Kansa Reinsurance Co., Ltd. v. Congressional Mortg. Corp. of Texas

United States Court of Appeals,

Fifth Circuit.

No. 93-1109.

KANSA REINSURANCE COMPANY, LTD., Plaintiff-Counter Defendant-
Appellant,

v.

CONGRESSIONAL MORTGAGE CORPORATION OF TEXAS, et al., Defendants.

UNITED POSTAL SAVINGS & LOAN ASSN., Defendant-Cross Plaintiff
Appellant,

v.

STEWART TITLE COMPANY and Stewart Title Guaranty Company,
Defendants-Counter-Plaintiffs-Cross-Defendants-Appellees.

May 24, 1994.

Appeals from the United States District Court for the Northern
District of Texas.

Before POLITZ, Chief Judge, KING and GARWOOD, Circuit Judges.

KING, Circuit Judge:

Appellants Kansa Reinsurance Company, Ltd. ("Kansa") and

United Postal Savings & Loan Association ("United Postal") appeal

from the district court's summary adjudication of their claims

against defendants Stewart Title Company and Stewart Title Guaranty

Company (together referred to as "Stewart"). Finding no error, we

affirm.

I. Background

A. The Scheme

In early 1983, a developer known as Tectonic Realty and its

affiliate, Prestonwood Green of Dallas, Inc. (together referred to

as the "developer"), converted a Dallas apartment complex into the

1
Prestonwood Green Condominiums, marketing the units to individuals

for investment purposes. The developer arranged for Congressional

Mortgage Corporation of Texas ("Congressional"), one of the

defendants below,1 to provide financing for the purchase price of

the individual units. The terms of the agreement were that

Congressional would loan up to 907 of the purchase price of the

condominiums, which would be paid directly to the developer.

Apparently, however, the developer and the condominium buyers

collaterally agreed to an inflated or falsified purchase price and

further agreed to share the loan proceeds received by the developer

through an illegal kick-back to the buyers. Additionally, the

developer, despite representations to the contrary, collected no

cash down payments from the unit buyers. Instead, the buyers

apparently gave notes for the 107 down payments required by the

mortgage company. Eighty-six units were sold according to this

scheme, fifteen of which are the subject of the case presented. In

each case, the buyer promptly defaulted upon his or her loan from

Congressional.

As part of the closing transaction, Congressional contacted

Home Guaranty Insurance Company ("HGIC"), a mortgage loan insurer,

in order to acquire insurance on the loans.2 In order to procure

1
Congressional is no longer a party to this suit because it
was discharged in bankruptcy during the course of the litigation
in the district court.
2
Since the appeal was filed in this case, HGIC has been
acquired by appellant Kansa, which was substituted as a party in
the appeal; however, as the events at issue involved only HGIC,
we will refer to both Kansa and HGIC as "HGIC."

2
the insurance, Congressional sent HGIC copies of its loan files on

the prospective borrowers and other information relating to the

purchase. HGIC did no independent investigation of the borrowers,

as it claims is customary in the industry for "review writers,"

such as itself. Relying upon the documents sent by Congressional,

HGIC issued commitments of mortgage insurance to Congressional for

the purchases at issue.

B. The Closing Transactions

The unit purchases were closed by Stewart. Many of the

investors purchased multiple units which were closed in

simultaneous closings. As part of its closing instructions,

Congressional directed Stewart to provide, inter alia, executed

HUD-1 settlement statement forms summarizing the closing

transaction. Congressional did not instruct Stewart to verify the

payments of earnest money deposits, which were equal to 107 of the

purchase price. Nor did it require that Stewart ensure execution

of the escrow agreement. Instead, Congressional provided Stewart

with executed Contracts of Sale (the "contracts") and signed

Federal National Mortgage Association Affidavits of Purchaser and

Vendor (the "FNMA affidavits") showing that the earnest money

deposits equal to ten percent of the purchase price had been paid

directly to the seller. These documents also specifically recited

that no secondary financing had been obtained on the properties and

contained an agreement that:

If this loan exceeds 807 of the appraised value of the
purchase price of the property ... no lien or charge upon such
property has been given or executed or has been contracted or
agreed to be so given or executed by the Property Purchaser to

3
 any person, including Property Vendor, except for (1) liens
disclosed in [the financial terms portion of the affidavit],
or (2) liens or charges which will be discharged from the
proceeds of subject mortgage.

As noted above, Congressional had agreed to finance 907 of the

purchase price, and so this provision was applicable. As part of

the closing instructions, Stewart was directed to notarize the FNMA

vendor/purchaser affidavits and return them to Congressional.

At closing, Stewart's escrow agent, Marilyn Baker ("Baker"),

finalized the HUD-1 statements, which HGIC and United Postal claim

showed that the earnest money deposits had been paid at

settlement.3 Baker followed the closing instructions given by

Congressional, including notarizing the FNMA affidavits and issuing

checks to HGIC for the mortgage insurance premiums, and returned

the documents to Congressional for final review before disbursement

of the funds, as she was directed to do. Upon receipt of the

documents, Congressional then made the final distribution of funds,

executed the final certificates of insurance, and, according to

HGIC, submitted the executed certificates and FNMA affidavits to

3
The HUD-1 settlement statements recite that the "[a]mounts
paid to and by the settlement agent are shown. Items marked
"(p.o.c.)' were paid outside the closing; they are shown here
for informational purposes only and are not included in the
totals." The HUD-1 statements at issue in the instant case all
contain entries in the spaces designated for "amounts paid by or
in behalf of buyer: deposit or earnest money" and "reductions in
amount due to seller: excess deposit," representing 107 of the
contract sales prices without any qualification that these monies
were paid outside closing. The earnest money amounts, however,
were not included in the totals due from the buyer at settlement.
Even more telling is the fact that the earnest money sums were
not included in the totals due to the seller at closing, which
tends to show that the seller had already received these payments
outside of the closing.

4
HGIC.

Prior to closing, the purchasers apparently executed

promissory notes in favor of the developer or its subsidiary which

operated as second liens. These notes represented the 107 earnest

money/downpayments which had never been paid. At various times

outside of the closings, Baker was presented with these second lien

deeds of trust. Baker testified at her deposition that the sales

representatives and borrowers who presented the documents for

notarization were also involved with other condominiums in the area

which she did not close. Baker notarized the documents, and they

were subsequently recorded in March of 1984, several months after

the closings (the "second liens").

