Imperial Premium v. Khoury

REVISED
United States Court of Appeals,

Fifth Circuit.

No. 96-20963.

IMPERIAL PREMIUM FINANCE, INC., Plaintiff-Appellee,

v.

John KHOURY, et al., Defendants,

John Khoury and Southern Assurance Inc., Defendants-Appellants.

Dec. 1, 1997.

Appeal from the United States District Court for the Southern
District of Texas.

Before DeMOSS and DENNIS, Circuit Judges, and LEE, District Judge.*

LEE, District Judge.

Plaintiff Imperial Premium Finance, Inc. filed this suit

against appellants Southern Assurance, Inc. (SAI) and its

president, John Khoury, asserting claims for, inter alia, breach of

warranty and fraud in connection with a premium finance transaction

arranged by SAI and Khoury on behalf of SAI's client, Monterrey,

Ltd., a Nigerian company in the business of providing offshore oil
rig support for certain American oil companies. Imperial alleged

that Khoury and SAI, through Khoury and others, misrepresented the

identity of Monterrey's insurers, the amounts of the premiums and

the cancellation terms of the policies that were to be purchased

with the funds advanced by Imperial pursuant to the finance

*
District Judge of the Southern District of Mississippi,
sitting by designation.

1
agreement, which constituted fraud and breach of certain

agent/broker warranties contained in the agreement. Following

trial, the jury returned a verdict against both SAI and Khoury for

fraud, awarding actual damages in the amount of $314,000 and

$490,000 in punitive damages against each defendant. The jury also

found against both SAI and Khoury on the breach of warranty claim,

inexplicably assessing damages on that claim in the sum of $44,000.

Imperial waived entry of judgment on the breach of warranty

verdict, choosing instead to secure judgment against defendants

only on the fraud claim.1 The district court entered judgment on

the fraud verdict and denied defendants' motion for a judgment

notwithstanding the verdict or a new trial.

On appeal, defendants advance several grounds which they

contend warrant reversal of the jury's verdict. Having considered

defendants' arguments, we conclude that we must reverse and remand

the case for a new trial.

Background

For several years preceding the transaction at issue, SAI, an

independent insurance agency, had used Imperial for premium

financing for its clients. For the policy year 1992-93, SAI had

procured for Monterrey a hull policy and protection and indemnity

(P & I) coverage from "Lloyds and ILU [Institute of London

Underwriters] Companies" for a combined annual premium of nearly $2

1
Neither plaintiff, defendants nor the district court were
able to account for how the jury could have found damages of
$44,000 on the breach of warranty claim when the parties agreed
that the amount of compensatory damages at issue was $314,000.

2
million, of which approximately $1.5 million was financed by

Imperial. When the time came for Monterrey to renew its policies

or obtain other coverage, SAI again sought premium financing from

Imperial on Monterrey's behalf. The record reflects that there was

some question initially as to whether the "London market" would be

able to provide the necessary coverages as it had for the prior

policy year, and Imperial was thus advised by SAI that there would

be "new players." Ultimately, however, SAI informed Imperial that

the securities, or insurers, would be the same as in the previous

year, and a premium finance agreement was prepared by SAI which,

like the premium finance agreement of the preceding year,

identified Monterrey's insurers as "Lloyds and ILU Companies." The

agreement further recited January 31, 1993 as the effective date of

coverage and reflected a combined annual premium of $2,763,000 for

the two policies. Imperial financed nearly $2.2 million of that

amount pursuant to the premium finance agreement which included not

only the signature of Donald Koehl, Monterrey's president, but also

reflected Khoury's signature under a paragraph entitled

"Agent/Broker Warranty" which recited, in pertinent part, as

follows:

By submitting this agreement to Imperial [Plaintiff], the
undersigned warrants and agrees: 1) That Borrower's signature
is genuine, ... [that] Borrower has authorized this
transaction in the manner required by applicable state law ...
and agrees to the assignment of the security interest as set
forth herein; 2) that Borrower has received a copy of this
Agreement; 3) that the policies are in full force and effect
and the information in the Schedule of Policies [appearing
immediately above the warranties] and the premium is correct,
that none of the policies listed is non-cancellable or written
for a term of less than one year, ... 5) that all unearned
premiums, dividends and unearned commissions will be paid to

3
 Imperial, and that any lien on any unearned premium is
subordinated to Imperial's lien or security interest therein;
6) that the policy(ies) can be cancelled on 10 days' notice.

