there because it dictates only when an insurer is liable to the state for sales tax. Dkt. #17 at 12. “Rule 3.62 simply describes when Root . . . would owe sales tax to the State.” Id. (emphasis in original). Taylor goes on, “Rule 3.62 has no relevance to what Root owes its insureds under the Policy.” Id. (emphasis in original). But it does have relevance because it provides the applicable sales tax rate for the insurance settlement between Root and Taylor. And it is clear: The motor vehicle sales and use tax is not due .... TEX. ADMIN. CODE § 3.62 (emphasis added). Thus, there is no applicable sales tax rate to apply to the transaction.
Taylor also argues that if the Administrative Code is relevant-which it is-it “cannot override the plain language of an insurance policy,” claiming “parties are free to ‘contract-out' or ‘contract around' state or federal law . . . so long as there is nothing void as to public policy or statutory law about such contract.” Id. (citing Scarborough v. Travelers Ins. Co., 718 F.2d 702, 709 (5th Cir. 1983) (concluding the Fifth Circuit was bound by Louisiana law to enforce a contract as written unless it was unambiguously shown to conflict with public policy “or the statutory law of Louisiana”)). Taylor's position is that Rule 3.62 “has nothing to do with the express contractual, first party obligation owed by the insurer to the insured.” Id.
“[F]reedom of contract is not unbounded.” Fairfield Ins. Co. v. Stephens Martin Paving, LP, 246 S.W.3d 653, 664-65 (Tex. 2008). “As a rule, parties have the right to contract as they see fit as long as their agreement does not violate the law or public policy.” In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 129 & n.11 (Tex. 2004). “Absent strong public policy reasons for holding otherwise, however, the preservation of contractual freedom and enforcement is no less applicable to the relationship between an insured and insurer.” Fairfield Ins. Co., 246 S.W.3d at 665 (citing Fortis Benefits v. Cantu, 234 S.W.3d 642, 648, 649 (Tex. 2007)). Texas's “public policy is reflected in its statutes.” Tex. Com. Bank, N.A. v. Grizzle, 96 S.W.3d 240, 250 (Tex. 2002); Teal Trading & Dev., LP v. Champee Springs Ranches Prop. Owners Ass'n, 593 S.W.3d 324, 339 (Tex. 2020) (“when the legislature has spoken on the topic, we generally consider its statutory enactments to be expressions of public policy”). Rules promulgated by the comptroller have the force and effect of statutes. Burgess, 101 S.W.3d at 555-56.
The court appreciates that parties may contract around statutory language, so long as the contract is not contrary to law or public policy. Here public policy is Rule 3.62. That rule, which has the force of statutory law, is relevant to and is “applicable” to this precise situation. Taylor alleges Root took title to her vehicle, Dkt. #1 at ¶ 27, and issued a check to her in as part of an insurance settlement. Id. ¶ 30. Taylor urges that Root owes her the 6.25% sales tax applicable to a “retail sale.” But the relevant public policy provides that the settlement between Root and Taylor was not a retail sale, so the court applies the on-point public policy provision-Rule 3.62. The motor vehicle sales and use tax is not due because the transaction between Taylor and Root was a transaction in which an insurance company[, Root,] obtain[ed] title to [Taylor's] motor vehicle in return for an insurance settlement. See TEX. ADMIN. CODE § 3.62; and see Dkt. #1 at ¶¶ 27, 30.
Courts “construe administrative rules, which have the same force as statutes, in the same manner as statutes.” Hegar v. Black, Mann & Graham, L.L.P., No. 03-20-00391-CV, 2022 Tex.App. LEXIS 1311, at *24 (Tex. App.- Austin Feb. 25, 2022, no pet. h.) (quoting Rodriguez v. Service Lloyds Ins., 997 S.W.2d 248, 254 (Tex. 1999)). “In particular, valid rules promulgated by the comptroller acting within the scope of legislative authority have the force and effect of legislation.” Burgess v. Gallery Model Homes, 101 S.W.3d 550, 555-56 (Tex. App.-Houston [1st Dist.] 2003, pet. denied) (citing Sw. Airlines Co. v. Bullock, 784 S.W.2d 563, 568 (Tex. App.-Austin 1990, no writ)).
