Dunbar Medical Sys v. Gammex Inc ( 2000 )

Revised August 14, 2000
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
____________________
No. 99-20274
____________________
DUNBAR MEDICAL SYSTEMS INC
Plaintiff - Counter Defendant - Appellee
v.
GAMMEX INC, formerly known as Radiation Measurements Inc
Defendant - Counter Claimant - Appellant
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________________________________________________
June 21, 2000
Before KING, Chief Judge, and REAVLEY and STEWART, Circuit
Judges.
KING, Chief Judge:
Gammex Inc. appeals the district court’s entry of judgment
on Dunbar Medical Systems Inc.’s fraudulent inducement claim,
arguing that two clauses in the parties’ settlement agreement or
Texas Rule of Civil Procedure 11 bar that claim. Gammex further
contends that the court erred in finding that there was no intent
to perform at the time the alleged misrepresentations were made,
in awarding punitive damages given the existence of contract
language barring the recovery of such damages, in awarding
punitive damages given the elements of fraud had not been proved
by clear and convincing evidence, and in awarding pre-judgment
interest on both compensatory and punitive damages. We affirm
the entry of judgment and the award of punitive damages, and
reform the judgment solely to clarify the pre-judgment interest
award.
I. FACTUAL AND PROCEDURAL BACKGROUND
Gammex Inc. is a manufacturer of teleradiology equipment,
which is used to digitize data from a medium such as x-ray film
or ultrasound and to transmit those data to a remote unit for
purposes of medical review and diagnosis. Until 1994, Ms. Linda
Dunbar, president and sole shareholder of Dunbar Medical Systems,
Inc. (“DMSI”), was an independent distributor of teleradiology
equipment for Gammex.1 A by-product of the dissolution of the
parties’ relationship was a lawsuit, filed by Gammex on April 28,
1994, in which Gammex sought return of equipment and damages
(“1994 Litigation”). In February 1995, DMSI filed a counterclaim
asserting breach of contract, fraud, defamation, and various
1
In early 1989, DMSI and DataSpan, Inc. entered into an
agreement whereby DMSI became an independent sales representative
for DataSpan. Radiation Measurements, Inc. is Gammex’s
predecessor in interest. DataSpan was acquired by
Gammex/Radiation Measurements in 1989. We refer to each of these
companies as “Gammex.”
2
other claims against Gammex. Shortly before trial, the parties
executed a Settlement Agreement. That Agreement is the focus of
the case before us.
Discussions leading up to the execution of the Settlement
Agreement occurred between December 1995 and July 1996. In
December, the parties participated in unsuccessful court-ordered
mediation. Sometime thereafter, Ms. Margaret Lescrenier, a vice-
president of Gammex, telephoned Ms. Dunbar to discuss settlement
terms, including the possibility of transferring equipment to
DMSI in lieu of cash. The district court found that in that
conversation, Ms. Dunbar told Ms. Lescrenier that she did not
want to consider older Courier II units because they had software
and hardware defects.2 According to Ms. Dunbar, Ms. Lescrenier
assured her that the units would be new and come from the latest
run of fifty manufactured by Gammex and would be problem free. A
follow-up letter dated February 1, 1996 faxed by Ms. Lescrenier
to Ms. Dunbar listed various equipment, including ten Courier II
units, that Gammex was willing to give DMSI. The letter gave a
list price of the Courier II units of $10,000 each, a total list
price of all offered equipment of $203,600, and stated that
“[t]he majority of the above equipment is new, never been used.
Some of the Courier computers were demonstration units.”
On February 8, Ms. Dunbar sent a fax to Ms. Lescrenier that
2
The Courier II is a stand-alone computer that runs
teleradiology equipment.
3
responded to the proposal. That transmission included a list of
the same equipment along with dealer transfer prices. Ms.
Dunbar’s fax indicated that, based on the dealer prices, the
actual value of Gammex’s proposal was $44,654.25. Ms. Dunbar
also stated that she did not “know what to do” with some of the
listed equipment, and that there had to be a cash settlement
along with the equipment package.
The two principals again corresponded later in February.
Ms. Lescrenier proposed as a counteroffer a new combination of
equipment and $50,000 in cash. Ms. Dunbar, the district court
found, emphasized in a phone conversation with Ms. Lescrenier the
importance to DMSI that the equipment (including the Courier IIs)
be new. Ms. Lescrenier made the same representations as earlier
— that the Courier IIs were from the latest production run, and
that for the most part, the equipment was new or demonstration
units and thus practically new. Ms. Dunbar requested a
particular type of camera that normally went with the base units
that were part of the proposed package, but was told that Gammex
had none in stock and did not wish to purchase one merely for
purposes of settlement.3
These discussions were outlined in a fax dated February 26.
That communication (1) explained the equipment substituted for
3
Ms. Dunbar later determined that in fact, the camera’s
manufacturer had earlier ceased production of the requested
camera.
