Summary
noting that the Texas Supreme Court reiterated its acceptance of the independent injury requirement in negligent misrepresentation claims by requiring a pecuniary loss
Summary of this case from Levels v. MerlinoOpinion
Civil Action No. 3:05-CV-0433-P.
March 15, 2006
ORDER
Now before the Court is:
1. Third-Party Plaintiff's Motion for Partial Summary Judgment (cited as "Third-Party Pl.'s Mot. Summ. J."), filed November 22, 2005;
2. Third-Party Defendant USF Logistics Services Inc.'s Cross Motion for Summary Judgment (cited as "Third-Party Def.'s Mot. Summ. J."), filed January 17, 2006;
3. Defendants' Motion for Summary Judgment on Plaintiff's Claims and Motion for Partial Summary Judgment on Defendants' Counterclaim (cited as "Def.'s Mot. Summ. J."), filed January 17, 2006;
4. Defendants' Motion to Strike and Objections to Plaintiff's "Summary Judgment Evidence" ("Defendants' Motion to Strike"), filed February 17, 2006; and
5. Third-Party Defendant's Motion to Strike Third-Party Plaintiff Carolina Logistics Inc.'s Jury Demand, filed February 24, 2006.
Third-Party Defendant filed a Response on January 17, 2006. The Response was consolidated with Third Party Defendant's Cross-Motion for Summary Judgment. Third-Party Plaintiff filed a Reply on February 1, 2006.
Third-Party Plaintiff filed a Response on February 1, 2006. The Response was consolidated with its Reply to Third-Party Plaintiff's Motion for Partial Summary Judgment.
Plaintiff filed a Response on February 6, 2006.
Third-Party Plaintiff filed a Response on March 1, 2006, and Third-Party Defendant filed a Reply on March 3, 2006.
After considering the parties' arguments, the briefing, and the applicable law, the Court hereby GRANTS Third-Party Plaintiff's Motion for Partial Summary Judgment, DENIES Third-Party Defendant USF Logistics Services Inc.'s Cross Motion for Summary Judgment, GRANTS IN PART and DENIES IN PART Defendant's Motion for Summary Judgment on Plaintiff's Claims. The Court grants summary judgment in regards to the claim for breach of duty of good faith and fair dealings, and denies the remainder of the motion. The Court further GRANTS Defendants' Motion for Partial Summary Judgment on Defendants' Counterclaim, DENIES AS MOOT Defendants' Motion to Strike, and GRANTS Third-Party Defendant's Motion to Strike Third-Party Plaintiff Carolina Logistics Inc.'s Jury Demand.
I. Background
Prior to 2000, Plaintiff JPA, Inc. ("JPA") and Defendants USF Processors Trading Corp., Inc. and USF Processors, Inc. (collectively "Defendants") were both involved in the business of salvaging unsold merchandise from large retailers. (Def.'s Mot. Summ. J. at 2.) In November of 2000 and January of 2001, JPA and Defendants entered into two separate contracts. (Third-Party Def.'s Mot. Summ. J. at 3.) Under each contract, JPA agreed to purchase salvaged merchandise with money advanced by Defendants. ( Id.) JPA would then ship the salvaged merchandise to the Defendants' warehouses to be processed for resale. ( Id. at 3-4.) Once processed, the merchandise would be sold to third parties; Defendants were to receive a portion of the proceeds from those sales.
But the business relationship between the parties quickly deteriorated. By February of 2002, the companies terminated the contracts and ceased doing business together. Both parties now allege that the other breached certain obligations under the contracts. Subsequent collection efforts by Defendants were unsuccessful. On March 31, 2004, USF Processors, Inc. ("USF Processors") sent a written letter to JPA, demanding payment of $728,978.51, the amount still claimed to be owing on the two contracts. (Third-Party Pl.'s Mot. Summ. J. at 3.) On April 28, 2004, JPA responded by denying that it owed any money to USF Processors, and further claiming that it was the victim of fraud. JPA's letter stated that "[i]n the near future, an appropriate action will be filed by JPA against USF Processors." (App. Third-Party Pl.'s Mot. Summ. J., Ex. D.) On May 17, 2004, USF Corporation, the parent corporation of USF Processors, responded to JPA's letter by warning that any legal action taken by JPA would be met, at a minimum, with "a counterclaim for fraud, misrepresentation and breach of contract." ( Id. at Ex. E.) No immediate action was taken by either party.
On or about October 2004, Carolina Logistics Services, Inc. ("CLS") began negotiations with USF Logistics Services, Inc. ("USFL") for the purchase of USF Processors. On February 25, 2005, CLS entered into a Stock Purchase Agreement ("SPA") whereby it agreed to purchase all shares of USF Processors stock. (Third-Party Pl.'s Mot. Summ. J. at 4.) Soon thereafter, on March 3, 2005, JPA filed the present lawsuit against USF Processors Trading Corp., Inc. and USF Processors, now known as Carolina Logistics. In its amended complaint, JPA brings claims for fraud, fraudulent inducement, breach of contract, and breach of duty of good faith and fair dealing. ( See Pl.'s Am. Compl.; Doc. # 28.) In its answer filed April 12, 2005, Defendant filed counter-claims asserting breach of contract on both the November 2000 and January 2001 contracts, as well as a claim for attorney's fees. Defendants have now filed a motion for summary judgment, contending that Plaintiff's claims fail as a matter of law. Furthermore, Defendants move for partial summary judgment on their counter-claims, arguing that every element of a breach of contract is established in regards to the November 2000 contract.
