United States Court of Appeals,
Fifth Circuit.
No. 94-20189.
GLOBAL PETROTECH, INC., Plaintiff-Appellee,
v.
ENGELHARD CORPORATION, Defendant-Appellant.
July 19, 1995.
Appeal from the United States District Court for the Southern
District of Texas.
Before KING, GARWOOD and BENAVIDES, Circuit Judges.
BENAVIDES, Circuit Judge:
Engelhard Corporation ("Engelhard") appeals the district
court's final judgment and order overruling it's motions for
judgment as a matter of law, for new trial and to alter judgment
arising from the jury trial of claims brought by Global Petrotech,
Inc. ("Global") under the Texas Deceptive Trade Practices Act
("DTPA"). After the jury answered all special interrogatories in
favor of Global, the district court entered a final judgment
awarding Global $351,156.22 in compensatory damages, $500,000.00 in
exemplary (punitive) damages, prejudgment interest at 10%,
postjudgment interest at 3.74%, attorneys fees and costs. We
vacate the award of punitive damages, and remand for new trial on
that issue.
I. BACKGROUND
In August 1990, Global, a small Houston trading company that
purchases goods for resale and export to customers in China, was
contacted by China Technical Corporation ("CTC"), a subsidiary of
1
China National Technical Import & Export Corporation ("CNTIC"), to
obtain a quote for palladium chloride from Engelhard. Global
related CTC's specification to an Engelhard customer service
representative on August 3, 1990. In that request, Global inquired
about the price and the terms of purchasing 170 kilograms of
palladium chloride with a palladium content between 59.5% and
60.5%. Global also informed Engelhard that it was inexperienced in
handling precious metal commodities like palladium. Engelhard's
response quoted a price for "Palladium Chloride solution red-brown
powder, hygroscopic, soluble in dilute HC1, 60% PD content
(theoretical)." The quote was erroneous in that it identified a
solution of palladium chloride with 60% palladium, which does not
exist. Palladium chloride solution manufactured by Engelhard only
contains 10% or 20% palladium.
Because Global was unfamiliar with palladium chloride, it did
not realize that Engelhard's quote was incorrect. On October 24,
1990, Global sent Engelhard a purchase order for 170 kilograms of
palladium chloride solution containing 60% palladium, with 3279.373
troy ounces of palladium as the amount of palladium required to
fabricate the goods. Global then wire-transferred $316,459.49 to
Engelhard as advance payment for the order.
In December 1990, Engelhard shipped the palladium chloride
order directly to CTC. After receiving the shipment, CTC notified
Global that the product was incorrect; CTC received 510 kilograms
of palladium chloride solution containing only 20% palladium rather
than palladium chloride containing a concentration of 60%
2
palladium.1 Global then contacted Engelhard about CTC's receipt of
20% palladium instead of 60%. On January 4, 1991, Engelhard
requested Global to find out whether CTC could use the palladium
chloride solution, and that, if CTC could not, CTC should return
the shipment to Engelhard to be reprocessed into palladium chloride
containing a concentration of 60% palladium.2
On January 11, 1991, Global informed Engelhard that CNTIC
would be returning the palladium chloride solution to Engelhard,
requested that Engelhard provide Global with the name of
Engelhard's shipping agent in Beijing for delivery of the shipment
and requested that Engelhard reimburse CNTIC for all direct
out-of-pocket costs incurred relating to CNTIC's handling of the
shipment.3
After Engelhard informed Global that it did not have a
shipping agent in Beijing, CNTIC shipped the palladium chloride
solution back to the United States via an Air China flight from
Beijing to JFK airport in New York. CNTIC had procured $521,566.80
in insurance on Global's behalf from the Peoples' Insurance Company
1
The shipment did, however, contain 3279.373 troy ounces of
palladium. The difference between the quantity of palladium
chloride shipped (510 kilograms) and the quantity ordered (170
kilograms) was due to the specification in the purchase order for
3279.373 troy ounces of palladium; 170 kilograms of palladium
chloride solution would have required only 1093.11 troy ounces of
palladium.
