Opinion
Civil Action No. 3:01 — CV-2615-D
November 13, 2003
MEMORANDUM OPINION AND ORDER
Defendant Lawyers Title Insurance Corporation ("LTIC") moves for summary judgment, principally presenting the question whether plaintiffs' action is barred by res judicata. The court must also decide whether Texas recognizes a cause of action for fraud on the court like the one plaintiffs assert here. Concluding that res judicata bars most of plaintiffs' claims and that their claim for fraud on the court fails as a matter of law, the court grants LTIC's motion and dismisses the balance of this action with prejudice.
I
The court's prior opinion in this case sets forth the relevant background facts. See Hawk v. Williams, 2002 WL 31255096, at *1-*2 (N.D. Tex. Oct. 4, 2002) (Fitzwater, J.) (" Hawk I). Pertinent background facts and procedural history can also be found in the opinion of the Texas Court of Appeals in the relevant state court case. See E.K. Arledge, Inc. v. Hawk, 107 S.W.3d 79 (Tex.App. 2003, pet. denied) (" Hawk II"). To place the present decision in context, the court will briefly recount additional pertinent facts and procedural background.
The court recounts the evidence favorably to plaintiffs as the summary judgment nonmovants and draws all reasonable inferences in their favor. See Clift v. Clift, 210 F.3d 268, 270 (5th Cir. 2000).
Plaintiffs Danny J. Hawk ("Hawk") and Mitchell R. Henson ("Henson") purchased from the Delaware Insurance Commissioner, as Receiver ("the Receiver") for an insurance company, two promissory notes and associated deeds of trust. Hawk and Henson obtained the notes and deeds of trust in 1998 in connection with the settlement of a state court lawsuit (the "Note Case"). In the Note Case, the Receiver, acting on behalf of the insurance company, sued James B. Johnson ("Johnson"), who had assumed the obligation to pay the notes, to recover the unpaid balance. The Receiver and Johnson executed a settlement agreement and release under the terms of which Hawk and Henson were third-party beneficiaries. Hawk and Henson agreed to pay $100,000 to the Receiver in exchange for the two notes, all the Receiver's rights, title, and interest therein, including all rights against the collateral securing the notes and all rights of action asserted or that could be asserted by the Receiver against Johnson. The notes were secured by deeds of trust on two pieces of real property. In 1999 Hawk and Henson foreclosed on the deeds of trust and purchased the properties at foreclosure.
E. K. Arledge, Inc. ("Arledge"), a company that claimed title to the two tracts, filed a lawsuit in 2000 in Texas state court ("the Title Suit") to quiet title to the properties. See E.K. Arledge, Inc. v. Hawk, No. 00-0396-C (193rd Dist. Ct, Dallas County), aff'd as modified, 107 S.W.3d 79 (Tex.App. 2003, pet. denied). LTIC retained counsel to represent Arledge under an owner's policy of title insurance. Arledge alleged that Hawk and Henson had received no title to the properties from the 1999 foreclosure because Arledge had first obtained title via a 1997 foreclosure and sale undertaken to satisfy ad valorem tax liens. The Texas Court of Appeals noted in Hawk II that in 1997, two years before the 1999 deed of trust foreclosures under which Hawk and Henson claimed title, a state court foreclosed the tax liens and ordered the properties sold. The Sheriff sold the properties and deeded both tracts to Arledge's predecessor in title. See Howk II, 107 S.W.3d at 81. During the trial of the Title Suit, Mark J. Chmielarski, Esquire ("Chmielarski"), as counsel for the Receiver, testified by deposition that the Receiver was aware of and consented to the tax sale.
Arledge moved for and obtained partial summary judgment that effectively quieted title to the properties in Arledge. Id. Hawk and Henson appealed, and with a modification not pertinent here, the Texas Court of Appeals affirmed. See id. at 84. The Court of Appeals held as a matter of law that Arledge held superior title to the properties. Id.
