Opinion ID: 552196
Heading Depth: 3
Heading Rank: 1

Heading: State Fraud Claims

Text: 28 We agree with the district court that uncontroverted evidence determines Hutton's common law fraud, negligent misrepresentation, and Texas statutory fraud 4 claims as a matter of law. Our review of the record confirms that Hutton cannot establish elements common to these three causes of action for any alleged fraudulent conduct. 29
30 To succeed in a common law fraud action, a plaintiff's reliance on the defendant's fraudulent conduct must be justifiable as well as actual. Fredonia Broadcasting Corp. v. RCA Corp., 481 F.2d 781, 795 (5th Cir.1973); Garcia v. Flynt, 574 S.W.2d 587, 589 (Tex.Civ.App.--Houston [14th Dist] 1978), rev'd on other grounds, 587 S.W.2d 109 (Tex.1979); Grumman Allied Industries, Inc. v. Rohr Industries, Inc., 748 F.2d 729, 737 (2d Cir.1984). 31 Justifiable reliance represents a lesser burden on fraud plaintiffs than what reasonable reliance might imply. 5 See generally Dupuy v. Dupuy, 551 F.2d 1005, 1018 (5th Cir.), cert. denied, 434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197 (1977); Restatement (Second) of Torts, Secs. 545A (1977); Prosser and Keeton on Torts, Sec. 108, at 750 (5th ed. 1984). To determine justifiability, courts inquire whether--given a fraud plaintiff's individual characteristics, abilities, and appreciation of facts and circumstances at or before the time of the alleged fraud--it is extremely unlikely that there is actual reliance on the plaintiff's part. See, e.g., Lone Star Machinery Corp. v. Frankel, 564 S.W.2d 135, 139 (Tex.Civ.App.--Beaumont 1978, no writ) (specifications showed that representations were false as to house's square footage, putting plaintiff on such notice of fraud as to create a duty to make further inquiry); General Motors Corp., Pontiac Motor Div. v. Courtesy Pontiac, Inc., 538 S.W.2d 3, 6 (Tex.Civ.App.--Tyler 1976, no writ) (plaintiff may not justifiably rely on representations which any [person of normal intelligence, experience, and education] would recognize at once as preposterous ... or which are shown by facts within his observation to be so patently and obviously false that he must have closed his eyes to avoid discovery of the truth) (quoting Prosser on Torts, Sec. 103, at 731 (3d ed.)); Grumman Allied Industries, 748 F.2d at 737 (New York courts are particularly disinclined to entertain claims of justifiable reliance when sophisticated plaintiff has access to information that would reveal fraud at a time when harm could be averted). 32 The summary judgment record conclusively establishes that Hutton could not have justifiably relied on the following allegedly fraudulent conduct in assenting to the Facility Agreement. 33 i. Aubin's Ownership Interest in Mercury--Hutton claims that certain Aubin parties--Aubin, Haralson, and Fuqua--hid the fact that Aubin owned a 50% interest in the proceeds from any sale of the S&Ls. Hutton shamelessly contends that it would have sought repayment of Aubin's trading losses from this interest rather than enter into the Facility Agreement had it known that Aubin had such a claim on the S&Ls. 34 But Hutton's Mundy testified in his deposition that he knew from Aubin that Aubin was due even more than 50% of the proceeds from any sale of the S&Ls. Mundy testified that he told Hutton director Sanders this before the Facility Agreement was signed. The Aubin parties even discovered a tape recording of a February 1985 telephone conversation between Sanders and Mundy wherein Mundy stated that Aubin had access to at least 50% of the proceeds from a sale of the S&Ls. 35 Because a corporation operates through individuals, the privity and knowledge of individuals at a certain level of responsibility must be deemed the privity and knowledge of the organization. Continental Oil Co. v. Bonanza Corp., 706 F.2d 1365, 1376 (5th Cir.1983). All Hutton executives who negotiated the Facility Agreement knew that Sanders and Mundy were the Hutton employees who knew Aubin best. If these people failed to ask Mundy what relevant information he had before assenting to the Facility Agreement, they simply did not avail themselves of knowledge which we now impute to their corporation. 36 ii. Aubin's Impecuniosity--Our holding that Hutton knew of Aubin's 50% interest in the S&Ls' sale proceeds also disposes of Hutton's claim that Aubin parties misrepresented Aubin and his companies as impecunious on March 8, 1985. We need not decide, as did the court below, whether general representations about one's personal wealth are actionable. As a matter of law, Hutton knew that Aubin had rights in substantial assets and was not induced into signing the Facility Agreement by any representation otherwise. 