United States Court of Appeals,
Fifth Circuit.
Nos. 95-11149, 96-10076.
SID RICHARDSON CARBON & GASOLINE CO., Plaintiff-Appellant,
v.
INTERENERGY RESOURCES, LTD., Defendant,
Wagner & Brown II, Cyril Wagner, Jr., and Jack E. Brown,
Defendants-Appellees.
SID RICHARDSON CARBON & GASOLINE CO., Plaintiff-Appellant,
v.
INTERENERGY RESOURCES, LTD., Defendant-Appellee,
Wagner & Brown II, Cyril Wagner, Jr., and Jack E. Brown,
Defendants.
Nov. 15, 1996.
Appeals from the United States District Court for the Northern
District of Texas.
Before SMITH and PARKER, Circuit Judges, and JUSTICE, District
Judge.*
JERRY E. SMITH, Circuit Judge:
In this consolidated matter, Sid Richardson Carbon & Gasoline
Company ("Sid Richardson") appeals the denial of its motion to
remand these proceedings to state court and appeals the subsequent
entry of final judgments in favor of Wagner & Brown II, Cyril
Wagner, Jr., and Jack E. Brown (collectively "Wagner & Brown") and
Interenergy Resources, Ltd. ("Interenergy"). Because we hold that
the district court erred in finding that the Wagner & Brown
*
District Judge of the Eastern District of Texas, sitting by
designation.
1
defendants were fraudulently joined, we conclude that complete
diversity does not exist among the parties, so there is no subject
matter jurisdiction. We reverse, vacate and remand the judgment
with instructions to remand to state court.
I.
In 1979, Wagner & Brown II, a general partnership engaged in
the production of natural gas, entered into negotiations with Sid
Richardson Carbon & Gasoline Company concerning the conveyance of
processing rights to Wagner & Brown's natural gas production.
Cyril Wagner, Jr., and Jack E. Brown, Wagner & Brown's general
partners, represented the partnership in the negotiations.
The transaction ultimately was structured to accommodate
Wagner's and Brown's respective estate planning goals. Under the
terms of the contract, Wagner & Brown II would make a charitable
contribution of ten percent of the processing rights to the Dallas
Community Chest; both Wagner & Brown II and the Dallas Community
Chest then would convey their interests in the gas processing
rights to Interenergy, a Cayman Islands corporation, in return for
cash and an interest-bearing note in the amount of $8.4 million.
Interenergy, in turn, would assign the processing rights to Sid
Richardson in return for payments prescribed under the contract.
None of the Wagner & Brown defendants signed the contract by which
Interenergy assigned the processing rights to Sid Richardson.
During the negotiations, Interenergy warranted that there was
no obligation for Sid Richardson to withhold federal income taxes
on its payments to Interenergy. Article 11.4 of the contract
2
provided that Interenergy would be responsible for the payment of
such taxes, and Interenergy furnished a separate letter of
indemnity to Sid Richardson, promising to "indemnify and hold
Richardson harmless from any liability or expense it may incur
because of Richardson's failure to withhold any portion of the
payments due to Interenergy." The indemnity letter was signed only
by Interenergy, not by the Wagner & Brown defendants.
Soon after this transaction, the gas market collapsed. Within
two years after consummation of the agreement, Sid Richardson sued
to rescind or reform the contract, citing changed market conditions
that had rendered the agreement economically infeasible. In 1984,
this lawsuit was settled by an agreement granting Sid Richardson,
inter alia, the right to terminate the contract and all related
agreements if it incurred losses of $10 million as a consequence of
the contract. In March 1985, Sid Richardson gave notice of its
intention to exercise this "stop-loss" provision.
After Interenergy and the Wagner & Brown defendants demanded
arbitration of the dispute, Sid Richardson filed a second lawsuit,
seeking interpretation of the settlement agreement and enforcement
of the "stop-loss" provision. This second lawsuit was resolved by
a second settlement agreement, effective June 1, 1988, which forms
the basis of the instant case. The settlement agreement contained
both a termination provision, terminating all agreements between
the parties, and a release provision, releasing all claims between
the parties. The Wagner & Brown defendants contend that these
provisions extinguished the indemnity rights of Sid Richardson,
3
whereas Sid Richardson argues that its right to indemnity survived
the settlement agreement.
