Mid-Continent Casualty Co. v. Roger Davis ( 2012 )

Case: 11-10142 Document: 00511881397 Page: 1 Date Filed: 06/08/2012
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
June 8, 2012
No. 11-10142 Lyle W. Cayce
Clerk
MID-CONTINENT CASUALTY CO.,
Plaintiff-Appellant
v.
ROGER DAVIS d/b/a DAVIS CONSTRUCTION,
Defendant-Appellee
GLORIA SERRATO, Individually and as personal representative of the
Estate of Jorge Serrato; ET AL.,
Intervenors-Defendants-Appellees
Appeal from the United States District Court
for the Northern District of Texas
Before GARZA, DENNIS, and HIGGINSON, Circuit Judges.
HIGGINSON, Circuit Judge:
Appellant Mid-Continent Casualty Company (“Mid-Continent”) appeals
the district court’s final judgment that Mid-Continent has a duty to indemnify
Davis Construction in the underlying wrongful death action brought by the
family of decedent Jorge Serrato (“Serrato”). We AFFIRM the district court’s
ruling, finding that the district court did not abuse its discretion in determining
that Serrato was an independent contractor and not an employee of Davis
Construction.
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FACTS AND PROCEEDINGS
In June 2007, decedent Serrato fell through a hole on the second floor of
a construction site where he was working as part of a framing crew for Davis
Construction and eventually died from the fall. Davis Construction, owned by
Roger Davis, was in the business of framing buildings (typically residential) and
obtained jobs by bidding on projects with general contractors. Roger Davis or
Bill Ritchie would hire crew members for projects Davis Construction was
awarded. Davis Construction worked on one job at a time and, therefore, only
used one crew. Typically, Davis Construction’s crew consisted of four people in
addition to Ritchie, who served as a supervisor, and the four workers on the crew
often remained the same for years. During the month of Serrato’s accident, the
four workers on the Davis Construction crew were Vidal Negrete, Eduardo
Negrete, Hector Sanchez, and Jorge Serrato.
Following the accident, the Serratos1 filed a wrongful death, survival, and
personal injury action (the “Underlying Lawsuit”) against Davis Construction
and Tommy Richie Construction, LLC. Mid-Continent Casualty Company (“Mid-
Continent”) sued Roger Davis d/b/a Davis Construction, seeking a declaratory
judgment that Mid-Continent had no duty to indemnify Davis Construction in
the Underlying Lawsuit because Serrato was an employee of Davis Construction.
The Serratos filed a motion to intervene in the Mid-Continent action, and the
district court granted that motion.
1
Intervenors Gloria Serrato, Cornejo Lopez de Serrato, and Jose Benjamin de Serrato
seek at least $5 million in damages for Serrato’s wrongful death, at least $5 million for
Serrato’s survival damages, and at least $5 million in exemplary damages in this underlying
lawsuit.
2
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At the time of Serrato’s accident, Davis Construction had a Commercial
Lines Policy, issued by Mid-Continent under policy number 04-GL000660872
with an effective policy period from January 24, 2007 to January 24, 2008 (the
“Policy”). The Policy contained two relevant coverage exclusions to which the
Policy does not apply:
d. Workers’ Compensation and Similar Laws
Any obligation of the insured under a workers’ compensation,
disability benefits or unemployment compensation law or any
similar law.
e. Employer’s Liability
“Bodily injury” to:
(1) An “employee” of the insured arising out of and in the course of:
(a) Employment by the insured; or
(b) Performing duties related to the conduct of that insured’s
business . . . .
Mid-Continent claims that because Serrato was an employee of the insured,
Davis Construction, exclusions “d” and “e” of the Policy apply to exclude coverage
for losses resulting from the Underlying Lawsuit.
The district court conducted a bench trial and issued a nine-page
Memorandum Order and Opinion making findings of fact and conclusions of
law. The following day, the district court signed its final judgment, declaring
that Serrato was an independent contractor—not an employee of Davis
Construction—and, therefore, Mid-Continent has a duty to indemnify Davis
Construction in the Underlying Lawsuit.
STANDARD OF REVIEW
In an appeal from a district court’s final judgment following a bench trial,
we review the district court’s findings of fact for clear error and review
conclusions of law de novo. Dickerson v. Lexington Ins. Co., 556 F.3d 290, 294
3
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(5th Cir. 2009). Under this standard, “[w]here there are two permissible views
of the evidence, the factfinder’s choice between them cannot be clearly
erroneous.” Anderson v. City of Bessemer City, 470 U.S. 564, 573–74 (1985).
