BankDirect Capital Finance v. Plasma Fab, LLC: SCOTX on Mandates, Manners, and Equitable Itches

           When will courts read a substantial compliance exception into a statute? The Texas Supreme Court recently took a hard-line stance against reading such an exception into a statute that does not, itself, include a substantial compliance exception.

            In BankDirect Capital Finance v. Plasma Fab, LLC, 60 Tex. Sup. J. 892, No. 15-0635 (Tex. 2017), the Court considered the issue whether BankDirect improperly cancelled an insurance policy it financed for Plasma Lab. Plasma Lab had defaulted on the premium payments owed to BankDirect. Pursuant to the Texas Premium Finance Act, BankDirect sent Plasma Lab a notice of intent to cancel the policy. The statute required that such notice provide the defaulting party ten days from the date the notice is mailed to cure. Although BankDirect set out a ten-day period for Plasma Lab to cure, it sent the notice one day after the date listed on the notice, thereby providing Plasma Lab nine days from the date the notice was mailed to cure. Plasma Lab did not cure the default and BankDirect subsequently cancelled the policy.

            Four days after the deadline to cure the default, a fire destroyed an apartment where some of Plasma Lab’s employees worked. Plasma Lab paid the default amount the next day, but the policy had already terminated, so it lacked insurance coverage for the apartment fire. Plasma Lab was sued for injuries and damages arising from the fire, which resulted in a $6 million judgment against Plasma Lab. Plasma Lab then sued BankDirect and Scottsdale Insurance Company for breach of contract and related claims.

            The majority opinion made clear that the statutory text itself resolved the case. No “substantial compliance” exception is stated in the relevant Act. And the facts demonstrate that BankDirect did not comply with the required notice provision. Therefore, because BankDirect provided only a nine day cure period instead of the required ten, BankDirect improperly terminated Plasma Lab’s insurance policy. The majority opinion explained that the Court’s role in interpreting a statute is to resolve the issue by the text itself:

We must resist the interpretive free-for-all that can ensue when courts depart from statutory text to mine extrinsic clues prone to contrivance. The Code Construction Act offers a buffet of interpretive options, but to our credit, we have often been picky eaters, opting instead for a simpler, less manipulative principle: Clear text equals controlling text.

. . .

“Substantial compliance” may scratch an equitable itch, but law, without equity, though hard and disagreeable, is much more desirable for the public good, than equity without law: which would make every judge a legislator, and introduce most infinite confusion.

            A closer look at the majority opinion, however, reveals a more nuanced judicial philosophy or position. As an example, the BankDirect majority cites to Roccaforte v. Jefferson County, 341 S.W.3d 919 (Tex. 2011), where the Texas Supreme Court interpreted a “substantial compliance,” as opposed to full compliance, requirement in a statute. Rather than just say that the Court should not have ruled the way it did, the majority attempted to distinguish Roccaforte.

            In Roccaforte, the issue was whether the plaintiff failed to comply with a pre-suit notice requirement in the Local Government Code, which required notice within a prescribed time and a prescribed manner—by registered or certified mail. The plaintiff hand-delivered notice within the prescribed time.  The Roccaforte Court held that the statute at issue requires only substantial compliance, and hand-delivery accomplished the underlying purpose of the statute. The BankDirect Court reasoned that Roccaforte is distinguishable because, unlike with the plaintiff in BankDirect, Roccaforte satisfied the time limit, which the Court reasoned was a mandate, even though Roccaforte did not satisfy the delivery method, which the Court reasoned only concerned the “manner” of notice.

            But the BankDirect majority’s explanation here is incomplete. For one thing, in just one paragraph earlier, the majority provided an extensive list of statutes in which the legislature had written in a substantial compliance rule, concluding that “‘[s]ubstantial compliance’ needs no judicial assist. . . When the Legislature desires a not-so-bright line forgiving noncompliance, it knows what to say and how to say it.” The statute in Roccaforte, however, did not include an express substantial compliance clause.

            The BankDirect majority’s distinction between a mandate and a manner, then, was expected to do all of the work. What the majority never answered is why the time-limit of delivery is a mandate but the method of delivery is only a manner?  And, what is the difference when it comes to a statute?  And, why does that difference matter?  To answer these questions requires the majority to do exactly what it says it should not do: “scratch an equitable itch.”

            The majority attempted to distinguish a time-limit from other types of statutory requirements by quoting to a line in Edwards Aquifer Authority v. Chemical Lime, Ltd., 291 S.W.3d 392, 405 (Tex. 2009):  “A deadline is not something one can substantially comply with.” The dissent quickly dispensed with the majority’s attempted analogy to Chemical Lime by pointing out that the date there was a deadline for the filing of permit applications. The time-period at issue in BankDirect was a time-frame, not necessarily a deadline, and the time-frame did not provide a minimum notice period to the borrower, Plasma Lab. So, if the mail is extremely slow, because of a holiday or some other reason, the borrower may only have a couple of days to cure, even if the notice was sent ten days before the cure date. Substantial compliance is possible under these circumstances. Also, though not addressed by either the majority or dissenting opinions, it is not at all clear why “deadlines” are not something one can substantially comply with. There are many hard-and-fast deadlines in the Texas Rules of Civil Procedure that are easily overcome by a showing of good cause or lack of unfair surprise or prejudice, and these are hard to distinguish from a substantial compliance rule. (One might be tempted to point to the difference between procedure and substance, but this “difference” is one without a distinction in many instances).

            The dissenting opinion offers a contrasting view of judicial statutory interpretation. The dissent pointed to the Code Construction Act, which provides courts guidance on how to interpret certain words and phrases in statutes. See Tex. Gov’t Code § 311.016. The dissent also pointed out that the Legislature has made clear in the Texas Government Code that it “intends for statutes to have a just and reasonable result,” and that courts “may consider, among other matters, the object sought to be obtained and the consequences of a particular construction.”Id. at § 311.021(3).

            With a view toward a just and reasonable result that fulfills the object to be obtained by the statute, the dissent reasoned that “substantial compliance” within the ten-day time frame was all the Act required. The Act at issue did not assess a consequence for failure to comply with the time frame, and the Court previously held that the purpose of similar statutes favored allowing a party to cure and comply. The purpose of the Premium Finance Act is to strike “a balance between protecting the rights of borrowers and premium finance lenders.” And, since the time-frame in the Act “links the notice’s time requirement to the lender’s action in mailing the notice instead of the borrower’s receipt of the notice,” a buyer is not afforded a fixed amount of time to cure the default after receiving notice. So long as the buyer is provided notice of a specific cancellation date with some time to cure, substantial compliance is possible with the Act and should be read into the statute.

            The Majority, on the other hand, chided the dissent’s position:  “The dissent favors a ‘just and reasonable’ outcome. Respectfully, our role is to be neither generous nor parsimonious. Statutes that impose timelines naturally burden those who miss them. We must resist the temptation to alter a statute to realign perceived inequities, particularly when the Legislature has proven itself adept at enacting lenient substantial compliance’ language when it wishes. Our text-centric approach abjures the desire to cushion statutory strictness.”

            The upshot of the BankDirect opinion is that absolute compliance with a time limit in a statute is the best option when the statute does not specifically allow substantial compliance, even if the statute does not state a consequence for failure to comply with that time limit. Bottom line: Mind your manners and follow your mandates.