* District Judge of the Eastern District of Texas, sitting by

designation.

1 United States Court of Appeals,

Fifth Circuit.

Nos. 95-11149, 96-10076.

SID RICHARDSON CARBON & GASOLINE CO., Plaintiff-Appellant,

v.

INTERENERGY RESOURCES, LTD., Defendant,

Wagner & Brown II, Cyril Wagner, Jr., and Jack E. Brown,

Defendants-Appellees.

SID RICHARDSON CARBON & GASOLINE CO., Plaintiff-Appellant,

v.

INTERENERGY RESOURCES, LTD., Defendant-Appellee,

Wagner & Brown II, Cyril Wagner, Jr., and Jack E. Brown,

Defendants.

Nov. 15, 1996.

Appeals from the United States District Court for the Northern

District of Texas.

Before SMITH and PARKER, Circuit Judg es, and JUSTICE, District

Judge. *

JERRY E. SMITH, Circuit Judge:

In this consolidated matter, Sid Richardson Carbon & Gasoline

Company ("Sid Richardson") appeals the denial of its motion to

remand these proceedings to state court and appeals the subsequent

entry of f inal judgments in favor of Wagner & Brown II, Cyril

Wagner, Jr., and Jack E. Brown (collectively "Wagner & Brown") and

Interenergy Resources, Ltd. ("Interenergy"). Because we hold that

the district court erred in finding that the Wagner & Brown2

defendants we re fraudulently joined, we conclude that complete

diversity does not exist among the parties, so there is no subject

m atter jurisdiction. We reverse, vacate and remand the judgment

with instructions to remand to state court.

I.

In 1979, Wagner & Brown II, a general partnership engaged in

the production of natural gas, entered into negotiations with Sid

Richardson Carbon & Gasoline Company concerning the conveyance of

processing rights to Wagner & Brown's natural gas production.

Cyril Wagner, Jr., and Jack E. Brown, Wagner & Brown's general

partners, represented the partnership in the negotiations.

The transaction ultimately was structured to accommodate

Wagner's and Brown's respective estate planning goals. Under the

terms of the contract, Wagner & Brown II would make a charitable

contribution of ten percent of the processing rights to the Dallas

Community Chest; both Wagner & Brown II and the Dallas Community

Chest then would convey their interes ts in the gas processing

rights to Interenergy, a Cayman Islands corporation, in return for

cash and an interest-bearing note in the amount of $8.4 million.

Interenergy, in turn, would assign the processing rights to Sid

Richardso n in return for payments prescribed under the contract.

None of the Wagner & Brown defendants signed the contract by which

Interenergy assigned the processing rights to Sid Richardson.

During the negotiations, Interenergy warranted that there was

no obligation for Sid Richardson to withhold federal income taxes

on its payments to Interenergy. Article 11.4 of the contract3

provided that Interenergy would be responsible for the payment of

such taxes, and Interenergy furnished a separate letter of

indemnity to Sid Richardson, promising to "indemnify and hold

Richardson harmless from any liability or expense it may incur

because of Richardson's failure to withhold any portion of the

payments due to Interenergy." The indemnity letter was signed only

by Interenergy, not by the Wagner & Brown defendants.

Soon after this transaction, the gas market collapsed. Within

two years after consummation of the agreement, Sid Richardson sued

to rescind or reform the contract, citing changed market conditions

that had rendered the agreement economically infeasible. In 1984,

this lawsuit was settled by an agreement granting Sid Richardson,

inter alia, the right to terminate the contract and all related

agreements if it incurred losses of $10 million as a consequence of

the contract. In March 1985, Sid Richardson gave notice of its

intention to exercise this "stop-loss" provision.