After making a number of the monthly payments required by the

agreement, Monterrey defaulted. When Imperial attempted to cancel

the policies and recover the unearned premiums under the policies,

which stood as collateral for Imperial's loan, Imperial learned

that Monterrey's hull coverage had not been obtained from "Lloyds

and ILU Companies," as represented in the premium finance

agreement, but had instead been purchased for the same premium from

North American Casualty Company, S.A., a Costa Rican insurer, and

it discovered that while the P & I coverage was placed through the

London market, the premium for that coverage was $102,000,

substantially less than the $238,000 premium set forth in the

premium finance agreement. Due to minimum unearned premium

retention provisions in the policies, the amount of unearned

premiums which Imperial was able to collect toward satisfaction of

Monterrey's remaining indebtedness was not sufficient and a

deficiency balance of approximately $314,000 remained.

Accordingly, Imperial filed this suit against Monterrey and Koehl

for their default.2 Imperial also sued SAI and Khoury alleging

breaches of the Agent/Broker Warranty and fraud arguing that

because these defendants misrepresented the insurers and the terms

of the policies for which premium financing was sought, plaintiff

sustained damage when, upon Monterrey's default, it was unable to

2
Imperial secured a default judgment against Monterrey and
Koehl prior to the trial of its claims against SAI and Khoury.

4
collect on what it understood was its collateral because the

policies which were actually issued, as contrasted with those that

had been represented by defendants, did not have satisfactory

cancellation terms for plaintiff's protection.

Validity of the Premium Finance Agreement

As one basis for reversal of the jury's verdict, defendants

contend that since the Imperial premium finance agreement form had

not received approval of the Texas Board of Insurance as of the

time of the parties' transaction in accordance with TEX.INS.CODE ANN.

art. 24.11(a) ("A premium finance agreement shall be in writing on

a form approved by the board"), the agreement was void. Defendants

then reason that since the agreement was void, it could not have

been validly asserted by plaintiff as the basis for any of its

causes of action against defendants and that consequently, the jury

verdict must be set aside.3 The district court rejected

defendants' argument, concluding by reference to McLaren v.

Imperial Casualty & Indemnity Co., 767 F.Supp. 1364 (N.D.Tex.1991),

aff'd, 968 F.2d 17 (5th Cir.1992), cert. denied, 507 U.S. 915, 112

3
The particular premium finance agreement form used in the
January 1993 Imperial/Monterrey transaction was first submitted to
the Board for approval in May 1993. For more than a year, no
action was taken by the Board on the form, and in June 1994,
Imperial submitted a revised form to the Board for approval. At
that time, the Board advised Imperial there was a problem on both
forms relating to the statutory requirement that the forms contain
"the amount or method of computing the amount of any default or
delinquency charge that is payable in the event of late payment."
art. 24.11(d)(3). Imperial submitted a revised form which
corrected the problem identified by the Board and that form was
approved by the Board in August 1994. The form submitted by
Imperial in May 1993—the form involved in the transaction at issue
in this case—was never approved or disapproved by the Board.

5
S.Ct. 1269, 122 L.Ed.2d 665 (1993), and Travelers Insurance Co. v.

Chicago Bridge & Iron Co., 442 S.W.2d 888, 893

(Tex.Civ.App.—Houston [1st Dist.1969], writ ref'd, n.r.e.), that

the finance agreement executed by the parties was not illegal or

void due to Imperial's failure to secure prior Board approval of

its form. The courts in both of the cited cases, considering

article 5.06 of the Insurance Code which permits insurers to use

only policy forms approved in writing by the Board, held that the

insureds could not use the fact of the Board's non-approval of the

insurers' policy forms to prevent the insurers from enforcing

exclusions in their policies, reasoning that the insureds could not

insist on their right to coverage while at the same time denying

the insurers' right to enforcement of exclusions from coverage.

