Imperium Insurance Company v. Shelton & Associates

Case: 16-60728 Document: 00514861476 Page: 1 Date Filed: 03/06/2019
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 16-60728 FILED
March 6, 2019
Lyle W. Cayce
IMPERIUM INSURANCE COMPANY, Clerk
Plaintiff - Appellee
v.
SHELTON & ASSOCIATES, PROFESSIONAL ASSOCIATION, A
Mississippi Professional Association; JASON L. SHELTON,
Defendants - Appellants
____________________
Consolidated with 16-60730
IMPERIUM INSURANCE COMPANY,
Plaintiff - Appellee
v.
JASON SHELTON; SHELTON & ASSOCIATES, PROFESSIONAL
ASSOCIATION,
Defendants - Appellants
Appeals from the United States District Court
for the Northern District of Mississippi
USDC No. 1:14-CV-84
USDC No. 1:14-CV-83
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c/w No. 16-60730
ON PETITION FOR REHEARING AND REHEARING EN BANC
Before JOLLY, JONES, and HAYNES, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:*
On petition for rehearing, we WITHDRAW our earlier opinion issued on
August 30, 2018 and substitute the following as the opinion of the court. In
this consolidated appeal involving coverage under a legal-malpractice
insurance policy, we GRANT the petition for panel rehearing filed by Imperium
Insurance Company (“Imperium”) based on the question of whether the
jurisdictional amount to establish diversity jurisdiction has been met in each
of the two cases. We DENY the petition for rehearing en banc filed by Jason
Shelton and his law firm, Shelton & Associates (collectively, the “Shelton
Defendants”). On rehearing, we have determined that the amount in
controversy has been satisfied and have further determined that coverage was
properly denied in each case. 1 In all other respects, there are no material
changes from the initial opinion.
In January 2013, Jason Shelton applied for legal-malpractice insurance
on behalf of the Shelton Defendants. In the application, Shelton represented
that he and his attorneys were not aware of any “legal work or incidents that
might reasonably be expected to lead to a claim or suit against them.” Relying
on Shelton’s application, Imperium issued a claims-made insurance policy.
During the policy year, two malpractice suits were filed against Shelton and
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
1The opinion addresses subject matter jurisdiction in Part III. Revisions to our prior
decision on Imperium’s declaratory judgment claim are contained in Part IV.B. Revisions
pertaining to the Shelton Defendant’s counterclaims are in Part V.
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his firm by former clients. Shelton sought coverage from Imperium for each of
the cases. Imperium initially provided a defense under a reservation of its
rights but later filed these two declaratory-judgment actions in federal court,
seeking a declaration that coverage was excluded by the policy’s prior-
knowledge exclusion or, alternatively, that the policy may be rescinded due to
material misrepresentations made in Shelton’s application for insurance
coverage. Following discovery, in a single opinion, the district court granted
summary judgment in favor of Imperium in both cases. Shelton appealed both
cases, which we have consolidated for purposes of this appeal. We affirm.
I.
The insurance policy at issue in these appeals is a claims-made policy. 2
The policy provides coverage for malpractice claims arising out of “wrongful
acts” committed by the insured. The policy excludes, however, coverage for
claims arising out of wrongful acts occurring prior to the effective date of the
policy if the insured “knew or could have reasonably foreseen” that the
wrongful act for which coverage is sought “might be expected to be the basis of
a claim.” When filling out the insurance application in January 2013, Shelton
was asked: “After inquiry, are any attorneys in your firm aware . . . of any
legal work or incidents that might reasonably be expected to lead to a claim or
suit against them?” Shelton answered, “No.” Imperium claims that Shelton’s
answer was a material misrepresentation that entitles Imperium to rescind
the policy. Specifically, Imperium argues that the Shelton Defendants knew
2 “‘Claims-made’ policies are distinct from ‘occurrence’ policies; the latter focus on
whether an insured event occurred as specified during the policy period. The former focus
on the date that the claim was made against the insured.” OneBeacon v. T. Wade Welch &
Assocs., 841 F.3d 669, 672 n.1 (5th Cir. 2016) (citing Prodigy Commc’ns Corp. v. Agric. Excess
& Surplus Ins. Co., 288 S.W.3d 374, 378, 379 n.7 (Tex. 2009)).
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of the facts surrounding the representation of those two clients who ultimately
filed malpractice suits against the Shelton Defendants, yet failed to disclose
the two potential malpractice claims. The first malpractice suit was brought
by the bankruptcy estate of Paul Tyler. The second malpractice suit was
brought by the estate of Mamie Katherine Chism.