CLS is an affiliate of Carolina Logistics. (Third-Party Pl.'s Mot. Summ. J. at 1.)
It is undisputed that USFL owned USF Processors. (Third-Party Pl.'s Mot. Summ. J. at 1.)
USF Processors' name was then changed to Carolina Logistics. (Third-Party Pl.'s Mot. Summ. J. at 4.)
Plaintiff's Amended Complaint also contains a claim for negligence. However, this cause of action was previously dismissed with prejudice. ( See Order of June 7, 2005; Doc. # 26.)
As a result of the suit, on March 16, 2005, Carolina Logistics demanded indemnity from USFL pursuant to the SPA. To date, USFL has refused to indemnify. Carolina Logistics, as defendant and third-party plaintiff, now brings counterclaims against USFL for breach of contract for failure to indemnify under the SPA, fraud/fraud in the inducement, and negligent misrepresentation. ( See Third-Party Pl.'s Am. Compl.; Doc. # 31.) USFL opposes Carolina Logistics' motion for partial summary judgment and has filed its own cross-motion for summary judgment. USFL contends that summary judgment is proper on all of Carolina Logistics' claims against it.
II. Summary Judgment Legal Standard
Summary judgment shall be rendered when the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The moving party bears the burden of informing the district court of the basis for its belief that there is an absence of a genuine issue for trial, and of identifying those portions of the record that demonstrate such an absence. Id. However, all evidence and reasonable inferences to be drawn therefrom must be viewed in the light most favorable to the party opposing the motion. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962).
Once the moving party has made an initial showing, the party opposing the motion must come forward with competent summary judgment evidence of the existence of a genuine fact issue. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The party defending against the motion for summary judgment cannot defeat the motion unless he provides specific facts that show the case presents a genuine issue of material fact, such that a reasonable jury might return a verdict in his favor. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). Mere assertions of a factual dispute unsupported by probative evidence will not prevent a summary judgment. Id. at 248-50; Abbot v. Equity Group, Inc., 2 F.3d 613, 619 (5th Cir. 1993). Finally, the Court has no duty to search the record for triable issues. Ragas v. Tenn. Gas Pipeline Co., 136 F.3d 455, 458 (5th Cir. 1998).
III. Third-Party Plaintiff's Motion for Summary Judgment
The Court will first discuss the claims of the Third-Party Plaintiff. The crux of the dispute between Carolina Logistics and USFL centers on the application and interpretation of the SPA. Carolina Logistics claims that USFL did not disclose JPA's demand letter that threatened litigation, and this failure violated the terms of the SPA in four different respects. Furthermore, Carolina Logistics asserts that the SPA requires USFL to indemnify them for costs associated with defending itself in the instant litigation, as such costs are a result of a breach of warranty or misrepresentation made by USFL in the SPA. Carolina Logistics brings a claim for, inter alia, breach of contract, and moves for summary judgment on such claim.
Article IX, Section 9.9 of the SPA states that:
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND PERFORMED ENTIRELY IN THE STATE OF ILLINOIS, WITHOUT GIVING EFFECT TO ANY PRINCIPLES OF CONFLICTS OF LAWS THAT WOULD CAUSE THE LAWS OF ANY OTHER JURISDICTION TO APPLY.
(App. Third-Party Def.'s Mot. Summ. J. at 96.) As such, the Court must construe the contract under principles of Illinois law. "Under Illinois law, `to state a cause of action for breach of contract a plaintiff must show: (1) the existence of a valid and enforceable contract; (2) the performance of the contract by plaintiff; (3) the breach of the contract by defendant; and (4) a resulting injury to plaintiff.'" Priebe v. Autobarn, Ltd., 240 F.3d 584, 587 (7th Cir. 2001) (quoting Hickox v. Bell, 552 N.E.2d 1133, 1143 (Ill.App.Ct. 1990)). USFL does not dispute the existence or validity of an enforceable contract, nor does it appear to dispute that Third-Party Plaintiff performed under the contract. Further, Third-Party Plaintiff has established injury by showing that attorney's fees have been expended in defense of the litigation. USFL, however, takes issue with Carolina Logistics' allegations of breach.
Specifically, Carolina Logistics first maintains that Article IV, Section 4.10(a) of the SPA was breached when USFL failed to disclose JPA's demand letter. Section 4.10(a) provides that:
Except as set forth on Section 4.10 to the Disclosure Schedule, as of the date hereof, there are no Actions by or against Seller in respect of any Acquired Company that relates to or may affect the Business of, or any of the Assets owned or used by, any Acquired Company, pending before or, to the knowledge of Seller, threatened to be brought before, any Governmental Authority by any third party, including any Action that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, any of the Contemplated Transactions, except as would not, individually or in the aggregate, have a Material Adverse Affect.