4
the items for which Ms. Dunbar indicated she had no use; (2) made
reference to an exclusive dealer contract, a definition of a
sales territory, service arrangements, and assistance with
advertising that were agreed to in earlier mediation proceedings,
and (3) offered $50,000 in cash. The total list price associated
with the new equipment package was $203,975, and again, the
communication indicated that the majority of the equipment was
“new, never been used” and that “[s]ome of the Courier computers
were demonstration units.” The fax also stated that Ms. Dunbar
had “misstated the value of the equipment in the original list”
in her February 8 response.
Negotiations resumed in late April, when Ms. Dunbar’s
attorney contacted Gammex’s counsel. By April, DMSI was no
longer interested in maintaining certain relationships with
Gammex,4 and it indicated that several aspects of the earlier
proposals were no longer of value (e.g., a new distributorship
agreement, assistance with advertising). Negotiations between
the parties’ counsel dealt, inter alia, with the amount of cash
Gammex was to pay to DMSI, the equipment to be transferred (e.g.,
whether mouses and cables were included, whether a six-month
warranty would be included, configuration and programming
4
The letter Ms. Dunbar’s attorney sent to Gammex’s
attorney listed as part of Ms. Dunbar’s settlement proposal that
“[a]ll continuing or past relationships will be severed (except
for the terms of the settlement agreement, the non-disclosure and
software license agreements).”
5
issues), the availability of documentation regarding the
equipment, the availability of discounts on such items as
replacement parts, responsibility for shipping and insurance
costs, and the timing of the delivery of the cash and the
equipment. Thus, the focus of the second stage was on the
consideration Gammex was to give DMSI in return for DMSI
releasing its claims.
The parties eventually agreed to Gammex’s releasing claims
related to the 1994 Litigation, and transferring to DMSI the
equipment listed in Ms. Lescrenier’s second proposal and $70,000
in cash. The final agreement included three express warranties:
(1) that Gammex “has good and clear title to the Equipment, and
that the Equipment is free of all liens, mortgages and
encumbrances at the time of shipment to Dunbar Medical”; (2) that
the equipment “is either new and has never been used, or has
previously been used as demonstration or loaner equipment”; and
(3) that the “Equipment, at the time of shipment to Dunbar
Medical, is working and operational in accordance with the
manufacturer’s specifications applicable to each item included in
the Equipment.” In return, DMSI agreed to release claims related
to the 1994 Litigation. The agreement was signed by Ms. Dunbar,
on behalf of herself and DMSI, on July 18, 1996; Charles
Lescrenier, Gammex’s CEO, signed the agreement on July 23, 1996.
As per the agreement, Gammex transferred $70,000 to DMSI.
The parties dismissed, with prejudice, their respective claims.
6
Ms. Dunbar sent to Gammex instructions regarding how the Courier
II units were to be configured and programmed. DMSI received
equipment from Gammex, albeit after the date stated in the
Agreement. After receiving the equipment, some of which was
damaged in transit, Ms. Dunbar determined through testing that it
differed in significant ways from what it had been represented to
be.
As a result, on November 11, 1996, DMSI filed in the 152nd
Judicial District Court of Harris County, Texas an action
asserting breach of contract and fraud claims. Gammex removed
the case on December 23, 1996 to the United States District Court
for the Southern District of Texas.5 In response to the district
court’s granting of Gammex’s November 28, 1997 motion for a more
definite statement, DMSI filed a first amended complaint on
January 16, 1998. In that complaint, DMSI alleged breach of
contract and fraudulent inducement, and sought $150,000 in
compensatory damages, $600,000 in punitive damages, pre- and
post-judgment interest, and attorney fees.
Gammex filed a motion for summary judgment on February 2,
1998, arguing, inter alia, that under the Texas Supreme Court’s
decision in Schlumberger Technology Corporation v. Swanson, 959
S.W.2d 171 (Tex. 1997), the Settlement Agreement barred DMSI’s
5
Jurisdiction is claimed under 28 U.S.C. § 1332. DMSI is
a Texas corporation with its principal place of business in
Harris County, Texas, and Gammex is a Wisconsin corporation with
its principal place of business in Middleton, Wisconsin.
7
fraudulent inducement claim.6 The district court denied Gammex’s
motion on March 4, 1998, and also denied Gammex’s subsequent
motion to reconsider.7 A three-day bench trial began March 31,
1998. Gammex’s motion for a judgment as a matter of law was
denied.
In the district court’s careful and thorough Findings of
Fact and Conclusions of Law, the court admitted DMSI’s parol
evidence of Gammex’s prior oral representations and promises,
finding that they did not contradict or vary the Agreement, and
instead specified and clarified the nature of the equipment made
part of that Agreement. It found that Gammex had breached its
contract with DMSI. According to the court:
The evidence revealed that some of the highly technical
equipment was not only not new, but outmoded, or
defective, or had been used not merely for
demonstration or loaner purposes. The ten Courier II
units were not programmed as set forth by Linda Dunbar
in breach of Paragraph 2.2 of the Agreement. The
evidence, both testimonial and spreadsheet
documentation, showed that upon arrival, none of the
ten Courier IIs captured images off the digitizer or
ultrasound and that the equipment did not meet
specifications provided to Gammex by DMSI . . . .