A.
We turn first to the facts forming the basis of Paul Tyler’s malpractice
claim against the Shelton Defendants.
By way of background, in 2004, the Shelton Defendants represented
Tyler in an adversary proceeding in bankruptcy court brought by Automotive
Finance Company (AFC) against Tyler’s bankruptcy estate. William Griffin
was the Shelton & Associates attorney in charge of the Tyler case. Sometime
in 2004, however, Griffin left the firm, taking the Tyler file with him. In 2005,
the bankruptcy court dismissed the adversary proceeding without prejudice,
and in 2006 AFC filed the same action anew against Tyler in state court.
On May 24, 2007, AFC served Tyler with discovery requests, including
requests for admissions. No response was submitted. On July 9, 2007, AFC
moved to have its requested admissions deemed admitted due to the failure to
respond. A hearing was set for November 2.
On October 29, however, Tyler returned to Shelton & Associates as a
client for representation in the state-court litigation. A Shelton attorney
entered an appearance in state court on behalf of Tyler on that day and
requested a continuance of the hearing. The court granted the continuance,
resetting the hearing on the motion to January 30, 2008. Leading up to the
January hearing, however, Shelton & Associates did not move to set aside the
admissions or otherwise correct the failure to respond to AFC’s discovery
requests.
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During the January 2008 state-court hearing, Tyler did not show up to
testify. So one of the Shelton attorneys informed the court: “Your honor,
[Tyler] has no response [to the motion], no response at all, your Honor.” The
state court then entered an order deeming all of the requests admitted.
In September 2010, AFC filed a motion for summary judgment against
Tyler. A state-court hearing on the motion was set for March 21, 2011. AFC
served notice of the motion and hearing to a former Shelton attorney who was
no longer with the firm. AFC discovered its mistake and re-served the notice
on Shelton & Associates on February 2, 2011. The Shelton Defendants claim,
however, that they did not actually receive the notice.
On March 21, 2011, the state court held its hearing on AFC’s motion for
summary judgment. No one from Shelton & Associates showed up at the
hearing. One of Shelton’s attorneys, Amanda Daniels, was at the courthouse
that day, working on a separate matter. At the courthouse, AFC’s counsel
spoke with Daniels about the hearing that day. Instead of attending the
hearing and objecting, for example, that service had not been received, Daniels
left the courthouse and did nothing. So the state court granted AFC’s motion
for summary judgment, specifically “noting that no reply or response
whatsoever has been filed by [Tyler] in opposition” to summary judgment. The
judgment against Tyler was entered, setting the amount at around $2.9
million, plus interest at the highest legal rate.
Three days later, on March 24, 2011, Shelton filed a motion to set aside
the judgment against his client, Tyler. And on November 29, half a year after
the judgment and a full three years after the original hearing to have the
unanswered requests deemed admitted, Shelton filed a motion to amend
Tyler’s response to AFC’s request for admissions. In his motion, Shelton
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argued that he had not received proper service or notice of any of the hearings
or motions.
On January 31, 2012, the state court denied both motions. The state
court found that the Shelton Defendants, and thus Tyler, had received proper
notice of the summary-judgment motion and hearing. The Shelton Defendants
appealed the state court’s decision to the state appellate courts.
On January 8, 2013, less than a year later, Shelton filled out his
application for malpractice insurance with Imperium. He represented in his
application that, after inquiry, neither he nor any of his attorneys were
“aware . . . of any legal work or incidents that might reasonably be expected to
lead to a claim or suit against them.” On January 28, Imperium accepted the
policy. On February 1, the policy went into effect.
In the meantime, the Shelton Defendants’ appeal of the judgment
against Tyler moved up through the Mississippi appeals courts. On April 4,
2013, the Mississippi Supreme Court affirmed the judgment against Tyler,
expressly rejecting the Shelton Defendants’ arguments that they had not
received proper service; the state supreme court also called attention to the
Shelton Defendants’ poor handling of the litigation. See Tyler v. Auto. Fin. Co.,
113 So. 3d 1236, 1240–41 (Miss. 2013).
In January 2014, some ten months later, Tyler filed a malpractice suit
against the Shelton Defendants. Tyler alleged that the Shelton Defendants
committed malpractice by, among other things, failing to respond to the
requests for admission; failing to move to withdraw or amend the admissions;
failing to respond to AFC’s motions to have the requests deemed admitted; and
failing to respond to AFC’s motion for summary judgment.
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B.
We turn next to the malpractice claim arising out of the Shelton
Defendants’ representation of the estate of Mamie Katherine Chism in a
wrongful-death action against the manufacturers of the prescription drug
Vioxx.
