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
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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.
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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.
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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.
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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.
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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
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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
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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
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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:
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[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.
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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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