Shortly after the closings, on December 21, 1983, United

Postal purchased sixty-eight of the mortgages from Congressional

and succeeded to the mortgage insurance provided by HGIC covering

those loans. Subsequently, the buyers mass-defaulted on their

first payments due under the mortgages, and United Postal made

claims upon HGIC under the policies.

C. The Instant Litigation

HGIC filed suit in the United States District Court for the

Northern District of Texas in January of 1986 against

Congressional, United Postal, and Stewart, alleging fraud,

negligence, negligent misrepresentation, and breach of fiduciary

duty based upon the December 1983 closings. HGIC tendered the

premiums it had received and sought recission of the mortgage

insurance policies issued to Congressional and assigned to United

5
Postal. Alternatively, HGIC sought compensatory damages from

Stewart to the extent HGIC was liable on the policies.

Almost five years later, on October 23, 1990, United Postal

filed a cross-claim against Stewart asserting the same causes of

action as had HGIC with the addition of a breach of contract claim.

United Postal contended that it first learned of the second liens

and corresponding lack of down payments during the May 8, 1990,

deposition of Baker. United Postal also claimed that Stewart

represented at closing that the purchasers had made a ten percent

cash downpayment despite knowledge of the second liens and that

United Postal would never have purchased the mortgages had it known

about the problems.

Stewart moved to dismiss United Postal's cross-claims as

time-barred and for summary judgment on HGIC's claims. By order

entered March 14, 1991, the trial court dismissed United Postal's

cross-claims as being barred by limitations (the "March 14

Dismissal"). On June 4, 1992, the court below entered an

interlocutory summary judgment in favor of Stewart on HGIC's claims

(the "June 4 Order"). In doing so, the court concluded that (i)

HGIC's negligent misrepresentation claim was subject to a two-year

statute of limitations which had passed prior to its commencement

of this action, and (ii) its summary judgment evidence respecting

its fraud claim failed to create a triable issue of fact since

there was no evidence that Stewart had knowledge of the false

representations or that it made any misrepresentations with an

intent to deceive.

6
 HGIC and United Postal settled their claims against one

another as reflected in the January 5, 1993, agreed order, and the

district court entered a final judgment on the same day. United

Postal and HGIC took separate appeals from the rendition of

judgment against them disposing of their claims against Stewart.

II. Analysis

A. Dismissal Of United Postal's Cross-Claim

In dismissing United Postal's cross-claim, the district court

determined that (i) the pleading did not "relate back" to the

filing of United Postal's original answer and (ii) United Postal's

claims accrued at the latest by March 15, 1984, and consequently,

the applicable statutes of limitations had run before it filed its

cross-claim in October of 1990. United Postal challenges each of

these findings on appeal.

1. Standard of review

In reviewing the district court's dismissal of United

Postal's cross-claim, we accept all factual allegations made in the

pleading as true and ask whether, under the circumstances asserted,

the allegations state a claim sufficient to avoid dismissal. See,

e.g., United States v. Gaubert, 499 U.S. 315, 327, 111 S.Ct. 1267,

1276, 113 L.Ed.2d 335 (1991); Berkovitz v. United States, 486 U.S.

531, 540, 108 S.Ct. 1954, 1960-61, 100 L.Ed.2d 531 (1988). "[W]e

may uphold ... [a Rule 12(b)(6) dismissal] only if it appears that

no relief could be granted under any set of facts that could be

proved consistent with the allegations." American Waste &

Pollution Control Co. v. Browning-Ferris, Inc., 949 F.2d 1384, 1386

7
(5th Cir.1991) (quoting Baton Rouge Bldg. & Constr. Trades Council

v. Jacobs Constructors, Inc., 804 F.2d 879, 881 (5th Cir.1986)).

While the district court must accept as true all factual

allegations in the complaint, Clark v. Amoco Prod. Co., 794 F.2d

967, 970 (5th Cir.1986), it need not resolve unclear questions of

law in favor of the plaintiff. Bane v. Ferguson, 890 F.2d 11, 13

(7th Cir.1989). Moreover, when a successful affirmative defense

appears on the face of the pleadings, dismissal under Rule 12(b)(6)

may be appropriate. Clark, 794 F.2d at 970.

2. "Relation back" of United Postal's cross-claim

Federal Rule of Civil Procedure 15(c) is a procedural

provision to allow a party to amend an operative pleading despite

an applicable statute of limitations in situations where the

parties to litigation have been sufficiently put on notice of facts

and claims which may give rise to future, related claims.4 The

rationale of the rule is that, once litigation involving a

particular transaction has been instituted, the parties should not

be protected by a statute of limitations from later asserted claims

that arose out of the same conduct set forth in the original

pleadings. 6A CHARLES A. WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE §

1496 (1990). Rule 15(c) provides, in relevant part, that:

Whenever the claim or defense asserted in the amended pleading

4
Rule 15(c)'s relation back doctrine, though it has the
ultimate effect of "tolling" limitations, is considered by this
court to be purely procedural and is thus governed by federal
law. See, e.g., Hensgens v. Deere & Co., 869 F.2d 879, 880 (5th
Cir.), cert. denied, 493 U.S. 851, 110 S.Ct. 150, 107 L.Ed.2d 108
(1989) ("[F]ederal law regarding relation back of amendments to
pleadings is controlling in diversity cases in federal court.").

8
 arose out of the same conduct, transaction, or occurrence set
forth or attempted to be set forth in the original pleading,
the amendment relates back to the date of the original
pleading.

FED.R.CIV.P. 15(c). This so-called "relation back" doctrine "does

not extend the limitations period, but merely recognizes that the

purposes of the statute are accomplished by the filing of the

initial pleading." American Tel. & Tel. Co. v. Delta

Communications Corp., 114 F.R.D. 606, 612 (S.D.Miss.1986).

As the district court observed, "[t]he necessary implication

of the rule is that in order for an amended pleading to relate back

for statute of limitations purposes, there must be a previous

pleading to which the amendment dates back." It concluded that no

such pleading existed. United Postal argues on appeal that the

cross-claim related back to either HGIC's original complaint or to

its April 18, 1989, amended answer and counterclaim (the "amended

answer"). The cross-claim filed by United Postal is, however, an

"original" cross-claim against a co-party, not an amendment to a

previously filed pleading. Accordingly, it does not appear to be

within the province of Rule 15(c). Furthermore, Rule 13(g)

governing cross-claims does not permit relation back of a

cross-claim seeking affirmative and independent relief to the

original complaint. See United States for the use of Bros.