In 2007, Chism’s niece, Margaret Bailey, retained the Shelton
Defendants to represent Chism’s estate after Chism died from a heart attack,
allegedly caused by her use of Vioxx. The Shelton Defendants filed a wrongful-
death action in state court on behalf of Chism’s estate. The case was eventually
removed to federal court and transferred to the Vioxx multi-district litigation
(MDL).
In early 2008, the manufacturer agreed to settle all claims pending in
the MDL court. To successfully enroll in the settlement program, each
claimant was required to submit documentation, including proof that the
claimant actually took Vioxx for a certain amount of time. Despite having
several months to do so, the Shelton Defendants failed to submit the required
documentation by the July 1, 2008 deadline.
More than a year later, in August 2009, Shelton met with the
representative of Chism’s estate, Bailey, and informed her that the claim had
not been timely filed and apologized for “not communicating effectively with
her” about the claim. A few days later, Shelton stipulated to the dismissal of
Chism’s claim with prejudice, and the stipulation was filed with the MDL
court.
Two months later, in October 2009, Shelton filed a petition in the MDL
court to permit Chism to either opt out of the settlement program or submit
late documentation. But the MDL court denied the petition, along with similar
petitions that Shelton had filed on behalf of his other Vioxx clients.
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Two years later, in 2011, the new representative of Chism’s estate, Karen
Caviness, visited Shelton’s office. Caviness informed one of Shelton’s
employees that she had recently come to learn why the estate’s claim was
dismissed and stated that she was “disappointed.”
As stated previously, on January 8, 2013, Shelton applied for malpractice
insurance, representing that he and his attorneys were not “aware . . . of any
legal work or incidents that might reasonably be expected to lead to a claim or
suit against them.” On January 28, Imperium accepted the policy, with an
effective date set for February 1.
Also on January 28, a lawyer representing one of Shelton’s former Vioxx
clients, James Harbin, submitted a demand letter to the Shelton Defendants,
alleging malpractice due to their failure to timely file a claims package in the
Vioxx settlement program. The letter informed Shelton that the lawyer would
be “investigating whether there are other former clients who have a potential
claim based on a similar theory.” Upon receiving the letter, Shelton forwarded
it to Imperium. A few days after that, Imperium issued an “incident exclusion”
for any malpractice claim arising out of the Harbin incident. The Shelton
Defendants did not inform Imperium of any other potential claims from other
Vioxx claimants.
Less than a year later, Chism’s estate filed a malpractice suit against the
Shelton Defendants in state court. Chism’s estate alleged that it had “provided
all information to [Shelton] that were [sic] needed in order for Mamie Chism’s
estate to recover a settlement in the Vioxx litigation.” But, according to the
allegations, Shelton & Associates was “in turmoil,” the attorneys “largely
absent,” and “the task of compiling and submitting information related to the
firm’s many Vioxx clients [was delegated] to non-attorney staff members.” The
complaint further states that, as a result, Shelton did not complete the work
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necessary for Chism’s estate to participate in the Vioxx settlement and its
claims were dismissed. Chism’s estate sought a “judgment against Defendants
in an amount in excess of $50,000.00 for compensatory damages, punitive
damages, costs, attorney’s fees and pre and post judgment interest.”
C.
The Shelton Defendants reported both malpractice claims to Imperium,
seeking coverage. Imperium initially provided a defense, subject to its right to
contest coverage issues later. While the state-court litigation was proceeding,
Imperium separately filed these two declaratory-judgment actions in federal
court, seeking a declaration that the Shelton Defendants were not covered
under the policy. The Shelton Defendants asserted counterclaims against
Imperium, alleging that Imperium denied coverage in bad faith.
Following discovery, Imperium moved for summary judgment, arguing
that the policy’s prior-knowledge exclusion applies and, alternatively, that
Imperium is entitled to rescind the policy due to Shelton’s failure to disclose
the potential Tyler and Chism claims in the insurance application. The district
court granted Imperium’s motion. Additionally, because an insured seeking to
recover on a claim of bad faith must first establish the existence of coverage on
the underlying claim, the district court also granted summary judgment in
Imperium’s favor, denying Shelton’s bad-faith counterclaims.
II.
We review the district court’s grant of summary judgment de novo,
applying the same standard as the district court. OneBeacon, 841 F.3d at 675.
Summary judgment is appropriate if there is “no genuine issue as to any
material fact” and the moving party is “entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(a). A genuine dispute of material fact exists if the
evidence is such that a reasonable jury could return a verdict for the
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nonmoving party. Johnson v. World All. Fin. Corp., 830 F.3d 192, 195 (5th Cir.
