Opinion ID: 21495
Heading Depth: 1
Heading Rank: 2

Heading: the fraudulent inducement claim

Text: Before us, Gammex challenges only the district court’s entry of judgment on DMSI’s fraudulent inducement claim, its award of $300,000 in punitive damages, and its award of pre-judgment interest on those punitive damages.8 In general, Gammex contends that (1) DMSI’s claim is barred, either by the Settlement Agreement’s terms or by Texas Rule of Civil Procedure 11; (2) the evidence does not support the court’s finding of no intent to perform; (3) the Agreement bars the punitive damage award; (4) DMSI has not met its statutory burden in proving entitlement to such damages; and (5) the lower court improperly awarded prejudgment interest on punitive damages. We note that Gammex does not challenge the lower court’s findings that Ms. Lescrenier made the statements that are at the heart of DMSI’s fraudulent 8 Gammex concedes that DMSI is entitled to recover $150,000 in compensatory damages on its breach of contract claim, and to receive $35,200 in attorney fees. It also concedes that DMSI is entitled to recover pre-judgment interest at the rate of 6% per annum on the compensatory damages award. 10 inducement claim, that the statements included misrepresentations of fact, or that Ms. Dunbar relied on Ms. Lescrenier’s statements. In assessing Gammex’s arguments, we apply the wellestablished standard of review applicable to bench trials, examining questions of law de novo, and reviewing findings of fact for clear error. See Gebreyesus v. F.C. Schaffer & Assocs., Inc., 204 F.3d 639, 642 (5th Cir. 2000).
Gammex contends that under Schlumberger Technology Corporation v. Swanson, 959 S.W.2d 171 (Tex. 1997), two provisions within the Settlement Agreement operate to bar DMSI’s fraudulent inducement claim. The first is an “as is” clause, which provides that “[e]xcept as expressly provided for herein, the equipment is conveyed and transferred by Gammex to Dunbar Medical as is, where is, and with all faults, and there are no warranties which extend beyond the description of the equipment on the face of exhibit ‘A’ attached hereto.”9 ¶ 2.2. The second provision, a merger clause, provides that the Settlement Agreement “contains the entire agreement between the parties, and no representations, inducements, promises, or agreement, oral or otherwise between the parties with reference thereto and not 9 The quoted language appears in all capital letters, in a bold-face type, at the end of the paragraph that lists Gammex’s warranties with regard to the equipment. 11 embodied herein shall be of any force.” ¶ 4.2. The district court rejected Gammex’s argument in its review of Gammex’s motion for summary judgment. It distinguished Schlumberger from the case sub judice by noting that “while the agreement here may appear to Gammex to be an integrated one, there was no express, specific disclaim of reliance on Gammex’s alleged statements and representations.” We also reject Gammex’s argument, but do so for somewhat different reasons. In Schlumberger, the Texas Supreme Court recognized the inherent tension between the principle that the “[p]arties should be able to bargain for and execute a release barring all further dispute,” 959 S.W.2d at 179, and prior authority holding that clauses in contracts, including merger and disclaimer provisions, need not bar subsequent claims of fraudulent inducement. See id. at 178-79. The court held that “a release that clearly expresses the parties’ intent to waive fraudulent inducement claims, or one that disclaims reliance on representations about specific matters in dispute, can preclude a claim of fraudulent inducement,” but also emphasized that “a disclaimer of reliance or merger clause will not always bar” such a claim.10 Id. at 181. Because the 10 The court cited its opinion in Prudential Insurance Co. v. Jefferson Associates, Ltd., 896 S.W.2d 156, 162 (Tex. 1995), as describing some of the circumstances under which such clauses would not be binding. Included in those circumstances are where the contract was procured by fraud and where a seller’s conduct obstructs a buyer’s ability to inspect the condition of what is being sold. See id. The court also noted that “[w]here the ‘as is’ clause is an important part of the basis of the bargain, not 12 parties should be able to rely on their negotiated disclaimer or merger clauses to resolve fully their disputes, the question for the court was “under which circumstances such disclaimers are