Builders Supply Co. v. Old World Artisans, Inc., 702 F.Supp. 1561,

1569 (N.D.Ga.1988) (noting that the common law rule that "statutes

of limitations do not run against pure defenses does not apply to

setoffs, counterclaims or crossclaims that are affirmative,

independent causes of action").

9
 United Postal relies heavily upon an unpublished opinion from

the Southern District of New York, Hemmerick v. Chrysler Corp.,

1989 WL 4493 (S.D.N.Y. Jan. 13, 1989), in which the court allowed

a plaintiff to amend his original complaint to assert an otherwise

untimely cross-claim against his co-plaintiff. Pertinent to that

case was the fact that both co-plaintiffs had been previously

represented by the same counsel and that the cross-plaintiff sought

to assert the cross-claim only after retaining independent counsel.

In the instant case, by contrast, Stewart and United Postal have

been represented by independent counsel with no potential conflict

which would prevent United Postal from asserting the cross-claim.

We are not persuaded that the Hemmerick result would be proper

under the circumstances of this case.

United Postal alternatively argues that its amended answer is

the relevant pleading to which we look for Rule 15(c) purposes and

argues that this answer was effectively amended by the cross-claim;

thus, it concludes, the cross-claim "relates back" to April 18,

1989. We disagree. The cross-claim does not amend the answer

because it does not contain any of the allegations in either the

amended answer or the counterclaim; rather, it stands alone.

Moreover, the amended answer was a responsive pleading which did

not assert—or even intimate—any allegations of wrongdoing against

Stewart even though all the facts necessary to give rise to such

allegations were present in HGIC's original complaint. In fact,

the counterclaim did not even mention Stewart. Further, the

counterclaim contained in the amended answer was aimed solely

10
against HGIC and cannot be viewed as having put Stewart on notice

that United Postal sought relief against Stewart. See Baldwin

County Welcome Ctr. v. Brown, 466 U.S. 147, 149-50 n. 3, 104 S.Ct.

1723, 1724-25 n. 3, 80 L.Ed.2d 196 (1984) (holding that Rule 15(c)

was designed to allow parties to present untimely claims based upon

the same transaction so long as it would not work unfair surprise

or prejudice). Stewart was not put on notice by the amended answer

that it might have to satisfy two separate potential judgments.5

O'Loughlin v. National R.R. Passenger Corp., 928 F.2d 24, 26-27

(1st Cir.1991) (refusing to allow an amendment to relate back to

the original pleading which asserts claims not even suggested in

the original).

The case presented is not one of joint and several liability

where Stewart would at least be aware of the potential of a

contribution or indemnification cross-claim by United Postal. See,

e.g., B.S. Livingston Export Corp. v. M/V Ogden Fraser, 727 F.Supp.

144 (S.D.N.Y.1989) (allowing amendment to assert cross-claim for

indemnification of damages plaintiff might potentially recover from

cross-claiming defendant). Rather, the relief HGIC sought against

United Postal was merely recissionary; there are no allegations

that United Postal was an active participant in any scheme to

5
HGIC's claims for damages against Stewart were for
indemnification of any amounts for which HGIC might be liable
under the mortgage insurance policies. According to United
Postal's counterclaim against HGIC, the insurance policies
covered at most 207 of the principal and interest due. Thus,
even if United Postal recovered the requested 207 from HGIC under
the policies, it would still potentially have a claim against
Stewart for its remaining losses.

11
defraud. This distinction is important because it has been carried

over from the common law rule, and the federal courts still employ

it. The courts are usually willing to allow a defendant to relate

back a cross-claim in the nature of recoupment, indemnity, or

contribution which seeks to reduce the amount a plaintiff can

recover from that defendant; conversely, however, if the

defendant's cross-claim "is an affirmative or independent cause of

action not in the nature of a defensive claim, the defendant must

comply with the applicable statute of limitations." Brothers

Builders, 702 F.Supp. at 1569; see also Appelbaum v. Ceres Land

Co., 546 F.Supp. 17, 20 (D.Minn.1981), aff'd, 687 F.2d 261 (8th

Cir.1982).

Acknowledging this distinction, United Postal contends that

its cross-claim is a defensive, rather than affirmative, claim

because it is "defensively postured"—similar to a claim for

contribution—since "if someone is required to pay for a loss

incurred in connection with the Prestonwood Green condominiums, it

should be Stewart...." This argument does not hold water because

HGIC did not sue—and indeed could not have sued—United Postal for

money damages. Consequently, United Postal had no right to seek

offset damages from Stewart. Simply put, United Postal can only

recover from Stewart based upon affirmative claims and must

independently satisfy the relevant statutes of limitations without

the benefit of relation back.

The district court characterized United Postal's argument as

requesting that Rule 15(c) be used to "ratify all pleadings which

12
would otherwise be time barred, as long as the party who seeks to

invoke the rule has an operative pleading on file." The district

court properly declined to accept the invitation to adopt such an

expansive interpretation of Rule 15(c),6 and we agree with its

conclusion that Rule 15(c) does not apply under the facts presented

because United Postal did not have an operative pleading on file

with the court below to which the October 23, 1990, cross-claim

could relate back.

3. The applicable statutes of limitation

United Postal asserted cross-claims against Stewart for

negligence, negligent misrepresentation, fraud, breach of fiduciary

duty, and breach of contract. As this is a diversity case, and the

causes of action all arise under state law, the district court

properly applied the applicable Texas statutes of limitations to

the claims presented. See Fluor Eng'g & Constr. v. Southern Pac.

Transp. Co., 753 F.2d 444, 448 (5th Cir.1985).