(App. Third-Party Def.'s Mot. Summ. J. at 63.) According to Third-Party Plaintiff, the demand letter from JPA qualified as an action "threatened to be brought" and should have been disclosed pursuant to the warranty set forth in Section 4.10(a). As the JPA dispute was not in Section 4.10 of the Disclosure Schedule, Carolina Logistics claims that this paragraph was breached. USFL disagrees, stating that, as a matter of law, the JPA letter did not constitute threatened litigation within the meaning of Section 4.10(a), as the demand letter was sent 9 months earlier and was not reasonably viewed as a legitimate threat. In addition, USFL contends that the JPA litigation would not have a material adverse affect on the acquired companies, further taking it out of the realm of information they were obligated to disclose.
The Court finds that the JPA letter did constitute threatened litigation, and the failure to disclose the letter was breach. The passage of nine months, under the circumstances, is not sufficient for Defendant to reasonably believe that suit would not be filed. Defendant cannot avoid contractual obligations by claiming that it subjectively believed there was no threat of litigation when a reasonable person in the same situation would know disclosure was appropriate.
In its cross-claim motion, USFL premises much of its argument for summary judgment on the reading of the phrase Material Adverse Effect. USFL argues that it was not obligated to disclose the JPA demand letter because, even if the litigation came to fruition, the suit would not have a substantial effect on the overall condition of Carolina Logistics. But this reading misconstrues the plain language of the SPA. While Material Adverse Effect is not explicitly defined, it is clear that it refers to the effect upon the "Acquired Companies taken as a whole" rather than the total effect on the acquiring company. (App. Third-Party Def.'s Mot. Summ. J. at 48.) Thus, it is irrelevant that the estimated loss only accounts for an estimated 1.3% of the total revenues of Carolina Logistics. The relevant inquiry is the effect on the acquired company, USF Processors. Carolina Logistics has valued the effect of the instant lawsuit at $450,000. As Carolina Logistics paid $4.5 million for USF Processors, the value of the lawsuit would be at least 10% of the value of the acquired company. While not defined in the SPA, the Court finds that a minimum 10% effect is materially adverse. For these reasons, summary judgment is appropriate for the claim of breach for Section 4.10(a).
As discussed by Third-Party Plaintiff in its Reply, if JPA were to recover on its breach of contract claim the effect of such an event could be well over a 60% loss to the value of USF Processors. (Third-Party Pl.'s Reply at 7.)
Second, Carolina Logistics claims that USFL breached the representations made in
Section 4.10(d) of the SPA. In pertinent part, Section 4.10(d) warrants that:
To the knowledge of Seller, Section 4.10 of the Disclosure Schedule sets forth a list of all customer complaints (written or oral) relating to the Material Contracts . . . received by any of the Acquired Companies and unresolved as of the date hereof, where the dollar value of the disputed amount sought to be recovered or credited . . . exceeds One Hundred Thousand Dollars ($100,000).
(App. Third-Party Def.'s Mot. Summ. J. at 63.) The Court finds this language to be unambiguous. Under Illinois law, if a court determines that a contract is unambiguous, there is no issue of material fact and the court must decide the contract's meaning as a matter of law. United States v. 4500 Audek Model No. 5602 AM/FM Clock Radios, 220 F.3d 539, 542-43 (7th Cir. 2000). "Material Contract" is defined by Section 4.14(a)(viii) to include all contracts "relating to the processing of inventory or assets with aggregate creditable return or billable value in excess of $200,000." ( Id. at 65.) The two contracts at issue were related to the processing of inventory and USFL maintains that both had uncollected debt in excess of $200,000. Thus, the only question is whether JPA's demand letter was a "customer complaint." While not defined within the SPA, it is clear that a letter alleging fraudulent dealings and misrepresentation on past contracts constitutes a complaint from a customer. USFL argues that Section 4.10(d) was only concerned with current contracts, but nothing in the language of the SPA so limits such required disclosures. Rather, the language mandates comprehensive disclosure of all complaints, whether oral or written. Therefore, the Court finds that JPA's demand letter was a customer complaint and, pursuant to the SPA, USFL was required to disclose such complaint. USFL admits that it did not disclose the letter. (App. Third-Party Def.'s Mot. Summ. J. at 301.) Thus, USFL breached the contract and summary judgment is proper on Carolina Logistics' claim of breach for Section 4.10(d).
Third, Carolina Logistics claims Section 4.14 of the SPA was violated when USFL did not disclose the 2000 and 2001 contracts with JPA. The pertinent language of Section 4.14(b) warrants that:
Seller has heretofore made available to Purchaser complete and accurate copies of all written Material Contracts . . . and (iv) neither Seller nor any Acquired Company has given to or received from any other Person, at any time since December 31, 2003, any written notice or other written communication specifically alleging the breach or potential breach of a Material Contract.
