United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS August 20, 2003
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
_______________________ Clerk
No. 02-20655
_______________________
BENCHMARK ELECTRONICS, INC.,
Plaintiff-Appellant,
versus
J.M. HUBER CORPORATION,
Defendant-Appellee.
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________________________________________________
Before REAVLEY, JOLLY, and, JONES, Circuit Judges.
EDITH H. JONES, Circuit Judge:
Benchmark Electronics, Inc. (Benchmark) sued J.M. Huber
Corporation (Huber) after a Huber subsidiary that Benchmark
purchased lost significant customers and experienced a catastrophic
income decline. Benchmark alleged the breach of various contract
provisions, fraud, and negligent misrepresentation. Responding to
dispositive motions by the parties, the district court treated
Huber’s motion for judgment on the pleadings as a motion for
summary judgment, applied New York law to all of Benchmark’s
claims, and granted summary judgment and dismissal on the pleadings
for Huber. We conclude that while New York law governs Benchmark’s
breach of contract claims pursuant to the parties’ contractual
choice, Texas law governs its fraud and negligent misrepresentation
claims. Further, Benchmark’s fraud and misrepresentation pleadings
withstand a lack of particularity challenge under Rule 9(b).
Accordingly, we vacate the judgment and remand the case for further
proceedings.*
I. BACKGROUND
In August 1999, Benchmark, a Texas corporation with its
principal place of business in Angleton, Texas, purchased the stock
of AVEX, a contract manufacturer for the electronics industry
headquartered in Alabama. Huber, the seller, is a New Jersey
corporation with its principal place of business in Edison, New
Jersey. Huber put Avex on the market after it suffered heavy
operating losses in 1997 and 1998. In April 1999, a Huber
representative met with Benchmark representatives in Texas to
promote AVEX’s sale, but he did not disclose any substantive
information about the company because Benchmark had not yet signed
a confidentiality agreement. Huber retained New York investment
banking and law firms to facilitate the AVEX transaction.
In May, Benchmark signed a Confidentiality Agreement in
which it agreed that only representations and warranties in a
*
Judge Reavley concurs in the judgment only.
2
definitive agreement between the parties would have any legal
effect. Huber then sent Benchmark executives in Texas a
Confidential Descriptive Memorandum about the potential AVEX
acquisition that touted AVEX’s current and expected customer
relationships and profitability. After Benchmark officially
expressed interest in purchasing AVEX, Huber allowed Benchmark
access to data rooms in New York that contained information
regarding AVEX, its operations, contracts, customers, and
historical financial performance. Benchmark also interviewed AVEX
customers as part of its due diligence. From June to August,
Huber representatives and AVEX executives authorized to speak for
Huber made representations regarding AVEX’s profitability in
telephone conversations with Benchmark representatives in Texas.
Because Benchmark could not, despite its due diligence,
verify Huber’s representations regarding AVEX’s renewed
profitability and the strength of its customer relationships, it
negotiated a series of representations and warranties in the
parties’ Stock Purchase Agreement. Huber disclaimed all other
representations and warranties.
In June, Benchmark and Huber representatives and their
counsel met in New York for a negotiating session. Further
negotiations took place by teleconference with Benchmark
representatives in Texas. Huber’s counsel sent drafts of the
agreement to Benchmark in Texas, and Benchmark’s attorneys proposed
revisions to the agreement from Houston. At a final negotiating
3
session in New York, Huber agreed to sell AVEX to Benchmark for
$255 million in cash, subject to a working capital adjustment, plus
one million shares of Benchmark stock worth approximately $34
million. The parties executed the Original Stock Purchase
Agreement in New York and an Amended Stock Purchase Agreement
(Agreement) in their respective home states. A formal closing took
place in New York in August 1999.
Contrary to Huber’s representations, several AVEX
customers allegedly reduced or discontinued their purchases from
AVEX in 1999 before the sale closed, and AVEX allegedly suffered
significant operational losses.