After Interenergy and the Wagner & Brown defendants demanded

arbitration of the dispute, Sid Richardson filed a second lawsuit,

seeking interpretation of the settlement agreement and enforcement

of the "stop-loss" provision. This second lawsuit was resolved by

a second settlement agreement, effective June 1, 1988, which forms

the basis of the instant case. The settlement agreement contained

both a terminatio n provision, terminating all agreements between

the parties, and a release provision, releasing all claims between

the parties. The Wagner & Brown defendants contend that these

provisions extinguished the indemnity rights o f Sid Richardson,1 This amount represented the $7.7 million princi pal

deficiency, penalties, and interest.

4 whereas Sid Richardson argues that its right to indemnity survived

the settlement agreement.

Meanwhi le, in 1985 the Internal Revenue Service ("IRS") had

ini tiated a preliminary inquiry into the original transaction,

specifically concerning w hether Sid Richardson was obligated to

withhold taxes on the payments made to Interenergy un der the

contract and to remit those funds to the IRS. In 1986, the IRS

proposed an assessment of $7.7 million against Sid Richardson,

offering to stay the proceedings while Sid Richardson sought

indemnity from Interenergy pursuant to the letter of indemnity.

All parties agree that Sid Richardson notified Wagner & Brown

II of the investigation and offered to let Wagner & Brown assume

responsibility for the defense; the parties vehemently disagree,

however, concerning whether this communication constituted a demand

by Sid Richardson upon Wagner & Brown and an invo cation of the

indemnity provision, or merely a courtesy call. In any event,

Wagner & Brown refused to assume responsibility for the d efense,

and apparently the matter was dropped when the IRS failed actively

to pursue the investigation against Sid Richardson, turning its

attention instead to Interenergy.

Failing in its efforts to collect the delinquent taxes from

Interenergy, the IRS renewed its investigatio n of Sid Richardson

and in 1995 issued a statutory notice of deficiency against Sid

Richa rdson in the amount of $38,651,368.19. 1 In the interim,5

however, Sid Richardson had entered into the settlement agreement

with Interenergy and the Wagner & Brown defendants, terminating all

prior agreements and releas ing all claims between the parties.

Predictably, the parties vehemently disagree as to whether this

settlement extinguished Sid Richardson's indemnity rights.

Consequently, all parties have denied respons ibility for the IRS

assessment.

Sid Richardson initiated this lawsu it in Texas state court,

suing Interenergy and the Wagner & Brown defendants for breach of

contract and seeking a declaratory judgment enforcing the terms of

the indemnity letter to guarantee Sid Richardson indemnification

against potential tax liability. The defendants removed to federal

court, invoking diversity jurisdiction.

Although complete diversity existed only between Sid

Richardson, a Texas corporation, and Interenergy, a Cayman Islands

corporation, the defendants argued that the W agner & Brown

defendants had been fraudulently joined. The district court agreed

and dismissed all claims against the Wagner & Brown defendants with

prejudice, exercising its diversity jurisdiction over the remaining

parties. The district court severed all claims against the Wagner

& Brown defendants, entering final judgment for the defendants

pursuant to F ED .R.C IV .P. 54(b), and Sid Richardson appealed.

While that appeal, No. 95-11149, was pen ding, the lawsuit

against Interenergy proceeded in the district court, which, on

January 5, 1996, entered summary judgment for Interenergy on all

claims. Sid Richardson appealed, in No. 96-10076, and the two2 Cavallini v. State Farm Mut. Auto Ins. Co., 44 F.3d 256, 259

(5th Cir.1995); a ccord East Texas Mack Sales, Inc. v. Northwest

Acceptance Corp., 819 F.2d 116, 119 (5th Cir.1987); B

, Inc. v.

Miller Brewing Co., 663 F.2d 545, 549 (5th Cir. Unit A Dec. 1981).

Fraudulent joinder also m ay be established by demonstrating that

there has been "outright fraud in the plaintiff's recitation of

jurisdictional facts." Burden, 60 F.3d at 217. This rule is not

relevant, however, to the present case.

6 cases were consolidated for appeal.

II.