Meanwhile, in 1985 the Internal Revenue Service ("IRS") had
initiated a preliminary inquiry into the original transaction,
specifically concerning whether Sid Richardson was obligated to
withhold taxes on the payments made to Interenergy under the
contract and to remit those funds to the IRS. In 1986, the IRS
proposed an assessment of $7.7 million against Sid Richardson,
offering to stay the proceedings while Sid Richardson sought
indemnity from Interenergy pursuant to the letter of indemnity.
All parties agree that Sid Richardson notified Wagner & Brown
II of the investigation and offered to let Wagner & Brown assume
responsibility for the defense; the parties vehemently disagree,
however, concerning whether this communication constituted a demand
by Sid Richardson upon Wagner & Brown and an invocation of the
indemnity provision, or merely a courtesy call. In any event,
Wagner & Brown refused to assume responsibility for the defense,
and apparently the matter was dropped when the IRS failed actively
to pursue the investigation against Sid Richardson, turning its
attention instead to Interenergy.
Failing in its efforts to collect the delinquent taxes from
Interenergy, the IRS renewed its investigation of Sid Richardson
and in 1995 issued a statutory notice of deficiency against Sid
Richardson in the amount of $38,651,368.19.1 In the interim,
1
This amount represented the $7.7 million principal
deficiency, penalties, and interest.
4
however, Sid Richardson had entered into the settlement agreement
with Interenergy and the Wagner & Brown defendants, terminating all
prior agreements and releasing all claims between the parties.
Predictably, the parties vehemently disagree as to whether this
settlement extinguished Sid Richardson's indemnity rights.
Consequently, all parties have denied responsibility for the IRS
assessment.
Sid Richardson initiated this lawsuit in Texas state court,
suing Interenergy and the Wagner & Brown defendants for breach of
contract and seeking a declaratory judgment enforcing the terms of
the indemnity letter to guarantee Sid Richardson indemnification
against potential tax liability. The defendants removed to federal
court, invoking diversity jurisdiction.
Although complete diversity existed only between Sid
Richardson, a Texas corporation, and Interenergy, a Cayman Islands
corporation, the defendants argued that the Wagner & Brown
defendants had been fraudulently joined. The district court agreed
and dismissed all claims against the Wagner & Brown defendants with
prejudice, exercising its diversity jurisdiction over the remaining
parties. The district court severed all claims against the Wagner
& Brown defendants, entering final judgment for the defendants
pursuant to FED.R.CIV.P. 54(b), and Sid Richardson appealed.
While that appeal, No. 95-11149, was pending, the lawsuit
against Interenergy proceeded in the district court, which, on
January 5, 1996, entered summary judgment for Interenergy on all
claims. Sid Richardson appealed, in No. 96-10076, and the two
5
cases were consolidated for appeal.
II.
We review a denial of remand to state court de novo. Burden
v. General Dynamics Corp., 60 F.3d 213, 216 (5th Cir.1995). A
party invoking the removal jurisdiction of the federal courts bears
a heavy burden. Id. at 217; see also Carriere v. Sears, Roebuck
& Co., 893 F.2d 98, 100 (5th Cir.), cert. denied, 498 U.S. 817, 111
S.Ct. 60, 112 L.Ed.2d 35 (1990) (observing that the removing party
bears the burden of proving fraudulent joinder). In order
successfully to prove that non-diverse defendants have been
fraudulently joined in order to defeat diversity, 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."2
In reviewing a claim of fraudulent joinder, the district
court must evaluate all factual allegations and ambiguities in the
controlling state law in favor of the plaintiff. Burden, 60 F.3d
at 216; B, Inc., 663 F.2d at 549. If there is any possibility
that the plaintiff has stated a cause of action against any
non-diverse defendant, the federal court must conclude that joinder
is proper, thereby defeating complete diversity, and the case must
2
Cavallini v. State Farm Mut. Auto Ins. Co., 44 F.3d 256, 259
(5th Cir.1995); accord East Texas Mack Sales, Inc. v. Northwest
Acceptance Corp., 819 F.2d 116, 119 (5th Cir.1987); B, Inc. v.
Miller Brewing Co., 663 F.2d 545, 549 (5th Cir. Unit A Dec. 1981).
Fraudulent joinder also may be established by demonstrating that
there has been "outright fraud in the plaintiff's recitation of
jurisdictional facts." Burden, 60 F.3d at 217. This rule is not
relevant, however, to the present case.
