Court Opinion

ID: 2959325
Source: CourtListenerOpinion
Date Created: 2015-09-17 03:55:57.263151+00
Date Added: 2024-06-11T11:37:14.121271
License: Public Domain

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

                                      NO. 03-13-00336-CV

                                   R. D. Tips, Inc., Appellant

                                                 v.

                                     Virginia Jett, Appellee

     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 419TH JUDICIAL DISTRICT
       NO. D-1-GN-11-003799, HONORABLE RHONDA HURLEY, JUDGE PRESIDING

                            MEMORANDUM OPINION

               R.D. Tips, Inc. appeals the trial court’s order granting summary judgment in favor

of Virginia Jett on Jett’s claim for breach of a guaranty. In two issues, Tips contends that (1) the

trial court erred by granting summary judgment because there was a genuine issue of material fact

regarding its affirmative defense that it was fraudulently induced into executing the guaranty

and (2) the trial court erroneously sustained Jett’s objections to certain of its summary-judgment

evidence. We will affirm the trial court’s judgment.

                                        BACKGROUND

               Virginia Jett was married to Clifton Mitchell and their community property included

interests in North American Life Insurance Co., an insurance company subject to oversight and

regulation by the Texas Department of Insurance. In October 2005, Jett filed for divorce. While the

divorce was pending, Mitchell began negotiating with Albert Range, an officer of Tips, for the
merger of Tips’s subsidiary, MTM Life Insurance Co., with North American Life. Jett was not

personally involved in any aspect of those negotiations. The division of Jett and Mitchell’s marital

estate was resolved by a final decree of divorce rendered on November 6, 2006, and signed by the

trial court on June 29, 2007. Pursuant to a mediated settlement agreement, Jett had agreed to

relinquish her community property interest in North American Life in exchange for Mitchell’s

execution of a Secured Owelty Note, payable to Jett, in the principal amount of $4,637,276.40.

Jett’s agreement was conditioned on Tips’s guaranteeing payment of the Note. Mitchell executed

the Note with an effective date of November 1, 2006, and Tips executed a Guaranty on May 21,

2007, with an effective date of November 1, 2006. The Guaranty provided that it would become

null and void if the merger between MTM and North American Life was abandoned or not

completed by August 15, 2007. The merger was accomplished by the deadline.

               Mitchell made several of the payments required under the Note but, in November

2011, he failed to make a required $1 million payment. Jett sent correspondence to Mitchell, with

a copy to Tips, demanding that Mitchell make the missed payment. Mitchell failed to cure the

default and discontinued making further payments required by the Note. Jett then filed suit against

Tips alleging that, following Mitchell’s default, Tips failed to elect to cure the default and assume

all obligations under the Note as provided by the Guaranty. She sought enforcement of the Guaranty

and an award of damages in the amount due under the Note, plus principal and interest. Tips filed

a general denial and asserted as affirmative defenses (1) that its execution of the Guaranty was

induced by Jett’s fraudulent misrepresentations or by conduct for which Jett was legally responsible,

and (2) failure of consideration for the Guaranty. Tips also included in the allegations supporting

                                                 2
its affirmative defenses that “[b]ecause Jett benefitted from the fraud by virtue of the execution of

the Guaranty and the completion of the merger, she is liable for fraud under section 27.01 of the

Texas Business and Commerce Code.” See Tex. Bus. & Com. Code § 27.01 (establishing statutory

cause of action for securities fraud).

               After the parties conducted discovery, Jett filed traditional and no-evidence motions

for summary judgment. In her traditional motion for summary judgment, Jett argued that she had

established, as a matter of law, all of the elements of her breach of contract cause of action arising

out of Tips’s failure to perform its obligations under the Guaranty. See Tex. R. Civ. P. 166a. She

also argued that the evidence established, as a matter of law, that there was adequate consideration

to support the Guaranty. In her no-evidence motion for summary judgment, Jett asserted that

there was no evidence of an essential element of Tips’s affirmative defenses of common-law and

statutory fraud. Specifically, Jett challenged the existence of evidence that she made any material

misrepresentation with the intent that Tips act on that representation or to induce Tips’s reliance

on that representation. See Tex. R. Civ. P. 166a(i); Exxon Corp. v. Emerald Oil & Gas Co., L.C.,

348 S.W.3d 194, 217 (Tex. 2011) (setting forth elements of fraudulent inducement); Robbins v.

Capozzi, 100 S.W.3d 18, 26 (Tex. App.—Tyler 2002, no pet.) (element of statutory fraud is that

representation must be made with intent to induce other party to enter contract); see also U.S. Quest

Ltd. v. Kimmons, 228 F.3d 399, 406 (5th Cir. 2000) (securities fraud laws generally embody same

elements of common-law fraud, including intent to induce reliance on misrepresentation). Jett also

argued that statutory fraud does not apply to guaranty agreements and that, while section 27.01

creates a cause of action for statutory fraud, it may not be asserted as an affirmative defense to a

breach of contract claim.