Benchmark’s lawsuit against Huber alleged fraud,
negligent misrepresentation, and breach of contract claims. The
district court ordered Benchmark to file various documents in
support of its fraudulent misrepresentation claims, a bill of
particulars, and a page on each material adverse change in AVEX’s
business condition; it also ordered Huber to file a counter-
explanation. The district court next ordered mediation. When
mediation failed, the court ordered Huber to file a motion for
summary judgment, but Huber, instead, sought partial summary
judgment urging application of New York law and judgment on the
pleadings on all of Benchmark’s claims. Benchmark filed a cross
motion for partial summary judgment, asserting that Texas law
governs its noncontractual claims and that Huber is liable for
statutory fraud and breach of the contractual warranty in § 3.7 of
4
the Agreement. The district court treated Huber’s motion for
judgment on the pleadings as a motion for summary judgment, applied
New York law, granted Huber’s motions, and denied Benchmark’s
motions. Benchmark timely appealed.
II. DISCUSSION
A. Sufficiency of Benchmark’s Pleadings
As a preliminary matter, we turn to the district court’s
decision that Benchmark failed to plead its fraud and negligent
misrepresentation claims with the particularity required by Federal
Rule of Civil Procedure 9(b). Although Rule 9(b) by its terms does
not apply to negligent misrepresentation claims, this court has
applied the heightened pleading requirements when the parties have
not urged a separate focus on the negligent misrepresentation
claims. Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir.
1997). That is the case here, as Benchmark’s fraud and negligent
misrepresentation claims are based on the same set of alleged
facts.
“What constitutes ‘particularity’ will necessarily differ
with the facts of each case . . . .” Guidry v. Bank of LaPlace,
954 F.2d 278, 288 (5th Cir. 1992). “At a minimum, Rule 9(b)
requires allegations of the particulars of time, place, and
contents of the false representations, as well as the identity of
the person making the misrepresentation and what he obtained
thereby.” Tel-Phonic Servs., Inc. v. TBS Int’l, Inc., 975 F.2d
5
1134, 1139 (5th Cir. 1992) (internal quotation marks and citation
omitted). Put simply, Rule 9(b) requires “the who, what, when,
where, and how” to be laid out. Williams, 112 F.3d at 179. Review
of a dismissal for failure to comply with Rule 9(b) is de novo.
United States ex rel. Russell v. Epic Healthcare Mgmt. Group, 193
F.3d 304, 308 (5th Cir. 1999).
Benchmark’s final complaint satisfies the pleading
requirements of Rule 9(b). It alleges that a Huber representative1
made false representations regarding AVEX’s operations, financial
results, and customer relations in April 1999 in Angleton, Texas.
It also alleges false or misleading statements regarding favorable
past financial results and the strength of its customer relations
with Lucent, Compaq, General Instruments, and Ericsson in the
Confidential Descriptive Memorandum sent on behalf of Huber to
Benchmark in May 1999, in the information provided to Benchmark in
the data rooms at the offices of Huber’s investment bankers in June
and July 1999, and in personal discussions between Huber
representatives and Benchmark in June, July, and August 1999.
Specifically, Timothy D. Boates, Gregor J. Smith, and Jeffrey
Nesbitt allegedly were involved in the oral misrepresentations.
The complaint also alleges fraud and negligent misrepresentation
based on representations and warranties made in the Original Stock
Purchase Agreement in July and in the Amended Stock Purchase
1
The parties stipulated that the Huber representative was Mr. Michael Marberry.
6
Agreement in August that AVEX had encountered no material adverse
change prior to closing, that AVEX had not received notice of
default or termination under any significant contract, and that
AVEX’s proffered financial statements were accurate under generally
accepted accounting principles.
In addition to setting forth the who, what, when, and
where, Benchmark’s complaint also explains why the various
assertions are fraudulent or misleading. The complaint alleges,
for example, that AVEX lost as customers General Instruments and
Compaq, and that Ericsson, Lucent, and Phillips planned to
dramatically reduce their purchases from AVEX. It also alleges
that AVEX’s financial statements materially overstated the
company’s financial condition and that, due to the
misrepresentations, Huber was able to sell its stock to Benchmark,
and Boates, Smith, and Nesbitt became entitled to substantial
transaction incentive bonuses. Based on the foregoing, Benchmark’s
final complaint satisfies Rule 9(b)’s pleading requirements and
sufficiently puts Huber on notice as to the challenged assertions.
