Joslin v. Personal Investments

• Court: Court of Appeals for the Fifth Circuit
• Decided: March 8, 2004
• Docket: 03-40200
• Status: Unpublished

Opinion

United States Court of Appeals Fifth Circuit F I L E D March 8, 2004 In the Charles R. Fulbruge III United States Court of Appeals Clerk for the Fifth Circuit _______________

m 03-40200 _______________

DENNIS JOSLIN,

Plaintiff-Third Party Plaintiff- Appellee-Cross Appellant,

VERSUS

PERSONAL INVESTMENTS, INC.,

Defendant- Cross-Appellee,

BASHER AHMAD, ALSO KNOWN AS ROBERT HELMAND, DOING BUSINESS AS PACIFIC LAND EXCHANGE,

Third Party Defendant- Appellant-Cross-Appellee.

_________________________

Appeal from the United States District Court for the Southern District of Texas m C-00-CV-324 _________________________ Before KING, Chief Judge, JONES AND SMITH, to an accompanying security interest. Circuit Judges. In 1994, Helmand placed the highest bid on * JERRY E. SMITH, Circuit Judge: a package of loans that included a loan (the “Nix loan”) originally taken out by Jimmy Nix, We consider here the validity of a verdict a real estate developer. The Nix loan was se- awarding plaintiff, an investor in delinquent cured by a deed of trust in a subdivision that loan packages, $50,000 for losses he suffered Nix was developing (the “Nix deed”). Soon af- in reliance on misleading information that ter acquiring this interest, Helmand foreclosed could have been debunked through a simple on the Nix deed of trust and purchased the lots investigation, and that he was told not to rely at his own foreclosure sale. Instead of paying on. The common law action for negligent mis- cash for this interest, Helmand credited the Nix representation is not an insurance policy entit- loan $250,000. ling unwary investors to a refund whenever they are injured by their failure to investigate A title search revealed, much to Helmand’s dubious information. disappointment, that the interest so acquired was junior to several other encumbrances. To prevail in such an action, the plaintiff These were collectively valued at a price higher must demonstrate that he was justified in rely- than the appraised value of the property, ing on the misrepresentation. Concluding that making Helmand’s interest effect ively the evidence and reasonable inferences drawn worthless. therefrom overwhelmingly favor a finding that plaintiff’s reliance was not justified, we reverse Helmand contacted the federal agency from and render a take-nothing judgment. which he had purchased the package, seeking a refund for the Nix loan. Ultimately, that agen- I. cy’s successor in interest, the Federal Deposit This case involves the market for delinquent Insurance Corporation (“FDIC”), agreed to loan pools sold at government auctions. The refund the purchase price in exchange for an defendants are Basher Ahmad, also known as assignment of the original deed of trust.2 Robert Helmand, and his wholly owned close corporation, Personal Investments (“PI”). Helmand claims to have protested at length Like plaintiff Dennis Joslin, Helmand and PI that he could not assign the extinguished inter- are in the business of purchasing packages of est represented by the Nix deed, and offered delinquent loans at government auctions. instead to convey his substitute trustee’s deed. Because the obligors on these loans are As he tells the story, however, the FDIC was unlikely to make any further payments, the not interested and insisted that a refund would investment is valuable only to the extent that be available only if Helmand assigned that foreclosure affords an opportunity to gain title which he no longer had. Helmand ultimate-

* 2 Pursuant to 5TH CIR. R. 47.5, the court has The Nix deed had more value to the FDIC than determined that this opinion should not be pub- it did to Helmand, because the FDIC already owned lished and is not precedent except under the limited the other encumberances on the land and could pool circumstances set forth in 5TH CIR. R. 47.5.4. all the interests together for sale to a single party.

