Sunwest Bank of El Paso v. Basil Smith Engineering Co., Inc.

• Decision Date: 27 November 1996
• Docket Number: No. 08-95-00297-CV,08-95-00297-CV
• Parties: SUNWEST BANK OF EL PASO, an affiliate of Sunwest Financial Services, Inc., and its predecessor, American Bank of Commerce, Appellant, v. BASIL SMITH ENGINEERING COMPANY, INC., and Basil Smith, Individually, Appellees.
• Court: Texas Court of Appeals

Page 671

939 S.W.2d 671

SUNWEST BANK OF EL PASO, an affiliate of Sunwest Financial Services, Inc., and its predecessor, American Bank of Commerce, Appellant, v. BASIL SMITH ENGINEERING COMPANY, INC., and Basil Smith Individually, Appellees.

No. 08-95-00297-CV.

Court of Appeals of Texas,

El Paso.

Nov. 27, 1996.

Rehearing Overruled Jan. 29, 1997.

E. Link Beck, E. Link Beck & Associates, El Paso, for appellant.

Marvin K. Foust, Marvin Foust, P.C., Mark Berry, El Paso, for appellees.

Before BARAJAS, C.J., and LARSEN and CHEW, JJ.

OPINION

LARSEN, Justice.

This is an appeal by the defendant bank from adverse jury findings on theories of conversion and negligence. We reverse and render, based on the bank's statute of limitations defense.

FACTS

The appellee, Basil Smith, is an engineer in El Paso, Texas. In the late 1960s, Smith began doing business with North American Land Development ("NALD"). NALD was developing raw land in Timberon, New Mexico into a residential community. NALD sometimes paid for Smith's engineering services by assigning installment contracts for the purchase of Timberon lots to him. Smith, in turn, would assign the contracts to others for cash. Smith's employee, Pete Dix, handled sales and assignments of the contracts. During 1982 and 1983, the appellant, Sunwest Bank, formerly known as American Bank of Commerce ("ABC"), purchased some of Smith's contracts as investments for various trust accounts. Dix and Scott Flower, ABC's senior vice-president in charge of the trust department, concocted a scheme to skim money from Smith. In most instances, Dix would take a contract to Smith for signature. The contract would have an exhibit attached which outlined basic information such as the principal amount remaining on the contract, the interest rate, the monthly payment, and the sale price from Smith to ABC. Smith would execute the contract, with its exhibit attached, as assignor to ABC. When Dix took a contract to ABC to complete the assignment, Flower would issue two checks. One check would be to Smith for several thousand dollars less than the stated sale price. The second check would be to Dix as "agent," or to a corporation owned by Dix. The two checks always added up to the sale price stated on that particular contract's exhibit.

Apparently knowing that Smith trusted him and would not check or notice the discrepancy, Dix would deposit Smith's check and report the deposited amount to Smith. Smith, who controlled the business's checkbook at the time, would himself enter the "skimmed" amount in the company books. At trial, Smith admitted that he had seen the contracts with their exhibits prior to the assignment and that he could have caught the discrepancy easily had he ever compared the sale price on the exhibit with the deposit amount he received. He never did so because he trusted Dix, and he had "a lot of things I had to take care of." In a few instances of even more brazen conduct, Dix either forged Smith's name as assignor, or signed as assignor himself, and kept all of the proceeds. Despite having kept the records for billings to and payments from NALD himself, Smith never noticed that these contracts, assigned to him in payment for his engineering work at NALD, had been assigned to someone else with no payment whatsoever to Smith.

Sometime late in 1985 or early 1986, Smith discovered that Dix had committed various acts of conversion and other misconduct not involving the land contracts at issue here. Dix quit before Smith could fire him. Investigating Dix's activities, Smith found, among other things, forged checks on Smith's business accounts, an unauthorized checking account Dix used for personal expenses, and unauthorized payments to Dix out of company funds. Smith's investigation, which he performed without the aid of an accountant or other professional auditor, failed to uncover the skimmed land contract deals.

