Boggan v. Data Systems Network Corp.

• Decision Date: 25 August 1992
• Docket Number: No. 91-4707,91-4707
• Parties: Harold J. BOGGAN, et al., Plaintiffs-Appellees, v. DATA SYSTEMS NETWORK CORP., et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 149

969 F.2d 149

Harold J. BOGGAN, et al., Plaintiffs-Appellees, v. DATA SYSTEMS NETWORK CORP., et al., Defendants-Appellants.

No. 91-4707.

United States Court of Appeals Fifth Circuit.

Aug. 25, 1992.

Rehearing Denied Oct. 20, 1992.

Charles Michael Clark, Dennis M. Dylewski, Ernest Kersten, Calvin, Dylewski, Gibbs, Maddox & Verner, Houston, Tex., for defendants-appellants.

Braden W. Sparks, Gregory A. Whittmore, Taylor & Mizell, Dallas, Tex., for plaintiffs-appellees.

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

Before GOLDBERG, HIGGINBOTHAM, and DAVIS, Circuit Judges.

GOLDBERG, Circuit Judge:

This is one of those rare cases in which we must overturn a civil jury verdict for insufficiency of the evidence. We do not do so nonchalantly. We have sifted through the record, searching, both at the direction of the parties and on our own, for evidence to sustain the jury's verdict in favor of the plaintiff. Concluding that there is no evidence to support plaintiff's claim of fraudulent inducement, we REVERSE the judgment.

I. BACKGROUND

Harold Boggan owned 51% of Interprint, Inc., a supplier of computers and computer equipment with offices in Dallas and Houston. Through a listing broker, Boggan attempted to locate a company to buy or merge with Interprint. The broker located several potential buyers, including Data Systems Network Corporation ("Data Systems"). Boggan first met Data Systems's President, Michael Grieves, in late 1987, and they met and spoke again on several occasions during the fall of 1988. According to Boggan, during these early communications between Boggan/Interprint and Grieves/Data Systems, Grieves told Boggan that entrepreneur Warren Avis (founder of Avis Rent-A-Car), was intimately involved in Data Systems, that Grieves had a close relationship with Avis, and that Data Systems' purchase of Interprint would allow Boggan to become "part of the [Warren Avis] fold."

In January of 1989, Grieves travelled to Texas to examine Interprint's operations. Boggan conveyed to Grieves exactly what Boggan expected to receive from Data Systems if it wanted to buy Interprint: (1) two times the net book value of the company; (2) an employment agreement compensating Boggan $60,000 a year; (3) repayment of a $60,000 loan to Interprint guaranteed by Boggan; (4) health insurance coverage for Boggan; (5) a company car for Boggan; (6) accrued vacation time for Boggan; (7) fair and equitable treatment of Interprint employees; (8) assumption of Interprint's 3-year lease of a building leased from a Boggan partnership. At the end of the meeting, Grieves told Boggan that "I think we have a deal," but said that he would have to "run it by" the Data Systems Board and get a formal proposal drafted by Data Systems's lawyer. Grieves specifically advised Boggan to retain counsel, but Grieves indicated that his own attorney would do the bulk of the paperwork, while Boggan's attorney would simply assist in the preparation of schedules and ancillary documents.

In February, Grieves sent Boggan a Letter of Intent drafted by Data Systems' attorney, which indicated that the letter was "a proposal and not a final agreement. It is subject to final negotiations and approval by [Data Systems'] counsel, our bank, and our board of directors." One of the more critical provisions in the Letter of Intent involved the inventory and accounts receivables. The letter stated:

Since [Data Systems] is only interested in acquiring viable assets, [Data Systems] would want the option of returning any accounts receivables or inventory after 120 days to Interprint that was found to be bad; that is, accounts receivable that was non-collectable or inventory that was obsolete. This would result in a commensurate reduction in book value. (11 R. 113)

The term "obsolete" was not defined in the letter. Boggan testified that based on his discussions with Grieves, he understood this "set-off" provision to refer to "non-current" inventory as reflected on Interprint's balance sheet: roughly $170,000 worth. (11 R. 150) The total inventories as reflected in the balance sheet was valued at roughly $900,000. Thus, based on his conversations with Grieves, Boggan believed that he was obliged to sell the $170,000 in non-current inventory lest it be deducted from the book value of his company (and hence from the purchase price). Boggan testified that at no time did Grieves explain that the set-off provision applied to all of the inventories. But in any event, Boggan was aware that a deal had not yet been struck. To be sure, even after receipt of the Letter of Intent, Boggan continued his efforts to sell, merge or refinance Interprint.