2
Engelhard also noted that the shipping and refabrication
would be completed at no additional charge to Global.
3
Engelhard later agreed to pay for the shipping charges
necessary for shipping the palladium chloride solution back to
Engelhard's facilities, but requested documentation of any
additional costs.
3
of China ("PICC") to cover the return shipment.4
When the return shipment of palladium chloride solution
arrived at JFK airport, it was placed in an airport warehouse.
Sometime later it was lost or stolen by an unknown third party.
When it was determined that the return shipment could not be
located, Global requested a new shipment from Engelhard in late
March 1991. Engelhard did not refund the $316,459.49 that Global
paid for the first shipment, and agreed to send a second shipment
only if Global paid Engelhard in advance, or provided a letter of
credit in advance, for the cost of the palladium needed to
fabricate another shipment. Global protested, complaining about
Engelhard's demand for a higher per ounce price for the second
shipment of palladium than charged for the first shipment.
Nonetheless, on April 19, 1991, Global wire-transferred to
Engelhard $321,378.26 as payment in advance for the palladium used
to fabricate the replacement shipment of palladium chloride. Then
on April 29, 1991, Engelhard shipped 170 kilograms of palladium
chloride containing a concentration of 60% palladium to CNTIC in
Beijing.
CNTIC subsequently filed a claim for insurance proceeds for
the lost shipment of palladium chloride solution with PICC. CNTIC
assigned its rights under the policy to Global. Global and PICC
executed a release agreement on July 30, 1992 specifying that
Global promised to release PICC of all liability regarding the
4
The total dollar amount of the insurance covered the price
CNTIC contracted to pay Global ($521,566.80) for the shipment of
palladium chloride.
4
insurance for loss, and that PICC would pay Global the sum of
$260,000.00.
On January 29, 1992, Global filed suit against Engelhard in
Texas state court alleging breach of contract, breach of warranty
and violations of the DTPA. Engelhard removed the suit to federal
court. On February 1, 1993, the district court ordered the parties
to file written arguments on the issue of Engelhard's claim for a
credit for the insurance proceeds received by Global. After the
parties filed their memoranda, the court ruled that the insurance
proceeds would count in reducing a damage award to Global based on
the breach of contract claim.5 The court noted, however, that
under Texas law the collateral source rule applies to DTPA claims
and therefore, the insurance proceeds would not be applied to an
award for Global under the DTPA claim.
In the first amended pretrial order, Global dropped all but
its DTPA claims against Engelhard. Global's two DTPA claims
stemmed from Engelhard's quote to Global misrepresenting the
characteristics of palladium chloride that led to Engelhard
shipping an incorrect concentration of palladium in violation of
sections 17.46(b)(5) and (7) of the Texas Business & Commerce Code
("the Code"), and Engelhard's unconscionable act of retaining
Global's purchase money and refusing to supply replacement
palladium chloride without additional charge after the first
shipment was lost in violation of section 17.50(a)(3) of the Code.
5
Global Petrotech, Inc. v. Engelhard Corp., 824 F.Supp. 103,
104 (S.D.Tex.1993).
5
Additionally, Global sought punitive damages for Engelhard's
"knowing" engagement in an unconscionable course of action, defined
in section 17.45(9) of the Code.
At the final pretrial conference, Engelhard's counsel did not
dispute that Global rejected the first palladium chloride solution
shipment as nonconforming. Thus, the district court ruled that
under Texas contract law the first shipment was at all times the
property of Engelhard. The court also excluded all evidence of the
insurance proceeds received by Global, even on the issue of
unconscionability.
During the jury trial, the district court instructed the
attorneys that, on the issue of who owned the first shipment of
palladium chloride solution after it left Engelhard's possession,
"no further questioning should be done about Engelhard's belief or
knowledge of risk of loss, or the consequences of the loss, and how
that formed their policy." In answering the special
interrogatories, the jury found that Engelhard engaged in a false,
misleading, or deceptive act that caused damage to Global, and that
Engelhard engaged in an unconscionable course of action. Moreover,
the jury found that Engelhard's unconscionable course of action was
"knowingly" committed. The jury awarded Global $351,156.22 in
actual damages and $500,000.00 in punitive damages. On February 8,
1994, the district court entered final judgment against Engelhard;
including prejudgment interest on the actual damages at the rate of
10%, attorneys' fees, and postjudgment interest.