We review a denial of remand to state court de novo. Burden

v. General Dynamics Corp., 60 F.3d 213, 216 (5th Cir.1995). A

party invoking the removal jurisdiction of the federal courts bears

a heavy burden. Id. at 217; see also Carriere v. Sears, Roebuck

& Co., 893 F.2d 98, 100 (5th Cir.), cert. denied, 498 U.S. 817, 111

S.Ct. 60, 112 L.Ed.2d 35 (1990) (observing that the removing party

bears the burden of proving fraudulent jo inder). In order

successfully to prove that non-diverse defendants have been

fraudulently joined i n order to defeat diversity, the removing

party must demonstrate "that the re is absolutely no possibility

that the plaintiff will be able to establish a cause of action

against the in-state defendant in state court." 2

In reviewing a claim of fraudulent joinder, the district

court must evaluate all factual allegations and ambiguities in the

controlling state law in favor of the plaintiff. Burden, 60 F.3d

at 216; B

, Inc., 663 F.2d at 549. If there is any possibility

that the plaintiff has stated a cause of action against any

non-diverse defendant, the federal court must conclude that joinder

is proper, thereby defeating complete diversity, and the case must7

be remanded. Burden, 60 F.3d at 216; B, Inc., 663 F.2d at 550.

We have consistently held that claims of fraudulent joinder

s hould be resolved by a summary judgment-like procedure whenever

possible. Although the district court may "pierce the pleadings"

to examine affidavits and other evidentiary material, it should not

conduct a full evidentiary hearing on questions of fact, but rather

should make a summary determination by resolving all disputed facts

in favor of the plaintiff. B urden, 60 F.3d at 217; C avallini, 44

F.3d at 263; see also B, Inc., 663 F.2d at 551 (holding that the

prelimin a ry question of subject matter jurisdiction should be

resolved by a summary determinati on). Insofar as Sid Richardson

objects to the summary judgment-like procedure employed by the

dist rict court, therefore, the objection is meritless. S ee

Carriere, 893 F.2d at 100.

Our evaluation of fraudulent joinder claims does not

anticipate a judgment on the merits, but merely considers whether

there is any possibility that the plaintiff might prevail. "We do

not determine whether the plaintiff will actually or even probably

prevail on the merits of the claim, but look only for a possibility

that the plaintiff might do so." B urden, 60 F.3d at 216. Mindful

of our obligation to exercise diversity jurisdiction only in cases

of complete diversity, we will not authorize removal on the basis

of fraudulent joinder unles s there is n o possibility that the

plaintiff could state a cause of ac tion against the non-diverse

defendants. S ee B, Inc., 663 F.2d at 549. The Wagner & Brown

defendants have failed to satisfy this strict burden of proof.3 Although the petition formally stated two independent causes

of action for breach of contract and declaratory judgment, the

latter ground is merely a theory of recovery for the former. The

Texas Uniform Declaratory Judgments Act, T EX .C IV .P RAC

. & R EM .C ODE A NN

. § 37.001 et seq. (Vernon 1986), is merely a procedural device; it

does not create any substantive rights or causes of action. E xxon

Corp. v. Burglin, 4 F.3d 1294, 1302 (5th Cir.1993). Consequently,

we construe the request for declaratory judgment as a theory of

r ecovery predicated upon the cause of action for breach of

contract.

8 III.

In its original petition filed in state court, Sid Richardson

stated a single cause of action for breach of contract against

Interenergy and the Wagner & Brown defendants. 3 Sid Richardson

requested a declaration that Interenergy is obligated to indemnify

it for any tax liability and expenses it has incurred or will incur

in relation to the statutory notice of deficiency and requested a

corollary dec laration that the Wagner & Brown defendants are

jointly and severally liable with Interenergy because they

disregarded the corporate form and induced Sid Richardson to enter

into the transaction by use of a fraudulent indemnity agreement.

Finally, Sid Richardson sought damages for the defendants' failure

to fulfill their obligations under the indemnity agreement.

