*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this opinion should not be published and is not precedent except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.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 97-21024

_____________________

PARKWAY IMAGING CENTER, INC. AND QUANTUM MRI 

& DIAGNOSTIC CENTER, INC.’S LIFE ACCIDENT AND 

HEALTH BENEFIT PLAN; PARKWAY IMAGING CENTER, 

INC.; QUANTUM MRI & DIAGNOSTIC CENTER, INC.,

Plaintiffs-Appellants,

versus

HOME LIFE FINANCIAL ASSURANCE CORPORATION; 

HOME LIFE GROUP BENEFITS AND SERVICES, INC.;

DENNIS R. GREENSAGE; D. R. GREENSAGE & ASSOCIATES, INC.,

Defendants-Appellees.

_________________________________________________________________

Appeal from the United States District Court

for the Southern District of Texas

(H-95-CV-4250)

_________________________________________________________________

September 27, 1999

Before REAVLEY, JOLLY, and EMILIO M. GARZA, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:*

I

A

On February 1, 1992, the appellants, Parkway Imaging Center,

Inc. and Quantum MRI & Diagnostic Center, Inc.’s Life, Accident,

and Health Benefit Plan; Parkway Imaging Center, Inc.; and Quantum

MRI & Diagnostic Center Inc. (collectively, “Quantum”) adopted a

self-funded employee benefits plan (the “Plan”) under the Employee
2

Retirement Income Security Act, 29 U.S.C. § 1001, et seq.

(“ERISA”). The appellees, Home Life Financial Assurance Co. and

Home Life Group Benefits and Services, Inc. (collectively, “Home

Life”), administered and reinsured the Plan. 

Under the terms of the parties’ Administrative Services

Agreement (the “Agreement”), also entered into on February 1, 1992,

Home Life processed and paid all eligible employee claims covered

by the Plan, subject to qualified reimbursement from Quantum. The

Agreement required Quantum to remit payment to Home Life on

reimbursed claims within ten days after the billing date.

Quantum’s failure to meet this obligation could trigger termination

of the Agreement.

During the same time the parties entered into the Agreement,

Quantum also purchased a stop-loss reinsurance policy from Home

Life. Appellee Dennis Greensage of D.R. Greensage & Associates,

Inc. (“Greensage”) negotiated the terms of the stop-loss policy and

was also the policy’s agent of record. Quantum first requested a

fully insured policy that would pay all covered employee benefits

claims under the Plan. Quantum maintains that Greensage and Home

Life persuaded it to purchase the stop-loss policy, which only paid

employee claims in excess of Quantum’s deductible under the policy.

Both the Agreement and the stop-loss policy were subject to renewal

on February 1, 1993. 

In September 1992, Quantum became dissatisfied with its

coverage under the policy. Consequently, Quantum informed
3

Greensage that it wished to convert the stop-loss policy into a

fully insured policy. Greensage responded that in the light of the

February 1, 1993 renewal date, “it was too late” to switch the

Plan’s insurance coverage. Quantum then discussed the issue with

Home Life, which also stated that the stop-loss policy could not be

converted prior to its renewal. At this point, Quantum became

convinced that Greensage, with Home Life’s assistance, had

purposely refused to honor its conversion request because of the

commission Greensage stood to earn under the stop-loss policy.

Therefore, on January 13, 1993, over Home Life’s objection, Quantum

terminated Greensage as agent of record and hired a replacement,

Stacey Merritt. Notwithstanding, in February 1993, Quantum

renewed, without modification, the Agreement and its limited

reinsurance coverage under the stop-loss policy.

Starting in September 1993, relations between the parties

became acrimonious. From this date, Quantum refused to pay Home

Life premiums or reimburse claims on the basis that Home Life had

failed to honor its obligation to provide Quantum a fully-insured

policy. In response, Home Life informed Quantum that its stop-loss

policy had lapsed, and demanded payment of outstanding premiums and

delinquent reimbursement payments. Subsequently, the parties

agreed to reinstatement of the policy based on a schedule of

payments to be made by Quantum to Home Life (the November 1993

Agreement). But this agreement fell apart based on Quantum’s

assertion that Home Life thereafter only selectively paid its
4

employees’ claims for medical benefits under the Plan. Quantum

stopped making payments under its previous agreement and with

respect to continuing coverage. In December 1993, Home Life

notified Quantum that it was terminating the policy retroactive to

September 30, 1993, and submitted a final accounting to Quantum for

$37,656.57. Quantum refused to pay the outstanding balance on the

stop-loss policy.

