Gleasman, Matter of
| Decision Date | 10 June 1991 |
| Docket Number | No. 90-8301,90-8301 |
| Citation | 933 F.2d 1277 |
| Parties | In the Matter of James Yao GLEASMAN and Margaret Yao Gleasman, Debtors. James Yao GLEASMAN and Margaret Yao Gleasman, Appellants, v. JONES, DAY, REAVIS & POGUE, Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
James M. Vogt, Stephen A. Roberts, Edward D. Burbach, Griggs & Harrison, Austin, Tex., for appellants.
Morris Atlas, Gary Gurwitz, Lisa Powell, Atlas & Hall, McAllen, Tex., for appellee.
Appeal from the United States District Court Western District of Texas.
Before GOLDBERG, HIGGINBOTHAM, and JONES, Circuit Judges.
This suit for legal malpractice rests on diversity jurisdiction and is controlled by Texas law. The grant of summary judgment for the law firm rested on Texas's two-year period of limitations and discovery rule.
James and Margaret Yao Gleasman sued the law firm of Jones, Day, Reavis & Pogue in a Texas state court. After the case was removed to the federal bankruptcy court, where the Gleasmans had earlier filed for bankruptcy, the bankruptcy court granted summary judgment in favor of Jones, Day on the ground that the two-year limitations period had run on the Gleasmans' malpractice claim. The court reasoned that the suit was time-barred under Texas law because the Gleasmans knew, or should have discovered through the exercise of reasonable care and diligence, the facts establishing the elements of their claim more than two years before they filed suit. The district court affirmed. We affirm on essentially the same grounds.
In February 1983 James and Margaret Yao Gleasman purchased 151 acres of unimproved land in Travis County, Texas. In October 1984 the Gleasmans refinanced the land by borrowing $2.5 million from Equitable Savings Association. The accompanying note had a maturity of one year. Under its terms, the Gleasmans were to pay Equitable Savings a one-year interest payment based on a variable rate of not less than 14 percent. The Gleasmans also gave Equitable Savings a deed of trust in the land, a $125,000 origination fee, and an assignment of net profits under which the Gleasmans promised to pay Equitable Savings at least an additional $322,200.00 at the maturity of the note. The note also contained certain covenants restricting the Gleasmans' use of the land to residential purposes. In this transaction the Gleasmans were represented by the law firm of McDuff & Damron. Before closing the loan with Equitable Savings, the Gleasmans reviewed the truth-in-lending statement with their attorneys. That statement estimated the annual interest rate on the loan to be 32.8 percent over the one-year term of the loan. When the Gleasmans asked their attorneys whether this was usurious, the attorneys responded by saying that they would agree to sign an opinion that the rate was not usurious, as a favor to the Gleasmans; however, they implied that by doing so they were taking a risk, because of the possibility that the loan might later be found to be usurious. The Gleasmans then closed the loan.
In December 1984, the Gleasmans hired Jones, Day to represent them in forming an Arabian-horse limited partnership. 1 Simultaneously Jones, Day was representing Equitable Savings in other matters, including a merger between Equitable Savings and Northwest Savings Association. The Gleasmans contend that they were unaware that Equitable Savings was a Jones, Day client and hence that a potential conflict of interest existed. Jones, Day says that while it never explicitly told the Gleasmans that it represented Equitable Savings, the Gleasmans either knew or should have known that Equitable Savings was also a client. On the other hand, the Gleasmans did not inform Jones, Day of the lien Equitable Savings held against their land until January 1985. At that time the Gleasmans provided Jones, Day with copies of the documents of the Equitable Savings loan--including those containing the net-profits provision, the deed restrictions, and the "no usury" opinion.
What happened next is disputed: Jones, Day says that, upon seeing the terms of the Equitable Savings loan, it advised the Gleasmans that, as long as that loan remained outstanding, the net-profits provision and deed restriction would have to be disclosed to potential investors in the limited partnership. The Gleasmans, on the other hand, argue that Jim Erb--a Jones, Day lawyer--told them that SEC regulations would prevent the syndication from going through with the net-profits provisions; that before proceeding with the syndication, the Gleasmans would have to retire the Equitable Savings loan. The Gleasmans contend that this statement was false and misleading and was calculated to get the Gleasmans to retire the usurious Equitable-Savings loan and facilitate regulatory approval of a merger between Equitable Savings and another savings institution. Jones, Day denies making any false or misleading statements, but readily acknowledges that when it saw the net-profits interest held by Equitable Savings it had some question about usury. Yet, Jones, Day explains, because it owed a duty of loyalty to Equitable Savings as well as to the Gleasmans, Jones, Day left the raising of the issue to the Gleasmans' other law firms, with the further plan that if the Gleasmans decided to refinance the Equitable Savings loan, it would insist that the Gleasmans hire another lawyer for the transaction.