B. Summary Judgment for Huber
The district court awarded summary judgment to Huber in
three stages. First, it converted, sua sponte, Huber’s
deliberately limited motion for judgment on the pleadings and for
partial summary judgment on the application of New York law, into
an all-encompassing defensive summary judgment motion. Second, it
7
held that New York law applied to the transaction and consequently
deprives Benchmark of actionable fraud and misrepresentation
claims. Third, it rejected Benchmark’s cross-motion for summary
judgment, and sua sponte awarded summary relief to Huber, based on
various warranties contained in the AVEX sale contract. These
rulings are incorrect and require the vacatur of the summary
judgment along with a clarification of the claims that are
preserved by Texas law.
1. Conversion to Summary Judgment
Huber filed a motion for partial summary judgment seeking
application of New York law and a motion for judgment on the
pleadings on all of Benchmark’s claims. Benchmark contends, and we
agree, that the district court erred by treating Huber’s motion for
judgment on the pleadings as a motion for summary judgment without
providing Benchmark an opportunity to conduct discovery.
“[I]t is well-settled that a district court may grant
summary judgment sua sponte, so long as the losing party has ten
days notice to come forward with all of its evidence in opposition
to summary judgment.” Love v. Nat’l Med. Enters., 230 F.3d 765,
770-71 (5th Cir. 2000) (internal quotation marks and citation
omitted). Although this court ordinarily reviews whether there was
lack of the required notice for harmless error, Washington v.
Resolution Trust Corp., 68 F.3d 935, 939 (5th Cir. 1995), “where
the party against whom summary judgment is granted moves for
8
reconsideration under FED. R. CIV. P. 59(e), but does not, in that
motion, challenge the procedural propriety of the summary judgment
ruling, our court has reviewed the asserted procedural
irregularity, raised for the first time on appeal, only for plain
error.” Love, 230 F.3d at 771. Benchmark did not specifically
raise the procedural propriety of the district court’s summary
judgment ruling in its Rule 59(e) motion; we conclude that the
district court plainly erred in converting Huber’s motion for
judgment on the pleadings to a summary judgment.
A “purpose of the Rule 56 notice requirement is that the
summary judgment may not be used to cut off discovery.” Clark v.
Tarrant County, 798 F.2d 736, 746 (5th Cir. 1986). In Clark,
conversion of a Federal Rule of Civil Procedure 12(b)(6) motion to
summary judgment was proper when the court accepted evidence
outside the pleadings and the appellants had a “full, fair, and
wholly adequate opportunity for discovery” for more than sixteen
months. Id.
In this case, the district court did not allow the
parties full discovery. While it ordered Benchmark to file
documents supporting its allegations of misrepresentations, it did
not allow Benchmark the benefit of disclosures by Huber or other
sources. When the district court ordered mediation, it stayed
everything, including discovery, except for extraordinary emergency
motions. After mediation failed, rather than enter a pretrial
9
scheduling order, as Benchmark had requested, the district court
ordered Huber to move for summary judgment. Despite the court’s
order, Huber filed only a partial motion for summary judgment on
the choice of law issue and moved for judgment on the pleadings on
Benchmark’s claims.
Huber specifically limited its motion on Benchmark’s
claims to judgment on the pleadings, explaining that the court need
not convert its motion to summary judgment because the attached
exhibits could be considered part of the pleadings. See Venture
Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th
Cir. 1993) (“Documents that a defendant attaches to a motion to
dismiss are considered part of the pleadings if they are referred
to in the plaintiff’s complaint and are central to her claim.”).
The single affidavit submitted by Huber supported only its partial
motion for summary judgment on the choice of law issue. When
Benchmark requested the district court to lift the stay on
discovery, Huber opposed the motion, arguing that discovery would
be premature because Huber had “a Rule 12(c) motion for judgment on
the pleadings pending. The ultimate issue on a motion for judgment
on the pleadings is whether the plaintiff will be allowed to offer
any evidence to support its claims.”