B

In September 1994, Home Life filed suit against Quantum in the

county court of Harris County, Texas, to recover the $37,656.57.

Specifically, Home Life alleged that Quantum breached the parties’

February 1992 Agreement, and breached its fiduciary duty owed under

the Agreement when it failed to pay the premiums and the claims for

reimbursement owed under the stop-loss policy. Quantum entered a

verified denial to the suit and, in doing so, pled several

affirmative defenses: anticipatory breach; fraud in the

inducement; misrepresentation; bad faith; privilege; and failure to

meet conditions precedent.

On August 3, 1995, while the Harris County court suit was

still pending, Quantum filed suit against Home Life and Greensage

in the Texas State District Court of Harris County, Texas. In its

original petition, Quantum alleged numerous causes of action

against the appellees/defendants: (1) unfair insurance practices in

violation of the Texas Insurance Code, art. 21.21, §§ 4 and 16; (2)

deceptive trade practices in violation of the Deceptive Trade
 

1On October 25, 1997, Quantum moved the district court, a

magistrate judge presiding, to remand the cause back to the state

district court of Harris County, Texas. In its October 27, 1995

amended motion to remand, Quantum argued, inter alia, that its

5

Practice Act (“DTPA”); (3) violation of the duty of good faith and

fair dealing; (4) fraudulent misrepresentation; (5) breach of

contract; and (6) negligence and gross negligence. Quantum alleged

that it and Greensage were both Texas corporations, and that Home

Life was a foreign corporation, maintaining its home office in the

state of New Jersey. The factual allegations underlying Quantum’s

claims related to Home Life’s performance of its obligations under

the February 1992 Agreement, the Agreement as renewed in February

1993, and the November 1995 agreement. Finally, Quantum requested

damages minimally in the amount of $115,000--the sum of the unpaid

employee benefits claims that Home Life refused to pay from

September 30, 1993 until December 6, 1993.

On August 25, 1995, Home Life removed the case to the United

States District Court for the Southern District of Texas under 28

U.S.C. § 1446(a) and (b). Home Life alleged that removal was

proper on the basis of federal question jurisdiction under the

ERISA, and on the basis of diversity jurisdiction under 28 U.S.C.

§ 1332. Home Life contended that Quantum had fraudulently joined

Greensage to defeat diversity jurisdiction, as each of Quantum’s

claims against it were time barred. 

After initial proceedings before a magistrate

judge,1.Quantum’s amended complaint was later stricken by the
state law claims were not completely preempted by ERISA. Quantum

further argued that no diversity jurisdiction existed as Greensage,

a non-diverse defendant, was a resident of Texas--the forum state.

The magistrate judge denied Quantum’s motion to remand, concluded

that its claims were completely preempted by ERISA, and ordered

Quantum to re-plead its claims under ERISA. Quantum filed its

first amended complaint under ERISA on January 25, 1996.

 

On December 10, 1996, the case was released from the docket of

the magistrate judge and set for trial in February 1997. The

district court, however, informed the parties that the magistrate

judge’s order constituted “serious legal error” and that it would

decide sua sponte whether Quantum’s Texas state law claims were

completely preempted under the ERISA.

6

magistrate judge on January 31, 1996. The magistrate judge ruled

that Quantum had erroneously been ordered to file an amended

complaint under ERISA for a cause of action not provided therein.

2 Greensage moved for summary judgment on Quantum’s state law

claims against it under the Texas Insurance Code and the DTPA.

Greensage argued that Quantum had failed to bring its claims within

the applicable two-year statute of limitations period. Greensage

contended that Quantum’s claims accrued, and, therefore, the

statute of limitations began to run no later than February 1, 1993.

Therefore, Quantum’s claims filed on August 7, 1995, were untimely.

Greensage also moved the court to retain diversity jurisdiction

over the case under 28 U.S.C. § 1332. Building on its earlier

argument that Quantum’s claims against it were untimely, Greensage

argued that it had been fraudulently joined in the action, and,

therefore, its residence should not be counted in determining the

citizenship of the parties. 

On May 28, 1997, the district court ruled on the ERISA

preemption issue and on each of Greensage’s January 9, 1997

motions. The district court concluded that ERISA did not preempt

Quantum’s Texas state law claims against Home Life and Greensage.

