Life Ins. Co. of Virginia v. Murray Inv. Co.
| Decision Date | 29 May 1981 |
| Docket Number | No. 79-3266,79-3266 |
| Citation | 646 F.2d 224 |
| Parties | The LIFE INSURANCE COMPANY OF VIRGINIA, Plaintiff-Appellant Cross-Appellee, v. The MURRAY INVESTMENT COMPANY and Murray Advisory Corporation, Defendants- Appellees Cross-Appellants. . Unit A |
| Court | U.S. Court of Appeals — Fifth Circuit |
Coke & Coke, E. Russell Nunnally, T. L. Caudle, III, Debra A. Olson, Dallas, Tex., for plaintiff-appellant cross-appellee.
Rain, Harrell, Emery, Young & Doke, Robert W. Jordan, Sidney A. Fitzwater, Dallas, Tex., for defendants-appellees cross-appellants.
Appeals from the United States District Court for the Northern District of Texas.
Before RUBIN and GARZA, Circuit Judges, and SUTTLE *, District Judge.
This case involves the purchase of a real estate note by the Life Insurance Company of Virginia (LOV) plaintiff-appellant from The Murray Investment Company (MIC) and Murray Advisory Corporation (MAC) defendant-appellees, cross-appellants. The trial resulted in judgment for LOV from which all parties now appeal. Only for the purpose of context in discussing those issues on appeal which we believe meritorious do we set forth a brief statement of the facts.
LOV, a life insurance company, as part of its investment program, purchased long-term real estate notes. Over the years LOV had business relations with Home Mortgage, a real estate financing company. Shortly before the transaction involved here, Home Mortgage merged into MIC and on April 18, 1973, LOV and MIC entered a Correspondent Loan Agreement whereby MIC was to submit loan applications to LOV and service, on behalf of LOV, any loans purchased by LOV.
During April, 1973, Home Mortgage had forwarded to LOV a loan application for long-term real estate financing from the Gar-Dal Venture (later to become Gar-Dal, Inc.) for the purchase of real estate in Dallas and construction of a 52,064 square foot office building thereon. MIC took over the processing of this loan application after the merger.
The transaction was structured for LOV to purchase a complete loan package including a note and all applicable security agreements from MIC after all construction was complete. Pursuant to this proposed loan, MIC sent plans and specifications for the building to LOV for its approval. Soon thereafter LOV approved the terms of the transaction and the parties' obligations were set forth in a Loan Commitment in which LOV obligated itself to purchase the first mortgage loan on the Gar-Dal Venture from MIC. However, as a prerequisite to LOV's obligation to purchase the mortgage, certain conditions were to be fulfilled including that (1) the building and 155 parking spaces be completed according to plans at cost of no less than $1,050,000; (2) MIC was to furnish quarterly reports certifying construction was proceeding according to plans; (3) upon completion MIC was to certify that all construction had been completed according to plans; and (4) that Hamby & Shaver lease and occupy 20,000 square feet of the building. After the Loan Commitment was signed, MIC arranged for interim financing from Murray Real Estate Investment Trust which in turn utilized the services of MAC as its advisor and working arm in the management of real estate loans.
After commencement of construction, MIC sent the required quarterly inspection reports to LOV, however, most of the inspection reports had been prepared by MAC. Over the next year LOV received reports from officers of both MAC and MIC stating that all construction was proceeding "according to plans and specifications", "quality and workmanship have been superior", and the project was progressing "extremely well". LOV was advised by MIC that construction had been completed and after inspection had been found to have been constructed in accordance with plans and specifications. No representative from LOV ever inspected the project site, but upon the representations of MIC and MAC the final inspection report, and the completion certificate, LOV decided to purchase the loan. The loan was transferred and collateral assigned to LOV on December 3, 1974. On December 17, 1974, LOV paid $1,050,000 for the note.
Following the purchase of the loan, Gar-Dal, Inc. made one monthly mortgage payment and thereafter defaulted. LOV accelerated the indebtedness of the loan. Shortly thereafter, LOV first learned that Gar-Dal, Inc. had run into trouble because it had run out of money for tenant improvements. Prior to receiving this information LOV had been told that the principals of Gar-Dal had substantial net worth. Upon further investigation LOV learned that the building and real improvements had substantial defects and did not comply with the plans and specifications. Following the default, LOV requested that MIC buy back the loan but MIC refused. A public foreclosure sale was held and LOV purchased the property for $750,000.