The determination of whether an individual is an employee or an
independent contractor is a conclusion of law to be reviewed de novo. Rodriguez
v. Sarabyn, 129 F.3d 760, 765 (5th Cir. 1997). However, “[f]indings on the
Limestone factors themselves” are factual determinations and, therefore, are
reviewed for clear error. Amerisure Ins. Co. v. Navigators Ins. Co., 445 F. App’x
756, 759 (5th Cir. 2011) (unpublished); cf. Brock v. Mr. W. Fireworks, Inc., 814
F.2d 1042, 1044 (5th Cir. 1987).
DISCUSSION
The issue before us is whether the district court erred in concluding that
Mid-Continent had a duty to indemnify Davis Construction because Serrato was
an independent contractor and not an employee of Davis Construction.2
When jurisdiction is based on diversity of citizenship, as it is in this case,
we apply the substantive law of the forum state “in an attempt to rule as a
[forum state’s] court would if presented with the same issues.” Musser Davis
2
Appellees alternatively argue that even if the district court erred in its legal
conclusion that Serrato was an independent contractor and not an employee, Mid-Continent
is nonetheless estopped from denying that Serrato was an independent contractor based on
evidence that Davis Construction detrimentally relied on Mid-Continent’s representations
with respect to the characterization of Davis Construction’s workforce. Appellees cite: (1) the
yearly audit summaries Davis Construction received from Mid-Continent for the policy periods
between January 24, 2003 and January 24, 2008 which state, “[t]he insured has no employees;
contractor labor is utilized for the construction work,” and (2) the Policy itself which states,
“[t]he insured has no employees; contractor labor is utilized for the construction work.” The
district court did not address this estoppel argument in its Memorandum and Opinion, and
because we affirm the district court’s legal conclusion that Serrato was an independent
contractor, we need not reach Appellees’ estoppel argument.
4
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Land Co. v. Union Pac. Res., 201 F.3d 561, 563 (5th Cir. 2000). Therefore,
because the forum state here is Texas, we apply the Texas definition of
“employee” and “independent contractor” in our analysis.
In Texas, determining whether an individual is acting in the capacity of
an “independent contractor” or as an “employee” requires assessment of the
amount of control the employer exerts or has the right to exert over the
“progress, details, and methods of operations of the work.” Limestone Prod.
Distrib. Inc. v. McNamara, 71 S.W.3d 308, 312 (Tex. 2002). The Texas Supreme
Court set forth the following five factors to assess whether a worker is an
employee or independent contractor:
(1) the independent nature of the worker’s business; (2) the worker’s
obligation to furnish necessary tools, supplies, and material to
perform the job; (3) the worker’s right to control the progress of the
work except about final results; (4) the time for which the worker is
employed; and (5) the method of payment, whether by unit of time
or by the job.
Id. at 312. Importantly, “the legal test for determining independent-contractor
status in Texas is right to control, not comparison of control.” Id.The district court, after conducting a trial on the merits during which
testimony was heard from five witnesses about who controlled Serrato’s fate,
held that Serrato was an independent contractor and not an employee of Davis
construction based on an analysis explicitly applying the five factors laid out by
the Texas Supreme Court in Limestone. We examine the district court’s analysis
of each of the five Limestone factors, reviewing each of these factual
determinations for clear error. Amerisure, 445 F. App’x at 759.
Considering the first Limestone factor, “the independent nature of the
worker’s business,” the district court acknowledged that this factor “does very
5
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little to shed light on . . . Davis’ right to control the crew’s work,” and Mid-
Continent concedes that the district court’s analysis of this factor “was
inconclusive.”3 See Limestone, 71 S.W.3d at 312. On the one hand, the district
court found that Davis “does not have control over whether the crew members
work for other framing crews or even run their own framing business.”4 On the
other hand, the district court also found that, “Jorge Serrato and the other crew
member’s business does not appear to be independent in nature.” Because the
district court’s findings are mixed, we consider the first Limestone factor to be
neutral, supporting neither a finding that Serrato was an employee nor a finding
that Serrato was an independent contractor.5
3
We find unpersuasive Mid-Continent’s argument that the district court’s finding,
based on the testimony of Davis, Ritchie, and Mid-Continent auditor Lyle Whitsett, that the
industry standard treats members of a framing crew as independent contractors “is influenced
by an erroneous view of the law and is, therefore, entitled to no deference.” Appellants cite
an unpublished district court case, Caballero v. Archer, No. SA-04-CA-561-OG, 2007 WL
628755, at *4 (W.D. Tex. Feb. 1, 2007), as support for their argument that an industry
standard should not be considered. The district court in Caballero, however, gave no weight
to the testimony of a retained expert whose opinions were “based on his own interpretation
of industry standards or trucking practices . . . .” Caballero, 2007 WL 628755, at *4. Here,
by contrast, the industry standard evidence came from the testimony of Mid-Continent’s own
auditor, who testified that, in his experience, most home building businesses, such as Davis
Construction, use contract labor, not employees. Therefore, the district court’s consideration
of Mid-Continent’s auditors’ adverse statements regarding industry standards, which also
serve to illuminate the expectations that Mid-Continent had when it agreed to insure Davis
Construction, was not an error.