6
be remanded. Burden, 60 F.3d at 216; B, Inc., 663 F.2d at 550.
We have consistently held that claims of fraudulent joinder
should be resolved by a summary judgment-like procedure whenever
possible. Although the district court may "pierce the pleadings"
to examine affidavits and other evidentiary material, it should not
conduct a full evidentiary hearing on questions of fact, but rather
should make a summary determination by resolving all disputed facts
in favor of the plaintiff. Burden, 60 F.3d at 217; Cavallini, 44
F.3d at 263; see also B, Inc., 663 F.2d at 551 (holding that the
preliminary question of subject matter jurisdiction should be
resolved by a summary determination). Insofar as Sid Richardson
objects to the summary judgment-like procedure employed by the
district court, therefore, the objection is meritless. See
Carriere, 893 F.2d at 100.
Our evaluation of fraudulent joinder claims does not
anticipate a judgment on the merits, but merely considers whether
there is any possibility that the plaintiff might prevail. "We do
not determine whether the plaintiff will actually or even probably
prevail on the merits of the claim, but look only for a possibility
that the plaintiff might do so." Burden, 60 F.3d at 216. Mindful
of our obligation to exercise diversity jurisdiction only in cases
of complete diversity, we will not authorize removal on the basis
of fraudulent joinder unless there is no possibility that the
plaintiff could state a cause of action against the non-diverse
defendants. See B, Inc., 663 F.2d at 549. The Wagner & Brown
defendants have failed to satisfy this strict burden of proof.
7
III.
In its original petition filed in state court, Sid Richardson
stated a single cause of action for breach of contract against
Interenergy and the Wagner & Brown defendants.3 Sid Richardson
requested a declaration that Interenergy is obligated to indemnify
it for any tax liability and expenses it has incurred or will incur
in relation to the statutory notice of deficiency and requested a
corollary declaration that the Wagner & Brown defendants are
jointly and severally liable with Interenergy because they
disregarded the corporate form and induced Sid Richardson to enter
into the transaction by use of a fraudulent indemnity agreement.
Finally, Sid Richardson sought damages for the defendants' failure
to fulfill their obligations under the indemnity agreement.
The Wagner & Brown defendants argue that they cannot be held
jointly and severally liable for this alleged breach of contract,
however, because they were not parties to the contract. Indeed,
the Wagner & Brown defendants signed neither the final agreement to
convey processing rights from Interenergy to Sid Richardson nor the
indemnity letter that forms the basis of this lawsuit. Hence, the
Wagner & Brown defendants argue that it is legally impossible for
3
Although the petition formally stated two independent causes
of action for breach of contract and declaratory judgment, the
latter ground is merely a theory of recovery for the former. The
Texas Uniform Declaratory Judgments Act, TEX.CIV.PRAC. & REM.CODE ANN.
§ 37.001 et seq. (Vernon 1986), is merely a procedural device; it
does not create any substantive rights or causes of action. Exxon
Corp. v. Burglin, 4 F.3d 1294, 1302 (5th Cir.1993). Consequently,
we construe the request for declaratory judgment as a theory of
recovery predicated upon the cause of action for breach of
contract.
8
Sid Richardson to recover damages from them.
As a general rule, the Wagner & Brown defendants' failure to
sign the contract would immunize them from liability, justifying
the district court's conclusion that these defendants were
fraudulently joined merely to defeat complete diversity. Sid
Richardson, however, pleaded facts that, when taken as true for
purposes of fraudulent joinder analysis, would warrant "piercing
the corporate veil" to impose liability upon the Wagner & Brown
defendants. Under such circumstances, we cannot conclude that
joinder was fraudulent.
As a general rule, shareholders are not liable for the debts
of a corporation under Texas law. Nonetheless, Texas courts will
"pierce the corporate veil" to prevent fraud or to achieve equity.
In particular, courts will disregard the corporate fiction when
individuals exploit the corporate form as a sham to perpetrate a
fraud.4 To warrant such equitable relief, a plaintiff must prove
that the defendant caused the corporation to be used for the
purpose of perpetrating a fraud on the plaintiff, primarily for the
personal benefit of the defendant. TEX.BUS.CORP.ACT ANN. art.
2.21A(2) (Vernon Supp.1996).
