Supreme Court of Texas Holds Non-Binding Mediation Renders a Debtor a “Settling Person”

The Supreme Court of Texas has held that participation in a non-binding mediation rendered a debtor a “settling person” under Chapter 33 of the Texas Civil Practice and Remedies Code for purposes of determining proportionate liability.

In MCI Sales & Serv. v. Hinton, No. 09-0048, (Tex. December 17, 2010), the owner and operator of a motorcoach rental service, Central Texas, filed for Chapter 11 bankruptcy protection after an accident in which five passengers were killed and several others were injured. Central Texas maintained a $5 million liability policy, the proceeds of which were paid into a liability fund maintained by the bankruptcy court. The crash victims filed creditor claims against Central Texas in bankruptcy court and participated in a non-binding mediation intended to apportion the proceeds of the liability fund. During mediation, each claimant was assigned a percentage of the fund. These percentages were incorporated into a plan submitted to and approved by the bankruptcy court in October 2003.

Under the “Apportionment Plan,” a claimant could accept the mediator’s percentage and immediately receive that portion of the liability fund. If the claimant chose not to accept the mediator’s allocation, the claimant participated in a “Litigation Plan.” Under this plan, the claimants tried their claims to a special judge agreed to by the participants, and their recovery under this plan was capped at 110% of the mediator’s allocation. Further, the parties could agree at any time to approve a full or partial distribution to any or all participants. Central Texas’s tort liability in excess of the liability fund was discharged upon approval of its reorganization plan the following year.

In June 2003, the claimants filed a lawsuit against the manufacturer of the motorcoach, Motor Coach Industries Mexico, S.A., (MCI) alleging the manufacturer of the bus should have installed seatbelts and glazed the windows of the coach with a different material. After the trial court denied MCI’s motion to join Central Texas and refused to submit a question to the jury regarding proportionate liability, a jury awarded the claimants more than $17 million.

Following the lawsuit against MCI, each claimant participated in the bankruptcy court Litigation Plan and appeared before a special judge. The special judge held that the bus driver’s negligence was the proximate cause of the claimants’ injuries and awarded all but one claimant 110% of the mediator’s award. The awards were prorated due to limited funds, however, and each claimant received a sum within 2% of that awarded by the mediator. The trial court next entered a judgment which adjusted the damage awards to account for funds each claimant received under the Litigation Plan.

MCI appealed and an appellate court reversed and remanded the case, but rejected MCI’s preemption argument. MCI then petitioned the Supreme Court of Texas for review of its preemption argument and the claimants cross-petitioned for a “review of the proportionate responsibility issue.”

MCI argued that the jury’s award was preempted by the Federal Motor Vehicle Safety Standards 205 and 208. Federal safety regulations governing at the time the motorcoach was manufactured allowed bus manufacturers to choose between several particular types of window glaze and were silent as to whether seatbelts were required.

After a lengthy review of the regulations at issue, the Supreme Court of Texas held,

Because we conclude that the jury’s verdict which is grounded in this state’s common law does not present any obstacle to the accomplishment of the federal regulatory scheme’s purpose, we hold that the federal safety standards at issue do not preempt state law.

Next, the Supreme Court determined whether Central Texas was a “setting person” under Chapter 33 of the Texas Civil Practice and Remedies Code. At the time of the accident, “section 33.003 required a trier of fact to determine the percentage of responsibility for each claimant, each defendant, each settling person, and each responsible third party who had been properly joined.” If a defendant’s percentage of responsibility exceeded 50%, that defendant was jointly and severally responsible for all of the damages a claimant could recover. The Supreme Court held that Central Texas was a “settling person” under the statute “and the trial court should have submitted a question to the jury concerning Central Texas’s proportionate responsibility as such.”

According to the Court,

We also apply Chapter 33 of the Texas Civil Practice and Remedies Code to a plan adopted by a bankruptcy court to apportion a debtor’s insurance proceeds among a group of creditors who filed claims against the bankruptcy estate. The unique plan allowed the claimants to either accept a mediated percentage of the proceeds or to litigate their claims before a special judge. Even if the claimants chose the latter course, their recovery was capped at 110% of the mediator’s award, and the claimants could agree at any time to full or partial distributions to any or all of the claimants. We must decide if this plan renders the debtor—who purchased the insurance policy funding the plan and whose further liability was discharged in bankruptcy—a settling person under Chapter 33 for purposes of determining proportionate liability. We conclude that it does. Accordingly, we affirm the court of appeals’ judgment and remand to the trial court for further proceedings consistent with this opinion.

The Supreme Court of Texas held that the jury’s verdict was not preempted because it was grounded in state common law and did not present any obstacle to the accomplishment of the federal regulatory scheme’s purpose. The Court further held that Central Texas was a “settling person” for purposes of determining proportionate liability under Chapter 33 of the Texas Civil Practice and Remedies Code and remanded the case.

In his dissent, Chief Justice Jefferson’s stated,

I would hold that the court of appeals erred in reversing the trial court’s refusal to submit Central Texas as a “settling person.” Because the Court’s holding regarding Chapter 33 neither complies with the statute (“at the time of submission”), nor properly construes the circumstances under which [claimant] pursued his claims within the bankruptcy proceedings, I respectfully dissent from that part of the Court’s judgment.

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