Geosearch, Inc. v. Howell Petroleum Corp.

• Decision Date: 08 June 1987
• Docket Number: No. 85-2755,85-2755
• Citation: 819 F.2d 521
• Parties: GEOSEARCH, INC., Plaintiff-Appellee, v. HOWELL PETROLEUM CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 521

819 F.2d 521

GEOSEARCH, INC., Plaintiff-Appellee, v. HOWELL PETROLEUM CORPORATION, Defendant-Appellant.

No. 85-2755.

United States Court of Appeals Fifth Circuit.

June 8, 1987.

Rehearing Denied July 23, 1987.

Thomas C. Wright, Miller, Keeton, Bristow & Brown, Houston, Tex., for defendant-appellant.

Timothy T. Read, J. Currie Bechtol, Hutcheson & Grundy, Houston, Tex., for plaintiff-appellee.

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

Before RUBIN, JOHNSON, and JONES, Circuit Judges.

JOHNSON, Circuit Judge:

The holder of a working interest in an oil and gas well, Geosearch, Inc., sued Howell Petroleum Corporation, the operator of the well and holder of another working interest, for damages resulting from an underground well blowout. Geosearch claimed that Howell misrepresented that its insurance covered Geosearch, so that Geosearch failed to seek a policy that would have covered its losses. The jury agreed. Howell argues on appeal that the trial court erred in (1) not submitting all the elements of negligent misrepresentation to the jury; (2) not submitting the issue of "justifiable reliance," but instead asking the jury an immaterial issue; and (3) refusing to reduce the jury's damages award for Geosearch's comparative negligence. The case is a diversity case, governed by Texas law. For the reasons stated below, we affirm.

I. BACKGROUND

In November 1980, Howell and Geosearch signed an operating agreement granting Geosearch a working interest in the Pass Fourchon Prospect. The agreement did not require Howell to carry insurance covering Geosearch's interest, although Howell, as operator, did have certain administrative and reporting duties.

On January 12, 1981, a Geosearch employee, Loreen Smith, called Howell Petroleum and spoke to one of its employees, Nagle. During this telephone conversation, which lasted only a few minutes, Nagle told Smith that Howell carried well control insurance that covered Geosearch's interest. Smith scribbled a note of the conversation: "1-12-81 Tom Nagle--Howell Petroleum[:] well control insurance[;] nothing for fishing; stuck drill stem; side tracking unless it had to do with controlling the well." Plaintiff's Exhibit No. 2.

In May 1981, the well had an underground blowout that forced abandonment. A second well was drilled, but turned out to be dry. Geosearch had no insurance to cover its share of the costs for controlling the first well or drilling the second.

Geosearch sued Howell under the Texas Deceptive Trade Practices Act, and for common law fraud and negligent misrepresentation. The court directed a verdict for Howell on the deceptive trade practices claim. The jury, answering special issues, found Howell liable for negligent misrepresentation but not fraud, and set Geosearch's comparative negligence at forty-five percent. The trial court entered judgment against Howell for the full amount of the jury's answer to the damages issue, $218,732.00.

II. DISCUSSION

A. Negligent Misrepresentation

Howell contends that the district court should have directed a verdict against Geosearch because Geosearch failed to prove two elements of the tort of negligent misrepresentation; alternatively, Howell argues that the court should have submitted these elements to the jury. In order to assess these contentions, we must determine what elements the courts of Texas have held to constitute negligent misrepresentation. Texas courts follow the Restatement (Second) of Torts, section 552 (hereinafter Sec. 552), in imposing liability for "Information Negligently Supplied for the Guidance of Others." See, e.g., Blue Bell v. Peat, Marwick, Mitchell & Co., 715 S.W.2d 408, 411 (Tex.App.--Dallas 1986, no writ); Great American Mortgage Investors v. Louisville Title Insurance Co., 597 S.W.2d 425, 429 (Tex.Civ.App.--Ft. Worth 1980, writ ref'd n.r.e.); Shatterproof Glass Corp. v. James, 466 S.W.2d 873, 878 (Tex.Civ.App.--Ft. Worth 1971, writ ref'd n.r.e.) (draft Restatement). Section 552 reads:

(1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

(2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered

(a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and

(b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction.

(3) The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them.

