1 United States Court of Appeals,

Fifth Circuit.

No. 94-20189.

GLOBAL PETROTECH, INC., Plaintiff-Appellee,

v.

ENGELHARD CORPORATION, Defendant-Appellant.

July 19, 1995.

Appeal from the United States District Court for the Southern

District of Texas.

Before KING, GARWOOD and BENAVIDES, Circuit Judges.

BENAVIDES, Circuit Judge:

Engelhard Corporation ("Engelhard") appeals the district

court's final judgment and order overruling it's motions for

judgment as a matter of law , for new trial and to alter judgment

arising from the jury trial of claims brought by Global Petrotech,

Inc. ("Global") under the Texas Deceptive Trade Practices Act

("DTPA"). After the jury answered all special interrogatories in

fav or of Global, the district court entered a final judgment

awarding Global $351,156.22 in compensatory damages, $500,000.00 in

exemplary (punitive) damages, prejudgment interest at 10%,

postjudgment interest at 3.74%, attorneys fees and costs. We

vacate the award of punitive damages, and remand for new trial on

that issue.

I. BACKGROUND

In August 1990, Global, a small Houston trading company that

purchases goods for resale and export to customers in China, was

contacted by China Technical Corporation ("CTC"), a subsidiary of2

China National Technical Import & Export Corporation ("CNTIC"), to

o btain a quote for palladium chloride from Engelhard. Global

related CTC's specification to an Engelhard customer service

representative on August 3, 1990. In that request, Global inquired

about the price and the terms of purchasing 170 kilograms of

palladium chloride with a palladium content between 59.5% and

60.5%. Global also informed Engelhard that it was inexperienced in

handling precious metal commodities like palladium. Engelhard's

response quoted a price for "Palladium Chloride solution red-brown

powder, hygroscopic, solu ble in dilute HC1, 60% PD content

(theoretical)." The quote was erroneous in that it identified a

solution of palladium chloride with 60% palladium, which does not

exist. Palladium chloride solution manufactured by Engelhard only

contains 10% or 20% palladium.

Because Global was unfamiliar with palladium chloride, it did

not realize that Engelhard's quote was incorrect. On October 24,

1990, Global sent Engelhard a purchase order for 170 kilograms of

palladium chloride solution containing 60% palladium, with 3279.373

troy ounces of palladium as the amount of palladium required to

fabricate the goods. Global then wire-transferred $316,459.49 to

Engelhard as advance payment for the order.

In Dece mber 1990, Engelhard shipped the palladium chloride

order directly to CTC. After receiving the shipment, CTC notified

Global that the product was incorrect; CTC received 510 kilograms

of palladium chloride solution containing only 20% palladium rather

t han palladium chloride containing a concentration of 6 0 %1 The shipment did, however, contain 3279.373 troy ounces of

palladium. The difference between the quantity of palladium

chloride shipped (510 kilograms) and the quantity ordered (170

kilograms) was due to the specification in the purchase order for

3279.373 troy ounces of palladium; 170 kilograms of palladium

chloride solution would have required only 1093.11 troy ounces of

palladium.

2 Engelhard also noted that the shipping and refabrication

would be completed at no additional charge to Global.

3 Engelhard later agreed to pay for the shipping charges

necessary for shipping the palladium chloride solution back to

Engelhard's facilities, but requested documentation of any

additional costs.

3 palladium. 1 Global then contacted Engelhard about CTC's receipt of

20% palladium instead of 60%. On January 4, 1991, Engelhard

requested Global to find out whether CTC could use the palladium

chloride solution, and that, if CTC could not, CTC should return

the shipment to Engelhard to be reprocessed into palladium chloride

containing a concentration of 60% palladium. 2

On January 11, 1991, Global informed Engelhard that CNTIC

would be returning the palladium chloride solution to Engelhard,

requested that Engelhard provide Global with the name of

Engelhard's shipping agent in Beijing for delivery of the shipment

and requested that Engelhard reimburse C NTIC for all direct

out-o f-pocket costs incurred relating to CNTIC's handling of the

shipment. 3

After Engelhard informed Global that it did not have a

shipping agent in Beijing, CNTIC shipped the palladium chloride

solution back to the United States via an Air China fl ight from

Beijing to JFK airport in New York. CNTIC had procured $521,566.80

in insurance on Global's behalf from the Peoples' Insurance Company4 The total dollar amount of the insurance covered the price

CNTIC contracted to pay Global ($521,566.80) for the shipment of

palladium chloride.