binding.” Id. at 179. For the answer to this question, the court looked to “[t]he contract and the circumstances surrounding its formation . . . .” Id.; see also Prudential Ins. Co. v. Jefferson Assocs., Ltd., 896 S.W.2d 156, 162 (Tex. 1995) (stating that, in determining whether an “as is” clause is unenforceable, “[t]he nature of the transaction and the totality of the circumstances surrounding the agreement must be considered”). We read Schlumberger as holding that particular contract clauses may, under certain limited circumstances, curtail the contracting parties’ ability to challenge the contract’s validity on fraudulent inducement grounds. Schlumberger gives us some indication of what those circumstances may include. That the negotiating parties in Schlumberger were represented by counsel, were experts in the subject matter of the negotiations, and were bargaining at arm’s length were important to the court.11 See Schlumberger, 959 S.W.2d at 180. In addition, the court noted an incidental or ‘boiler-plate’ provision, and is entered into by parties of relatively equal bargaining position, a buyer’s affirmation and agreement that he is not relying on representations of the seller should be given effect.” Id. 11 The argument that merger or disclaimer clauses should be binding whenever parties to the agreement were represented by independent legal counsel was expressly rejected by the Schlumberger court. See 959 S.W.2d at 178. 13 that at the center of the parties’ dispute was the object of the alleged misrepresentations — the value of the mining project — and that the sole purpose of the unambiguous release was to end that dispute “once and for all.” Id. We must assess whether Gammex and DMSI’s Settlement Agreement “clearly expresses the parties’ intent to waive fraudulent inducement claims, or . . . disclaims reliance on representations about specific matters in dispute.” Id. at 181. The parties in the instant action were represented by counsel, and bargained at arm’s length over the terms of the Settlement Agreement. The final bargain struck exchanged releases of claims for equipment and cash. Both parties could be considered extremely knowledgeable about the type of equipment reflected in the agreement — one manufactured and marketed that equipment, the other was previously a distributor of the equipment. We nonetheless conclude that under the circumstances of this case, the “as is” and merger clauses do not bar DMSI’s fraudulent inducement claim. The Agreement reflects that Gammex and DMSI specifically contemplated future, although not continuing, interactions with one another. DMSI had the right to send one employee to Gammex’s offices for training on the Courier II and other equipment, Gammex was to provide DMSI free support by telephone for one year, and Gammex agreed to apply for one year its standard trade discount to DMSI’s purchases of replacement parts and supplies. In addition to future interactions, the 14 parties contemplated future disputes related to the Settlement Agreement. A punitive-damages provision in that Agreement presupposes a claim arising from or related to it. This suggests that the parties were not seeking to end all disputes between them “once and for all.” Schlumberger, 959 S.W.2d at 180. Although these observations are not dispositive, they frame our analysis of the “as is” and merger clauses. As the Texas Supreme Court noted in Prudential Insurance, although an “as is” clause can negate a claim that a seller’s conduct caused a buyer injury, see 896 S.W.2d at 161, such a clause is not always enforceable. See id. at 162. The court explicitly noted that fraud used to induce agreement was a circumstance that rendered that clause unenforceable. See id. (“A buyer is not bound by an agreement to purchase something ‘as is’ that he is induced to make because of a fraudulent representation or concealment of information by the seller.”). The issue at hand is whether the “as is” clause demonstrates the parties’ clear intent to waive fraudulent inducement claims or disclaim reliance on representations about specific matters in dispute. See Schlumberger, 959 S.W.2d at 181. We conclude that it does not. The misrepresentations in this case went to the condition of the equipment (i.e., its “newness” and its being problem-free). The contract specifically warrants that the equipment be either “new and . . . never . . . used, or . . . previously . . . used as demonstration or loaner 15 equipment” and that it would be “working and