Rather, "when an insured seeks to enforce a policy, ... the insured

cannot select the good and discard the bad. Instead, he must take

or leave the policy in its entirety." McLaren, 767 F.Supp. at

1376. See also Hertz Corp. v. Pap, 923 F.Supp. 914, 922

(N.D.Tex.1995), aff'd, 98 F.3d 1339 (5th Cir.1996) ("The insured

cannot choose to void only that language in the policy which does

not favor her and retain the remainder of the policy, including the

payment provisions."); cf. Mutual Life Ins. Co. of New York v.

Daddy$ Money, Inc., 646 S.W.2d 255, 257 (Tex.App.—Dallas, 1982,

writ ref'd n.r.e.) (where insurer had secured approval of policy

form but had not obtained Board approval of conflicting

endorsement, in violation of Article 3.42 of Insurance Code,

insurer could not enforce endorsement against insured so as to

6
restrict insured's coverage).

Though our rationale may be somewhat different, we are

convinced, as was the district court, that the premium finance

agreement is not void. Nothing in the language of article 24.11 or

any other provision of the Texas Insurance Code suggests that the

legislature intended that an agreement executed in violation of the

statute be declared void. In fact, indications are to the

contrary. No penalty provision is included within the terms of

article 24.11, but article 24.08 makes any violation of Chapter 24

an "offense" which is a Class B misdemeanor, and article 24.05

specifically authorizes the Board to revoke or suspend a premium

finance company's license if, after notice and hearing, the Board

finds "that the licensee has violated this chapter," which, of

course, includes article 24.11. Thus, a penalty for the violation

is already prescribed by statute. See Chicago Bridge, 442 S.W.2d

at 894 (fact that Act prescribed penalty for violation—revocation

of insurer's permit—indicated legislative intention that policy not

be declared void).

Furthermore, the legislature explicitly declined to invalidate

premium finance agreements for more serious violations than the

mere failure to obtain Board approval. More to the point, article

24.08(b) states:

A premium finance company's taking or receiving from or
charging an insured a greater charge than authorized by this
chapter does not invalidate the premium finance agreement or
the principal balance payable under the agreement but may be
adjudged a forfeiture of all charges that the premium finance
agreement carries with it or that have been agreed to be paid
on the agreement.

7
In our opinion, this provision reflects a clear intent that the

insured/borrower not be permitted to avoid its obligation under a

premium finance agreement to repay the principal loan amount,

though it may be relieved of what would otherwise have been its

contractual obligation to pay additional charges where those

charges are imposed in violation of the provisions of Chapter 24.

This is consistent with the manifest purpose of Chapter 24, and

article 24.11, in particular, which is protection of the

insured/borrower under these types of agreements. Indeed, the

concern to which article 24.11 is directed is evident from the

language of the statute: full and complete disclosure to the

insured of all terms of the loan, including all applicable charges

and required payments. Where there is a failure of the complete

disclosure contemplated by the statute, then the proper response

might well be to invalidate those terms and conditions not

disclosed, but not avoidance of the agreement in toto.4

Moreover, while we do not suggest that defendants lack

standing to assert a challenge to the validity of this agreement,5

the facts that these defendants are not insureds, for whose

protection the statute was drafted, and that the warranties which

4
Of course, had the form involved been disapproved by the
Board rather than simply not affirmatively approved by the Board,
the court's analysis would no doubt be different. But that is not
the situation which we confront or the issue we address.
5
Imperial argued to the court below that SAI and Khoury, not
being insureds/borrowers under the premium finance agreement,
lacked standing to challenge the validity of the premium finance
agreement. The district court concluded that these defendants'
interest in the agreement was sufficient to confer standing, and we
do not disagree.

8
they are charged with having breached are not among the matters

which article 24.11 mandates be included in premium finance

agreements, tend to further persuade the court that defendants'

argument in the case sub judice ought to be rejected.6 Since the

court concludes that the agreement is not void, the court finds no

merit to defendants' contention that the lower court erred in

excluding evidence that the form had not been approved by the

Board. The trial court correctly concluded that defendants'

evidence regarding the failure of approval was irrelevant and

inadmissible.

The Fraud Verdict

Defendants' primary argument on appeal is that the jury's

verdict for fraud cannot stand in view of the principle espoused by

the Texas Supreme Court in Southwestern Bell Telephone Co. v.