4 of China ("PICC") to cover the return shipment. 4

When the return sh ipment of palladium chloride solution

arrived at JFK airport, it was placed in an airport warehouse.

Sometime later it was lost or stolen by an unknown third party.

When it was determined that the return shipment could not be

located, Global requested a new shipment from Engelhard in late

March 1991. Engelhard did not refund the $316,459.49 that Global

paid for the first shipment, and agreed to send a second shipment

only if Global paid Engelhard in advance, or provided a letter of

credit in advance, for the cost of the palladium needed to

fabricate another shipment. Global protested, complaining about

Engelhard's demand for a higher per ounce price for the second

shipment of palladium than charged for the first shipment.

Nonetheless, on Apr il 19, 1991, Global wire-transferred to

Engelhard $321,378.26 as payment in advance for the palladium used

to fabricate the replacement shipment of palladium chloride. Then

on April 29, 1991, Engelhard shipped 170 kilograms of palladium

chloride containing a concent ration of 60% palladium to CNTIC in

Beijing.

CNTIC subsequently filed a claim for insurance proceeds for

the lost shipment of palladium chloride solution with PICC. CNTIC

assigned its rights under the policy to Globa l. Global and PICC

executed a release agreemen t on July 30, 1992 specifying that

Global promised to release PICC of all liability regarding the5 Global Petrotech, Inc. v. Engelhard Corp., 824 F.Supp. 103,

104 (S.D.Tex.1993).

5 insurance for loss, and that PICC would pay Global the sum of

$260,000.00.

On Janu ary 29, 1992, Global filed suit against Engelhard in

Texas state court alleging breach of contract, breach of warranty

and violations of the DTPA. Engelhard removed the suit to federal

court. On February 1, 1993, the district court ordered the parties

to file written arguments on the issue of Engelhard's claim for a

credit for the insurance proceeds received by Global. After the

parties filed their memoranda, the court ruled that the insurance

proceeds would count in reducing a damage award to Global based on

the breach of contrac t claim. 5 The court noted, however, that

under Texas law the collateral source rule applies to DTPA claims

and therefore, the insurance proceeds would not be applied to an

award for Global under the DTPA claim.

In the first amended pretri al order, Global dropped all but

its DTPA claims against Engelhard . Global's two DTPA claims

stemmed from

Engelhard's quote to Global misrepresenting the

characteristics of palladium chl oride that led to Engelhard

s hipping an incorrect concentration of palladium in violation of

sections 17.46(b)(5) and (7) of the Texas Business & Commerce Code

("the Code " ), and Engelhard's unconscionable act of retaining

Global's purchase money and refusing to supply replacement

palladium chl oride without additional charge after the first

shipment was lost in violation of section 17.50(a)(3) of the Code.6

Additionally, Global sought punitive damages for Engelhard's

"knowing" engagement in an unconscionable course of action, defined

in section 17.45(9) of the Code.

At the final pretrial conference, Engelhard's counsel did not

dispute that Global rejected the first palladium chloride solution

shipment as nonconforming. Thus, the district court ruled that

under Texas contr act law the first shipment was at all times the

property of Engelhard. The court also excluded all evidence of the

insurance proceeds received by Global, even on the issue of

unconscionability.

During the jury trial, the district court instructed the

attorneys that, on the issue of who owned the first shipment of

palladium chloride solution after it left Engelhard's possession,

"no further questioning should be done about Engelhard's belief or

knowledge of risk of loss, or the consequences of the loss, and how

t hat formed their policy." In answering the special

interrogatories, the jury found that Engelhard engaged in a false,

misleading, or deceptive act that caused damage to Global, and that

Engelhard engaged in an unconscionable course of action. Moreover,

the jury found that Engelhard's unconscionable course of action was

"knowingly" committed. The jury awarded Global $351,156.22 in

actual damages and $500,000.00 in punitive damages. On February 8,

1994, the district court entered final judgment against Engelhard;

including prejudgment interest on the actual damages at the rate of

10%, attorneys' fees, and postjudgment interest.