                                                  3
               Tips filed a response with evidence attached, including the affidavit and deposition

testimony of Albert Range. Tips argued that its summary-judgment evidence created a fact issue

regarding whether Jett fraudulently induced it into signing the Guaranty. Jett objected to various

paragraphs of the Range affidavit and to various pages of the Range deposition. The trial court

sustained Jett’s objections to four paragraphs of the Range affidavit and overruled the remaining

objections. After a hearing on Jett’s motion for summary judgment, the court signed an order

granting summary judgment in Jett’s favor in which it recited that “Plaintiff’s cause of action for

breach of contract against Defendant is granted in full and all of Defendant’s claims or affirmative

defenses in this suit are denied or dismissed with prejudice.” The order awarded Jett actual damages

of $3,327,990.56. The parties then stipulated to an award of $85,000 as Jett’s reasonable and

necessary attorneys’ fees, and the trial court rendered a final judgment awarding Jett damages and

attorneys’ fees. Tips then perfected this appeal.

                                           DISCUSSION

               In its first appellate issue, Tips asserts that the trial court erred in granting summary

judgment in Jett’s favor. We review the granting of a motion for summary judgment de novo.1

Buck v. Palmer, 381 S.W.3d 525, 527 (Tex. 2012). When the trial court does not specify the grounds

for its ruling, summary judgment must be affirmed if any of the grounds on which judgment was

       1
         The standards for reviewing a summary judgment are well established and undisputed on
appeal. See, e.g., City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex. 2005); see also Goodyear Tire
& Rubber Co. v. Mayes, 236 S.W.3d 754, 755 (Tex. 2007); Fort Worth Osteopathic Hosp., Inc. v.
Reese, 148 S.W.3d 94, 99 (Tex. 2004); Ford Motor Co. v. Ridgway, 135 S.W.3d 598, 600 (Tex.
2004); see also Tex. R. Civ. P. 166a(c), (i). Accordingly, we need not repeat them here.

                                                    4
sought are meritorious. State v. Ninety Thousand Two Hundred Thirty-Five Dollars & No Cents in

U.S. Currency, 390 S.W.3d 289, 292 (Tex. 2013).

               Tips argues in its brief that the trial court erred in granting Jett’s motion for traditional

summary judgment and her no-evidence motion for summary judgment because the evidence it

submitted in its response created a genuine issue of material fact “as to Jett’s claim under the

guaranty.” Specifically, Tips asserts that it could not be held liable under the Guaranty because it

was “defrauded in connection with the merger transaction and the guaranty.” We understand Tips

to argue that its summary-judgment evidence created genuine issues of material fact as to whether

it was fraudulently induced into signing the Guaranty as alleged in its affirmative defenses.2 See

Brownlee v. Brownlee, 665 S.W.2d 111, 112 (Tex. 1984) (defendant wishing to assert affirmative

defense to defeat summary judgment on plaintiff’s claim must urge defense in his response and

present sufficient evidence to create fact issue on each element).

               A contract is subject to avoidance on the ground of fraud. Williams v. Glash, 789
S.W.2d 261, 264 (Tex. 1990). To prevail on a fraudulent-inducement contention, a party must

establish the elements of fraud “as they relate to an agreement between the parties.” Haase v.

Glazner, 62 S.W.3d 795-99 (Tex. 2001). The elements of fraud are (1) a material misrepresentation,

(2) made with knowledge of its falsity or without any knowledge of the truth and as a positive

assertion, (3) made with the intention that it should be acted on by the other party, and (4) the other

       2
          Tips states in his brief that “Jett sought a traditional summary judgment on R.D. Tips’
common law fraud claim on the theory that the requisite ‘intent to induce reliance’ was absent as a
matter of law.” Tips’s pleadings, however, did not include a cause of action against Jett for fraud.
Rather, Tips pleaded fraud as an affirmative defense to Jett’s breach of contract claim.

