Armstrong v. American Home Shield Corp.

• Decision Date: 06 June 2003
• Docket Number: No. 02-10596.,02-10596.
• Parties: John ARMSTRONG and Dan Armstrong, Plaintiffs-Appellants, v. AMERICAN HOME SHIELD CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 566

333 F.3d 566

John ARMSTRONG and Dan Armstrong, Plaintiffs-Appellants, v. AMERICAN HOME SHIELD CORPORATION, Defendant-Appellee.

No. 02-10596.

United States Court of Appeals, Fifth Circuit.

June 6, 2003.

Frank M. Gilstrap (argued), Thomas A. Fuller, Christopher Alan Troutt, Hill Gilstrap, Arlington, TX, for Plaintiffs-Appellants.

Frederick J. Lewis (argued), Keri Goldstein Unowsky, Lewis, Fisher, Henderson, Claxton & Mulroy, Memphis, TN, for Defendant-Appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GARWOOD and HIGGINBOTHAM, Circuit Judges, and FELDMAN,^* District Judge.

FELDMAN, District Judge:

John and Dan Armstrong sued American Home Shield Corporation (AHS) for breach of contract in Texas state court. The lawsuit was removed to federal court,¹ and the Armstrongs subsequently amended their complaint to include claims for fraud and negligent misrepresentation. The district court summarily dismissed each of the Armstrongs' claims. We affirm.

I.

AHS sells and services home warranty contracts throughout Texas. In 1995, AHS acquired Texas Home Warranty Corporation (THW) from John and Dan Armstrong. AHS was particularly interested in emulating THW's practice of entering fixed-rate agreements with its contractors,² and AHS hired John and Dan Armstrong.

The Armstrongs' employment agreements included several savings programs:³

Program one: the Armstrongs were to convert all AHS pool/spa contractors in Texas to the THW fixed-rate methodology;

Program two: the Armstrongs were to convert 5,000 AHS contracts in the Dallas-Fort Worth area to the THW fixed-rate methodology;

Program four: the Armstrongs were to recommend the implementation of contract coverages, limitations, and exclusions which AHS had not previously adopted; and

Program five: the Armstrongs were to develop and implement a program for checking heating and air conditioning systems at the time the homeowner purchased the warranty contract.

AHS agreed to pay the Armstrongs a portion of the cost savings accomplished under each program.

The Armstrongs complained that they were not sufficiently compensated under the terms of the savings programs, and sued AHS for breach of contract, negligent misrepresentation and fraud.⁴

II.

Review of a grant of summary judgment is de novo. See Young v. Equifax Credit Info. Servs. Inc., 294 F.3d 631, 635 (5th Cir.2002). Summary judgment is proper if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits filed in support of the motion, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Id. The moving party bears the burden of pointing to an absence of evidence to support the nonmoving party's case, and summary judgment will be granted where the nonmovant is unable to point to any evidence in the record that would sustain a finding in the nonmovant's favor on any issue on which he bears the burden of proof at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Moreover, all facts and inferences must be viewed in the light most favorable to the nonmoving party. See Perez v. United States, 312 F.3d 191, 194 (5th Cir.2002).

A. Breach of Contract

The appellants first contend that AHS breached the terms of savings programs one and four. They assert that AHS failed to sufficiently compensate them for converting pool/spa contractor fee arrangements, and for recommending that AHS charge its customers for freon recovery.

1) Savings Program One: Converting Pool-Spa Contractor Fee Arrangements

Savings program one provides that the Armstrongs are to be paid 25% of all cost savings realized from their conversion of AHS's pool/spa contractors to the fixed-rate methodology. Program one states:

For example, AHS will establish its average contract cost for pool/spa option in Texas for 1995 (the "Base Cost Per Option"). If we assume the Base Cost Per Option was $140 and the average Cost Per Option in Texas in 1996 is $79, or a Cost Savings of $61 per average Cost Per Option, AHS, at the beginning of 1997, would calculate its Cost Savings (total # of applicable pool/spa options times $61), subtract applicable Deductions Against Cost Savings, multiply that amount by 18.75%, and pay Armstrong the result. The remaining 6.25% (excluding deductions) would be set aside for payment at the end of year three.

Accordingly, cost savings realized under program one are a function of the 1995 average cost for pool/spa contracts.