The district court further ruled that Greensage had been

fraudulently joined, as Quantum’s claims against it were timebarred, and that it retained diversity jurisdiction over the case.

The district court therefore granted Greensage’s motion for summary

judgment and dismissed it from the action with prejudice. Thus,

Home Life remained the only party/defendant in the federal action.

During the parties’ litigation in federal court, Home Life’s

August 3, 1995 suit remained on the active docket of the Harris

County court. On September 4, 1997, the Harris County suit was

called to trial. Quantum’s attorney also appeared but moved to

withdraw as counsel on the grounds of a conflict of interest. The

Harris County court granted the withdrawal motion and Quantum made
7

no further appearance in the Harris County suit. On September 16,

1997, the Harris County court entered a default judgment in favor

of Home Life and the Texas Children’s Hospital, awarding Home Life

$37,656.67 and intervenor Texas Children’s Hospital $51,875.80.

The court also awarded attorney’s fees to both parties.

After the judgment in its favor in the Harris County court,

Home Life filed a supplemental motion for summary judgment in the

district court action. In its motion, Home Life asserted the

defense of res judicata and moved the district court to accord

preclusive effect to the Harris County judgment. Home Life argued

that Quantum’s federal claims against it arose out of the same

agreement at issue in the Harris County suit, Quantum’s federal

claims were the same as its defenses pled in the prior suit, and

both the state and federal actions involved the same subject

matter. On November 24, 1997, applying the federal doctrine of res

judicata, the district court granted Home Life’s motion and entered

a take-nothing judgment in its favor.

Quantum timely appealed the district court’s grant of summary

judgment in favor of Greensage, on the grounds of fraudulent

joinder and its grant of summary judgment in favor of Home Life.

II

A

On appeal, Quantum argues that in granting summary judgment in

favor of Home Life, the district court erred in applying the

federal doctrine of res judicata because the preclusive effect of

a state court judgment is determined by state law. Quantum further

argues that under the Texas law of res judicata, the Harris County

court judgment is not binding in federal court. Citing Barr v.

Resolution Trust Co., 837 S.W.2d 627, 631 (Tex. 1992), Quantum

contends that in according a judgment preclusive effect, Texas

courts follow the transactional approach: “[A] subsequent suit

will be barred if it arises out of the same subject matter of a

previous suit and which through the exercise of diligence could

have been litigated in a prior suit.” Quantum maintains that as a

defendant in the Harris County suit, it could not have litigated

its federal claims as counterclaims because the amount in

controversy in the federal suit exceeded the statutory

jurisdictional limits of the Harris County court. Quantum

therefore argues that its federal action against Home Life is not

subject to claim preclusion.

B

(1)

We review de novo the district court’s grant of summary

judgment. See Matador Petroleum Co. v. St. Paul Surplus Lines

Insurance Co., 174 F.3d 653, 656 (5th Cir. 1999) (citations

omitted). We also review de novo the district court’s decision to

accord full faith and credit to a prior state court judgment. See

In re Miller, 156 F.3d 598, 601 (5th Cir. 1998) (citations and

internal quotations omitted).
 

3The Restatement (Second) of Judgments § 24(1) provides that

a final judgment on an action extinguishes the right to bring suit

on the transaction, or series of connected transactions, out of

which the action arose. The Restatement further instructs that a

"transaction" is determined pragmatically, “giving weight to such

considerations as whether the facts are related in time, space,

origin, or motivation; whether they form a convenient trial unit;

and whether their treatment as a unit conforms to the parties'

expectations or business understanding or usage.” Id. at § 24(2).

8

Quantum correctly asserts that the preclusive effect, if any,

of the Harris County judgment is determined by Texas state law.

See Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 373

(1996) (citing Kremer v. Chemical Constr. Co., 456 U.S. 461, 481-

82 (1985)); Sid Richardson Carbon & Gasoline Co. v. Interenergy

Resources, Ltd., 99 F.3d 746, 756 (5th Cir. 1996). We likewise

agree that Texas courts follow the transactional approach to claim

preclusion as provided in the Restatement (Second) of Judgments

§ 24.3 See Jones v. Nightingale, 900 S.W.2d 87, 88 (Tex.Civ.App.

