Opinion ID: 790940
Heading Depth: 2
Heading Rank: 1

Heading: The Existence of a Duty to Disclose

Text: 11 United Teacher first claims that the district court erred when it found that Union/USA had not committed fraud because it did not have a duty to disclose the consent orders to United Teacher absent a confidential or fiduciary relationship between United Teacher and Union/USA. According to United Teacher, a duty to disclose can exist in Texas even when there is no confidential or fiduciary relationship between the parties. 12 United Teacher begins its argument by noting that in Texas, a plaintiff wishing to prove fraud must establish a material representation, which was false, and which was either known to be false when made or was asserted without knowledge of its truth . . . . Formosa Plastics Corp. v. Presidio Eng'rs. & Contractors, Inc., 960 S.W.2d 41, 47 (Tex.1998) (internal quotation marks omitted). United Teacher also notes that the Texas Supreme Court has stated that [w]hen the particular circumstances impose on a person a duty to speak and he deliberately remains silent, his silence is equivalent to a false representation. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 435 (Tex.1986). United Teacher then cites Union Pacific Resources Group, Inc. v. Rhone-Poulenc, Inc., 247 F.3d 574, 586 (5th Cir.2001), for the claim that a duty to disclose can exist in Texas absent a fiduciary or confidential relationship. In Rhone-Poulenc, this court stated: 13 A duty to speak arises by operation of law when (1) a confidential or fiduciary duty relationship exists between the parties; or (2) one party learns later that his previous statement was false and misleading; or (3) one party knows that the other party is relying on a concealed fact and does not have an equal opportunity to discover the truth; or (4) one party voluntarily discloses some but less than all material facts, so that he must disclose the whole truth, i.e., all material facts, lest his partial disclosure convey a false impression. 14 247 F.3d at 586. According to United Teacher, the district court should have invoked the doctrine of stare decisis and held that, in accordance with Rhone-Poulenc, Union/USA had a duty to disclose the consent orders. United Teacher also notes that this court, as well as Texas intermediate appellate courts, have reached similar conclusions in a number of other cases, both before and after the Texas Supreme Court decided Bradford v. Vento, the case on which the district court and Union/USA rely. See, e.g., Rimade Ltd. v. Hubbard Enters., Inc., 388 F.3d 138, 143 (5th Cir.2004); Lewis v. Bank of Am. NA, 347 F.3d 587 (5th Cir.2003) (per curiam); Citizens Nat'l Bank v. Allen Rae Invs., Inc., 142 S.W.3d 459, 476-77 (Tex. App.—Fort Worth 2004); Pellegrini v. Cliffwood-Blue Moon Joint Venture, 115 S.W.3d 577, 580 (Tex.App.—Beaumont 2003, no pet.); Lesikar v. Rappeport, 33 S.W.3d 282, 299 (Tex.App.—Texarkana 2000, pet. denied); Hoggett v. Brown, 971 S.W.2d 472, 487 (Tex.App.—Houston [14th Dist.] 1997, pet. denied); Ralston Purina Co. v. McKendrick, 850 S.W.2d 629, 635-36 (Tex.App.—San Antonio 1993, writ denied). Accordingly, United Teacher contends that the district court, in making its Erie guess, incorrectly stated that the holding in Rhone-Poulenc was no longer in accord with Texas state law. 15 Union/USA responds by arguing that in Bradford, which was decided three weeks after Rhone-Poulenc, the Supreme Court of Texas conclusively established that a duty to disclose does not exist in Texas absent a confidential or fiduciary relationship. In support of this claim, Union/USA cites the following language from Bradford: 16 Several courts of appeals have held that a general duty to disclose information may arise in an arm's-length business transaction when a party makes a partial disclosure that, although true, conveys a false impression. See, e.g., Hoggett v. Brown, 971 S.W.2d 472, 487 (Tex. App.—Houston [14th Dist.] 1997, no writ); Ralston Purina, 850 S.W.2d at 636. The Restatement (Second) of Torts section 551 also recognizes a general duty to disclose facts in a commercial setting. In such cases, a party does not make an affirmative misrepresentation, but what is said is misleading because other facts are not disclosed. We have never adopted section 551. 17 Bradford, 48 S.W.3d at 755-56 (emphasis added) (some internal citations omitted). 5 Additionally, Union/USA notes that the Texas Supreme Court in Bradford cited its decision in SmithKline Beecham Corp. v. Doe, 903 S.W.2d 347 (Tex.1995), in which it similarly stated that Section 551 of the RESTATEMENT (SECOND) OF TORTS recognizes a general duty to disclose facts in a commercial setting, which could encompass the duty Doe seeks in this case. . . . This Court has cited section 551 only once, but has never embraced it as a rule of law in Texas. Id. (citing SmithKline Beecham Corp., 903 S.W.2d at 352-53 (internal citations omitted)). Finally, Union/USA states that this court, as well as Texas's intermediate appellate courts, have before and after Bradford stated that no duty to disclose exists in Texas absent a fiduciary or confidential relationship. See Coburn Supply Co., Inc. v. Kohler Co., 342 F.3d 372 (5th Cir.2003); Imperial Premium Fin., Inc. v. Khoury, 129 F.3d 347, 352-53 (5th Cir.1997); Bay Colony Ltd. v. Trendmaker, Inc., 121 F.3d 998, 1004 (5th Cir.1997); Engstrom v. First Nat'l Bank of Eagle Lake, 936 S.W.2d 438, 444-45 (Tex.App.