2016). This court views the facts in the light most favorable to the non-moving
party and draws all reasonable inferences in its favor. Id.
III.
We address first the question of jurisdiction. “A federal district court has
subject matter jurisdiction over a state claim when the amount in controversy
is met and there is complete diversity of citizenship between the parties.”
Mumfrey v. CVS Pharmacy, Inc., 719 F.3d 392, 397 (5th Cir. 2013) (citing 28
U.S.C. § 1332(a)). The amount in controversy, exclusive of costs and interest,
must exceed $75,000. See 28 U.S.C. § 1332(a).
In a declaratory judgment action, the amount in controversy “is the value
of the right to be protected or the extent of the injury to be prevented.” St. Paul
Reinsurance Co., Ltd. v. Greenberg, 134 F.3d 1250, 1252–53 (5th Cir. 1998)
(quoting Leininger v. Leininger, 705 F.2d 727, 729 (5th Cir. 1983)). In a suit
seeking a declaratory judgment regarding insurance coverage, “‘the object of
the litigation is the policy’ and the ‘value of the right to be protected is [the]
plaintiff’s potential liability under that policy.’” Id. at 1253 (quoting Allstate
Ins. Co. v. Hilbun, 692 F. Supp. 698, 700 (S.D. Miss. 1988)). In determining the
amount in controversy, we therefore consider the “policy limits[,] potential
attorney’s fees, . . . penalties, statutory damages, and punitive damages.” Id.
The burden is on the party invoking federal jurisdiction to prove, by a
preponderance of the evidence, that the jurisdictional amount in controversy
is met. Id.
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Here, there is complete diversity of citizenship between the parties. 3 To
determine whether the amount in controversy is met, we “first examine the
complaint to determine whether it is ‘facially apparent’ that the claims exceed
the jurisdictional amount.” Id. Tyler seeks a total judgment of $4,120,367.09
in his state-court malpractice action, and therefore it is plain that we have
subject matter jurisdiction over the Tyler action.
The Chism case presents a less apparent amount. In the state court
action, the Chism estate’s pleadings seeks a “judgment against Defendants in
an amount in excess of $50,000.00.” (emphasis added). That amount does not
in clear terms satisfy the statutory minimal requirement for jurisdiction. We
therefore turn to “summary-judgment type” evidence to determine if the
jurisdictional amount is met. See id.; see also 28 U.S.C. § 2108 (allowing
consideration of “other competent evidence” when deciding the amount in
controversy). During the deposition of Karen Caviness, the representative of
Chism’s estate, her lawyer expressly represented that the value of the estate’s
Vioxx claim was $200,000. Neither party disputed this amount. To the
contrary, the Shelton Defendants and the Chism estate have admitted in
pleadings that the amount in controversy is met. This representation,
combined with the parties’ admissions, is sufficient evidence to clarify that the
amount in controversy is met. We therefore possess subject matter jurisdiction
over the Chism action.
IV.
We will now turn to the merits of the malpractice claims. On appeal,
Imperium reiterates its earlier position that the policy’s prior-knowledge
3 Imperium is a Texas corporation. Shelton is a citizen of Mississippi and Shelton &
Associates is a Mississippi corporation.
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exclusion applies. 4 Additionally, and in the alternative, Imperium asserts that
the policy may be rescinded based on Shelton’s material misrepresentation to
Imperium when he failed to disclose the potential Tyler and Chism claims in
the application for insurance back in January 2013. 5,6
Mississippi law applies in this diversity case. “Under Mississippi law, if
an applicant for insurance is found to have made a misstatement of material
fact in the application, the insurer that issued a policy based on the false
4 The prior knowledge-exclusion states that:
This policy does not apply to:
....
any CLAIM arising out of any WRONGFUL ACT occurring prior to the
effective date of this policy if:
....
the INSURED at or before the effective date knew or could have
reasonably foreseen that such WRONGFUL ACT might be expected to be the
basis of a CLAIM. However, this [exclusion] does not apply to any INSURED
who had no knowledge of or could not have reasonably foreseen that any such
WRONGFUL ACT might be expected to be the basis of a CLAIM.
5 The application asked whether, “After inquiry, are any attorneys in your firm aware
. . . of any legal work or incidents that might reasonably be expected to lead to a claim or suit
against them?”