1995, writ ref’d) (citing Barr, 837 S.W.2d at 631). Therefore, a

movant asserting the defense of res judicata under Texas law has

the burden of proving: (1) a prior final judgment on the merits by

a court of competent jurisdiction; (2) identity of parties or those

in privity with them; and (3) a second action based on the same

claims as were raised or could have been raised in the first

action. See Amstadt v. United States Brass Corp., 919 S.W.2d 644,

652 (Tex. 1996) (citing Texas Water Rights Comm'n v. Crow Iron

Works, 582 S.W.2d 768, 771-72 (Tex. 1979)). 

Although not phrased by Quantum as such, the dispositive issue

is whether, for the purposes of res judicata, the Harris County

court constitutes a court of competent jurisdiction. To qualify as

a court of competent jurisdiction, a Texas county court must have

jurisdiction over the subject matter as well as the amount in

controversy. See Smith v. Clary Co., 917 S.W.2d 796, 798 n.1 (Tex.

1996). Texas county courts have jurisdiction in “civil cases in

which the amount in controversy exceeds $500.00 but does not exceed

$100,000.00, excluding interest, statutory or punitive damages and

penalties, and attorney’s fees and costs, as alleged on the face of

the petition.” Tex. Gov’t Code Ann. § 25.0003(c)(1). A

counterclaim is treated as a separate suit under Texas law, and, as

such, it must independently comply with a county court’s

jurisdictional limits. See Jones v. Sheehan, Young & Culp, P.C.,

82 F.3d 1334, 1339 (5th Cir. 1996)(citing Color Tile, Inc. v.

Ramsey, 905 S.W.2d 620, 623 (Tex.Civ.App. 1995, n.w.h.) (other

citations omitted). To determine whether a counterclaim is within

the jurisdiction of a county court, we look to the amount in

controversy at the time of the original pleading. See Smith v.
9

Texas Improvement Co., 570 S.W.2d 90, 92 (Tex.Civ.App. 1978, no

writ) (citations omitted). 

As previously stated, Home Life removed Quantum’s suit filed

in Texas state district court to federal district court.

Therefore, for the purposes of our jurisdictional inquiry, we

regard Quantum’s original petition filed in Texas state district

court as the “original pleading.” On the face of its original

petition, Quantum affirmatively pled damages in excess of $115,000.

Thus, under § 25.0003(c)(1), the Harris County court lacked

jurisdiction to hear Quantum’s federal claims if pled as

counterclaims in the Harris County suit. The Harris County court

would have dismissed those counterclaims in excess of its $100,000

jurisdictional limit. See Kitchen Designs, Inc. v. Wood, 584

S.W.2d 305, 307 (Tex.Civ.App. 1979, writ ref’d n.r.e.).

Accordingly, for the purposes of res judicata, the September 17,

1997 Harris County court judgment does not constitute a judgment

from a court of competent jurisdiction. In short, Home Life has

not carried its burden of establishing each of the requisite

elements of claim preclusion.

(2)

Home Life responds that notwithstanding the limited

jurisdiction of the Harris County court, Quantum raised the same

claims, albeit as affirmative defenses, in the Harris County suit

that it now seeks to litigate in federal district court. Home Life

therefore argues that because the Harris County court decided these

affirmative defenses adversely to Quantum, it should be precluded

from re-litigating them in federal court. 

The factual allegations made in Quantum’s defensive pleadings

in the Harris County suit are indeed the same as those alleged in

its original petition in the Texas state district court suit later

removed to federal court. We have held that, under Texas law, res

judicata precluded a subsequent federal action where the charges in

the appellant’s federal complaint mirrored those defensive

allegations raised by it in the prior state court action, and both

suits arose out of the same subject matter. See Sheehan, 82 F.3d

at 1342-43. Moreover, an appellant is precluded from pursuing in

federal district court the exact claims that were previously

decided adversely to him in the county court action. Id. at 1341.

But Sheehan stands on a different procedural footing than the

present appeal; therefore, its principles are not controlling here.

In applying Texas’ law on claim preclusion, the Sheehan court

expressly noted that the appellant failed to plead affirmatively

damages in excess of the jurisdictional limits of the Texas county

court, and, therefore, the county court could have properly

exercised jurisdiction over his counterclaims. Id. at 1340. This

initial finding of jurisdiction–-one that cannot be made on the

facts of this appeal--was predicate to the court’s application of

the doctrine of res judicata.
10

In any event, we find a second jurisdictional bar exists to

the application of claim preclusion in this case. As we have

previously discussed, the Harris County court is a statutory court

of limited jurisdiction. See § 25.0003(c)(1). Under Tex. Civ.