After Arledge filed the Title Suit, Hawk and Henson filed the instant action against the LTIC and others. They allege that LTIC is liable on claims of tortious interference with rights under contract, conversion, conspiracy to convert, injurious falsehood-disparagement of property, and fraud on the court that heard the Title Suit. Hawk and Henson counterclaimed against Arledge in the Title Suit on several grounds, but they did not assert any of the causes of action at issue in this case. They also initiated a third-party action against LTIC but non-suited the action shortly after filing it. The state court entered a final judgment in the Title Suit in favor of Arledge, and the judgment was affirmed, as modified, on appeal, while the instant action was still pending. LTIC moves for summary judgment, contending, inter alia, that Hawk and Henson's first four claims are barred by res judicata. LTIC maintains that their fifth claim is not an independent cause of action and does not undermine the preclusive effect of the prior judgment in the Title Suit. Hawk and Henson oppose the motion.
Hawk and Henson voluntarily dismissed their suit against defendant Donald C. McDougal, Jr. In Hawk I the court dismissed plaintiffs' actions against the Receiver and Mark J. Chmielarski, Esquire, counsel for the Receiver, without prejudice to their being brought in Delaware chancery court. See Hawk I, 2002 WL 31255096, at *5.
LTIC moves for summary judgment on several grounds. The court need only decide whether this action is barred by res judicata.
Hawk and Henson have filed a cross-motion for partial summary judgment. The court need not decide the motion.
Hawk and Henson ask the court to abate its decision until the Supreme Court of Texas reviews their appeal of the Texas Court of Appeals' decision IN Hawk II. Because the Supreme Court of Texas denied their petition for review on October 17, 2003, this request is moot.
II
The court turns first to LTIC's contention that Hawk and Henson's first four claims are barred by res judicata because they should have been brought in the Title Suit. Because res judicata is an affirmative defense, to obtain summary judgment LTIC "must establish `beyond peradventure all of the essential elements of the . . . defense.'" Bank One, Tex., N.A. v. Prudential Ins. Co. of Am., 878 F. Supp. 943, 962 (N.D. Tex. 1995) (Fitzwater, J.) (quoting Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986)). Hawk and Henson maintain that LTIC is not entitled to summary judgment on this basis because it failed to plead this affirmative defense, res judicata does not apply because LTIC was not a party to the Title Suit, or, alternatively, LTIC is estopped by its own actions or those of Arledge from asserting that the Title Suit judgment is res judicata.A
Before reaching the merits, the court must address Hawk and Henson's contention that LTIC waived the defense of res judicata by not pleading it in its answer. " Res judicata is an affirmative defense which is considered waived if not specifically pleaded in the answer or an amended answer permitted under Fed.R.Civ.P. 15(a)." Simi Inv. Co. v. Harris County, 236 F.3d 240, 252 (5th Cir. 2000). Nevertheless, "technical failure to comply precisely with Rule 8(c) is not fatal." Lucas v. United States, 807 F.2d 414, 417-18 (5th Cir. 1986) (quoting Allied Chem. Corp. v. Mackay, 695 F.2d 854, 856 (5th Cir. 1983) (per curiam)).
If a party that asserts an affirmative defense (such as res judicata) fails to raise that defense in an operative pleading, that party does not necessarily waive the defense. Instead, if the party asserting the defense raised the issue at a pragmatically sufficient time, and the party opposing the defense was not prejudiced in its ability to respond, a court may hold that the defense was not waived.United States v. Shanbaum, 10 F.3d 305, 312 (5th Cir. 1994) (citations and quotation marks omitted). In Shanbaum the panel held that the party opposing res judicata "had an adequate opportunity to respond to the . . . assertion of res judicata" because res judicata — a legal matter — was raised at a pragmatically sufficient time when it was presented for the first time in the trial briefs filed the same day as the pretrial order and served on the opponent before the trial began. Id.; see Lucas, 807 F.2d at 418 (holding that affirmative defense, having been raised at trial, was asserted at pragmatically sufficient time, and noting that applicability of affirmative defense of statutory cap on damages was purely legal and could "be resolved without need for factual proof); cf. Simon v. United States, 891 F.2d 1154, 1159 (5th Cir. 1990) (holding that affirmative defense — Louisiana damages limitations statute — was not raised at pragmatically sufficient time when it was presented by Rule 59(e) motion to alter or amend judgment); Ingraham v. United States, 808 F.2d 1075, 1078-79 (5th Cir. 1987) (holding that affirmative defense — malpractice limitation — was not raised at pragmatically sufficient time when it was raised in Rule 60 motion seeking relief from judgment three months after entry of judgment). The court holds that LTIC raised the affirmative defense of res judicata at a pragmatically sufficient time by asserting the defense in a pretrial motion for summary judgment. Hawk and Henson have not been prejudiced because they have been able to respond fully on the merits of the motion. Accordingly, LTIC has not waived the defense of res judicata.
