Opinion ID: 159203
Heading Depth: 3
Heading Rank: 2

Heading: Texas Standard of Materiality

Text: 118 In contrast, the Texas Plaintiffs correctly characterize as subjective the definition of materiality under their two distinct claims, i.e., Texas common law fraud and a violation of section 27.01 of the Texas Business & Commercial Code (section 27.01). 18 Although the Texas Supreme Court has not recently articulated a materiality definition for either of these two causes of action, numerous Texas Court of Appeals and Fifth Circuit opinions lead this court to agree with the position taken by the Texas Plaintiffs. Discussing Texas common law fraud, the Texas Court of Appeals recently stated, A misrepresentation is material if it induced the complaining party to enter into the contract. Marburger v. Seminole Pipeline Co., 957 S.W.2d 82, 86 n.4 (Tex. App.1997, writ denied) Marburger simply follows a long line of cases establishing this subjective standard. See, e.g., Hart v. Aetna Cas. & Sur. Co., 756 S.W.2d 27, 29 (Tex. App. 1988, no writ); Sawyer v. Pierce, 580 S.W.2d 117, 124 (Tex. App. 1979, writ ref'd n.r.e.); Putnam v. Bromwell, 11 S.W. 491, 492 (Tex. 1889). Additionally, the Fifth Circuit has noted that Texas common law fraud, unlike federal securities fraud, defines materiality in subjective terms. See In re Sioux Ltd., Securities Litigation v. Coopers & Lybrand, 914 F.2d 61, 65-66 (5th Cir. 1990), implied overruling on other grounds recognized by,Pacific Mut. Ins. Co. v. First RepublicBank Corp., 997 F.2d 39, 41 (5th Cir. 1993). Indeed, a treatise on Texas law states the following: 119 In order to constitute actionable fraud, representations must pertain to material facts . . . . 120 The test for determining whether a represented fact is material relates to the effect of the representation on the transaction in question. . . . 121 A representation is not material if it appears that the transaction would have been entered into notwithstanding the representation. On the other hand, a represented fact is said to be material if the transaction would not have been entered into had the representation not been made. 122 Elizabeth A. Wong, 41 Texas Jurisprudence, Fraud and Deceit § 13 (3d ed. 1998). 123 Admittedly, a few Texas cases have caused some confusion about the proper materiality standard under Texas common law fraud. Two recent Texas Court of Appeals cases each confusingly recite both an objective and a subjective materiality standard in a single sentence. See Beneficial Personnel Servs. of Texas, Inc. v. Porras, 927 S.W.2d 177, 186-87 (Tex. App. 1996, writ granted w.r.m.); Beneficial Personnel Servs. of Texas, Inc. v. Rey, 927 S.W.2d 157, 168 (Tex. App. 1996, writ granted w.r.m.). The objective language in these two cases is drawn from another case upon which the Defendants rely, which merely quoted a trial court's instructions employing an objective standard but never affirmatively approved those instructions. See American Medical Int'l, Inc. v. Giurintano, 821 S.W.2d 331, 338 (Tex. App. 1991, no writ). No other case to which the Defendants cite suggests Texas common law fraud utilizes an objective definition of materiality. 19 Porras and Rey merely confuse the issue; they do not overrule earlier cases and they antedate Marburger. Therefore, this court is convinced that Texas common law fraud jurisprudence establishes a subjective standard of materiality. 124 Materiality under section 27.01 is also measured subjectively. As the Fifth Circuit noted, Because the statute is derived from Texas common law fraud, the reliance and materiality elements of section 27.01 do not differ from those of Texas common law fraud. Haralson v. E.F. Hutton Group, Inc., 919 F.2d 1014, 1025 n.4 (5th Cir. 1990); see also Fisher v. Yates, 953 S.W.2d 370, 380 n.7 (Tex. App. 1997, writ denied) (The reliance and materiality elements of statutory fraud [under section 27.01] do not differ from common law fraud.); Keith A. Rowley, The Sky is Still Blue in Texas: State Law Alternatives to Federal Securities Remedies, 50 Baylor L. Rev. 99, 124 n.104, 163 n.198 (1998) (noting that in contrast to an action under Texas Securities Act, an action pursuant to common law fraud or section 27.01 merely requires a subjective showing of materiality). The Defendants have failed to alert this court to any authority that treats section 27.01's materiality element as an objective one, and nor have we found any such authority. This court thus concludes that section 27.01 imposes a subjective standard of materiality. 125 Finally, the district court's incorrect jury instruction sufficiently prejudiced the Texas Plaintiffs to warrant reversal. This court recently noted its own conflicting precedent regarding the precise standard for reversal due to erroneous instructions. See Morrison Knudsen Corp. v. Fireman's Fund Ins. Co., 175 F.3d 1221, 1236-37 (10th Cir. 1999). Coleman and City of Wichita v. U.S. Gypsum Co. require reversal when a jury might have based its decision on an erroneous instruction, even if that possibility was very unlikely. See Coleman, 108 F.3d at 1202; U.S. Gypsum, 72 F.3d 1491, 1495 (10th Cir. 1989). An earlier case, however, indicated this court should only reverse when it is more likely than not that the erroneous instruction affected a substantial right of the appellant. SeeUnited States Indus., Inc. v. Touche Ross & Co., 854 F.2d 1223, 1253 n.39 (10th Cir. 1988), implied overruling on other grounds recognized by, Anixter v. Home-State Production Co., 77 F.3d 1215, 1231 (10th Cir. 1996). Morrison Knudsen did not need to reconcile these differing standards. See 175 F.3d at 1237. 126 Again, we need not decide which of these competing standards controls, because the erroneous instruction here would require reversal under either approach. The district court's erroneous instruction on an essential element of the Texas Plaintiffs' fraud claims effectively directed the jury to ignore the Texas Plaintiffs' own testimony that they would not have entered into the SPA absent the Defendants' misrepresentations and omissions. Additionally, the Defendants failed to present any evidence contradicting the Texas Plaintiffs' testimony about their states of mind. 20 Even under the more burdensome Touche Rossastandard, therefore, the erroneous instruction warrants reversal, because the error more than likely, if not necessarily, affected a substantial right of the Texas Plaintiffs, i.e., the right to have the jury even consider the primary and only direct evidence on the materiality element. The district court therefore committed reversible error with respect to the Texas Plaintiffs' claims when it instructed the jury to determine objectively whether the Defendants' misrepresentations and omissions were material.