United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
June 22, 2007
FOR THE FIFTH CIRCUIT
_____________________ Charles R. Fulbruge III
Clerk
No. 06-20422
_____________________
SMITH INTERNATIONAL, INC.,
Plaintiff - Appellant,
versus
THE EGLE GROUP LLC; DON M. EGLE;
DANIEL REES, as Trustee of the Egle
Trust for Michelle A. Egle, the
Egle Trust for John M. Egle Jr.,
and the Egle Trust for Lauren E. Egle,
Defendants - Appellees.
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________________________________________________
Before JONES, Chief Judge, and JOLLY and STEWART, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:
This dispute arises from a sales-purchase agreement under
which the purchaser, Smith International, Inc. (“Smith”), seeks
indemnity from the defendant sellers for damages caused by
allegedly false representations and warranties in the agreement.
Smith appeals the district court’s grant of summary judgment in
favor of the defendants on all its claims. Although we conclude
that Smith’s breach of contract and negligent misrepresentation
claims are time-barred, we hold that Smith’s indemnity claim is not
barred by res judicata or the statute of limitations under Texas
law. We therefore AFFIRM in part, REVERSE in part, and REMAND for
further proceedings.
I.
In April 1997, co-defendant the Egle Group, L.L.C. (“Egle
Group”)1 and Tri-State Technologies, L.L.C. (“Tri-State”)2 sold
their respective 50% interests in Tri-Tech Fishing Services, L.L.C.
(“Tri-Tech”) to Smith pursuant to a sales-purchase agreement
(“Agreement”). The Agreement listed the Egle Group and Tri-State
as the sole sellers (“Sellers”) and Smith as the sole purchaser.
In the Agreement, Sellers made numerous representations and
warranties, and under the Agreement’s indemnity clause, Sellers
agreed to reimburse Smith for damages arising from any false
representations and warranties. The Agreement was signed, on
behalf of the Sellers, by representatives of the Egle Group,3 by
member-managers of Tri-State,4 and by the general manager of Tri-
Tech, Ray Daugherty. In April 1997 and January 1998, pursuant to
1
The Egle Group is comprised of the Egle Trust for Michelle
A. Egle, the Egle Trust for John M. Egle, and the Egle Trust for
Lauren E. Egle (collectively, the “Egle Trusts”). Two individuals,
Glenn Dauterive and Ray Daugherty, also claimed partial ownership
of the Egle Group at the time of the sale.
2
At the time of the sale, Tri-State was a limited liability
corporation composed of several member-managers, including Ray
Daugherty.
3
The representatives of the Egle Group signing the Agreement
were Glenn Dauterive, Ray Daugherty, and Don M. Egle, who signed as
manager of the Egle Group and as trustee for the Egle Trusts.
4
The member-managers of Tri-State signing the Agreement were
Ray Daugherty and several other individuals.
2
the Agreement, Smith paid approximately $21 million to the Egle
Trusts, Glenn Dauterive, Daugherty, and other individuals.
On March 13, 2000, Smith’s felicity took a turn when Rose Dove
Egle, the ex–wife of John M. Egle, added Smith as a defendant in an
ongoing Louisiana state court suit against her ex-husband. Rose
Egle alleged, inter alia, that in 1994, although the Egle Trusts
owned 100% of the Egle Group, her ex-husband and others in Tri-Tech
conspired and wrongfully conveyed a 12% interest in the Egle Group
to Dauterive and a 25% interest in the Egle Group to Daugherty.
According to Rose Egle, Smith was liable, as successor to Tri-Tech,
for the 1994 wrongful conveyances. When Smith purchased Tri-Tech,
it wrongfully disbursed a total of $3,468,919 to Dauterive and
Daugherty for their 12% interest and 25% interest, respectively, in
the Egle Group, which Smith should have distributed to the Egle
Trusts. The question went to a Louisiana jury, and it agreed. It
found that Tri-Tech committed fraud and misappropriated the
$3,468,919 to Dauterive and Daugherty and that Smith was the
successor to Tri-Tech and was not a good-faith purchaser of Tri-
Tech. On June 1, 2004, the Louisiana court entered judgment
against Smith in the full amount of $3,468,919 plus interest and
costs. Smith appealed the judgment to the Louisiana appellate
court, where, as far as the record shows, it is now pending.
