Knoderer v. State Farm Lloyds

WILLIAM R. AND SUSAN M. KNODERER, Appellants v. STATE FARM LLOYDS, PENNI PERKINS AND TOM ROBERTS, Appellees

No. 06-13-00027-CV

Court of Appeals Sixth Appellate District of Texas at Texarkana

Date Submitted: April 2, 2014

September 19, 2014

On Appeal from the 354th District Court Hunt County, Texas

Trial Court No. 74,037

Before Morriss, C.J., Carter and Moseley, JJ.

Memorandum Opinion by Chief Justice MorrissMEMORANDUM OPINION

In this case, both sides—William R. Knoderer and wife, Susan M. Knoderer, as plaintiffs (collectively, the Knoderers), and State Farm Lloyds, Penni Perkins, and Tom Roberts, as defendants (collectively, State Farm)—have gone to remarkable lengths in fighting an insurance dispute over a house flooded by a leak in its plumbing system. The record reveals voluminous discovery, the substantial use of experts by both sides, the apparently intentional destruction of evidence by William in direct violation of a trial court directive, the substantial disembowelment of the Knoderer house, and the remarkable discovery sanctions of the procedural "death penalty"¹ together with monetary sanctions assessed against the Knoderers of over one million dollars. This appeal is about those sanctions.

State Farm requested these death penalty sanctions based on its allegations that the Knoderers—after they allegedly pried a water valve fitting from the water pipe causing their house to flood February 20, 2008—first, fabricated six photographs in an attempt to discredit State Farm's analysis and, then, intentionally destroyed evidence concerning these six fabricated photographs just hours after being explicitly directed by the trial court to preserve it. The trial court granted State Farm's latest motion for sanctions, rendered judgment deciding the case in favor of State Farm, and ordered the Knoderers to pay State Farm $142,339.44 in expert fees, $33,474.57 in costs, and $1,000,000.00 in attorneys' fees.

On appeal, the Knoderers attack the sanctions. They claim that it was error to assess sanctions against Susan and that the "death penalty" sanctions were improper. State Farm disagrees and argues that the Knoderers failed to assign error challenging the monetary sanctions.

We reverse and remand this case to the trial court, because (1) "death penalty" sanctions are not sustainable on this record against either of the Knoderers, (2) the Knoderers fairly presented the claim that the monetary sanctions are excessive, (3) the monetary sanctions are excessive, and (4) without evidence that Susan committed any sanctionable conduct, sanctions were improperly assessed against her.

The ill will between the parties apparently originates from a prior lawsuit the Knoderers lost seeking compensation from State Farm for mold resulting from an earlier water leak. Before the current case arose, a water filter valve had burst and flooded the Knoderers' home. Mold had been discovered, but, after restoration was completed, State Farm refused to "pay to completely redo those repairs to access and address hidden mold." State Farm also had prevailed in the precursor lawsuit in its position that the Knoderers' policy did not cover mold.

After losing that first lawsuit, the Knoderers added specific mold coverage to their homeowner's policy. On January 30, 2008, State Farm, after determining the coverage should not have been issued, sent the Knoderers a letter advising that their mold coverage would cease effective March 6, 2008. On the evening of February 20, 2008, a blue PEX pipe supply line separated from a brass "SharkBite" fitting inside the wall of a utility closet, flooding the Knoderers' residence.

State Farm hired Dr. Antoine Rios, Ph.D., a mechanical engineer, to conduct an expert analysis of the fitting. Rios released his initial report on the pipe fitting March 13, 2008. This report concluded that it was "unlikely that pull out occurred due to water pressure alone." State Farm requested additional testing.

Meanwhile, State Farm sent the Knoderers a letter demanding access to the home² and representing, "In accordance with your contract, we will pay for water damages and necessary mold remediation resulting from the February 20, 2008[,] water loss." Two additional letters dated April 29, 2008, and May 7, 2008, can reasonably be interpreted to represent that demolition was necessary and that State Farm would pay for the restoration. After the Knoderers granted State Farm access to the house, the cabinets, countertops, fixtures, appliances, doors, trim, flooring, and bottom four feet of sheetrock were removed from the house.