(App. Third-Party Def.'s Mot. Summ. J. at 66.) As discussed previously, the Court finds that the contracts with JPA were `Material Contracts.' The 2004 correspondence between USFL and JPA certainly alleged breach or potential breach of these Material Contracts; USFL has admitted that they did not disclose such letters. ( Id. at 301.) Thus, the admissions by USFL and plain language of the contract clearly constitute breach. Summary judgment is proper in favor of Carolina Logistics as to liability, however, the amount of damages is yet to be determined.
Once again, the unambiguous text of the SPA belies the arguments made by Third-Part Defendant. Section 4.14(b) does not apply solely to current contracts, rather it includes "each other Person that has or had any obligation or Liability under any Material Contract." (App. Third-Party Def.'s Mot. Summ. J. at 66.)
Carolina Logistics further argues that USFL breached Section 4.7 of the SPA. The Court need not address this argument, as Third-Party Plaintiff has already clearly established its claim for breach of contract.
As Third-Party Plaintiff has established that warranties made in the SPA were breached, Carolina Logistics is further entitled to indemnity from USFL. In Section 8.2(a), USFL "agrees to indemnify and hold harmless Purchaser and its officers, directors and affiliates (the `Purchaser Indemnified Persons') . . . against any and all Losses . . . incurred or suffered by the Purchaser Indemnified Persons . . . as a result of (i) any breach of any representation or warranty made by Seller in this Agreement." ( Id. at 89.) The legal fees Carolina Logistics has accumulated in defending against the present lawsuit constitute a loss incurred as a result of a breach of a warranty made by USFL. For the foregoing reasons, the Court GRANTS Third-Party Plaintiff's Motion for Partial Summary Judgment.
IV. Third-Party Defendant's Cross Motion for Summary Judgment
In addition to opposing Carolina Logistics' motion for partial summary judgment, USFL also moves for summary judgment to be entered in its favor on all claims brought by Third-Party Plaintiff. Initially, the Court DENIES USFL's motion for summary judgment in regards to the breach of contract claim, for the reasons discussed above. Carolina Logistics' remaining claims, sought to be dismissed by USFL, are for fraud/fraud in the inducement and negligent misrepresentation. ( See Third-Party Pl.'s Am. Compl.; Doc. # 31.)
Article IX, Section 9.9 of the SPA is a choice of law provision agreed upon by the parties that narrowly specifies that the SPA is to be governed, construed, and enforced in accordance with the laws of the State of Illinois. A narrow choice of law provision is to be construed narrowly. Thompson Wallace of Memphis, Inc. v. Falconwood Corp., 100 F.3d 429, 433 (5th Cir. 1996). As such, the choice of law provision at issue does not specify the law to be applied to claims involving the formation or inducement into the contract. A federal court sitting in diversity applies the choice of law rules of the forum state. Under Texas choice of law rules, courts apply the substantive law of the state having the most significant relationship to the litigation. As neither party disputes that Texas has the most significant relationship to the litigation, the Court will apply Texas substantive law.
A. Fraud or Fraud in the Inducement
Under Texas law, a claim for fraud or fraudulent inducement is established by a showing that: (1) a material misrepresentation was made; (2) the representation was false; (3) the representation was made with knowledge of its falsity or recklessness as to its truth; (4) made with the intention that it should be relied upon by the party; (5) the party acted in reliance upon the misrepresentation; and (6) the party thereby suffered injury. Norman v. Apache Corp., 19 F.3d 1017, 1022 (5th Cir. 1994).
The elements of fraudulent inducement mirror those of fraud. See Formosa Plastics Corp. v. Presidio Engineers Contractors, Inc., 960 S.W.2d 41, 47-48 (Tex. 1998).
In its motion for summary judgment, USFL's sole contention is that Third-Party Plaintiff is barred from recovering for fraud or fraudulent inducement because reliance cannot be shown. USFL argues that the parties executed valid and binding disclaimers of reliance, thus, as a matter of law, Third-Party Plaintiff cannot satisfy the fifth element. But this argument is belied by the express language of the provision cited by USFL. Carolina Logistics' claim for fraud and fraudulent inducement is based on representations that, as discussed above, were directly contrary to the warranties made in the SPA. Section 4.27 unequivocally states that the SPA does not disclaim representations expressly made in the SPA. (App. Third-Party Def.'s Mot. Summ. J. at 78.) USFL's argument is completely without merit. Carolina Logistics claims that it relied on express warranties in the SPA, thus the fifth element is established for purposes of defeating a motion for summary judgment. As USFL asserts no other basis for its motion for summary judgment on the claim of fraud/fraud in the inducement, such motion is denied.
Section 4.27 provides that "EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT . . . ALL OTHER REPRESENTATIONS OR WARRANTIES . . . ARE HEREBY DISCLAIMED."