During April and early May, Data Systems circulated four different drafts of a proposed asset purchase agreement to Boggan. Although the purchase price remained subject to certain set-off rights in all drafts, the set-off provision itself changed substantially between the third draft (dated May 1, 1989) and fourth draft (dated May 2, 1989). In all of the drafts except the fourth draft (dated May 2, 1989), Data Systems could reduce, or set-off, book value only for "obsolete" inventory as stated in the Letter of Intent. The term "obsolete" was not defined in the drafts, nor was any reference made to the term "non-current" inventory. In the fourth draft (dated May 2, 1992), the set-off provision allowed Data Systems to set-off the value of all Interprint inventory, not sold or returned to vendors within 120 days after closing, against book value. That change was marked so that Boggan and his advisers would take note of it. Indeed, Boggan read the changed provision and discussed it with his accountant, who discussed it with Boggan's attorney. Neither Boggan nor his advisers discussed this change with Grieves, however. The set-off provision in the fourth draft was incorporated into a final Asset Purchase Agreement, executed by the parties on May 4. The parties also entered into an Employment Agreement.

Boggan did not sell or return to vendors most of the Interprint inventory with the 120 days following closing. Data Systems set off the unsold and unreturned inventory against the balance of the purchase price and offered to give Boggan the remaining inventory that had not yet been sold. Boggan sued Data Systems alleging multiple causes of action against Data Systems and the Grieveses. ¹ The Defendants counterclaimed for breach of the Asset Purchase Agreement and Employment Agreement, violations of the Texas Deceptive Trade Practices Act, and declaratory relief.

The district court entered partial summary judgment for the defendants on several of Boggan's claims, directed a verdict in their favor on others, and submitted the rest of the claims to a jury. The jury returned a verdict in favor of Boggan on his claim for fraudulent inducement, awarding compensatory damages in the amount of $783,076.43 against Data Systems and Grieves. Based on the jury's finding that Data Systems and Grieves acted "willfully and maliciously" in fraudulently inducing Boggan and Interprint to enter the Asset Purchase Agreement and Employment Agreement, the jury awarded punitive damages in the amount of $1.5 million against Data Systems and $1 million against Grieves. The district court denied the Defendants' motion for judgment notwithstanding the verdict or, alternatively, motion for a new trial and entered judgment in accordance with verdict. Data Systems and Grieves appealed; Boggan did not.

II. DISCUSSION

Under Texas law, a plaintiff must establish six elements to prove actionable common law fraud: (1) the making of a material representation; (2) that was false (3) that, when the speaker made it, the speaker knew was false or made it recklessly without knowledge of its truth and as a positive assertion; (4) that the speaker made it with the intent that it should be acted on by the other party; (5) that the other party acted in reliance on it; and, (6) that the other party suffered injury thereby. Trenholm v. Ratcliff, 646 S.W.2d 927, 930 (Tex.1983) (citation omitted). Defendants Data Systems and Grieves, the appellants herein, argue that the evidence was insufficient to sustain a jury verdict on the fraudulent inducement claim because Plaintiff Boggan failed to prove any misrepresentations of material fact (elements 1 and 2) made by the defendants and failed to prove that the defendants acted in justifiable reliance on the alleged misrepresentations of material fact (element 5). Thus, the defendants contend that the district court should have directed a verdict in their favor or entered a judgment notwithstanding the verdict.

On appeal, this Court employs the same standard that the district court used in ruling on the defendants' motions: The court "must review the evidence in the light and with all reasonable inferences most favorable to the party opposing the directed verdict or judgment notwithstanding the verdict." Fruge v. Penrod Drilling Co., 918 F.2d 1163, 1165-66 (5th Cir.1990) (citations omitted). As we first explained in Boeing Co. v. Shipman and have often repeated:

On motions for directed verdict and for judgment notwithstanding the verdict the Court should consider all of the evidence--not just that evidence which supports the non-mover's case--but in the light and with all reasonable inferences most favorable to the party opposed to the motion. If the facts and inferences point so strongly and overwhelmingly in favor of one party that the Court believes that reasonable [persons] could not arrive at a contrary verdict, granting of the motions is proper. On the other hand, if there is substantial evidence opposed to the motions, that is, evidence of such quality and weight that reasonable and fair-minded [persons] in the exercise of impartial judgment might reach different conclusions, the motions should be denied, and the case submitted to the jury.

411 F.2d 365, 374-75 (5th Cir.1969) (en banc)...