On October 27, 2004, Smith filed this suit in federal district
court in Texas seeking compensation and indemnification for the
Louisiana judgment. Smith alleged breach of contract, breach of
3
indemnity, and negligent misrepresentation against the Egle Group,
Daniel Rees as trustee of the Egle Trusts (collectively,
“Defendants”), the Egle Trusts,5 and Don M. Egle.6 The parties
moved for summary judgment, and on January 27, 2006, the district
court granted summary judgment in favor of Defendants and Don M.
Egle on the basis of res judicata because Smith failed to raise its
claims in the form of a reconventional demand in the Louisiana
suit. The district court concluded that all of Smith’s claims
existed at the time Smith became a defendant in the Louisiana suit
and that all of those existing claims arose out of the “same
transaction or occurrence” that was the subject matter of the
Louisiana suit. Accordingly, the district court held that
Louisiana’s res judicata statute, La. Rev. Stat. Ann. § 13:4231
(West 2006), and reconventional demand rule, La. Code Civ. Proc.
5
Although Smith originally listed the Egle Trusts as
defendants, the district court, in its June 3, 2005 memorandum,
dismissed them as improper parties. In that memorandum, the
district court also held that the Egle Trusts are bound by the
Agreement and that Daniel Rees is therefore a proper defendant as
the current trustee of the Egle Trusts. On appeal, the parties
dispute whether the Egle Trusts are bound by the Agreement, and
thus, whether Smith may assert its claims against Daniel Rees in
his capacity as trustee.
6
On appeal, Smith does not seek relief against Don M. Egle.
In the “Certificate of Interested Parties” in its brief, Smith does
not list Don M. Egle as a party to the appeal, and throughout its
brief Smith only argues for relief against the Egle Group and the
Egle Trusts, through their trustee Daniel Rees. Accordingly, Don
M. Egle advised this Court by letter dated September 14, 2006 that
he would not be filing an appellee’s brief.
4
Ann. art. 1061 (West 2005), barred Smith’s claims for failure to
raise them in the Louisiana suit.
On March 29, 2006, the district court vacated the portion of
its January 27 order ruling in favor of the Egle Group on the basis
of res judicata, apparently because the Egle Group was not a party
to the Louisiana suit. Nevertheless, the district court affirmed
its grant of summary judgment in favor of the Egle Group, holding
that Smith’s claims against the Egle Group were time-barred by the
statute of limitations because Smith’s claims accrued when Smith
became a defendant in the Louisiana suit. Smith filed this appeal.
II.
We review de novo the district court’s grant of summary
judgment, applying the same standard as the district court.
Gowesky v. Singing River Hosp. Sys., 321 F.3d 503, 507 (5th Cir.
2003). Summary judgment is appropriate when “there is no genuine
issue as to any material fact and [] the moving party is entitled
to a judgment as a matter of law.” Fed. R. Civ. P. 56(c).
The issue before us is whether Smith’s causes of action
accrued on March 13, 2000, when Smith was named as a defendant in
the Louisiana suit, or on June 1, 2004, after the Louisiana court
entered final judgment against Smith. The accrual date is
dispositive in this case for two reasons.
First, the accrual date of its causes of action determines
whether Smith was required, by principles of res judicata, to
assert its claims in a reconventional demand in the Louisiana suit.