Prac. & Rem. § 31.004(a), the Texas state legislature modified the

common law doctrine of res judicata so that only those claims that

were actually litigated in a court of limited jurisdiction are

given preclusive effect. See Sheehan, 82 F.3d at 1341 n.7 (citing

Webb v. Persyn, 866 S.W.2d 106, 107 (Tex.Civ.App. 1993, no writ)).

Thus, claims that could have been litigated in a Texas county court

but were not are not subject to claim preclusion. Id. As our

earlier discussion makes clear, Quantum’s claims against Home Life

were not, and, indeed, could not have been litigated in the Harris

County court. Hence, under § 31.004(a), Quantum is not bound by

the Harris County court judgment in federal district court. 

We therefore conclude that the district court erred in

according preclusive effect to the September 16, 1997 Harris County

court judgment under the federal doctrine of res judicata.

III

A

In its final argument on appeal, Quantum contends that the

district court erred in concluding that Greensage had been

fraudulently joined. Quantum advances several arguments in support

of its position. First, Quantum argues that in deciding the

fraudulent joinder issue, the district court failed to resolve a

disputed issue of fact in its favor–-that it did not discover its

cause of action against Greensage until December 1993. Second,

Quantum argues that instead of taking this allegation as true, the

district court impermissibly relied on the affidavit testimony of

Mark Latham and erroneously concluded that its claims against

Greensage accrued in January 1993. Third, Quantum complains that

the district court failed to consider whether, under the discovery

rule, it was “possible” that Quantum could maintain its state law

claims under the Texas Insurance Code and the DTPA. Finally, at

oral argument, citing Giles v. NYLcare Health Care Plans, Inc., 172

F.3d 332 (5th Cir. 1999), and McClelland v. Grunwald, 155 F.3d 507

(5th Cir. 1998), Quantum alternatively contended that when the

district court concluded that its claims were not completely

preempted by ERISA, the district court lacked jurisdiction to rule

on Greensage’s statute of limitations defense. If so, the district

court should have remanded the case back to Texas state district

court.

B

(1)

We review the district court’s denial of a remand to state

court de novo. See Rodriguez v. Sabatino, 120 F.3d 589, 591 (5th

Cir. 1997), cert. denied, 118 S.Ct. 1511 (1998) (citations

omitted). A party invoking the removal jurisdiction of the federal

courts bears a heavy burden. Id.; Richardson, 99 F.3d at 751
 

4The removing party may also establish fraudulent joinder by

demonstrating “outright fraud in the plaintiff’s recitation of

jurisdictional facts.” Rodriguez, 120 F.3d at 591 (citing Burden

v. General Dynamics Co., 60 F.3d 213, 217 (5th Cir. 1995)).

Greensage has not advanced this theory of fraudulent joinder on

appeal.

11

(citations omitted). To establish that a plaintiff has

fraudulently joined a non-diverse party in an attempt to defeat

diversity jurisdiction, the removing party must demonstrate "that

there is absolutely no possibility that the plaintiff will be able

to establish a cause of action against the in-state defendant in

state court."4 Id. 

In reviewing a claim of fraudulent joinder, we employ a

summary judgment-like procedure. See Cavallini v. State Farm Mut.

Auto Ins. Co., 44 F.3d 256, 263 (5th Cir. 1995) (citing Carriere v.

Sears, Roebuck & Co., 893 F.2d 98, 100 (5th Cir. 1990). We

consider the factual allegations contained in the plaintiff’s state

court pleadings and we may also elect to “pierce the [plaintiff’s]

pleadings” to consider other summary judgment-type proof, such as

affidavit and deposition testimony. See Cavallini, 44 F.3d at 263

(citations omitted). All contested issues of fact and all

ambiguities in controlling state law are resolved in favor of the

plaintiff--the non-removing party. See Rodriguez, 120 F.3d at 591

(citations omitted); Richardson, 99 F.3d at 751 (citations

omitted). Notwithstanding our use of a summary judgment-like

procedure, our evaluation of a fraudulent joinder claim does not

contemplate a judgment on the merits of the plaintiff’s underlying

state law claims; we do not consider whether the plaintiff will

actually or even probably prevail on the claims. See Richardson,

99 F.3d at 751. Instead, our focus is the much lesser inquiry of

whether there exists any possibility that the plaintiff may

prevail. Id. (Emphasis added.)

