Armstrong v. American Home Shield Corp.

                                                       United States Court of Appeals
                                                                Fifth Circuit
                                                             F I L E D
                                                               June 6, 2003
              IN THE UNITED STATES COURT OF APPEALS
                      FOR THE FIFTH CIRCUIT              Charles R. Fulbruge III
                                                                 Clerk
                       _____________________

                           No. 02-10596
                     _______________________



JOHN ARMSTRONG and DAN ARMSTRONG,
                                               Plaintiffs-Appellants
                              versus

AMERICAN HOME SHIELD CORPORATION,
                                               Defendant-Appellee


          Appeal from the United States District Court
                For the Northern District of Texas


Before GARWOOD and HIGGINBOTHAM, Circuit Judges, and FELDMAN,*
District Judge.


FELDMAN, District Judge:

     John and Dan Armstrong sued American Home Shield Corporation

(AHS) for breach of contract in Texas state court.    The lawsuit

was removed to federal court,1 and the Armstrongs subsequently



     *
       District Judge of the Eastern District of Louisiana, sitting
by designation.
     1
       AHS removed this lawsuit on the basis of diversity
jurisdiction: the Armstrongs are Texas residents; AHS is a Delaware
corporation with its principal place of business in Tennessee.

                                1
amended their complaint to include claims for fraud and negligent

misrepresentation.   The district court summarily dismissed each

of the Armstrongs’ claims.   We affirm.



                               I.

     AHS sells and services home warranty contracts throughout

Texas.   In 1995, AHS acquired Texas Home Warranty Corporation

(THW) from John and Dan Armstrong.      AHS was particularly

interested in emulating THW’s practice of entering fixed-rate

agreements with its contractors,2 and AHS hired John and Dan

Armstrong.

     The Armstrongs’ employment agreements included several

savings programs:3

     Program one: the Armstrongs were to convert all AHS
     pool/spa contractors in Texas to the THW fixed-rate
     methodology;

     Program two: the Armstrongs were to convert 5,000 AHS
     contracts in the Dallas-Fort Worth area to the THW
     fixed-rate methodology;

     Program four: the Armstrongs were to recommend the
     implementation of contract coverages, limitations, and
     exclusions which AHS had not previously adopted; and


     2
        Home warranty firms in Texas generally paid their
contractors on a per-claim basis.         Under the fixed-rate
methodology, however, contractors agree to manage all repairs for
a particular homeowner for a flat fee regardless of the number of
service calls required.
     3
        These programs are outlined in Paragraph 8 of the
agreements’ Incentive Plans. Cost savings program three is not
relevant to our review.

                                    2
     Program five: the Armstrongs were to develop and
     implement a program for checking heating and air
     conditioning systems at the time the homeowner
     purchased the warranty contract.

AHS agreed to pay the Armstrongs a portion of the cost savings

accomplished under each program.

     The Armstrongs complained that they were not sufficiently

compensated under the terms of the savings programs, and sued AHS

for breach of contract, negligent misrepresentation and fraud.4



                                II.

     Review of a grant of summary judgment is de novo.   See Young

v. Equifax Credit Info. Servs. Inc., 294 F.3d 631, 635 (5th Cir.

2002).   Summary judgment is proper if “the pleadings,

depositions, answers to interrogatories, and admissions on file,

together with any affidavits filed in support of the motion, show

that there is no genuine issue of material fact and that the

moving party is entitled to judgment as a matter of law.”     Id.

The moving party bears the burden of pointing to an absence of

evidence to support the nonmoving party’s case, and summary

judgment will be granted where the nonmovant is unable to point

to any evidence in the record that would sustain a finding in the



     4
        The Armstrongs allege that, during contract negotiations,
AHS misrepresented that: 1) it was losing money in the Dallas-Fort
Worth market; 2) the Systems Check program was likely to expand;
and 3) the average contract cost in Texas was “based on current and
historical cost information.”

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nonmovant’s favor on any issue on which he bears the burden of

proof at trial.   See Celotex Corp. v. Catrett, 477 U.S. 317, 322-

24 (1986).   Moreover, all facts and inferences must be viewed in

the light most favorable to the nonmoving party.    See Perez v.

United States, 312 F.3d 191, 194 (5th Cir. 2002).


A.   Breach of Contract

     The appellants first contend that AHS breached the terms of

savings programs one and four.   They assert that AHS failed to

sufficiently compensate them for converting pool/spa contractor

fee arrangements, and for recommending that AHS charge its

customers for freon recovery.


     1)   Savings Program One: Converting Pool-Spa Contractor Fee
          Arrangements

     Savings program one provides that the Armstrongs are to be

paid 25% of all cost savings realized from their conversion of

AHS’s pool/spa contractors to the fixed-rate methodology.

