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holding that imposition of a stay lasting through appeal would likely be unduly burdensome to the plaintiff's interest
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Civil Action No. 3:00-CV-1335-D
July 15, 2002
MEMORANDUM OPINION AND ORDER
In this action to recover for negligent misrepresentation, the court decides three motions for summary judgment that present inter alia the question whether the claim is barred in whole or in part by limitations. The court also decides whether the testimony of plaintiff's damages expert should be excluded under Daubert as unreliable, and it resolves a discovery dispute related to plaintiff's damages claim. For the reasons that follow, the court denies defendants' summary judgment motions because there is a genuine issue of material fact whether limitations was tolled under the doctrine of fraudulent concealment; permits defendants to conduct additional discovery and file a joint supplemental motion for partial summary judgment regarding plaintiff's claim for damages; and denies defendants' motion to exclude the testimony of plaintiff's damages expert.
Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 539 (1993).
I
Plaintiff Heller Healthcare Finance, Inc. ("Heller") filed this suit on June 19, 2000 against defendants Irving D. Boyes ("Boyes"), Stephen K. Morehead ("Morehead"), and Donald R. Iglehart ("Iglehart") seeking to recover on a claim for negligent misrepresentation. Heller was engaged in the business of lending to health care service providers. In early January 1998 it took preliminary steps toward initiating a lending relationship with Chartwell Healthcare, Inc. ("Chartwell"). At the time, Boyes, Morehead, and Iglehart were Chartwell officers.
The court recounts the evidence favorably to Heller as the summary judgment nonmovant and draws all reasonable inferences in its favor. See Clift v. Clift, 210 F.3d 268, 270 (5th Cir. 2000).
Heller's affiliate, Healthcare Analysis Corp. ("HCAC"), began performing due diligence into Chartwell's finances in order to generate a pre-loan survey for Heller's Credit Committee. HCAC routinely conducted such due diligence for Heller in connection with its decisions whether to extend credit to health care companies. HCAC's procedure typically consisted of reviewing accounts receivables, financial records, and the general financial condition of the potential borrower.
Heller contends that Boyes and Morehead made false representations during the preparation of the survey. On approximately January 26, 1998 the Heller Credit Committee approved a loan to Chartwell. The Committee reviewed the HCAC survey and a Credit Committee report submitted by the underwriter. On February 11, 1998 Heller entered into a Loan and Security Agreement ("Loan Agreement") with Chartwell, under which Heller extended a $10 million revolving line of credit that was secured in part by security interests in Chartwell's accounts receivable. The Loan Agreement, which Boyes signed, contained several representations and warranties by Chartwell. As part of the Loan Agreement transaction, Chartwell executed a revolving credit note.
Pursuant to the Loan Agreement, Chartwell submitted to Heller written borrowing base certificates ("Certificates") to obtain advances on the line of credit. Each Certificate contained a computation of collateral that set forth the specific amount of Chartwell's eligible receivables and corresponding maximum borrowing limit. Each Certificate also represented that Chartwell was then in compliance with the material terms, covenants, and conditions of the Loan Agreement, there existed neither an event of default nor any event that would constitute one under prescribed circumstances, and the representations and warranties contained in the Loan Agreement were true in every material respect.
Chartwell submitted Certificates to Heller between March 12, 1998 and July 27, 1998. Heller maintains that each Certificate up to June 29, 1998 overstated the true amount of Chartwell's accounts receivable. It alleges that Chartwell caused these overstatements by failing to apply Medicare Periodic Interim Payments ("Payments") to reduce the reported receivables of certain Chartwell facilities. Heller maintains that these overstatements resulted in an excess advance under the Loan Agreement of approximately $960,000. It posits that, on June 29, 1998, HCAC discovered the Chartwell practice of not applying Payments to reduce accounts receivable.