At some point the Gleasmans asked Mr. Erb to arrange a meeting between themselves and a representative of Equitable Savings, so that the Gleasmans could inquire about refinancing their note. Mr. Erb set up the meeting, which was attended by the Gleasmans and Danny Payne, a representative of Equitable Savings. Before the meeting began, however, Erb excused himself from the room, saying he could not remain in attendance because of the possibility of a conflict of interest. This is how Margaret Gleasman characterized the meeting:
Erb then arranged a meeting for us with Danny Payne in a conference room at the Jones, Day office. When we arrived at the office, Erb took us to the conference room, introduced us to Payne and then excused himself from the room with words to the effect of, "We'd rather you meet alone because there might be some kind of conflict." Because he elaborated no further on the matter, my husband speculated Franklin might be buying Equitable.
The Gleasmans decided to refinance their loan through Franklin Savings Association. Franklin Savings is also a client of Jones, Day, a fact disclosed to the Gleasmans. Jones, Day argues that Franklin Savings was the only bank that was able and willing to refinance the Equitable loan. The loan was for $3,625,000. Its terms included a 15 percent annual interest rate, a $145,000 origination fee, and a deed of trust on the land. Under the loan agreement, the Gleasmans were to execute and deliver to Equitable Savings a document entitled "Full Release," under which the Gleasmans agreed to release and discharge Equitable Savings from liability for usury relating to the Equitable Savings note. The Gleasmans contend that they signed the Franklin Savings note under duress and as a result of the fraud and conspiracy committed by Jones, Day in conjunction with Equitable Savings and Franklin Savings and that, therefore, the usury release is invalid. The Franklin Savings loan was closed on June 28, 1985. The law firm of Coffee, Goldston & Vogt, and later the firm of Vogt & Scherer, represented the Gleasmans in connection with the Franklin Savings loan. Jones, Day continued to represent the Gleasmans with regard to the syndication until the end of 1985, when, for reasons unrelated to this case, the Gleasmans stopped pursuing the horse syndication. Jones, Day never represented the Gleasmans on any other matters. The note was renewed on September 30, 1986.
The Gleasmans eventually defaulted on the Franklin Savings note. Subsequently, in January 1988, they filed suit in Texas state court against several financial institutions in connection with the Equitable Savings loan and the Franklin Savings loan. The state suit alleged usury, fraud, duress, conspiracy, and bad faith. On March 23, 1988, the Gleasmans amended their complaint to include Jones, Day as a defendant. In September 1988 the Federal Home Loan Bank Board declared insolvent CreditBanc Savings, the successor of Equitable Savings, and Franklin Savings, and adopted a resolution appointing the Federal Savings and Loan Insurance Corporation as receiver of both institutions.
In October 1988 James Gleasman declared bankruptcy, and in January 1989 Margaret Gleasman followed suit. Both bankruptcies were filed in the U.S. Bankruptcy Court in the Western District of Texas. FSLIC intervened and removed the state lawsuits to the bankruptcy court, where the matters were consolidated. In January 1989 Franklin Federal Bancorp was granted intervenor status in place of the FSLIC. In August 1989 the bankruptcy court granted summary judgment in favor of Jones, Day and Franklin Federal Bancorp. On review, the district court affirmed the bankruptcy court's decision.
The Gleasmans appeal the portion of the district court's judgment affirming the bankruptcy court's grant of summary judgment in favor of Jones, Day. The Gleasmans alleged that Jones, Day did not tell them of their potential usury claim against Equitable Savings or tell them that Jones, Day had a potential conflict of interest due to its representation of Equitable Savings. They also alleged that Jones, Day had deliberately concealed these facts from them as part of a conspiracy with Equitable Savings and Franklin Savings. This, said the Gleasmans, was a breach of a fiduciary duty, negligence and fraud. In analyzing the plea of limitations, both the bankruptcy court and the district court treated these variations as a single allegation of legal malpractice.
Both the bankruptcy court and the district court found that the defense...
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