2 lySSand again as he tells it, reluctant- at a tax auction, where PI purchased it for a net lySSrelented to the FDIC’s demand and, in investment of $60,000. March 1996, assigned to the FDIC the now- extinguished Nix deed in exchange for a In 1996, Joslin participated in an FDIC auc- $177,000 refund. Naturally, he kept his own tion at which he successfully bid on a package recorded interest in the property. of loans that included the Nix loan and the now worthless Nix deed. To formulate his bid, The documents assigning the Nix deed did Joslin was given access to a loan file containing not indicate that it had been foreclosed. An documentation for many, if not all, the loans in accompanying ledger card should haveSSbut his pool. He arrived at a bid value by did notSSreflect the $250,000 credit Helmand examining the documents in the loan file and, had placed on the loan at foreclosure. without performing any outside investigation, Although that document contained a notation sharply discounting their paper value to reflect saying “Send to Foreclosure,” there was no the inherent risk in purchasing distressed assets. written indication on the ledger card or the Nix In this manner, he ultimately placed a value of deed to indicate that the interest had been $34,483 on the Nix loan and Nix deed as part foreclosed on and sold at auction. Helmand of a total bid of more than $1.2 million. knew, at this time, that the FDIC was re- acquiring the deed assignment and the ledger When, in 1999, Joslin discovered that Hel- card so they could be used as supporting docu- mand had stripped the Nix loan of its collateral ments in a subsequent auction of the Nix loan. before selling it back to the FDIC, Joslin’s attorney contacted PI and asserted a claim over In February 1997SSalmost a year after Hel- the property. PI sued Joslin in state court, mand received his full refundSShis lawyer, Jim seeking to quiet title to the lot. Balis, sent a letter to the FDIC declaring that Helmand recently had discovered that the Joslin removed the case to federal court, as- foreclosure in 1994 preceded the assignment serting diversity jurisdiction, and filed a coun- to the FDIC in 1996 and that, as an ter-claim against PI and a third-party complaint unfortunate result, FDIC had paid $177,000 against Helmand, alleging fraud, negligent for a worthless interest in real property. Hel- misrepresentation, constructive fraud, and mand’s disclosure to the FDIC would be a conspiracy. The district court re-aligned the tautology, however, if he indeed had been parties to make Joslin the plaintiff, dismissed all telling the agency all along that he had the claims against PI, and entered judgment as foreclosed on the loan and had taken title to a matter of law (“j.m.l.”) in favor of Helmand the collateral. on the constructive fraud and conspiracy claims. Nevertheless, Balis’s letter offered to ten- der Helmand’s deed to the FDIC, but The jury found Helmand liable for negligent explained that there was a pending tax suit misrepresentation, but not fraud, and awarded filed against the property by Nueces County, damages of $50,000. Helmand appeals the Texas. The FDIC did not respond to this verdict against him, and Joslin cross-appeals the letter or to Helmand’s two attempts to mail it j.m.l. and the calculation of prejudgment a deed. The property was sold by the county interest.

3 II. foreclosure, and a ledger card failing to reflect We review a verdict only to determine the $250,000 credit Helmand had used to whether there is a legally sufficient evidentiary purchase the foreclosed property. The record basis for the jury to find as it did. Morante v. shows that Helmand had substantial experience Am. Gen. Fin. Ctr., 157 F.3d 1006, 1009 (5th in this business and intended the documents to Cir. 1998). We draw all reasonable inferences be used in future FDIC auctions. That evidence in favor of the non-moving party, without adequately supports a finding that the weighing the evidence or assessing the statements contained false information, were credibility of witnesses. Serna v. City of San made in the course of Helmand’s business, and Antonio, 244 F.3d 479, 482 (5th Cir. 2001). were (at least) negligently given. “There is no legally sufficient evidentiary basis when the facts and inferences point so strongly We reverse the judgment that is based on the and overwhelmingly in favor of one party that verdict, however, because the record does not the Court believes that reasonable men could support a finding of justifiable reliance on the not arri ve at a contrary verdict.” Wallace v. part of Joslin. Leaving aside the scant evidence Methodist Hosp. Sys., 271 F.3d 212, 219 (5th of actual reliance (Joslin’s testimony regarding Cir. 2001). his habits minimally establishes that he probably relied on the documents in preparing his bid.), Texas courts follow the common law defi- it was unreasonable for Joslin to formulate his nition of negligent misrepresentation embodied bid in reliance on the accuracy of documents in in the Restatement (Second) of Torts § 552. the loan file. Fed. Land Bank Ass’n v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991). The elements of the Under Texas law, a plaintiff must prove rea- tort are that sonable reliance. Clardy Mfg. Co. v. Marine Midland Bus. Loans Inc., 88 F.3d 347, 358 (1) the representation is made by a (5th Cir. 1996). The reasonableness of reliance defendant in the course of his business, or is measured in light of the plaintiff’s intelligence in a transaction in which he has a pecuniary and experience. Id. Moreover, the context in interest; (2) the defendant supplies ‘false in- which information is given will affect the con- formation’ for the guidance of others in clusion whether a party was justified in relying their business; (3) the defendant did not ex- thereon.3 Reliance is unjustified where the act ercise reasonable care or competence in ob- of reliance is itself an act of negligence by the taining or communicating the information; plaintiff. Scottish Heritable Trust, PLC v. Peat and (4) the plaintiff suffers pecuniary loss Marwick Main & Co., 81 F.3d 606, 615 (5th by justifiably relying on the representation. Cir. 1996).