B. Negligent Misrepresentation
USFL further argues that it is entitled to summary judgment on Carolina Logistics' claim for negligent misrepresentation because such claim is barred by the independent injury doctrine. (Third-Party Def.'s Mot. Summ. J. at 30.) In D.S.A., Inc. v. Hillsboro Indep. Sch. Dist., 973 S.W.2d 662, 663-64 (Tex. 1998), the Texas Supreme Court reiterated its acceptance of the independent injury requirement in the context of claims for negligent misrepresentation and adopted section 552B of the Restatement (Second) of Torts. Id. Section 552B states that:
(1) The damages recoverable for a negligent misrepresentation are those necessary to compensate the plaintiff for the pecuniary loss to him of which the misrepresentation is legal cause, including:
(a) the difference between the value of what he has received in the transaction and its purchase price or other value given for it; and
(b) pecuniary loss suffered otherwise as a consequence of the plaintiff's reliance upon the misrepresentation.
(2) the damages recoverable for a negligent misrepresentation do not include the benefit of the plaintiff's contract with the defendant.
RESTATEMENT (SECOND) OF TORTS § 552B (1977). Thus, in order to maintain its claim, Carolina Logistics must be able to show it suffered a pecuniary loss independent of breach of contract damages. USFL argues that the only injury alleged is the monetary damages incurred as a result of the failure to indemnify — a breach of contract claim. The Court, however, finds that the alleged negligent misrepresentations could have caused pecuniary losses independent of breach of contract damages. A failure to disclose threatened litigation over disputed contracts could have created an inflated purchase price such that there existed a disparity in the purchase price and value of what was received. Therefore, the misrepresentations allegedly caused injury independent of the breach of contract.
Furthermore, USFL argues that Section 8.9 states that the indemnification provisions of the SPA provide the exclusive remedy for negligent misrepresentation, and thus such claim is contractually barred. The Court disagrees. Section 8.9 applies only to "claims arising in connection with the transactions contemplated" by the SPA. (App. Third-Party Def.'s Mot. Summ. J. at 93.) The claim for negligent misrepresentation relates to the formation of the contract, not the transactions contemplated by the contract. Thus, summary judgment is not proper and Carolina Logistics may maintain its claim for negligent misrepresentation.
For these reasons, the Court DENIES Third-Party Defendant USF Logistics Services Inc.'s Cross Motion for Summary Judgment in all respects.
V. Defendants' Motion for Summary Judgment on Plaintiff's Claims
The dispute in the primary action revolves around two contracts entered into by Plaintiff and Defendants. Prior to such dealings, JPA contracted with companies such as Costco and Sam's to purchase salvaged merchandise such as returns and closeout goods. (Pl.'s Resp. at 2.) In 2000, JPA and the Defendants began negotiations for an agreement whereby merchandise purchased by JPA would be shipped to the Defendants' warehouses. The Defendants would then provide inventory processing services in exchange for fees and commissions from the sale of such goods. (Def.'s Mot. Summ. J. at 4.) On November 15, 2000, the parties entered into a preliminary agreement that called for Defendants to finance certain purchases of JPA. Then, on January 31, 2001, a final agreement between the parties was memorialized. The Joint Service Agreement ("JSA") provided that "USF and JPA hereby associate themselves for the limited purpose of acquiring, storing, handling, providing accounting for and reselling certain liquidation products (the `Products') . . . Specifically, JPA will be acquiring and reselling the Products and USF will be storing, handling, providing accounting for and reselling the Products." (App. Def.'s Mot. Summ. J., Ex. B at 1.)
Both parties soon became dissatisfied with the performance of such agreement, and by February 27, 2002, the contract was terminated. (Def.'s Mot. Summ. J. at 10.) In 2004, Defendants demanded payment of $728,978.51 from JPA, the amount allegedly still owed on the contracts. JPA refused to pay this disputed amount and responded with allegations of fraud and breach of contract. On March 3, 2005, JPA filed the present lawsuit against the Defendants. In its amended complaint, JPA brings claims for fraud, fraudulent inducement, breach of contract, breach of duty of good faith and fair dealing, and for accounting. ( See Pl.'s Am. Compl.; Doc. # 28.) Defendants now move for an order granting final summary judgment on Plaintiff's claims. Defendants claim that Plaintiff has no evidence in support of one or more essential elements of each claim. In addition, Defendants move for summary judgment in their favor on their counterclaim for the breach of the 2000 contract with JPA.
A. Defendants' Motion to Strike
Initially, the Court DENIES AS MOOT Defendants' Motion to Strike. Much of the affidavit testimony objected to by Defendants is not hearsay as it falls under the ambit of Fed.R.Evid. 801(d)(2)(D). Any summary judgment evidence considered by the Court is further found to be based on the personal knowledge of the witness pursuant to Fed.R.Evid. 602 and lay opinion that is rationally based on the perception of the witness in accord with Fed.R.Evid. 701.