B
Hawk and Henson also maintain that LTIC is estopped from asserting res judicata. They contend that they attempted to join LTIC as a party to the Title Suit but Arledge — LTIC's insured-obtained an order striking the tort claims alleged against LTIC and Arledge. They also rely on the fact that, when LTIC moved to strike the claims against it, they promptly non-suited LTIC. The court disagrees.
The state court in the Title Suit struck Hawk and Henson's claims against Arledge and the third-party defendants because they filed the claims in violation of the scheduling order that controlled the case. See Ps. App. 44. Moreover, Hawk and Henson concede that they non-suited LTIC from the Title Suit before the court ruled on LTIC's and Arledge's motions to strike. Either their lack of diligence in joining LTIC as a party, or their voluntary dismissal of LTIC, is fatal to their argument that LTIC is estopped from relying on res judicata in the instant case.
C
The court now turns to the merits of LTIC's res judicata defense.1
"This court must give the [judgment in the Title Suit] the same preclusive effect that another Texas court would give it." In re Hansler, 988 F.2d 35, 37 (5th Cir. 1993). Texas follows the transactional approach in determining claim preclusion. "[A] subsequent suit will be barred if it arises out of the same subject matter of a previous suit and which through the exercise of diligence, could have been litigated in a prior suit." Barr v. Resolution Trust Corp., 837 S.W.2d 627, 631 (Tex. 1992). Res judicata bars "the relitigation of a claim or cause of action that has been finally adjudicated, as well as related matters that, with the use of diligence, should have been litigated in the prior suit." Id. at 628. Res judicata requires proof of "(1) a prior final judgment on the merits by a court of competent jurisdiction; (2) identity of parties or those in privity with them; and (3) a second action based on the same claims as were raised or could have been raised in the first action." Amstadt v. U.S. Brass Corp., 919 S.W.2d 644, 652 (Tex. 1996).
Hawk and Henson do not dispute the first requirement of the test: that the Title Suit is a final judgment entered by a court of competent jurisdiction. They posit that LTIC cannot establish that it was a party to the Title Suit and that their claims in this lawsuit "are not substantially the same" as the ones determined in the Title Suit. Ps. Br. at 6. The court will therefore turn to the second and third components of the res judicata test.
2
The second element concerns the identity of the parties or those in privity with them. It is undisputed that LTIC was not a party to the Title Suit. Hawk and Henson seem to assign significance to this fact. See Ps. Resp. at 5 (contending that res judicata does not apply "since LTIC was not party to that prior judgment"). The question presented, however, is not whether LTIC was a party to the Title Suit but whether it was in privity with Arledge. Under Texas law, the second element can be based on identity of parties or of those in privity with them. See Amstadt, 919 S.W.2d at 652-53.Under Texas law,
[p]eople can be in privity in at least three ways: (1) they can control an action even if they are not parties to it; (2) their interests can be represented by a party to the action; or (3) they can be successors in interest, deriving their claims through a party to the prior action.Id. at 653. Hawk and Henson have conceded that LTIC and Arledge were in privity due to the nature of their interests arising from the insurance policy under which LTIC insured Arledge's title in the two properties at issue. The following passage, taken from their response to LTIC's Fed.R.Civ.P. 12(b)(6) motion to dismiss, is illustrative. Hawk and Henson argued:
Therefore, it is obvious that (1) all actions or proceedings adverse to [Hawk and Henson] which were instituted by LTIC prior to the filing of [Hawk and Henson's] counterclaim in [the Title Suit] were purportedly done for and on behalf of LTIC pursuant to Subsection (b) of Section 4 of its policy of title insurance[,] and (2) after the filing of [Hawk and Henson's] counterclaim in [the Title Suit] instituted by LTIC, all actions or proceedings in prosecution of [the Title Suit] instituted by LTIC were purportedly done also for and on behalf of LTIC pursuant to Subsection (b) of Section 4 of the policy, and all actions or proceedings in defense by LTIC, using the name of E. K. Arledge, Inc., of [Hawk and Henson's] counterclaim in [the Title Suit] were also done for and on behalf of LTIC pursuant to Subsection (b) of Section 4 of the policy, because LTIC was the real party in interest who had instituted the suit. . . . [T]he real party in interest in suits brought to either clear or to enforce such title defects, liens, or encumbrances is not the insured. Rather, it is the title insurance company who failed to schedule them and is liable to the insured for loss arising from unscheduled title defects, liens, or encumbrances.