The appellants contend that AHS breached the terms of the savings program because its calculation of the 1995 "average contract cost" reflected only those pool/spa contracts which the Armstrongs later converted to the fixed-rate methodology. The Armstrongs claim that the 1995 "average contract cost" should have been compiled from all of AHS's Texas pool/spa contracts.

Although the parties intended to convert pool/spa contracts throughout the entire state, contracts were actually converted only in Dallas-Fort Worth, Austin, and San Antonio. The 1995 average costs for contracts in non-urban areas are greater than in urban areas.⁵ Thus, a bonus scheme based upon the difference between the average costs for post-conversion urban contracts, and pre-conversion statewide contracts, would effectively compensate the Armstrongs for cost savings not actually realized.

The language of the Armstrongs' employment agreements clearly states that bonuses are to be derived from actual cost savings.⁶ The Armstrongs' interpretation, which compensates them for cost savings not actually realized, is obviously contrary to the spirit and intent of the savings programs. We agree with the district court that program one "permitted AHS to pay Plaintiffs based only on the cost savings generated in the areas where the pool/spa program had been implemented."

2) Savings Program Four: Recommending that AHS Charge Customers for Freon Recovery

Savings program four rewards the Armstrongs for proposing cost saving "contract coverages, limitations, and exclusions which AHS has not previously adopted." The Armstrongs contend that AHS breached the terms of program four when it refused to compensate them for the cost savings generated by their proposal that AHS charge customers for freon recovery.

AHS's home warranty contracts did not provide coverage for the costs related to freon recovery. The Armstrongs proposed that cost savings would be realized by a stricter enforcement of the freon exclusionary clause. Because the Armstrongs merely suggested that AHS enforce an existent contractual provision, the appellants did not propose a contractual change "which AHS has not previously adopted." Thus, AHS's refusal to compensate the Armstrongs for the resultant cost savings was not a breach of the employment agreement.

B. Negligent Misrepresentation

The appellants next urge that AHS negligently misrepresented itself throughout contract negotiations. In particular, the Armstrongs assert that AHS misstated that it was unprofitable in the Dallas-Fort Worth market, and that the average contract cost in Texas was based on "historical and current cost data."

The district court held that both of the Armstrongs' negligent misrepresentation claims were time-barred by the Texas two-year statute of limitations. See Tex. Civ. Prac. & Rem.Code Ann. § 16.003(a) (Vernon 2002). The Armstrongs do not contend that they filed their lawsuit within two years of being injured; rather they assert that the Texas statute of limitations was tolled by the discovery rule.

It is unclear whether the discovery rule tolls the Texas statute of limitations for negligent misrepresentation claims. See Kansa Reins. Co. v. Congressional Mortgage Corp., 20 F.3d 1362, 1372 (5th Cir. 1994) ("We similarly decline to apply the discovery rule to a negligent misrepresentation claim, finding that the Texas courts classify such a cause of action as a negligent tort rather than a fraud action."). But see Matthiessen v. Schaefer, 27 S.W.3d 25, 31 (Tex.App. — San Antonio 2000, pet. denied) ("[T]he discovery rule applies to [a] claim of negligent misrepresentation."); Hendricks v. Thornton, 973 S.W.2d 348, 365 (Tex.App. — Beaumont 1998, pet. denied). We need not address this issue of law, however, unless the Armstrongs' negligent misrepresentation claims are of the type protected by the discovery rule.

The discovery rule only reaches a claim if the injury is inherently undiscoverable, and the evidence of the injury is objectively verifiable. See Velsicol Chemical Corp. v. Winograd, 956 S.W.2d 529, 531 (Tex.1997). An injury is inherently undiscoverable if it is of a type not generally discoverable by the exercise of reasonable diligence. See HECI Exploration Co. v. Neel, 982 S.W.2d 881, 886 (Tex.1998) (the applicability of the discovery rule is determined categorically by examining the nature of the particular injury alleged).

We find that the profitability of a corporate division, and the source of information which underlies a cost quotation, are precisely the types of information that a seller involved in a substantial business transaction would seek to discover and could discover through the exercise of reasonable diligence. See Martinez Tapia v. Chase Manhattan Bank, N.A., 149 F.3d 404, 409 (5th Cir.1998) ("The investor who seeks to blame his investment loss on fraud or misrepresentation must himself exercise due diligence to learn the nature of his investment and associated risks."). Of added significance, the Armstrongs even seem to have been aware of their injury. For instance, in a December 1995 deposition, the appellants acknowledged that they might have been defrauded by AHS.

Thus, assuming that the discovery...