[C]redible testimony established that a large portion
of the equipment was not new, but used, and some
nonoperational or only partly operational. Despite
6
The Settlement Agreement contains a choice-of-law clause
that provides that the Agreement “shall be construed and governed
by the laws of the State of Texas.”
7
Because Gammex’s motion to reconsider raised a new
argument — that Texas Rule of Civil Procedure 11 barred DMSI’s
claims — the lower court interpreted the motion as a supplemental
motion for summary judgment that was ripe for decision given DMSI
had responded.
8
Linda Dunbar’s insistence that she wanted Courier II
units from the last production run that did not have
the hard drive and software problems identified in the
state court suit, none of the equipment sent to DMSI
was manufactured later than 1993, and most was
manufactured between 1990-1992. It included old,
discontinued models . . . . Some of the equipment had
been used and taken back by Gammex as trade-ins or
exchanges.
The court also noted Ms. Dunbar’s testimony that the August 1996
value of the transferred equipment was no more than $20,000. It
held that as a result of Gammex’s breach, DMSI was entitled to
$150,000 in benefit-of-the-bargain damages and to $35,200 in
attorney fees.
The court went on to find that Gammex had fraudulently
induced DMSI to enter into the Settlement Agreement. Ms.
Lescrenier was found by the court to have knowingly made false
statements regarding the transferred equipment’s value,
condition, and age. The court found that the estimates of the
equipment’s value were “deliberately and greatly inflated.” Ms.
Lescrenier’s statements, which were found by the district court
not to be expressions of opinion, were made with the intention of
causing Ms. Dunbar to rely on them and settle the parties’
dispute. Ms. Dunbar was found to have relied on Ms. Lescrenier’s
statements and to have been injured as a result. The court
determined that Gammex’s fraud entitled DMSI to $150,000 in
benefit-of-the-bargain damages, and $300,000 in punitive damages.
As a result of these determinations, the court ordered on
November 23, 1998 that DMSI submit a proposed final judgment, and
9
allowed Gammex to file objections to that proposed judgment. On
February 22, 1999, the court entered final judgment, which, not
surprisingly, reflected DMSI’s election to recover under its
fraud in the inducement cause of action. The court awarded DMSI
$150,000 in compensatory damages, $300,000 in punitive damages,
and pre- and post-judgment interest. Gammex timely appealed.
II. THE FRAUDULENT INDUCEMENT CLAIM
Before us, Gammex challenges only the district court’s entry
of judgment on DMSI’s fraudulent inducement claim, its award of
$300,000 in punitive damages, and its award of pre-judgment
interest on those punitive damages.8 In general, Gammex contends
that (1) DMSI’s claim is barred, either by the Settlement
Agreement’s terms or by Texas Rule of Civil Procedure 11; (2) the
evidence does not support the court’s finding of no intent to
perform; (3) the Agreement bars the punitive damage award;
(4) DMSI has not met its statutory burden in proving entitlement
to such damages; and (5) the lower court improperly awarded pre-
judgment interest on punitive damages. We note that Gammex does
not challenge the lower court’s findings that Ms. Lescrenier made
the statements that are at the heart of DMSI’s fraudulent
8
Gammex concedes that DMSI is entitled to recover $150,000
in compensatory damages on its breach of contract claim, and to
receive $35,200 in attorney fees. It also concedes that DMSI is
entitled to recover pre-judgment interest at the rate of 6% per
annum on the compensatory damages award.
10
inducement claim, that the statements included misrepresentations
of fact, or that Ms. Dunbar relied on Ms. Lescrenier’s
statements. In assessing Gammex’s arguments, we apply the well-
established standard of review applicable to bench trials,
examining questions of law de novo, and reviewing findings of
fact for clear error. See Gebreyesus v. F.C. Schaffer & Assocs.,
Inc., 204 F.3d 639, 642 (5th Cir. 2000).
A. Whether Contractual Provisions Act as a Bar
Gammex contends that under Schlumberger Technology
Corporation v. Swanson, 959 S.W.2d 171 (Tex. 1997), two
provisions within the Settlement Agreement operate to bar DMSI’s
fraudulent inducement claim. The first is an “as is” clause,
which provides that “[e]xcept as expressly provided for herein,
the equipment is conveyed and transferred by Gammex to Dunbar
Medical as is, where is, and with all faults, and there are no
warranties which extend beyond the description of the equipment
on the face of exhibit ‘A’ attached hereto.”9 ¶ 2.2. The second
provision, a merger clause, provides that the Settlement
Agreement “contains the entire agreement between the parties, and
no representations, inducements, promises, or agreement, oral or
otherwise between the parties with reference thereto and not
9
The quoted language appears in all capital letters, in a
bold-face type, at the end of the paragraph that lists Gammex’s
warranties with regard to the equipment.
11
embodied herein shall be of any force.” ¶ 4.2.
The district court rejected Gammex’s argument in its review
of Gammex’s motion for summary judgment. It distinguished
Schlumberger from the case sub judice by noting that “while the
agreement here may appear to Gammex to be an integrated one,
there was no express, specific disclaim of reliance on Gammex’s
alleged statements and representations.” We also reject Gammex’s
argument, but do so for somewhat different reasons.