The Wagner & Brown defendants argue that they cannot be held

jointly and severally liable for this alleged breach of contract,

however, because they were not parties to the contract. Indeed,

the Wagner & Brown defendants signed neither the final agreement to

convey processing rights from Interenergy to Sid Richardson nor the

indemnity letter that forms the basis of this lawsuit. Hence, the

Wagner & Brown defendants argue that it is legally impossible for4 Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex.1987),

superseded on other grounds b y T E X .B US .C ORP

. A CT A NN

. art 2.21A(3)

(Vernon Supp.1996); s ee also Fidelity & Deposit Co. v. Commercial

Casualty

Consultants, Inc., 976 F.2d 272, 274-75 (5th Cir.1992)

(summarizing the doctrine of corporate disregard under Texas law);

Sims v. Western Waste Indus., 918 S.W.2d 682, 684

(Tex.App.—Beaumont 1996, n.w.h.) (same).

9 Sid Richardson to recover damages from them.

As a general rule, the Wagner & Brown defendants' failure to

s ign the contract would immunize them from liability, justifying

the district court's conclusion that these defendants were

fraudulently joined merely to defeat complete diversity. Sid

Richardson, however, pleaded facts that, when taken as true for

purposes of fraud ulent joinder analysis, would warrant "piercing

the corporate veil" to impose liability upon the Wagner & Brown

defenda nts. Under such circumstances, we cannot conclude that

joinder was fraudulent.

As a general rule, shareholders are not liable for the debts

of a corporation under Texas law. Nonetheless, Texas courts will

"pierce the corporate veil" to prevent fraud or to achieve equity.

In particular, courts will disregard the co rporate fiction when

individuals exploit the corporate form as a sham to perpetrate a

fraud. 4 To warrant such equitable relief, a plaintiff must prove

that the defendant caused the corporation to be used for the

purpose of perpetrating a fraud on the plaintiff, primarily for the

personal benefi t of the defendant. T E X .B US .C ORP .A CT A NN

. art.

2.21A(2) (Vernon Supp.1996).

S i d Richardson pleaded facts that would warrant judgment

against the Wagner & Brown defendants on a theory of corporate10

disregard. Sid Richardson alleged, inter alia, that the Wagner &

Brown defendants are the real parties in interest in this lawsuit,

exercising control over Interenergy and causing Interenergy to be

used for the purpose of perpetrating a fraud on Sid Richardson for

the direct personal benefit of the defendants. Moreover, Sid

Richardson adduced specific facts i n support of its motion to

remand that support the theory of corporate disregard.

Viewing the pleadings and evidence in the light most favorable

to the plaintiff, we cannot conclude that there is "absolutely no

possibility" that Sid Richardson could succes sfully pierce the

corporate veil to impose liability on the Wagner & Brown defendants

under Texas law. S ee Cavallini, 44 F.3d at 259; a ccord East Texas

Mac k Sales, Inc., 819 F.2d at 119; B

, Inc., 663 F.2d at 549.

Therefore, the mere fact that the Wagner & Brown defendants were

not formal parties to the indemnity agreement does not demonstrate,

as a matter of law, that joinder was fraudulent.

IV.

Having conclu ded that Sid Richardson successfully stated a

claim for breach of contract and corporate disregard, we turn to

the affirmative defenses raised by the Wagner & Brown defendants.

Should the defendants p revail on any of these defenses, it

necessarily follows that joinder was fraudulent, and the district

court properly ex ercised its removal jurisdiction. On the other

hand, if there is any possibility that Sid Richardson might survive

the affirmative defenses, we must vacate for remand to state court.

The Wagner & Brown defendants argue that the indemnity rights5 A fourth party to the settlement agreement, Canyon Pipe Line

Corporation, is not a party to this litigation and hence is not

relevant to our analysis.

6 A sublease agreement specifically excepted from the

settlement agreement is not at issue.