6 The district court granted summary judgment on the basis that Imperium was
entitled to rescind the policy because Shelton made a material misrepresentation concerning
the Chism claim. The district court further found that the policy’s prior-knowledge exclusion
applies to both the Tyler and Chism claim. Imperium, however, also raised below the
material misrepresentation issue as to the Tyler claim and sought rescission of the policy on
that basis. “We may affirm summary judgment on any legal ground raised below, even if it
was not the basis for the district court’s decision.” Performance Autoplex II Ltd. v. Mid-
Continent Cas. Co., 322 F.3d 847, 853 (5th Cir. 2003). We rule on alternative grounds here
because it appears that Mississippi courts have not yet definitively addressed prior-
knowledge exclusions; Mississippi courts have, however, developed a body of case law on
material misrepresentations made in the course of purchasing insurance policies. See, e.g.,
Prudential Ins. Co. of Am. v. Russell’s Estate, 274 So. 2d 113 (Miss. 1973).
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application is entitled to void or rescind the policy.” Carroll v. Metro. Ins. &
Annuity Co., 166 F.3d 802, 805 (5th Cir. 1999). “To establish that, as a matter
of law, a material misrepresentation has been made in an insurance
application, (1) it must contain answers that are false, incomplete, or
misleading, and (2) the false, incomplete, or misleading answers must be
material to the risk insured against or contemplated by the policy.” Id.; see
also Bullock v. Life Ins. Co. of Miss., 872 So. 2d 658, 661 (Miss. 2004). A
material misrepresentation must be established by clear and convincing
evidence. Carroll, 166 F.3d at 805. “Whether the misrepresentation was
intentional, negligent, or the result of mistake or oversight is of no
consequence.” Id. We address each case in turn.
A.
We begin with the Tyler claim.
1.
First, the “misrepresentation.” In January 2013, Shelton filled out an
insurance application, which contained the following question: “After inquiry,
are any attorneys in your firm aware . . . of any legal work or incidents that
might reasonably be expected to lead to a claim or suit against them?” Shelton
answered, “No.” The parties dispute whether Shelton’s answer was a
misrepresentation.
Imperium argues that when Shelton filled out the application, Shelton
and the attorneys in his firm were (1) aware of legal work that (2) might
reasonably be expected to lead to a malpractice claim. Imperium focuses on
Shelton’s representation of Paul Tyler in the state-court lawsuit filed against
Tyler by AFC. When Shelton resumed representation of Tyler in October 2007,
Shelton knew that no one had responded to AFC’s requests for admissions and
that there was a pending hearing on AFC’s request to have those admissions
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deemed admitted. The Shelton Defendants successfully moved for a
continuance of the hearing but, during the three months leading up to the
hearing, made no effort to amend or otherwise rectify Tyler’s failure to respond
to AFC’s admission requests. In January 2008, at the hearing, the Shelton
Defendants informed the court that Tyler had “no response at all” to AFC’s
motion to deem the discovery requests admitted. In September 2010, over two
years later, AFC filed a motion for summary judgment on those admissions. A
hearing was set for March 21, 2011. Although a notice of the hearing was not
properly served initially, notice was properly served on Shelton & Associates
on February 2, 2011. Still, no one from Shelton & Associates responded to
AFC’s motion for summary judgment. On the day of the hearing, one of
Shelton’s attorneys was present at the courthouse, informed of the hearing,
and yet did nothing. The state court granted AFC’s motion for summary
judgment against Tyler, almost $3 million at the highest interest rate, on the
basis of the admissions and Tyler’s failure to respond to the motion for
summary judgment. Although the Shelton Defendants filed a motion on behalf
of Tyler to set aside the judgment and, eight months later, filed a motion to
amend Tyler’s response to AFC’s request for admissions, the state court denied
both motions, explicitly rejecting the Shelton Defendants’ argument that notice
had not been received. Imperium argues that there is no dispute of fact that
any reasonable attorney with awareness of the above facts would conclude that
a malpractice claim “might reasonably be expected.”
The Shelton Defendants do not dispute knowledge of these facts.
Instead, they argue that knowledge of the facts would not lead a reasonable
attorney to expect a malpractice claim. They insist that there is a genuine
dispute of fact as to whether their “legal work . . . might reasonably be expected
to lead to a claim or suit” of malpractice. Specifically, they blame the failure
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to respond to AFC’s request for admissions on one of Tyler’s former attorneys.
Further, and contrary to the record evidence, the Shelton Defendants insist
that they did not receive proper notice of the summary-judgment motion or
hearing. Finally, they argue that there was a substantial delay in Tyler’s
bringing suit, justifying a reasonable belief that no claim was possible.
