Smith Intern., Inc. v. Egle Group, LLC

• Decision Date: 22 June 2007
• Docket Number: No. 06-20422.,06-20422.
• Citation: 490 F.3d 380
• Parties: SMITH INTERNATIONAL, INC., Plaintiff-Appellant, v. The EGLE GROUP, LLC; Don M. Egle; Daniel Rees, as Trustee of the Egle Trust for Michelle A. Egle, the Egle Trust for John M. Egle, Jr., and the Egle Trust for Lauren E. Egle, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

490 F.3d 380

SMITH INTERNATIONAL, INC., Plaintiff-Appellant, v. The EGLE GROUP, LLC; Don M. Egle; Daniel Rees, as Trustee of the Egle Trust for Michelle A. Egle, the Egle Trust for John M. Egle, Jr., and the Egle Trust for Lauren E. Egle, Defendants-Appellees.

No. 06-20422.

United States Court of Appeals, Fifth Circuit.

June 22, 2007.

Cynthia C. Hollingsworth (argued), Gardere Wynne Sewell, Dallas, TX, Geoffrey H. Bracken, Gardere Wynne Sewell, Houston, TX, for Smith Intern., Inc.

Walter C. Thompson, Jr. (argued), Jan K. Frankowski, Barkley & Thompson, New Orleans, LA, for Daniel Rees.

Norman William Peters, Jr. (argued), Kasowitz, Benson, Torres & Friedman, Houston, TX, for Daniel Rees and Egle Group, LLC.

David B. Dickinson, Lundeen & Dickinson, Houston, TX, for Don M. Egle.

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

Before JONES, Chief Judge, and JOLLY and STEWART, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

This dispute arises from a sales-purchase agreement under which the purchaser, Smith International, Inc. ("Smith"), seeks indemnity from the defendant sellers for damages caused by allegedly false representations and warranties in the agreement. Smith appeals the district court's grant of summary judgment in favor of the defendants on all its claims. Although we conclude that Smith's breach of contract and negligent misrepresentation claims are time-barred, we hold that Smith's indemnity claim is not barred by res judicata or the statute of limitations under Texas law. We therefore AFFIRM in part, REVERSE in part, and REMAND for further proceedings.

I.

In April 1997, co-defendant the Egle Group, L.L.C. ("Egle Group")¹ and Tri-State Technologies, L.L.C. ("Tri-State")² sold their respective 50% interests in Tri-Tech Fishing Services, L.L.C. ("Tri-Tech") to Smith pursuant to a sales-purchase agreement ("Agreement"). The Agreement listed the Egle Group and Tri-State as the sole sellers ("Sellers") and Smith as the sole purchaser. In the Agreement, Sellers made numerous representations and warranties, and under the Agreement's indemnity clause, Sellers agreed to reimburse Smith for damages arising from any false representations and warranties. The Agreement was signed, on behalf of the Sellers, by representatives of the Egle Group,³ by member-managers of Tri-State,⁴ and by the general manager of Tri-Tech, Ray Daugherty. In April 1997 and January 1998, pursuant to the Agreement, Smith paid approximately $21 million to the Egle Trusts, Glenn Dauterive, Daugherty, and other individuals.

On March 13, 2000, Smith's felicity took a turn when Rose Dove Egle, the ex-wife of John M. Egle, added Smith as a defendant in an ongoing Louisiana state court suit against her ex-husband. Rose Egle alleged, inter alia, that in 1994, although the Egle Trusts owned 100% of the Egle Group, her ex-husband and others in Tri-Tech conspired and wrongfully conveyed a 12% interest in the Egle Group to Dauterive and a 25% interest in the Egle Group to Daugherty. According to Rose Egle, Smith was liable, as successor to Tri-Tech, for the 1994 wrongful conveyances. When Smith purchased Tri-Tech, it wrongfully disbursed a total of $3,468,919 to Dauterive and Daugherty for their 12% interest and 25% interest, respectively, in the Egle Group, which Smith should have distributed to the Egle Trusts. The question went to a Louisiana jury, and it agreed. It found that Tri-Tech committed fraud and misappropriated the $3,468,919 to Dauterive and Daugherty and that Smith was the successor to Tri-Tech and was not a good-faith purchaser of Tri-Tech. On June 1, 2004, the Louisiana court entered judgment against Smith in the full amount of $3,468,919 plus interest and costs. Smith appealed the judgment to the Louisiana appellate court, where, as far as the record shows, it is now pending.