Finally, we note that the expiration of an applicable statute

of limitations is an affirmative defense. We have previously held

that should the defendant establish the existence of an affirmative

defense to the plaintiff’s state law claims, “it necessarily

follows that joinder was fraudulent, and the district court

properly exercised its removal jurisdiction.” Id. at 753. See

also LeBlang Motors, Ltd. v. Subaru of America, Inc., 148 F.3d 680,

690-92 (7th Cir. 1998) (holding district court properly dismissed

claim as fraudulently joined where the statute of limitations for

fraud under Illinois state law had run against the defendants).

However, if there exists any possibility that the plaintiff might

survive the affirmative defense, we must vacate the district

court’s judgment of fraudulent joinder and remand the cause to

state court. See Richardson, 99 F.3d at 753. 
 

5From 1992-1994, Latham was Quantum’s assistant administrator

and was responsible for maintaining the insurance on the Plan.

12

Applying these standards, we conclude that no possibility

exists that Quantum could have prevailed on Greensage’s statute of

limitations defense under Texas law. In its original petition

filed in Texas state district court on August 7, 1995, Quantum pled

causes of action against Greensage under the Texas Insurance Code,

art. 21.21 §§ 4 and 16, and the DTPA, Tex. Bus. & Com. Code

§ 17.50, et seq. Quantum alleged, inter alia, that in violation of

both the insurance code and the DTPA, Greensage misrepresented: (1)

the propriety and appropriateness of the administrative services

agreement and the stop-loss policy; (2) the ease and/or possibility

of converting the stop-loss policy into a fully insured policy; and

(3) its ability and/or willingness to convert the stop-loss policy

into a fully insured policy. Quantum further charged that, despite

Greensage’s representations and assurances as to the

appropriateness of the stop-loss policy, it was forced to pay

deductibles grossly in excess of that required under a fullyinsured policy. Finally, Quantum contended that because of its

desire to protect the residual premium payments it earned under the

stop-loss policy, Greensage delayed renewal of the policy until it

was too late to honor Quantum’s conversion request.

In concluding that Greensage had been fraudulently joined, the

district court found that, based on the affidavit testimony of Mark

Latham, Quantum knew or should have known the nature of its claims

against Greensage by January 1993, when it terminated Greensage as

agent of record for the stop-loss policy and replaced him with

Stacey Merritt. The district court therefore concluded that under

the two-year statute of limitations applicable to the Texas

Insurance Code and the DTPA, Quantum’s August 7, 1995 claims

against Greensage were untimely. We agree. 

The DTPA provides that “all actions brought under this

subchapter must be commenced within two years after the date on

which the false, misleading, or deceptive act or practice occurred

or within two years after the consumer discovered or in the

exercise of reasonable diligence should have discovered the

occurrence of the false, misleading, or deceptive act or

practice. . . .” Tex Bus & Com. Code § 17.565. The Texas

Insurance Code similarly instructs that a claim must be brought

“within two years after the person bringing the action discovered

or in, the exercise of reasonable diligence, should have discovered

the occurrence of the . . . unfair or deceptive act or practice.”

Tex. Ins. Code. Ann. art. 21.21 § 16(d). 

In his May 6, 1996 supplemental affidavit submitted in

response to Greensage’s motion for summary judgment, Michael

Latham5 made the following allegations: On February 1, 1992,

Greensage persuaded Quantum to purchase the stop-loss reinsurance
13

policy; in late 1992, Quantum became concerned about its payment of

large deductibles under the policy and instructed Greensage to

switch its coverage to a fully-insured policy; Greensage refused to

comply with the request and instead engaged in delay tactics to

thwart conversion of the policy; then, in late 1992 and early 1993,

Greensage stated that it was too late to convert the stop-loss

policy into a fully-insured policy prior to the February 1, 1993

renewal date, but that the coverage would be changed after the

policy was renewed; during that time, Greensage also represented

that the stop-loss policy was the most appropriate policy for

Quantum’s employee benefits plan, was an affordable policy, and

would in the long run, save more money in comparison to fullyinsured policy; nonetheless, Quantum was extremely frustrated with

its inability to obtain assistance from Greensage and,

consequently, on January 13, 1993, replaced him as agent of record

for the policy with Stacey Merritt; finally, as a direct result of

Greensage’s fraudulent misrepresentations, Quantum was forced to

renew the stop-loss policy in 1993.