Benchmark was equally careful to treat Huber’s motion as
a Rule 12 motion on the pleadings, agreeing that the court could
consider Huber’s exhibits without converting the motion to a
10
summary judgment. Benchmark did, however, move for partial summary
judgment on two claims that we discuss below, breach of the
contractual warranty found in § 3.7 of the Agreement and statutory
fraud based on § 27.01 of the Texas Business and Commerce Code.
Putting aside these two claims for the moment, we vacate summary
judgment on Benchmark’s other claims and remand for discovery. See
Clark, 798 F.2d at 746. Although Huber asserts that Benchmark did
not need discovery because it could have relied on the AVEX
documents it owned after the acquisition, discovery in a highly
fact intensive case like this is critical. Moreover, Benchmark was
lulled into responding to Huber’s peremptory motion without
offering evidence, and was thus deprived of a full and fair
opportunity to defend against summary judgment on its claims. The
district court plainly erred in treating Huber’s deliberately
limited motion for judgment on the pleadings as a motion for
summary judgment without allowing discovery.
2. Choice of Law
Pivotal to the merits of this case is the choice of law
applicable to Benchmark’s claims. According to the parties, either
New York or Texas law governs their dispute. The district court
held that New York law applies to the entire case. From this
conclusion, it followed that New York substantive law affords
Benchmark no claim for extracontractual fraud and misrepresentation
claims. We hold that, because the parties entered into a narrow
11
choice of law clause, Texas law applies to and, at least
conceptually, preserves some of those noncontractual claims.
To determine the applicable law, a federal court sitting
in diversity applies the choice of law rules of the forum. Spence
v. Glock, GES.m.b.H., 227 F.3d 308, 311 (5th Cir. 2000).
Accordingly, Texas choice of law rules apply.
The parties’ contract provides that the “Agreement shall
be governed by, and construed in accordance with, the internal laws
of the State of New York . . . .” Texas law gives effect to choice
of law clauses regarding construction of a contract. In re J. D.
Edwards World Solutions Co., 87 S.W.3d 546, 549 (Tex. 2002);
RESTATEMENT (SECOND) OF CONFLICT OF LAWS § 187 cmt. c. We will
therefore respect the parties’ determination that their agreement
be construed under New York law.
The contractual choice of law clause does not, however,
address the parties’ entire relationship; Benchmark’s claims of
fraud and negligent misrepresentation are not governed by the
parties’ narrow choice of law provision. The provision at hand is
narrow because it deals only with the construction and
interpretation of the contract. Huber relies on Tel-Phonic Servs.,
Inc. v. TBS Int’l, Inc., 975 F.2d 1134 (5th Cir. 1992), in arguing
that this court should apply New York law to Benchmark’s tort
claims. In Tel-Phonic, this court applied the parties’ chosen law
to breach of contract and fraud claims, concluding that “the Texas
Supreme Court would follow the conflicts principle that the effect
12
of a misrepresentation or undue influence upon a contract is
determined by the same law that governs the contract. Restatement
(Second) of Conflicts of Law § 201 (1971).” Id. at 1142. Because
Tel-Phonic does not quote the parties’ choice of law language, we
do not know the breadth of the provision at issue in that case.
When dealing with narrow choice of law provisions, Texas
law requires an issue-by-issue choice of law analysis. In Stier v.
Reading & Bates Corp., 992 S.W.2d 423, 433 (Tex. 1999), the Texas
Supreme Court held that a provision stating that an “agreement
shall be interpreted and enforced in accordance with the laws of
the State of Texas, U.S.A. . . . applies only to the interpretation
and enforcement of the contractual agreement. It does not purport
to encompass all disputes between the parties or to encompass tort
claims.” See also Busse v. Pac. Cattle Feeding Fund #1, Ltd., 896
S.W.2d 807, 812-13 (Tex. App.--Texarkana 1995, writ denied)
(provision that an “agreement and the rights and obligations of the
parties arising hereto shall be construed in accordance with the
laws of the State of Iowa” does not apply to claims under Deceptive
Trade Practices Act, the Texas Securities Act, and the common law).