In Schlumberger, the Texas Supreme Court recognized the
inherent tension between the principle that the “[p]arties should
be able to bargain for and execute a release barring all further
dispute,” 959 S.W.2d at 179, and prior authority holding that
clauses in contracts, including merger and disclaimer provisions,
need not bar subsequent claims of fraudulent inducement. See id.
at 178-79. The court held that “a release that clearly expresses
the parties’ intent to waive fraudulent inducement claims, or one
that disclaims reliance on representations about specific matters
in dispute, can preclude a claim of fraudulent inducement,” but
also emphasized that “a disclaimer of reliance or merger clause
will not always bar” such a claim.10 Id. at 181. Because the
10
The court cited its opinion in Prudential Insurance Co.
v. Jefferson Associates, Ltd., 896 S.W.2d 156, 162 (Tex. 1995),
as describing some of the circumstances under which such clauses
would not be binding. Included in those circumstances are where
the contract was procured by fraud and where a seller’s conduct
obstructs a buyer’s ability to inspect the condition of what is
being sold. See id. The court also noted that “[w]here the ‘as
is’ clause is an important part of the basis of the bargain, not
12
parties should be able to rely on their negotiated disclaimer or
merger clauses to resolve fully their disputes, the question for
the court was “under which circumstances such disclaimers are
binding.” Id. at 179. For the answer to this question, the
court looked to “[t]he contract and the circumstances surrounding
its formation . . . .” Id.; see also Prudential Ins. Co. v.
Jefferson Assocs., Ltd., 896 S.W.2d 156, 162 (Tex. 1995) (stating
that, in determining whether an “as is” clause is unenforceable,
“[t]he nature of the transaction and the totality of the
circumstances surrounding the agreement must be considered”).
We read Schlumberger as holding that particular contract
clauses may, under certain limited circumstances, curtail the
contracting parties’ ability to challenge the contract’s validity
on fraudulent inducement grounds. Schlumberger gives us some
indication of what those circumstances may include. That the
negotiating parties in Schlumberger were represented by counsel,
were experts in the subject matter of the negotiations, and were
bargaining at arm’s length were important to the court.11 See
Schlumberger, 959 S.W.2d at 180. In addition, the court noted
an incidental or ‘boiler-plate’ provision, and is entered into by
parties of relatively equal bargaining position, a buyer’s
affirmation and agreement that he is not relying on
representations of the seller should be given effect.” Id.
11
The argument that merger or disclaimer clauses should be
binding whenever parties to the agreement were represented by
independent legal counsel was expressly rejected by the
Schlumberger court. See 959 S.W.2d at 178.
13
that at the center of the parties’ dispute was the object of the
alleged misrepresentations — the value of the mining project —
and that the sole purpose of the unambiguous release was to end
that dispute “once and for all.” Id.
We must assess whether Gammex and DMSI’s Settlement
Agreement “clearly expresses the parties’ intent to waive
fraudulent inducement claims, or . . . disclaims reliance on
representations about specific matters in dispute.” Id. at 181.
The parties in the instant action were represented by counsel,
and bargained at arm’s length over the terms of the Settlement
Agreement. The final bargain struck exchanged releases of claims
for equipment and cash. Both parties could be considered
extremely knowledgeable about the type of equipment reflected in
the agreement — one manufactured and marketed that equipment, the
other was previously a distributor of the equipment.
We nonetheless conclude that under the circumstances of this
case, the “as is” and merger clauses do not bar DMSI’s fraudulent
inducement claim. The Agreement reflects that Gammex and DMSI
specifically contemplated future, although not continuing,
interactions with one another. DMSI had the right to send one
employee to Gammex’s offices for training on the Courier II and
other equipment, Gammex was to provide DMSI free support by
telephone for one year, and Gammex agreed to apply for one year
its standard trade discount to DMSI’s purchases of replacement
parts and supplies. In addition to future interactions, the
14
parties contemplated future disputes related to the Settlement
Agreement. A punitive-damages provision in that Agreement
presupposes a claim arising from or related to it. This
suggests that the parties were not seeking to end all disputes
between them “once and for all.” Schlumberger, 959 S.W.2d at
180. Although these observations are not dispositive, they frame
our analysis of the “as is” and merger clauses.
As the Texas Supreme Court noted in Prudential Insurance,
although an “as is” clause can negate a claim that a seller’s
conduct caused a buyer injury, see 896 S.W.2d at 161, such a
clause is not always enforceable. See id. at 162. The court
explicitly noted that fraud used to induce agreement was a
circumstance that rendered that clause unenforceable. See id.
(“A buyer is not bound by an agreement to purchase something ‘as
is’ that he is induced to make because of a fraudulent
representation or concealment of information by the seller.”).
The issue at hand is whether the “as is” clause demonstrates the
parties’ clear intent to waive fraudulent inducement claims or
disclaim reliance on representations about specific matters in
dispute. See Schlumberger, 959 S.W.2d at 181.
