In The
Court of Appeals
Sixth Appellate District of Texas at Texarkana
No. 06-14-00045-CV
THE VILLAS OF MOUNT PLEASANT, LLC, D/B/A GREENHILL VILLAS, F/D/B/A
VILLAS OF MOUNT PLEASANT, MT. PLEASANT OPERATORS, LLC, AND LLOYD
DOUGLAS, Appellants
V.
KYLE KING, INDIVIDUALLY, AS ADMINISTRATOR OF THE ESTATE OF MARILOU
WHATLEY KING, DECEASED, AND ON BEHALF OF THE WRONGFUL DEATH
BENEFICIARIES OF MARILOU WHATLEY KING, Appellee
On Appeal from the 276th District Court
Titus County, Texas
Trial Court No. 37,338
Before Morriss, C.J., Carter and Moseley, JJ.
Opinion by Justice Carter
OPINION
Kyle King admitted his mother, Marilou Whatley King (Whatley), to The Villas of
Mount Pleasant, LLC, d/b/a Greenhill Villas (the Villas) nursing facility in Mount Pleasant,
Texas. Acting as Whatley’s agent, King signed an admission agreement containing an
arbitration clause that purported to require the parties to arbitrate any controversy arising from
the services provided by the Villas to Whatley. Whatley died, and King sued the Villas alleging
that her death was caused by its failure to render proper nursing home care and to protect his
mother from abuse. Under Section 74.451 of the Texas Civil Practice and Remedies Code, the
arbitration agreement, to be enforceable, must contain a conspicuously placed, written notice
stating that the agreement is invalid unless it is also signed by an attorney chosen by and
representing the patient. TEX. CIVIL PRAC. & REM. CODE ANN. § 74.451 (West 2011). The
agreement signed by King on Whatley’s behalf contained no such notice, and it was not signed
by an attorney acting on Whatley’s behalf. The trial court found that the arbitration agreement
was not enforceable.
The first issue we must resolve is whether the Federal Arbitration Act (the FAA)
preempts Section 74.451, thereby rendering it inapplicable to this case. If the FAA does preempt
Section 74.451, then we must decide whether the McCarran-Ferguson Act (the MFA) reverse
preempts the FAA, thereby negating the FAA’s preemptive effect and restoring Section 74.451’s
applicability to Whatley’s agreement with the Villas.
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I. Texas Law on Arbitration Agreements Between Patients and Health Care Providers
Section 74.451 of the Texas Civil Practice and Remedies Code prohibits health care
providers from requiring or even requesting that a patient execute an agreement to arbitrate a
health care liability claim unless such agreement includes a clear, conspicuous, written notice
printed in ten-point, boldface type and stating,
UNDER TEXAS LAW, THIS AGREEMENT IS INVALID AND OF NO
LEGAL EFFECT UNLESS IT IS ALSO SIGNED BY AN ATTORNEY OF
YOUR OWN CHOOSING. THIS AGREEMENT CONTAINS A WAIVER OF
IMPORTANT LEGAL RIGHTS, INCLUDING YOUR RIGHT TO A JURY.
YOU SHOULD NOT SIGN THIS AGREEMENT WITHOUT FIRST
CONSULTING WITH AN ATTORNEY.
TEX. CIV. PRAC. & REM. CODE ANN. § 74.451(a). No such provision was included in the
agreement at issue in this case.
II. Preemption of Texas Law by the FAA
The Villas contends that the FAA preempts Section 74.451 and that, consequently, the
FAA governs the enforceability of the arbitration agreement signed by King on Whatley’s
behalf. The United States Supreme Court has held that the FAA “extends to any contract
affecting commerce, as far as the Commerce Clause of the United States Constitution will
reach.” In re L & L Kempwood Assocs., 9 S.W.3d 125, 127 (Tex. 1999) (citing Allied-Bruce
Terminix Co. v. Dobson, 513 U.S. 265, 268 (1995)). Stated differently, if an arbitration
agreement relates to a transaction involving interstate commerce, then the FAA preempts state
law and governs the enforceability of that arbitration agreement. If, on the other hand, the
arbitration agreement does not relate to a transaction involving interstate commerce, then state
law governs enforceability. The Texas Supreme Court has held that the payment of federal
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Medicare or Medicaid funds to a Texas health care provider as reimbursement for health care
services involves interstate commerce to a sufficient degree to render the transaction between the
Texas health care provider and its patient a transaction affecting commerce. In re Nexion Health
at Humble, Inc., 173 S.W.3d 67, 69 (Tex. 2005). Consequently, an arbitration agreement
between a Texas health care provider and its patient under the above scenario relates to a
transaction affecting interstate commerce, and the enforceability of that arbitration agreement is
governed by the FAA. Id. Here, the Villas participates in the Medicare and Medicaid programs
and is obligated to meet certain minimum health and safety standards established by the
Department of Health and Human Services. Further, Whatley received monthly Medicare
benefits that were used to partially defray the expenses arising from her stay at the Villas.
