Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca5-03-40200/USCOURTS-ca5-03-40200-0/pdf.json

Parties Involved:
Basher Ahmad
Appellant Cross-Appellee
Dennis Joslin
Appellee Cross-Appellant

Document Text:

United States Court of Appeals

Fifth Circuit

FILED

March 8, 2004

Charles R. Fulbruge III

Clerk

In the

United States Court of Appeals

for the Fifth Circuit

_______________

m 03-40200

_______________

DENNIS JOSLIN,

Plaintiff-Third Party PlaintiffAppellee-Cross Appellant,

VERSUS

PERSONAL INVESTMENTS, INC.,

DefendantCross-Appellee,

BASHER AHMAD,

ALSO KNOWN AS ROBERT HELMAND,

DOING BUSINESS AS PACIFIC LAND EXCHANGE,

Third Party DefendantAppellant-Cross-Appellee.

_________________________

Appeal from the United States District Court

for the Southern District of Texas

m C-00-CV-324

_________________________

 Case: 03-40200 Document: 0051142988 Page: 1 Date Filed: 03/08/2004
2

Before KING, Chief Judge,JONES AND SMITH,

Circuit Judges.

JERRY E. SMITH, Circuit Judge:*

We consider here the validity of a verdict

awarding plaintiff, an investor in delinquent

loan packages, $50,000 for losses he suffered

in reliance on misleading information that

could have been debunked through a simple

investigation, and that he was told not to rely

on. The common law action for negligent misrepresentation is not an insurance policy entitling unwary investors to a refund whenever

they are injured by their failure to investigate

dubious information. 

To prevail in such an action, the plaintiff

must demonstrate that he was justified in relying on the misrepresentation. Concluding that

the evidence and reasonable inferences drawn

therefrom overwhelmingly favor a finding that

plaintiff’sreliancewas not justified, we reverse

and render a take-nothing judgment.

I.

This case involvesthemarketfor delinquent

loan pools sold at government auctions. The

defendants are Basher Ahmad, also known as

Robert Helmand, and his wholly owned close

corporation, Personal Investments (“PI”).

Like plaintiff Dennis Joslin, Helmand and PI

are in the business of purchasing packages of

delinquent loans at government auctions.

Because the obligors on these loans are

unlikely to make any further payments, the

investment is valuable only to the extent that

foreclosure affords an opportunity to gain title

to an accompanying security interest.

In 1994, Helmand placed the highest bid on

a package of loans that included a loan (the

“Nix loan”) originally taken out by Jimmy Nix,

a real estate developer. The Nix loan was secured by a deed of trust in a subdivision that

Nix was developing (the “Nix deed”). Soon after acquiring this interest, Helmand foreclosed

on the Nix deed of trust and purchased the lots

at his own foreclosure sale. Instead of paying

cash for this interest, Helmand credited the Nix

loan $250,000. 

A title search revealed, much to Helmand’s

disappointment, that the interest so acquired

was junior to several other encumbrances.

These were collectivelyvalued at a price higher

than the appraised value of the property,

making Helmand’s interest effectively

worthless.

Helmand contacted the federal agency from

which he had purchased the package, seeking a

refund for the Nix loan. Ultimately, that agency’s successor in interest, the Federal Deposit

Insurance Corporation (“FDIC”), agreed to

refund the purchase price in exchange for an

assignment of the original deed of trust.2 

Helmand claims to have protested at length

that he could not assign the extinguished interest represented by the Nix deed, and offered

instead to convey his substitute trustee’s deed.

As he tells the story, however, the FDIC was

not interested and insisted that a refund would

be available only if Helmand assigned that

which he no longer had. Helmand ultimate-

* 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.

2 The Nix deed had more value to the FDIC than

it did to Helmand, because the FDIC already owned

the other encumberances on the land and could pool

all the interests together for sale to a single party.

 Case: 03-40200 Document: 0051142988 Page: 2 Date Filed: 03/08/2004
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lySSand again as he tells it, reluctantlySSrelented to the FDIC’s demand and, in

March 1996, assigned to the FDIC the nowextinguished Nix deed in exchange for a

$177,000 refund. Naturally, he kept his own

recorded interest in the property. 

The documents assigning the Nix deed did

not indicate that it had been foreclosed. An

accompanying ledger card should haveSSbut

did notSSreflect the $250,000 credit Helmand

had placed on the loan at foreclosure.

Although that document contained a notation

saying “Send to Foreclosure,” there was no

written indication on the ledger card or the Nix

deed to indicate that the interest had been

foreclosed on and sold at auction. Helmand

knew, at this time, that the FDIC was reacquiring the deed assignment and the ledger

card so theycould be used assupporting documents in a subsequent auction of the Nix loan.