We conclude that it does not. The misrepresentations in
this case went to the condition of the equipment (i.e., its
“newness” and its being problem-free). The contract specifically
warrants that the equipment be either “new and . . . never . . .
used, or . . . previously . . . used as demonstration or loaner
15
equipment” and that it would be “working and operational in
accordance with the manufacturer’s specifications . . . .” The
“as is” clause specifically excepts the other explicit
warranties. Under these circumstances, we cannot conclude that
DMSI, in agreeing to the “as is” clause, disclaimed reliance on
Gammex’s representations regarding the equipment’s age or
functioning, or intended to waive fraudulent inducement claims.
Cf. SMB Partners, Ltd. v. Osloub, 4 S.W.3d 368, 371 (Tex. App.
1999, no pet.) (holding that an “as is” clause that specifically
excluded other warranties did not apply to the purported
misrepresentation and thus did not bar the fraudulent inducement
claim).
The merger clause, on its face, represents a closer
question. In agreeing to that clause, DMSI agreed that “no
representations . . . oral or otherwise between the parties with
reference [to the Settlement Agreement] and not embodied [in the
Agreement] shall be of any force.” Again, however, we find that
the language of the clause is not sufficient to bar DMSI’s
fraudulent inducement claim. Gammex contends that Ms.
Lescrenier’s representations regarding the equipment’s age and
ability to operate problem-free are not embodied in the
Settlement Agreement’s language, and DMSI argues the opposite.
The agreement’s reference to new equipment that had never been
used is the outgrowth of the February discussions regarding the
equipment, appearing in the contract after DMSI reminded Gammex
16
of Ms. Lescrenier’s proposal that the majority of the equipment
was new, with some demonstration equipment, and drafted proposed
language that stated that the equipment is “either new and never
been used or only used as demonstration units.”12 Whether this
history is sufficient to conclude that the representations are
embodied in the agreement is something we need not decide, for we
can say that under the circumstances, the agreement does not
reflect the “requisite clear and unequivocal expression of intent
necessary to disclaim reliance on the[] specific representations”
by Gammex. Schlumberger, 959 S.W.2d at 179. As a result, the
district court did not err in concluding that DMSI’s fraudulent
inducement claim was not barred.13
12
DMSI also sought additional language relating to a six-
month warranty on the equipment. This was rejected. The
description of the equipment to be transferred in the final
agreement differs from the description in the documents exchanged
by Ms. Lescrenier and Ms. Dunbar in including a reference to
“loaner” equipment. This addition does not contradict Ms.
Lescrenier’s representations, however, as loaner equipment,
although not new, could still come from the last fifty
manufactured by Gammex and be problem-free.
13
We note that the parties negotiated separate release
clauses covering any and all claims “made in or based on or
related to the claims made in the Litigation.” The “Litigation”
was defined as the action Gammex initiated in 1994. Thus, we do
not read the release clauses as covering claims arising from the
Settlement Agreement. Indeed, in a section of the contract
separate from the “Releases” section, the parties included
provisions relating specifically to the Settlement Agreement.
Those provisions were the merger clause, the clause prohibiting
recovery of punitive and special damages, and the choice-of-law
clause.
17
B. Whether Rule 11 Acts to Make Oral Representations
Unenforceable
Gammex also argues that under the Texas Supreme Court’s
opinion in Padilla v. LaFrance, 907 S.W.2d 454 (Tex. 1995), Texas
Rule of Civil Procedure 11 makes oral representations made in the
course of negotiating a settlement agreement unenforceable.14 As
a result, DMSI cannot rely on Ms. Lescrenier’s statements to
support a claim of fraudulent inducement. Gammex takes issue
with the district court’s rejection of this argument, contending
that the court erred in concluding that because the Settlement
Agreement was to be performed in less than one year, the statute
of frauds does not apply.
Like the district court, we conclude that Gammex’s argument
must be rejected, although we base our decision on different
reasoning. In Padilla, the Texas Supreme Court faced the
question of whether a series of letters between parties
constituted an agreement that satisfied Rule 11’s writing
requirement. Analogizing to the statute of frauds, the court
held that the letters evidenced a binding agreement, in part
because they reflected “all material terms of the agreement.”
907 S.W.2d at 460-61. Gammex wishes to use language within the
14
Under Rule 11, “no agreement between attorneys or
parties touching any suit pending will be enforced unless it be
in writing, signed and filed with the papers as part of the
record, or unless it be made in open court and entered of
record.” TEX. R. CIV. P. 11 (West 2000).
18
Padilla opinion to require that all oral representations made in
the context of settlement negotiations be in writing in order to
be enforceable. See id. at 460 (“To satisfy the statute of
frauds, ‘there must be a written memorandum which is complete
within itself in every material detail . . . .’” (quoting Cohen
v. McCutchin, 565 S.W.2d 230, 232 (Tex. 1978))). Gammex contends
that because oral settlement agreements are unenforceable as a
matter of law, no claim of fraudulent inducement can be brought.
It looks to Weakly v. East, 900 S.W.2d 755, 758 (Tex. App. 1995,
writ denied), for support for this contention.