11 granted to Sid Richardson in the original transaction were either

terminated or released by the terms of the settlement agreement.

T o prevail on these affirmative defenses as a matter of law, the

Wagner & Brown defendants must prove that the language of the

settlement agreement is unambiguous. The determination of whether

a settlement agreement is ambiguous is a ques tion of law that we

review de novo. See Shelton v. Exxon Corp., 921 F.2d 595, 602-03

(5th Cir.1991).

In addition, the Wagner & Brown defendants argue that the

indemnity claim is res judicata, because Sid Richardson could have

litigated the indemnity question in previous litigation between the

parties. We review d e novo the assertion that a given claim is res

judicata. P roduction Supply Co., Inc. v. Fry Steel, Inc., 74 F.3d

76, 78 (5th Cir.1996).

A.

The Wagner & Brown defendants argue that the promise of tax

indemnity provided to Sid Richardson in the 1980 indemnity letter

was terminated by the settlement agreement executed in 1988 among

S id Richardson, Interenergy, and the Wagner & Brown defendants. 5

The settlement agreement purported to terminate, i nter alia, all

agreements among the parties relating to the processing of gas or

any related matters. 6 Sid Richardson does not dispute that the12

indemnity letter is a "related matter" within the terms of the

settlement agreement and acknowledges that the indemnity letter was

terminated by the settlement.

Sid Richardson justifies its claim for tax indemnity, however,

by distinguishing between the prospective termination of agreements

and the retroactive release of rights. Whereas the settlement

agreement prospectively terminated agreements between the parties,

Sid Richardson argues, the settlement did not retroactively release

rights to indemnity that had vested previously in Sid Richardson.

The right to indemnity, Sid Richardson suggests, vested immediately

upon its payment of funds to Interenergy in reliance on the

indemnity letter. Consequently, Sid Richardson concludes that the

right to tax indemnity, which had vested prior to 1988 in reliance

on the indemnity letter, was not retroactively extinguished by the

subsequent termination of the indemnity letter pu rsuant to the

settlement agreement.

In effect, Sid Richardson advocates a distinction between the

"termination" of an agreement, which operates prospectively only,

and the "rescission" of an agreement, which operates retroactively

to restore the parties to the status quo ante. Because the 1988

settlement agreement "terminated" all agreements among the parties,

rather than "rescinding" the agreements, Sid Richardson concludes

that its vested indemnity rights survived the settlement.

Although we express no opinion on this interpretation of the

settlement agreement, we acknowledge that the agreement's terms are

a mbiguous. Under Texas law, parties may mutually agree to7 See Allen v. Allen, 751 S.W.2d 56 7, 573 (Tex.App.—Houston

[14th Dist.] 1988, writ denied); s ee also Manges v . Guerra, 621

S.W.2d 652, 6 58 (Tex.Civ.App.—Waco 1981) (noting the express

retroactive effect of rescission), rev'd in part and aff'd in part,

673 S.W.2d 180 (Tex.1984).

8 See also C ORBIN ON C ONTRACTS § 1266 at 66-67 (1962) (suggesting

that powers of termination usually operate prospectively but do not

discharge obligations that have already arisen); R E STATEMENT (S ECOND )

OF C ONTRACTS § 283 cmt. a (1981) (distinguishing "rescission" from

"termination").

9 See Shelton, 921 F .2d at 603; s ee also 14 T EX .J UR .3d

Contracts § 263 (1981) (stating t hat the court must determine

whether the parties intended rescission to discharge all

liabilities previously incurred under the agreement).

13 "rescind" a contract, restoring the status quo ante. 7 The parties

agreed to "terminate" the indemnity agreement, not to "rescind" it,

however.