—Houston [14th Dist.] 1996, writ denied); Travel Music of San Antonio, Inc. v. Douglas, No. 04-00-00757-CV, 2002 WL 1058527, at  (Tex.App.—San Antonio, May 29, 2002) (not designated for publication). Accordingly, Union/USA argues that the district court correctly concluded that because the Texas Supreme Court explicitly declined in Bradford to adopt the disclosure duties described in § 551 and in cases like Hoggett, and because the Texas Supreme Court has only explicitly recognized a duty to disclose in the context of a confidential or fiduciary relationship, a duty to disclose does not exist in Texas absent a confidential or fiduciary relationship. 18 After a bench trial, findings of fact are reviewed for clear error and issues of law are reviewed de novo. Kona Tech. Corp. v. S. Pac. Transp. Co., 225 F.3d 595, 601 (5th Cir.2000). In order to determine questions of state law, federal courts look to final decisions of the state's highest court. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); St. Paul Fire & Marine Ins. Co. v. Convalescent Servs., Inc., 193 F.3d 340, 342 (5th Cir.1999). While decisions of intermediate state appellate courts provide guidance, they are not controlling. Matheny v. Glen Falls Ins. Co., 152 F.3d 348, 354 (5th Cir. 1998). If a state's highest court has not ruled on the issue in question, a federal court must determine, to the best of its ability, what the highest court of the state would decide. St. Paul Marine, 193 F.3d at 342. 19 A reasonable jurist might well conclude, certainly after Bradford, that a duty to disclose exists in Texas only in the context of a confidential or fiduciary relationship. This court has so held in Coburn, the only Fifth Circuit case that discusses the relevant portion of Bradford. However, apart from Coburn, it would be fair to say that courts after Bradford (including this court) have not gotten the message, but have instead continued to find that a duty to disclose can exist in Texas absent a confidential or fiduciary relationship. See, e.g., Rimade, 388 F.3d at 143; Lewis, 347 F.3d at 587; Citizens Nat'l Bank, 142 S.W.3d at 476-77; Pellegrini, 115 S.W.3d at 580; but see Travel Music, 2002 WL 1058527, at . 20 Fortunately, we need not decide whether a duty to disclose exists in Texas absent a confidential or fiduciary relationship because, even if such a duty did exist, United Teacher's fraud claim would fail. In Texas, fraud occurs when: (1) the defendant misrepresented a material fact; (2) the defendant knew the material representation was false or made it recklessly without any knowledge of its truth; (3) the defendant made the false material representation with the intent that it should be acted upon by the plaintiff; and (4) the plaintiff justifiably relied on the representation and thereby suffered injury. Ernst & Young, 51 S.W.3d at 577. The first requirement of this test can be met if the defendant concealed or failed to disclose a material fact when a duty to disclose existed. See New Process Steel Corp., Inc. v. Steel Corp. of Texas, Inc., 703 S.W.2d 209, 214 (Tex. App.—Houston [1st Dist.] 1985, writ ref'd n.r.e.); Moore & Moore Drilling Co. v. White, 345 S.W.2d 550, 555 (Tex. App.—Dallas 1961, writ ref'd n.r.e.). Assuming, arguendo, that United Teacher has established the first prong of this test because Union/USA had a duty to disclose the consent orders, United Teacher's fraud claim nevertheless fails because it cannot prove fraudulent intent. In its Findings of Fact and Conclusions of Law, the district court noted that Clause 3.11 of the Agreement for Reinsurance states: 21 To the best of [Union Labor's] knowledge, information and belief, no warranty or representation made by the Company in this Agreement nor in any writing furnished or to be furnished by [Union Labor] to [United Teacher] pursuant hereto or in connection herewith contains or will contain any untrue statement of material fact or omits or will fail to state, any material fact necessary to make the statements contained herein or therein not misleading. 