II. EXCLUSION OF EVIDENCE
6
We will not reverse a district court's evidentiary rulings
unless they are erroneous and substantial prejudice results. The
burden of proving substantial prejudice lies with the party
asserting error. F.D.I.C. v. Mijalis, 15 F.3d 1314, 1318-19 (5th
Cir.1994). Where, however, "the admissibility determination
necessarily involves a substantive legal decision," we engage in a
two-tiered review process. Stokes v. Georgia-Pacific Corp., 894
F.2d 764, 767 (5th Cir.1990). First we conduct a de novo review of
the underlying legal analysis. Id. Second, we examine the
evidentiary ruling for abuse of discretion. Id.
A. Mistaken Belief as to Ownership
Punitive damages are proper under the DTPA; "[i]f the trier
of fact finds that the conduct of the defendant was committed
knowingly, the trier of fact may award not more than three times
the amount of actual damages." TEX.BUS & COM.CODE ANN. § 1750(b)
(Vernon Supp.1995). Under the DTPA, "knowingly" is defined as
"actual awareness of the falsity, deception, or unfairness of the
act or practice giving rise to the consumer's claim." TEX.BUS. &
COM.CODE ANN. § 17.45(9) (Vernon 1987).
Engelhard argues that the district court abused its discretion
by excluding evidence of its belief that the first shipment of
palladium chloride solution belonged to Global once it was
delivered to CTC. Engelhard avers that it does not seek to offer
the evidence of its purportedly "mistaken" belief as a defense to
Global's DTPA claim, but, rather, to prove its state of mind at the
time it allegedly engaged in an unconscionable course of action.
7
The district court erred, according to Engelhard, by not allowing
Engelhard to offer evidence for the limited purpose of its good
faith mistake of law to prove that its actions were not "knowingly"
unconscionable, as defined under the DTPA, to warrant the
imposition of punitive damages.
Under Texas law, it is clear that intent is not an element of
§ 17.50(a)(3), which prohibits any unconscionable action. See
Miller v. Soliz, 648 S.W.2d 734, 738 (Tex.App.1983). Thus, for the
underlying liability in a DTPA claim brought for committing
unconscionable acts, "[t]he defense of good faith and/or bona fide
error is not available." Id. at 739. Nevertheless, in light of
the knowing conduct that must be found in order to allow a recovery
for punitive damages under the DTPA, evidence with regard to
Engelhard's state of mind or belief about the falsity, deception,
or unfairness of its acts is clearly relevant to whether it acted
knowingly. The question we must address is whether the exclusion
of the evidence of Engelhard's mistaken belief resulted in
substantial prejudice. Mijalis, 15 F.3d at 1318-19.
Our review of the record indicates that Engelhard's evidence
of mistaken understanding of Texas contract law, which led to its
mistaken belief that Global still owned the first shipment of
palladium chloride solution that was rejected as nonconforming, is
highly relevant to a determination as to whether Engelhard violated
the DTPA "knowingly." Engelhard would have offered testimony from
its employees regarding their belief that Global owned the first
shipment of palladium chloride solution, and how that mistaken
8
belief affected their handling of Global's request for a second
shipment. Specifically, Engelhard would have argued that it would
not have charged Global for the second shipment of palladium
chloride if it had known that it owned, and was responsible for,
the first shipment.6 Testimony about Engelhard's mistaken belief
could have a substantial impact on the jury's determination as to
whether Engelhard possessed the requisite state of mind to commit
its violation of the DTPA "knowingly." If the jury concluded that
Engelhard believed, although mistakenly, that Global owned the
first shipment of palladium chloride solution and was responsible
for shipping it back to Engelhard, then they could have reasonably
concluded that the charge for the second shipment of palladium
chloride was not made with actual awareness of its falsity,
deception, or unfairness. Because we conclude that the exclusion
of the evidence of Engelhard's mistaken belief did have a
substantial impact on the jury's determination on the issue of
punitive damages, we find the error was sufficiently prejudicial to
effect Engelhard's substantial rights so as to require a new
hearing on the issue of punitive damages. See Brown v. Miller, 631
F.2d 408, 413 (5th Cir.1980).