This court’s decisions in Thompson & Wallace of Memphis, Inc. v.
Falconwood Corp., 100 F.3d 429, 433 (5th Cir. 1996), and Caton v.
Leach Corp., 896 F.2d 939, 943 (5th Cir. 1990), are in accord. To
the extent that Tel-Phonic is inconsistent with these cases, it has
13
been superseded by subsequent developments in Texas law and does
not control.
Texas courts use the Restatement’s “most significant
relationship” test to decide choice of law issues. Hughes Wood
Prods., Inc. v. Wagner, 18 S.W.3d 202, 205 (Tex. 2000). Three
Restatement sections guide our analysis. Section 145(2)2 provides
the factors to be considered when applying the general choice of
law principles set forth in § 63 to tort cases. Texas courts also
apply the Restatement section specifically addressed to the issue
at hand. Id. Although the Texas Supreme Court has not yet applied
§ 148,4 the Restatement section specifically addressed to fraud and
2
Restatement (Second) of Conflict of Laws § 145(2) provides:
Contacts to be taken into account in applying the principles of § 6 to determine the
law applicable to an issue include: (a) the place where the injury occurred, (b) the
place where the conduct causing the injury occurred, (c) the domicil, residence,
nationality, place of incorporation and place of business of the parties, and (d) the
place where the relationship, if any, between the parties is centered. These
contacts are to be evaluated according to their relative importance with respect to
the particular issue.
3
Restatement (Second) of Conflict of Laws § 6 states that the factors relevant to choosing
the applicable rule of law include:
(a) the needs of the interstate and international systems, (b) the relevant policies of
the forum, (c) the relevant policies of other interested states and the relative
interests of those states in the determination of the particular issue, (d) the
protection of justified expectations, (e) the basic policies underlying the particular
field of law, (f) certainty, predictability and uniformity of result, and (g) ease in the
determination and application of the law to be applied.
4
Restatement (Second) of Conflict of Laws § 148(2) provides:
14
misrepresentation, the Texas Court of Appeals recently relied on
Hughes in applying § 148 to determine the governing law in a
misrepresentation case. Tracker Marine, L.P. v. Ogle, 2003 Tex.
App. LEXIS 3084 (Tex. App.--Houston [14th Dist.] Apr. 10, 2003, no
pet. h.).
Consideration of the relevant Restatement factors
demonstrates that Texas law should govern Benchmark’s fraud and
misrepresentation claims. Although Huber hired New York attorneys
and investment bankers, who provided data rooms for Benchmark’s
review in New York, and the parties executed the Original Stock
Purchase Agreement, held a formal closing, and exchanged stock in
New York, neither Benchmark nor Huber nor AVEX has any other
mentioned connection to New York. On the other hand, many factors
weigh in favor of the application of Texas law. Huber touted
AVEX’s profitability in a promotional memorandum sent to Benchmark
When the plaintiff’s action in reliance took place in whole or in part in a state other
than that where the false representations were made, the forum will consider such
of the following contacts, among others, as may be present in the particular case in
determining the state which, with respect to the particular issue, has the most
significant relationship to the occurrence and the parties: (a) the place, or places,
where the plaintiff acted in reliance upon the defendant’s representations, (b) the
place where the plaintiff received the representations, (c) the place where the
defendant made the representations, (d) the domicil, residence, nationality, place of
incorporation and place of business of the parties, (e) the place where a tangible
thing which is the subject of the transaction between the parties was situated at the
time, and (f) the place where the plaintiff is to render performance under a contract
which he has been induced to enter by the false representations of the defendant.
15
representatives in Texas and in telephone conversations with
representatives in Texas. Benchmark received drafts of the Stock
Purchase Agreement in Texas, and participated in negotiations by
conference call from Texas, and its attorneys drafted proposed
revisions to the agreements in Texas. Benchmark representatives
decided in Texas to purchase AVEX. The parties executed the
Amended Stock Purchase Agreement in their respective home towns.