Lastly, Taylor also contends that applicable sales tax must be the 6.25% statutory rate because the Policy states Root “will include” the applicable sales tax when it pays money for a total loss and that “‘applicable' serves only to identify the specific percentage to be applied.” Dkt. #17 at 8. The court is skeptical of this reading because it renders “applicable” surplusage. If sales tax was due whenever Root paid money for a loss no matter what, the Policy simply would read: “payment will include the sales tax” or something similar; there would be no need to limit “sales tax” to what is applicable. Giving “applicable” its plain meaning does not render the word surplusage. Indeed, it has meaning in this situation where the applicable sales tax does not exist and it provides direction to the statutory sales tax for the other types of transactions covered by the Policy: payment to repair or replace damaged or stolen property. Thus, the court's reading is neither strained nor contrived and acknowledges Texas's clear public policy, limiting “applicable” to what is appropriate for a particular transaction.
The policy language thus must be given its plain meaning. Salcedo v. Evanston Ins. Co., 462 Fed.Appx. 487, 490 (5th Cir. 2012) (citing Canutillo Indep. Sch. Dist. v. Nat'l Union Fire Ins. Co., 99 F.3d 695, 701 (5th Cir. 1996) (“These special rules favoring the insured . . . are applicable only when there is an ambiguity in the policy.”)).
Taylor's Complaint alleges breach of contract, contending that Root breached the Policy by failing to pay “applicable sales tax” when Root paid money for her loss as settlement of her insurance claim. The court agrees that under the Policy Root owed the “applicable sales tax,” but the court determines the applicable amount was zero because the Texas Administrative Code- public policy around which parties may not contract-provides that no sales tax applies to Taylor's insurance settlement. Thus, whether or not Rule 3.62 is about Root's tax obligation to State of Texas, it contains no sales tax rate to apply to the value of Taylor's vehicle. Accordingly, the Complaint fails to state a claim for which relief may be granted, and the undersigned will recommend this claim's dismissal pursuant to Rule 12(b)(6).
B. Texas Prompt Payment of Claims Act Claim
Taylor alleges Root violated the PPCA. Dkt. #1 at ¶ 75. Root argues Taylor's PPCA claim should be dismissed because Root was not liable for a breach of contract. Dkt. #15 at 4.
“In order to prevail on a Prompt Payment Act claim, the insured must show ‘(1) a claim under an insurance policy (2) for which the insurer is liable and (3) that the insurer has not followed one or more sections' of the Act.” Tremago, L.P. v. Euler-Hermes Am. Credit Indem. Co., 602 Fed.Appx. 981, 983 (5th Cir. 2015) (quoting Wellisch v. United Servs. Auto. Ass'n, 75 S.W.3d 53, 57 n.2 (Tex. App.-San Antonio 2002, pet. denied)). “Insurance agencies are required to pay . . . Prompt Payment Act damages only after having first been found liable for the claim.” Amine v. Liberty Lloyds of Tex. Ins. Co., No. 01-06-00396-CV, 2007 Tex.App. LEXIS 6280, 2007 WL 2264477, at *5 (Tex. App.-Houston [1st Dist.] 2007, no pet.) (citing cases) (cleaned up).
The court concluded Taylor has failed to state a claim for breach of the Policy. See “Breach of Contract” supra. Because Taylor has not pled a breach, an element of her PPCA claim is missing and must fail. Accordingly, the undersigned will recommend dismissal of Taylor's Prompt Payment Act claim pursuant to Rule 12(b)(6).
IV. Distinguishing Cited Cases
Taylor urges that “the Court should consider the holdings from other courts that have adopted Plaintiff's reasonable construction” of the Policy's provision. Dkt. #17 at 8. Taylor notes that federal district courts in Missouri and Illinois found that policies with identical or near identical language to the Policy required the insurer (Esurance in both cases) to pay sales tax when it paid money for the insureds' losses. Root contends the cases Taylor cites are not on point.
“Texas courts strive for uniformity in construing insurance provisions when the language is the same across jurisdictions.” Terry Black's Barbecue, L.L.C. v. State Auto. Mut. Ins. Co., 22 F.4th 450, 457 (5th Cir. 2022) (citing RSUI Indem. Co. v. Lynd Co., 466 S.W.3d 113, 118 (Tex. 2015) (“When construing an insurance policy, [Texas courts] are mindful of other courts' interpretations of policy language that is identical or very similar to the policy language at issue.” (brackets in original)). Indeed, the Texas Supreme Court has “repeatedly stressed the importance of uniformity ‘when identical insurance provisions will necessarily be interpreted in various jurisdictions.'” Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 496-97 (Tex. 2008) (quoting Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 824 (Tex. 1997)).