We are aware of no Texas authority that provides that the

"termination" of agreements automatically applies retroactively to

extinguish vested rights; to the contrary, several authorities

suggest otherwise. The Uniform Commercial Code, for example,

defines "termination" as a prospective remedy only, which does not

extinguish vested rights. "On "termination' all obligations which

are still executory on both sides are discharged but any right

based on prior breach or performance survives." T E X .B US

. & C OM .C ODE

A NN

. § 2.106(c) (Tex.U .C.C.) (Vernon 1994). 8 At a minimum,

therefore, the law of Texas is ambiguous concerning the retroactive

effect of a settlement agreement purporting to "terminate" all

prior agreements between the parties.

The task of a court interpreting the terms of a contract is

t o vindicate the intent of the parties. 9 In the present case,14

however, neither the language of the contract nor the law of Texas,

is sufficiently unambiguous for us to ho ld, as a matter of law,

that any indemnity rights that had vested in Sid Richardson prior

to the settlement agreement were retroactively extinguished by the

termination clause.

All parties agree that the agreement is silent on the question

of whether pre-termination contractual obligations survived the

termination clause. Moreover, the language of the settlement

agreement is inherently ambiguous, and that amb iguity is merely

compounded by Texas law. Therefore, mindful of our obligation to

view the facts in the light most favorable to the plaintiff and to

construe ambiguity in state law in favor of the plaintiff, we

cannot say that there is absolutely no possibility that Sid

Richardson might prevail in state court. Under such circumstances,

joinder is not fraudulent.

The Wagner & Brown defendants note that Texas courts do not

draft new contracts for parties who fail to provide for themselves.

Royal Indemnity Co. v. Marsha ll, 388 S.W.2d 176, 181 (Tex.1965).

Neither do we. Therefore, we hold that the ambiguous termination

provision in the 1988 settlement agreement does not establish

fraudulent joinder.

B.

Alternatively, appellees argue that the release provision in

the 1988 settlement agreement fully released the Wagner & Brown

defendants from all liabi lity incurred prior to 1988 pursuant to

the indemnity letter. Insofar as the right to indemnity vested in1 0 Hence, appellees con clude that the settlement agreement

comprehensively extinguishes all potential liability to Sid

Richardson, arguing that if it vested prior to execution of the

settlement agreement, it was released, whereas if the right vested

after the settlement agreement, it was extinguished by the

termination of the indemnity agreement. We acknowledge that this

interpretation is a reasonable construction of the settlemen t

agreement and may ultimately prevail in state court. For reasons

that we will explain, however, it is not sufficiently impregnable

to satisfy the heavy burden of proof required to establish

fraudulent joinder.

1 1 Anheuser-Busch Cos. v. Summit Coffee Co., 858 S.W.2d 928, 933

(Tex.App.—Dallas 1993, writ denied), vacated on other grounds,

---

U.S. ----, 115 S.Ct. 1309, 131 L.Ed.2d 192 (1995), reinstated as

modified, No. 05-92-00389-CV, 1996 WL 14061, at *4,

--- S.W.2d

---- (Tex.App.—Dallas Jan. 12, 1996, n.w.h.).

15 Sid Richardson prior to the termination of the indemnity agreement,

they conclude , such indemnity rights were fully released and

discharged by the release provision of the settlement agreement. 10

Although this affirmative defense ultimately may prove successful,

we cannot conclude, as a matter of law, that the release provision

extinguished Sid Richardson's right to recover tax indemnity from

the Wagner & Brown defendants.

Categorical releases are construed narrowly under Texas law. 11

The release provision at issue in the present case states that the

parties to the settlement agreement "release, discharge, disclaim,

and renounce any and all claims, controversies, demands, rights,

disputes, and causes of action, of whatsoever kind and nature,

whether known or unknown, conting ent or absolute, which were

asserted or c ould have been asserted" by the respective parties.