Program one states:

     For example, AHS will establish its average contract
     cost for pool/spa option in Texas for 1995 (the “Base
     Cost Per Option”). If we assume the Base Cost Per
     Option was $140 and the average Cost Per Option in
     Texas in 1996 is $79, or a Cost Savings of $61 per
     average Cost Per Option, AHS, at the beginning of 1997,
     would calculate its Cost Savings (total # of applicable
     pool/spa options times $61), subtract applicable
     Deductions Against Cost Savings, multiply that amount
     by 18.75%, and pay Armstrong the result. The remaining
     6.25% (excluding deductions) would be set aside for
     payment at the end of year three.


                                 4
Accordingly, cost savings realized under program one are a

function of the 1995 average cost for pool/spa contracts.

     The appellants contend that AHS breached the terms of the

savings program because its calculation of the 1995 “average

contract cost” reflected only those pool/spa contracts which the

Armstrongs later converted to the fixed-rate methodology.    The

Armstrongs claim that the 1995 “average contract cost” should

have been compiled from all of AHS’s Texas pool/spa contracts.

     Although the parties intended to convert pool/spa contracts

throughout the entire state, contracts were actually converted

only in Dallas-Fort Worth, Austin, and San Antonio.   The 1995

average costs for contracts in non-urban areas are greater than

in urban areas.5   Thus, a bonus scheme based upon the difference

between the average costs for post-conversion urban contracts,

and pre-conversion statewide contracts, would effectively

compensate the Armstrongs for cost savings not actually realized.

     The language of the Armstrongs’ employment agreements

clearly states that bonuses are to be derived from actual cost

savings.6   The Armstrongs’ interpretation, which compensates them

     5
      The 1995 average contract cost in Dallas-Fort Worth was
$106.03; Austin, $94.35; and San Antonio, $108.03. The average
contract cost state-wide was $124.44.
     6
       Paragraph 1, entitled “Basis Understanding,” states that
“AHS will share certain cost savings with Armstrong.” Paragraph 3
explains, “AHS shall pay Armstrong his share of the cost savings
generated from each Cost Savings Program.” Paragraph 8(d) requires
AHS to pay the Armstrongs a percentage of cost savings on “the
applicable converted contracts.”

                                 5
for cost savings not actually realized, is obviously contrary to

the spirit and intent of the savings programs.    We agree with the

district court that program one “permitted AHS to pay Plaintiffs

based only on the cost savings generated in the areas where the

pool/spa program had been implemented.”


     2)   Savings Program Four: Recommending that AHS Charge
          Customers for Freon Recovery

     Savings program four rewards the Armstrongs for proposing

cost saving “contract coverages, limitations, and exclusions

which AHS has not previously adopted.”    The Armstrongs contend

that AHS breached the terms of program four when it refused to

compensate them for the cost savings generated by their proposal

that AHS charge customers for freon recovery.

     AHS’s home warranty contracts did not provide coverage for

the costs related to freon recovery.   The Armstrongs proposed

that cost savings would be realized by a stricter enforcement of

the freon exclusionary clause.   Because the Armstrongs merely

suggested that AHS enforce an existent contractual provision, the

appellants did not propose a contractual change “which AHS has

not previously adopted.”   Thus, AHS’s refusal to compensate the

Armstrongs for the resultant cost savings was not a breach of the

employment agreement.


B.   Negligent Misrepresentation

     The appellants next urge that AHS negligently misrepresented

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itself throughout contract negotiations.      In particular, the

Armstrongs assert that AHS misstated that it was unprofitable in

the Dallas-Fort Worth market, and that the average contract cost

in Texas was based on “historical and current cost data.”

     The district court held that both of the Armstrongs’

negligent misrepresentation claims were time-barred by the Texas

two-year statute of limitations.       See Tex. Civ. Prac. & Rem. Code

Ann. § 16.003(a) (Vernon 2002).    The Armstrongs do not contend

that they filed their lawsuit within two years of being injured;

rather they assert that the Texas statute of limitations was

tolled by the discovery rule.

     It is unclear whether the discovery rule tolls the Texas

statute of limitations for negligent misrepresentation claims.

See Kansa Reins. Co. v. Congressional Mortgage Corp., 20 F.3d

1362, 1372 (5th Cir. 1994) (“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.”).       But see

Matthiessen v. Schaefer, 27 S.W.3d 25, 31 (Tex. App.--San Antonio

2000, pet. denied) (“[T]he discovery rule applies to [a] claim of

negligent misrepresentation.”); Hendricks v. Thornton, 973 S.W.2d

348, 365 (Tex. App.--Beaumont 1998, pet. denied).      We need not

address this issue of law, however, unless the Armstrongs’

negligent misrepresentation claims are of the type protected by



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the discovery rule.

     The discovery rule only reaches a claim if the injury is

inherently undiscoverable, and the evidence of the injury is

objectively verifiable.   See Velsicol Chemical Corp. v. Winograd,

956 S.W.2d 529, 531 (Tex. 1997).       An injury is inherently

undiscoverable if it is of a type not generally discoverable by

the exercise of reasonable diligence.       See HECI Exploration Co.

v. Neel, 982 S.W.2d 881, 886 (Tex. 1998) (the applicability of

the discovery rule is determined categorically by examining the

nature of the particular injury alleged).