II. EXCLUSION OF EVIDENCE7

We will not reverse a district court's evi dentiary rulings

unless they are erroneous and substantial prejudice results. The

burden of proving substantial prejudice lies with the party

asserting error. F.D.I.C. v. Mijalis, 15 F.3d 1314, 1318-19 (5th

Cir.1994). Where, however, "the admissibility determination

necessarily involves a substantive legal decision," we engage in a

two-tiered review process. S tokes v. Georgia-Pacific Corp., 894

F.2d 764, 767 (5th Cir.1990). First we conduct a d e novo review of

the underlying legal analysis. I d. Second, we examine the

evidentiary ruling for abuse of discretion. Id.

A. Mistaken Belief as to Ownership

Punitive damages are proper under the DTPA; "[i]f the trier

of fact finds that the conduct of the defendant was committed

knowingly, th e trier of fact may award not more than three times

the amount of actu al damages." T E X .B US & C OM .C ODE A NN

. § 1750(b)

(Vernon Supp.1995). Under the DTPA, "knowingly" is defined as

"actual awareness of the falsity, deception, or unfairness of the

act or practice giving rise to the consumer's claim." T E X .B U S

. &

C OM .C ODE A NN . § 17.45(9) (Vernon 1987).

Engelhard argues that the district court abused its discretion

by excluding evidence of its belief that the first shipment of

palladi um chloride solution belonged to Global once it was

delivered to CTC. Engelhard avers that it does not seek to offer

the evidence of its purportedly "mistaken" belief as a defense to

Global's DTPA claim, but, rather, to prove its state of mind at the

t ime it allegedly engaged in an unconscionable course of acti on.8

The district court erred, according to Engelhard, by not allowing

Engelhard to offer evidence for the limited purpose of its good

faith mistake of law to prove that its actions were not "knowingly"

unconscionable, as defined under the DTPA, to warrant the

imposition of punitive damages.

Under Texas law, it is clear that intent is not an element of

§ 17.50(a)(3), which prohibits any unconscionable actio n. S ee

Miller v. Soliz, 648 S.W.2d 734, 738 (Tex.App.1983). Thus, for the

underlying liabil ity in a DTPA claim brought for committing

unconscionable acts, "[t]he defense of good faith and/or bona fide

error is not available." I d. at 739. Nevertheless, in light of

the knowing conduct that must be found in order to allow a recovery

for punitive damages under the DT PA, evidence with regard to

Engelhard's state of mind or belief about the falsity, deception,

or unfairness of its acts is clearly relevant to whether it acted

knowingly. The question we must address is whether the exclusion

of the evidence of Engelhard' s mistaken belief resulted in

substantial prejudice. Mijalis, 15 F.3d at 1318-19.

Our review of the record indicates that Engelhard's evidence

of mistaken understanding of Texas contract law, which led to its

mistaken b elief that Global still owned the first shipment of

palladium chloride solution that was rejected as nonconforming, is

highly relevant to a determination as to whether Engelhard violated

the DTPA "knowingly." Engelhard would have offered testimony from

its employees regarding t heir belief that Global owned the first

shipment of palladium chloride so lution, and how that mistaken6 Although Global contends that the jury did hear testimony

from Engelhard's manager, who stated in response to the district

judge's questions that "it was my belief that the first shipment

belonged to Global," the judge's immediate instruction to the

jury limited the effect of that testimony. Thus, we can not

conclude that the substance of the desired testimony was ever

presented to the jury. See United States v. Ashley, 555 F.2d 462

(5th Cir.), cert. denied, 434 U.S. 869, 98 S.Ct. 210, 54 L.Ed.2d

147 (1977).

