American National Insurance Co. v. International Business Machines Corp.

933 S.W.2d 685, 1996 Tex. App. LEXIS 4520

• Court: Court of Appeals of Texas
• Decided: October 9, 1996
• Docket: No. 04-95-00196-CV
• Status: Published

Opinions

HILL, Justice (Assigned).

American National Insurance Company appeals from a summary judgment dismissing certain tort actions that it brought against International Business Machines Corporation, Thomas Kendra, an employee of IBM, and Image Services, Inc., the appel-lees. American National brought a breach of contract action against the appellees arising out of two contracts between itself and IBM, with Image serving as a subcontractor under the second contract. American National also sought damages for fraud and certain other torts. The trial court granted the appellees’ motions for partial summary judgment and dismissed American National’s tort actions. After those tort actions were severed from the actions based upon breach of contract, American National brought this appeal. It contends in four points of error that the trial court erred: (1) in granting summary judgment dismissing its causes of action for negligence and gross negligence, fraud, and negligent misrepresentation; (2) in granting summary judgment dismissing its tort causes of action because the appel-lees faded to present any summary judgment evidence or otherwise meet their summary judgment burden of proof; (3) in granting summary judgment dismissing its causes of action for negligence and gross negligence because there is no absolute bar against maintaining a tort action against a party to a contract; and (4) in granting summary judgment dismissing American National’s causes of action for fraud and negligent misrepresentation, because there is no absolute bar against maintaining such actions against a party to a contract.

We reverse the summary judgment as it relates to American National’s causes of action for fraud against IBM and Image, including allegations that they never intended to perform under the contract, and we affirm the summary judgment as it relates to American National’s other tort causes of action, for reasons set forth in this opinion.

American National urges in its four points of error that the trial court erred in granting partial summary judgment as to the tort causes of action that it brought against the appellees.

American National is an insurance company with several divisions, including health, accident and life. In its petition, American National alleged, among other things, that it contracted with IBM for the performance of an image study to assess the need for, feasibility of, size and cost of, and benefits of an advanced computer image processing system. It alleged that subsequently, based upon representations of IBM, Kendra, and Image, it entered into a second contract by which it agreed to purchase certain hardware, software, and services necessary for its image printing requirements. It alleged that the appellees made certain misrepresentations of fact and that it relied upon those representations. American National alleged that it was forced to replace some of the IBM equipment that it purchased pursuant to the contract, at a cost of $4,242 million; to purchase additional direct access storage devices and additional related expenses in excess of $2,234 million, and to purchase additional optical storage units and related expenses in excess of $4,152 million. These figures total approximately $10,628 million. In its breach of contract action against IBM, American National alleged damages of $14,065 million for the purchase of substitute goods. It did not allege a specific figure with respect to its breach of contract action against Image.

IBM and Kendra brought their motion for partial summary judgment, asking the trial court to dismiss American National’s tort causes of action because American National could not recover against them on its tort actions since its claim did not meet the two-part test set down by the Texas Supreme Court in Southwestern Bell Telephone Co. v. DeLanney, 809 S.W.2d 493, 494-95 (Tex.1991), and Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 617-18 (Tex.1986). Image brought a similar motion based upon the same theory.

The appellees had the burden of showing that there is no genuine issue of fact and that they are entitled to judgment as a matter of law. Nixon v. Mr. Property Management Co. Inc., 690 S.W.2d 546, 548—49 (Tex.1985). Since these motions are based solely upon the allegations in American National’s petition, we must accept each of its allegations as true. Cronen v. City of Pasadena, 835 S.W.2d 206, 210 (Tex.App. — Houston [1st Dist.] 1992, no writ), overruled on other grounds, Lewis v. Blake, 876 S.W.2d 314, 315 (Tex.1994).

American National’s claims against the appellees are based in part upon its contracts with IBM. The appellees claim that American National has no independent tort causes of action against them. In a case brought on the theory of the negligent performance of a contract, the Texas Supreme Court established a two-part test in determining whether a claim based upon a contract may also give rise to independent tort causes of action. DeLanney, 809 S.W.2d at 494-95. First, the court should examine whether the liability asserted arose solely as a result of a contractual duty or out of an independent obligation imposed by law. Id. Second, the court should examine whether the injury asserted is other than an economic loss to the subject of the contract. Id. at 494-95. Earlier, in the case of Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex.1986), the court said that in determining whether there is a tort action, a breach of contract action, or both, the nature of the injury most often determines which duty or duties are breached. Id. at 618. The court indicated that when the injury is only the economic loss to the subject of a contract itself, the action sounds in contract alone. Id.

We will first discuss American National’s claims of fraud. Among other things, American National claims that IBM and Image have made fraudulent statements, indicating that they entered the contract with no intention of performing that contract. Since DeLanney, the Texas Supreme Court has held that “[a]s a general rule, the failure to perform the terms of a contract is a breach of contract, not a tort. However, when one party enters into a contract with no intention of performing, that misrepresentation may give rise to an action in fraud.” Crim Truck & Tractor Co. v. Navistar Intern. Transp. Corp., 823 S.W.2d 591, 597 (Tex.1992) (citations omitted).