We find Weakly distinguishable on its facts. In that case,
plaintiffs alleged that defendants, in an effort to forestall the
sale of the real estate to another buyer and to purchase that
property at a lower price in a foreclosure sale, promised to
purchase real estate with no intention of actually carrying out
that promise. See id. at 758. The court found that the essence
of the fraud claim was the oral promise to purchase realty. See
id. Because a contract for the sale of realty is not enforceable
unless in writing, and because the alleged fraud did not prevent
the necessary writing, the court found that summary judgment in
favor of the defendants was proper on the fraud claim. See id.
Gammex’s argument could have more force if DMSI was seeking
to enforce as a contract an alleged oral settlement agreement
between Ms. Dunbar and Ms. Lescrenier. Here, however, DMSI
challenges the validity of the signed Agreement. Unlike the
19
plaintiffs in Weakly, DMSI alleges that Gammex’s actions
constituted fraud in the inducement — the writing, signed by the
parties, was procured by Ms. Lescrenier’s misrepresentations as
to the condition of the equipment to be transferred. This
allegation cannot be said to be an attempt to by-pass the statute
of frauds via a fraud claim, or an attempt to enforce an
otherwise unenforceable oral settlement agreement. DMSI’s injury
stems from Gammex’s alleged violation of its independent legal
duty not to procure a contract with DMSI through fraud. See
Formosa Plastics Corp. USA v. Presidio Engineers & Contractors,
960 S.W.2d 41, 46 (Tex. 1998).
Gammex seeks to distinguish Formosa on the ground that it
involves a contract, rather than a settlement agreement. Rule 11
applies only to settlement agreements. Although it is clear that
a settlement agreement must be in writing to be enforceable under
Texas courts’ interpretation of Rule 11, we must reject Gammex’s
attempt to rely on the scope of that Rule to negate DMSI’s
fraudulent inducement claim. We can think of no principled
reason for distinguishing between fraudulent inducement claims
targeting contracts and those targeting settlement agreements,
and Texas law provides us with no cause to do so.
In general, Texas law treats a settlement agreement as a
contract, and courts typically analyze an agreement’s
enforceability following contract law. See Certain Underwriters
at Lloyd’s v. Oryx Energy Co., 203 F.3d 898, 901 (5th Cir. 2000);
20
Will. v. Glash, 789 S.W.2d 261, 264 (Tex. 1990); National Cas.
Co. v. Lane Express, Inc., 998 S.W.2d 256, 262 (Tex. App. 1999,
writ denied); Stewart v. Mathes, 528 S.W.2d 116, 118 (Tex. Civ.
App. 1975, no writ). Like a contract, “an agreement in
compliance with [Rule 11] is subject to attack on the grounds of
fraud or mistake.” Kennedy v. Hyde, 682 S.W.2d 525, 529 (Tex.
1984) (citing Burnaman v. Heaton, 240 S.W.2d 288 (Tex. 1951)).
There is no suggestion in the instant case that the signed
Settlement Agreement does not comply with Rule 11’s requirements.
“[A] fraud claim can be based on a promise made with no intention
of performing, irrespective of whether the promise is later
subsumed within a contract.” Formosa, 960 S.W.2d at 46; see also
Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432 (Tex. 1986)
(holding, in a fraudulent misrepresentation case, that evidence
was sufficient to support jury finding that employer did not
intend to implement a bonus plan when he orally promised to do
so). Under Texas law, parties challenging contracts as
fraudulently induced may rely on evidence of oral promises or
agreements to support their claims. See Santos v. Mid-Continent
Refrigerator Co., 471 S.W.2d 568, 569 (Tex. 1971) (per curiam)
(“The parol evidence rule will not prevent proof of fraud or
mutual mistake.”); Dallas Farm Mach. Co. v. Reaves, 158 Tex. 1,
307 S.W.2d 233, 239 (1957) (holding that a merger clause does not
bar the use of parol evidence to establish that the contract was
induced by fraud). Padilla negates none of these principles. We
21
therefore conclude that neither Padilla nor Rule 11 precludes
DMSI’s fraudulent inducement claim.15
C. Whether a Factual Basis Exists for a Finding of Fraud
Under Texas law, a party claiming fraudulent inducement must
demonstrate (1) a material representation, (2) that was false,
(3) that was either known to be false when made or was asserted
without knowledge of the truth, (4) that was intended to be acted
upon, (5) was relied upon, and (6) that caused injury. See
Formosa, 960 S.W.2d at 47; DeSantis v. Wackenhut Corp., 793
S.W.2d 670, 688 (Tex. 1990), cert. denied, 498 U.S. 1048 (1991).
“A promise of future performance constitutes an actionable
misrepresentation if the promise was made with no intention of
performing at the time it was made.” Formosa, 960 S.W.2d at 48.
Gammex contends that the district court erred in finding
that Ms. Lescrenier intended not to perform at the time she
15
Gammex also contends that we should apply language from
Boggan v. Data Systems Network Corp., 969 F.2d 149 (5th Cir.
1992), to hold that Ms. Lescrenier’s statements cannot constitute
actionable misrepresentations. See id. at 153 (“It is well
settled that the negotiations and discussions leading up to the
writing cannot displace the terms of the written agreement.”).