Benchmark wired money from its Texas bank account to provide Huber
the cash required under the Agreement. And as has been noted,
Benchmark is a Texas company with its principal place of business
in Angleton, Texas. The alleged injury occurred to Benchmark in
Texas, and it arose from misrepresentations made in or directed to
this state. Texas clearly has an interest in protecting its
businesses from fraudulent activities.
In short, Texas has the dominant contacts with the
parties and the transaction, while New York is an adventitious
location, which, apart from the choice of law clause in the
parties’ contract, is simply the domain of the professionals Huber
chose to represent it in selling AVEX. New York’s undoubted
interest in serving as the venue for significant financial
transactions is less compelling than that of the home state of one
of the parties. (No one urged application of New Jersey or Alabama
law, corresponding to Huber’s or AVEX’s locations). Texas has the
“most significant relationship” to Benchmark’s fraud and
misrepresentation claims.
16
3. Status of Benchmark’s Fraud and Misrepresentation Claims
Applying Texas law to Benchmark’s fraud and
misrepresentation claims mandates a different substantive analysis
than the district court undertook. We sketch the parameters of
that analysis, which raises pure questions of law briefed by the
parties, to expedite the case on remand.
Benchmark bases its fraud claims on (1) allegedly
misleading information provided to Benchmark during negotiations
and (2) Huber’s alleged breach of contractual representations and
warranties in the Agreement. We conclude that the Stock Purchase
Agreement’s disclaimer bars Benchmark’s claims based on un-
warranted precontractual representations. Texas law, however,
allows Benchmark’s common law and statutory fraud claims to proceed
to the extent they are based on representations warranted in the
Agreement.
The parties’ Confidentiality Agreement and Stock Purchase
Agreement each contains a disclaimer. Pursuant to the agreements’
choice of law provisions, New York law controls the validity of the
disclaimers. Under New York law, “[a] disclaimer is generally
enforceable only if it ‘tracks the substance of the alleged
misrepresentation . . . .’” Caiola v. Citibank, N.A., 295 F.3d
312, 330 (2d Cir. 2002) (quoting Grumman Allied Indus., Inc. v.
Rohr Indus., Inc., 748 F.2d 729, 735 (2d Cir. 1984)); see also
Harsco Corp. v. Segui, 91 F.3d 337, 345-48 (2d Cir. 1996). Under
17
this standard, the disclaimer in the Confidentiality Agreement is
too broad and general to be enforceable.5
By contrast, the disclaimer in the Stock Purchase
Agreement6 specifically excludes, and the agreement thus vouches
for, representations made in “Article III”, a thirteen-page,
single-space section that incorporates by reference additional
schedules and financial statements. The contractual
representations cover, inter alia, AVEX’s operations, financial
results, and customer contracts, dealing with the same subject
5
The Confidentiality Agreement states:
You acknowledge that Huber . . . make[s] no representation or warranty, express
or implied, as to the accuracy or completeness of the Information and that Huber .
. . undertake[s] no obligation to furnish you with access to any additional
information. . . . You agree that Huber . . . shall have no liability to you or to any
of your Representatives as a result of the use of the Information by you and your
Representatives, it being understood that only those particular representations and
warranties which may be made by Huber in a definitive agreement, when, as and if
executed, and subject to such imitations and restrictions as may be specified in
such definitive agreement, shall have any legal effect.
6
Section 3.29 of the Stock Purchase Agreement, titled “Disclaimer of other
Representations and Warranties,” provides in pertinent part:
Except as expressly set forth in this Article III, Seller makes no representation or
warranty, express or implied, at law or in equity, in respect of Seller, any of the
AVEX Group or any of their respective assets, liabilities or operations . . . . Seller
and the AVEX Group make no representations or warranties with respect to any
projections, estimates or budgets delivered to or made available to Purchaser of
future revenues or results of operations or any component thereof, future cash
flow or future financial condition or with respect to any other documents made
available to Purchaser with respect to the AVEX Group.