     We find that the profitability of a corporate division, and

the source of information which underlies a cost quotation, are

precisely the types of information that a seller involved in a

substantial business transaction would seek to discover and could

discover through the exercise of reasonable diligence.       See

Martinez Tapia v. Chase Manhattan Bank, N.A., 149 F.3d 404, 409

(5th Cir. 1998) (“The investor who seeks to blame his investment

loss on fraud or misrepresentation must himself exercise due

diligence to learn the nature of his investment and associated

risks.”).   Of added significance, the Armstrongs even seem to

have been aware of their injury.       For instance, in a December

1995 deposition, the appellants acknowledged that they might have

been defrauded by AHS.

     Thus, assuming that the discovery rule applies to claims for



                                   8
negligent misrepresentation, the Armstrongs would nonetheless not

benefit from its application because their injuries were not

inherently undiscoverable.   We therefore affirm the finding of

the district court that appellants’ claims are time-barred under

the Texas statute of limitations.


C.   Fraud

     The appellants next urge that AHS intentionally

misrepresented itself during contract negotiations.    They contend

that AHS fraudulently stated that it was expanding its Systems

Checks program, and that the average contract cost in Texas was

based on “historical and current cost data.”

     Under Texas law, fraud requires “a material representation,

which was false, and which was either known to be false when made

or was asserted without knowledge of its truth, which was

intended to be acted upon, which was relied upon, and which

caused injury.”   Formosa Plastics Corp. USA v. Presidio Engineers

and Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998).    AHS

maintains that the employment agreements’ merger clauses preclude

the Armstrongs from establishing the “reliance” element of fraud

claims.

     Texas courts hold that “a merger clause can be avoided based

on fraud in the inducement and that the parol evidence rule does

not bar proof of such fraud.”   Schlumberger Technology Corp. v.

Swanson, 959 S.W.2d 171, 179 (Tex. 1997) (citing Dallas Farm


                                 9
Machinery Co. v. Reaves, 307 S.W.2d 233 (1957)).     This general

principle, however, does not wholly preclude parties from

bargaining for, and executing, a release barring future fraud

claims.   For instance, a fraud claim can be negated where a

merger clause evinces a party’s clear and unequivocal expression

of intent to disclaim reliance on specific representations.     See

Schlumberger, 959 S.W.2d at 179.     Moreover, courts utilize parol

evidence to evaluate whether a disclaimer of reliance is

enforceable.   Id. (“[T]he contract and the circumstances

surrounding its formation determine whether the disclaimer of

reliance is binding.”).

     The Armstrongs’ employment agreements provide:

     This Agreement shall constitute the entire contract
     between the parties and supercedes all existing
     agreements between them, whether oral or written, with
     respect to the subject matter hereof.

     This clause, while indicative of the parties’ intent to bar

later disputes related to underlying agreements, notably fails to

mention or refer to prior representations.     Cf. U.S. Quest Ltd.

v. Kimmons, 228 F.3d 399 (5th Cir. 2000) (holding that merger

clause superceding all prior “agreements, communications, or

understandings” was a valid disclaimer of reliance upon

representations).   We nonetheless conclude, upon review of the

entire employment agreement, that the Armstrongs’ merger clauses

were unequivocal disclaimers of reliance.

     The language and the intent of the employment agreements


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makes clear that the Armstrongs did not rely upon AHS’s

representation that it was expanding its Systems Checks program.

For example, savings program five states that “AHS shall have the

sole right to determine whether to implement a systems check

program and to what extent.”

     Moreover, the agreements demonstrate that the Armstrongs did

not rely upon statements that the average contract cost in Texas

was based on “historical and current cost data.”   Paragraph 11 of

the Incentive Plan dictates that “AHS makes no representations,

warranties, and/or guarantees of the accuracy of the numbers

and/or assumptions, the savings to be realized and/or bonus to be

paid under Cost Savings Programs 1-6," and that all numerical

information and assumptions were “estimated” and “provided for

information purposes only.”

     Reviewing the employment agreement in whole, we find the

merger clauses were clear and unequivocal disclaimers of

reliance.   Thus, summary judgment of the Armstrongs’ fraud claims

was warranted.



                               III.

     AHS did not breach the Armstrongs’ employment agreements.

We find that the “average contract cost,” as outlined in savings

program one, is a function of those contracts which the

Armstrongs later converted to the fixed-rate methodology.   We

also find that the fourth savings program does not reward

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recommendations to enforce warranty provisions.   Moreover, the

appellants’ negligent misrepresentation claims are time-barred by

Texas’ statute of limitations, and their fraud claims are

precluded by the agreements’ merger clauses.   AFFIRMED.




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