                                                    5
party acts in reliance on the misrepresentation and thereby suffers injury. See Formosa Plastics

Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 47-48 (Tex. 1998). Jett’s

no-evidence summary-judgment motion was limited to challenging the existence of a fact issue

on the third element of Tips’s affirmative defense of fraudulent inducement; i.e., whether she

made any misrepresentation with the intent that it be relied on by Tips. To raise a fact issue on this

element, Tips points to Range’s averment that Jett induced it to execute the Guaranty by making

misrepresentations about North American Life’s financial condition, which it relied on when

agreeing to the merger between North American Life and MTM. According to Tips, if Jett had not

misrepresented North American Life’s financial condition, it would not have entered into the merger

or executed the Guaranty.3

               In his affidavit, Range averred that, while conducting due diligence related to the

proposed merger of MTM and North American Life, he reviewed financial statements North

American Life filed with the Texas Department of Insurance in 2003 and 2004. These financial

statements were signed by Jett in her capacity as North American Life’s secretary and treasurer.

       3
           We observe that the type of representations that would have induced Tips to sign the
merger agreement between MTM and North American Life seem conceptually distinct from the type
of representations that would have induced Tips to execute the Guaranty, which is the contract at
issue in this case. The representation that caused Tips to execute the Guaranty—that Jett would not
agree to relinquish her interest in North American Life unless Tips guaranteed payment of the
Note—was unrelated to North American Life’s financial condition. There is no evidence tending
to show that Jett would have agreed to give up her interest in North American Life even if Tips had
refused to execute the Guaranty, rendering that representation false or misleading. Nevertheless,
Jett did not argue that misrepresentations regarding North American Life’s financial condition could
not provide the basis for avoiding the Guaranty, and the parties have joined issue on whether there
was a fact question with regard to the intent element of Tips’s affirmative defenses. We will,
therefore, confine our discussion to that dispute.

                                                  6
Range stated that he also reviewed “Statutory-Basis Financial Statements” for the years ending

December 31, 2004 and 2005, which had been prepared by Deloitte & Touche, North American

Life’s accounting firm. Tips contends that it relied on these financial statements in deciding to go

forward with the merger, which could not be accomplished unless it executed the Guaranty. Tips

maintains that, after the merger, it discovered that the financial statements were misleading in

various respects and that, had it been aware of North American Life’s true financial picture, it would

not have gone forward with the merger or executed the Guaranty.

                Assuming that both the financial statements filed with the Texas Department of

Insurance and the “Statutory-Basis Financial Statements” prepared by Deloitte & Touche were in

fact false and misleading, and assuming that Jett knew that they were, there must also be evidence

that Jett made the misrepresentations contained in the financial statements with the intent that they

be relied on by Tips in its evaluation of whether to consummate the merger. Actionable fraud

requires that the party making the representation do so with the actual intent to cause the other party

to rely on the falsity, thus inducing it to act in a manner that causes its injury. See Eagle Props. Ltd.

v. Scharbauer, 807 S.W.2d 714, 723 (Tex. 1990). Thus, the party making the representation must

have intended to induce action or inaction by means of the false representation.

                We first consider the “Statutory-Basis Financial Statements” prepared by

North American Life’s accountants Deloitte & Touche to determine whether they constitute

misrepresentations made by Jett with the intent that they be relied on or induce Tips to complete

the merger or sign the Guaranty. The statements were prepared by independent auditors, were not

signed by Jett, and contain no representations made by her as an officer of North American Life.

                                                   7
Moreover, the reports were addressed to North American Life’s board of directors and expressly

state that the information was intended “solely for the information and use” of North American Life

and state insurance departments having jurisdiction over North American Life. The reports further

state that the financial statements “should not be used by anyone other than these specified parties.”

The report to which the financial statements were attached was completed by Deloitte & Touche on

or about June 29, 2006, long after Jett ceased being a North American Life officer in 2005. Jett

averred that she was not involved with preparation of North American Life’s financial statements

for any year after 2004, evidence that is uncontroverted. There is no evidence that the representations

contained in the Statutory-Basis Financial Statements were made by Jett or by Deloitte & Touche

with the intent that they be relied on or induce Tips into completing a merger between MTM and

North American Life.

               We next consider the financial statements Jett signed as an officer of North American

Life and filed with the Texas Department of Insurance in 2003 and 2004. These filings were made

in the ordinary course of North American Life’s business as an insurance company regulated by the

Texas Department of Insurance and well before Tips and Mitchell had even begun discussing a

potential merger. There is no evidence that Jett had any knowledge at the time she signed the

statements that there would later be discussions between Tips and Mitchell to merge North American

Life with MTM. Any representation in the 2003 and 2004 Department of Insurance filings could not

have been made to induce that merger. Tips argues, however, that Jett had a “reason to expect” that

Tips would rely on the misleading financial statements when conducting its due diligence and,

therefore, there is evidence creating a fact issue on the intent-to-induce reliance element of fraud.