Id.

There are sufficient facts on which a jury 3 See, e.g., McCamish, Martin, Brown & Loeff- could determine that the first three elements of ler v. F.E. Appling Interests, 991 S.W.2d 787, 794 this test are met. The representations were the (Tex. 1999) (finding unreasonable the reliance on an transfers of a deed of trust failing to reflect attorney’s representations in an adversarial context); that its value had been eviscerated by Lesikar v. Rappeport, 33 S.W.3d 282, 319 (Tex. App.SSTexarkana 2000, pet. denied) (same).

4 Joslin had between two and five weeks in Joslin argues that a reasonable jury could which to formulate his bid and perform the find his reliance justified, because the nature of necessary due diligence. The FDIC’s loan sale the market for delinquent loans requires him to agreement warned Joslin and other investors assume that the documents contain some not to rely on any documents provided by the minimal semblance of accuracy. He points out FDIC, and urged that the investor perform that the loans are auctioned off in large pools, whatever investigations he “deems to be each containing too many parts to allow for warranted.” detailed due diligence.

Joslin used his time to review the doc- Although acknowledging he takes a risk that uments in the various loan files to arrive at a any individual loan will turn out to be bid price, but he did not run title searches on worthless, Joslin argues that he did not take a the properties listed as security. Instead, it corresponding risk “that one of his fellow bid- was his custom to enter numerous bids, ders would rig the auction by stripping the asset discounting the value of the assets to account of its collateral,” causing buyers to place for the likelihood that some loans in a pool unrealistic bids on completely worthless proper- would be worthless. By discounting in this ty. Joslin reasons that by injecting deliberately manner, Joslin, in his bid, valued the Nix loan false information into the marketplace, Hel- at only $34,483, or around one-tenth of the mand distorted the normal balance of risks and land’s appraised value of $346,000. rewards on which Joslin and others relied in formulating their bids. It was only after he placed a winning bid at auction that Joslin assigned his employees the This explanation is unavailing. Joslin was task of investigating his interest in the unable to persuade the jury, by a preponderance collateral he had purchased. As a result, it was of the evidence, that there was fraud. As a re- not until 1999 that Joslin discovered the Nix sult, the reasonableness of Joslin’s reliance can- deed had been extinguished by the not be established by an argument that no foreclosure.4 reasonable investor should be punished for hav- ing failed to anticipate fraud. Indeed, had actual fraud been shown, Joslin would not have 4 Consequently, his negligent misrepresentation needed to prove the reasonableness of his reli- claim would have been barred by the statute of ance.5 limitations, had that been raised. See Milestone Props., Inc. v. Federated Metals Corp., 867 S.W.2d 113, 119 (Tex. App.SSAustin, 1993, no 4 (...continued) writ) (two-year limitations period applies to negli- ground, because Helmand did not argue the point, as gent misrepresentation claims); Heci Exploration was his burden to do. Woods v. William M. Mer- Co. v. Neel, 982 S.W. 2d 881, 886-87 (Tex. 1998) cer, Inc., 769 S.W.2d 515, 517 (Tex. 1988). (discovery rule does not toll two-year limitations 5 period where misrepresentation was discoverable in The elements of common law fraudulent mis- the title records). Federal courts sitting in diversity representation in Texas are that (1) the defendant apply state statutes of limitations. Vaught v. made a material representation to the plaintiff; Showa Denko K.K., 107 F.3d 1137, 1145 (5th Cir. (2) the representation was false; (3) the defendant 1997). But, we do not decide the case on this knew of the representation’s falsity when it was (continued...) (continued...)