4
This factual finding is supported by testimony that crew leader Bill Ritchie had a side
business framing and building homes. Also, crew-member Vidal Negrete testified that he
worked for “a lot” of other people, including “some of [his] own work,” during the ten years he
also worked with Davis Construction “because sometimes we work not all of the time [for
Davis].”
5
Mid-Continent contends that the district court’s finding, listed under the
“Background” section of its Memorandum Opinion and Order, that, “[m]ost of the workers
have framing experience when Davis Construction hires them to be on the crew” is clearly
erroneous. Because the district court does not discuss this point in its analysis of the first
6
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The district court found that, “[t]he second Limestone factor, ‘the worker’s
obligation to furnish necessary tools, supplies, and material to perform the job’
weighs heavily in favor of finding that Jorge Serrato was an independent
contractor.” Though framing crew member Vidal Negrete testified that Davis
Construction provided some of the tools to the crew members,6 he also testified,
both before and after his single statement that Davis provided some tools, that:
(1) the compressors used by the crew in 2007 belonged to either him or Ritchie;
(2) that Serrato had his own nail gun, saw, and hand tools; and (3) that Davis
did not provide any tools to Serrato. Similarly, Ritchie testified that: (1) he had
a compressor that the other crew members would use; (2) “everybody has got a
compressor;” and (3) that most workers had their own nail guns, but if they did
not, they would “be a cut man instead of a nail man or something of that nature.”
Crew member Hector Sanchez testified that he and his fellow crew members had
their own tools or borrowed them from other crew members.7 Finally, in his
Limestone factor, we need not address it here.
6
While testifying about the work that was being done in 2007, the year of Serrato’s
accident, Vidal Negrete was asked, “[s]ome of the tools that were being used were furnished
by the company?” Vidal Negrete responded, “[t]hat is right.” We have not found and Mid-
Continent does not point to any other evidence in the record that shows Davis provided tools
to crew members.
7
Q: Mr. Sanchez, did Vidal have tools in his truck for the workers
to use who didn’t have their own tools?
A: You see, normally it is our tools. We put it in the truck just so
that we don’t have to carry it around ourselves.
Q: Did everyone have their own compressor?
A: Not compressor but, you know, like the gun or the saw, yes.
Q: Did everyone have their own nail gun?
A: Yes.
7
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deposition, Davis stated, “[t]he guys furnish all their hand tools, that’s nail guns,
they’ve got—they carry their own compressors and everything.”8
At oral argument, Mid-Continent contended that the district court’s
finding that, “there is no evidence that Davis or Davis Construction ever
provided any of the crew members with tools” (emphasis added) was clearly
erroneous.9 We agree that this particular factual finding is clearly erroneous
because, as discussed above, there was a statement by Vidal Negrete that Davis
Construction provided some tools to crew members. However, considering the
inherent inconsistency of Vidal Negrete’s testimony, coupled with the testimony
from crew members and Davis himself that shows Davis did not provide tools for
the crew, the district court did not clearly err in finding that the evidence overall
showed that Davis did not provide tools to the crew members and that Davis
Construction crew members either provided their own tools or borrowed tools
from other crew members. Moreover, the district court did not err in any of the
other factual findings it made in its analysis of the second Limestone factor.10
8
Davis continued to explain that no other tools were needed: “[t]o build a house, you
need a nail gun and a compressor and some nails and that’s it.” Later, Davis reiterated, “[t]he
guys that work out there. Each one has got their own set of tools.”
9
Mid-Continent failed to make this argument in any of its briefing to this court, but
we nonetheless address this argument because this factual finding is included in the district
court’s analysis of the second Limestone factor and therefore necessary to a review of the
district court’s factual finding regarding that factor.