Following the precedent of the Texas Supreme Court and under the facts and circumstances of
this case, we hold that the FAA preempts Section 74.451 of the Texas Civil Practice and
Remedies Code. See id. The remaining question, then, is whether the reverse preemption
mechanism contained in the MFA applies under the facts and circumstances of this case.
III. The MFA and Reverse Preemption
The MFA states, in pertinent part, “No Act of Congress shall be construed to invalidate,
impair, or supersede any law enacted by any State for the purpose of regulating the business of
insurance . . . unless such Act specifically relates to the business of insurance.” 15 U.S.C.
§ 1012(b). “The McCarran-Ferguson Act (MFA) provides an exception to . . . preemption if the
conflicting state law was enacted ‘for the purpose of regulating the business of insurance.’”
Fredericksburg Care Co., L.P. v. Perez, 406 S.W.3d 313, 318 (Tex. App.—San Antonio 2013,
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pet. granted) (quoting 15 U.S.C. § 1012(b)). Three conditions must be satisfied to invoke the
MFA’s preemption exception: (1) the federal statute at issue—here, the FAA—must not
“specifically relate[] to the business of insurance,” (2) the state statute at issue—here
Section 74.451 of the Texas Civil Practice and Remedies Code—must have been “enacted . . .
for the purpose of regulating the business of insurance,” and (3) application of the federal statute
must “invalidate, impair, or supersede” the state statute. 15 U.S.C. § 1012(b); Perez, 406 S.W.3d
at 318 (citing United States Dep’t of Treasury v. Fabe, 508 U.S. 491, 500–01 (1993); Munich
Am. Reinsurance Co. v. Crawford, 141 F.3d 585, 590 (5th Cir. 1998)). The first and third
conditions are unquestionably met in the case; the issue we must decide is whether Section
74.451 was enacted for the purpose of regulating the business of insurance.
The San Antonio Court of Appeals recently addressed this issue in Perez, where several
former patients sued a nursing home alleging negligence and gross negligence. After carefully
analyzing the issues related to reverse preemption and the MFA, the San Antonio Court found
that “section 74.451 is a law ‘enacted for the purpose of regulating the business of insurance’
within the meaning of the first clause of section 1012(b) of the MFA and is, thus, exempted from
preemption by the FAA.” Perez, 406 S.W.3d at 325–26 (quoting 15 U.S.C. § 1012(b)). 1 In
reaching this decision, the San Antonio Court relied heavily on In re Kepka, 178 S.W.3d 279
(Tex. App.— Houston [1st Dist.] 2005, orig. proceeding), overruled in part on other grounds by
1
San Antonio applied the same reasoning to reach the same result in two additional opinions issued the same day as
Perez: Fredricksburg Care Co., L.P. v. Lira, 407 S.W.3d 810 (Tex. App.—San Antonio 2013, pet. filed), and
Williamsburg Care Co., L.P. v. Acosta, 406 S.W.3d 711 (Tex. App.—San Antonio 2013, pet. filed).
5
Labatt Food Serv., L.P., 279 S.W.3d 640 (Tex. 2009). 2 Kepka was the first case to address the
interplay of Section 74.451, the FAA, and the MFA, albeit in the context of Section 74.451’s
predecessor, Article 4590i, Section 15.01 of the Texas Medical Liability Insurance Improvement
Act. 3
In analyzing Article 4590i, the Kepka court took note of the findings and purposes
underlying its enactment and found,
It is clear . . . that the purpose of the entire statute — even those substantive
provisions that do not expressly mention insurance — was to decrease the costs of
health-care liability claims through modifications of the insurance, tort, and
medical-practice systems, in order to make insurance reasonably affordable so
that health-care providers could have protection against potential liability and so
that citizens could have more affordable and accessible health care.