Sid Richardson contends that its claim for tax indemnity did not

accrue until the IRS issued a formal notice of deficiency in 1995,

and consequently the claim could not have been asserted at the time1 2 S ee also Ponder v. Brice & Mankoff, 889 S.W.2d 637, 642-43

(Tex.App.—Houston [14t h Dist.] 1994, writ denied) (holding that

claim accrued upon receipt of for mal notices of adjustment);

Hoover v. G regory, 835 S.W.2d 668, 672-74 (Tex.App.—Dallas 1992,

writ denied) (holding that claim accrued only upon receipt of

notice of deficiency).

16 the se ttlement agreement was executed in 1988. Thus, Sid

R ichardson concludes that its claim for tax indemnity was not

released under the terms of the settlement agreement.

Under Texas law, a cause of action predicated on tax

liability does not accrue until the IRS issues a formal notice of

deficiency. S ee Bankruptcy Estate of Rochest er v. Campbell, 910

S.W.2d 647, 651-52 (Tex.App.—Austin 1995, writ granted). 12

Preliminary notice of tax deficiency is not sufficient to trigger

accrual of a claim. "Prior awareness of IRS activity, such as a

preliminary notice of deficiency, informs the taxpayer of some

risk, but the risk is not sufficiently definite or concrete until

the IRS has issued its formal notice of deficiency." Id. at 651-

52. Therefore, because only a formal notice of deficiency creates

the requisite concrete and substantial risk of tax liability, a

cause of action founded upon a tax deficiency does not accrue under

Texas law until the IRS has issued a formal notice of deficiency.

Id.

Notwithstanding preliminary inqu iries as early as 1985, the

IRS did not issue a formal notice of deficiency to Sid Richardson

until 1995. Sid Richardson may credibly argue, therefore, that its

claim for indemnity did not accrue until 1995 and could not have

been asserted under Texas law at the time the settlement agreement1 3 The Wagner & Brown defendants argue that, regardless of when

the claim accrued, Sid Richardson actually asserted its claim for

tax indemnity in 1986. Therefore, they conclude that the claim was

released by the settlement agreement. After the IRS conducted a

preliminary inquiry into the transaction and proposed an assessment

o f $7.7 million against Sid Richardson, appellant notified th e

Wagner & Brown defendants of the investigation. The parties

vehemently disagree as to whether this communication constituted a

formal assertion of the indemnity claim or merely a courtesy call.

We need not resolve this disagreement, however. For

purposes of fraudulent joinder analysis , we must construe

disputed facts in favor of the plaintiff, so we assume,

arguendo, that Sid Richardson did not m ake demand upon the

Wagner & Brown defendants in 1986, invoking the terms of the

indemnity l etter. Therefore, we cannot conclude that the

settlement agreement released a claim for tax indemnity that

Sid Richardson had previously asserted.

Moreover, because preliminary communications with the IRS

are insufficient to provide "sufficiently definite or

concrete" notice of potential tax liability to trigger accrual

of the claim, these informal communications among the IRS, Sid

Richardson, and the Wagner & Brow n defendants were

insufficient to trigger accrual of the tax indemnity claim in

1986. See Campbell, 910 S.W.2d at 651-52. For purposes of

fraudulent joinder analysis, therefore, we must assume t hat

the tax indemnity claim did not accrue until 1995, when the

IRS issued a statutory notice of deficiency to Sid Richardson.

17 was executed. Because we conclude that the right to tax indemnity

did not accrue under Texas law until 1995, we cannot hold, as a

matter of law, that the 1988 release provision extinguished the

claim asserted by Sid Richardson against the Wagner & Brown

defendants. See Anheuser-Busch, 858 S.W.2d at 933. 13

Under these circumstances, we cannot conclude that there is

absolutely no possibility that Sid Richardson might prevail against

the Wagner & Brown defendants in state court, notwithstanding the

termination and release provisions of the settl ement agreement.

See Cavallini, 44 F.3d at 259. Viewing the facts and the state law1 4 Hence, Sid Richardson avoids the no-win situation created by

the complementary construction of the termination and release

provisions advocated by appellees. Because the right to indemnity

vested in Sid Richardson prior t o execution of the settlement

agreement, the termination provision did not retroactively

terminate the vested right. Because the claim for tax indemnity

arising from that right did not accrue until 1995, however, when

the IRS issued its notice of deficiency, the release provision did

not extinguish the cause of action.