operational in accordance with the manufacturer’s specifications . . . .” The “as is” clause specifically excepts the other explicit warranties. Under these circumstances, we cannot conclude that DMSI, in agreeing to the “as is” clause, disclaimed reliance on Gammex’s representations regarding the equipment’s age or functioning, or intended to waive fraudulent inducement claims. Cf. SMB Partners, Ltd. v. Osloub, 4 S.W.3d 368, 371 (Tex. App. 1999, no pet.) (holding that an “as is” clause that specifically excluded other warranties did not apply to the purported misrepresentation and thus did not bar the fraudulent inducement claim). The merger clause, on its face, represents a closer question. In agreeing to that clause, DMSI agreed that “no representations . . . oral or otherwise between the parties with reference [to the Settlement Agreement] and not embodied [in the Agreement] shall be of any force.” Again, however, we find that the language of the clause is not sufficient to bar DMSI’s fraudulent inducement claim. Gammex contends that Ms. Lescrenier’s representations regarding the equipment’s age and ability to operate problem-free are not embodied in the Settlement Agreement’s language, and DMSI argues the opposite. The agreement’s reference to new equipment that had never been used is the outgrowth of the February discussions regarding the equipment, appearing in the contract after DMSI reminded Gammex 16 of Ms. Lescrenier’s proposal that the majority of the equipment was new, with some demonstration equipment, and drafted proposed language that stated that the equipment is “either new and never been used or only used as demonstration units.”12 Whether this history is sufficient to conclude that the representations are embodied in the agreement is something we need not decide, for we can say that under the circumstances, the agreement does not reflect the “requisite clear and unequivocal expression of intent necessary to disclaim reliance on the[] specific representations” by Gammex. Schlumberger, 959 S.W.2d at 179. As a result, the district court did not err in concluding that DMSI’s fraudulent inducement claim was not barred.13 12 DMSI also sought additional language relating to a sixmonth warranty on the equipment. This was rejected. The description of the equipment to be transferred in the final agreement differs from the description in the documents exchanged by Ms. Lescrenier and Ms. Dunbar in including a reference to “loaner” equipment. This addition does not contradict Ms. Lescrenier’s representations, however, as loaner equipment, although not new, could still come from the last fifty manufactured by Gammex and be problem-free. 13 We note that the parties negotiated separate release clauses covering any and all claims “made in or based on or related to the claims made in the Litigation.” The “Litigation” was defined as the action Gammex initiated in 1994. Thus, we do not read the release clauses as covering claims arising from the Settlement Agreement. Indeed, in a section of the contract separate from the “Releases” section, the parties included provisions relating specifically to the Settlement Agreement. Those provisions were the merger clause, the clause prohibiting recovery of punitive and special damages, and the choice-of-law clause. 17 B. Whether Rule 11 Acts to Make Oral Representations Unenforceable Gammex also argues that under the Texas Supreme Court’s opinion in Padilla v. LaFrance, 907 S.W.2d 454 (Tex. 1995), Texas Rule of Civil Procedure 11 makes oral representations made in the course of negotiating a settlement agreement unenforceable.14 As a result, DMSI cannot rely on Ms. Lescrenier’s statements to support a claim of fraudulent inducement. Gammex takes issue with the district court’s rejection of this argument, contending that the court erred in concluding that because the Settlement Agreement was to be performed in less than one year, the statute of frauds does not apply. Like the district court, we conclude that Gammex’s argument must be rejected, although we base our decision on different reasoning. In Padilla, the Texas Supreme Court faced the question of whether a series of letters between parties constituted an agreement that satisfied Rule 11’s writing requirement. Analogizing to the statute of frauds, the court held that the letters evidenced a binding agreement, in part because they reflected “all material terms of the agreement.” 