Olney Sav. & Loan Ass'n v. Trinity Banc Sav. Ass'n, 88-1842

Citation885 F.2d 266
Decision Date10 October 1989
Docket NumberNo. 88-1842,88-1842
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
PartiesOLNEY SAVINGS & LOAN ASSOCIATION, Plaintiff-Appellee Cross-Appellant, v. TRINITY BANC SAVINGS ASSOCIATION, etc., et al., Defendants, Bright Banc Savings Association f/k/a Trinity Savings & Loan Association, Trinity Banc Savings Association, and Bright Mortgage Co., f/k/a STM Mortgage Company, Defendants-Appellants Cross-Appellees.

F. Franklin Honea, Payne & Vendig, Dallas, Tex., for defendants-appellants cross-appellees.

Robert J. Clary, Johnson, Bromberg & Leeds, Dallas, Tex., for intervenor FSLIC.

William Reid, E. Eldridge Goins, Jr., Dallas, Tex., additional counsel on plea in intervention.

On appeal from the United States District Court for the Northern District of Texas.

Before GARZA, REAVLEY and POLITZ, Circuit Judges.

GARZA, Circuit Judge:

Olney Savings & Loan Association ("Olney") obtained a judgment for rescission of a loan participation, plus actual and punitive damages, against Bright Banc Savings Association, formerly Trinity Savings & Loan Association and Trinity Banc Savings Association ("Trinity"), and Bright Mortgage Company, formerly STM Mortgage Company ("STM"). Trinity is now under conservatorship of the Federal Savings and Loan Insurance Corporation ("FSLIC"). Trinity and STM appeal on sufficiency of the evidence grounds from the district court's judgment, which was based on the jury's finding of fraud; FSLIC, who intervened as conservator during the pendancy of this appeal, now asserts statutory and sovereign immunity defenses that were not available to Trinity and STM at trial. We affirm the judgment of the trial court.

In early 1982, townhouse developers Third Aquarius Corporation, with Bob Pritchett and Curtis Baggett, conceived a plan through which they would find lenders to finance the purchase of townhouses for certain buyers, who would then immediately deed the properties back to the developers. Using that plan, the developers could indirectly finance the purchases at a time when they themselves could not finance directly. Trinity financed a package of twenty loans, and Olney agreed to purchase a 90% participation in most of those loans through a Loan Participation Agreement and letter of commitment. Within a short period of time, virtually all of the loans were in default, and STM as loan servicer foreclosed on the properties. Trinity bought the properties at full loan value so there was no possibility of obtaining a deficiency judgment against the buyers.

Olney then sued Trinity and STM for rescission of the loan contracts and damages. Olney alleged that Trinity and STM, agents for each other at the time they were negotiating Olney's participation in the loans, misrepresented to Olney, among other things, that (1) the buyers would make down payments, which they did not do; (2) that one-half of the buyers would themselves occupy the townhouses, which was not so; and (3) that the townhouses were in good repair, and they were not. Indeed, Trinity and STM's in-house appraiser affirmed that the townhouses were constructed "below average" and were "not in good condition."

At trial, the court submitted to the jury questions on fraud, negligent misrepresentation breach of contract, negligence in foreclosure, and negligence in performance of the Participation Agreement; the jury found in favor of Olney on each issue. 1 Based on the jury's affirmative finding of fraud, Olney elected rescission as its remedy, and the district court correctly entered judgment for Olney in the amount of $507,226.03 to effect the rescission, plus $300,000 in punitive damages, jointly and severally against Trinity and STM.

From that judgment Trinity and STM now appeal, complaining that: first, the district court erred in granting rescission because the court did not submit jury questions on the defense of ratification; second, the court erred in submitting a general fraud question which listed multiple fraud issues, when one or more of the fraud issues was not supported by the evidence; and finally, there was insufficient evidence to support the jury's verdict and the court's judgment on the issues of fraud, negligent misrepresentation, and their causation of damages. 2

After the district court entered its final judgment and Trinity and STM had posted a supersedeas bond and otherwise perfected their appeal, FSLIC stepped in as conservator for the insolvent Trinity. FSLIC complains, for the first time on appeal, that sovereign immunity prohibits assessment of punitive damages here as FSLIC is an instrumentality of the United States, and that the D'Oench doctrine, codified at 12 U.S.C. Sec. 1823(e), can be raised at this time and serve as a complete defense to Olney's claims as the Participation Agreement is an invalid "secret agreement." FSLIC further asserts that it is a holder in due course of the Participation Agreement, and that Olney is not entitled to rescission as Olney suffered no tort injury separate from the breach of contract. 3

I. Trinity and STM Claims
A. Rescission and Ratification

The district court entered a judgment for rescission in favor of Olney based on the jury's finding of fraud and misrepresentation. The jury also found that Olney had not by its conduct waived any right to sue. 4 Trinity and STM complain now that the court erred in not submitting a question specifically on the issue of ratification, because Olney would not be entitled to rescission of a contract it had ratified.