9 bel ief affected their handling of Global's request for a second

shipment. Specifically, Engelhard would have argued that it would

not have charged Global for the second shipment of pa lladium

chloride if it had known that it owne d, and was responsible for,

the first shipment. 6 Testimony about Engelhard's mistaken belief

could have a substantial impact on the jury's determination as to

whether Engelhard possessed the requisite state of mind to commit

its violation of the DTPA "knowingly." If the jury concluded that

Engelha rd believed, although mistakenly, that Global owned the

first shipment of palladium chloride solution and was responsible

for shipping it back to Engelhard, then they could have reasonably

concluded that the charge for the second shipment of palladium

chloride was not made with actual awareness of its falsity,

deception, or unfairness. Because we conclude that the exclusion

of the evidence of Engelhard's mistake n belief did have a

substantial impact on the jury's determination on the issue of

punitive damages, we find the error was sufficiently prejudicial to

effect Engelhard's substantial rights so as to requir e a new

hearing on the issue of punitive damages. S ee Brown v. Miller, 631

F.2d 408, 413 (5th Cir.1980).

B. Insurance10

"The collateral source rule precludes a tortfeasor from

obtaining the benefit of payment conferred upon the injured parties

from sources other than the tortfeasor." J ones v. Red Arrow Heavy

Hauling, Inc., 816 S.W.2d 134, 136 (Tex.App.—Beaumont 1991) (citing

R ESTATEMENT (S ECOND ) OF T ORTS § 920A). Its theory is that the wrongdoer

should not receive the benefit of insurance independently obtained

by the injured pa rty. Brown v. American Transfer & Storage Co.,

601 S.W.2d 931, 934 (Tex.), cert. denied, 449 U.S. 1015, 101 S.Ct.

575, 66 L.Ed.2d 474 (1980) (citation omitted). "Evidence that the

injured party received benefits from a collateral source is

inadmissible under the rules of relevancy." Id. (citing Martinez

v. RV Tool, Inc., 737 S.W.2d 17 (Tex.App.—El Paso 1987), writ

denied, 747 S.W.2d 379 (Tex.1988)).

Engelhard contends that the district court erroneously

excluded evidence based on the collateral source rule regarding

Engelhard's belief that Global wo uld be fully compensated by

insurance for the lost first shipment of palladium chloride

so lution. Engelhard further argues that even if the collateral

source rule applies to the insurance policy, the evidence that

Engelhard believed that Global would be fully compensated by the

insurance proceeds had probative value to show that Engelhard

lacked the requisite state of mind to warrant the imposition of

punitive dama ges under the "knowing" requirement relating to

engaging in an unconscionable course of action. Engelhard contends

that presenting this evidence to the jury, for the limited purpose

of rebutting the "knowing" requirement for punitive damages, would11

result in little prejudice.

For the collateral sourc e rule to apply, the source of the

benefit must truly be "collateral." S ee Phillips v. Western Co. of

North America, 953 F.2d 923, 929 (5th Cir.1992). Generally, the

rule does not apply when the tortfeasor has paid for the

plaintiff's collateral benefit. "[T]he "essence' of the rule has

been described as the independence of the transaction giving rise

to the collateral source." I d. at 931 (citation omitted)

.

However, the rule may not also apply even in situations where the

tortfeasor does not directly pay for the benefit. "Application of

the collateral source rule depends less upon the source of the

funds than upon the character of the benefits received." H aughton

v. Bla ckships, Inc., 462 F.2d 788, 790 (5th Cir.1972) (citation

omitted). Thus, the rule excluding evidence of a collateral source

does not apply if the intended beneficiary of the collateral source

is the tortfeasor.

In the pretrial joint admission of facts, Engelha rd agreed

th at CNTIC procured an insurance policy, on Global's behalf, to

cover the return of the first shi pment of palladium chloride

solution. Yet Engelhard has offered no evidence to show that the

insurance policy was meant to benefit it in any way. Therefore, we

find that the district court properly determined that the insurance

was a collateral source.