The language at issue in both cases is strikingly similar, if not identical to the language, to the Policy's language. That said, neither case involved a statutory or public policy framework similar or identical to that of Texas's. Recall that the court concluded-as did the courts in the cases Taylor cites-that under the Policy, Root owed the “applicable sales tax” to Taylor, but Texas law provides that no amount was applicable to Taylor's settlement because no tax was owed. Because neither case Taylor cites involved a statute or public policy similar to that of Texas Administrative Code § 3.62, a different ultimate result obtains.
“[T]he [p]olicy provides that in the event Esurance pays for the loss in money, the payment “will include the applicable sales tax for the damaged or stolen property.” Rawlins v. Esurance Prop. & Cas. Ins. Co., No. 4:21-cv660-RLW, 2022 U.S. Dist. LEXIS 14061, at *2 (E.D. Mo. Jan. 26, 2022). “If ‘we' pay for ‘loss' in money, ‘our' payment will include the applicable sales tax for the damaged or stolen property.” Romaniak v. Esurance Prop. & Cas. Ins. Co., No. 1:20-cv-2773, 2021 U.S. Dist. LEXIS 173787, at *3 (N.D. Ohio Sept. 14, 2021).
V. Leave to Amend
Taylor requests leave to amend her Complaint if the court the determines that the Complaint does not state a claim. Taylor states: “Upon amendment, [she] will include (at least) the following:
“Movants must ‘give the court at least some notice' of what the amendments would be and how those amendments would ‘cure the initial complaint's defects.'” Nix v. Major League Baseball, 62 F.4th 920, 935 (5th Cir. 2023) (quoting Scott v. U.S. Bank Nat'l Ass'n, 16 F.4th 1204, 1209 (5th Cir. 2021) (per curiam), as revised (Nov. 26, 2021). “Thus, a court may deny leave where ‘the plaintiff does not provide a copy of the amended complaint nor explain how the defects could be cured.'” Id. (citing cases).
1. Root's other Form Policy used in Texas which does not expressly provide for payment of a sales tax benefit.
2. Details from Plaintiff's appraisal award, showing that the amount awarded by the appraisers was $22,750.00 ‘plus any applicable sales tax.'”Dkt. #17 at 15 (emphasis in original).
The proposed amendments would not alter the court's analysis that a plain reading of the contract does not give rise to a claim for breach of contract or a derivative PPCA claim. Thus, the amendments would be futile. Accordingly, the undersigned declines to recommend granting Taylor leave to amend. FED. R. CIV. P. 15(a)(2); Rio Grande Royalty Co. v. Energy Transfer Partners, L.P., 620 F.3d 465, 469 (5th Cir. 2010) (“For reason of futility, the district court did not abuse its discretion in denying the plaintiff leave to amend its complaint.”).
VI. Conclusion
The court understands that Taylor is arguing she is owed a paid-for benefit under the Policy. The court agreed that the Policy requires Root to pay the applicable sales tax. The problem for Taylor is that when the court went looking for the appropriate sales tax rate to apply, it found that there is none. Taylor's argument that the parties permissibly contracted around Texas law is also problematic because Taylor's assertion that their contract-the Policy-was not contrary to statute or public policy is incorrect. Texas public policy is clear that no sales tax is owed in a total-loss settlement transaction and that such a transaction is not a retail sale. Thus, when the court looked for the applicable sales tax rate to apply to this settlement, there simply was none.
VII. Recommendations
For the reasons given above, the undersigned RECOMMENDS that Defendant Root Insurance Company's Motion to Dismiss Plaintiff's Class Action Complaint (Dkt. #15) be GRANTED and the Complaint be DISMISSED with PREJUDICE.
The undersigned FURTHER RECOMMENDS that Plaintiff's Request for Leave to Amend her Complaint be DENIED.
VIII. Objections
The parties may file objections to this Report and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. See Battles v. United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
A party's failure to file written objections to the proposed findings and recommendations contained in this Report within 14 days after the party is served with a copy of the Report shall bar that party from de novo review by the District Court of the proposed findings and recommendations in the Report and, except upon grounds of plain error, shall bar the party from appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53 (1985); Douglass v. United Services Auto. Ass'n, 79 F.3d 1415 (5th Cir. 1996) (en banc).