5 Measured by the jury’s decision to absolve the risks that panned out with tort judgments Helmand of responsibility for the alleged inten- for the risks that did not. The verdict and dam- tional actSSa finding Joslin does not challenge age award are vacated.6 as being erroneousSSHelmand’s statements are nothing more than an inadvertent mistake, III. negligently made. In this respect, nothing Joslin cross-appeals the j.m.l. on his claims distinguishes those statements from the bevy of constructive fraud and conspiracy, and the of other inaccurate documents in the loan files, court’s partial failure to award prejudgment many of which place an unrealistic paper value interest. There is no error. on the assets to which they correspond. In Texas, constructive fraud lies where a Joslin took the same risk with respect to party breaches a “legal or equitable duty which, each of those documents: He chose to invest irrespective of moral guilt, the law declares without investigating the accuracy of any of fraudulent because o f its tendency to deceive the statements contained therein, hoping that others, to violate confidence, or to injure public his profit from the accurate documents out- interests.” Archer v. Griffith, 390 S.W.2d 735, weighed his losses on the inaccurate ones. 740 (Tex. 1965). State appellate courts frequently intimate that this occurs only where The evidence, viewed in the light most fa- there is a fiduciary relationship between the vorable to Joslin, fails to demonstrate a legally parties,7 and a “decision by an intermediate sufficient justification for his reliance on the appellate state court is a datum for ascertaining documents in the loan files. He was expressly state law which is not to be disregarded by a warned not to rely on any statements found in federal court unless it is convinced by other the files, and he easily could have dispelled any persuasive data that the highest court of the lingering doubt over the accuracy of the state would decide otherwise.” First Nat’l statements by performing a simple title search. Bank v. Trans Terra Corp. Int’l, 142 F.3d 802, He chose instead to apply a discount factor to the value represented in the loan files, and it is unreasonable for him now to fault the 6 As a result, we do not reach Helmand’s argu- negligence of another for his losses from the ment that, under Trans-Gulf Corp. v. Performance investment. Aircraft Servs., Inc., 82 S.W.3d 691 (Tex. App.SSEastland 2002, no pet.), Joslin lacks stand- Reliance under those circumstances is itself ing to sue Helmand for negligent misrepresentation. an act of negligence, insufficient to support a 7 verdict. See Clardy Mfg., 88 F.3d at 358. See, e.g., Jean v. Tyson-Jean, 118 S.W.3d 1, 9 Joslin cannot now supplement his profits from (Tex. App.SSHouston 2003, pet. filed) (“Construc- tive fraud is the breach of a legal or equitable duty which the law declares fraudulent because it violates a fiduciary relationship.”); Connell v. Connell, 889 5 (...continued) S.W.2d 534, 542 (Tex. App.SSSan Antonio 1994, made; (4) the defendant made the representation writ denied) (“To prove constructive fraud with the intention that the plaintiff act on it; and (5) appellants must introduce evidence that Alvin the plaintiff detrimentally relied on the mis- breached a legal or equitable duty, which the law representation. See T.O. Stanley Boot Co. v. Bank declares fraudulent because it violated a fiduciary of El Paso, 847 S.W.2d 218, 222 (Tex. 1992). relationship.”).

6 809 (5th Cir. 1998). RENDER a take-nothing judgment against Joslin. Joslin does not dispute that there is no evi- dence of such a relationship here, but instead relies on dictum in Vickery v. Vickery, 999 S.W.2d 342 (Tex. 1999), for the proposition that a fiduciary relationship is not necessary. His argument has no merit. In Vickery, id. at 378, the court indicated that constructive fraud is “most frequently” found only in cases where such a relationship exists, but it did not cite a single instance where a fiduciary relationship was not present and the tort was nevertheless found to lie.

Joslin does not cite any such cases either, nor has our research revealed any. In any event, Joslin fails to point to anything that would qualify as a commensurate “legal or equitable duty,” Archer, 390 S.W.2d at 740, that would justify excusing his inability to prove an intent to deceive on Helmand’s part. The district court properly granted j.m.l. on this ground.

Joslin concedes that the above stated analysis also forecloses his claim of conspiracy to commit constructive fraud, because the alleged conspiracy would have, as its object, the commission of a non-tortious act. More- over, there can be no conspiracy here, because Joslin asserts nothing more than that Helmand directed his wholly-owned close corporation to act for his benefit, and there is, accordingly, no allegation of a meeting of two independent minds. See Elliott v. Tilton, 89 F.3d 260, 265 (5th Cir. 1996). The district court properly granted j.m.l. on this ground, as well.

Inasmuch as we reverse all damages award- ed to Joslin, the question of prejudgment inter- est is moot. The judgment is REVERSED in part and AFFIRMED in part, and we