907 S.W.2d at 460-61. Gammex wishes to use language within the 14 Under Rule 11, “no agreement between attorneys or parties touching any suit pending will be enforced unless it be in writing, signed and filed with the papers as part of the record, or unless it be made in open court and entered of record.” TEX. R. CIV. P. 11 (West 2000). 18 Padilla opinion to require that all oral representations made in the context of settlement negotiations be in writing in order to be enforceable. See id. at 460 (“To satisfy the statute of frauds, ‘there must be a written memorandum which is complete within itself in every material detail . . . .’” (quoting Cohen v. McCutchin, 565 S.W.2d 230, 232 (Tex. 1978))). Gammex contends that because oral settlement agreements are unenforceable as a matter of law, no claim of fraudulent inducement can be brought. It looks to Weakly v. East, 900 S.W.2d 755, 758 (Tex. App. 1995, writ denied), for support for this contention. We find Weakly distinguishable on its facts. In that case, plaintiffs alleged that defendants, in an effort to forestall the sale of the real estate to another buyer and to purchase that property at a lower price in a foreclosure sale, promised to purchase real estate with no intention of actually carrying out that promise. See id. at 758. The court found that the essence of the fraud claim was the oral promise to purchase realty. See id. Because a contract for the sale of realty is not enforceable unless in writing, and because the alleged fraud did not prevent the necessary writing, the court found that summary judgment in favor of the defendants was proper on the fraud claim. See id. Gammex’s argument could have more force if DMSI was seeking to enforce as a contract an alleged oral settlement agreement between Ms. Dunbar and Ms. Lescrenier. Here, however, DMSI challenges the validity of the signed Agreement. Unlike the 19 plaintiffs in Weakly, DMSI alleges that Gammex’s actions constituted fraud in the inducement — the writing, signed by the parties, was procured by Ms. Lescrenier’s misrepresentations as to the condition of the equipment to be transferred. This allegation cannot be said to be an attempt to by-pass the statute of frauds via a fraud claim, or an attempt to enforce an otherwise unenforceable oral settlement agreement. DMSI’s injury stems from Gammex’s alleged violation of its independent legal duty not to procure a contract with DMSI through fraud. See Formosa Plastics Corp. USA v. Presidio Engineers & Contractors, 960 S.W.2d 41, 46 (Tex. 1998). Gammex seeks to distinguish Formosa on the ground that it involves a contract, rather than a settlement agreement. Rule 11 applies only to settlement agreements. Although it is clear that a settlement agreement must be in writing to be enforceable under Texas courts’ interpretation of Rule 11, we must reject Gammex’s attempt to rely on the scope of that Rule to negate DMSI’s fraudulent inducement claim. We can think of no principled reason for distinguishing between fraudulent inducement claims targeting contracts and those targeting settlement agreements, and Texas law provides us with no cause to do so. In general, Texas law treats a settlement agreement as a contract, and courts typically analyze an agreement’s enforceability following contract law. See Certain Underwriters at Lloyd’s v. Oryx Energy Co., 203 F.3d 898, 901 (5th Cir. 2000); 20 Williams v. Glash, 789 S.W.2d 261, 264 (Tex. 1990); National Cas. Co. v. Lane Express, Inc., 998 S.W.2d 256, 262 (Tex. App. 1999, writ denied); Stewart v. Mathes, 528 S.W.2d 116, 118 (Tex. Civ. App. 1975, no writ). Like a contract, “an agreement in compliance with [Rule 11] is subject to attack on the grounds of fraud or mistake.” Kennedy v. Hyde, 682 S.W.2d 525, 529 (Tex. 1984) (citing Burnaman v. Heaton, 240 S.W.2d 288 (Tex. 1951)). There is no suggestion in the instant case that the signed Settlement Agreement does not comply with Rule 11’s requirements. “[A] fraud claim can be based on a promise made with no intention of performing, irrespective of whether the promise is later subsumed within a contract.” Formosa, 960 S.W.2d at 46; see also Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432 (Tex. 1986) (holding, in a fraudulent misrepresentation case, that evidence was sufficient to support jury finding that employer did not intend to implement a bonus plan when he orally promised to do so). Under Texas law, parties challenging contracts as fraudulently induced may rely on evidence of oral promises or agreements to support their claims. See Santos v. Mid-Continent