22 The district court interpreted this clause as an affirmative representation that Union Labor disclosed all material information necessary to make other representations related to the sale not misleading. The district court then analyzed whether Union/USA committed fraud by intentionally concealing or failing to disclose the consent orders during the parties' negotiations, thereby misleading United Teacher. The district court wrote: 23 a. Omitted material information. United Teacher asserts that the omitted material information was the existence of the consent orders and that disclosing the existence of the consent orders was necessary to make other information provided by Union Labor during negotiations not misleading. There can be no doubt, and the Court finds, that the existence of the consent orders and their content was information material to United Teacher in analyzing the proposed purchase. United Teacher offers several examples of how information furnished by Union Labor was rendered misleading by the failure to disclose the consent order. Lazio disclosed to Doze that Union Labor received a 12% rate increase on the Florida Medicare Supplement policies on June 22, 1999, and an 8% increase for the Florida Medicare Select policies on December 16, 1999, without disclosing that these increases were related to the 1997 and 1999 consent orders. Later, in connection with the 2001 Florida rate filings, Lazio advised Doze that Union Labor had received an 18% rate increase on the Medicare Select business and that the 100% request on the Supplement business was pending. When Florida offered a 6% rate increase (rather than the 100% requested), Lazio did not inform Doze that the low increase was the result of the 1999 consent order. 24 b. Union Labor's knowledge and intent. United Teacher alleges that Union Labor knew the consent orders were material and intentionally concealed them from United Teacher during negotiations. As evidence of Union Labor's fraudulent intent, United Teacher points to Union Labor's insistence on performing the 2001 Florida rate filing, which, if performed by United Teacher, would have led to its discovery of the consent orders. United Teacher argues that Union Labor's failure to send the 2001 filing information to Doze promptly after he requested it is further evidence of Union Labor's intent to conceal the consent orders. However, Union Labor explained that it performed the 2001 Florida rate filing because it had access to the necessary information and that when Doze later requested the filing information, it was not readily available because an outside consultant had actually prepared the filing. Further, Lazio, a young actuary with almost no experience in conducting due diligence for the purchase or sale of a business, credibly testified that she did not know that the consent orders, signed by Union Labor and the Florida Department of Insurance, would also bind United Teacher and that, since Doze did not specifically request information in the category of the consent orders, she did not think to produce them. 25 United Teacher has presented evidence that Union Labor may have intended to conceal the consent orders, but Union Labor's explanations for its allegedly suspicious behavior are plausible. United Teacher has failed in its burden of proof and persuasion. 26 United Teacher Assocs. Ins. v. Union Labor Life Ins. Co., 311 F.Supp.2d 587, 599 (W.D.Tex.2004) (emphasis added). United Teacher does not challenge this finding by the district court on appeal. Nevertheless, it contends that this finding is not dispositive of its claim of fraud by nondisclosure because the district court's analysis regarding intent only applied to fraud by affirmative misrepresentation. In support of this claim, United Teacher states that the intent requirement for fraud by affirmative misrepresentation does not exist with respect to fraud by nondisclosure. Specifically, United Teacher argues that it need not prove intent in order to establish fraud by nondisclosure, since intent is irrelevant when an affirmative duty to disclose exists and was violated. This is wrong. Courts in Texas have consistently held that fraud by nondisclosure or concealment requires proof of all of the elements of fraud by affirmative misrepresentation, including fraudulent intent, with the exception that the misrepresentation element can be proven by the nondisclosure or concealment of a material fact in light of a duty to disclose. See, e.g., Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 181 (Tex.1997) (holding that fraud by non-disclosure is simply a subcategory of fraud requiring, e.g., proof of reliance); Columbia/HCA Healthcare v. Cottey, 72 S.W.3d 735, 744-46 & n. 5 (Tex.App.—Waco 2002, no pet.) (stating intent as an element of fraud by nondisclosure and finding sufficient evidence of intent to support the jury's verdict); Peltier Enters., Inc. v. Hilton, 51 S.W.3d 616, 623 (Tex.App.—Tyler 2000) (holding that fraudulent concealment requires proof of the same elements [as fraud by affirmative misrepresentation]). Because the intent prong is the same in Texas for fraud by affirmative misrepresentation as it is for fraud by nondisclosure or concealment, the district court's finding of a lack of fraudulent intent would apply equally if the district court had found that a common law duty to disclose the consent orders existed. Accordingly, the district court's unchallenged finding of no fraudulent intent in the nondisclosure of the consent orders is fatal to United Teacher's fraud by nondisclosure claim, regardless of whether or not a duty to disclose the consent orders existed. We therefore need not reach the question of whether a duty to disclose can exist in Texas absent a confidential or fiduciary relationship. 6 27