Ps. May 21, 2002 Resp. Mot. Dis. at 4-5 (emphasis added). It is clear from Texas law that "[t]hose in privity with a party may include persons who exert control over the action [or] persons whose interests are represented by the party[.]" Getty Oil Co. v. Ins. Co. of N. Am., 845 S.W.2d 794, 800-01 (Tex. 1992). LTIC has established without doubt that it was in privity with Arledge in the Title Suit.
3
The third element of res judicata requires "a second action based on the same claims as were raised or could have been raised in the first action." Amstadt, 919 S.W.2d at 652. LTIC points out that Hawk and Henson premise their claims against it on the same factual background as their claims in the Title Suit. "In both cases, Plaintiffs claim an interest in the Properties pursuant to the Deeds of Trust they acquired, and subsequently foreclosed, and assert that Arledge and/or LTIC wrongfully deprived them of that interest." D. Br. at 7.
Other than the waiver and estoppel arguments addressed above, Hawk and Henson's argument concerning res judicata consists of one paragraph. They maintain that
[p]laintiffs' current claims against LTIC are not substantially the same as Plaintiffs' claims that were determined by the title-suit judgment, so as to be barred by res judicata. LTIC in essence concedes that the claims are not the same by arguing that the claims in this suit were not asserted in the title suit, but should have or could have[ ] been asserted there.
Ps. Br. at 6. This argument appears to reflect a fundamental misunderstanding of the res judicata doctrine. Hawk and Henson seem to be saying that, by contending that the claims "should have or could have been asserted" in the Title Suit, LTIC is conceding that they were not in fact asserted and that this establishes that res judicata cannot apply. Under Texas law, however, the third element of res judicata merely requires "a second action based on the same claims as were raised or could have been raised in the first action." Amstadt, 919 S.W.2d at 652 (emphasis added). Hawk and Henson could have raised the claims now asserted against LTIC, as evidenced by the fact that they asserted similar claims against LTIC in the Title Suit. See D. App. 20, 22 (alleging causes of action for slander of title, intentional infliction of emotional distress, intentional interference with business relations, and conspiracy). The fact that the claims against LTIC were dismissed because Hawk and Henson did not join LTIC in a timely matter does not call into question whether the claims against LTIC could have been litigated in a prior suit. See Barr, 837 S.W.2d at 631.
Res judicata serves its purpose in this case because "separate lawsuits would require significant duplication of effort of the court and the parties involved." Id "Any cause of action which arises out of those same facts should, if practicable, be litigated in the same lawsuit." Id. at 630 (citing Gracia v. RC Cola-7-Up Bottling Co., 667 S.W.2d 517, 519 (Tex. 1984)).
Accordingly, LTIC's motion for summary judgment with respect to claims for interference with rights under contract, conversion, conspiracy to convert and injurious falsehood-disparagement of property based on res judicata is granted.