5
Under Louisiana res judicata law,7 a final judgment in favor of a
plaintiff extinguishes “all causes of action existing at the time
of final judgment arising out of the transaction or occurrence that
is the subject matter of the litigation.” La. Rev. Stat. Ann. §
13:4231(1); see La. Code Civ. Proc. Ann. art. 1061 (reconventional
demand rule).8 Thus, if Smith had a cause of action that arose out
of the same transaction, and that had accrued at the time Smith
became a defendant in the Louisiana suit, then Smith’s failure to
assert such claims barred them under res judicata principles. On
the other hand, if Smith’s causes of action did not accrue until
after the Louisiana court entered final judgment against it, then
Smith’s causes of action did not exist “at the time of final
judgment,” see La. Rev. Stat. Ann. § 13:4231(1), and Smith could
not have raised its causes of action in a reconventional demand,
see La. Code Civ. Proc. Ann. art. 1061.
Second, and apart from res judicata considerations, the
accrual date is dispositive because it determines when the statute
7
The parties agree that Louisiana law governs the question of
res judicata. See Jones v. Sheehan, Young & Culp, P.C., 82 F.3d
1334, 1338 (5th Cir. 1996) (“When a federal court is asked to give
res judicata effect to a state court judgment, the federal court
must determine the preclusiveness of that state court judgment
under the res judicata principles of the state from which the
judgment originates.”).
8
Under Louisiana Code of Civil Procedure article 1061, a
defendant must assert, in a reconventional demand, “all causes of
action that he may have against the plaintiff that arise out of the
transaction or occurrence that is the subject matter of the
principal action.” Id.
6
of limitations began to run on Smith’s causes of action, and
consequently, whether the statute of limitations expired. Under
Texas law, indemnity and breach of contract claims are subject to
a four-year statute of limitations, Ingersoll-Rand Co. v. Valero
Energy Corp., 997 S.W.2d 203, 206, 210-11 (Tex. 1999) (citing Tex.
Civ. Prac. & Rem. Code Ann. § 16.004(a)(3) (Vernon 2002));9
negligent misrepresentation claims are subject to a two-year
statute of limitations, Tex. Civ. Prac. & Rem. Code Ann. §
16.003(a) (Vernon 2002); Coleman v. Rotana, Inc., 778 S.W.2d 867,
873 (Tex. App. 1989).10 If Smith’s indemnity and breach of contract
claims accrued at the time Smith became a defendant in the
Louisiana suit on March 13, 2000, the four-year statute of
limitations expired before Smith filed this suit in federal
district court on October 27, 2004.11 If, however, Smith’s claims
9
The Agreement contains an express choice-of-law clause
stating that the Agreement shall be governed by and construed in
accordance with Texas law, and the parties agree that Texas law
governs the Agreement. Therefore, we apply Texas law to Smith’s
indemnity and breach of contract claims.
10
Smith argues its negligent misrepresentation claim under
Texas law, and Defendants do not argue otherwise because they
conclude that the result is the same under Texas and Louisiana law.
Therefore, we apply Texas law to Smith’s negligent
misrepresentation claim.
11
In its January 27, 2006 memorandum and order, the district
court dismissed all claims, including Smith’s negligent
misrepresentation claim, against all defendants. However, when the
district court modified its January 27, 2006 memorandum and order
by issuing its March 29, 2006 memorandum and order, the district
court did not specifically address whether Smith’s negligent
misrepresentation claim against the Egle Group was barred by the
statute of limitations. Nor is it clear whether Smith still
7
did not accrue until after the Louisiana court entered final
judgment against it on June 1, 2004, then Smith’s claims are not
barred by the statute of limitations.
The parties dispute when Smith’s causes of action accrued, and
accordingly, whether res judicata and the statute of limitations
bar Smith’s claims.
III.
A.
In determining the accrual date of Smith’s claims, we first
turn to consider the rationale of the district court in concluding
that all of Smith’s claims accrued when Smith became a defendant in
the Louisiana suit. In its January 27, 2006 memorandum and order,
the district court focused its attention on Section 4.3 of the
Agreement, in which the Sellers represented that Smith would
acquire Tri-Tech “free and clear of any Liens.” Because the
Agreement defines “Lien” to include “any ... claim”,12 the district
court apparently inferred that this representation in Section 4.3
of the Agreement was breached at the moment Rose Egle asserted a
asserts a negligent misrepresentation claim against the Egle Group.