The record shows further that in his December 8, 1995

deposition, Don Ballard, Quantum’s executive vice president,

testified that in September 1992, Quantum knew that (1) the stoploss policy was inappropriate for a company of its size; (2) the

policy was putting a financial strain on the company; (3) it should

not have had such limited coverage “in the first place”; (4)

Greensage was the blame for the company’s purchase of the policy;

and, therefore, (5) he should be terminated. Similar to Latham,

Ballard further testified that when Quantum first contacted

Greensage in September 1992 to convert to a full-coverage policy,

Greensage failed to respond to its questions and requests for

information, failed to return Quantum’s phone calls, neglected to

supply it with the appropriate documentation regarding a fullcoverage policy, and stalled for time by giving it the “runaround.”

Ballard also stated that because of commissions it stood to earn

from the stop-loss policy, Greensage was not responsive to

Quantum’s need for a fully-insured policy. Finally, Ballard

testified that after Greensage was terminated as agent of record on

January 13, 1993, he made no further decisions on behalf of

Quantum. Notably, it was Ballard who made the decision to file

suit against Greensage in 1995.

Even when construed in the light most favorable to Quantum,

this evidence establishes that by January 1993, Quantum knew or

should have known of the facts giving rise to its claims against

Greensage under the Texas Insurance Code and the DTPA. Hence,

Quantum’s causes of action accrued on this date. Accordingly, at

the time of the filing of its original petition, August 7, 1995,

Quantum’s claims were time barred. In reaching this end, we

emphasize that the district court’s obligation to assume all facts

alleged by the plaintiff to be true is not so expansive as to

require the district court to disregard the uncontroverted evidence
 

6Under Texas law, the discovery rule provides that the

limitation period for a tort claim involving an injury of which the

plaintiff could not, and did not, know at the time it occurred,

does not begin to run until the injury done to the plaintiff is

discovered, or until the party acquires knowledge of facts which,

in the exercise of reasonable diligence, would lead to the

discovery of the injury. See Moreno v. Sterling Drug, Inc., 787

S.W.2d 348, 351 (Tex. 1990). It is not necessary that a party know

the details of the evidence by which to establish his cause of

action for it is enough that he knows a cause of action exists in

his favor. Id. at 754. When a party learns of the existence of

the cause of action, he or she must avail himself of those means

that the law provides for prosecuting or preserving the claim. Id.

(citing Hoover v. Gregory, 835 S.W.2d 668, 671 (Tex.Civ.App. 1992,

writ denied)). Thus, the discovery rule expressly mandates that

the plaintiff exercise reasonable diligence to discover facts of

negligence or omission. Id. (citations omitted).

14

existing outside of the plaintiff’s allegations. The district

court’s responsibility here is simply to resolve disputed facts in

favor of the plaintiff. See Burden, 60 F.3d at 217.

(2)

Quantum does not dispute Latham and Ballard’s testimony, but

instead contends that under the discovery rule, the statute of

limitations should be tolled until December 1993. Quantum

maintains that Greensage’s continuing misrepresentations made it

impossible to discover its deceptive insurance practices until

December 1993, when it arbitrarily terminated the stop-loss policy

and caused the Plan to collapse. 

Quantum’s argument is unavailing. Although by its terms, the

DTPA has incorporated the discovery rule into its two-year

limitation period,6 see Bell v. Showa Denko K.K., 899 S.W.2d 749,

753 (Tex.Civ.App. 1995, writ denied), for the purposes of tolling

the statute of limitations under the discovery rule, the

controlling question is simply “whether the plaintiff had knowledge

of facts, which would cause a reasonable person to diligently make

inquiry to determine his or her legal rights.” Id. at 754. By its

own admissions, Quantum knew no later than January 1993 that it had

allegedly suffered economic harm because of Greensage’s purported

fraudulent misrepresentations and deceptive conduct. At best, it

was not until December 1993 that Quantum learned the full extent of

the damages Greensage purportedly caused--its alleged loss of

$115,000 in unpaid employee benefits under the stop-loss policy.