DeLanney, 809 S.W.2d 493, 494 (Tex.1991), that while the acts of a

party may simultaneously breach duties in tort and contract,

"[w]hen the only loss or damage is to the subject matter of the

contract," the plaintiff's claim "ordinarily sounds only in

contract." The court must reject defendants' argument, however,

given the Texas Supreme Court's recent clarification in Formosa

Plastics Corp. v. Presidio Engineers, 40 Tex.Sup.Ct.J. 877, 1997 WL

378129 (Tex. July 9, 1997), that DeLanney does not apply to

6
Indeed, Imperial makes a plausible argument that since
article 24.11 does not include agent/broker warranties among the
matters which must be included in premium finance agreements, then
the Agent/Broker Warranty contained in its premium finance
agreement is severable from the remainder of the agreement and
enforceable in spite of any defect in the terms of the premium
finance agreement.

9
preclude tort damages in fraud cases.7

Defendants submit, alternatively, that even if plaintiff's

fraud claim is not objectionable on DeLanney grounds, it still must

be reversed inasmuch as it is legally and factually insufficient.

More to the point, defendants object that the district court erred

in failing to specifically instruct the jury that defendants could

be found liable for fraud only if their challenged representations

were false "when made." And, seeking relief from the district

court's denial of their motion for judgment as a matter of law,

they argue that there was not sufficient evidence from which the

jury could have found that their representations were false when

made.

Contrary to defendants' urging, the record discloses ample

evidence from which the jury could have inferred that Khoury and

SAI knew prior to preparing and presenting the premium finance

agreement to Imperial that the insurance carriers, policies and

terms reflected therein were not the carriers, policies and terms

which they, in fact, intended to secure for Monterrey. And if the

jury so found, the jury likewise had before it sufficient evidence

from which it could also have inferred that defendants' purpose in

misrepresenting these matters was to induce Imperial to loan monies

7
In so ruling, the Texas court explicitly disapproved a number
of state appellate court decisions which held that tort damages
were not recoverable for a fraudulent inducement claim in the
absence of an injury distinct from any permissible contractual
damages. Formosa Plastics, 1997 WL 378129, at *7. The court thus
implicitly rejected this court's conclusion in Heller Financial,
Inc. v. Grammco Computer Sales, Inc., 71 F.3d 518 (5th Cir.1996),
and Fielder v. King, 103 F.3d 17, 20 (5th Cir.1997), which adopted
the view of those disapproved state court decisions.

10
which it would not have loaned had it been apprised of the

defendants' true intentions. Thus, there is evidence in the record

which would support a verdict for fraud on the basis that Khoury

and SAI made representations which were false "when made" with the

intent that Imperial loan money to their client in reliance on

those representations.8

However, in addition to its argument at trial that Khoury

and/or SAI knew when the premium finance agreement was signed that

the matters reflected therein relating to Monterrey's insurance

coverage were false, plaintiff also suggested at trial that even if

the jury were to find that Khoury and/or SAI correctly represented

these matters in the premium finance agreement, the jury might

nevertheless find SAI and/or Khoury liable for fraud if it

determined that subsequent to their representations to Imperial but

prior to Imperial's disbursement of funds to Monterrey, SAI and/or

Khoury effected a change in Monterrey's insurance which they failed

to disclose to Imperial. In our opinion, this theory of fraud

liability is legally inadequate.

Under Texas law, in the absence of a duty to disclose, mere

silence does not amount to fraud or misrepresentation; and a duty

to disclose arises only where a fiduciary or confidential

8
The only specific evidence to which defendants have pointed
as having belied plaintiff's allegations of misrepresentation and
breach of warranty (other than Khoury's denials of wrongdoing) is
documentation which reflects that in December 1992, a month before
the premium finance agreement was signed, plaintiff was apprised
that there might be a "new player." However, when, a month later,
defendants specifically represented that the players were the same
as those of the previous policy year, plaintiff reasonably could
have assumed that there were no new players.