In February 1997SSalmost a year after Helmand received hisfullrefundSShislawyer, Jim

Balis, sent a letter to the FDIC declaring that

Helmand recently had discovered that the

foreclosure in 1994 preceded the assignment

to the FDIC in 1996 and that, as an

unfortunate result, FDIC had paid $177,000

for a worthless interest in real property. Helmand’s disclosure to the FDIC would be a

tautology, however, if he indeed had been

telling the agency all along that he had

foreclosed on the loan and had taken title to

the collateral. 

Nevertheless, Balis’s letter offered to tender Helmand’s deed to the FDIC, but

explained that there was a pending tax suit

filed against the property by Nueces County,

Texas. The FDIC did not respond to this

letter or to Helmand’s two attempts to mail it

a deed. The property was sold by the county

at a tax auction, where PI purchased it for a net

investment of $60,000.

In 1996, Joslin participated in an FDIC auction at which he successfully bid on a package

of loans that included the Nix loan and the now

worthless Nix deed. To formulate his bid,

Joslin was given accessto a loan file containing

documentation for many, if not all, the loans in

his pool. He arrived at a bid value by

examining the documents in the loan file and,

without performing any outside investigation,

sharply discounting their paper value to reflect

the inherent risk in purchasing distressed assets.

In this manner, he ultimately placed a value of

$34,483 on the Nix loan and Nix deed as part

of a total bid of more than $1.2 million. 

When, in 1999, Joslin discovered that Helmand had stripped the Nix loan of its collateral

before selling it back to the FDIC, Joslin’s

attorney contacted PI and asserted a claim over

the property. PI sued Joslin in state court,

seeking to quiet title to the lot. 

Joslin removed the case to federal court, asserting diversity jurisdiction, and filed a counter-claim against PI and a third-party complaint

against Helmand, alleging fraud, negligent

misrepresentation, constructive fraud, and

conspiracy. The district court re-aligned the

partiesto make Joslin the plaintiff, dismissed all

the claims against PI, and entered judgment as

a matter of law (“j.m.l.”) in favor of Helmand

on the constructive fraud and conspiracy

claims. 

The jury found Helmand liable for negligent

misrepresentation, but not fraud, and awarded

damages of $50,000. Helmand appeals the

verdict against him, and Joslin cross-appealsthe

j.m.l. and the calculation of prejudgment

interest.

 Case: 03-40200 Document: 0051142988 Page: 3 Date Filed: 03/08/2004
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II.

We review a verdict only to determine

whether there is a legally sufficient evidentiary

basis for the jury to find as it did. Morante v.

Am. Gen. Fin. Ctr., 157 F.3d 1006, 1009 (5th

Cir. 1998). We draw all reasonable inferences

in favor of the non-moving party, without

weighing the evidence or assessing the

credibility of witnesses. Serna v. City of San

Antonio, 244 F.3d 479, 482 (5th Cir. 2001).

“There is no legally sufficient evidentiary basis

when the facts and inferences point so strongly

and overwhelmingly in favor of one party that

the Court believes that reasonable men could

not arrive at a contrary verdict.” Wallace v.

Methodist Hosp. Sys., 271 F.3d 212, 219 (5th

Cir. 2001).

Texas courts follow the common law definitionofnegligent misrepresentation embodied

in the Restatement (Second) of Torts § 552.

Fed. Land Bank Ass’n v. Sloane, 825 S.W.2d

439, 442 (Tex. 1991). The elements of the

tort are that

(1) the representation is made by a

defendant in the course of his business, or

in a transaction in which he has a pecuniary

interest;(2) the defendantsupplies‘false information’ for the guidance of others in

their business; (3) the defendant did not exercise reasonable care or competence in obtaining or communicating the information;

and (4) the plaintiff suffers pecuniary loss

by justifiably relying on the representation.

Id.

There are sufficient facts on which a jury

could determine that the first three elements of

thistest are met. The representations were the

transfers of a deed of trust failing to reflect

that its value had been eviscerated by

foreclosure, and a ledger card failing to reflect

the $250,000 credit Helmand had used to

purchase the foreclosed property. The record

showsthat Helmand had substantial experience

in this business and intended the documents to

be used in future FDIC auctions. That evidence

adequately supports a finding that the

statements contained false information, were

made in the course of Helmand’s business, and

were (at least) negligently given.

We reverse the judgment that is based on the

verdict, however, because the record does not

support a finding of justifiable reliance on the

part ofJoslin. Leaving aside the scant evidence

of actual reliance (Joslin’s testimony regarding

his habitsminimally establishesthat he probably

relied on the documents in preparing his bid.),

it was unreasonable for Joslin to formulate his

bid in reliance on the accuracy of documents in

the loan file. 