Under this theory, be cause the right to tax indemnity

vested pr ior to termination yet accrued after release, the

c ause of action for tax indemnity survives the settleme n t

agreement. We do not suggest that this interpretation is

necessarily correct and conclusive, but only that it is a

reasonable interpretation of the settlement agreement that

precludes a finding of fraudulent joinder.

18 in the light most favorable to Sid Richardson, as we are obliged to

do for purposes of fraudulent joinder analysis, we acknowledge that

the right to tax indemnity may have vested in Sid Richardson prior

to the termination of the indemnity agreement, and that the cause

of action for tax indemnity may not have accrued until after

execution of the release in the settlement agreement. 14 Therefore,

we hold that the settlement agreement does not satisfy the heavy

burden of proof required to establish fraudulent joinder.

C.

Finally, the Wagner & Brown defendants argue that the instant

claim for tax indemnity raised by Sid Richardson is res judicata.

Although this affirmative defense ultimately may prove successful,

our conclusion that the tax indemnity claim did not accrue until

1995 precludes us from holding, as a matter of law, that the cause

of action is barred by res judicata.

We determine the preclusive effect of a state court judgment

according to state law. P atin v. Allied Signal, Inc., 77 F.3d 782,19

789 (5th Cir.1996). Texas follows the transactional approach to

res judicata. G etty Oil Co. v. Ins. Co. of N. Am., 845 S.W.2d 794,

798 (Tex.1992). Under this doctrine, a subsequent suit is barred

if it arises out of the same subject matter as a previous suit, and

the matter co uld have been litigated in the prior suit. I d.

Because the prior litigation between these pa rties concerned the

transaction at issue in the present case—the conveyance of gas

processing rights—the Wagner & Brown defendants conte nd that the

instant claim for tax indemnity is necessarily barred by res

judicata. We disagree.

In order to establish that the instant claim is res judicata,

the Wagner & Brown defendants must demonstrate that Sid Richardson

could have litigated its claim for tax indemnity in the prior suit.

As we have previously noted, however, the claim for tax indemnity

did not accrue under Texas law until 1995, when t he IRS issued a

statutory notice of deficiency.

It is axiomatic that a claim that has not yet accrued is not

ripe for adjudication, and hence it is not a claim that "could have

been litigated" in a previous lawsuit. Under such circumstances,

we cannot conclude that the instant claim for tax indemnity "could

have been litigated" by Sid Richardson before the cause of action

accrued in 1995, and thus we decline to hold that the instant claim

is barred by res judicata.

D.

Although we express no o pinion as to whether Sid Richardson

ultimately will prevail on the merits, we must conclude that the1 5 Our disposition of this case makes it unnecessary for us to

consider the second issue raised by Sid Richardson on this appeal,

i.e., whether the district court erred by deny ing the plaintiff

leave to amend the complaint.

20 Wagner & Brown defendants are not entitled to judgment as a matter

of law on their affirmative defenses. Because we cannot conclude

that there is "absolutely no possibility" that Sid Richardson might

prevail against the Wagner & Brown defendants, joinder was not

fraudulent. See Cavallini, 44 F.3d at 259. 15

V.

In summary, the judgment dismissing all claims against Wagner

& Brown II, Cyril Wagner, Jr., and Jack E. Brown in No. 95-11149,

on the grounds that they were fraudulently joined in this lawsuit,

is REVERSED. The summary judgment in favor of Interenergy

Resources, Ltd., in No. 96-10076 is VACATED for lack of subject

matter jurisdiction. This cause is REMANDED to the district court

with instructions to remand to st ate court, unless it should

otherwise appear that the district court may exercise subject

matter jurisdiction.