R.D. Tips, Inc. v. Virginia Jett

ACCEPTED
03-13-00336-CV
5018120
THIRD COURT OF APPEALS
AUSTIN, TEXAS
4/24/2015 9:35:22 AM
JEFFREY D. KYLE
CLERK
CASE NO. 03-13-00336-CV
IN THE COURT OF APPEALS FILED IN
3rd COURT OF APPEALS
THIRD COURT OF APPEALS DISTRICT AUSTIN, TEXAS
AUSTIN, TEXAS 4/24/2015 9:35:22 AM
JEFFREY D. KYLE
Clerk
R.D. TIPS, INC.,
Appellant
v.
VIRGINIA JETT,
Appellee
Appeal from the 419th District Court, Travis County, Texas
Trial Court Cause No. D-1-GN-11-003799
Hon. Rhonda Hurley, Judge Presiding
MOTION FOR REHEARING
TO THE HONORABLE COURT OF APPEALS:
Appellant, R.D. Tips, Inc., as its Motion For Rehearing pursuant to Texas
Rule of Appellate Procedure 49, respectfully states the following:
1. The Court's opinion allows Appellee Jett to submit materially
misleading financial statements to the Texas Department of Insurance, engage in a
transaction in which she benefitted financially while she had reason to know that
R.D. Tips, Inc. was relying on those financial statements, and escape any
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consequence for her actions. Instead, if this Court's opinion stands, Ms. Jett will
reap a multi-million dollar benefit from her conduct. That result is wrong.
2. R.D. Tips, Inc. alleged below that Jett's claim under the guaranty
agreement it signed was barred by fraud, an affirmative defense. Memorandum
Opinion at 2-3 (hereafter, "Mem. Op. at __"). R.D. Tips, Inc. also alleged that
Ms. Jett's claim was barred because she committed fraud in a transaction involving
corporate stock in violation of section 27.01 of the Texas Business & Commerce
Code. !d.
3. If a guarantor is induced to execute a guaranty through
misrepresentations, the guaranty is invalid. Sw. Sur. Ins. Co. v. Hico Oil Mill, 203
S.W. 137, 139 (Tex. Civ. App.-Fort Worth 1918), aff'd, 229 S.W. 479 (Tex.
Comm'n App. 1921, judgm't adopted) ("It is a general rule that, if one is induced
to become a surety or guarantor for another through material misrepresentations of
fact, such contract of the surety or guarantor will thereby be rendered invalid and
the obligor will be discharged from liability thereon; and this is true even though
such misrepresentations are honestly made with no intention to deceive or
defraud.").
4. Put differently, if a creditor knows or has reason to believe that a
guarantor is being deceived or induced to execute a guaranty "in ignorance of facts
materially increasing the risks," and fails to inform the guarantor of those facts
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despite an opportunity to do so, "good faith and fair dealing demand that he should
make such disclosures to him; and, if the creditor accepts the contract of suretyship
without doing so, the surety may afterward avoid it." Goodwin v. Abilene State
Bank, 294 S.W. 883, 886-87 (Tex. Civ. App.-Eastland 1927, writ ref d).
5. These principles undercut the result reached in this case. The
misrepresentations in North America Life's financial statements materially
increased the risk inherent in the merger, of which the guaranty was a part. The
matters that were misrepresented led to more than ten million dollars in losses for
the post-merger company. See Brief for Appellant at 5-10. Jett should not be
permitted to benefit from the guaranty despite those misrepresentations. Indeed,
under the cases cited above, this is true even if Ms. Jett did not intend to defraud
R.D. Tips, Inc. See supra, paragraph 3.
6. In its opinion in the case at hand, the Court focused on whether Ms.
Jett intended to induce R.D. Tips, Inc. to enter into the guaranty at the time she
filed North America Life's misleading financial statements with the Department of
Insurance. Mem. Op. at 8-10. The focus on that temporal aspect of her conduct
stemmed from the Court's reading of Exxon Corp. v. Emerald Oil & Gas Co., 348
S.W.3d 194 (Tex. 2007). That case, however, did not concern fraud as a defense to
the liability of a guarantor. It therefore did not address the principles set out above.