Refrigerator Co., 471 S.W.2d 568, 569 (Tex. 1971) (per curiam) (“The parol evidence rule will not prevent proof of fraud or mutual mistake.”); Dallas Farm Mach. Co. v. Reaves, 158 Tex. 1, 307 S.W.2d 233, 239 (1957) (holding that a merger clause does not bar the use of parol evidence to establish that the contract was induced by fraud). Padilla negates none of these principles. We 21 therefore conclude that neither Padilla nor Rule 11 precludes DMSI’s fraudulent inducement claim.15 C. Whether a Factual Basis Exists for a Finding of Fraud Under Texas law, a party claiming fraudulent inducement must demonstrate (1) a material representation, (2) that was false, (3) that was either known to be false when made or was asserted without knowledge of the truth, (4) that was intended to be acted upon, (5) was relied upon, and (6) that caused injury. See Formosa, 960 S.W.2d at 47; DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 688 (Tex. 1990), cert. denied, 498 U.S. 1048 (1991). “A promise of future performance constitutes an actionable misrepresentation if the promise was made with no intention of performing at the time it was made.” Formosa, 960 S.W.2d at 48. Gammex contends that the district court erred in finding that Ms. Lescrenier intended not to perform at the time she 15 Gammex also contends that we should apply language from Boggan v. Data Systems Network Corp., 969 F.2d 149 (5th Cir. 1992), to hold that Ms. Lescrenier’s statements cannot constitute actionable misrepresentations. See id. at 153 (“It is well settled that the negotiations and discussions leading up to the writing cannot displace the terms of the written agreement.”). We decline to do so. Our decision in Boggan was in part based on the finding that the alleged misrepresentations were expressions of intent, rather than statements of fact, see id., and that statements such as “I think we have a deal” could not, under the circumstances, be considered actionable misrepresentations. In the case before us, the district court found that Ms. Lescrenier’s statements were misrepresentations of fact, or promises made with no intention of performing. Each of these is an actionable misrepresentation under Texas law. See Formosa, 960 S.W.2d at 46-48. 22 represented that the transferred Courier IIs would come from the last production run and would be problem free. To support this contention, it points to the fact that the Ms. Lescrenier’s proposals were not fully accepted in February, to evidence that Ms. Lescrenier relied on a list of available equipment prepared by Mr. Sopotnick, and to evidence that Ms. Lescrenier did not participate in the second stage of negotiations. Gammex urges us to conclude that the evidence supporting the lower court’s finding of the requisite intent is “so weak that it creates only a mere surmise or suspicion of its existence,” T.O. Stanley Boot Co. v. Bank of El Paso, 847 S.W.2d 218, 222 (Tex. 1992), and is thus insufficient. Our review of the district court’s finding is limited. Under the Federal Rules, “due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses.” FED. R. CIV. P. 52(a); see also Coury v. Prot, 85 F.3d 244, 254 (5th Cir. 1996). “The burden of showing that the findings of the district court are clearly erroneous is heavier if the credibility of witnesses is a factor in the trial court’s decision.” Id. at 254 (citing Village Fair Shopping Ctr. v. Stanley Broadhead Trust, 588 F.2d 431, 434 n.2 (5th Cir. 1979)). In this case, the trial judge specifically noted her assessments of Ms. Dunbar’s, Ms. Lescrenier’s, and Mr. Sopotnick’s credibility. We do not emerge from our review of the record with a 23 “‘definite and firm conviction that a mistake has been committed.’” Concrete Pipe & Prods. of Cal., Inc. v. Construction Laborers Pension Trust for Southern Cal., 508 U.S. 602, 622 (1993) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)). Evidence indicates that although Ms. Lescrenier was not an active participant in the last rounds of negotiations, her second February proposal was a basis upon which those negotiations built. Although Ms. Lescrenier indicated in her testimony that Gammex’s inventory changed between February and August, when the equipment was shipped, Mr. Sopotnick testified that there was no change. He also testified that Ms. Lescrenier accompanied him when he reviewed the inventory to assess what equipment was available. Given this and other evidence in the record, we conclude that the district court’s finding is not clearly erroneous.