Under Texaslaw, a plaintiffmust prove reasonable reliance. Clardy Mfg. Co. v. Marine

Midland Bus. Loans Inc., 88 F.3d 347, 358

(5th Cir. 1996). The reasonableness of reliance

is measured in light ofthe plaintiff’sintelligence

and experience. Id. Moreover, the context in

which information is given will affect the conclusion whether a party was justified in relying

thereon.3 Reliance is unjustified where the act

of reliance is itself an act of negligence by the

plaintiff. Scottish Heritable Trust, PLC v. Peat

Marwick Main & Co., 81 F.3d 606, 615 (5th

Cir. 1996).

3 See, e.g., McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787, 794

(Tex. 1999) (finding unreasonable the relianceon an

attorney’s representations in an adversarial context);

Lesikar v. Rappeport, 33 S.W.3d 282, 319 (Tex.

App.SSTexarkana 2000, pet. denied) (same).

 Case: 03-40200 Document: 0051142988 Page: 4 Date Filed: 03/08/2004
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Joslin had between two and five weeks in

which to formulate his bid and perform the

necessary due diligence. The FDIC’s loan sale

agreement warned Joslin and other investors

not to rely on any documents provided by the

FDIC, and urged that the investor perform

whatever investigations he “deems to be

warranted.” 

Joslin used his time to review the documents in the various loan files to arrive at a

bid price, but he did not run title searches on

the properties listed as security. Instead, it

was his custom to enter numerous bids,

discounting the value of the assets to account

for the likelihood that some loans in a pool

would be worthless. By discounting in this

manner, Joslin, in his bid, valued the Nix loan

at only $34,483, or around one-tenth of the

land’s appraised value of $346,000. 

It was only after he placed a winning bid at

auction that Joslin assigned his employees the

task of investigating his interest in the

collateral he had purchased. As a result, it was

not until 1999 that Joslin discovered the Nix

deed had been extinguished by the

foreclosure.4

Joslin argues that a reasonable jury could

find his reliance justified, because the nature of

the market for delinquent loans requires him to

assume that the documents contain some

minimal semblance of accuracy. He points out

that the loans are auctioned off in large pools,

each containing too many parts to allow for

detailed due diligence. 

Although acknowledging he takes a risk that

any individual loan will turn out to be

worthless, Joslin argues that he did not take a

corresponding risk “that one of his fellow bidders would rig the auction by stripping the asset

of its collateral,” causing buyers to place

unrealistic bids on completely worthless property. Joslin reasons that by injecting deliberately

false information into the marketplace, Helmand distorted the normal balance of risks and

rewards on which Joslin and others relied in

formulating their bids.

This explanation is unavailing. Joslin was

unable to persuade the jury, bya preponderance

of the evidence, that there was fraud. As a result, the reasonableness ofJoslin’sreliance cannot be established by an argument that no

reasonable investorshould be punished for having failed to anticipate fraud. Indeed, had

actualfraud been shown, Joslin would not have

needed to prove the reasonableness of his reliance.5

4 Consequently, his negligent misrepresentation

claim would have been barred by the statute of

limitations, had that been raised. See Milestone

Props., Inc. v. Federated Metals Corp., 867

S.W.2d 113, 119 (Tex. App.SSAustin, 1993, no

writ) (two-year limitations period applies to negligent misrepresentation claims); Heci Exploration

Co. v. Neel, 982 S.W. 2d 881, 886-87 (Tex. 1998)

(discovery rule does not toll two-year limitations

periodwheremisrepresentation was discoverable in

the title records). Federal courts sitting in diversity

apply state statutes of limitations. Vaught v.

Showa Denko K.K., 107 F.3d 1137, 1145 (5thCir.

1997). But, we do not decide the case on this

(continued...)

4

(...continued)

ground, becauseHelmand did not argue the point, as

was his burden to do. Woods v. William M. Mercer, Inc., 769 S.W.2d 515, 517 (Tex. 1988).

5 The elements of common law fraudulent misrepresentation in Texas are that (1) the defendant

made a material representation to the plaintiff;

(2) the representation was false; (3) the defendant

knew of the representation’s falsity when it was

(continued...)

 Case: 03-40200 Document: 0051142988 Page: 5 Date Filed: 03/08/2004
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Measured by the jury’s decision to absolve

Helmand ofresponsibilityfor the alleged intentional actSSa finding Joslin does not challenge

as being erroneousSSHelmand’sstatements are

nothing more than an inadvertent mistake,

negligently made. In this respect, nothing

distinguishes those statements from the bevy

of other inaccurate documentsin the loan files,

many of which place an unrealistic paper value

on the assets to which they correspond. 