11
relationship exists. Bay Colony, Ltd. v. Trendmaker, Inc., 121

F.3d 998, 1004 (5th Cir.1997) (quoting Southwest E & T Suppliers,

Inc. v. American Enka Corp., 463 F.2d 1165, 1166 (5th Cir.1972)

("Texas law is clear that if there is no confidential or fiduciary

relation between the parties [creating a duty to disclose], mere

silence does not amount to fraud or misrepresentation."). Imperial

acknowledges this principle, but pointing out that it adduced

evidence at trial of its fiduciary relationship with Khoury and

SAI, submits that defendants' "duties"—referring presumably to

their alleged duties of disclosure—"arose from a special business

relationship of reposed trust and confidence which was breached."

In Crim Truck & Tractor Co. v. Navistar International

Transportation Corp., 823 S.W.2d 591, (Tex.1992), the court

explained that "while the existence of a confidential relationship

is ordinarily a question of fact, when the issue is one of no

evidence, it becomes a question of law." In this case, the jury

was never called upon to consider whether such a relationship

existed and consequently never found, implicitly or explicitly,

that a fiduciary or confidential relationship existed between

Imperial and SAI and/or Khoury.9 Neither was the jury apprised

that the existence of a fiduciary relationship stood as a

prerequisite to a verdict for fraud premised on a failure by SAI

and/or Khoury, following execution of the premium finance

9
A review of the record discloses no basis for the statement
in Imperial's brief that "[i]n the case before the Court, the
evidence amply supports the jury's finding that Plaintiff Imperial
and Defendants SAI/Khoury had a special relationship."

12
agreement, to inform Imperial of the changes in carriers and

coverage. Thus, even had the evidence tended to show a fiduciary

or confidential relationship between the parties, the absence of a

jury instruction on or jury finding of a fiduciary relationship

would undermine any fraud verdict for plaintiff premised on such a

duty. It is manifest, though, that there was no evidence from

which the jury could have found such a duty had it confronted the

issue, and therefore, as a matter of law, a jury verdict for fraud

potentially based on such a duty cannot stand.

Recently, in ARA Automotive Group v. Central Garage, Inc., 124

F.3d 720 (5th Cir.1997), after surveying pertinent Texas authority

on the subject of fiduciary and confidential relationships, a panel

of this court reversed a jury verdict for the plaintiff on its

claim for breach of fiduciary duty upon concluding that the

plaintiff's evidence was not sufficient to establish a fiduciary or

confidential relationship. This was the court's conclusion,

despite extensive evidence of a "long history of "oral and written

agreements, joint undertakings, shared confidences and cooperative

ventures'," marked by "cooperation and friendship." Id. at 724,

726. The court noted that in Texas, certain formal fiduciary

relationships, such as principal/agent, attorney/client,

partnership and trustee-cestui que trust, give rise to fiduciary

duties as a matter of law. Id. at 723 (citing Crim Truck, 823

S.W.2d at 593-94). Other "informal relationships," termed

"confidential relationships," may also give rise to a fiduciary

duty "where one person trusts in and relies upon another, whether

13
the relation is a moral, social, domestic or merely personal one."

Crim Truck, 823 S.W.2d at 594 (quoting Fitz-Gerald v. Hull, 150

Tex. 39, 237 S.W.2d 256, 261 (1951)). But as the court made clear

in Crim Truck, particularly in the business arena, trust and

reliance alone are not sufficient ingredients for the relationship,

for "[t]he fact that one businessman trusts another, and relies

upon his promise to perform a contract, does not rise to a

confidential relationship." Id. at 594. "Neither is the fact that

the relationship has been a cordial one, of long duration, evidence

of a confidential relationship." Id. at 595. Rather, a

confidential relationship exists only where "one party is in fact

accustomed to being guided by the judgment or advice of the other,

or is justified in placing confidence in the belief that such party

will act in its interest." Thames v. Johnson, 614 S.W.2d 612, 614

(Tex.Civ.App.—Texarkana 1981, no writ).

We recognize, as did the ARA panel, that under Texas law, "

"a fiduciary duty will not be lightly created' since "it imposes

extraordinary duties' and requires the fiduciary to "put the

interests of the beneficiary ahead of its own if the need arises.'

" ARA, at 723 (quoting Floors Unlimited, Inc. v. Fieldcrest

Cannon, Inc., 55 F.3d 181, 188 (5th Cir.1995)). And as was further

noted in ARA, since the Texas Supreme Court's decision in Crim

Truck, "few Texas cases have found fiduciary relationships outside

of legal relationships that carry fiduciary duties as a matter of

law." Id. at 726, and none had found such a relationship in "a

transactional setting involving experienced managers," id.