                                                  8
See Emerald Oil & Gas, 348 S.W.3d at 217-20 (discussing when misleading regulatory filings may

constitute evidence satisfying the intent-to-induce reliance element of fraud claim); Ernst & Young,

L.L.P. v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 581-82 (Tex. 2001) (party may be liable for

misrepresentations that were not made directly to injured party if there is “especial likelihood” that

third party will rely on those representations when entering into transaction contemplated by person

making representations).

                In Ernst & Young, the supreme court considered the proof necessary to establish the

intent-to-induce reliance element of a fraud claim. 51 S.W.3d at 580. While declining to formally

adopt the “reason-to-expect” standard outlined in section 531 of the Restatement (Second) of Torts,

the court concluded that the standard was consistent with Texas fraud jurisprudence. Id. The court

stated, however, that the “reason-to-expect” standard “requires more than mere foreseeability; the

claimant’s reliance must be ‘especially likely’ and justifiable, and the transaction sued upon must

be the type the defendant contemplated.” Id. Tips argues that the financial statements Jett signed

meet this standard because she became aware of the negotiations regarding the merger in or around

August 2006, giving her “ample reason to expect that R.D. Tips would rely on [North American

Life’s] regulatory filings . . . as part of its decision to engage in a merger.” Thus, according to Tips,

Jett knew there was an “especial likelihood” that Tips would rely on the information contained in

the financial statements she signed and certified on North American Life’s behalf.

                The fallacy in Tips’s argument is that it ignores the temporal component of the

supreme court’s analysis of the circumstances under which a party making a representation should

reasonably expect that there is an “especial likelihood” that the information will reach third parties

                                                   9
and influence their conduct. See id. Supreme court precedent instructs that if the evidence shows

only that Jett made the representations contained in North American Life’s regulatory filings

with knowledge or reason to expect that at some time in the future an investor or party seeking to

acquire the company might rely on the filings, that evidence would fail as a matter of law under

the Ernst & Young standard. See id. at 581-82; see also Emerald Oil & Gas, 348 S.W.3d at 219

(“Therefore, if the evidence shows only that Exxon made material misrepresentations in its plugging

reports to the Railroad Commission and knew that lessors and operators in the future may rely on

the filings, such evidence would fail as a matter of law . . . .”). The supreme court explained:

       Such a holding would open the cause of action [for fraud] to any person who
       subsequently relied on any public filings—including stocks and bonds, security
       interests, real property deeds, and tax filings—with few limits in sight. The intent-
       to-induce reliance element of fraud is a focused inquiry, more akin to a rifle shot
       than a shotgun blast. Intent-to-induce reliance is not satisfied by evidence that a
       misrepresentation may be read in the future by some unknown member of the public
       or of a specific industry.

Emerald Oil & Gas, 348 S.W.3d at 219. The focus, then, is on what the party making the

representation knew or had reason to expect at the time it made the representation. For example,

in Emerald Oil & Gas, the supreme court concluded that there was evidence of intent-to-induce

reliance because “Exxon knew of an especial likelihood that Emerald specifically would rely on

the plugging reports in a transaction being considered at the time it filed the plugging reports.” Id.

(emphasis added). In the present case there is no evidence tending to show that, at the time she

prepared and filed the 2003 and 2004 financial statements with the Texas Department of Insurance,

Jett knew of any planned merger of North American Life or any other entity. Thus, there is no

                                                 10
evidence supporting Tips’s assertion that Jett had reason to expect there was an “especial likelihood”

that Tips would rely on the regulatory filings for any purpose. See id. at 217. The fact that Jett later

became aware that Tips was contemplating the merger transaction is of no consequence. We

conclude that the 2003 and 2004 financial statements filed with the Texas Department of Insurance

do not constitute evidence creating a fact issue regarding the intent element of Tips’s fraudulent

inducement affirmative defense. To hold otherwise would reduce the intent-to-induce element to a

foreseeability standard in contravention of supreme court precedent. See Ernst & Young, 51 S.W.3d

at 580.