Sid Richardson pleaded facts that would warrant judgment
against the Wagner & Brown defendants on a theory of corporate
4
Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex.1987),
superseded on other grounds by TEX.BUS.CORP. ACT ANN. art 2.21A(3)
(Vernon Supp.1996); see also Fidelity & Deposit Co. v. Commercial
Casualty Consultants, Inc., 976 F.2d 272, 274-75 (5th Cir.1992)
(summarizing the doctrine of corporate disregard under Texas law);
Sims v. Western Waste Indus., 918 S.W.2d 682, 684
(Tex.App.—Beaumont 1996, n.w.h.) (same).
9
disregard. Sid Richardson alleged, inter alia, that the Wagner &
Brown defendants are the real parties in interest in this lawsuit,
exercising control over Interenergy and causing Interenergy to be
used for the purpose of perpetrating a fraud on Sid Richardson for
the direct personal benefit of the defendants. Moreover, Sid
Richardson adduced specific facts in support of its motion to
remand that support the theory of corporate disregard.
Viewing the pleadings and evidence in the light most favorable
to the plaintiff, we cannot conclude that there is "absolutely no
possibility" that Sid Richardson could successfully pierce the
corporate veil to impose liability on the Wagner & Brown defendants
under Texas law. See Cavallini, 44 F.3d at 259; accord East Texas
Mack Sales, Inc., 819 F.2d at 119; B, Inc., 663 F.2d at 549.
Therefore, the mere fact that the Wagner & Brown defendants were
not formal parties to the indemnity agreement does not demonstrate,
as a matter of law, that joinder was fraudulent.
IV.
Having concluded that Sid Richardson successfully stated a
claim for breach of contract and corporate disregard, we turn to
the affirmative defenses raised by the Wagner & Brown defendants.
Should the defendants prevail on any of these defenses, it
necessarily follows that joinder was fraudulent, and the district
court properly exercised its removal jurisdiction. On the other
hand, if there is any possibility that Sid Richardson might survive
the affirmative defenses, we must vacate for remand to state court.
The Wagner & Brown defendants argue that the indemnity rights
10
granted to Sid Richardson in the original transaction were either
terminated or released by the terms of the settlement agreement.
To prevail on these affirmative defenses as a matter of law, the
Wagner & Brown defendants must prove that the language of the
settlement agreement is unambiguous. The determination of whether
a settlement agreement is ambiguous is a question of law that we
review de novo. See Shelton v. Exxon Corp., 921 F.2d 595, 602-03
(5th Cir.1991).
In addition, the Wagner & Brown defendants argue that the
indemnity claim is res judicata, because Sid Richardson could have
litigated the indemnity question in previous litigation between the
parties. We review de novo the assertion that a given claim is res
judicata. Production Supply Co., Inc. v. Fry Steel, Inc., 74 F.3d
76, 78 (5th Cir.1996).
A.
The Wagner & Brown defendants argue that the promise of tax
indemnity provided to Sid Richardson in the 1980 indemnity letter
was terminated by the settlement agreement executed in 1988 among
Sid Richardson, Interenergy, and the Wagner & Brown defendants.5
The settlement agreement purported to terminate, inter alia, all
agreements among the parties relating to the processing of gas or
any related matters.6 Sid Richardson does not dispute that the
5
A fourth party to the settlement agreement, Canyon Pipe Line
Corporation, is not a party to this litigation and hence is not
relevant to our analysis.
6
A sublease agreement specifically excepted from the
settlement agreement is not at issue.
11
indemnity letter is a "related matter" within the terms of the
settlement agreement and acknowledges that the indemnity letter was
terminated by the settlement.
Sid Richardson justifies its claim for tax indemnity, however,
by distinguishing between the prospective termination of agreements
and the retroactive release of rights. Whereas the settlement
agreement prospectively terminated agreements between the parties,
Sid Richardson argues, the settlement did not retroactively release
rights to indemnity that had vested previously in Sid Richardson.
The right to indemnity, Sid Richardson suggests, vested immediately
upon its payment of funds to Interenergy in reliance on the
indemnity letter. Consequently, Sid Richardson concludes that the
right to tax indemnity, which had vested prior to 1988 in reliance
on the indemnity letter, was not retroactively extinguished by the
subsequent termination of the indemnity letter pursuant to the
settlement agreement.
In effect, Sid Richardson advocates a distinction between the
"termination" of an agreement, which operates prospectively only,
and the "rescission" of an agreement, which operates retroactively
to restore the parties to the status quo ante. Because the 1988
settlement agreement "terminated" all agreements among the parties,
rather than "rescinding" the agreements, Sid Richardson concludes
that its vested indemnity rights survived the settlement.