Kepka, 178 S.W.3d at 291. The Kepka court concluded that Article 4590i, including Section
15.01, was enacted to regulate the business of insurance. Id. at 289. Consequently, the Kepka
court held that the MFA’s exception was triggered, reversing the FAA’s preemptive effect on
Texas’ arbitration notice requirements. Id.
A. Review of Entire Statutory Scheme or Individual Parts?
The Villas criticizes the reasoning of Kepka and Perez, labeling it an “all or nothing
approach.” Indeed, the Kepka and Perez opinions considered the purpose of the TMLA—or its
predecessor in Kepka—in its entirety and found that the purpose behind the legislation, as a
whole, was to address issues of medical malpractice and the perception that professional liability
2
The Dallas Court of Appeals applied the reasoning of Kepka in reaching the same result in In re Sthran, 327
S.W.3d 839 (Tex. App.—Dallas 2010, orig. proceeding), as did the Federal District Court for the Eastern District of
Texas in Patterson v. Nexion Health, Inc., No. 2-06-CV-443, 2007 WL 2021326 (E.D. Tex. July 9, 2007).
3
See Act of May 25, 1993, 73d Leg., R.S., ch. 625, § 4, 1993 Tex. Gen. Laws 2347, 2349–50, repealed by Act of
June 2, 2003, 78th Leg., R.S., ch. 204, § 10.09, 2003 Tex. Gen. Laws 847, 884.
6
insurance was either too expensive or entirely unavailable. The Villas contends that the better
approach is to analyze Section 74.451, which limits the creation of arbitration agreements
between health care providers and patients, in isolation.
The TMLA was unquestionably enacted as a part of the tort reform movement in Texas,
and it was clearly intended to affect liability insurance rates paid by health care providers.
However, it is also true that the particular subsection with which we are confronted does not
specifically address the business of insurance; rather, Section 74.451 is a significant
encumbrance on the rights of certain parties—health care providers and their patients—to enter
into arbitration agreements. In fact, it is reasonable to conclude that Section 74.451 favors
litigation—generally thought to increase insurance premiums—over arbitration. The
conundrum, obviously, is determining whether we should look specifically at Section 74.451 or
to the larger body of legislation of which it is a subpart in determining whether the statute was
enacted for the purpose of regulating the business of insurance.
In Labor Life Insurance Co. v. Pireno, 458 U.S. 119 (1982), a chiropractor sued an insurance
company alleging that the company was using a peer review committee to examine whether his
treatment was reasonable and necessary. The allegation was that the peer review system violated
the Sherman Act and was a conspiracy to eliminate competitive pricing. Id. The issue
confronting the Pireno court was whether the MFA exempted the practice of using peer review
committees from antitrust scrutiny. If the MFA’s exception was to apply, then the peer review
practice would have to be deemed a part of the “business of insurance.” The United States
Supreme Court found that the use of peer review committees was not part of the business of
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insurance and that the MFA’s exception did not apply. Pireno discussed three criteria, first
applied in Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. 205, 211–12 (1979),
relevant in determining whether a particular practice by an insurance company is part of the
business of insurance: “(1) the practice has the effect of transferring or spreading a
policyholder’s risk, (2) the practice is an integral part of the policy relationship between the
insurer and the insured; and (3) the practice is limited to entities within the insurance industry.”
Pireno, 458 U.S. at 129 (citing Royal Drug Co., 440 U.S. 205, 211–12 (1979)).
In United States Department of Treasury v. Fabe, 508 U.S. 491 (1993), an insurance
company in Ohio was declared insolvent. A liquidator was appointed, and the United States
filed claims in excess of $10,700,000.00. Under federal law, the United States’ claims were
entitled to first priority, but under an Ohio statute, the insurance company’s policyholders were
given first priority over the United States. The liquidator argued that the Ohio law was an act
regulating the business of insurance and that the MFA’s exception applied, meaning Ohio law
governed the issue of priorities. Id. at 497. The United States Department of the Treasury
argued that the liquidation of an insolvent insurance company was not part of the business of
insurance and that, as a result, the MFA had no effect on the Sherman Act’s preemption of Ohio
state law.