Under Texas law, ratification occurs "when a person induced by fraud to enter into an agreement continues to accept benefits under the agreement after he becomes aware of the fraud, or if he conducts himself so as to recognize the agreement as binding." Johnson v. Smith, 697 S.W.2d 625 (Tex.App.--Houston [14th Dist.] 1985, no writ); Sawyer v. Pierce, 580 S.W.2d 117 (Tex.Civ.App.--Corpus Christi 1979, writ ref'd n.r.e.). The essential elements of ratification parallel those in the court's definition of waiver; that is, knowledge, and intentional conduct inconsistent with a right to rescind. Conduct on Olney's part that would have triggered an affirmative response on a ratification question would have done so on the submitted waiver question as well. For that reason, we find that the district court's submission of the waiver question in this instance satisfied Trinity and STM's request for a ratification question, and affirm the district court on this point.

B. General Fraud Question

The district court's charge to the jury set out eleven separate claims of fraud and misrepresentation, and instructed the jury to consider only those claims in answering the question on fraud and negligent misrepresentation. The court then asked simply:

Did Olney prove by a preponderance of the evidence that Trinity or STM, either directly or through their agent or alter ego, made fraudulent representations or negligent misrepresentations to Olney before the purchase and funding of the 17 loans?

Answer either "Olney did prove" or "Olney did not prove" as to each defendant.

                ANSWER:                           Trinity     STM
                (a)  Fraud                        ________  ________
                (b)  Negligent Misrepresentation  ________  ________
                

The jury answered "Olney did prove" to each component of this question, both as to Trinity and STM. Trinity and STM complain now that the district court erred in submitting the question in this broad form, and allege that, because there was insufficient evidence to support several of the claims, this case must be remanded for a new trial.

It is true that "when a case is submitted to the jury on a general verdict, the failure of evidence or a legal mistake under one theory of the case generally requires reversal for a new trial because the reviewing court cannot determine whether the jury based its verdict on a sound or unsound theory." Pan Eastern Exploration Co. v. Hufo Oils, 855 F.2d 1106, 1123 (5th Cir.1988); Nowell ex rel. Nowell v. Universal Electric Co., 792 F.2d 1310, 1312 (5th Cir.), cert. denied, 479 U.S. 987, 107 S.Ct. 578, 93 L.Ed.2d 581 (1986); Ward v. Succession of Freeman, 854 F.2d 780, 790 (5th Cir.1988), cert. denied, --- U.S. ----, 109 S.Ct.2064, 104 L.Ed.2d 629 (1989). The result is different, however, when the reviewing court can be "reasonably certain that the jury did not base its verdict on an unsound theory." Braun v. Flynt, 731 F.2d 1205, 1206 (5th Cir.), cert. denied sub. nom, Chic Magazine v. Braun, 469 U.S. 883, 105 S.Ct. 252, 83 L.Ed.2d 189 (1984). So, if any one of the district court's list of claims were not supported by evidence or in some other way unsound, we would be bound to remand this cause for a new trial, absent evidence that the jury did not base its verdict on that unsound claim. But we need not do so today, because each claim was properly submitted and supported by the evidence, as is discussed below. Trinity and STM's complaint on this point must, therefore, fail.

C. Sufficiency of the Evidence

As stated above, the district court set out a list of claims of fraud and misrepresentation, and the jury was asked whether Trinity and STM had committed the acts, and whether those acts proximately caused Olney's damages. The jury answered all questions in the affirmative. Trinity and STM now complain that the evidence was insufficient to support the verdict on virtually each and every one of those points, and insufficient to support an affirmative finding of causation. Our standard for reviewing a sufficiency of the evidence point is to view the evidence in the light most favorable to the verdict, and to grant the benefit of all reasonable inferences from the evidence. Boeing Co. v. Shipman, 411 F.2d 365, 375 (5th Cir.1969). Given that standard, and Trinity and STM's broad claims on appeal, we must now address those claims Trinity and STM allege are not supported.

1. Down Payments

The court's charge included a claim that Trinity and STM had...

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