However, the collateral source rule does not require in all

circumstances that the collateral benefit (insurance) be excluded

from the evidence introduced at trial. See Phillips, 953 F.2d at12

934. A narrow exception to the rule allows the admission of

collateral source evidence in certain circumstances:

If there is little likelihood of prejudice and no strong

potenti al for improper use, and a careful qualifying jury

instruction is given, then [a collater al source] may be

admissible for the limited purpose of proving another matter.

Simmons v. Hoegh Lines, 784 F.2d 1234, 1237 (5th Cir.1986).

The very crux of Global's claims is that it was harmed by

Eng elhard's action in misrepresenting the character of the first

shipment of palladium chloride solution and forcing Global to pay

for the sec ond shipment in advance. The "knowing" aspect of the

required second payment formed th e basis for Global's punitive

damages claim. We find that evidence of Engelhard's belief that

Global would be compensated by the insurance policy pur chased by

CNTIC is directly relevant to the issue of an "actual awareness" of

unfairness. Such evidence is relevant both to a factfinder's

decision to award punitive damages and the amount thereof. On the

other hand, evidence of Global's insurance benefits, or Engelhard's

belief in the existence of such benefits, might allow the jury to

infer that Global was not damaged and does not deserve compensation

for DTPA violations. The suggestion made here is that the limiting

instruction would confine the evidence to its proper use on the

issue of punitive damages.

We need not, however, in this proceeding determine whether the

district court abused its discretion in not allowing the proffered

evidence with a qualifying jury instruction. Inasmuch as we have

previously determined (in Part II.A. of this opinion) that a remand

is necessary for a retrial on punitive damages, suffice to say we7 The statute provides in pertinent part:

When no specific rate of interest is agreed upon by the

parties, interest at the rate of six percent per annum

shall be allowed on all accounts and contracts

ascertaining the sum payable, commencing on the

thirtieth (30th) day from and after the time when the

sum is due and payable.

Tex.Rev.Civ.Stat.Ann. art. 5069-1.03 (Vernon 1987).

13 see little, if any, undue prejudice from such evidence in a

subsequent proceeding in which ordinary liability and non-punitive

damages have already been determined.

III. PREJUDGMENT INTEREST

Engelhard contends that the district court erroneously

followed article 5069-1.05 of the Texas Revised Civil Statutes in

applying a ten percent interest rate in computing prejudgment

interest. Engelhard argues instead that the six percent interest

rate set forth in article 5069-1.03 is applicable because all of

Global's claims arise out of Engelhard's alleged failure to perform

and/or honor its contractual obligations.

Article 5069-1.03 limits prejudgment interest in certain

contract case s to six percent. 7 "For article 5069-1.03 to apply,

the case law suggests that we must look to the surface of the

contract and see a visible perimeter encircling t he prescribed

contractual liability." A tchison, Topeka and Santa Fe Railway Co.

v. Sherwin-Williams Co., 963 F.2d 746, 751-52 (5th Cir.1992).

However, if the contract fails to "unam biguously establish the

amount owed," then article 5069-1.05 applies. L aw Offices of Moore

& Associates v. Aetna Ins. Co., 902 F .2d 418, 421 (5th Cir.1990)14

(quoting Campbell, Athey & Zukowski v. Thomasson, 863 F.2d 398, 402

(5th Cir.1989)).

We find the contracts between Engelhard and Global are not

within the contemplation of article 5069-1.03. Neither the

contract for the first shipment of palladium chloride solution nor

the second contract for the second shipment of palladium chloride

state with any specificity any measure of liability and amount

owed. S ee Axelson, Inc. v. McEvoy-Willis, a Div. of Smith Intern.

(North Sea), Ltd., 7 F.3d 1230, 1234 (5th Cir.1993). Both contain

only a description of the product, order quantity, per unit price

and merchandise total. The total "sum payable" in damages is not

fixed by either contract. Therefore, the district court was

correct in applying a ten percent interest rate in accordance with

article 5069-1.05.

CONCLUSION

For the reasons articulated above, we VACATE the jury's award

of punitive damages, and REMAND for a new trial solely on Global's

cl aim for punitive damages under the DTPA. The judgment of the

district court is otherwise AFFIRMED.