18
matter as Huber’s precontractual representations.7 As the court
held in Harsco Corp., supra, the specificity of what is warranted
by Huber precludes Benchmark, a sophisticated business entity, from
claiming reliance upon other precontractual representations
covering the same subjects: “. . . the exhaustive nature of the .
. . representations adds to the specificity of [Section 3.29]’s
disclaimer of other representations. We see no reason not to hold
[Benchmark] to the deal it negotiated.” Harsco, 91 F.3d at 346.
Although, under the Stock Purchase Agreement’s
disclaimer, precontractual misrepresentations (covering anything
other than the warranties in Article III) are not actionable by
Benchmark, Texas law permits its allegations of fraudulent
inducement or fraud arising from false representations contained in
the contract to go forward. Under Texas law, “tort damages are
recoverable for a fraudulent inducement claim irrespective of
whether the fraudulent representations are later subsumed in a
contract or whether the plaintiff only suffers an economic loss
related to the subject matter of the contract.” Formosa Plastics
Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 47
(Tex. 1998). Statutory fraud claims under § 27.01 of the Texas
7
Pertinent to Benchmark’s fraud claims are the representations and warranties that AVEX
had not encountered any material adverse change since December 31, 1998; that AVEX had not
received written notice of default or termination under any significant contract; and that the
proffered financial statements of AVEX are complete and accurate under generally accepted
accounting principles.
19
Business and Commerce Code8 can also be based on false contractual
representations. See SMB Partners, Ltd. v. Osloub, 4 S.W.3d 368
(Tex. App.--Houston [1st Dist.] 1999, no writ). To the extent,
therefore, that Benchmark bases its common law and statutory fraud
claims on representations warranted in the Agreement, Texas law
allows such claims.
Further, Texas law governs Benchmark’s negligent
misrepresentation claim. On remand, the district court must
determine whether Benchmark can assert a case for recovery under
Texas law. See, e.g., D.S.A., Inc. v. Hillsboro Indep. Sch. Dist.,
973 S.W.2d 662, 663-64 (Tex. 1998); Fed. Land Bank Ass’n of Tyler
v. Sloane, 825 S.W.2d 439, 443 (Tex. 1991).
4. Benchmark’s Cross-Motion for Summary Judgment
After Huber moved to dismiss Benchmark’s claims on the
pleadings, Benchmark moved for partial summary judgment, asserting
Huber is liable for breach of several contract warranties. The
district court granted summary judgment in Huber’s favor. Although
8
Section 27.01 of the Texas Business and Commerce Code provides in relevant part:
(a) Fraud in a transaction involving real estate or stock in a corporation or joint
stock company consists of a
(1) false representation of a past or existing material fact, when the false
representation is
(A) made to a person for the purpose of inducing that person to enter into
a contract; and
(B) relied on by that person in entering into that contract . . . .
20
a court may grant summary judgment against the moving party, Landry
v. G.B.A., 762 F.2d 462, 464 (5th Cir. 1985), we vacate the
district court judgment. At this point, neither party is entitled
to judgment as a matter of law.9
As one example of the district court’s mistaken
contractual analysis, Huber warrants in § 3.7 that “since December
31, 1998, there has not been any Material Adverse Change.” The
Agreement defines “Material Adverse Change” as a “material adverse
change to the business, results of operations or financial
condition of the AVEX Group taken as a whole.” The parties
disagree on the meaning of § 3.7 but each offers a reasonable
interpretation of the provision. This contract interpretation
issue, as discussed above, is governed by New York law. “Under New
York law, the question of ambiguity vel non must be determined from
the face of the agreement, without reference to extrinsic evidence.
Contract language is ambiguous if it is capable of more than one
meaning when viewed objectively by a reasonably intelligent person
who has examined the context of the entire integrated agreement.”
Collins v. Harrison-Bode, 303 F.3d 429, 433 (2d Cir. 2002)
(internal quotation marks and citations omitted). Huber argues
that in § 3.7, the parties agreed upon December 31, 1998, as a
9
The grant of summary judgment is reviewed de novo. Hugh Symons Group, PLC v.