Heller also alleges that, although the payment problem did not continue after June 29, 1998, the Certificate that Chartwell submitted on July 13, 1998 overstated the receivable base by including money from a Medicare settlement that had already been collected a month earlier. See P. Br. (Boyes MSJ) at 11. Heller posits that this misrepresentation caused the borrowing base to be overstated by approximately $1.3 million. Id. Heller contends further that every Certificate violated the representations and warranties contained in sections 4.5 and 4.13 of the Loan Agreement.
Section 4.5:
Section 4.5. Litigation. Except as disclosed in Schedule 4.5, there are no actions, suits, proceedings or investigations pending or threatened against Borrower before any court or arbitrator or before or by any Governmental Authority which, in any one case or in the aggregate, if determined adversely to in the interests of Borrower, could have a material adverse effect on the business, properties, condition (financial or otherwise) or operations, present or prospective, of Borrower, or upon its ability to perform its obligations under the Loan Documents. Borrower is not in default with respect to any order of any court, arbitrator, or Governmental Authority applicable to Borrower or its properties.
P. App. (Boyes MSJ) 220.
Section 4.13:
Section 4.13. Compliance with Law. Except as described in Schedule 4.13, Borrower is not in violation of any statute, rule or regulation of any Governmental Authority (including, without limitation, any statute, rule or regulation relating to employment practices or to environmental, occupation and health standards and controls). Borrower has obtained all licenses, permits, franchises, and other governmental authorizations necessary for the ownership of its properties and the conduct of its business. Borrower is current with all reports and documents required to be filed with any state or federal securities commission or similar Governmental Authority and is in full compliance with all applicable rules and regulations of such commissions.
Id. at 222.
Heller alleges that a host of legal and regulatory actions in progress against Chartwell at the time each Certificate was submitted rendered these representations false. It also maintains that each Certificate misrepresented that Chartwell was in compliance with section 4.7 of the Loan Agreement. Heller posits that each Certificate contained a false representation that Chartwell was in compliance with section 4.9 of the Loan Agreement.
Section 4.7:
Section 4.7. Financial Condition. The annual financial statements of Borrower as of June 30, 1997, certified by the responsible financial officer of Borrower, which have been delivered to Lender, fairly present the financial condition of Borrower and the results of its operations and changes in financial condition as of the dates and for the periods referred to, and have been prepared in accordance with GAAP. There are no material unrealized or anticipated liabilities, direct or indirect, fixed or contingent, of Borrower as of the dates of such financial statements which are not reflected therein or in the notes thereto. There has been no adverse change in the business, properties, condition (financial or otherwise) or operations (present or prospective) of Borrower since June 30, 1997. Borrower's fiscal year ends on December 31. The federal tax identification number of each entity comprising Borrower is as described on Schedule 4.15.
Id. at 220-21.
Section 4.9:
Section 4.9. Title to Properties. Borrower has good and marketable title to its properties and assets, including the Collateral and the properties and assets reflected in the financial statements described in Section 4.7, subject to no lien, mortgage, pledge, encumbrance or charge of any kind, other than Permitted Liens. Borrower has not agreed or consented to cause any of its properties or assets whether owned now or hereafter acquired to be subject in the future (upon the happening of a continency or otherwise) to any lien, mortgage, pledge, encumbrance or charge of any kind other than Permitted Liens.
Id. at 221.
The final type of misrepresentation on which Heller relies concerns the management of a "lockbox account" into which funds on all of Chartwell's accounts receivable were to be paid. Under this arrangement, lockbox funds were swept and deposited into a Heller account. Heller contends that defendants made false representations concerning Chartwell's compliance with the agreed-upon lockbox procedure.
Misrepresentations alleged to have occurred prior to the signing of the Loan Agreement will be referred to as "pre-loan misrepresentations." Misrepresentations alleged to have been contained within the Certificates will be referred to as "Certificate misrepresentations." Misrepresentations alleged to have been made regarding compliance with the lockbox procedure will be referred to as "lockbox misrepresentations."