The district court applied a four-year statute of limitations

6
Rule 15(c) cannot be read to mean that any untimely
cross-claim or pleading automatically relates back to the
original complaint or answer merely because the later pleading
arises from the same conduct, transactions and occurrences;
otherwise, all cross-claims would be exempted from any time
limitations because such claims must arise out of the same
conduct, transactions, and occurrences in order to be asserted as
cross-claims. See FED.R.CIV.P. 13(g). Rather, there must be
indication that the opposing party has been put on notice. 6A
CHARLES A. WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE § 1496 (1990)
("[T]he standard for determining whether amendments qualify under
Rule 15(c) is not simply an identity of transaction test;
although not expressly mentioned in the rule, the courts also
inquire into whether the opposing party has been put on notice
regarding the claim or defense raised in the amended pleading.").

13
to United Postal's claims for negligent misrepresentation, fraud,

and breach of fiduciary duty. We agree with the court below that

Texas fraud claims prescribe if not brought within four years from

accrual. See Williams v. Khalaf, 802 S.W.2d 651, 656-58

(Tex.1990); TEX.CIV.PRAC. & REM.CODE ANN. § 16.004 (Vernon 1986).

However, as will be discussed further below in section II.B.1.a.,

and as the lower court recognized in its subsequent order granting

summary judgment on HGIC's negligent misrepresentation claims, the

two-year limitations period for general torts is the correct

measure for this type cause of action. See TEX.CIV.PRAC. & REM.CODE

ANN. § 16.003 (Vernon 1986). Moreover, as will be detailed in

section II.B.1.b., the limitations period for the fiduciary duty

claims is also two years.7 Id. Finally, a breach of contract

claim is governed by a four-year limitation period. TEX.CIV.PRAC.

& REM.CODE ANN. § 16.004(a)(3) (Vernon 1986).

4. Point of accrual

The determinative issue on appeal is whether the court below

measured the statutes from the appropriate reference point—i.e.,

whether it chose the correct point of accrual. United Postal's

fraud, negligent misrepresentation, and fiduciary duty claims were

based upon Stewart's alleged failure to disclose the substitution

of the second liens for cash down payments. The second liens were

filed in March of 1984, and the district court charged United

7
However, the district court's error in giving United Postal
the benefit of the longer limitations period for the negligent
misrepresentation and fiduciary duty claims obviously did not
affect the ultimate conclusion that the claims were barred.

14
Postal with constructive knowledge of the existence of these liens

at the time they were filed of record. Thus, it concluded, the

statutes of limitations ran by March of 1988, and United Postal's

cross-claim filed in 1990 was simply too late. Similarly, the

court below held that the contract claim—based upon Stewart's

purported failure to follow Congressional's closing

instructions—accrued no later than March 15, 1985, when the second

lien notes were filed in the Dallas County deed records.

The court below correctly cited the relevant Texas authority

holding that a cause of action for fraud is generally considered to

accrue either when the fraud is discovered or when the facts giving

rise to the fraud claim are discovered or might reasonably be

discovered through reasonable diligence—the so-called "discovery

rule." See Mooney v. Harlin, 622 S.W.2d 83, 85 (Tex.1981);

Lightfoot v. Weissgarber, 763 S.W.2d 624, 626 (Tex.App.—San Antonio

1989, writ denied). We disagree, however, with the district court

that the recording date of the second liens started the limitations

period. The court below principally relied upon the Texas Supreme

Court's opinion in Mooney, which it interpreted as charging United

Postal, the mortgage owner, with constructive knowledge of the

public records concerning its property. United Postal contends

that the opinion below improperly interprets Mooney to provide that

a recording in the deed records constitutes a wholesale

constructive notice of the contents to anyone having an interest

relating to the property. Mooney involved the claims of a former

girlfriend and care-giver against the estate of her lover. She did

15
not file her lawsuit for fraud against the estate until over four

years after the will had been admitted to probate. Mooney, 622

S.W.2d at 84. The Texas Supreme Court held that her claims were

too late because "[e]xamination of the probate records would have

disclosed that the will" made no bequest to the plaintiff. Id. at

85. In this context, the Texas court stated that "[a] person is

charged with constructive knowledge of the actual knowledge that

could have been acquired by examining public records." Id.

Important to the holding, however, was the fact that Texas law

charges all persons interested in an estate with knowledge of the

contents of the probate records. Id. (citing Salas v. Mundy, 59

Tex.Civ.App. 407, 125 S.W. 633, 636 (Amarillo 1910, writ ref'd)).

Therefore, the recording of a document in public records serves as

constructive notice for limitations purposes only for those persons

who are under an obligation to search the records. Lightfoot, 763

S.W.2d at 627; Cox v. Clay, 237 S.W.2d 798, 804

(Tex.Civ.App.—Amarillo 1950, writ ref'd n.r.e.) ("[I]t is settled

by numerous decisions of our courts that [a duly recorded

instrument] carries notice of its contents only to those who are

bound to search for it....").

Once United Postal acquired its interest as assignee of

Congressional, it was not required to make continuous searches of

the real property records for interests subsequently secured.

Biswell v. Gladney, 213 S.W. 256, 258 (Tex.Comm'n App.1919) (A

mortgagee is not charged with constructive notice of a subsequently

recorded deed conveying part of the land involved.); see also Cox

16
v. Clay, 237 S.W.2d at 804 ("[T]he object of all registration acts

is to affect with notice only such persons as have reason to

apprehend some transfer or incumbrance prior to their own, because

none arising afterwards can affect them or their estate in the

land."); Boucher v. Wallis, 236 S.W.2d 519, 526

(Tex.Civ.App.—Eastland 1951, writ ref'd n.r.e.) (observing that the

"purpose of [the Texas] recording laws is to notify subsequent

purchasers ... and not to give protection to the alleged

perpetrators of fraud.") (emphasis added); cf. Westland Oil Dev.

Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 908 (Tex.1982) (noting

that recordation gives constructive notice of facts disclosed by

the documents within a chain of title to a purchaser). Thus, the

recordation of the second liens after United Postal had already

acquired its interests as mortgagee was not sufficient to put

United Postal on notice of its potential claims against Stewart and

commence the limitations period. Cox v. Clay, 237 S.W.2d at 803-

04.

Thus concluding that the date of recordation is not the

relevant focus for our accrual analysis, we must determine what

facts were sufficient to put United Postal on notice of any

malfeasance and when those facts were, or should have been,

discovered. Doubtlessly, when United Postal learned of the

existence of the second liens or of the failure to provide cash

down payments at closing, its fraud and breach of fiduciary duty

claims would have accrued. We agree with Stewart that United

Postal's receipt of HGIC's complaint after it was filed on January

17
22, 1986, was sufficient to start the clock. In that pleading,

HGIC set forth ample allegations of wrongdoing on Stewart's behalf

and put United Postal on notice of the asserted actions and

omissions which form the basis of the October 1990 cross-claim.