37 iii. Aubin's Control of the S&Ls --Although not in its complaint, Hutton contends in its brief that Aubin parties defrauded Hutton by misrepresenting that Haralson controlled the S & Ls when in fact Aubin did. This is a fabricated contention. Yang testified that he believed Aubin had actual control of the S & Ls during all times relevant to this controversy. And Yang communicated this belief to his superiors. 38 iv. Hutton's Rights in the Sale of Milam --Hutton contends in its brief that, while negotiating the Facility Agreement, Aubin said that Hutton would have a superior interest in the sale of Milam, and that Aubin omitted telling Hutton that Aubin had a first lien on Milam's stock. The Facility Agreement obligates Haralson to pledge only Mercury's stock to Hutton. It also obligates him to take all action necessary to assign to Hutton the proceeds of either S&Ls' sale. 39 When the Hutton executives negotiating the Facility Agreement called Yang to get his estimate of the S&Ls' value, Yang urged them to get the stock of both Mercury and Milam as collateral. The deposition of Hutton's outside counsel, Irwin Schneiderman, indicates that Lynch's group listened to Yang. Schneiderman testified that whether Hutton would get a first lien on both Mercury and Milam or only on Mercury was negotiated on March 8, 1985. Hutton obviously lost on the issue given the Facility Agreement's language. Hutton's knowledge that it did not have a first lien on Milam means that it was not defrauded into thinking that it did. 40 v. RBI's Assets--Hutton claims that it was defrauded by Aubin-party representations that RBI had substantial assets when, in fact, RBI had no such assets and was formed two weeks before Haralson and Hutton signed the Facility Agreement. Hutton maintains that by asking for and receiving millions of dollars in loans, RBI's agents represented that RBI had substantial assets to meet its obligations under the Note. But Hutton's executives did not ask Aubin, Fuqua, Haralson, or anyone else about RBI's financial wherewithal before signing the Facility Agreement and lending RBI approximately $48 million. This peculiar laxity by sophisticated parties establishes an extreme unlikelihood that Hutton relied on RBI's financial strength in assenting to the Facility Agreement. Such unjustifiable reliance bars Hutton's common law fraud and negligent misrepresentation claims regarding RBI's assets as a matter of law. 41 Alternatively, we hold that Hutton waived its common law claims for fraudulent inducement based on RBI's lack of assets. In the Participation Agreements of June 7, 1985, Hutton's Lynch agreed that the Facility Agreement and Promissory Note attached thereto dated March 8, 1985 remain in full force and effect. One month earlier, Yang wrote Lynch that, according to Aubin, RBI has no assets. The Participation Agreements constitute Hutton's ratification of the Facility Agreement. Olney Sav. & Loan Ass'n v. Trinity Banc Sav. Ass'n, 885 F.2d 266, 270 (5th Cir.1989) (ratification occurs when a person induced by fraud to enter into an agreement continues to accept benefits under the agreement after he becomes aware of the fraud, or if he conducts himself so as to recognize the agreement as binding) (quoting Johnson v. Smith, 697 S.W.2d 625 (Tex.App.--Houston [14th Dist.] 1985, no writ)). Once a contract has been ratified by the defrauded party ..., the defrauded party waives any right of rescission or damages. Spellman v. American Universal Invest. Co., 687 S.W.2d 27, 29 (Tex.App.--Corpus Christi 1984, writ ref'd n.r.e.) (per curiam, en banc) (quoting Wise v. Pena, 552 S.W.2d 196 (Tex.Civ.App.--Corpus Christi 1977, writ dism'd w.o.j.)); cf. Bisbing v. Sterling Precision Corp., 34 A.D.2d 427, 312 N.Y.S.2d 305, 310 (1970) (a party who knows facts and freely recognizes a contract as existing acquiesces in it and is equitably estopped from impeaching it although it was originally void or voidable). 42 vi. Imminence of Southmark Transaction--Hutton claims that Aubin parties fraudulently induced Hutton's assent to the Facility Agreement by making Hutton believe that Southmark would buy the S&Ls. If Aubin, Haralson, or Fuqua made such representations, we find reliance on them unjustifiable. Yang was involved in the negotiations to sell the S&Ls to Southmark. Yang worked full time on this project for at least ten days from the end of February 1985 to the beginning of March 1985, meeting with Southmark's president in Dallas and Southmark's counsel in New York. Yang knew that Southmark had not conducted the in-depth review of the S&Ls' financial records that is customary in the purchase of financial institutions. The Facility Agreement itself provides only that [a] sale of Haralson's securities of Mercury and Milam is currently in the final stages of negotiation. Five days after signing the Facility Agreement, Haralson signed a sales contract with Southmark, but Southmark retained the right to walk away from the deal if it was dissatisfied after auditing the S&Ls' financial records. The record contains no evidence of Hutton's surprise at Southmark's retention of this right. Hutton did not justifiably rely on a certain Southmark purchase of the S&Ls in entering into the Facility Agreement. 