10
Davis’ testimony supports the district court’s finding that though crew members were
not responsible for providing materials for the jobs, Davis Construction also did not have
ultimate responsibility for providing materials. A general contractor would sometimes request
that Davis or Ritchie place an order for necessary materials, such as wood, but the general
contractor retained ultimate responsibility for provision of and payment for materials. In a
factually similar case, Anchor Cas. Co. v. O.E. Hartsfield, 390 S.W.2d 469 (Tex. 1965), where
the general contractor furnished materials needed for the job, the court did not discuss that
fact as weighing in favor of either a finding that Hartsfield was an employee or an independent
8
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Therefore, we conclude that the district court did not err in its ultimate factual
finding that the second Limestone factor weighs in favor of a determination that
Serrato was an independent contractor.
The district court held that the third Limestone factor, “the worker’s right
to control the progress of the work except about final results,” also supported
finding that Serrato was an independent contractor and not employee of Davis
Construction. See Limestone, 71 S.W.3d at 312. The freedoms that the district
court correctly lists to support its third Limestone factor analysis—that the crew
members were free to choose when to start and stop work each day and decided
among themselves which particular task each worker would perform and the
ways in which tasks were to be completed—are supported by evidence in the
record. See id. (finding that a worker’s ability to set his own hours supports a
finding that the worker was an independent contractor); Anchor Cas., 390
S.W.2d at 471 (same). In his deposition and at trial, Ritchie testified that: (1)
the crew members, not Davis, divided up who does what on the job site; (2) that
though the crew members generally worked eight-hour days, they set their own
hours and "they showed up when they showed up." Similarly, Davis testified at
trial that: (1) he did not set work hours for the crew; (2) he did not keep track of
the actual hours each crew member worked; (3) he did not assign crew members
particular tasks; and (4) he "primarily just want[ed] them to do the job and get
it done." Finally, Vidal Negrete testified at trial that: (1) the crew members, not
contractor and ultimately held that a worker for the subcontractor was an independent
contractor. Id. at 470–71 (holding that Hartsfield was an independent contractor of
subcontractor Wolff where Hartsfield was an experienced finish carpenter who furnished his
own tools, set his own hours, was paid by the job, and was not carried on the social security
or income tax withholding rolls of Wolff).
9
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Davis, set their work start and stop times and (2) that Davis did not assign tasks
to the crew members.
Mid-Continent argues that Davis Construction, not Serrato or the other
crew members, controlled the progress of the work because Davis tried to come
by the job site once a day to check on the work and supervisor Ritchie reported
to Davis daily on the progress being made on the job. However, Davis did not
control each step of the progress of the job; instead, he only made sure that the
work was being done according to blueprints, identified any problems with the
work and asked that they be corrected, and tried to speed up the work if it was
progressing too slowly. See Limestone, 71 S.W.3d at 313 (holding that where
evidence establishes that employer “merely controlled the end sought to be
accomplished” and the worker “controlled the means and details of
accomplishing the work,” the worker was an independent contractor).
The district court found that the fourth Limestone factor, “the time that
the worker is employed,” supported a finding that Serrato was an independent
contractor because Serrato was “employed for two week time periods several
times over the course of approximately eighteen months.” See id. at 312. The
district court’s factual findings that support its analysis of this factor—that crew
members were only employed by Davis Construction for the time that it takes
to complete one job and that there was no guarantee that Davis would hire a
crew member for the next job or that there will even be a next job—are
supported by testimony at trial. Davis testified at trial that the crew members
only get paid if they are working a job, stating, “[i]f they don’t work, no, sir, there
is no pay.” Moreover, the evidence shows that one crew member, Eduardo
Negrete, worked for Davis Construction for three or four years, but not
10
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continuously, and “left in 2008 and all when work got slow.” Eduardo Negrete
later returned to working for Davis.
Mid-Continent argues that the fact that Ritchie had worked continuously
for Davis Construction for seventeen years and Vidal Negrete for eight years
when Serrato’s accident occurred in 2007 supports a finding that Serrato and the
other crew members were employees. However, a long-term relationship does
not necessarily mean that relationship is employer-employee. See id. at 310
(holding that a driver who had worked for the same entity for more than three
years was an independent contractor). More importantly, Serrato, the subject
of the district court’s analysis, had only been working for Davis Construction for
approximately eighteen months to two years prior to his June 2007 accident.
Therefore, we cannot say that the district court clearly erred when it credited
testimony that the fourth Limestone factor supported a finding that Serrato was
an independent contractor.