United Postal concedes that it received the complaint and that

its cross-claim contained "virtually the same factual allegations

against Stewart as [HGIC] had alleged against Stewart [in its 1986

complaint]," but argues that it did not have sufficient proof to

make such allegations against Stewart until the Baker deposition in

May of 1990. Without the evidence from the Baker deposition,

United Postal contends that it would have risked violating Federal

Rule of Civil Procedure 11 by filing a claim based upon

unsubstantiated assertions. What United Postal fails to

appreciate, however, is the fact that Rule 11 has absolutely

nothing to do with the discovery rule. The cause of action was

deferred only until United Postal acquired knowledge of the facts

giving rise to its claim, not until it had sufficient facts to

prove the allegations. Therefore, we conclude that United Postal

was put on notice of sufficient facts as would alert it to its

potential fraud claims against Stewart in January of 1986, when it

received a copy of the complaint in the case at bar, and its delay

in filing a claim for over four years after that date resulted in

the claim being barred.8

8
United Postal alternatively argued in its reply brief that
the statute was tolled during a fifteen month stay of the
proceedings in the instant litigation—presumably due to
Congressional's bankruptcy. As we have noted before on countless
occasions, this court does not "consider arguments belatedly

18
 As will be discussed in greater detail in section II.B.1.a

infra, we hold that the discovery rule is not applicable to

negligent misrepresentation claims under Texas law and apply the

general rules of accrual for negligence causes of action.9 Because

a cause of action sounding in negligence accrues at the time of the

act or omission alleged to constitute negligence, Fusco v. Johns-

Manville Products Corp., 643 F.2d 1181, 1183 (5th Cir. Unit A

1981), and the events giving rise to potential liability took place

in late 1983, the statute ran out long before United Postal filed

its cross-claim in 1990. Accordingly, the district court correctly

granted summary judgment on these claims.

B. Summary Judgment On HGIC's Claims Against Stewart

As noted above, the district court granted summary judgment

in favor of Stewart, holding that (i) HGIC's negligent

misrepresentation and fiduciary duty claims were barred by

limitations, and (ii) there was no evidence of fraud. We review

the decision to grant summary judgment de novo, applying the same

raised after appellees have filed their brief" in the absence of
manifest injustice. Najarro v. First Fed. Sav. & Loan Ass'n, 918
F.2d 513, 516 (5th Cir.1990); see also Smith v. Lucas, 9 F.3d
359, 367 n. 16 (5th Cir.1993). United Postal does not offer
reason for its delay in interposing this issue, and we do not
find any "manifest injustice" in refusing to consider it.
9
The court below again treated fraudulent and negligent
misrepresentation claims alike in deciding upon an accrual point
in its March 14 Dismissal. Subsequently, in the June 4 Order,
the court properly reversed its position and refused to apply the
discovery rule to the negligent misrepresentation claims, as will
be discussed below. The erroneous application of the discovery
rule, however, actually gave United Postal the benefit of
prolonging the limitations period, and the claims were still
found to have prescribed.

19
criteria employed by the district court in the first instance.

Federal Deposit Ins. Corp. v. Dawson, 4 F.3d 1303, 1306 (5th

Cir.1993). Summary judgment is proper if "the pleadings,

depositions, answers to interrogatories and admissions on file,

together with affidavits, if any, show that there is no genuine

dispute as to any material fact and that the moving party is

entitled to judgment as a matter of law." FED.R.CIV.P. 56(c); see

also Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91

L.Ed.2d 265 (1986). Once a properly supported motion for summary

judgment is presented, the burden shifts to the non-moving party

who bears the burden of proof at trial to show with "significant

probative" evidence that there exists a triable issue of fact. In

re Municipal Bond Reporting Antitrust Litig., 672 F.2d 436, 440

(5th Cir.1982).

1. Stewart's limitations defenses

a. negligent misrepresentation

This court has previously interpreted the Texas authorities

to apply a two-year statute of limitations to negligent

misrepresentation claims. See Sioux Ltd. Sec. Litig. v. Coopers &

Lybrand, 914 F.2d 61, 63-64 (5th Cir.1990). HGIC contends,

however, that Sioux is inconsistent with the Texas Supreme Court's

holding in Williams, 802 S.W.2d at 656-58, and urges us to adopt

the four-year statute, citing M & M Distrib. v. Dunn, 819 S.W.2d

639, 640 (Tex.App.—Corpus Christi 1991, no writ) (equating

"misrepresentation" with fraud claims and applying the four-year

statute of limitations). This court has already evaluated the

20
effect of Williams upon Texas negligent misrepresentation claims

and determined that "Williams addresses the limitations period only

for fraud claims. It has no application to a claim of negligent

misrepresentation." Sioux, 914 F.2d at 64; see also Milestone

Properties, Inc. v. Federated Metals Corp., 867 S.W.2d 113, 119

(Tex.App.—Austin 1993, no writ) (holding that, because negligent

misrepresentation does not require intent, it sounds in negligence

rather than in fraud, and is thus subject to the two-year

negligence statute of limitations); Texas Am. Corp. v. Woodbridge

Joint Venture, 809 S.W.2d 299, 302 (Tex.App.—Fort Worth 1991, writ

denied) (also applying the two-year statute). We expressly

determined that the two-year statute covered negligent

misrepresentation claims and may not now deviate from the Sioux

holding unless the Texas courts issue supervening decisions. See

Broussard v. Southern Pac. Transp. Co., 665 F.2d 1387, 1389 (5th

Cir.1982) (en banc) (holding that one panel of this court may not

overrule another panel's determinations of the law of a state in a

diversity case).