Motorola, Inc., 292 F.3d 466, 468 (5th Cir. 2002). Summary judgment is proper if the record,
viewed in the light most favorable to the non-moving party, shows that there is no genuine issue
of material fact and that the moving party is entitled to judgment as a matter of law. Id.
21
“baseline” for comparison; under this view, AVEX’s condition as of
December 31, 1998, is the baseline condition against which alleged
material adverse changes must be assessed.
Benchmark, on the other hand, argues that the contract
does not establish December 31, 1998, as a baseline but, instead,
specifies the time period (after December 31, 1998) with respect to
which Huber warranted the absence of a material adverse change.
Under Benchmark’s view, the results of operations for the first
five months of 1999, which initially showed modest profits followed
by substantial losses, are part of the baseline against which
alleged material adverse changes must be assessed. We decline to
resolve the ambiguity on appeal and, instead, remand for the
parties to present extrinsic evidence supporting their
interpretations of the agreement. See id. at 434.10
In similar fashion, the district court too abruptly
dispatched Benchmark’s other breach of contract claims by making
findings on highly disputed facts. Review of the parties’
10
In addition to the ambiguous contract language, fact issues regarding changes in
AVEX’s customer relations, a dispute over the impact of arbitrated accounting adjustments, and
an email exchange between AVEX’s comptroller and CFO preclude summary judgment on this
issue. In response to the comptroller’s report that preliminary numbers showed a worldwide loss
of $1.3 million for July 1999, the CFO told the comptroller not to share this “good news” with
anyone until he discussed the numbers with the CEO. The CFO also wrote, “I guarantee we
won’t report a $1.3 million EBIT loss.” While Benchmark argues that the email proves the
existence of a material adverse change, Huber argues that preliminary numbers for a single month
do not prove a material adverse change, especially if December 31, 1998, is a baseline for
comparison since AVEX averaged over $5 million in losses per month in 1998. Huber also
argues that the CFO’s email could reflect his belief that a $1.3 million loss would not be reported
because a loss in that amount did not occur.
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arguments convinces us that further factual development on remand
is necessary to proper resolution of the contract claims.
D. Reassignment on Remand
Relying solely on the court’s unorthodox pretrial
procedure, Benchmark asks that this case be reassigned to another
district judge in the event of remand.
This circuit employs two tests to determine whether to
exercise its extraordinary power to reassign a case to another
judge on remand. In re DaimlerChrysler Corp., 294 F.3d 697, 700
(5th Cir. 2002). The first test requires consideration of three
factors: (1) whether the original judge would reasonably be
expected to have substantial difficulty putting aside previously
expressed views or findings determined to be erroneous, (2) whether
reassignment is advisable to preserve the appearance of justice,
and (3) whether reassignment would entail waste and duplication out
of proportion to any gain in preserving the appearance of fairness.
Id. at 700-01. The second test permits reassignment “when the
facts ‘might reasonably cause an objective observer to question
[the judge’s] impartiality.’” Id. at 701 (quoting United States v.
Microsoft Corp., 56 F.3d 1448, 1463 (D.C. Cir. 1995)).
Reassignment is not warranted under either test. Although there
was substantial delay in the management of the case, and one must
question the court’s repeated resort to perfunctory or settlement-
oriented procedures while thwarting Benchmark’s opportunity for
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discovery, the record does not reflect overt impartiality, bias, or
prejudice by the district court.
III. CONCLUSION
Based on the foregoing discussion, we conclude that while
New York law governs Benchmark’s contract claims, Texas law applies
to its fraud, statutory fraud and negligent misrepresentation
claims. The fraud and misrepresentation claims should not have
been dismissed for inadequate pleading under Rule 9(b). The Texas
fraud claims are viable, however, not based upon precontractual
representations, but only insofar as they are based on
representations specified in the parties’ contract. The district
court erred in peremptorily granting summary judgment against
Benchmark’s claims except for fraud grounded in precontractual
representations. On remand, we admonish the district court not to
cut procedural corners.
The judgment of the district court is accordingly VACATED
and REMANDED for further proceedings consistent with this opinion.
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