B. Fraud or Fraud in the Inducement
As mentioned above, under Texas law, a claim for fraud or fraudulent inducement is established by a showing that: (1) a material misrepresentation was made; (2) the representation was false; (3) the representation was made with knowledge of its falsity or recklessness as to its truth; (4) the representation was made with the intent that it should be relied upon by the party; (5) the party acted in reliance upon the misrepresentation; and (6) the party thereby suffered injury. Norman v. Apache Corp., 19 F.3d 1017, 1022 (5th Cir. 1994).
Plaintiff premises its claims for fraud and fraud in the inducement on numerous statements made both before and during the performance of the contract. Steven O'Neal, employed as Controller by Defendants during the time at issue, testified in deposition that Defendants told Plaintiff that they believed they "could manage the project." (App. Pl.'s Resp., Ex. B at 20.) Furthermore, Defendants stated that they "had the capabilities" to get the job done and their "systems were proven." ( Id., Ex. B at 21-22.) Joanne Page, a representative from JPA, also states that she was told by the Defendants that "[t]heir systems were such that it would easily handle the liquidation that would be coming through their doors." ( Id., Ex. D at 23.) Ms. Page further states that, based on her experience, the statements made to her "turned out not to be true." ( Id., Ex. D at 23.) The Court finds that Plaintiff has alleged that such representations were false and material to JPA entering into a contract with Defendants, thus the first and second elements are met.
Plaintiff has further submitted evidence that such misrepresentations were made with knowledge of their falsity, raising a fact issue as to the third element. Roger Magarrell, former Manager and Systems Coordinator for Defendants, states in affidavit that Defendants "downplayed the potential problems . . . mislead [sic] JPA about their experience and ability . . . [and] overstated what we could do." (App. Pl.'s Resp., Ex. E at 2.) Mr. Magarrell further states that Defendants "knew that our systems were not in place" despite assertions to the contrary. ( Id.) Viewing the evidence in the light most favorable to Plaintiff, as it must at the summary judgment stage, the Court finds that the third element is also met. Defendants have not pointed out the absence of a material fact in regards to elements (4), (5), or (6). Therefore, Plaintiff has stated a claim of fraud and fraud in the inducement.
As mentioned previously, the statements made in the affidavit of Mr. Magarrell are not hearsay. Fed.R.Evid. 801(d)(2)(D).
Defendants argue that Plaintiff cannot maintain a claim for fraud or fraud in the inducement, as the misrepresentations that form the basis of the complaint are merely opinion and thus not actionable. For misrepresentations to be actionable, the statements generally must be "concerning a material fact; a pure expression of opinion will not support an action for fraud." Clardy Mfg. Co. v. Marine Midland Business Loans, Inc., 88 F.3d 347, 359 (5th Cir. 1996) (quoting Transport Ins. Co. v. Faircloth, 898 S.W.2d 269, 276 (Tex. 1995)). However, even if the Court found the misrepresentations to be opinion, an exception exists and mere opinion constitutes fraud if the speaker knows it is false. Id. As stated above, Plaintiff has submitted evidence showing that the speaker knew the representations were false at the time they were made, therefore, Plaintiff may maintain its claim for fraud and fraudulent inducement.
Defendants further argue that Plaintiff ratified the contract and waived any claim of damages for fraud. But in Fortune Prod. Co. v. Conoco, Inc., the case cited by Defendants in support of their argument, the Texas Supreme Court clearly stated that "[n]ot every ratification of a contract induced by fraud will waive the right to sue for damages." 52 S.W.3d 671, 678 (Tex. 2000). The court held that the plaintiffs' continued performance on the contracts, without more, did not foreclose their ability to sue for damages on a fraud claim. Id. at 679. Defendants have cited no additional circumstances in the present case that would persuade this Court that the right to recover damages for fraud has been precluded.
Defendants have not pointed to an absence of a fact issue on any other element of a fraud or fraud in the inducement claim. For these reasons, summary judgment is improper.
B. Breach of Contract
Second, Plaintiff brings a claim against USF Processors Trading Corp. ("USFPT") for breach of the JSA. Under Texas law, "the essential elements in a breach of contract claim are as follows: (1) the existence of a valid contract; (2) that the plaintiff performed or tendered performance; (3) that the defendant breached the contract; and (4) that the plaintiff was damaged as a result of the breach." Bridgmon v. Array Sys. Corp., 325 F.3d 572, 577 (5th Cir. 2003) (quoting Frost Nat'l Bank v. Burge, 29 S.W.3d 580, 593 (Tex.App.-Houston [14th Dist.] 2000, no pet.)). A breach occurs when a party fails or refuses to perform an act that it has expressly promised to perform. Cronus Offshore, Inc. v. Kerr McGee Oil Gas Corp., 369 F. Supp. 2d 848, 855 (E.D. Tex. 2004) (citing Dorsett v. Cross, 106 S.W.3d 213, 217 (Tex.App.-Houston [1st Dist.] 2003, pet. denied)).