Although we express no opinion on this interpretation of the
settlement agreement, we acknowledge that the agreement's terms are
ambiguous. Under Texas law, parties may mutually agree to
12
"rescind" a contract, restoring the status quo ante.7 The parties
agreed to "terminate" the indemnity agreement, not to "rescind" it,
however.
We are aware of no Texas authority that provides that the
"termination" of agreements automatically applies retroactively to
extinguish vested rights; to the contrary, several authorities
suggest otherwise. The Uniform Commercial Code, for example,
defines "termination" as a prospective remedy only, which does not
extinguish vested rights. "On "termination' all obligations which
are still executory on both sides are discharged but any right
based on prior breach or performance survives." TEX.BUS. & COM.CODE
ANN. § 2.106(c) (Tex.U.C.C.) (Vernon 1994).8 At a minimum,
therefore, the law of Texas is ambiguous concerning the retroactive
effect of a settlement agreement purporting to "terminate" all
prior agreements between the parties.
The task of a court interpreting the terms of a contract is
to vindicate the intent of the parties.9 In the present case,
7
See Allen v. Allen, 751 S.W.2d 567, 573 (Tex.App.—Houston
[14th Dist.] 1988, writ denied); see also Manges v. Guerra, 621
S.W.2d 652, 658 (Tex.Civ.App.—Waco 1981) (noting the express
retroactive effect of rescission), rev'd in part and aff'd in part,
673 S.W.2d 180 (Tex.1984).
8
See also CORBIN ON CONTRACTS § 1266 at 66-67 (1962) (suggesting
that powers of termination usually operate prospectively but do not
discharge obligations that have already arisen); RESTATEMENT (SECOND)
OF CONTRACTS § 283 cmt. a (1981) (distinguishing "rescission" from
"termination").
9
See Shelton, 921 F.2d at 603; see also 14 TEX.JUR.3d
Contracts § 263 (1981) (stating that the court must determine
whether the parties intended rescission to discharge all
liabilities previously incurred under the agreement).
13
however, neither the language of the contract nor the law of Texas,
is sufficiently unambiguous for us to hold, as a matter of law,
that any indemnity rights that had vested in Sid Richardson prior
to the settlement agreement were retroactively extinguished by the
termination clause.
All parties agree that the agreement is silent on the question
of whether pre-termination contractual obligations survived the
termination clause. Moreover, the language of the settlement
agreement is inherently ambiguous, and that ambiguity is merely
compounded by Texas law. Therefore, mindful of our obligation to
view the facts in the light most favorable to the plaintiff and to
construe ambiguity in state law in favor of the plaintiff, we
cannot say that there is absolutely no possibility that Sid
Richardson might prevail in state court. Under such circumstances,
joinder is not fraudulent.
The Wagner & Brown defendants note that Texas courts do not
draft new contracts for parties who fail to provide for themselves.
Royal Indemnity Co. v. Marshall, 388 S.W.2d 176, 181 (Tex.1965).
Neither do we. Therefore, we hold that the ambiguous termination
provision in the 1988 settlement agreement does not establish
fraudulent joinder.
B.
Alternatively, appellees argue that the release provision in
the 1988 settlement agreement fully released the Wagner & Brown
defendants from all liability incurred prior to 1988 pursuant to
the indemnity letter. Insofar as the right to indemnity vested in
14
Sid Richardson prior to the termination of the indemnity agreement,
they conclude, such indemnity rights were fully released and
discharged by the release provision of the settlement agreement.10
Although this affirmative defense ultimately may prove successful,
we cannot conclude, as a matter of law, that the release provision
extinguished Sid Richardson's right to recover tax indemnity from
the Wagner & Brown defendants.
Categorical releases are construed narrowly under Texas law.11
The release provision at issue in the present case states that the
parties to the settlement agreement "release, discharge, disclaim,
and renounce any and all claims, controversies, demands, rights,
disputes, and causes of action, of whatsoever kind and nature,
whether known or unknown, contingent or absolute, which were
asserted or could have been asserted" by the respective parties.
