Isg State Operations v. Nat. Heritage Ins.

• Decision Date: 09 August 2007
• Docket Number: No. 11-05-00359-CV.,11-05-00359-CV.
• Citation: 234 S.W.3d 711
• Parties: ISG STATE OPERATIONS, INC., Appellant, v. NATIONAL HERITAGE INSURANCE COMPANY, INC., Appellee.
• Court: Texas Court of Appeals

234 S.W.3d 711

ISG STATE OPERATIONS, INC., Appellant, v. NATIONAL HERITAGE INSURANCE COMPANY, INC., Appellee.

No. 11-05-00359-CV.

Court of Appeals of Texas, Eastland.

August 9, 2007.

Rehearing Overruled September 13, 2007.

Charles E. Soechting, Gregory Finney, Neil C. McCabe, Stephen R. Walker, The O'Quinn Law Firm, Jett Williams, III, Davis Oretakey, P.C., Houston, for appellant.

Bobby M. Rubarts, Kim J. Askew, Robert Mow, Sean W. Fleming, Hughes & Luce, L.L.P., Dallas, Brittan Buchanan, Nick P. James, Van Osselaer, Cronin & Buchanan, Austin, for appellee.

Panel consists of WRIGHT, C.J., McCALL, J., and STRANGE, J.

OPINION

RICK STRANGE, Justice.

ISG State Operations, Inc. sued National Heritage Insurance Company, Inc. (NHIC) contending that NHIC breached a contract and fraudulently made precontractual and post-contractual misrepresentations. The trial court entered a directed verdict in NHIC's favor on ISG's fraudulent inducement cause of action, and the jury found for NHIC on ISG's breach of contract and common-law fraud claims. We affirm.

I. Background Facts

NHIC, an Electronic Data Systems (EDS) subsidiary, was responsible for managing the State's medicaid program. Medical service providers submitted claims to NHIC for processing. It verified the claim and paid the provider on the State's behalf. In 1992, NHIC signed a Memorandum of Understanding with the Texas Department of Human Services and agreed to participate in a program promoting Historically Underutilized Businesses (HUBs). ISG is a minority-owned business and was certified as a HUB. In 1993, NHIC contracted with ISG's parent company to study possible outsourcing opportunities. Service providers submitted claims on paper and electronically. ISG recommended that paper and electronic claims processing be outsourced and that it be the recipient of that outsourcing. In 1994, NHIC and ISG executed a contract that subcontracted paper — but not electronic — claim processing to ISG.¹

Problems soon developed. As part of the Subcontract, 137 claims-handling employees were transferred from NHIC to ISG. NHIC made a fixed contract payment to ISG at the beginning of the month and a variable payment at the end of the month that was based upon the month's actual claim count. The claim count began decreasing, and NHIC's end-of-the-month payment decreased correspondingly. This created financial difficulties for ISG. On more than one occasion, ISG failed to timely pay its employees. NHIC advised ISG that this was a breach of the Subcontract and requested a corrective action plan. ISG instead contacted the Texas Department of Health and complained that NHIC's greed and manner of doing business was straining their future, that NHIC was acting out of racial jealousy, and that NHIC was forcing it out of business.

ISG's operations manager resigned in May 1994 because of disagreements with ISG's owner. The replacement manager resigned in September 1994. Several other employees and supervisors resigned because of work conditions. After the departure of the second operations manager, ISG was unable to meet the Subcontract's performance requirements. NHIC sent ISG notices of default, and on August 25, 1995, NHIC terminated the Subcontract for failure to timely process claims.

ISG sued NHIC and alleged that it was fraudulently induced into executing the Subcontract. ISG alleged that NHIC represented that it would receive future electronic claims work and that ISG detrimentally relied upon NHIC's representations by working on the Subcontract to the exclusion of all other work. ISG also asserted causes of action for common-law fraud and breach of contract. The trial court dismissed ISG's fraudulent inducement claim by directed verdict. The trial court submitted ISG's breach of contract and common-law fraud claims to the jury. The jury found against ISG, and the trial court entered a take nothing judgment in NHIC's favor.

II. Issues

ISG raises three issues on appeal. First, it contends that the trial court abused its discretion by concluding that the merger clause precluded ISG's cause of action for fraudulent inducement based on NHIC's precontractual representations. Second, ISG argues that the trial court erred by granting NHIC's motion for directed verdict. Third, it claims that the trial court abused its discretion by excluding evidence of precontractual representations by NHIC.