On October 27, 2004, Smith filed this suit in federal district court in Texas seeking compensation and indemnification for the Louisiana judgment. Smith alleged breach of contract, breach of indemnity, and negligent misrepresentation against the Egle Group, Daniel Rees as trustee of the Egle Trusts (collectively, "Defendants"), the Egle Trusts,⁵ and Don M. Egle.⁶ The parties moved for summary judgment, and on January 27, 2006, the district court granted summary judgment in favor of Defendants and Don M. Egle on the basis of res judicata because Smith failed to raise its claims in the form of a reconventional demand in the Louisiana suit. The district court concluded that all of Smith's claims existed at the time Smith became a defendant in the Louisiana suit and that all of those existing claims arose out of the "same transaction or occurrence" that was the subject matter of the Louisiana suit. Accordingly, the district court held that Louisiana's res judicata statute, La.Rev.Stat. Ann. § 13:4231 (West 2006), and reconventional demand rule, La. Code Civ. Proc. Ann. art. 1061 (West 2005), barred Smith's claims for failure to raise them in the Louisiana suit.

On March 29, 2006, the district court vacated the portion of its January 27 order ruling in favor of the Egle Group on the basis of res judicata, apparently because the Egle Group was not a party to the Louisiana suit. Nevertheless, the district court affirmed its grant of summary judgment in favor of the Egle Group, holding that Smith's claims against the Egle Group were time-barred by the statute of limitations because Smith's claims accrued when Smith became a defendant in the Louisiana suit. Smith filed this appeal.

II.

We review de novo the district court's grant of summary judgment, applying the same standard as the district court. Gowesky v. Singing River Hosp. Sys., 321 F.3d 503, 507 (5th Cir.2003). Summary judgment is appropriate when "there is no genuine issue as to any material fact and [] the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).

The issue before us is whether Smith's causes of action accrued on March 13, 2000, when Smith was named as a defendant in the Louisiana suit, or on June 1, 2004, after the Louisiana court entered final judgment against Smith. The accrual date is dispositive in this case for two reasons.

First, the accrual date of its causes of action determines whether Smith was required, by principles of res judicata, to assert its claims in a reconventional demand in the Louisiana suit. Under Louisiana res judicata law,⁷ a final judgment in favor of a plaintiff extinguishes "all causes of action existing at the time of final judgment arising out of the transaction or occurrence that is the subject matter of the litigation." La.Rev.Stat. Ann. § 13:4231(1); see La.Code Civ. Proc. Ann. art. 1061 (reconventional demand rule).⁸ Thus, if Smith had a cause of action that arose out of the same transaction, and that had accrued at the time Smith became a defendant in the Louisiana suit, then Smith's failure to assert such claims barred them under res judicata principles. On the other hand, if Smith's causes of action did not accrue until after the Louisiana court entered final judgment against it, then Smith's causes of action did not exist "at the time of final judgment," see La.Rev.Stat. Ann. § 13:4231(1), and Smith could not have raised its causes of action in a reconventional demand, see La.Code Civ. Proc. Ann. art. 1061.

Second, and apart from res judicata considerations, the accrual date is dispositive because it determines when the statute of limitations began to run on Smith's causes of action, and consequently, whether the statute of limitations expired. Under Texas law, indemnity and breach of contract claims are subject to a four-year statute of limitations, Ingersoll-Rand Co. v. Valero Energy Corp., 997 S.W.2d 203, 206, 210-11 (Tex.1999) (citing Tex. Civ. Prac. & Rem.Code Ann. § 16.004(a)(3) (Vernon 2002));⁹ negligent misrepresentation claims are subject to a two-year statute of limitations, Tex. Civ. Prac. & Rem. Code Ann. § 16.003(a) (Vernon 2002); Coleman v. Rotana, Inc., 778 S.W.2d 867, 873 (Tex.App.1989).¹⁰ If Smith's indemnity and breach of contract claims accrued at the time Smith became a defendant in the Louisiana suit on March 13, 2000, the four-year statute of limitations expired before Smith filed this suit in federal district court on October 27, 2004.¹¹ If, however, Smith's claims did not accrue until after the Louisiana court entered final judgment against it on June 1, 2004, then Smith's claims are not barred by the statute of limitations.

The parties dispute when Smith's causes of action accrued, and accordingly, whether res judicata and the statute of limitations bar Smith's claims.

III.

A.

In determining the accrual date of Smith's claims, we first turn to consider the rationale of the district court in concluding that all of Smith's claims accrued when Smith became a defendant in the Louisiana suit. In its January 27, 2006 memorandum and order, the district court focused its attention on Section 4.3 of the Agreement, in which the Sellers represented that Smith would acquire Tri-Tech "free and clear of any Liens." Because the Agreement defines "Lien" to include "any ... claim",¹² the district court apparently inferred that this representation in Section 4.3 of the Agreement was breached at the moment Rose Egle asserted a legal claim against Smith in the Louisiana suit. Accordingly, the district court held that it was at this moment that all of Smith's causes of action—breach of contract, negligent misrepresentation, and indemnity—accrued.

B.

We now turn to consider whether the district court erred in each of its holdings, respectively. We begin with Smith's breach of contract claim. In Texas, "[t]he essential elements of a breach of contract action are: (1) the existence of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; and (4) damages sustained by the plaintiff as a result of the breach."...