43 Alternatively, we hold that Hutton waived its common law claims for fraudulent inducement based on its expectation that Southmark would purchase the S&Ls. Lynch knew by April 1985 that Southmark had exercised its option to back out of its purchase contract with Haralson. Over one month later, Lynch signed the Participation Agreements on Hutton's behalf. Hutton's only response is that it did not know why Southmark had backed out. But the reasons for Southmark's withdrawal have nothing to do with the misrepresentations and omissions concerning Southmark alleged in Hutton's complaint. By ratifying the Facility Agreement after learning that Southmark would not certainly purchase the S&Ls, Hutton waived its common law fraudulent inducement claims concerning Aubin-party representations otherwise. 44 vii. Texas Savings and Loan Department Supervision--Hutton claims that Aubin parties concealed a formal Supervisory Agreement that Mercury entered into with the TS&LD in September 1984. Indeed, to avoid a cease and desist order, Haralson agreed with then Texas Savings and Loan Commissioner Linton Bowman III to sell the S&Ls within a year, keep Aubin out of the S&Ls' affairs, and comply with other regulatory restrictions, including loan limits and approvals by an on-site TS&LD representative. 45 If Hutton officials did not actually read the Supervisory Agreement before executing the Facility Agreement, the record contains abundant evidence that Hutton knew by then that something was amiss between Haralson and the TS&LD. Yang testified that he knew of some arrangement between the S&Ls and the TS&LD in September 1984. A September 23, 1984 memorandum by Yang reveals that he knew that Texas regulators demanded that the S&Ls be dismantled, that Haralson agreed with them to cease his involvement in the Savings and Loan business, that the state commissioner would possibly take over the S&Ls, and that state personnel were already on site at the S&Ls. A March 8, 1985 memorandum by Yang establishes his awareness that an eleven million dollar loss would cause the TS&LD to close Mercury. Yang testified that before March 8, 1985, he understood that Aubin had moved out of Mercury's office space at the insistence of the Texas regulators. 46 We agree with the district court that Hutton could not have justifiably relied on the absence of regulatory problems at the S&Ls when it entered into the Facility Agreement fully aware of signs that serious problems existed. 6 47 viii. S&L Loan Portfolio Condition--Next, Hutton asserts that Aubin parties concealed significant problems in the S&Ls' loan portfolios. But both Yang and his associate, Lilian Shackleford, knew by February 1985 that another potential purchaser of the S&Ls--DBG, Inc.--was concerned about the S&Ls' acquisition, development, and construction (ADC) loan portfolios. DBG knew that the S&Ls were not revealing important information about their ADC loans, especially the S&Ls' equity participation in some of those loans. DBG pressured Yang to get more information from the S&Ls on these loans and vowed special scrutiny of the ADC loans when it conducted its pre-purchase review of the S&Ls' financial records. 48 Most significant, however, is Yang's clear understanding that the S&Ls were concealing loan portfolio information that was crucial in determining the S&Ls' value. Before Hutton executed the Facility Agreement, Yang acknowledged that anybody considering acquiring Mercury/Milam should watch out for the loan files, particularly the ADC loans. We hold that Hutton may not justifiably claim that it was defrauded by not having been told about the problematic loan portfolios because Hutton knew that Aubin kept this information from Hutton, that this information was of substantial importance, and that other potential purchasers had criticized the portfolios. 49 ix. The Value of Mercury--Next, Hutton claims that Aubin parties misrepresented that Mercury's stock was worth more than Hutton's exposure under the Facility Agreement, which was approximately $60 million. 