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7. The idea that the "reason to expect" standard requires knowledge of a
particular party's potential future reliance on a filing at the time it makes the filing
makes sense if the filer had no subsequent knowledge of such reliance. For
example, the Court relied extensively on Ernst & Young, L.L.P. v. Pac. Mut. Life
Ins. Co., which concerned a claim against an audit firm based on an audit of the
maker of certain promissory notes. 51 S.W.3d 573, 575 (Tex. 2001). There is no
indication in the decision that the auditor, Ernst & Young, had any involvement
with the maker subsequent to the audit in question. Accordingly, the only question
that could be asked was whether Ernst & Young had a "reason to expect" the buyer
of the notes would rely on its audit when it was performed.
8. Here, in contrast, R.D. Tips, Inc. alleges that Ms. Jett had a reason to
expect that R.D. Tips, Inc. would rely on North America's financial statements in
entering into the merger and executing the guaranty. Even if Jett did not know that
R.D. Tips, Inc. would rely on the financial statements when she signed them, this
subsequent knowledge should not be of no consequence for Ms. Jett's personal
responsibility. To hold otherwise would mean that a party can file misleading
financial statements, later learn that someone intends to rely on them in a
transaction from which the party will benefit, and remain silent with no
consequence.
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9. Nonetheless, the Court determined that "[t]he fact that Jett later
became aware that [R.D. Tips, Inc.] was contemplating the merger transaction is of
no consequence." Mem. Op. at 11. Particularly in light of the cases cited in
paragraphs 3 and 4 hereof, that conclusion should not stand. Texas law should not
permit Ms. Jett to take advantage of misleading financial statements that induced
R.D. Tips, Inc. to enter into the merger transaction with North America and the
guaranty. This particularly should not happen on summary judgment because
"[i]ssues of intent and knowledge are not susceptible to being readily controverted
and are inappropriate for summary judgment." Allied Chern. Corp. v. DeHaven,
752 S.W.2d 155, 158 (Tex. App.-Houston [14th Dist.] 1988, writ denied).
Questions about Ms. Jett's knowledge and intent should be submitted to a jury, not
dismissed based on her self-serving affidavit.
10. Further, in its opinion, the Court expressed the view that the relevant
sort of misrepresentation would have concerned Jett's unwillingness to agree to the
merger without the guaranty. Mem. Op. at 6, n. 3. This overlooks the fact that but
for the merger there would have been no guaranty.
11. In other words, if R.D. Tips, Inc. had not been induced to enter into
the merger, it would not have executed the guaranty. The representation that Jett
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would not approve the merger absent the guaranty is only a part of the picture. 1 It
cannot be viewed in isolation as the only inducement for the execution of the
guaranty because the guaranty was a part of the overall transaction and the
supposed value of North America Life (presumably as reflected in its financial
statements) was the economic motive for the transaction.
For the reasons stated, R.D. Tips, Inc. respectfully requests that the Court
grant this Motion For Rehearing and reverse the district court's decision.
Respectfully submitted,
ROSENTHAL PAUERSTEIN
SANDOLOSKI AGA THER LLP
755 E. Mulberry, Suite 200
San Antonio, Texas 78212
Telephone: (210) 225-5000
Facsimile: (210) 354-4034
jpauerstein@rpsalaw.com
ATTORNEYS FOR APPELLANT,
R.D. TIPS, INC.
R.D. Tips, Inc. recognizes that the Court did not base its decision on this issue, but has
addressed it out of a concern that it may have affected the Court's analysis of the case.
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CERTIFICATE OF COMPLIANCE
The undersigned counsel certifies that this document contains 1,294 words
(counting all parts of the document) as determined by MS Word. The body text is
in 14 point font, and the footnote text is in 12 point font.
CERTIFICATE OF SERVICE
The undersigned counsel hereby certifies that a true and correct copy of the
foregoing Motion For Rehearing was served via United States Mail on this 24th
day of April, 2015, upon the following counsel of record:
Eric J. Taube
100 Congress Avenue, 18th Floor
Austin, Texas 78701
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