III
Hawk and Henson allege a fifth claim against LTIC for fraud on the court that heard the Title Suit. The essence of this cause of action is that LTIC or Arledge referred the state court to the testimony of Chmielarski — as counsel for the Receiver — who testified by deposition that the Receiver was aware of and consented to the tax sale and disposition of the deeds of trust. They maintain that if one party to a transaction refers the other party to a third party for information, the party who makes the reference is liable for false and fraudulent representations made by the party to whom he refers. See Ps. Br. at 4-5. LTIC moves for summary judgment on the ground that Texas does not recognize an independent cause of action for fraud on the court.
Hawk and Henson have not cited, and the court has not located, any cases that support such an action. In view of authorities such as Kale v. Palmer, 791 S.W.2d 628 (Tex.App. 1990, writ denied), the validity of such a cause of action is doubtful. In Kale a physician who had been held liable in an earlier lawsuit for medical malpractice, and her physician-husband (who had also been sued but was dismissed before trial), sued the plaintiffs, their attorney, their expert witness, and the attorney who had represented the defendant-hospital. Id. at 630. They alleged that the parties had committed fraud and conspiracy to defraud them by introducing fabricated evidence in the medical malpractice case, thereby inducing the adverse malpractice verdict. Id. The trial court granted summary judgment. On appeal, the court of appeals held that the physician was essentially saying that the defendants had instituted a civil suit without probable cause and had improperly made the physician the subject of legal process, to her detriment. Id. at 632. The court held that it was "hard put to find anything under Texas law which would permit [the physician and her husband] to state a cause of action for fraud or conspiracy under our present case." Id. The panel noted that, under Texas law, "[i]t is fundamental that in the absence of a statute to the contrary, an unsuccessful litigant who has lost his case because of perjured testimony, cannot maintain a civil action against the person who commits the perjury[,]" and that "[t]he basis of a cause of action for conspiracy is damages for the commission of the wrong that injures another, and not the conspiracy itself." Id. The court held that "[t]he cases cited by appellants supporting their position that Texas recognizes such a cause of action, involves fraudulent real estate or lease transactions or fraud during post verdict proceedings and not fabricated evidence presented in a former jury trial." Id. The court then reasoned:
It would be a dangerous precedent for this Court to agree that appellants have a cause of action for civil damages in the present context and the effect such a holding would have regarding the finality of judgments and the rights of litigants to develop a claim or defense would be devastating. The consequences of permitting every losing litigant a second trial based solely on allegations of false testimony in the prior proceeding would create a staggering redundancy of litigation. Texas provides sufficient legal recourse for unjust proceedings by granting the rights of direct appeal or the right to maintain a cause of action for malicious prosecution.Id. at 632-33. Accordingly, the court concludes that Texas would not recognize the cause of action of fraud on the court that Hawk and Henson have asserted against LTIC.
Hawk and Henson cite King v. Shawver, 30 S.W.2d 930 (Tex.App. 1930, no writ), and Volcanic Gardens Management Co. v. Paxson, 847 S.W.2d 343 (Tex.App. 1993, no writ), in opposition to LTIC's summary judgment motion. King involved the question whether a party who did not procure any gain could be held liable for referring a person to someone who fraudulently misrepresented a business transaction. See King, 30 S.W.2d at 932 ("Hence if one party to a transaction refers the other to a third person for information, the party making the reference is liable for false and fraudulent representations made by the person to whom he refers." (quoting 12 Ruling Case Law at 403)). King does not demonstrate that Texas recognizes a cause of action for fraud committed on a court. Volcanic Gardens simply addresses when the attorney-client privilege applies and does not support a cause of action for fraud on the court.
Accordingly, the court grants LTIC's motion for summary judgment, concluding as a matter of law that Texas does not recognize a cause of action for "fraud on the court" like the one asserted in this case.
Moreover, "fraud on the court" has no effect on the preclusive effect of the judgment in the Title Suit and therefore cannot undermine the res judicata effect of the Title Suit. See, e.g. In re Cantu, 961 S.W.2d 482, 486-87 (Tex.App. 1997, no writ).
* * *
For the reasons set out, the court grants LTIC's motion for summary judgment and, by judgment filed today, dismisses the balance of this action.
SO ORDERED.