Joslin took the same risk with respect to

each of those documents: He chose to invest

without investigating the accuracy of any of

the statements contained therein, hoping that

his profit from the accurate documents outweighed his losses on the inaccurate ones.

The evidence, viewed in the light most favorable to Joslin, fails to demonstrate a legally

sufficient justification for his reliance on the

documents in the loan files. He was expressly

warned not to rely on any statements found in

the files, and he easily could have dispelled any

lingering doubt over the accuracy of the

statements by performing a simple title search.

He chose instead to apply a discount factor to

the value represented in the loan files, and it is

unreasonable for him now to fault the

negligence of another for his losses from the

investment. 

Reliance under those circumstancesisitself

an act of negligence, insufficient to support a

verdict. See Clardy Mfg., 88 F.3d at 358.

Joslin cannot now supplement his profits from

the risks that panned out with tort judgments

for the risks that did not. The verdict and damage award are vacated.6

III.

Joslin cross-appeals the j.m.l. on his claims

of constructive fraud and conspiracy, and the

court’s partial failure to award prejudgment

interest. There is no error.

In Texas, constructive fraud lies where a

party breaches a “legal or equitable duty which,

irrespective of moral guilt, the law declares

fraudulent because of its tendency to deceive

others, to violate confidence, or to injure public

interests.” Archer v. Griffith, 390 S.W.2d 735,

740 (Tex. 1965). State appellate courts

frequently intimate that this occurs only where

there is a fiduciary relationship between the

parties,7and a “decision by an intermediate

appellate state court is a datum for ascertaining

state law which is not to be disregarded by a

federal court unless it is convinced by other

persuasive data that the highest court of the

state would decide otherwise.” First Nat’l

Bank v. Trans Terra Corp. Int’l, 142 F.3d 802,

5

(...continued)

made; (4) the defendant made the representation

with the intention that the plaintiff act on it; and (5)

the plaintiff detrimentally relied on the misrepresentation. See T.O. Stanley Boot Co. v. Bank

of El Paso, 847 S.W.2d 218, 222 (Tex. 1992).

6 As a result, we do not reach Helmand’s argument that, under Trans-Gulf Corp. v. Performance

Aircraft Servs., Inc., 82 S.W.3d 691 (Tex.

App.SSEastland 2002, no pet.), Joslin lacks standing to sue Helmand for negligent misrepresentation.

7 See, e.g., Jean v. Tyson-Jean, 118 S.W.3d 1, 9

(Tex. App.SSHouston 2003, pet. filed) (“Constructive fraud is the breach of a legal or equitable duty

which the lawdeclaresfraudulent because it violates

a fiduciary relationship.”); Connell v. Connell, 889

S.W.2d 534, 542 (Tex. App.SSSan Antonio 1994,

writ denied) (“To prove constructive fraud

appellants must introduce evidence that Alvin

breached a legal or equitable duty, which the law

declares fraudulent because it violated a fiduciary

relationship.”).

 Case: 03-40200 Document: 0051142988 Page: 6 Date Filed: 03/08/2004
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809 (5th Cir. 1998). 

Joslin does not dispute that there is no evidence of such a relationship here, but instead

relies on dictum in Vickery v. Vickery, 999

S.W.2d 342 (Tex. 1999), for the proposition

that a fiduciary relationship is not necessary.

His argument has no merit. In Vickery, id. at

378, the court indicated that constructive fraud

is “most frequently” found only in cases where

such a relationship exists, but it did not cite a

single instance where a fiduciary relationship

was not present and the tort was nevertheless

found to lie. 

Joslin does not cite any such cases either,

nor has our research revealed any. In any

event, Joslin fails to point to anything that

would qualify as a commensurate “legal or

equitable duty,” Archer, 390 S.W.2d at 740,

that would justify excusing his inability to

prove an intent to deceive on Helmand’s part.

The district court properly granted j.m.l. on

this ground.

Joslin concedes that the above stated

analysis also forecloses his claimof conspiracy

to commit constructive fraud, because the

alleged conspiracy would have, as its object,

the commission of a non-tortious act. Moreover, there can be no conspiracy here, because

Joslin asserts nothing more than that Helmand

directed his wholly-owned close corporation

to act for his benefit, and there is, accordingly,

no allegation of a meeting of two independent

minds. See Elliott v. Tilton, 89 F.3d 260, 265

(5th Cir. 1996). The district court properly

granted j.m.l. on this ground, as well.

Inasmuch as we reverse alldamages awarded to Joslin, the question of prejudgment interest is moot. The judgment is REVERSED in

part and AFFIRMED in part, and we

RENDER a take-nothing judgment against

Joslin.

 Case: 03-40200 Document: 0051142988 Page: 7 Date Filed: 03/08/2004