Nevertheless, it is clear that Smith asserts the claim against
Daniel Rees as trustee. Thus, for the purposes of deciding this
appeal, we assume that Smith also continues to assert a negligent
misrepresentation claim against the Egle Group.
12
The Agreement defines “Lien” as “any lien, pledge, mortgage,
deed of trust, security interest, claim, lease, charge, option,
right of first refusal, easement or other real estate declaration,
covenant, condition, restriction or servitude, transfer restriction
under any shareholder or similar Contract, encumbrance or any other
restriction or limitation whatsoever” (emphasis added).
8
legal claim against Smith in the Louisiana suit. Accordingly, the
district court held that it was at this moment that all of Smith’s
causes of action -- breach of contract, negligent
misrepresentation, and indemnity -- accrued.
B.
We now turn to consider whether the district court erred in
each of its holdings, respectively. We begin with Smith’s breach
of contract claim. In Texas, “[t]he essential elements of a breach
of contract action are: (1) the existence of a valid contract; (2)
performance or tendered performance by the plaintiff; (3) breach of
the contract by the defendant; and (4) damages sustained by the
plaintiff as a result of the breach.” Valero Mktg. & Supply Co. v.
Kalama Int’l, L.L.C., 51 S.W.3d 345, 351 (Tex. App. 2001). The
accrual of a breach of contract claim is governed by the legal
injury rule. See Boulle v. Boulle, 160 S.W.3d 167, 174 (Tex. App.
2005). Under the legal injury rule, “a cause of action accrues
when a wrongful act causes some legal injury, even if the fact of
injury is not discovered until later, and even if all resulting
damages have not yet occurred.” S.V. v. R.V., 933 S.W.2d 1, 4
(Tex. 1996). “Legal injury” is defined as “an injury giving cause
of action by reason of its being an invasion of a plaintiff’s
right.” Murphy v. Campbell, 964 S.W.2d 265, 270 (Tex. 1997)
(quoting Houston Waterworks Co. v. Kennedy, 8 S.W. 36, 37 (Tex.
1888)). Accordingly, “[c]ontract claims generally accrue when the
contract is breached.” Hoover v. Gregory, 835 S.W.2d 668, 677
9
(Tex. App. 1992) (citing Wichita Nat. Bank v. U.S. Fidelity &
Guaranty Co., 147 S.W.2d 295, 297 (Tex. Civ. App. 1941) (“A cause
of action arising out of contractual relations between the parties
accrues as soon as the contract or agreement is breached.”)). “A
breach occurs when a party fails to perform a duty required by the
contract.” Id.
We thus conclude that Smith’s breach of contract cause of
action accrued no later than March 13, 2000 when Smith was named a
defendant in the Louisiana suit. The legal claim by Rose Egle put
Smith on notice that the Defendants allegedly had breached the
Agreement by misrepresenting in Section 4.3 that Smith would
acquire Tri-Tech free and clear of any claims by others. Given the
valid contract and Smith’s payment of the purchase price, the
elements of a breach of contract claim were present -- with the
possible exception of damages. See Valero Mktg., 51 S.W.3d at 351.
But damages did not matter for accrual purposes because the alleged
breach put Smith on notice of a legal injury -- “an invasion of
[its] right,” see Murphy, 964 S.W.2d at 270, to own Tri-Tech “free
and clear” of any “claim[s],” see Hoover, 835 S.W.2d at 677.
Therefore, Smith’s breach of contract claim accrued no later than
March 13, 2000 and is barred by the four-year statute of
limitations. Because the breach of contract claim is barred by the
statute of limitations, we need not determine whether it is also
barred by res judicata, which would require us to determine whether
the claim arose out of the same transaction or occurrence as Rose
10
Egle’s claims in the Louisiana suit. Accordingly, we affirm the
district court’s grant of summary judgment in favor of Defendants
on Smith’s breach of contract claim.
C.