Heller sues Boyes, Morehead, and Iglehart to recover its alleged losses of approximately $5.4 million under the revolving line of credit and approximately $1.8 million under letters of credit issued in Chartwell's favor. Chartwell is bankrupt.
II A
Under Texas law, to establish negligent misrepresentation the plaintiff must prove that (1) the defendant made a representation to the plaintiff in the course of the defendant's business or in a transaction in which the defendant had a pecuniary interest; (2) the defendant supplied false information for the guidance of others; (3) the defendant did not exercise reasonable care or competence in obtaining or communicating the information; (4) the plaintiff justifiably relied on the representation; and (5) the defendant's negligent misrepresentation proximately caused the plaintiff's injury. See Clardy Mfg. Co. v. Marine Midland Business Loans, Inc., 88 F.3d 347, 357 (5th Cir. 1996); McCarnish, Martin, Brown Loeffler v. F.E. Appling Interests, 991 S.W.2d 787, 791 (Tex. 1999). A negligent misrepresentation claim is governed by a two-year statute of limitations. See Tex. Civ. Prac. Rem. Code Ann. § 16.003(a) (Vernon 2002). "A cause of action generally accrues, and the statute of limitations begins to run, when facts come into existence that authorize a party to seek a judicial remedy." Sabine Towing Transp. v. Holiday Ins. Agency, Inc., 54 S.W.3d 57, 59-60 (Tex.App. 2001, pet. denied) (citing Johnson Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 514 (Tex. 1998)). "In most cases, a cause of action accrues when a wrongful act causes an injury, regardless of when the plaintiff learns of that injury or if all resulting damages have yet to occur." Id. at 60 (citing S.V. v. R.V., 933 S.W.2d 1, 4 (Tex. 1996)).
In applying this "legal injury" rule, the Supreme Court of Texas has held that a fraudulent misrepresentation cause of action accrues as soon as the misrepresentation induces the plaintiff to act. See Quinn v. Press, 140 S.W.2d 438, 440 (Tex. 1940).
Applying the legal injury rule to the present case, the court holds that, absent an applicable exception, Heller's negligent misrepresentation cause of action arising from the pre-loan misrepresentations accrued on February 11, 1998, the date the Loan Agreement was signed. It was on that date that the alleged misrepresentations induced Heller to act, i.e., to enter the Loan Agreement. This accrual date applies to the letters of credit that were granted in favor of certain Chartwell subsidiaries contemporaneously with the signing of the Loan Agreement, despite the fact that these letters of credit were not ultimately drawn on until August 1998. See id.
Each Certificate at issue stated: "This Certificate is given to the lender in order to induce the lender on the date hereof to make an advance to the Borrower[.]" P. App. (Boyes MSJ) 301. The court holds that the accrual date applicable to a misrepresentation contained in a particular Certificate is the date Heller advanced funds in reliance on that particular Certificate. Heller has introduced evidence indicating that advances took place in response to the submission of Certificates on the following dates in 1998: March 12, March 18, March 23, April 2, April 13, April 20, April 24, May 3, May 29, June 2, June 10, June 11, June 15, June 18, June 23, June 26, June 29, June 30, July 13, July 22 and, finally, on July 27. See Morehead App. (MSJ) 58.
The court holds that Heller's cause of action for any lockbox misrepresentations accrued at the time the misrepresentations were made, because any noncompliance with such procedures injured Heller immediately.
B
Heller argues that three exceptions to the legal injury rule apply in this case and remove its claim from the preclusive effect of the statute of limitations: (1) the discovery rule; (2) the doctrine of fraudulent concealment; and (3) the doctrine of equitable estoppel.
Because the court holds, for reasons explained below, that Heller has raised a genuine issue of material fact as to fraudulent concealment, it need not address the applicability of equitable estoppel.