B. Insurance
6
Although Global contends that the jury did hear testimony
from Engelhard's manager, who stated in response to the district
judge's questions that "it was my belief that the first shipment
belonged to Global," the judge's immediate instruction to the
jury limited the effect of that testimony. Thus, we can not
conclude that the substance of the desired testimony was ever
presented to the jury. See United States v. Ashley, 555 F.2d 462
(5th Cir.), cert. denied, 434 U.S. 869, 98 S.Ct. 210, 54 L.Ed.2d
147 (1977).
9
"The collateral source rule precludes a tortfeasor from
obtaining the benefit of payment conferred upon the injured parties
from sources other than the tortfeasor." Jones v. Red Arrow Heavy
Hauling, Inc., 816 S.W.2d 134, 136 (Tex.App.—Beaumont 1991) (citing
RESTATEMENT (SECOND) OF TORTS § 920A). Its theory is that the wrongdoer
should not receive the benefit of insurance independently obtained
by the injured party. Brown v. American Transfer & Storage Co.,
601 S.W.2d 931, 934 (Tex.), cert. denied, 449 U.S. 1015, 101 S.Ct.
575, 66 L.Ed.2d 474 (1980) (citation omitted). "Evidence that the
injured party received benefits from a collateral source is
inadmissible under the rules of relevancy." Id. (citing Martinez
v. RV Tool, Inc., 737 S.W.2d 17 (Tex.App.—El Paso 1987), writ
denied, 747 S.W.2d 379 (Tex.1988)).
Engelhard contends that the district court erroneously
excluded evidence based on the collateral source rule regarding
Engelhard's belief that Global would be fully compensated by
insurance for the lost first shipment of palladium chloride
solution. Engelhard further argues that even if the collateral
source rule applies to the insurance policy, the evidence that
Engelhard believed that Global would be fully compensated by the
insurance proceeds had probative value to show that Engelhard
lacked the requisite state of mind to warrant the imposition of
punitive damages under the "knowing" requirement relating to
engaging in an unconscionable course of action. Engelhard contends
that presenting this evidence to the jury, for the limited purpose
of rebutting the "knowing" requirement for punitive damages, would
10
result in little prejudice.
For the collateral source rule to apply, the source of the
benefit must truly be "collateral." See Phillips v. Western Co. of
North America, 953 F.2d 923, 929 (5th Cir.1992). Generally, the
rule does not apply when the tortfeasor has paid for the
plaintiff's collateral benefit. "[T]he "essence' of the rule has
been described as the independence of the transaction giving rise
to the collateral source." Id. at 931 (citation omitted).
However, the rule may not also apply even in situations where the
tortfeasor does not directly pay for the benefit. "Application of
the collateral source rule depends less upon the source of the
funds than upon the character of the benefits received." Haughton
v. Blackships, Inc., 462 F.2d 788, 790 (5th Cir.1972) (citation
omitted). Thus, the rule excluding evidence of a collateral source
does not apply if the intended beneficiary of the collateral source
is the tortfeasor.
In the pretrial joint admission of facts, Engelhard agreed
that CNTIC procured an insurance policy, on Global's behalf, to
cover the return of the first shipment of palladium chloride
solution. Yet Engelhard has offered no evidence to show that the
insurance policy was meant to benefit it in any way. Therefore, we
find that the district court properly determined that the insurance
was a collateral source.