We next consider whether the district court erred in
determining the accrual date for Smith’s negligent
misrepresentation claim. Texas has adopted the tort of negligent
misrepresentation as defined by the Restatement (Second) of Torts
§ 552: “One who, in the course of his business, profession or
employment, or in any transaction in which he has a pecuniary
interest, supplies false information for the guidance of others in
their business transactions, is subject to liability for pecuniary
loss caused to them by their justifiable reliance upon the
information, if he fails to exercise reasonable care or competence
in obtaining or communicating the information.” McCamish, Martin,
Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787, 791
(Tex. 1999). Like breach of contract claims, negligence claims are
subject to the legal injury rule. See Waxler v. Household Credit
Services, Inc., 106 S.W.3d 277, 280 (Tex. App. 2003).
Here, we conclude that Smith’s negligent misrepresentation
cause of action also accrued no later than March 13, 2000. As of
that day, Smith was on notice that it had suffered the same legal
injury it suffered by the alleged breach of contract -- “an
invasion of [its] right,” see Murphy, 964 S.W.2d at 270, to own
Tri-Tech “free and clear” of any “claim[s].” Therefore, Smith’s
11
negligent misrepresentation claim accrued no later than March 13,
2000 and is barred by the two-year statute of limitations. Because
the negligent misrepresentation claim is barred by the statute of
limitations, we need not determine whether it is also barred by res
judicata. Accordingly, we affirm the district court’s grant of
summary judgment in favor of Defendants on Smith’s negligent
misrepresentation claim.
D.
We are now ready to consider Smith’s indemnity claim, the
centerpiece of its appeal. The Sellers’ indemnity clause appears
in Section 11.1 of the Agreement, which states:
Subject to the provisions of this Article XI
and to the extent that the Damages are not
covered by insurance, Sellers agree to
indemnify and hold Purchaser harmless from and
against the Damages in excess of $100,000 but
not exceeding $2,000,000.00 resulting from or
arising out of: ... (b) any misrepresentation,
breach of warranty or breach or nonfulfillment
of any covenants of Sellers in this Agreement,
including the Schedules and Exhibits hereto.
The Agreement further defines Damages as
all costs, judgments, good faith settlements,
claims (whether or not such claims are
ultimately defeated), damages, losses,
penalties, fines, liabilities (including
strict liability), Liens, costs and expenses,
of whatever kind or nature, contingent or
otherwise, attorneys’ fees, costs and expenses
incurred in enforcing this Agreement or
collecting any sums due hereunder.
In contrast to breach of contract and negligence claims, Texas
courts do not apply the legal injury rule to indemnity claims. Cf.
12
Advent Trust Co. v. Hyder, 12 S.W.3d 534 (Tex. App. 1999) (applying
the legal injury rule to negligence and breach of contract claims
but not to a common law indemnity claim). Instead, as explained by
the Supreme Court of Texas, “[t]o determine the correct accrual
date of an indemnity claim we look to the contract’s indemnity
provision.” Ingersoll-Rand Co., 997 S.W.2d at 207.
All indemnity provisions fall under one of two categories:
those that indemnify against liabilities and those that indemnify
against damages. See id. (citing Tubb v. Bartlett, 862 S.W.2d 740,
750 (Tex. App. 1993); Russell v. Lemons, 205 S.W.2d 629, 631 (Tex.
Civ. App. 1947)). The very terms suggest an earlier date of
accrual for liability indemnity agreements. Liability indemnity
agreements may be called “broader,” often holding the indemnitee
“harmless” against “all claims” and “liabilities.” See id. Under
a liability indemnity agreement, the indemnitee’s right to sue does
not accrue, however, until liability becomes “fixed and certain, as
by rendition of a judgment, whether or not the indemnitee has yet
suffered actual damages, as by payment of a judgment.” Id.; see
also Pate v. Tellepsen Const. Co., 596 S.W.2d 548, 552 (Tex. App.