Alternatively, HGIC argues that the adoption of a two-year

statute would not bar its negligent misrepresentation claims

because of the application of the discovery rule. In support of

its position, HGIC points us to a number of Texas cases in which it

contends the discovery rule was applied to similar claims.10

10
See, e.g., Lightfoot v. Weissgarber, 763 S.W.2d 624, 626
(Tex.App.—San Antonio 1989, writ denied); Cook Consultants, Inc.
v. Larson, 677 S.W.2d 718, 721 (Tex.App.—Dallas 1984), rev'd on
other grounds, 690 S.W.2d 567 (Tex.1985); Fireman's Fund Indem.
Co. v. Boyle Gen. Tire Co., 381 S.W.2d 937, 939

21
Further, in HGIC's view, the Texas Supreme Court's decision in

Gaddis v. Smith, 417 S.W.2d 577, 580-581 (Tex.1967), is especially

instructive. That case involved a medical malpractice claim that

the operating physician had left a foreign object in the patient's

body. The Texas court applied the discovery rule due to the

unusual circumstances presented, which HGIC advocates are analogous

to the one at bar in that the negligence was not readily

discernible. Id. at 580.

The district court found that the discovery rule generally

plays no role in a negligence action, such as negligent

misrepresentation, under the relevant Texas authorities. In

support of its conclusion, it made reference to this court's

observation in Sioux that a negligent misrepresentation claim

sounds in negligence rather than fraud and determined that the

point of accrual was "the commission of the negligent act, not the

date of the ascertainment of damages." See Fusco, 643 F.2d at 1183

(citations omitted). The court further distinguished all of the

cases relied upon by HGIC except Gaddis as involving fraudulent

misrepresentation claims and opined that Gaddis was a "peculiar

type" of case and therefore "an exception to the general rule

expressed in Fusco." Thus concluding that the limitations period

should date back to the time of the alleged misrepresentations in

December of 1983, the court found HGIC's claims to be barred.

(Tex.Civ.App.—Waco 1964), reformed on other grounds, 392 S.W.2d
352 (Tex.1965); see also Sioux Ltd. Sec. Litig. v. Coopers &
Lybrand, 901 F.2d 51, 53 (5th Cir.), superseded by, 914 F.2d 61
(5th Cir.1990).

22
 We similarly decline to apply the discovery rule to a

negligent misrepresentation claim, finding that the Texas courts

classify such a cause of action as a negligent tort rather than a

fraud action. See Milestone Properties, 867 S.W.2d at 119

("[B]ecause negligent misrepresentation does not require knowledge,

it "is properly identified as being a claim sounding in negligence

rather than fraud'....") (quoting Woodbridge, 809 S.W.2d at 303);

see also Great American Mortgage Investors v. Louisville Title Ins.

Co., 597 S.W.2d 425, 430 (Tex.Civ.App.—Fort Worth 1980, writ ref'd

n.r.e.) (demonstrating that the tort of negligent misrepresentation

is grounded in principles of negligence). Thus, such a claim

should be subject to the rules of accrual governing negligence, and

we will apply the general Texas rule that the limitations period

for negligence actions runs from "the commission of the negligent

act, not the date of the ascertainment of damages." Fusco, 643

F.2d at 1183. The cases cited by HGIC do not persuade us

otherwise. In Lightfoot, the court of appeals discussed the

application of the discovery rule in a pure fraud context; there

were no claims for negligent misrepresentation. 763 S.W.2d at 624.

After careful review of Fireman's Fund Indem. Co. v. Boyle Gen.

Tire Co., 381 S.W.2d 937, 939 (Tex.Civ.App.—Waco 1964), reformed on

other grounds, 392 S.W.2d 352 (Tex.1965), we are unable to conclude

that the court specifically applied the discovery rule to negligent

misrepresentation claims; rather, it appears that the court was

also discussing fraud and fraudulent misrepresentation causes of

action in that case. The case is ambiguous on the point, and we

23
are not confident in relying upon it for authority that the

discovery rule applies to negligent misrepresentation actions.

Contrary to HGIC's assertions, the Dallas court of appeals in

Cook Consultants, Inc. v. Larson, 677 S.W.2d 718, 721

(Tex.App.—Dallas 1984), aff'd in part, rev'd in part on other

grounds, 690 S.W.2d 567 (Tex.1985), did not hold that the discovery

rule applied in this context. Instead, that court specifically

ruled that it "need not determine whether the discovery rule

applies in the instant case because, even if it does, the evidence

indicates that Larson actually discovered the [alleged

misrepresentation] more than two years prior to the institution of

suit." Id.11 Similarly, in Coleman v. Rotana, Inc., 778 S.W.2d

867, 873 (Tex.App.—Dallas 1989, writ denied), the court did not

expressly hold that the discovery rule applied, but rather stated

in dictum that the latest the claim could have accrued—i.e., when

the appellants had knowledge of the misrepresentation—was still

beyond the limitations period. Finally, Sioux Ltd. Sec. Litig. v.

Coopers & Lybrand, 901 F.2d 51, 53 (5th Cir.), superseded by, 914

F.2d 61 (5th Cir.1990) involved both fraudulent misrepresentation

claims—to which the discovery rule unquestionably applies—and

negligent misrepresentation allegations. The authorities upon

which we relied to set forth the parameters of the discovery rule

11
Moreover, the court in Larson recognized the general rule
that a negligence action accrues at the time of the negligent act
or omission, "despite the difficulty of ascertaining damages
until a later date." Cook Consultants, Inc. v. Larson, 677
S.W.2d 718, 721 (Tex.App.—Dallas 1984), aff'd in part, rev'd in
part on other grounds, 690 S.W.2d 567 (Tex.1985) (citing Bauman
v. Centex Corp., 611 F.2d 1115, 1118 (5th Cir.1980)).

24
were pure fraud cases. However, even giving the plaintiffs the

benefit of the discovery rule on the negligent misrepresentation

claim, we held the claims to have been barred. Id.