Under the discovery rule, however, that the total amount of party’s

damages are not immediately discernable does not toll the statute

of limitations. See Cornerstones Mun. Utility v. Monsanto Co., 889

S.W.2d 570, (Tex.Civ.App. 1994, writ denied) (citing Bayou Bend

Towers Council of Co-Owners v. Manhattan Construction Co., 866
15

S.W.2d 740, 744 (Tex.Civ.App. 1993, writ denied); Johnson v.

Walker, 824 S.W.2d 184, 187 (Tex.Civ.App. 1991, writ denied)

(citing Wichita Nat'l. Bank v. United States Fidelity & Guar. Co.,

147 S.W.2d 295, 297 (Tex.Civ.App. 1941, no writ)). 

(3)

We likewise reject Quantum’s argument under McClelland and

Giles that once the district court decided that its claims were not

completely preempted under ERISA, the court lacked subject matter

jurisdiction to rule upon the Texas state law statute of

limitations issue.

After a brief review of the relevant procedural history, we

are satisfied that the district court properly exercised diversity

jurisdiction over Quantum’s state law claims and, in turn,

Greensage’s statute of limitations defense. On December 10, 1996,

the district court advised the parties that the magistrate judge’s

ruling, which ordered Quantum to re-plead its state law claims

under the ERISA, constituted a “serious legal error” and that it

would resolve the preemption issue sua sponte, upon further

briefing by the parties. In doing so, the district court explained

its probable jurisdiction as follows: If ERISA completely

preempted Quantum’s state law claims, the case should be dismissed

for failure to state a claim for which relief could be granted.

However, if ERISA did not completely preempt the claims, the case

should be remanded to state court, as the district court lacked

subject matter jurisdiction over the purely state law action. In

response, Greensage moved the district court to retain jurisdiction

over the case under 28 U.S.C. § 1332, on the grounds of diversity

jurisdiction. Greensage argued that in its original petition filed

in Texas state district court, Quantum alleged that it was a

resident of Texas, Home Life was a foreign corporation, and that

the amount in controversy--$115,000--exceeded the $75,000 statutory

limit of § 1332 (a). Greensage further argued that Quantum had

fraudulently joined it in the action and, therefore, for the

purposes of determining the citizenship of the parties, the state

of its principal place of business (Texas) should not be counted.

Thus, on May 27, 1997, the district court had, inter alia, two

issues before it: (1) the ERISA preemption and jurisdictional

issues raised by the court sua sponte; and (2) Greensage’s motion

to retain jurisdiction. 

In ruling upon the motions, the district court first concluded

that Quantum’s state law claims were not completely preempted under

ERISA. Turning to the question of its jurisdiction, the district

court held that depending on its resolution of the fraudulent

joinder issue, it either retained diversity jurisdiction over

Quantum’s state law claims, or it retained no subject matter

jurisdiction over the case. The district court then concluded that

Greensage had been fraudulently joined, and, therefore, it retained

jurisdiction over Quantum’s state law claims under § 1332. Because

the district court’s exercise of jurisdiction in this case was
16

properly based upon § 1332 (diversity of citizenship), not § 1367

(supplemental jurisdiction), neither McClelland nor Giles are

relevant to the instant appeal. The issue in both of those cases

was whether the district court could properly exercise supplemental

jurisdiction over the plaintiff’s pendent state law claims under 28

U.S.C. § 1367(c) after concluding that the plaintiff’s claims were

completely preempted under ERISA.

In sum, we hold that on August 7, 1995, when Quantum filed its

claims under the Texas Insurance Code and the DTPA, there existed

“no possibility” that it could recover against Greensage as the

claims were untimely. Thus, the district court did not err in

concluding that Greensage had been fraudulently joined.
 

7The district court granted Greensage’s motion for summary

judgment with respect to Quantum’s state law claims, finding these

claims to be time barred under the applicable statute of

limitations. Based on this finding, the district court then

dismissed Greensage on the basis of fraudulent joinder. The

district court should not have entered judgment on the merits

against Quantum with respect to Greensage. Having found fraudulent

joinder of Greensage, the district court lacked jurisdiction over

Greensage to grant summary judgment for it on the merits. This

part of the district court’s judgment is therefore VACATED.

17

IV

For the reasons stated in this opinion, the district court’s

grant of summary judgment in favor of Home Life on the grounds of

res judicata is REVERSED. The district court’s dismissal of

Greensage is AFFIRMED.7 

AFFIRMED in part; REVERSED in part.