1980) (“a cause of action for indemnity does not accrue until the
judgment is either rendered or paid”). Damages indemnity
agreements, on the other hand, are not as broad, and the
indemnitee’s right to sue does not accrue “until the indemnitee has
suffered damage or injury by being compelled to pay the judgment or
debt.” Tubb, 862 S.W.2d at 750 (emphasis added). Accordingly,
13
under Texas law, the earliest possible accrual date for an
indemnity agreement is the day that judgment is entered against the
indemnitee, and this accrual date applies only when the indemnity
clause is so broad that it constitutes a liability indemnity
agreement. In contrast, the cause of action for a damage indemnity
agreement does not accrue until even later, that is, when the
indemnitee is “compelled to pay the judgment or debt.” See id.
Here, we need not determine whether the clause at issue is a
liability or damage indemnity agreement; even assuming the
indemnity clause in the Agreement is a liability indemnity
agreement with the earlier accrual date, Smith’s indemnity cause of
action did not accrue until June 1, 2004, at the earliest, after
the Louisiana court entered its judgment against Smith. See
Ingersoll-Rand Co., 997 S.W.2d at 207; Pate, 596 S.W.2d at 552.13
Therefore, Smith’s indemnity claim is not barred by the statute of
limitations or res judicata, and we reverse the district court’s
13
We reject Defendants’ argument to the contrary, which is
based on a faulty reading of Tubb. Defendants argue that the
indemnity clause here is a damages indemnity agreement. Defendants
then point to the definition of “Damages” in the Agreement, which
includes “claims (whether or not such claims are ultimately
defeated),” to suggest that Smith suffered just such a “claim,” and
therefore a “Damage,” when Rose Egle asserted a legal claim against
Smith on March 13, 2000. Thus, because Smith allegedly suffered a
“Damage,” as that term is defined in the Agreement, Defendants
argue that Smith “suffered damage[s],” as required by Tubb to
create a cause of action in a damages indemnity agreement. See
Tubb, 862 S.W.2d at 750. Defendants misread Tubb, which
specifically defines the “suffered damage[s]” that create a cause
of action as the damage or injury suffered “by being compelled to
pay the judgment or debt.” See id. The Agreement’s definition of
Damages is not determinative.
14
grant of summary judgment in favor of Defendants on Smith’s
indemnity claim.14
IV.
For the foregoing reasons, Smith’s breach of contract and
negligent misrepresentation causes of action accrued on March 13,
2000 and therefore are barred by the statutes of limitation.
Smith’s indemnity cause of action, however, did not accrue until
June 1, 2004, at the earliest, and therefore it is not barred by
res judicata or the statute of limitations. We therefore AFFIRM
summary judgment in favor of Defendants on Smith’s breach of
contract and negligent misrepresentation claims, we REVERSE summary
judgment in favor of Defendants on Smith’s indemnity claim, and we
14
We reject Defendants’ argument that Smith is barred from
bringing its indemnity claim against Daniel Rees, as trustee of the
Egle Trusts, because the Egle Trusts are allegedly not bound by the
Agreement. We agree with the Defendants that the Egle Trusts are
not listed in the Agreement as “Sellers,” which the Agreement
defines as the Egle Group and Tri-State. However, the Agreement
was signed on behalf of the Egle Group by, among others, Don Egle
as the co-trustee of the Egle Trusts. Furthermore, the other co-
trustee of the Egle Trusts, Janet Harrison, signed a “Consent and
Section 8.1(c) Certificate,” which states: “The signature of Don
M. Egle as Co-Trustee for the Trusts on the Agreement and all
documents necessary to complete the transactions contemplated by
the Agreement shall be sufficient to bind the Trusts.” This
document was submitted in response to the requirements of Section
8.1(c), which states: “Purchaser shall have received a certificate
of Sellers, dated as of the Closing Date and signed by Sellers’
members certifying as to the fulfillment of the conditions set
forth in this Section 8.1.” Section 8.1 is the general
representations and warranties provision of the Agreement. Thus,
the Egle Trusts are bound by the Agreement, and particularly, to
the representations and warranties made therein.
15
REMAND the case for further proceedings not inconsistent with this
opinion.
AFFIRMED in part; REVERSED in part; and REMANDED.
16