In 1986, ABC began negotiating with Sunwest for the sale of the bank. As part of the process, outside auditors reviewed ABC's trust department records. The auditors and ABC Bank personnel noticed documentation discrepancies in some of the land contracts Flower had purchased from Smith through Dix. On September 16 and 17, 1987, ABC sent ten letters to Smith, one for each affected trust account, requesting missing documents and information. Smith asked for ABC's documents and disbursement records to help him respond to the request. When Smith received the disbursement records from ABC, he realized that Flower had issued two checks on each transaction, and that one of the checks on each transaction was made out to Dix or a related entity. After obtaining NALD's records of all of the NALD-to-Smith contract assignments, Smith further realized that some of the contracts were entirely missing and unaccounted for. Smith concluded that "Flower was a thief." He filed this lawsuit against Sunwest as ABC's successor on April 4, 1989.

After a jury trial in April of 1995, Smith obtained findings of conversion and negligence against ABC/Sunwest. Smith submitted issues seeking a finding that he had a fiduciary relationship with ABC/Sunwest, and that ABC/Sunwest committed constructive fraud against Smith, but the jury found against Smith on those issues.

DISCUSSION

ABC/Sunwest appeals the judgment alleging forty-two points of error. The points are grouped into eleven substantive areas of argument. As we find that the points concerning the statute of limitations control, we do not reach the others.

Application of the Discovery Rule

In its first two points of error, ABC/Sunwest argues that the trial court erred in failing to find that Smith's negligence and conversion causes of action were barred by limitations as a matter of law. The trial court applied the discovery rule to the causes of action and entered judgment for Smith based on the jury's finding that Smith should not, in the exercise of reasonable diligence, have discovered his causes of action against ABC/Sunwest until December 14, 1987, the day Smith received the disbursement records from the bank. ¹ Smith argues that until he saw that two checks had been issued on each of the contract transactions, he did not and could not have known that Flower and Dix were skimming funds from each deal.

The parties do not contest that, upon accrual, Section 16.003(a) of the Texas Civil Practice and Remedies Code establishes a two-year statute of limitations for injury to the property of another or conversion of the property of another. TEX.CIV.PRAC. & REM.CODE ANN. § 16.003(a)(Vernon 1986 and Supp.1997). A cause of action for negligence normally accrues when the duty of ordinary care is breached by some act or omission, even though the injury is not immediately apparent and the injured party is not aware of a cause of action. Martinez v. Humble Sand & Gravel, Inc., 860 S.W.2d 467, 470 (Tex.App.--El Paso 1993), rev'd on other grounds, 875 S.W.2d 311 (Tex.1994). Similarly, unless possession is initially lawful, a cause of action for conversion accrues on the date of the conversion. See Hofland v. Elgin-Butler Brick Co., 834 S.W.2d 409, 414-15 (Tex.App.--Corpus Christi 1992, no writ). In this case, it is undisputed that by the end of 1983, Smith was no longer assigning contracts to ABC/Sunwest. His negligence and conversion causes of action based on the contract transactions therefore must have accrued, at the very latest, sometime in 1983. Smith failed to file suit on his claims until 1989, at least five years after the last of the land contract transactions. Unless the discovery rule applies to toll the statute of limitations, Smith's claims are barred.

The Texas Supreme Court has recently stated that application of the discovery rule is limited to cases where (1) the injury is inherently undiscoverable; and (2) evidence of the injury is objectively verifiable. Computer Associates Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453, 456 (Tex.1996). Since the evidence of injury in this case is well documented and objectively verifiable, the only issue is whether Smith's injury was inherently undiscoverable at the time it occurred. The purpose of statutes of limitations is to compel the assertion of claims within a reasonable period while the evidence is fresh in the minds of the parties and witnesses. Id. at 455. The discovery rule exception defers accrual of a cause of action until the plaintiff knew or, exercising reasonable diligence, should have known of the facts giving rise to the cause of action. Trinity River Auth. v. URS Consultants, Inc., 889 S.W.2d 259, 262 (Tex.1994). In Altai, Inc., the Supreme Court noted that the requirement of inherent undiscoverableness recognizes that the discovery rule exception should be permitted only in circumstances where "it is difficult for the injured party to learn of the negligent act or omission." 918 S.W.2d at 456, citing Willis v. Maverick, 760 S.W.2d 642, 645 (Tex.1988). The court went on to cite examples of inherently undiscoverable injuries: Kelley v. Rinkle, 532 S.W.2d 947, 949 (Tex.1976)("A person will not ordinarily have any reason to suspect that he has been defamed by the publication of a false credit report to a credit agency until he makes application for credit...."); Hays v. Hall, 488 S.W.2d 412, 414 (Tex.1972)("One who undergoes a vasectomy operation, and then after tests is told that he is...