Given the lack of clear authority to the contrary and the

persuasiveness of the Texas cases refusing to apply the discovery

rule in this context, the district court did not err in holding

that the negligent misrepresentation claims accrued in December of

1983, when it is undisputed that the misrepresentations, if any,

were made. HGIC failed to file its suit until January of 1986. We

therefore affirm the judgment of the district court dismissing

HGIC's negligent misrepresentation claims as being barred by

limitations.

b. fiduciary duty

The limitations period for a breach of fiduciary duty claim

appears to be similarly unsettled in the Texas courts. Compare

Spangler v. Jones, 797 S.W.2d 125, 132 (Tex.App.—Dallas 1990, writ

denied) (applying section 16.051 of the Civil Practice and Remedies

Code, the four-year residual limitations provision, to fiduciary

claims) with Hoover v. Gregory, 835 S.W.2d 668, 676

(Tex.App.—Dallas 1992, writ denied) (holding that the two-year

limitations period for torts applies to a fiduciary claim) and

Russell v. Campbell, 725 S.W.2d 739, 744 (Tex.App.—Houston [1st

Dist.] 1987, writ ref'd n.r.e.) (applying the two-year statute of

limitations under section 16.003 of the Texas Civil Practice and

Remedies Code to fiduciary duty causes of action). Unfortunately,

both the two-year and four-year limitations periods have been

25
employed by our court, resulting in an internal conflict. Compare

Resolution Trust Corp. v. Seale, 13 F.3d 850, 852 (5th Cir.1994)

(holding that a breach of a fiduciary duty of care is a tort claim

subject to the two-year general tort limitations statute) and FDIC

v. Dawson, 4 F.3d 1303, 1307 (5th Cir.1993) (same) with McGill v.

Goff, 17 F.3d 729, 734 (5th Cir.1994) (relying upon Spangler, 797

S.W.2d at 132, and utilizing four-year rule) and Sheet Metal

Workers Loc. Union No. 54 AFL-CIO v. E.F. Etie Sheet Metals Co., 1

F.3d 1464, 1469 (also citing Spangler and concluding that Williams

instructs the Texas courts to apply a four-year statute of

limitations to fiduciary claims). The general rule in our court is

that we look to the earlier line of authority where two lines of

panel decisions conflict. Texaco, Inc. v. Louisiana Land and

Exploration Co., 995 F.2d 43, 44 (5th Cir.1993). However, as noted

above, this court also employs a rule in diversity cases that

overrules our prior precedent when there is a significant change in

the applicable state's substantive law. Broussard, 665 F.2d at

1389 ("[A] prior panel decision should be followed by other panels

without regard to any alleged existing confusion in state law,

absent a subsequent state court decision or statutory amendment

which makes this Court's [prior] decision clearly wrong.") (quoting

Lee v. Frozen Food Express, Inc., 592 F.2d 271, 272 (5th

Cir.1979)). Thus, rather than trace the two lines of authority to

their roots to determine which was earlier, we look to the Texas

state courts' recent pronouncements on the issue to resolve the

question. We find the Texas Supreme Court's 1990 decision in

26
Williams to be the definitive point to which we must first turn in

evaluating this issue. Unquestionably, Williams was a supervening

decision which clarified the statute of limitations for fraud in

Texas and discussed its impact upon other tort claims. HGIC claims

that Williams dictates the application of the four-year residual

statute to fiduciary duty claims. It points to Spangler as

authority for this proposition. In Spangler, the Dallas court

likened a breach of fiduciary duty claim to a cause of action for

fraud or deceit for which it claimed there is no express

limitations period and concluded that section 16.051 of the Texas

Civil Practices and Remedies Code, the residual statute of

limitations period, should apply. 797 S.W.2d at 132 ("Inasmuch as

there is no limitations statute expressly applying to "fraud,'

"deceit,' "misrepresentation,' or any similar term, we conclude

that [§ 16.051], providing for all actions for which there is "no

express limitations period,' the statute of limitations is [sic]

four years is applicable.") (citing Williams, 802 S.W.2d at 654).

We do not find the reasoning in Spangler to be persuasive. First,

despite the fact that the Texas Supreme Court recited in Williams

that "[t]here is no limitations statute expressly applying to

"fraud,' ...," it held that the limitations period governing an

action on a debt—section 16.004(a)(3) of the Texas Civil Practices

and Remedies Code—was applicable. Moreover, in Williams, Texas'

highest court expressly stated that:

We do not retreat from our analysis in [First Nat'l Bank v.
Levine, 721 S.W.2d 287 (Tex.1986) ]. In general, torts
developed from the common law action for "trespass,' and a
tort not expressly covered by a limitation provision nor

27
 expressly held by this court to be governed by a different
provision would presumptively be a "trespass' for limitations
purposes. The same common law development simply does not
apply to fraud as to most other torts.

802 S.W.2d at 654-55 (emphasis added). Breach of fiduciary duty is

clearly a "tort" under Texas law, and thus, would appear to fall

within this reasoning. Moreover, the Texas Supreme Court declined

to overrule prior decisions setting forth a two-year statute of

limitations for certain similar tort claims, such as legal

malpractice12 and breach of the duty of good faith and fair

dealing,13 which had been raised as analogies for employing the

two-year limitations statute for fraud. Williams, 802 S.W.2d at

654 n. 2. For these reasons, we do not find persuasive the

reasoning in Spangler that Williams dictates the application of the

four-year statute of limitations for fiduciary duty claims and

decline to follow the opinions of this court which rely upon

Spangler.

Further, the first case by this court to confront the issue

after Williams applied the two-year general tort statute of repose

set forth in section 16.003 to a Texas fiduciary duty claim. See

Russell v. Board of Trustees of the Firemen, Policemen and Fire

Alarm Operators' Pension Fund, 968 F.2d 489, 492-93 (5th Cir.1992),

12
See Willis v. Maverick, 760 S.W.2d 642, 644 (Tex.1988)
(holding that "legal malpractice is in the nature of a tort and
is thus governed by the two-year limitations statute").
13
Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d
165, 168 (Tex.1987) (applying two-year statute to breach of good
faith and fair dealings claims); see also Murray v. San Jacinto
Agency, Inc., 800 S.W.2d 826, 827 (Tex.1990) (affirming use of
two-year statute to good faith and fair dealing claims, although
modifying accrual analysis of Arnold ).

28
cert. denied, --- U.S. ----, 113 S.Ct. 1266, 122 L.Ed.2d 662

(1993). Although Russell did not address the Williams decision, it

definitively determined the applicable limitations period, and its

result further persuades us to apply the two-year period absent a

sea change in Texas law. Therefore, we adopt the line of cases

applying the two-year tort statute of limitations to such causes of

action—see, e.g., Russell, 968 F.2d at 492-93 and Dawson, 4 F.3d at

1307—and affirm the judgment of the district court granting summary

judgment on HGIC's fiduciary duty claims.14

2. HGIC's fraud claims

The parties agree that the Texas statute of limitations for

fraud is four years, see Williams, 802 S.W.2d at 656-58, and that

HGIC filed its lawsuit well within that period. Stewart contends

however, that HGIC has not and cannot meet its Celotex burden with

respect to several of the elements of its fraud cause of action.