We hold that, under the facts outlined above, every reasonable attorney
aware of these facts would know that such facts “might reasonably be expected
to lead to a claim or suit.” First, even though it is true that a prior attorney
failed to respond to the discovery requests, the Shelton Defendants had months
to rectify Tyler’s failure to respond to AFC’s request for admissions. They did
nothing. Instead, they waited until half a year after the entry of judgment
against Tyler, which was a full three years after Tyler failed to respond to the
discovery requests. The Shelton Defendants could have made all of the
arguments they raise now to the state court during the hearings, but they did
not do so. The Mississippi Supreme Court, in particular, found “damning” the
statements of the Shelton attorney at the hearing to have the requests
admitted. Instead of objecting that service was improper, the attorney stated,
“Your honor, [Tyler] has no response, no response at all, your Honor.” See
Tyler, 113 So. 3d at 1240–41. With respect to the hearing on the motion for
summary judgment, Amanda Daniels, the Shelton attorney present at the
courthouse on the day of the hearing on the motion for summary judgment,
had an opportunity to appear on Tyler’s behalf and to object to the hearing on
the basis of lack of notice. But she did not. Instead, she left the courthouse,
saying nothing. The state court entered summary judgment on the basis of the
admissions and lack of response.
Second, the Mississippi state courts have consistently rejected the
Shelton Defendants’ arguments that they did not receive proper service or
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notice of the motions or hearings. Knowledge of those rejections would put any
reasonable attorney on notice that a malpractice claim “might reasonably be
expected.” 7 Any reasonable attorney would know that a judgment of $2.9
million entered against his client based in substantial part on his failure to
respond to, or even show up at a hearing for, a dispositive motion would be
reasonably likely to lead to a malpractice claim. This conclusion is especially
apparent when, as here, the state court has rejected all of the attorney’s
arguments in defense.
Third, and finally, there simply was no delay in Tyler’s raising a claim.
Less than a year had passed between the $2.9 million judgment against Tyler
and Shelton’s application for malpractice insurance. The Shelton Defendants
were appealing the judgment against Tyler when Shelton applied for insurance
with Imperium. Ten months later, Tyler brought his malpractice claim.
Therefore, we conclude that Shelton made a misrepresentation when he
represented that he was not aware of any “legal work or incidents that might
reasonably be expected to lead to a claim or suit.”
2.
Next, we turn to the “materiality” element. In Mississippi, “[a]
misrepresentation in an insurance application is material if knowledge of the
true facts would have influenced a prudent insurer in determining whether to
accept the risk.” Carroll, 166 F.3d at 805. “Stated differently, a fact is material
if it might have led a prudent insurer to decline the risk, accept the risk only
for an increased premium, or otherwise refuse to issue the exact policy
requested by the applicant.” Id. For example, had the insurer known the
7Moreover, the record confirms that notice of the hearing was served on the Shelton
Defendants on February 2, 2011.
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truth, and if the insurer would have not issued the policy at all or would have
issued the policy only with a higher premium, then the falsity is material. See
Jones-Smith v. Safeway Ins. Co., 174 So. 3d 240, 241, 245 (Miss. 2015) (en
banc); Safeway Ins. Co. v. Dukes, 185 So. 3d 977, 978–79 (Miss. 2015).
Here, the record reflects that Imperium introduced deposition evidence
from the insurance agent who procured the insurance policy for Shelton. The
agent testified that, had Imperium known of the Tyler facts, “it would have
either resulted in approval pending an incident exclusion, higher premium or
a denial to write the risk at all.” Shelton has pointed to no evidence in rebuttal
and thus fails to show a genuine dispute of material fact as to materiality. See
State Farm Fire & Cas. Co. v. Flowers, 854 F.3d 842, 844 (5th Cir. 2017) (“We
resolve factual controversies in favor of the nonmoving party, but only when
there is an actual controversy, that is, when both parties have submitted
evidence of contradictory facts.” (quoting Little v. Liquid Air Corp., 37 F.3d
1069, 1075 (5th Cir. 1994) (en banc))); see also Nappier v. Allstate Ins. Co., 961
F.2d 168, 170 (11th Cir. 1992) (holding that an uncontradicted affidavit of the
insurer’s representative, stating that the insurer would not have issued a
policy had it known the truth, was sufficient to preclude any genuine issue of
material fact, and thus summary judgment as to materiality was proper).
In sum, because Shelton made a material misrepresentation in his
application for insurance by failing to disclose the potential Tyler claim,
Imperium is entitled to rescind the policy and the district court judgment in
favor of Imperium in the Tyler matter is affirmed.