1
As a threshold matter, the court addresses defendants' contention that Heller cannot rely on any of these exceptions because it failed to plead them in its first amended complaint ("complaint"). "[W]hile the discovery rule must be specifically pleaded in Texas State Court to avoid the statute of limitations, it need not be specifically pleaded in federal court. Rather, `[u]nder Rule 8 of the Federal Rules of Civil Procedure, it is enough that the plaintiff plead sufficient facts to put the defense on notice of the theories on which the complaint is based.'" Colonial Penn Ins. Co. v. Market Planners Ins. Agency, Inc., 1 F.3d 374, 376 (5th Cir. 1993) (per curiam) (citations omitted) (quoting Simpson v. James, 903 F.2d 372, 375 (5th Cir. 1990)). Taking into account the essential legal elements of the statute of limitations exceptions at issue, the court holds that Heller's complaint notified defendants of Heller's reliance on the discovery rule and fraudulent concealment exceptions. Heller explicitly alleged that it "did not discover that Defendants' representations were false, despite the exercise of reasonable diligence, until after it made its final advance of funds to the Borrowers under the line of credit on July 27, 1998." Compl. ¶ 69. The court holds that this allegation was sufficient to plead both exceptions. See Colonial Penn, 1 F.3d at 376.2
Heller argues that the Texas "discovery rule" operates to defer accrual of a negligent misrepresentation claim until the plaintiff knows, or through the exercise of reasonable diligence should have known, of facts giving rise to the cause of action. Heller correctly cites Sabine Towing for the proposition that the discovery rule is at least potentially applicable to a cause of action based on negligent misrepresentation. See Sabine Towing, 54 S.W.3d at 57. The Supreme Court of Texas has stated, however, that "[t]he discovery rule, in application, proves to be a very limited exception to statutes of limitations." Computer Assocs. Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996); see also S.V., 933 S.W.2d at 25 (holding that "exceptions to the legal injury rule should be few and narrowly drawn"). "Generally, application [of the discovery rule] has been permitted in those cases where the nature of the injury incurred is inherently undiscoverable and the evidence of injury is objectively verifiable." Altai, 918 S.W.2d at 456.
To demonstrate that the discovery rule is applicable to the present case, Heller must establish that the claim it is asserting, and that would otherwise be time-barred, is (1) inherently undiscoverable and (2) objectively verifiable. See Sabine Towing, 54 S.W.3d at 60. "To be `inherently undiscoverable,' an injury need not be absolutely impossible to discover, else suit would never be filed and the question whether to apply the discovery rule would never arise." S.V., 933 S.W.2d at 7. "Nor does `inherently undiscoverable' mean merely that a particular plaintiff did not discover his injury within the prescribed period of limitations; discovery of a particular injury is dependent not solely on the nature of the injury but on the circumstances in which it occurred and plaintiff's diligence as well." Id. "An injury is inherently undiscoverable if it is by nature unlikely to be discovered within the prescribed limitations period despite due diligence." Id. (citing Computer Assocs. Int'l, 918 S.W.2d at 456).
The court holds that the misrepresentations at issue are not inherently undiscoverable, because they are not by nature unlikely to be discovered within the prescribed limitations period when due diligence is exercised. Heller's evidence indicates that from the inception, and through the life, of the Chartwell loan, Heller employees and affiliates were engaged in performing due diligence related to the loan. According to Heller, by June 29, 1998, a date well before the expiration of the limitations period, these activities resulted in the discovery of the Certificate misrepresentations related to the Payments. See P. App. (Boyes MSJ) 140-41, 439-52, 565-69. The due diligence endeavors led Heller to declare an event of default, as of April 16, 1998, based on noncompliance with the lockbox agreement. See Morehead Supp. App. 2. As to the Certificate misrepresentations related to pending legal and regulatory actions against Chartwell, Heller admits that a search for public documents pertaining to such actions was not part of its due diligence. See P. Br. (Boyes MSJ) at 28; P. App. (Boyes MSJ) 597-98. The record indicates that information relating to many of the then-pending actions against Chartwell could have been discovered by such a search. Although Heller is not charged with constructive notice of such publicly-available documents, the availability of this information is a factor to be considered in determining whether the misrepresentations at issue were "inherently undiscoverable." See HECI Exploration Co. v. Neel, 982 S.W.2d 881, 887 (Tex. 1998). Because the evidence indicates that, with the exercise of due diligence, the misrepresentations were capable of being discovered within the limitations period, the court holds as a matter of law that the misrepresentations were not "inherently undiscoverable" and that Heller cannot invoke the discovery rule to avoid the limitations bar. See S.V., 933 S.W.2d at 8.