Among the defects was a large, unsightly, twenty-foot deep ditch bordering the property which severely limited access to the building and reduced parking by one-third of that required by the plans. In addition, it was learned that Hamby and Shaver had never taken occupancy of any part of the premises. Furthermore, many deviations from the plans had occurred and much of the construction was defective. LOV further learned that both MIC and MAC, prior to LOV's purchase of the loan, knew the facts about the ditch, parking conditions, non-occupancy of the building, cost overruns and other deviations and defects.
LOV filed this lawsuit setting forth causes of action for common law fraud and conspiracy to defraud; fraud in a transaction involving real estate in violation of Texas Statute, Tex. Bus. and Comm. Code Ann. § 27.01; tortious breach of contract and conspiracy to bring about such breach of contract; violation of Article 581-33 of the Securities Act of Texas; violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and violation of Section 17(a) of the Securities Act of 1933. The District Court dismissed the claims under the Texas Securities Act, the Securities Exchange Act, and the Securities Act of 1933, holding that the note purchased was not a "security". 1
Pursuant to its common law fraud cause of action, LOV initially sought rescission of the loan purchase. However, three days prior to trial LOV alternatively sought consequential damages. The District Court refused to permit LOV to replead consequential damages holding that MIC and MAC would be placed in an unfair position because they would not have had proper discovery concerning the consequential damage claims.
The jury found that MIC had breached its contract by falsely representing (1) that the property was constructed and completed according to plans; (2) that Hamby and Shaver occupied their leased portion of the building; (3) the quarterly inspection reports. The jury further found that MIC and MAC knew the representations were false when made, that the representations were material to the contract, and that each representation was relied upon to the detriment of LOV. The jury further found that MIC and MAC had conspired to make the false representations. The jury found that the difference between the fair market value of the note was $300,000 less than was paid for it and that 50% of such difference was proximately caused by at least one of the false representations made by MIC and at least one false representation made by MAC. 2 Lastly, in conjunction with the Section 27.01 questions, the jury found that exemplary damages should be awarded in the amount of $500,000. The District Court instructed the jury that exemplary damages may be awarded as punishment for a wrongful act done "willfully." The District Court instructed the jury that a "willful" act is done knowingly, intentionally, deliberately or designedly.
Following the jury's verdict, the District Court awarded actual damages in the amount of $300,000 jointly and severally against MIC and MAC plus post-judgment interest. 3 The District Court refused to award exemplary damages holding that LOV had proved only a breach of contract not a separate tort as required under Texas law. Lastly, the District Court denied attorney's fees on the basis that Article 2226, V.A.T.S. did not allow attorney's fees to corporations at the time this suit was filed.
On Appeal LOV contends that the District Court erred in (1) refusing to award attorney's fees, and (2) refusing to award exemplary damages.
In support of this latter issue, LOV contends exemplary damages were awardable based upon the jury's finding of tortious breach of contract, common law fraud and conspiracy to defraud. Specifically, LOV argues that, under Texas law, if the act complained of constitutes both a breach of contract and a willful tort, exemplary damages are recoverable. Secondly, LOV argues that the jury findings of all elements of common law fraud, including the fact that MIC and MAC knew their representations were false at the time they were made, also stands as a basis for exemplary damages. Lastly, LOV argues that the jury findings of conspiracy to defraud also supports an award of exemplary damages.
In Texas the general rule is that a breach of contract will not give rise to a recovery of exemplary damages. However, if the act complained of constitutes both a breach of contract and a willful tort, exemplary damages are recoverable. International Bankers Life Insurance Co. v. Holloway, 368 S.W.2d 567 (Tex.1963); Roy Gladen Buick, Inc. v. Sterling, 524 S.W.2d 590 (Tex.Civ.App. Waco 1975, writ ref'd n. r. e.); Export Insurance Co. v. Herrera, 426 S.W.2d 895 (Tex.Civ.App Corpus Christi 1968, writ ref'd n. r. e.); Briggs v. Rodriguez, 236 S.W.2d 510 (Tex.Civ.App. San Antonio 1951, writ ref'd n. r. e.); See Kingsley v. Baker/Beech Nut Corporation, 546 F.2d 1136 (5th Cir. 1977). It is not necessary that the tort and contract...
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