The United States Supreme Court applied the Pireno test to the facts of Fabe and
concluded,
There can be no doubt that the actual performance of an insurance contract falls
within the “business of insurance,” as we understood that phrase in Pireno and
Royal Drug. To hold otherwise would be mere formalism. The Court’s statement
in Pireno that the “transfer of risk from insured to insurer is effected by means of
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the contract between the parties . . . and . . . is complete at the time that the
contract is entered” presumes that the insurance contract in fact will be enforced.
Without performance of the terms of the insurance policy, there is no risk transfer
at all. Moreover, performance of an insurance contract also satisfies the
remaining prongs of the Pireno test: It is central to the policy relationship
between insurer and insured and is confined entirely to entities within the
insurance industry. The Ohio priority statute is designed to carry out the
enforcement of insurance contracts by ensuring the payment of policyholders’
claims despite the insurance company’s intervening bankruptcy. Because it is
integrally related to the performance of insurance contracts after bankruptcy,
Ohio’s law is one “enacted by any State for the purpose of regulating the business
of insurance.”
Fabe, 508 U.S. at 503–04 (quoting Pireno, 458 U.S. at 130; 15 U.S.C. § 1012(b)). However, the
Fabe court limited its finding on the applicability of the MFA to the Ohio priority statute’s
regulation of policyholders when it stated, “The Ohio statute is enacted ‘for the purpose of
regulating the business of insurance’ to the extent that it serves to ensure that, if possible,
policyholders ultimately will receive payment on their claims.” Id. at 506. The court drew a
sharp distinction between the interests of policyholders, on the one hand, and those of general
creditors who were not policyholders, on the other. The Court stated, “To the extent that it is
designated to further the interests of other creditors, however, it is not a law enacted for the
purpose of regulating the business of insurance.” Id. at 508. It is this language from Fabe
concerning the interests of non-policyholder creditors that we find critical to the case at hand.
According to the Villas, Fabe requires that we analyze individual sections or subsections
that are clearly part of a larger statutory framework in a vacuum. In other words, the Villas
posits that, under Fabe, we must examine Section 74.451 in isolation, without reference to or
consideration of the legislative intent behind the TMLA, the larger statutory framework of which
Section 74.451 is a part. The Villas points to Fabe’s limited holding—“to the extent [the Ohio
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statute at issue] . . . regulates policyholders, [it] is a law enacted for the purpose of regulating the
business of insurance.” Id. at 508. However, “[t]o the extent [the statute] is designed to further
the interests of other creditors . . . it is not a law enacted for the purpose of regulating the
business of insurance.” Id. By analogy, the Villas argues that, even if the overall purpose of the
TMLA was to affect policyholders and rates, the purpose of this particular statute had no effect
on the business of insurance.
In support of its narrow interpretation of Fabe, the Villas directs us to footnote eight,
where the majority answered some of the dissent’s criticisms:
The dissent assails our holding at both ends, contending that it at once goes too far
and not quite far enough. On the one hand, the dissent suggests that our holding
is too “broad” in the sense that “any law which redounds to the benefit of
policyholders is, ipso facto, a law enacted to regulate the business of insurance.”