Sid Richardson contends that its claim for tax indemnity did not
accrue until the IRS issued a formal notice of deficiency in 1995,
and consequently the claim could not have been asserted at the time
10
Hence, appellees conclude that the settlement agreement
comprehensively extinguishes all potential liability to Sid
Richardson, arguing that if it vested prior to execution of the
settlement agreement, it was released, whereas if the right vested
after the settlement agreement, it was extinguished by the
termination of the indemnity agreement. We acknowledge that this
interpretation is a reasonable construction of the settlement
agreement and may ultimately prevail in state court. For reasons
that we will explain, however, it is not sufficiently impregnable
to satisfy the heavy burden of proof required to establish
fraudulent joinder.
11
Anheuser-Busch Cos. v. Summit Coffee Co., 858 S.W.2d 928, 933
(Tex.App.—Dallas 1993, writ denied), vacated on other grounds, ---
U.S. ----, 115 S.Ct. 1309, 131 L.Ed.2d 192 (1995), reinstated as
modified, No. 05-92-00389-CV, 1996 WL 14061, at *4, --- S.W.2d ----
(Tex.App.—Dallas Jan. 12, 1996, n.w.h.).
15
the settlement agreement was executed in 1988. Thus, Sid
Richardson concludes that its claim for tax indemnity was not
released under the terms of the settlement agreement.
Under Texas law, a cause of action predicated on tax
liability does not accrue until the IRS issues a formal notice of
deficiency. See Bankruptcy Estate of Rochester v. Campbell, 910
S.W.2d 647, 651-52 (Tex.App.—Austin 1995, writ granted).12
Preliminary notice of tax deficiency is not sufficient to trigger
accrual of a claim. "Prior awareness of IRS activity, such as a
preliminary notice of deficiency, informs the taxpayer of some
risk, but the risk is not sufficiently definite or concrete until
the IRS has issued its formal notice of deficiency." Id. at 651-
52. Therefore, because only a formal notice of deficiency creates
the requisite concrete and substantial risk of tax liability, a
cause of action founded upon a tax deficiency does not accrue under
Texas law until the IRS has issued a formal notice of deficiency.
Id.
Notwithstanding preliminary inquiries as early as 1985, the
IRS did not issue a formal notice of deficiency to Sid Richardson
until 1995. Sid Richardson may credibly argue, therefore, that its
claim for indemnity did not accrue until 1995 and could not have
been asserted under Texas law at the time the settlement agreement
12
See also Ponder v. Brice & Mankoff, 889 S.W.2d 637, 642-43
(Tex.App.—Houston [14th Dist.] 1994, writ denied) (holding that
claim accrued upon receipt of formal notices of adjustment);
Hoover v. Gregory, 835 S.W.2d 668, 672-74 (Tex.App.—Dallas 1992,
writ denied) (holding that claim accrued only upon receipt of
notice of deficiency).
16
was executed. Because we conclude that the right to tax indemnity
did not accrue under Texas law until 1995, we cannot hold, as a
matter of law, that the 1988 release provision extinguished the
claim asserted by Sid Richardson against the Wagner & Brown
defendants. See Anheuser-Busch, 858 S.W.2d at 933.13
Under these circumstances, we cannot conclude that there is
absolutely no possibility that Sid Richardson might prevail against
the Wagner & Brown defendants in state court, notwithstanding the
termination and release provisions of the settlement agreement.
See Cavallini, 44 F.3d at 259. Viewing the facts and the state law
13
The Wagner & Brown defendants argue that, regardless of when
the claim accrued, Sid Richardson actually asserted its claim for
tax indemnity in 1986. Therefore, they conclude that the claim was
released by the settlement agreement. After the IRS conducted a
preliminary inquiry into the transaction and proposed an assessment
of $7.7 million against Sid Richardson, appellant notified the
Wagner & Brown defendants of the investigation. The parties
vehemently disagree as to whether this communication constituted a
formal assertion of the indemnity claim or merely a courtesy call.
We need not resolve this disagreement, however. For
purposes of fraudulent joinder analysis, we must construe
disputed facts in favor of the plaintiff, so we assume,
arguendo, that Sid Richardson did not make demand upon the
Wagner & Brown defendants in 1986, invoking the terms of the
indemnity letter. Therefore, we cannot conclude that the
settlement agreement released a claim for tax indemnity that
Sid Richardson had previously asserted.