14
 This case now before the court obviously does not involve any

of the formal relationships that automatically give rise to

fiduciary duties, and therefore, Imperial could only have

established a duty of disclosure which might support its claim of

fraud by adducing sufficient proof of an informal, confidential

relationship with SAI and/or Khoury. The only proof presented by

Imperial toward that end was limited testimony that Imperial had a

business relationship with SAI, and with Khoury, spanning a several

year period, and that Imperial had given SAI, through Khoury, draft

authority up to a certain amount. The fact that it extended them

this authority, according to Imperial, clearly establishes the

trust which it accorded SAI and Khoury. These facts are plainly

insufficient to establish a fiduciary or confidential relationship

between these parties for they would not have warranted Imperial's

expecting that SAI and/or Khoury would put Imperial's interests

ahead of their own. At best, Imperial established that it reposed

a degree of trust—and not unlimited trust—in defendants' judgment

and integrity. We would reiterate, though, "[t]he fact that one

businessman trusts another ... does not rise to a confidential

relationship." Crim Truck, 823 S.W.2d at 594.

For the reason that there was no fiduciary relationship

between the parties, it follows that there could have been no

legally sufficient basis for a fraud verdict premised on SAI's

and/or Khoury's post-representation nondisclosure of the change in

insurance carriers and coverages. Because the court submitted to

the jury a single fraud interrogatory which did not differentiate

15
between the theories of fraud liability posited by plaintiffs, it

is impossible for us to now determine whether or not the jury's

verdict is legally sustainable. This court has said that "[w]hen

a district court submits two or more alternative grounds for

recovery to the jury on a single interrogatory and the plaintiff

prevails, we ordinarily order a new trial if one of the grounds for

recovery is "legally inadequate,' " Reeves v. AcroMed Corp., 44

F.3d 300, 302 (5th Cir.), cert. denied, 515 U.S. 1104, 115 S.Ct.

2251, 132 L.Ed.2d 258 (1995) (citing Walther v. Lone Star Gas Co.,

952 F.2d 119, 126 (5th Cir.1992)), for in such a case, "the

reviewing court cannot determine whether the jury based its verdict

on a sound or unsound theory," id. (quoting Pan Eastern Exploration

v. Hufo Oils, 855 F.2d 1106, 1123 (5th Cir.1988)).

In most cases, "[w]here two [or more] claims have been
submitted to the jury ... in a single interrogatory, a new
trial may be required if one of the claims was submitted
erroneously," unless we are " "reasonably certain that the
jury was not significantly influenced by issues erroneously
submitted to it.' " Braun v. Flynt, 731 F.2d 1205, 1206 (5th
Cir.), cert. denied, 469 U.S. 883, 105 S.Ct. 252, 83 L.Ed.2d
189 (1984) (quoting E.I. du Pont de Nemours & Co. v. Berkley
& Co., 620 F.2d 1247, 1258 n. 8 (8th Cir.1980)). Thus, if we
find that the defendants were entitled to a directed verdict
on any one of the ... theories of liability, we must remand
the case for a new trial unless we are "reasonably certain"
that the jury's verdict was not based upon the
erroneously-submitted theory or theories.

Woods v. Sammisa Co., Ltd., 873 F.2d 842, 849-50 (5th Cir.1989),

cert. denied, 493 U.S. 1050, 110 S.Ct. 853, 107 L.Ed.2d 847 (1990).

Because we cannot be "reasonably certain" that the jury's

verdict in this case was based on a sustainable theory of fraud,

rather than on a legally invalid and hence erroneously submitted

theory, we must reverse the verdict and remand the case for a new

16
trial on the plaintiff's charge that defendants SAI and/or Khoury

made representations to Imperial which were false "when made." We

would be compelled to do this even were we of the view that the

jury's verdict on the breach of warranty claim was proper and could

be upheld, since the jury, in addition to its verdict for

compensatory damages, also awarded punitive damages which, under

Texas law, are available for fraud but not for breach of contract.

See Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex.1986).

But plaintiff's claim for breach of warranty suffers a shortcoming

similar to that identified with respect to its cause of action for

fraud.