Under Texas law, HGIC must prove that (i) Stewart made a

false representation as to a past or existing fact (ii) which was

material to the transaction, (iii) Stewart knew the representation

to be false, (iv) and made the representation for the purpose of

inducing HGIC to take certain action, (v) HGIC reasonably relied

14
Although HGIC asserts in its brief that the fiduciary duty
claims should be subject to the discovery rule, it failed to
brief this point on appeal. Thus, any error it could assert with
respect to the district court's failure to apply the discovery
rule to these claims has been waived. See, e.g., Burlington
Northern R.R. Co. v. Office of Inspector Gen., R.R. Retirement
Board, 983 F.2d 631, 638-39 n. 3 (5th Cir.1993); Atwood v. Union
Carbide Corp., 847 F.2d 278, 280 (5th Cir.1988) ("[I]ssues not
briefed, or set forth in the list of issues presented, are
waived."), cert. denied, 489 U.S. 1079, 109 S.Ct. 1531, 103
L.Ed.2d 836 (1989).

29
upon the representation, (vi) to its detriment. Meyers v. Moody,

693 F.2d 1196, 1214 (5th Cir.1982), cert. denied, 464 U.S. 920, 104

S.Ct. 287, 78 L.Ed.2d 264 (1983); DeSantis v. Wackenhut Corp., 793

S.W.2d 670, 688 (Tex.1990), cert. denied, 498 U.S. 1048, 111 S.Ct.

755, 112 L.Ed.2d 775 (1991).

The district court evaluated the summary judgment evidence and

decided that there was no evidence that Stewart had actual

knowledge of any false assertions it may have made in the

settlement statements. Further, the court determined that HGIC had

failed to introduce evidence to satisfy another of the critical

elements of fraud—that Stewart's representations were made with an

intent to deceive HGIC or to induce HGIC to act in a particular

manner. The court below concluded that:

The evidence introduced by HGIC would probably raise issues of
fact regarding negligence. However, there is no evidence that
Stewart ... engaged in fraudulent activity with respect to the
transactions at issue.

Accordingly, it dismissed HGIC's fraud claims against Stewart. We

agree with the district court's assessment of the summary judgment

evidence on this point. The representations which HGIC claims were

fraudulent were (i) the HUD-1 settlement statements reflecting

earnest money deposits which failed to disclose that they were paid

outside the closing, (ii) Baker's purported failure to disclose the

existence of the second liens to Congressional,15 (iii) the FNMA

affidavits, notarized by Baker, which reflect that there was no

15
See Olney Sav. & Loan Ass'n v. Trinity Banc Sav. Ass'n,
885 F.2d 266, 272 (5th Cir.1989) (noting that a misrepresentation
need not be a direct assertion).

30
secondary lien financing on the properties, and (iv) the loan

applications which reflect that the downpayments were held in

escrow by Stewart.

The only document alleged to be fraudulent that was prepared

by Stewart was the HUD-1 form, which, as discussed previously,

failed to recite specifically that the earnest money deposits were

made outside closing. Although there is no specific notation that

the earnest money was paid outside closing as would be consistent

with the instructions on the HUD-1, the earnest money deposit was

shown as a reduction in the total amount due from the borrower

pursuant to the settlement statement, as well as a reduction in the

total amount owed to the seller at closing, indicating that the

earnest money had already been transferred from buyer to seller

outside the closing. We agree with the district court that there

may be issues of fact regarding negligence in the preparation of

this document, but, without more, the evidence is insufficient to

create a jury issue of fraud. Baker testified that she relied upon

Congressional's closing instructions, undisputedly reflecting that

the FNMA affidavits—which had been prepared by Congressional and

had already been signed by the borrowers and seller—were enclosed

for her notarization. The uncontroverted evidence reveals that

Stewart was not instructed to confirm that the earnest money

deposits had previously been given to the developer and that Baker

in fact relied upon the sworn statements of the purchasers and

seller that the earnest money had been delivered. Further, Stewart

was not instructed to review the loan applications, but instead to

31
present the sealed envelopes to the buyers—who were to sign and

reseal them—and simply to send the sealed documents back to

Congressional.

Moreover, Baker's purportedly inconsistent notarization of the

second liens and the FNMA affidavits reflecting that no secondary

financing had been obtained does not charge her with knowledge of

the contents of either of those sets of documents. Rather,

notarization is a certification by the notary only that the persons

whose signatures appear on the affidavits swore before a notary

that the statements contained in the documents were true. See

Shelton v. Swift Motors, Inc., 674 S.W.2d 337, 342 (Tex.App.—San

Antonio 1984, writ ref'd n.r.e.). The FNMA affidavits were

prepared by Congressional, the mortgage company, and signed prior

to closing. As noted above, Stewart was not instructed to verify

the accuracy of the affidavits, but rather to notarize them and

include them with the closing documents.

With respect to the second liens, Baker testified consistently

that she had no knowledge of their contents, and neither HGIC nor

United Postal showed otherwise. The only controverting evidence

offered by HGIC was expert testimony that Baker would have had to

have read—or at least noticed—the contents of the documents and

understood their implications upon several of the numerous

transactions she was in the process of closing. We are unwilling

to place such an elevated standard of imputed knowledge upon escrow

agents. The second liens were presented to Baker for simple

notarization under circumstances wholly outside the closings

32
involved. The persons requesting Baker's notarization were also

participants in other transactions which Baker did not close.

Although one of the second liens contains a Stewart filing

identification number on it, Baker denied having written the number

on the document, and HGIC offered only speculation that "no one

else would have had reason to do this," to controvert her

testimony. In light of the undoubtedly countless documents

notarized and filed by Baker as a title agent, we cannot

presume—absent additional circumstances as would give rise to an

inference of fraud—that her notarization of the second liens or

FNMA affidavits is "significant probative evidence" that there

exists a triable issue of fact as to either Stewart's knowledge or

intent to deceive. In re Municipal Bond Reporting, 672 F.2d at

440.

III. Conclusion

For the foregoing reasons, we AFFIRM the judgment of the

district court.

33