A more detailed report was issued by Rios May 18, 2008. This report stated,

The failed fitting shows slight drag marks instead of grooves, as demonstrated in the pull out test samples. The witness marks of the failed fitting indicate that the tube was appropriately inserted. The witness marks are deeper than the drag marks. This is an indication that the teeth had to be partially released to allow the tube to be pulled out. Additionally, the drag marks are not symmetrical on the tube, which indicates that some teeth were released further than others.

In two later reports issued March 12, 2009, and July 1, 2010, Rios conducted additional testing, including various pressure tests, and concluded that the "tests clearly show that the collar partially retracted the teeth consistent with the use of a screwdriver, or similar tool, to press the collar of the actual fitting."

The Knoderers filed this lawsuit claiming State Farm used deception to increase the Knoderers' damages by misrepresenting in their letters to the Knoderers that State Farm would pay for the demolition and restoration of the house. The Knoderers' cause of action was based on the Texas Insurance Code.³ Section 541.060(a)(1) provides in pertinent part:

(a) It is an unfair method of competition or an unfair or deceptive act or practice in the business of insurance to engage in the following unfair settlement practices with respect to a claim by an insured or beneficiary:

(1) Misrepresenting to a claimant a material fact or policy provision relating to coverage at issue . . . .

TEX. INS. CODE ANN. § 541.060(a)(1) (West 2009). Section 541.061 provides in pertinent part:

It is an unfair method of competition or an unfair or deceptive act or practice in the business of insurance to misrepresent an insurance policy by:

(1) making an untrue statement of material fact;

. . . .

(3) making a statement in a manner that would mislead a reasonably prudent person to a false conclusion of a material fact. . . .

TEX. INS. CODE ANN. § 541.061 (West 2009). The Knoderers' latest petition alleges violations only of subsections (1) and (3).

The record contains evidence that State Farm suspected the claim might be denied when it sent the letter promising to pay for the restoration. Tom Roberts, the State Farm agent who sent the letter, states in his affidavit,

After receiving, considering and analyzing the initial report from The Madison Group, opining that it was unlikely the loss occurred due to water pressure on the fitting alone, it was determined that State Farm needed outside legal assistance and advice in connection with its ongoing investigation.

The Knoderers claim this admission establishes that the letter contains misrepresentations.

The Knoderers denied State Farm's claims of fraud. Although the Knoderers did not contest the evidence with competing scientific experts, the Knoderers have some compelling contrary evidence. The Knoderers were in Vermont for six days starting February 13. Kelly Gaudreau, Acting Director of the Greenville YMCA, states in his affidavit that he was a housesitter for the Knoderers for ten years and took care of the house on the weekend in question. Gaudreau states he did laundry Sunday, February 17, and did not notice any water leaks in the utility closet. Gaudreau left the house at 9:00 a.m. February 19. Scott Mooney⁴ testified in his deposition that it was impossible to disconnect the pipe, re-sheetrock the wall, have the sheetrock dry, and then paint the wall "in that short amount of time." Randy Wineinger, owner of R.L. Wineinger Construction,⁵ identified the sheetrock patch⁶ as the same sheetrock patch he installed nine months before. Wineinger states in his affidavit:

Those photos depict exactly the sheetrock repair I made before the leak involved in this matter occurring. The reason the texture and finish are different in my repair to that area is that when I was making the two sheetrock repairs to the utility closet, I was using texture from an aerosol spray can. I ran out of spray texture before I could finish the sheetrock repair in the exact area where the leak in this case occurred. The sheetrock patch over the area where the leak in this case occurred was exactly as I left it in the repair I made there some nine months before the leak involved in this matter occurred. I recognize my work, and that sheetrock patch that was removed after the leak in this matter is the exact patch which I installed before the leak involved in this matter. The texture and finish of my repair in that area are different simply because I ran out of the spray texturebefore I could complete the texturing and finishing of the sheetrock repair in that area.

The affidavit of Ronny Hobbs, the plumber who repaired the leak and removed the fitting, casts even more doubt on State Farm's evidence. Hobbs states that the fitting had been placed in a box with other fittings. Hobbs further states, "I informed Mr. Tayler that we could not say if this was the pipe from Mr. Knoderer's house and that we had attempted to see why the fitting failed and had assembled and disassembled the piece he took many times." Hobbs also states that the State Farm agent also left with "a fitting from my stock" which Hobbs had used to "show and discuss with [the agent] how it worked."

In his deposition, William disclosed for the first time that he had six photographs proving the fitting...