Initially, USFPT argues that the second element cannot be met as a matter of law because Plaintiff acknowledges its own breach of the contract. In his letter of November 20, 2001, Jeff Persitz, President of JPA, admits that his company failed to timely repay the "Advanced Funds" as obligated in the JSA. (App. Def.'s Mot. Summ. J., Ex. E.) However, pursuant to Section 3.01 of the JSA, these "Advanced Funds" would be repaid through money received from customers. ( Id., Ex. B at 3.) According to the testimony of Mr. Persitz, the money from the customers went "directly to USF" and thus, JPA was prevented from repaying the "Advanced Funds" according to the JSA. ( Id., Ex. C at 132.) General contract law provides that "[p]revention of performance by one party excuses performance by the other party." See, e.g., Dorsett v. Cross, 106 S.W.3d 213, 217 (Tex.App.-Houston [1st Dist.] 2003, pet. denied). As such, Plaintiff's alleged breach does not necessarily preclude their suit for breach of contract.
As discussed earlier, Plaintiff did not ratify the contract merely by its failure to terminate, and the doctrine of quasi-estoppel does not apply because JPA does not assert a right contrary to earlier positions. Lopez v. Munoz, Hockema Reed, 22 S.W.3d 857, 864 (Tex. 2000). The doctrine of quasi estoppel only applies when "it would be unconscionable to allow a person to maintain a position inconsistent with one to which he acquiesced." Id. JPA merely sought to give USFP an opportunity to comply with the contract; the Court finds that this behavior does not call for a finding of ratification or quasi-estoppel. Defendants have not shown the absence of a material fact in Plaintiff's breach of contract claim, thus, summary judgment is improper.
C. Good Faith and Fair Dealing
Not every contract creates a duty of good faith and fair dealing. Midland v. O'Bryant, 18 S.W.3d 209, 215 (Tex. 2000). Rather, a duty of good faith and fair dealing exists only upon a finding of a special relationship. Id. Plaintiff argues that the relationship between the parties was a joint venture, thus constituting a special relationship. To establish the existence of a joint venture, the following four elements must be present: (1) a community of interest in the venture; (2) an agreement to share profits; (3) an agreement to share losses; and (4) a mutual right of control or management of the enterprise. Ayco Dev. Corp. v. G.E.T. Serv. Comp., 616 S.W.2d 184, 186 (Tex. 1978). If any one of the elements of a joint venture is not present, then as a matter of law, an actionable duty of good faith and fair dealing does not exist and Plaintiff's claim is invalid. See Swinehart v. Stubbeman, McRae, Sealy, Laughlin Browder, Inc., 48 S.W.3d 865, 879 (Tex.App.-Houston [14th Dist.] 2001, pet. denied).
Texas courts have repeatedly recognized that the elements necessary to establish a joint venture are the same as those for a partnership. See, e.g., Carlyle Joint Venture v. H.B. Zachry Co., 802 S.W.2d 814, 816 (Tex.App.-San Antonio 1990). Thus, an express provision disavowing the existence of a partnership signals the absence a joint venture. FDIC v. Claycomb, 945 F.2d 853, 859 (5th Cir. 1991). In Section 1.02 of the JSA, the parties expressly agree that "[n]othing herein shall be construed to create a general partnership between the parties." (App. Def.'s Mot. Summ. J., Ex. B at 1.) Section 1.02 goes on to state that "[e]xcept as otherwise expressly and specifically provided in this Agreement, none of the parties shall have any authority to act for, or to assume any obligations or responsibility on behalf of any other party." ( Id.) Such language indicates that there is no community of interest in the venture, no mutual right of control or management, and hence, no intent to create a partnership or joint venture.
The absence of an express provision providing for the sharing of losses further precludes the finding of a joint venture. Id.; Fed. Sav. Loan Ins. Corp. v. Griffin, 935 F.2d 691, 699-700 (5th Cir. 1991). Plaintiff points to provisions in the contract that might arguably have the effect of sharing losses in some circumstances, but the JSA contains no express loss-sharing provision. ( See App. Def.'s Mot. Summ. J., Ex. B at 4-5.) For these reasons, the Court finds there was no joint venture or other special relationship. As a result, there is no duty of good faith and fair dealing as a matter of law. Summary judgment is proper as to such claim.
D. Accounting
The contract between the parties states that "USF and JPA hereby associate themselves for the limited purpose of acquiring, storing, handling, providing accounting for and reselling certain liquidation products." (App. Def.'s Mot. Summ. J., Ex. B at 1.) (emphasis added). Section 4.01 of the JSA further states that "[e]ach party shall have the right . . . to cause the books of account and reports relating to this Agreement . . . to be audited." ( Id., Ex. B at 4.) Section 11.01 of the JSA states that "[e]ach party shall maintain adequate books and records of account concerning the transactions contemplated by this Agreement." ( Id., Ex. B at 8.) Thus, the Court finds the parties contemplated a contractual right of accounting. Defendants have presented no evidence to the contrary; summary judgment is improper on this claim.