Moreover, because preliminary communications with the IRS
are insufficient to provide "sufficiently definite or
concrete" notice of potential tax liability to trigger accrual
of the claim, these informal communications among the IRS, Sid
Richardson, and the Wagner & Brown defendants were
insufficient to trigger accrual of the tax indemnity claim in
1986. See Campbell, 910 S.W.2d at 651-52. For purposes of
fraudulent joinder analysis, therefore, we must assume that
the tax indemnity claim did not accrue until 1995, when the
IRS issued a statutory notice of deficiency to Sid Richardson.
17
in the light most favorable to Sid Richardson, as we are obliged to
do for purposes of fraudulent joinder analysis, we acknowledge that
the right to tax indemnity may have vested in Sid Richardson prior
to the termination of the indemnity agreement, and that the cause
of action for tax indemnity may not have accrued until after
execution of the release in the settlement agreement.14 Therefore,
we hold that the settlement agreement does not satisfy the heavy
burden of proof required to establish fraudulent joinder.
C.
Finally, the Wagner & Brown defendants argue that the instant
claim for tax indemnity raised by Sid Richardson is res judicata.
Although this affirmative defense ultimately may prove successful,
our conclusion that the tax indemnity claim did not accrue until
1995 precludes us from holding, as a matter of law, that the cause
of action is barred by res judicata.
We determine the preclusive effect of a state court judgment
according to state law. Patin v. Allied Signal, Inc., 77 F.3d 782,
14
Hence, Sid Richardson avoids the no-win situation created by
the complementary construction of the termination and release
provisions advocated by appellees. Because the right to indemnity
vested in Sid Richardson prior to execution of the settlement
agreement, the termination provision did not retroactively
terminate the vested right. Because the claim for tax indemnity
arising from that right did not accrue until 1995, however, when
the IRS issued its notice of deficiency, the release provision did
not extinguish the cause of action.
Under this theory, because the right to tax indemnity
vested prior to termination yet accrued after release, the
cause of action for tax indemnity survives the settlement
agreement. We do not suggest that this interpretation is
necessarily correct and conclusive, but only that it is a
reasonable interpretation of the settlement agreement that
precludes a finding of fraudulent joinder.
18
789 (5th Cir.1996). Texas follows the transactional approach to
res judicata. Getty Oil Co. v. Ins. Co. of N. Am., 845 S.W.2d 794,
798 (Tex.1992). Under this doctrine, a subsequent suit is barred
if it arises out of the same subject matter as a previous suit, and
the matter could have been litigated in the prior suit. Id.
Because the prior litigation between these parties concerned the
transaction at issue in the present case—the conveyance of gas
processing rights—the Wagner & Brown defendants contend that the
instant claim for tax indemnity is necessarily barred by res
judicata. We disagree.
In order to establish that the instant claim is res judicata,
the Wagner & Brown defendants must demonstrate that Sid Richardson
could have litigated its claim for tax indemnity in the prior suit.
As we have previously noted, however, the claim for tax indemnity
did not accrue under Texas law until 1995, when the IRS issued a
statutory notice of deficiency.
It is axiomatic that a claim that has not yet accrued is not
ripe for adjudication, and hence it is not a claim that "could have
been litigated" in a previous lawsuit. Under such circumstances,
we cannot conclude that the instant claim for tax indemnity "could
have been litigated" by Sid Richardson before the cause of action
accrued in 1995, and thus we decline to hold that the instant claim
is barred by res judicata.
D.
Although we express no opinion as to whether Sid Richardson
ultimately will prevail on the merits, we must conclude that the
19
Wagner & Brown defendants are not entitled to judgment as a matter
of law on their affirmative defenses. Because we cannot conclude
that there is "absolutely no possibility" that Sid Richardson might
prevail against the Wagner & Brown defendants, joinder was not
fraudulent. See Cavallini, 44 F.3d at 259.15
V.
In summary, the judgment dismissing all claims against Wagner
& Brown II, Cyril Wagner, Jr., and Jack E. Brown in No. 95-11149,
on the grounds that they were fraudulently joined in this lawsuit,
is REVERSED. The summary judgment in favor of Interenergy
Resources, Ltd., in No. 96-10076 is VACATED for lack of subject
matter jurisdiction. This cause is REMANDED to the district court
with instructions to remand to state court, unless it should
otherwise appear that the district court may exercise subject
matter jurisdiction.
15
Our disposition of this case makes it unnecessary for us to
consider the second issue raised by Sid Richardson on this appeal,
i.e., whether the district court erred by denying the plaintiff
leave to amend the complaint.
20