III. Analysis

A. Did the Trial Court Err by Granting a Directed Verdict on ISG's Fraudulent Inducement Cause of Action?

1. The Trial Court's Rulings.

The trial court held a pretrial hearing on the parties' motions in limine and granted NHIC's motion to preclude evidence of precontractual representations that were inconsistent with the Subcontract's merger clause.² After the jury was selected, ISG asked the trial court to reconsider this ruling. ISG argued that it was not offering evidence of precontractual representations to vary the terms of the Subcontract but to show that, both before and after the Subcontract's execution, NHIC promised that ISG would receive a separate contract for handling electronic claims. The trial court expressed a concern over parol evidence being used to vary the Subcontract's terms but indicated that ISG could offer evidence that NHIC had decided to give ISG a contract for electronic claims handling.

The following day, during a hearing to consider deposition testimony objections, ISG re-urged its position that the Subcontract's merger clause did not preclude a cause of action for fraudulent inducement based upon precontract representations. The trial court reaffirmed its decision that precontract representations were contractually excluded from consideration and deferred any ruling on post-contract representations pending the conclusion of ISG's case. When ISG rested, NHIC moved for directed verdict on ISG's fraudulent inducement cause of action. The trial court granted NHIC's motion noting: "I didn't hear any evidence of reliance because you were seeking benefit of the bargain."³

2. Standard of Review.

ISG frames its first issue by arguing that the trial court erred when it held that the Subcontract's merger clause precluded any fraudulent inducement claim for electronic claims processing. ISG's issue correctly states the reason articulated by the trial court for its ruling, but our review is necessarily broader. We must affirm the trial court's judgment — even if its rationale is erroneous — if it can be supported on any basis. Cano v. N. Tex. Nephrology Assocs., P.A., 99 S.W.3d 330, 339 (Tex.App.-Fort Worth 2003, no pet.). Consequently, the burden on ISG is to show that no basis supports the trial court's decision. See McKelvy v. Barber, 381 S.W.2d 59, 62 (Tex.1964).

A directed verdict for a defendant is appropriate when the plaintiff does not present evidence raising a fact issue essential to the plaintiff's right of recovery or when a plaintiff admits or the evidence conclusively establishes a defense to the plaintiff's cause of action. Prudential Ins. Co. of Am. v. Fin. Review Servs., Inc., 29 S.W.3d 74, 77 (Tex.2000). We consider only evidence supporting ISG's case and disregard all contrary evidence. City of Keller v. Wilson, 168 S.W.3d 802, 823-26 (Tex.2005). We must decide if there is any evidence of probative value that raises issues of fact on the material questions presented. Bostrom Seating, Inc. v. Crane Carrier Co., 140 S.W.3d 681, 684 (Tex. 2004). If the evidence rises to a level to allow reasonable and fair-minded people to differ in their conclusions, it constitutes more than a scintilla of evidence, an instructed verdict is improper, and the case must be reversed and remanded. Coastal Transp. Co. v. Crown Cent. Petroleum Corp., 136 S.W.3d 227, 234 (Tex.2004). Where no evidence of probative force on an ultimate fact element exists or where the probative force of the testimony is so weak that only a mere surmise or suspicion is raised as to the existence of essential facts, an instructed verdict is appropriate. ITT Consumer Fin. Corp. v. Tovar, 932 S.W.2d 147, 160 (Tex.App.-El Paso 1996, writ denied).

3. ISG's Fraudulent Inducement Claim.

ISG alleged that NHIC made a number of fraudulent misrepresentations to induce it to enter into the Subcontract and to take a number of related actions. To establish a fraudulent misrepresentation, ISG was required to prove:

(1) NHIC made a material representation;

(2) the representation was false;

(3) when the representation was made, NHIC knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion;

(4) NHIC made the representation with the intent that ISG act upon it;

(5) ISG acted in reliance on the representation; and

(6) ISG thereby suffered injury.

Formosa Plastics Corp. v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 47 (Tex.1998). Because ISG alleged fraudulent inducement as opposed to common-law fraud, ordinary detrimental reliance is insufficient. Instead, ISG was required to show that it was induced into executing a contract. See Haase v. Glazner, 62 S.W.3d 795, 798 (Tex.2001).⁴

ISG's fraudulent inducement claim would normally bring the Subcontract's validity into question because a fraudulently induced party has not assented to the agreement. See Lyn-Lea Travel Corp. v. Am. Airlines, Inc., 283 F.3d 282, 289 (5th Cir.2002).⁵ However, ISG did not seek rescission of the Subcontract — in fact its breach of contract claim was based upon it — and ISG conceded during oral argument that there was no evidence that it would not have executed the Subcontract but for NHIC's representations regarding electronic claims. Rather, ISG is attempting to use fraudulent inducement as a vehicle to recover the expected profits from a second, unexecuted agreement.⁶ ISG told the trial court that it was induced to sign the Subcontract with a promise that it "would be given another separate, distinct contract to handle electronic claims."

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