Breach of Warranty

As with its fraud claim, Imperial urged at trial that SAI

and/or Khoury knew at the time the Agent/Broker Warranty was

executed that the identity of the insurers, the terms of the

policies obtained or to be obtained and the amount of premium for

those policies which were set forth in the finance agreement were

not correct. However, the jury was also permitted to find for

Imperial on this claim even if it concluded that the matters

warranted by Khoury and/or SAI were correct when the warranty was

signed if the jury were to find that Khoury and/or SAI knew, prior

to Imperial's disbursement of the loan funds, that Monterrey

planned to purchase alternate coverage. In support of their

contention that this latter theory could constitute a valid basis

for imposing liability, Imperial reasons that because the finance

agreement executed by the parties specifically requires Imperial's

17
written consent to changes in the agreement, then the agreement

necessarily mandates that Imperial be notified of any changes in

coverage.10 And while it concedes that Monterrey was not precluded

by the agreement or otherwise from changing its insurance coverage,

it maintains that in the event of any change in coverage, it was

entitled to notice, and that therefore, even assuming that the

policy information contained in the premium finance agreement was

correct when the warranty was signed, the failure of SAI and/or

Khoury to notify it of Monterrey's change of insurers, coverage and

premium amounts constituted a breach of the contract. Defendants

are correct, however, in their contention that any contractual duty

to notify Imperial of post-execution changes in coverage was

Monterrey's, not Khoury's or SAI's, and any breach of that duty by

Monterrey could not provide the basis of a verdict against SAI or

Khoury for breach of the Agency/Broker Warranty.

Personal Liability of Khoury

Khoury argues that there is no factual basis upon which he

could be held personally liable to Imperial on any theory of

recovery. In support of his position, he asserts that there was no

evidence that he spoke directly with anyone at Imperial concerning

Monterrey's insurance coverage or the premium finance agreement and

that instead, all communications between Imperial and SAI were with

SAI employee Sarah Estep. In response to this contention, Imperial

10
The agreement states in relevant part:

ENTIRE DOCUMENT AND GOVERNING LAW. This document is the
entire agreement between Imperial and Borrower and can
only be changed by a writing signed by both parties.

18
points to evidence which was presented at trial to demonstrate

Khoury's intimate involvement in the transaction at issue from

which, in our opinion, the jury could reasonably have inferred that

at the time he signed the Agent/Broker Warranty, Khoury knew that

the information included in the agreement was false, or that he

made the warranty regarding Monterey's insurance coverage

recklessly without any knowledge of the truth.

Khoury insists further, though, that he did not sign the

warranty in his personal capacity but rather did so solely in a

representative capacity as an agent for his disclosed principal,

SAI, as evidenced by the fact that SAI, and not Khoury, was

identified as the "Agent" in the upper left-hand corner of the

document.11 It is clear under Texas law that since Khoury's

signature appears on the Agent/Broker Warranty, unaccompanied by

any designation to suggest that he was signing on behalf of SAI,

then at least in the absence of any proof by Khoury that he

disclosed to Imperial at the time of the transaction that he was

signing the document in a representative capacity, he cannot escape

personal liability on the warranty. See Seale v. Nichols, 505

S.W.2d 251 (Tex.1974); see also Griffin v. Ellinger, 538 S.W.2d 97

(Tex.1976); A to Z Rental Center v. Burris, 714 S.W.2d 433

(Tex.App.—Austin 1986, writ ref'd n.r.e.). And this is so even

11
Khoury notes that while his signature appears under the
Agent/Broker Warranty on the premium finance agreement, he did not
actually sign the document himself but rather his signature was
stamped on the form by a secretary. However, Khoury has not
contended that he did not authorize the placement of his signature
on the document, and in fact, he implicitly acknowledged at trial
that his signature was placed on the warranty with his approval.

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though the identity of his principal, SAI, was disclosed in the

agreement. Cf. Griffin, 538 S.W.2d at 99 (fact that name of

corporation appeared on check and account was that of corporation

does not establish that signer signed check in representative

capacity).

We have considered the other issues raised by the defendants

and find them without merit.

Accordingly, we REVERSE the district court's ruling denying

defendants’ motion for new trial and REMAND this case for a new

trial consistent with this opinion.

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