IBM urges that DeLanney applies and that American National’s allegations, if true, do not meet either prong of the two-part test set forth in that opinion. As previously stated, the first prong is that the alleged tort must arise out of an independent obligation imposed by law rather than solely as a result of a contractual duty. It is apparent that the duty not to fraudulently induce one into a contract that one has no intention of performing does not arise from the contract subsequently entered into. Therefore, if De-Lanney applies, then we must conclude, based upon Grim, that an allegation of fraud such as made here by American National meets that test. A conclusion that it does not meet the test is inconsistent with logic and with the Supreme Court’s holding in Crim to which we have just referred. If such an allegation does not meet the first prong of the DeLanney test, we must conclude, based upon Crim, that DeLanney does not apply to such an allegation of fraud.

The second prong of the DeLanney test is whether there is a loss other than an economic loss to the subject of the contract. One court of appeals has held that DeLanney and Jim Walter Homes do not apply when the tort accompanying the contract is an action for fraud. Matthews v. AmWest Sav. Ass’n, 825 S.W.2d 552, 554 (Tex.App. — Beaumont 1992, writ denied). Another court of appeals has indicated that at least the second prong of DeLanney and the rule in Jim Walter Homes are not applicable in cases involving fraud in the inducement of a contract where one enters into a contract with no intention of performing the contract. Schindler v. Austwell Farmers Coop., 829 S.W.2d 283, 291 (Tex.App. — Corpus Christi), modified on other grounds, 841 S.W.2d 853 (Tex.1992).

One basis for the court’s holding that it is not applicable is that the general rule that contractual remedies are limited to compensatory damages only, regardless of the culpable mental state of the breaching party, should not be extended to those who seek to fraudulently induce others into entering contracts that they have no intention of performing. Id, at 291. The other basis is that such a holding would virtually eliminate the tort of fraudulent misrepresentation in the procurement of a contract, a tort discussed in Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex.1986). Schindler, 829 S.W.2d at 291. In Spoljaric, the Texas Supreme Court stated that a promise to do an act in the future is actionable fraud when made with the intention, design, and purpose of deceiving and with no intention of performing the act. Spoljaric, 708 S.W.2d at 434. As previously noted, to apply the second prong of DeLanney to this tort would result in its virtual elimination. We do not believe that the Texas Supreme Court intended such a result when it decided Jim Walter Homes and DeLanney. See Peco Constr. Co. v. Guajardo, 919 S.W.2d 736, 739, n. 4 (Tex.App. — San Antonio 1996, writ denied).

The dissent, in a very thoughtful and scholarly opinion, raises the issue of whether we, as a transferee court, are to apply the precedent of the transferring court or are to apply our own precedent. We believe that the answer is that we are not to blindly apply either, but are to reach our best conclusion as to what the law of the State of Texas is on this issue.

The dissent refers to two cases, River Consulting, Inc. v. Sullivan, 848 S.W.2d 165 (Tex.App. — Houston [1st Dist.] 1992, writ denied) and Hebisen v. Nassau Dev. Co., 754 S.W.2d 345 (Tex.App. — Houston [14th Dist.] 1988, writ denied), both of which are cited by the appellees. We agree with the dissent that our opinion is inconsistent with these authorities. In both cases the court applied DeLanney, Jim Walter Homes, or both, to cases involving allegations of fraud in the inducement of contracts with no intention of performing as agreed. River Consulting, Inc., 848 S.W.2d at 170; Hebisen, 754 S.W.2d at 348. In neither case was there any significant discussion as to whether these authorities should be applicable in such a case. The theory of our law is that the State of Texas has but one law on any given subject, and that the law is as proclaimed by the courts of appeals and finally, in civil cases, by the Texas Supreme Court.

This theory acknowledges that there may be differences of opinion among the courts of appeals as to what that law is. The remedy for such conflicts or errors is an appeal to the Texas Supreme Court. Tex. Gov’t Code ANN. § 22.001(a)(2)(6) (Vernon 1988).

Conflicts of law rules make sense when applied to separate sovereigns, whether nations or sovereign states, because in those instances there really can be conflicts in the law from one sovereign state or nation to the other. Where, however, there is only one sovereign, a court of appeals’ duty is to decide and apply the law of that sovereign, not to ascertain the law as stated in a given district, whether its own or the district from which a case has been transferred. The State of Texas consists of only one sovereign state, not fourteen.

We acknowledge that there can be problems caused by the fact that Texas is such a large and diverse state, that we have fourteen courts of appeals districts, and that eases are transferred from one of those districts to other districts where the justices’ views of what the law of Texas is may differ from the justices of the court from which the case arose. We believe, however, that the answer to those difficulties lies in an appeal to the Texas Supreme Court, in civil cases, or to the Texas Court of Criminal Appeals, in criminal cases, rather than in an effort on our part to be parochial in our application of the law to the facts presented us.