B.
We turn now to the Chism action and hold that Imperium is also entitled
to summary judgment because the insurance policy is voidable. Our decision
is not based upon failure of Shelton to disclose the Chism claim. The result of
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Shelton’s misrepresentation concerning the Tyler matter is that Imperium may
rescind the Shelton Defendant’s insurance policy in its entirety. See Carroll,
166 F.3d at 805 (“Under Mississippi law, if an applicant for insurance is found
to have made a misstatement of material fact in the application, the insurer
that issued a policy based on the false application is entitled to void or rescind
the policy.”); see also Coffey v. Standard Life Ins. & Annuity Co. of the S., 120
So. 2d 143, 148–49 (Miss. 1960) (holding material misrepresentations in an
insurance application gave the insurer the “right to declare null and void the
insurance”). This rescinded policy is the only policy that would have covered
the Chism estate’s malpractice claim. There is simply no surviving or extant
policy to cover the Chism estate’s claim against Shelton’s malpractice.
Consequently, Imperium is not under any duty to pay the claims brought by
the Chism or Tyler estates against the Shelton Defendants. 8 The Chism
estate’s relief must come from the Shelton Defendants themselves. The district
court judgment in favor of Imperium in the Chism case is thus affirmed.
V.
Finally, we turn to the Shelton Defendants’ bad-faith counterclaims. In
Mississippi, “[a]n insured seeking to recover on a claim of bad faith must first
establish the existence of coverage on the underlying claim.” Stubbs v. Miss.
Farm Bureau Cas. Ins. Co., 825 So. 2d 8, 13 (Miss. 2002). Because we affirm
8 On first impression it may seem unfair to permit Imperium to deny coverage for the
Chism claim because of Shelton’s misrepresentations regarding the unrelated Tyler claim.
That Shelton’s material misrepresentation regarding his malpractice conduct allowed
Imperium to void a policy that may have otherwise covered many claims against the Shelton
Defendants is indeed unfortunate. But here it is equally “unfair” to both victims of Shelton’s
alleged malpractice—the estates of Tyler and Chism—neither of whom committed a wrong
nor are responsible in any way for the policy’s rescission. But the bottom line result is that,
once rescinded, there is no insurance available to cover claims brought by any of Shelton’s
former clients.
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the district court’s holding that the policy does not provide coverage with
respect to the Tyler and Chism claims, we also affirm the district court’s
holding that the Shelton Defendants’ counterclaims cannot survive.
VI.
In sum, we hold that Shelton made material misrepresentations when
he applied for insurance in January 2013 regarding the Tyler matter.
Accordingly, under Mississippi law, Imperium is entitled to rescind the policy.
We therefore AFFIRM the district court’s grant of summary judgment for
Imperium with respect to both actions. We further AFFIRM the dismissal of
the Shelton Defendants’ counterclaims.
AFFIRMED.
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HAYNES, Circuit Judge, dissenting:
I concur in the portion of the revised judgment concluding that we have
jurisdiction as to the Chism claim. Because there is a genuine issue of material
fact as to whether Shelton made a misrepresentation by failing to disclose the
Tyler action as a potential claim in his application for malpractice insurance, I
respectfully dissent from the judgment affirming the Tyler claim. As a result,
I also dissent from the judgment affirming the Chism claim because it relies
upon the findings as to the Tyler claim.
The majority opinion focuses primarily on three facts to conclude that
“every reasonable attorney aware of the facts would know that such facts
‘might reasonably be expected to lead to a claim or suit’”: (1) an attorney with
Shelton & Associates responded that Tyler had “no response at all” to the
motion to have the requests for admissions deemed admitted, (2) the firm failed
to respond to the motion for summary judgment, and (3) Ms. Daniels, who was
present at the courthouse on the day of the summary judgment hearing, failed
to make an appearance on Tyler’s behalf. Maj. Op. at 13–14. Because this is
a summary judgment, all of these facts must be viewed in the light most
favorable to the Shelton Defendants. See Johnson v. World All. Fin. Corp., 830
F.3d 192, 195 (5th Cir. 2016). While any of these events arguably could put a
reasonable attorney on notice that a malpractice claim may reasonably be
expected, I do not agree with the majority opinion’s conclusion that
they necessarily do so.