                The summary-judgment evidence conclusively established that Jett had no involvement

in the merger transaction (other than her insistence that she receive a guaranteed Note in exchange

for relinquishing her interest in one of the merging entities) or that she made any representations

whatsoever to Tips regarding North American Life. The evidence was uncontroverted that Jett

(1) did not sign or file any financial statement for North American Life after 2004, (2) ceased acting

as an officer for North American Life in 2005, (3) did not even become aware that Tips had any

interest in a merger of MTM and North American Life until 2006, nearly a year after she had filed

for divorce from Mitchell, and (4) was not a party to the merger agreement, had no communications

with Tips about the merger, and was not involved in any of the negotiations or due diligence related

to the merger. Moreover, there is no evidence that Jett had any knowledge of what representations

were made to Tips by Mitchell or what information was disclosed to or withheld from Tips in

connection with the merger. Thus, assuming that section 27.01 statutory fraud can be asserted as an

affirmative defense, Tips has failed to raise a fact issue with respect to one of the essential elements

                                                  11
when the defense is based on one person’s knowledge of the falsity of a representation made by

another person. See Tex. Bus. & Com. Code § 27.01(d). To the extent that Tips attempts to attribute

to Jett fraud-in-the-inducement by Mitchell, it has presented no evidence that Jett was aware of,

encouraged, or endorsed any such conduct. Tips cites no authority for the proposition that Jett may

be held liable for Mitchell’s fraudulent conduct, if any, simply by virtue of her having been married

to Mitchell.

                We conclude that Tips failed to meet its burden of creating a fact issue regarding the

intent element of its affirmative defense of fraudulent inducement and of its contention that Jett

committed statutory fraud under Texas Business and Commerce Code section 27.01. We overrule

Tips’s first appellate issue.

                In its second issue, Tips contends that the trial court erroneously sustained Jett’s

objections to portions of the Range affidavit. We review the trial court’s evidentiary rulings for an

abuse of discretion. Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d 887, 906 (Tex. 2000). “A

trial court abuses its discretion when it reaches a decision so arbitrary and unreasonable as to amount

to a clear and prejudicial error of law.” BMC Software Belg., N.V. v. Marchand, 83 S.W.3d 789, 800

(Tex. 2002) (quoting Johnson v. Fourth Court of Appeals, 700 S.W.2d 916, 917 (Tex. 1985)).

Moreover, “[u]nless the trial court’s erroneous evidentiary ruling probably caused the rendition of

an improper judgment, we will not reverse the ruling.” Owens-Corning Fiberglas Corp. v. Malone,

972 S.W.2d 35, 43 (Tex. 1998).

                The trial court sustained Jett’s objections to the following averments in the Range

affidavit:

                                                  12
       [North American Life] employed Rudd & Wisdom software in the operation of its
       business. [North American Life] had the software modified to allow agent reserves
       to have a negative balance status but to continue to pay commissions on new policies
       to agents who owed significant amounts to [North American Life] for commissions
       advanced to them on policies that later lapsed.4

       Both Clif Mitchell and Virginia Jett are believed to have benefitted financially
       through this practice due to payment of commissions to North America Insurance
       Agency, in which RD Tips Inc. believes they owned some sort of interest.5

       After the merger it was disclosed that Clif Mitchell had a written agreement to
       purchase an interest in the Pace-Stancil Group.6

       Further the leases for the funeral homes in Alvin did not make the lessee personally
       liable thereunder. This apparently was due to the “insider” nature of the transaction.
       The lessee defaulted on the leases and it appears at this time that [North American
       Life] will incur a loss on the sale of these properties in excess of $500,000.7

The evidence the trial court excluded consisted of details regarding the nature of the

misrepresentations Tips believes were contained in North American Life’s financial statements

and other information provided to it or not disclosed to it during the due diligence period. As

discussed above, even assuming that the financial statements Jett prepared contained such

misrepresentations, Tips failed to meet its burden of raising a genuine issue of material fact with

regard to whether Jett made such misrepresentations with the intent that Tips rely on them or to

       4
        Jett’s objection was based on the absence of a foundation showing that Range had personal
knowledge of software matters or that he had any basis for determining whether the software was
modified as alleged.
       5
           Jett objected that Range’s statement was based on speculation.
       6
        Jett’s objection was based on lack of a foundation showing that Range had personal
knowledge of this information.
       7
           Jett objected that this statement contained a legal conclusion and was based on speculation.

                                                   13
induce Tips into completing the merger or signing the Guaranty. Thus, any error in excluding this

summary-judgment evidence did not probably cause the rendition of an improper judgment. See

Tex. R. App. P. 44.1(a)(1). Moreover, even if relevant to the question of Jett’s intent, it does not

appear to us that the trial court abused its discretion in sustaining Jett’s objections to these portions

of the Range affidavit. We overrule Tips’s second appellate issue.

                                           CONCLUSION

                Having overruled Tips’s two appellate issues, we affirm the trial court’s judgment.

                                                __________________________________________

                                                David Puryear, Justice

Before Chief Justice Rose, Justices Puryear and Goodwin

Affirmed

Filed: April 9, 2015

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