The dissent’s conclusion that the “one sovereign” theory is somehow belied by the conflicts that arise among the courts of appeals makes logical sense only if one assumes that courts of appeals are somehow deemed infallible under that theory. Rather, the right of final appellate review from courts of appeal to the Texas Supreme Court or to the Texas Court of Criminal Appeals is based upon the premise that the intermediate appellate courts can and do err in reaching their conclusions as to what Texas law is.

The dissent’s real argument is that we should choose to follow someone else’s view of what Texas law is, rather than our own, because the Texas Supreme Court, for whatever reason, cannot readily resolve conflicts among the courts of appeals.

As noted by the dissent itself, this approach has been entirely rejected in the federal courts. We can find no basis for adopting it in Texas.

The arguments of the appellees are based upon the premise that the second prong of DeLanney and the holding in Jim Walter Homes are applicable to cases of fraudulent inducement to enter a contract when made with no intention of performing the contract. There are other courts of appeals that have applied these principles in fraud cases. These include Grace Petroleum Corp. v. Williamson, 906 S.W.2d 66, 69 (Tex.App. — Tyler 1995, no writ); Parker v. Parker, 897 S.W.2d 918, 924 (Tex.App. — Fort Worth 1995, writ denied); Leach v. Conoco, Inc., 892 S.W.2d 954, 960 (Tex.App. — Houston [1st Dist.] 1995, writ dism’d w.o.j.); Harrison v. Bass Enter. Prod. Co., 888 S.W.2d 532, 536 (Tex.App.— Corpus Christi 1994, no writ); Collins v. Allied Pharmacy Mgmt., 871 S.W.2d 929, 936 (Tex.App. — Houston [14th Dist.] 1994, no writ); Central Sav. & Loan Ass’n v. Stemmons Northwest Bank N.A., 848 S.W.2d 232, 240-41 (Tex.App. — Dallas 1992, no writ); and Airborne Freight Corp., Inc. v. C.R. Lee Enter., Inc., 847 S.W.2d 289, 296 (Tex.App. — El Paso 1992, writ denied).

In these cases the exact nature of the fraud is not always clear. Some of the cases are distinguishable because they do not involve allegations or evidence of fraudulent inducement to enter a contract where the fraudulent party had no intention of performing that contract. While one of these cases discusses the issue with reference to a situation where the fraudulent party has no intention of performing the contract, the opinion presumes, without significant discussion, that Jim Walter Homes is applicable to such cases. Ironically, the authority for the opinion’s conclusion that one must allege and prove distinct actual damages attributable to the fraud and not to the breach of contract for the fraud claim to survive is Schindler, 829 S.W.2d at 290. See also Central Sav. and Loan Ass’n., 848 S.W.2d at 240. As we have noted, Schindler stands for the opposite proposition, that the rale in Jim Walter Homes does not apply to cases in which the tort is fraudulent inducement to contract with no intention of performing the contract. None of the cases cited by the appellees involves any significant discussion of the issue as to whether the principles in DeLan-ney and Jim Walter Homes are applicable to cases of this nature. To the extent that any of these cases hold that Jim Walter Homes or the second prong of DeLanney applies to cases involving fraudulent inducement to enter a contract where the fraudulent party had no intention of performing the contract, we decline to adopt those holdings for the reasons that we have stated.

The appellees rely on two other Texas Supreme Court cases, Texas Nat. Bank v. Karnes, 717 S.W.2d 901, 903 (Tex.1986), and Bellefonte Underwriters Ins. Co. v. Brown, 704 S.W.2d 742, 745 (Tex.1986), both of which state that one may not recover exemplary damages where there were actual damages for breach of contract but no actual damages for the tort that was proved. We find both of those authorities to also be distinguishable because neither involved the fraudulent inducement to enter a contract where the fraudulent party had no intention of performing the contract.

This court has previously held that one could not recover damages for fraud where one made representations that it never had an intention to fulfill, where the accompanying contract is barred by the statute of frauds. Collins v. McCombs, 511 S.W.2d 745, 747 (Tex.Civ.App. — San Antonio 1974, writ ref'd n.r.e.). We find this case to be distinguishable because the statute of frauds is not involved in the case at bar.

American National conceded at trial that its other tort actions were precluded by its breach of contract suit. We sustain American National’s points of error as they relate to its causes of action for fraud as to IBM and Image, including the allegations that they never intended to perform under the contract, and we overrule those same points of error as they relate to American National’s other tort causes of action.

We reverse the summary judgment as it relates to American National’s claims for fraud as to IBM and Image, including the allegations that they never intended to perform under the contract, and we affirm the summary judgment as it relates to American National’s other tort causes of action. The cause is remanded to the trial court for further proceedings consistent with this opinion.