We decline to do so. Our decision in Boggan was in part based on
the finding that the alleged misrepresentations were expressions
of intent, rather than statements of fact, see id., and that
statements such as “I think we have a deal” could not, under the
circumstances, be considered actionable misrepresentations. In
the case before us, the district court found that Ms.
Lescrenier’s statements were misrepresentations of fact, or
promises made with no intention of performing. Each of these is
an actionable misrepresentation under Texas law. See Formosa,
960 S.W.2d at 46-48.
22
represented that the transferred Courier IIs would come from the
last production run and would be problem free. To support this
contention, it points to the fact that the Ms. Lescrenier’s
proposals were not fully accepted in February, to evidence that
Ms. Lescrenier relied on a list of available equipment prepared
by Mr. Sopotnick, and to evidence that Ms. Lescrenier did not
participate in the second stage of negotiations. Gammex urges us
to conclude that the evidence supporting the lower court’s
finding of the requisite intent is “so weak that it creates only
a mere surmise or suspicion of its existence,” T.O. Stanley Boot
Co. v. Bank of El Paso, 847 S.W.2d 218, 222 (Tex. 1992), and is
thus insufficient.
Our review of the district court’s finding is limited.
Under the Federal Rules, “due regard shall be given to the
opportunity of the trial court to judge of the credibility of the
witnesses.” FED. R. CIV. P. 52(a); see also Coury v. Prot, 85 F.3d
244, 254 (5th Cir. 1996). “The burden of showing that the
findings of the district court are clearly erroneous is heavier
if the credibility of witnesses is a factor in the trial court’s
decision.” Id. at 254 (citing Village Fair Shopping Ctr. v.
Stanley Broadhead Trust, 588 F.2d 431, 434 n.2 (5th Cir. 1979)).
In this case, the trial judge specifically noted her assessments
of Ms. Dunbar’s, Ms. Lescrenier’s, and Mr. Sopotnick’s
credibility.
We do not emerge from our review of the record with a
23
“‘definite and firm conviction that a mistake has been
committed.’” Concrete Pipe & Prods. of Cal., Inc. v. Construction
Laborers Pension Trust for Southern Cal., 508 U.S. 602, 622
(1993) (quoting United States v. United States Gypsum Co., 333
U.S. 364, 395 (1948)). Evidence indicates that although Ms.
Lescrenier was not an active participant in the last rounds of
negotiations, her second February proposal was a basis upon which
those negotiations built. Although Ms. Lescrenier indicated in
her testimony that Gammex’s inventory changed between February
and August, when the equipment was shipped, Mr. Sopotnick
testified that there was no change. He also testified that Ms.
Lescrenier accompanied him when he reviewed the inventory to
assess what equipment was available. Given this and other
evidence in the record, we conclude that the district court’s
finding is not clearly erroneous.
III. PUNITIVE DAMAGES AND PRE-JUDGMENT INTEREST
Because we conclude that the district court did not err in
entering judgment on DMSI’s fraudulent inducement claim, we turn
to Gammex’s challenges to the lower court’s punitive damages and
pre-judgment interest decisions. With regard to punitive
damages, Gammex contends that the district court erred in not
enforcing a contractual provision in which DMSI explicitly
released claims for punitive damages, and that DMSI is not
entitled to such damages because it has not met its statutory
24
burden of proof.
The parties’ Settlement Agreement provides that
As to any and all claims that may be asserted by Dunbar
Medical or Dunbar arising from or in any way relating
to this Settlement Agreement, including but not limited
to the Equipment, in no event shall Dunbar Medical or
Dunbar be entitled to recover special, consequential or
punitive damages, and recovery of special,
consequential or punitive damages shall be absolutely
precluded.
Gammex contends that this language must be interpreted as a
release of DMSI’s punitive damages claim, and that because the
clause was freely negotiated, it bars DMSI’s recovery of such
damages.
In general, a party is not bound by a fraudulently induced
contract. See Formosa, 960 S.W.2d at 46; Prudential Ins., 896
S.W.2d at 162. Underlying this rule is the notion that a party
induced by fraud to enter into an agreement has not provided the
assent necessary to make a binding contract. See Dallas Farm
Mach. Co., 307 S.W.2d at 240; Edward Thompson Co. v. Sawyers, 111
Tex. 374, 234 S.W. 873, 874 (1921) (“Contracts, though reduced to
writing, are avoided when induced by material promises, never
intended to be kept, not because one is allowed to vary his
written contract, but because real assent is essential to a
binding contract.”). “One who is entitled to avoid an entire
written contract because it lacked his assent can no longer be
held bound by any of its stipulations . . . .” Sawyers, 234 S.W.
at 874-75.
25
Because a party is not bound by a contract he was induced by
fraud to enter, we find inapplicable Memorial Medical Center v.
Keszler, 943 S.W.2d 433 (Tex. 1997), a case Gammex relies upon to
support its contention that the punitive damages provision is
enforceable. In Memorial Medical, the Texas Supreme Court
determined, inter alia, that a post-injury release of claims for
gross negligence is not against public policy. See id. at 435.