VI. Defendants' Motion for Partial Summary Judgment on its Breach of Contract Counterclaim
In their motion for summary judgment, Defendants also move for an order granting summary judgment on their counterclaim for breach of the 2000 contract with JPA. Defendants have submitted evidence that all elements of a breach of contract claim have been met. Defendants claim that a valid contract exists, they paid the "Advanced Funds" pursuant to the contract, JPA has admitted that it did not repay the funds as mandated by the contract, and Defendants have suffered injury in the loss of money advanced to JPA.
In response, JPA argues that the evidence tending to show its admission of breach is inadmissible under Fed.R.Evid. 408 ("Rule 408"). In a letter written on November 20, 2001, the president of JPA submits a proposal to Defendants whereby he states "JPA agrees that we owe USF for the Costco advances." (App. Def.'s Mot. Summ. J., Ex. E.) Plaintiff claims the Court is precluded from considering this evidence, as it is insulated by Rule 408. But Rule 408 only shields compromise negotiations from admission into evidence. While litigation or threatened litigation is not required for communications to be considered compromise negotiations, the fact that a lawsuit was not threatened until several years later is relevant to the Court's determination that the letter constituted simple business communications. Ferguson v. FDIC, No. 3:91-CV-2494-D, 1997 WL 135597, at *2 (N.D. Tex. Mar. 19, 1997) (Fitzwater, J.) ("[I]t should be noted that the letter predated the initiation of any litigation by almost three years. And while Rule 408 is not limited to settlement negotiations that commence after a lawsuit is filed, the gap in time corroborates the court's view that [plaintiff] lacked a valid basis to invoke Rule 408 insulation."). The Court finds that the letter from JPA is admissible. However, because there is a fact issue as to whether Defendant breached the same contract, the Court cannot now grant summary judgment in Defendant's favor. Thus, Defendants' Motion for Partial Summary Judgment on Defendants' Counterclaim is denied.
VII. Third-Party Defendant's Motion to Strike Third-Party Plaintiff Carolina Logistics Inc.'s Jury Demand
Section 9.10 of the SPA states that "EACH OF THE PARTIES HERETO WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO TRIAL BY JURY . . ." (App. Third-Party Def.'s Mot. Summ. J. at 55.) Pursuant to such language and Fed.R.Civ.P. 39(a)(2), USFL moves to strike the previous jury demand of Carolina Logistics. In response, Carolina Logistics argues that any contractual right to a non-jury trial was waived by USFL's failure to timely assert such right. Carolina Logistics contends that USFL first objected more than 300 days after their original jury demand and a mere 38 days before the trial setting. Third-Party Plaintiff relies on RDO Fin. Servs. Co. v. Powell, 191 F. Supp. 2d 811 (N.D. Tex. 2002) (Lynn, J.) in support of its argument that USFL has relinquished its right to enforce a jury waiver. In Powell, the court found that the contractual jury waiver was "printed in a very small font size . . . buried in the middle of a lengthy paragraph, not set off from the rest of the text . . . [and] wholly one-sided." Powell, 191 F. Supp. 2d at 814. Such facts led the Court to find, as a matter of law, that there was no "knowing and voluntary waiver" of the right to a jury trial. Id. The basis of the court's holding was the absence of a knowing and voluntary waiver; the delay in filing the motion to strike merely buttressed the court's opinion. As is evident above, the jury waiver clause in the SPA is prominently displayed, in all capital letters, in its own section of the agreement. ( See App. Third-Party Def.'s Mot. Summ. J. at 55.) There is nothing before the Court that would suggest the jury waiver was not made knowingly and voluntarily; rather, the SPA clearly indicates the agreement was made by sophisticated parties.
Furthermore, Fed.R.Civ.P. 39(a)(2) "contains no time limit" by which a party must object to a jury demand. Jones-Hailey v. Corp. of the Tenn. Valley Auth., 660 F. Supp. 551, 553 (E.D. Tenn. 1987); see also Armco, Inc. v. Armco Burglar Alarm Co., Inc., 693 F.2d 1155, 1158 (5th Cir. 1982). A court has the discretion to grant a motion to strike a jury demand at any time, even on the eve of trial. See Armco, 693 F.2d at 1158. For these reasons, the Court finds it appropriate to strike the jury demand.
VIII. Conclusion
For the foregoing reasons, the Court hereby GRANTS Third-Party Plaintiff's Motion for Partial Summary Judgment, DENIES Third-Party Defendant USF Logistics Services Inc.'s Cross Motion for Summary Judgment, and GRANTS IN PART and DENIES IN PART Defendant's Motion for Summary Judgment on Plaintiff's Claims. The Court grants summary judgment in regards to the claim for breach of duty of good faith and fair dealings, and denies the remainder of the motion. The Court further DENIES Defendants' Motion for Partial Summary Judgment on Defendants' Counterclaim, DENIES AS MOOT Defendants' Motion to Strike, and GRANTS Third-Party Defendant's Motion to Strike Third-Party Plaintiff Carolina Logistics Inc.'s Jury Demand. The Court therefore finds it appropriate to sever the third party claims for a trial without a jury. The setting of such trial date shall be determined through consultation with counsel at the upcoming pre-trial conference.