Post, at 511. But this is precisely the argument we reject in the text, as evidenced
by the narrowness of our actual holding. Uncomfortable with our distinction
between the priority given to policyholders and the priority afforded other
creditors, the dissent complains, on the other hand, that this is evidence of a
“serious flaw.” Post, at 517. But the dissent itself concedes that a state statute
regulating the liquidation of insolvent insurance companies need not be treated as
a package which stands or falls in its entirety. Post, at 518. Given this
concession, it is the dissent’s insistence upon an all-or-nothing approach to this
particular statute that is flawed. The dissent adduces no support for its assertion
that we must deal with the various priority provisions of the Ohio law as if they
were all designed to further a single end. That was not the approach taken by this
Court in National Securities,[4] which carefully parsed a state statute with dual
4
SEC v. Nat’l Secs., Inc., 393 U.S. 453 (1969). Two Arizona insurance companies had merged with approval of the
Arizona Director of Insurance as required by state law; the SEC sued to rescind the merger for alleged material
misrepresentations, and the insurance companies invoked the MFA in arguing that federal securities law did not
apply because the relevant Arizona law concerned the business of insurance. The United States Supreme Court
found that the MFA’s preemption exception did not apply. In the words of the Court, “[The] core of the ‘business of
insurance’” under the MFA is “[t]he relationship between insurer and insured, the type of policy which could be
issued, its reliability, interpretation, and enforcement.” Id. at 460. Without elaborating, the Court also recognized
that, “[u]ndoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that
they too must be placed in the same class.” Id. Finally, the Court stated that, “whatever the exact scope of the
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goals and held that it regulated the business of insurance only to the extent that it
protected policyholders. Supra, at 502. And the dissent misinterprets our
pronouncement on the clash of priorities as a “compromise holding,” Post, at 517,
forgetting that the severability of the various priority provisions is a question of
state law.[5]
Fabe, 508 U.S. at 509, n.8.
In holding that the result in Fabe was based on the dual goals of the Ohio statute, Perez
rejected the argument that Fabe mandates a particularized parsing approach in determining
whether a particular statute is governed by the MFA:
[Appellant nursing facility] cites to Fabe as support for this “parsing” type of
statutory construction. However, Fabe clarified in a footnote that the basis for its
“parsing” analysis of the Ohio statute was the statute’s dual goals in giving
priority to policyholders as well as other creditors. Fabe, 508 U.S. at 508, 509
n.8. Section 74.451 has no such dual goal.
Perez, 406 S.W.3d at 325.
We reject this reading of Fabe. Fabe teaches that the entirety of a statute need not be treated in
such a way as to overlook the particularized goals of discrete statutory provisions. Here, for
example, the overarching goal of the TMLA is undoubtedly to reduce medical malpractice
liability insurance premiums. It is apparent, however, that not every section of the Act explicitly
advances that goal. Indeed, the particularized goal of Section 74.451—ensuring that patients are
explicitly notified of their rights before signing an arbitration agreement—has nothing to do with
statutory term, it is clear where the focus was—it was on the relationship between the insurance company and the
policyholder.” Id.
5
In a concurring opinion, Chief Justice Roberts explicitly recognized the precedential value of footnotes by stating
that “footnotes are part of an opinion, too.” United States v. Denedo, 556 U.S. 904, 921(2009). The precedential
value of footnotes has been implicitly recognized in dissenting opinions based solely on footnotes. See, e.g., Fry v.
Pliler, 551 U.S. 112 (2007) (Breyer, J., joining the majority except as to footnote 1 and Part II-B); William A.
Ramsey, Taking Note of Footnotes: The Precedential Value of Footnotes in Judicial Opinions, RES GESTAE, Sept.
2010, at 10.
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regulating the business of insurance. Taking our guidance from Fabe, we do not believe the
entirety of the TMLA must be treated as advancing a single, unitary purpose. Other cases have
taken this approach. For example, the Austin Court of Appeals in Everest Reinsurance Co. v.
Howard, 950 S.W.2d 800 (Tex. App.—Austin 1997, writ denied), relied on Fabe in holding that
the now repealed Article 21.28, Section 4(h) of the Texas Insurance Code was “not a law enacted
‘for the purpose of regulating insurance. . . .” Id. at 803; see Act of June 1, 1987, 70th Leg.,
R.S., ch. 1073, § 33, sec. 4(h), 1987 Tex. Gen. Laws 3610, 3649, repealed by Act of May 24,
2005, 79th Leg., R.S., ch. 727, § 18(a)(6), 2005 Tex. Gen. Laws 1752, 2187. Under Section
4(h), the filing of a delinquency proceeding against an insurer or a receiver in a Texas
receivership court made that specific court the exclusive venue for all actions or proceedings
filed thereafter relating to that insurer or receiver. Act of June 1, 1987, 70th Leg., R.S., ch. 1073,
§ 33, sec. 4(h), 1987 Tex. Gen. Laws 3610, 3649 (repealed 2005). In Howard, a delinquency
proceeding was filed against an insolvent reinsurance company (Company 1), and a receiver was
appointed to conduct Company 1’s affairs. The receiver filed a complaint against another
reinsurance company (Company 2) for monies allegedly due to Company 1. Company 2
removed the case to federal court, and the receiver fought removal by arguing that Section 4(h)
was enacted for the purpose of regulating the business of insurance and that, consequently, under
the MFA, Section 4(h) was excepted from preemption by the federal removal statute. In
rejecting this argument, the Austin Court stated,
The exclusive venue provision of section 4(h) does not affect the relationship
between insurance companies and their policyholders; it merely designates a
forum in which disputes concerning insolvent insurers can be heard. The
substantive rights and responsibilities of insurers and their policyholders can be
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protected in either state or federal court. Accordingly, because section 4(h) of the
Receivership Statute is not a law enacted “for the purpose of regulating
insurance,” the McCarran-Ferguson Act does not apply and cannot preempt the
federal removal statute.