The settlement agreement and release at issue in the case were
considered valid documents. See id. at 434 (“The parties . . .
have not contested the validity of the release or claimed
ambiguity or fraud in its execution.”). Thus, the issue regarded
the enforceability of a clause within the contract, not the
validity of the contract. Here, we consider whether a clause in
a contract otherwise unenforceable against DMSI may nonetheless
preclude punitive damages. We hold that it cannot. Because DMSI
was found to have been induced into entering the Settlement
Agreement by Gammex’s fraud, the district court did not err in
concluding that the Agreement’s punitive damages provision was
not binding on DMSI.
Gammex next argues that DMSI has not met its burden under
section 41.003 of the Texas Civil Practice and Remedies Code, and
therefore is not entitled to a punitive damages award. Section
41.003(a) provides that a claimant prove “by clear and convincing
evidence that the harm with respect to which the claimant seeks
recovery of exemplary damages results from (1) fraud, (2) malice,
26
or (3) wilful act or mission or gross neglect in wrongful death
actions . . . .” Gammex attacks the lack of “clear and
convincing” evidence supporting a finding of no intent to perform
on the part of Ms. Lescrenier, and argues that this case exhibits
neither the “evil mind,” Transportation Ins. Co. v. Moriel, 879
S.W.2d 10, 18 (Tex. 1994), nor the “extraordinary harm,” id. at
24, that are required under Texas law to award punitive damages.
Gammex’s reliance on Moriel and other cases building on its
principles is misplaced. The cases cited each deal with
allegations of bad faith. See State Farm Fire & Cas. Co. v.
Simmons, 963 S.W.2d 42 (Tex. 1998) (involving allegations that
insurance company breached its duty of good faith and fair
dealing); Universe Life Ins. Co. v. Giles, 950 S.W.2d 48 (Tex.
1997) (same); Moriel, 879 S.W.2d at 14 (same). As subsequent
Texas Supreme Court decisions have recognized, Moriel “clarified
the requirements for the imposition of punitive damages in a bad
faith case.” Simmons, 963 S.W.2d at 47; see also Giles, 950
S.W.2d at 54 (noting Moriel limits recovery of punitive damages
in bad faith cases to, among others, those able to show
fraudulent conduct in addition to bad faith).
This is a fraud case. Under section 41.003(a), DMSI had the
burden of demonstrating that its harm was due to Gammex’s fraud.
The statute defines fraud to be “fraud other than constructive
fraud.” TEX. CIV. PRAC. & REM. CODE ANN. § 41.001(6). As the Texas
Supreme Court has noted, “[a] finding of intent to harm or
27
conscious indifference to the rights of others will support an
award of exemplary damages. In [Trenholm v. Ratcliff, 646 S.W.2d
927, 933 (Tex. 1983)], this court held that a fraudulent
inducement was enough to support at least a finding of conscious
indifference.” Spoljaric, 708 S.W.2d at 436 (internal citations
omitted). DMSI did not also need to show malice, as the statute
is explicit in providing that a claimant needs to show harm from
fraud or malice.
DMSI was required to show by clear and convincing evidence
the elements of punitive damages provided in section 41.003(a).
See TEX. CIV. PRAC. & REM. CODE ANN. § 41.003(b). Clear and
convincing evidence is “that measure or degree of proof which
will produce in the mind of the trier of fact a firm belief or
conviction as to the truth of the allegations sought to be
established.” Id. § 41.001(2). Gammex contends only that
evidence is insufficient to support a finding that Ms. Lescrenier
had no intent to perform when she assured Ms. Dunbar of the
condition of the equipment to be transferred. We have considered
the evidence under the clear error standard and have rejected
Gammex’s argument. It fares no better under the standard
applicable here. Thus, we conclude that the district court did
not err in awarding punitive damages.
The final argument Gammex raises before us challenges the
district court’s award of pre-judgment interest. The court’s
judgment provides that DMSI “is also entitled to recover pre-
28
judgment interest at the rate of 10% per annum from November 18,
1996 until entry of judgment . . . .” Gammex contends that this
is an award of pre-judgment interest on punitive damages in
addition to compensatory damages. Under Texas law, pre-judgment
interest is not recoverable on an award of punitive damages. See
TEX. CIV. PRAC. & REM. CODE ANN. § 41.007. We hold that DMSI is
entitled to pre-judgment interest at the rate of 10% per annum
assessed on only the compensatory damages portion of its award.16
IV. CONCLUSION
For the foregoing reasons, we affirm the district court’s
entry of judgment on DMSI’s fraudulent inducement claim, and its
award of punitive damages. We reform the judgment to clarify
that pre-judgment interest at the rate of 10% per annum is to be
assessed only on the compensatory damage award. See Krieser v.
Hobbs, 166 F.3d 736, 747 (5th Cir. 1999).
AFFIRMED in part; REFORMED in part. Gammex shall bear the
costs of this appeal.
16
Gammex also asks that we reform the interest award to
reduce the rate to 6%, as this was the rate DMSI requested. It
does not contend that an award at the higher rate was erroneous,
and thus we deny its request.
29