7 50 The district court held that any Aubin-party representations as to value were opinions and therefore not actionable. See Cravens v. Skinner, 626 S.W.2d 173, 177 (Tex.App.--Ft. Worth 1981, no writ) (absent a confidential relationship, a representation of market value of a commodity is merely an opinion that cannot be made the basis of recovery for fraud). But another Texas court held that statements like the bank is doing very well and it is a good, sound bank and will continue to make money were actionable. Wink Enterprises, Inc. v. Dow, 491 S.W.2d 451, 453 (Tex.Civ.App.--El Paso 1973, writ ref'd n.r.e.). Federal courts have also been reluctant to hold that broad statements concerning value are opinions, and thus not actionable. See Eisenberg v. Gagnon, 766 F.2d 770, 775-76 (3d Cir.), cert. denied, 474 U.S. 946, 106 S.Ct. 342, 88 L.Ed.2d 290 (1985); First Virginia Bankshares v. Benson, 559 F.2d 1307, 1318 (5th Cir.1977), cert. denied, 435 U.S. 952, 98 S.Ct. 1580, 55 L.Ed.2d 802 (1978). Especially given Aubin's superior access to information concerning the S&Ls, we do not agree that his representations as to value must be disregarded as opinion. See Wright v. Carpenter, 579 S.W.2d 575, 580 (Tex.Civ.App.--Corpus Christi 1979, writ ref'd n.r.e.) ([r]epresentations as to matters not equally open to parties are legally statements of fact and not opinions). 51 Even so, we will not ignore Hutton's knowledge of the following facts before assenting to the Facility Agreement: 52 --Aubin and Haralson are reputed swindlers. 53 --Aubin twice got Hutton sued for fraud. 54 --Yang believed that Aubin and Haralson were out to screw Hutton. 55 --Aubin let Hutton believe that he controlled the 1100 Limited trading account that held over $25 million in equity while it was in his interest to do so and only when he owed Hutton money did he explain that Mercury controlled that account. 56 --The S&Ls were under the TS&LD's continuous supervision. 57 --The TS&LD was forcing Haralson to sell the S&Ls and get out of the savings and loan business. 58 --There was a strong possibility that the TS&LD would assume control of the S&Ls. 59 --An $11 million cash loss would cause the TS&LD to close Mercury, a business with over $5 billion in loans outstanding. 60 --The S&Ls held equity interests in several of their ADC loans. 61 --Potential investors were skeptical about the S&Ls' loan portfolios. 62 --Aubin imposed onerous conditions on the S&Ls' sale. 63 --Yang believed that before taking the S&Ls as collateral, Hutton should be careful in examining the S&Ls financial records and should especially watch out for the ADC loan files. 64 We hold that Hutton's knowledge of these facts establishes that Hutton could not have justifiably relied on any Aubin-party representation as to Mercury's value. 65
66 Only representations of material facts are actionable under either common law fraud or negligent misrepresentation theories. Trenholm v. Ratcliff, 646 S.W.2d 927, 931 (Tex.1983) (fraud); Croce v. Croce, 199 Misc. 635, 100 N.Y.S.2d 97, 102-03 (1950); MBank Ft. Worth, N.A. v. Trans Meridian, Inc., 820 F.2d 716, 718 (5th Cir.1987) (negligent misrepresentation). In fraudulent inducement cases, the test for materiality is whether the contract would have been signed by the plaintiff without such misrepresentations having been made. Adickes v. Andreoli, 600 S.W.2d 939, 946 (Tex.Civ.App.--Houston [1st Dist.] 1980, writ dism'd w.o.j.). 67 Haralson's Unencumbered Ownership of Mercury Stock--Hutton's final claim concerns Haralson's misrepresentation in the Facility Agreement that he owned all stock in Mercury free and clear of all liens, charges and encumbrances whatsoever. In fact, Haralson had already pledged his Mercury stock to IBR as collateral for loans totaling at least $5.8 million. On May 3, 1985, IBR assigned four Haralson promissory notes to Aubin's Sigma Capital Corporation. 68 These facts, even if unknown to Hutton, do not support a fraudulent inducement claim because Hutton fails to substantiate their materiality. Hutton agrees that upon receiving the Mercury stock certificates, it had a perfected first lien on Mercury's stock. See Tex.Bus. & Com.Code Ann. Secs. 8.321, 9.305 (Vernon Supp.1991). Because Hutton cannot explain why the absence of subordinate encumbrances was material to its assent to the Facility Agreement, its common law claims based on Haralson's representation that no such encumbrances existed fail as a matter of law. 69 Thus, albeit on different grounds, we affirm the district court's summary dismissal of all of Hutton's common law fraud, negligent misrepresentation, and Texas Business and Commerce Code section 27.01 claims for fraudulent inducement into the Facility Agreement.