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