The Perils of Loser Pays

Originally Published in Texas Lawyer

For a run-of-the-mill car accident case, Andrade v. Ankur contains an important lesson about one of the many controversial tort-reform provisions the Texas Legislature put into place a year ago with House Bill 4. And, for a change, the case shows how the reforms that were supposed to curb frivolous suits had a negative effect on a defendant.

That’s right, a defendant. Andrade illustrates the perils of using the so-called “loser pays” provision of H.B. 4, which forces the losing litigant to pay certain court costs if the litigant refused a settlement offer and then recovered less at trial than what was offered by the other side. Yet few litigators have been willing to use the provision. And several defense attorneys say the Sept. 28 outcome of Andrade is Exhibit A for why they rarely use the tactic.

Isabel Andrade alleged in her petition that she was struck and seriously injured by a car as she crossed the intersection of Congress Avenue and Seventh Street in Austin on Jan. 12, 2003. As a result, Andrade, a University of Texas School of Law student, filed a personal-injury suit against motorist Ankur Wadhwa in Travis County Court-at-Law No. 2. In his answer, Wadhwa responded that Andrade contributed to her own injuries by failing to “exercise a degree of care of an ordinary person” when crossing the intersection.

Andrade and her attorneys demanded $14,500 for her injuries, says Cris Feldman, an associate with Austin’s Ivy Crews & Elliott who represents Andrade. Wadhwa and his attorneys offered $12,000, Feldman says. But instead of closing the settlement offer gap, Wadhwa and his lawyers chose the road less traveled by invoking Rule 167 of the Texas Rules of Civil Procedure, the “loser pays” provision, and taking the case to trial, Feldman says.

Under that H.B. 4-created provision, if a plaintiff recovers a jury award that is less than 80 percent of what is offered in settlement, the plaintiff is responsible for the defendant’s attorneys’ fees, up to two expert witness bills and other court costs. But if a plaintiff wins more than 120 percent of what was offered, the defendant is responsible f or those same costs. H.B. 4 allows only the defense to invoke Rule 167.

At trial Andrade prevailed and on Sept. 28, the jury awarded her $29,819. Because the award amounted to well over 120 percent of what the defense offered her in the settlement, the defense was responsible for the plaintiff ‘s relevant litigation costs, Feldman says. “They were trying to get her to settle a good case for a low price,” Feldman says. “And in this case, it worked to the advantage of the plaintiff .

But overall, it [Rule 167] is a bad thing for working people in Texas.” Irene Said, a lawyer Houston’s Kilpatrick & White, represented Ankur at trial. She was out of the country the week of Oct. 4 and unavailable for comment. Kilpatrick & White represents Liberty Mutual policyholders such as Ankur. A Liberty Mutual spokesperson says it is corporate policy not to comment about their clients. So instead of paying the $2,500 difference between the original settlement offers, the defense will end up paying $29,819 plus interest to Andrade and $16,407 in her litigation costs, according to an agreement that both parties signed on Oct 1.

It worked out in the end, but Andrade says she was hesitant about taking the case to trial because of the risk of paying the other side’s fees. “The added risk of the provision almost prevented me from going to trial,” Andrade says. “I can see that the provision might prevent some frivolous lawsuits. But, in the end, I think it will work against accident victims and provide insurance companies with one more way to harass those making claims against them.”

Bully or Bust?

Feldman and Andrade believe that Rule 167’s purpose is to bully plaintiffs into settling for low-ball offers. But if that’s the case, it’s curious that few defense attorneys are willing to use the rule, numerous Texas litigators say. Rob Roby, a partner in Dallas’ Gwinn & Roby, has given presentations about the effects of H.B. 4 to defense attorneys at local bar meetings across the state. And every time, he asks defense attorneys if they’ve ever utilized Rule 167. “We have asked that question of over 3,000 attorneys,” Roby says. “And we have never had anyone raise their hand.”

Roby says his own civil defense firm did an analysis of Rule 167 to determine under what circumstances the defense should use it. And it was hard pressed to come up with a single scenario. “The defendant doesn’t see it as an effective way to deal with settlement,” Roby says. “They see it as a way to expose themselves to additional expenses.” The risks are especially high in cases in which a plaintiff wants to settle in an insurance coverage case in which the plaintiff ‘s demand is on the high end of the defendant’s policy limits, Roby says. If Rule 167 is used by the defense and the plaintiff ‘s recovery beats the defense’s offer, the insured defendant could be personally liable for litigation costs that exceed the policy limits, Roby says. “I’ve never had a carrier suggest that a settlement be handled that way,” Roby says of Rule 167. “And I’ve never had a client express an interest in it.”

David M. Pruessner, of Dallas’ Law Of f ice of David M. Pruessner who represents insurance companies, also has yet to hear of defense counsel using Rule 167. But if a defense lawyer was going to use Rule 167, it probably would be in a smaller case in which a plaintiff ‘s recovery likely will be about the same as his or her litigation costs. Those cases would be the ones in which a plaintiff may have an incentive to take the lower settlement offer or risk having his or her recovery offset by the defense’s litigation costs, Pruessner says. “I just started pulling numbers and saying, “What if ?’ ” Pruessner says. “It seemed to me that it would affect cases from $20,000 to $100,000, because in cases like that the attorney’s fee and expenses would be significant to the relevant merit” of the case.

State Rep. Joe Nixon, R-Houston, the lawmaker who sponsored H.B. 4, says Rule 167 is not meant to be used frequently. It was designed for a situation in which the defense knows it is liable, but the plaintiff is making unreasonable settlement demands, he says. “It’s really and truly a situation where you say, “I give up. I want to make amends, and I want to pay your client in full,’ ” says Nixon, a partner in Houston’s Phillips & Akers. “It was never intended and is not intended to be an every-case tool. The only reason you’re doing it is because the demand is outrageous.”

Paula Sweeney, a plaintiffs attorney and partner in Dallas’ Howie & Sweeney, says the reason Rule 167 is rarely used is pretty clear to her. “The reason they [defense lawyers] don’t use it is plaintiffs usually make reasonable demands,” Sweeney says. “If they invoke this, they’re opening themselves up. That’s the proof in the pudding.”

Michael Sawicki, a plaintiffs attorney and partner in Dallas’ Brown Sawicki & Mitchell, says he’d relish a defendant using Rule 167. “If you make a reasonable demand and they make a really low offer, it opens the opportunity to get them responsible for costs,” Sawicki says. “Invoking this is like a high-noon showdown, either you’re right or you’re wrong,” Sawicki says. “[W]here as under the old system you’re wrong and you don’t get hit.” “I’m not a defense lawyer, but I assume they have the same challenges in evaluating case values as we do,” Sawicki says. “And unless you’re slam-dunk sure of what you’ve got, this rule poses a risk.”