Restatement (Second) of Torts Sec. 552 (1977) (emphasis added).

Because this tort requires less fault than the intentional tort of fraud, the drafters of the Restatement included the emphasized language to limit liability in three ways. Id., Comment (a) at 127-28. On the defendant's end, the supplier of the false information must either be in the business of supplying that sort of information or must have a "pecuniary interest" in the transaction to which the information pertains. Section 552(1) and Comment (c). On the receiver's end, the plaintiff must first be either the intended recipient of the information or a known indirect recipient. Section 552(2)(a) and Comment (h). Second, the recipient must use the information in a transaction that the supplier intends to influence or at least knows of. Section 552(2)(b) and Comment (j). Rosenthal v. Blum, 529 S.W.2d 102, 104 (Tex.Civ.App.--Waco 1975, writ ref'd n.r.e.). Howell argues that it should have had a directed verdict, or at least a jury instruction, on all three limiting elements.

In regard to the second two elements, Howell's argument has no merit. There was no dispute at trial that Smith was an employee of Geosearch and that Nagle knew that fact. Section 552(2)(a) becomes an issue only when the direct recipient of false information passes it on to a third party. See, e.g., Blue Bell, 715 S.W.2d at 411 (accountant supplied audit to debtor who passed it on to creditor); Cook Consultants, Inc. v. Larson, 700 S.W.2d 231 (Tex.App.--Dallas 1985, writ ref'd n.r.e.) (surveyor who gave erroneous report to seller of real estate is liable to buyer). ¹ As to the third element, the jury was asked (Special Issue No. 7, Record Vol. 2 at 5) whether Nagle knew that Geosearch would use the information in making a decision about buying insurance. The jury answered "yes," and that answer was based on sufficient evidence concerning the telephone conversation.

The first element presents a more difficult problem. Howell clearly was not engaged in the business of supplying insurance information. Nor was there any factual dispute that Howell had no "pecuniary interest" in Geosearch's insurance purchase but did have such an interest in the drilling of the well. The issue turns on whether this Court should define "transaction" narrowly for section 552 purposes, to include only the insurance purchase that motivated Smith's phone call, or more broadly to cover the drilling venture that linked the two parties and made insurance necessary.

The Texas cases shed a very faint light on where this line should be drawn. One court allowed a retailer-tenant to recover from his shopping center landlord when the landlord stated, falsely, that its insurance would cover tenants for all thefts except shoplifting. Southwest Craft Center v. Heilner, 670 S.W.2d 651, 655-56 (Tex.App.--San Antonio [4th Dist.] 1984, writ ref'd n.r.e.). The Heilner court does not cite section 552, ² but the defendant landlord clearly had no "pecuniary interest" in its tenants' insurance. Another court found that an employee stated a cause of action, under section 552, against an insurance company for giving the employee information that led the employee to defer retirement and lose his benefits. Aetna Life & Casualty Co. v. Lyon, 576 S.W.2d 114, 117 (Tex.Civ.App.--Texarkana 1978, writ ref'd n.r.e.). The plaintiff in that case would have lost had the court defined the "transaction" as a decision on retirement rather than on insurance. ³ Similarly, a New Jersey court has allowed an employee to recover in a negligent misrepresentation suit against her employer, who misinformed her about her eligibility for a health plan, leading her to suffer loss when a member of her family had an accident. Berry v. Playboy Enterprises, Inc., 195 N.J.Super. 520, 480 A.2d 941 (1984), certification denied, 99 N.J. 231, 491 A.2d 720 (1985). The defendant in that case had a "pecuniary interest" in employing the plaintiff but not in running a health plan. Id. ⁴

While the precedents are not as clear as they could be, they caution against drawing an artificial line around one incident in an ongoing relationship and declaring that incident to be a separate "transaction" for section 552 purposes. In the instant case, the insurance that Geosearch was considering buying would have covered the very well in which Howell and Geosearch both had a pecuniary interest. In holding that the relevant transaction is the well investment, we give the word "transaction," as it appears in subsections (1) and (2)(b) the same meaning--i.e., the well investment. Geosearch and Howell both had a "pecuniary interest" in the well, and Howell knew that Geosearch's telephone call sought information concerning that well in order to influence a decision about the well. ⁵ Thus, we hold that the...