Finally, the district court found that the fifth Limestone factor, “the
method of payment, whether by unit of time or by the job,” weighed strongly in
favor of finding that Serrato was an independent contractor. See id. at 312. The
district court found that: (1) the amount of time each crew member was
employed and the amount each crew member was paid depended on the job;11 (2)
Davis did not withhold any social security, federal withholding taxes, or
Medicare from the payments he made to crew members; (3) Davis did not pay
the State of Texas unemployment taxes based on compensation being paid to the
crew members; and (4) Davis issued each crew member a 1099 at the end of the
11
As the district court correctly noted from Davis’ testimony at trial, Serrato was paid
between $300 and $400 per week.
11
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year.12 These findings, supported by evidence in the record, support a
determination that the fifth Limestone factor weighs in favor of finding that
Serrato was an independent contractor. See id. at 312–13 (holding that the
worker was an independent contractor where the worker’s income was reported
on a 1099 form instead of a W-2 and the worker paid his own social security and
federal income taxes); Anchor Cas., 390 S.W.2d at 471 (holding that the fact that
the worker was not on the social security and income tax withholding rolls of the
subcontractor helped establish the worker was an independent contractor).
Mid-Continent argues that the district court erred in its fifth Limestone
factor analysis because there is testimony in the record from crew members
Vidal Negrete and Hector Sanchez that they were paid at an hourly rate.
However, there is also ample conflicting testimony from Davis and Ritchie that
crew members were not paid hourly and were, instead, paid a weekly rate, which
varied based on the job, and was the same rate regardless of how many hours
they actually work each week.13 Therefore, because there is conflicting evidence
12
Notably, Davis testified that he was audited by the IRS in 1993 and the IRS did not
at that time question his classification of the members of the framing crew as independent
contractors. Davis also testified that his CPA never questioned him about his classification
of the framing crew members.
13
Ritchie testified that: (1) the amount of money he was paid per week “changed per
job;” (2) that “[e]very job pays differently. There is more money is some jobs than there is
other jobs, and if a job are [sic] larger, more complex, they pay more, you know;” and (3) that
the amount he was paid was the same regardless of the number of days he worked in a
particular week. Davis testified at trial that he calculated the crew members’ pay, which was
by the week, in the following manner: “It is more or less when I bid a job, as I put in my
deposition, that I about know what it takes in labor costs to build that house up to 12 days,
and so I break it down that way due to their experience and everything,” an explanation he
repeated later during his testimony. When Davis was asked again about the crew members’
pay, he stated, “it is based on the bid of the job . . . .” Davis explained that the crew members
“would be compensated by the amount of the money I was able to draw from the builder for
the amount of work that was done.” Davis also testified at trial that the weekly rate he paid
12
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in the record, the district court did not err by giving more weight to the
testimony of Davis and Ritchie and finding that Davis Construction framing
crew members were paid by the job. See Halliburton v. Texas Indem. Ins. Co.,
213 S.W.2d 677, 679–81 (Tex. 1948) (holding that workers’ calculation of their
pay in order to receive a certain hourly rate did not make them employees when
the majority of other evidence presented weighed in favor of finding workers
were independent contractors).
In sum, the facts of this case may be analogized to the facts of Limestone,
where the Texas Supreme Court held that summary judgment evidence
established that Mathis, a distributer, was, as a matter of law, an independent
contractor. 71 S.W.3d at 313. In Limestone, Coy Mathis had been an employee
of Limestone Products for a long period of time when Limestone Products
changed his designation to an independent contractor, including changing his
tax documentation from a W-2 to a 1099 form. Id. at 310. Mathis had been
working for Limestone for more than three years as both an employee and then
as an independent contractor when his accident occurred. Id. The court found
that Mathis was an independent contractor because he provided his own tools
(including his truck); paid his own insurance, social security and federal income
taxes; no longer received workers’ compensation coverage from Limestone;
received a 1099; and had considerable discretion regarding the details of his
work and how to complete it. See id. at 312–13. Similarly, here, Serrato
provided his own tools (or borrowed them from other crew members); did not
have social security or federal income taxes withheld; was issued a 1099 (not a
W-2) from Davis Construction; was not provided workers’ compensation coverage
crew members did not vary based on the actual number of hours worked per week.
13
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from Davis Construction; and had discretion over the details of how his work
was to be completed.
The district court did not abuse its discretion because, as discussed above,
there is evidence in the record to support the factual findings the district court
made that four of the five Limestone factors, the remaining factor being
inconclusive, weigh in favor of the conclusion that Serrato was an independent
contractor and not an employee of Davis Construction.
CONCLUSION
For the foregoing reasons, we AFFIRM the district court’s final judgment
that Mid-Continent has a duty to indemnify Davis Construction in the
underlying wrongful death action brought by the family of decedent Serrato,
based on a conclusion that Serrato was an independent contractor.
14