Id. at 803; see also Langdeau v. United States, 363 S.W.2d 327 (Tex. Civ. App.—Austin 1962,
no writ) (holding that provision of Texas Insurance Code did not regulate business of insurance
but established priority for class of creditors of insurance company). While the Insurance Code,
when considered collectively and in broad, general terms, was obviously intended to regulate the
business of insurance, the Austin Court of Appeals twice looked beyond the collective intent to
the actual intent and effect of specific subsections of the Insurance Code to determine that those
specific subsections were not enacted for the purpose of regulating insurance. We agree with the
approach and reasoning employed by our sister court in Austin.
In Fabe, the statute in question was a part of the Ohio Insurance Code. In determining
whether the MFA’s exception was triggered, the Supreme Court specifically examined the
priority of claims statute, not the entirety of the Ohio Insurance Code. In analyzing that
particular statute, the Supreme Court noted the differing goals for different sections of the same
statute; one section was designed for the regulation of the business of insurance, and another
section was not.
In the face of a “medical malpractice insurance crisis,” the Legislature broadened the
scope of Article 4590i and recodified it as Chapter 74 of the Texas Civil Practice and Remedies
Code. Tex. West Oaks Hosp., LP v. Williams, 371 S.W.3d 171, 176–77 (Tex. 2012) (citing Act
of June 2, 2003, 78th Leg., R.S., ch. 204, § 10.11(a)(5), 2003 Tex. Gen. Laws 847, 884). Even
so, Section 74.451 does not specifically address the regulation of the business of insurance.
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This section has nothing to do with the relationship between insurers and insureds and is not
integral to that relationship. Cf. Fabe, 508 U.S. at 504. Laws which would fall within the
MFA’s ambit include those
enacted “for the purpose of regulating the business of insurance” . . . [which]
possess the “end, intention, or aim” of adjusting, managing, or controlling the
business of insurance. BLACK’S LAW DICTIONARY 1236, 1286 (6th ed. 1990).
This category necessarily encompasses more than just the “business of
insurance.” . . . [W]e believe that the actual performance of an insurance contract
is an essential part of the “business of insurance.” Because the Ohio statute is
“aimed at protecting or regulating” the performance of an insurance contract,
National Securities, 393 U.S. at 460, it follows that it is a law “enacted for the
purpose of regulating the business of insurance,” within the meaning of the first
clause of § 2(b).
Fabe, 508 U.S. at 505. Section 74.451 does not fit the definition adopted in Fabe.
Finally, even if Section 74.451 has a tangential effect on insurance contracts, any such
indirect effect is insufficient to trigger the MFA’s preemption exception. The United States
Supreme Court’s rejection of this argument in Fabe is instructive:
Of course, every preference accorded to the creditors of an insolvent insurer
ultimately may redound to the benefit of policyholders by enhancing the
reliability of the insurance company. This argument, however, goes too far: “But
in that sense, every business decision made by an insurance company has some
impact on its reliability . . . and its status as a reliable insurer.” Royal Drug, 440
U.S. at 216–17. Royal Drug rejected the notion that such indirect effects are
sufficient for a state law to avoid pre-emption under the McCarran-Ferguson Act.
Id. at 217.
Fabe, 508 U.S. at 508–09.
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In light of the foregoing, we reverse the trial court’s judgment and remand this case for
further proceedings consistent with this opinion.
Jack Carter
Justice
Date Submitted: September 24, 2014
Date Decided: December 31, 2014
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