However, the collateral source rule does not require in all
circumstances that the collateral benefit (insurance) be excluded
from the evidence introduced at trial. See Phillips, 953 F.2d at
11
934. A narrow exception to the rule allows the admission of
collateral source evidence in certain circumstances:
If there is little likelihood of prejudice and no strong
potential for improper use, and a careful qualifying jury
instruction is given, then [a collateral source] may be
admissible for the limited purpose of proving another matter.
Simmons v. Hoegh Lines, 784 F.2d 1234, 1237 (5th Cir.1986).
The very crux of Global's claims is that it was harmed by
Engelhard's action in misrepresenting the character of the first
shipment of palladium chloride solution and forcing Global to pay
for the second shipment in advance. The "knowing" aspect of the
required second payment formed the basis for Global's punitive
damages claim. We find that evidence of Engelhard's belief that
Global would be compensated by the insurance policy purchased by
CNTIC is directly relevant to the issue of an "actual awareness" of
unfairness. Such evidence is relevant both to a factfinder's
decision to award punitive damages and the amount thereof. On the
other hand, evidence of Global's insurance benefits, or Engelhard's
belief in the existence of such benefits, might allow the jury to
infer that Global was not damaged and does not deserve compensation
for DTPA violations. The suggestion made here is that the limiting
instruction would confine the evidence to its proper use on the
issue of punitive damages.
We need not, however, in this proceeding determine whether the
district court abused its discretion in not allowing the proffered
evidence with a qualifying jury instruction. Inasmuch as we have
previously determined (in Part II.A. of this opinion) that a remand
is necessary for a retrial on punitive damages, suffice to say we
12
see little, if any, undue prejudice from such evidence in a
subsequent proceeding in which ordinary liability and non-punitive
damages have already been determined.
III. PREJUDGMENT INTEREST
Engelhard contends that the district court erroneously
followed article 5069-1.05 of the Texas Revised Civil Statutes in
applying a ten percent interest rate in computing prejudgment
interest. Engelhard argues instead that the six percent interest
rate set forth in article 5069-1.03 is applicable because all of
Global's claims arise out of Engelhard's alleged failure to perform
and/or honor its contractual obligations.
Article 5069-1.03 limits prejudgment interest in certain
contract cases to six percent.7 "For article 5069-1.03 to apply,
the case law suggests that we must look to the surface of the
contract and see a visible perimeter encircling the prescribed
contractual liability." Atchison, Topeka and Santa Fe Railway Co.
v. Sherwin-Williams Co., 963 F.2d 746, 751-52 (5th Cir.1992).
However, if the contract fails to "unambiguously establish the
amount owed," then article 5069-1.05 applies. Law Offices of Moore
& Associates v. Aetna Ins. Co., 902 F.2d 418, 421 (5th Cir.1990)
7
The statute provides in pertinent part:
When no specific rate of interest is agreed upon by the
parties, interest at the rate of six percent per annum
shall be allowed on all accounts and contracts
ascertaining the sum payable, commencing on the
thirtieth (30th) day from and after the time when the
sum is due and payable.
Tex.Rev.Civ.Stat.Ann. art. 5069-1.03 (Vernon 1987).
13
(quoting Campbell, Athey & Zukowski v. Thomasson, 863 F.2d 398, 402
(5th Cir.1989)).
We find the contracts between Engelhard and Global are not
within the contemplation of article 5069-1.03. Neither the
contract for the first shipment of palladium chloride solution nor
the second contract for the second shipment of palladium chloride
state with any specificity any measure of liability and amount
owed. See Axelson, Inc. v. McEvoy-Willis, a Div. of Smith Intern.
(North Sea), Ltd., 7 F.3d 1230, 1234 (5th Cir.1993). Both contain
only a description of the product, order quantity, per unit price
and merchandise total. The total "sum payable" in damages is not
fixed by either contract. Therefore, the district court was
correct in applying a ten percent interest rate in accordance with
article 5069-1.05.
CONCLUSION
For the reasons articulated above, we VACATE the jury's award
of punitive damages, and REMAND for a new trial solely on Global's
claim for punitive damages under the DTPA. The judgment of the
district court is otherwise AFFIRMED.
14