First, the Shelton Defendants have outlined a plausible strategy behind
their actions at the hearing on the motion to have the requests for admission
admitted. The Shelton & Associates attorney representing Tyler investigated
various strategies to get the admissions set aside, including whether there was
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a legitimate factual basis on which to deny the requests for admission. The
attorney determined that the best course of action would be for Tyler to testify
at the hearing and defend the motion, even though Tyler could not deny many
of the requests. When Tyler did not attend the hearing, the attorney did not
believe he had the necessary information to defend the motion, leading to the
statement that Tyler did not have a response. Under those circumstances,
where the lawyer depended on the client to attend and defend the motion and
the client did not attend, a reasonable attorney could believe that there was
not a basis for a malpractice suit. Further, because it was apparent that many
of the requests—perhaps the most damning of them—could not be denied, a
reasonable attorney would not necessarily anticipate a malpractice suit by not
immediately making a motion for leave to amend the request for admissions.
Second, with respect to the issue of whether the Shelton Defendants
were served with notice of the summary judgment hearing, the summary
judgment ruling was on appeal at the time that Shelton applied for malpractice
insurance. The majority opinion rejects that the appeal makes any difference,
because “the Mississippi state courts have consistently rejected the Shelton
Defendants’ arguments that they did not receive proper service or notice of the
motions or hearings.” Maj. Op. at 15. But every case is different. Because of
confusion created by an attorney leaving the firm and the varied
representation of Tyler that resulted, the Shelton Defendants could reasonably
believe they could prove that they had not received actual notice and that the
district court had made an inaccurate ruling as to whether service had been
proper. I cannot agree that Mississippi courts rejecting similar contentions in
other cases would have put the Shelton Defendants on notice that a
malpractice claim may be reasonably expected while their case was still on
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appeal. Furthermore, Tyler’s failure and inability to assist in the request for
admissions set aside also impacted the merits of the summary judgment
motion.
Third, it cannot be that the presence of Ms. Daniels at the courthouse on
the day of the summary judgment hearing for a different case would put every
reasonable attorney on notice that a malpractice claim may reasonably be
expected. Neither party claims that Ms. Daniels knew anything of Tyler prior
to being at the courthouse. She only learned from a third party, that day, that
the case existed. When she looked up the files, she believed that a former
associate of Shelton & Associates was working on the case, and she testified
that the third party did not think Shelton & Associates was working on
Tyler. Therefore, she left the courthouse when she had completed her work
there. Ms. Davis had investigated multiple sources and did not believe that
Shelton was working on the case; therefore, she would not have known that
she should attend the hearing and object for any reason (such as lack of
notice). A reasonable attorney could say that this instance was not reasonably
likely to result in a malpractice suit.
In sum, while the Shelton Defendants could have, and likely should
have, handled aspects of the Tyler claim differently, assuming the facts in a
light most favorable to the Shelton Defendants, these are not clear instances
where every reasonable attorney would reasonably expect a malpractice claim.
This is a factual question for the jury on which Imperium would have the
burden of proof. Accordingly, I respectfully dissent from the portion of the
judgment concluding that Shelton made a misrepresentation to Imperium in
applying for malpractice insurance.
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Because of my conclusion above, I turn to Imperium’s other argument for
affirmance which was not addressed in the majority opinion: that the Shelton
Defendants violated the policy’s prior-knowledge exclusion. The prior-
knowledge exclusion states that the policy does not apply to “any claim arising
out of any wrongful act occurring prior to the effective date of th[e] policy if . . .
the insured at or before the effective date knew or could have reasonably
foreseen that such wrongful act might be expected to be the basis of a claim.”
Our decision in OneBeacon Insurance Co. v. T. Wade Welch & Associates, 841
F.3d 669 (5th Cir. 2016), guides the analysis here. 1 There, we interpreted a
prior-knowledge exclusion in a claims-made malpractice policy to apply only to
a “‘wrongful act’ reasonably likely to lead to a malpractice claim.” 841 F.3d at
677. A claims-made lawyer malpractice policy would be worth virtually
nothing if knowledge by the attorney that he had committed an act or omission
coupled with a later malpractice lawsuit based upon that act or omission were
enough to defeat coverage.
The standard in OneBeacon avoids the circularity that would result from
Imperium’s approach. As discussed with respect to the misrepresentation
analysis, Imperium has not proven that any of the alleged “wrongful acts”
would have been reasonably likely to lead to a malpractice claim. Therefore,
the prior-knowledge exclusion does not provide an alternative basis to affirm.
Accordingly, I respectfully dissent from the judgment affirming the
district court. 2
1Although OneBeacon applied Texas law, no material difference between Texas and
Mississippi law exists in this instance, as conceded by the parties at oral argument.
2Because this conclusion affects the disposition of the Shelton Defendants’ bad-faith
counterclaims, I would vacate and remand those claims pending the outcome of this case.
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