Court Opinion

ID: 18825
Source: CourtListenerOpinion
Date Created: 2010-04-25 07:18:59+00
Date Added: 2024-06-11T08:51:23.890960
License: Public Domain

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

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this opinion should not be published and is not precedent except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

                                            2
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

                                       3
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

                                      4
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

      1
       On 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
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 time-
barred, 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

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
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).

                                7
     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.

     3
      The 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
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.

                                9
     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

                                10
(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.

     4
      The 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
     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 fully-
insured 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

    5
     From 1992-1994, Latham was Quantum’s assistant administrator
and was responsible for maintaining the insurance on the Plan.

                                12
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 fully-
insured 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 stop-
loss 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 full-
coverage 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

                                13
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

       6
        Under 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
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

                                15
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.

                                16
                                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.

      7
       The 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