Regarding the second discovery rule requirement — that the evidence of injury be "objectively verifiable" — the Supreme Court of Texas has held that "the bar of limitations cannot be lowered for no other reason than a swearing match between parties over facts and between experts over opinions." S.V., 933 S.W.2d at 15. "The requirement of objective verifiability requires physical or other evidence, such as an objective eyewitness account, to corroborate the existence of the claim." In re Coastal Plains, Inc., 179 F.3d 197, 215 (5th Cir. 1999) (citing S.V., 933 S.W.2d at 15). "Objectively verifiable evidence is the key factor for determining the discovery rule's applicability." Askanase v. Fatjo, 130 F.3d 657, 668 (5th Cir. 1997). "An injury is `objectively verifiable' if the presence of injury and the producing wrongful act cannot be disputed." Howard v. Fiesta Tex. Show Park, Inc., 980 S.W.2d 716, 720 (Tex.App. 1998, pet. denied). "To satisfy the objectively verifiable standard, `the evidence must rise to a higher level of certainty' than the preponderance of the evidence for liability." Prieto v. John Hancock Mut. Life Ins. Co., 132 F. Supp.2d 506, 515 (N.D. Tex. 2001) (Lindsay, J.) (quoting S.V., 933 S.W.2d at 19).
It appears from the summary judgment record that determining the falsity of certain of the alleged misrepresentations will require the trier of fact to consider delicate technical issues regarding the proper recording and presenting of accounts receivable by a borrower. Whatever the ultimate resolution of this question, this seems to be a matter about which there is at least some divergence of professional opinion. See, e.g., Ds. Br. (Mot. to Preclude Expert Testimony) at 5-9. The same is also true regarding the method by which plaintiff's propose to calculate damages. See, e.g., Boyes Br. (MSJ) at 19-20. For these reasons, the court holds that, even if the misrepresentations at issue were "inherently undiscoverable," the discovery rule would still not be available because the evidence of Heller's injury is not "objectively verifiable."
3
Heller also argues that, under the doctrine of fraudulent concealment, its claim is not barred by limitations. To avail itself of tolling under this doctrine, a plaintiff must raise a genuine issue of material fact regarding (1) actual knowledge by the defendant that a wrong has occurred, and (2) a fixed purpose on the part of the defendant to conceal the facts necessary for the plaintiff to know that it has a cause of action. See Santanna Natural Gas Corp. v. Hamon Operating Co., 954 S.W.2d 885, 890 (Tex.App. 1997, pet. denied). Where a plaintiff has established the elements of fraudulent concealment, the statute of limitations is tolled "until the fraud is discovered or could have been discovered with reasonable diligence." Velsicol Chem. Corp. v. Winograd, 956 S.W.2d 529, 531 (Tex. 1997).
Because it will bear the burden of proving the fraudulent concealment exception at trial, Heller must at the summary judgment stage raise a genuine issue of material fact regarding this basis for tolling the statute of limitations. See Prieto, 132 F. Supp.2d at 515. The court will address Heller's claim of fraudulent concealment as to each defendant in conjunction with its consideration below of the substantive claims asserted against each defendant.
III
The court now turns to Boyes' motion for summary judgment. Boyes maintains that he is entitled to summary judgment because: (1) Heller's claims based on conduct before June 19, 1998 are barred by limitations; (2) Heller has failed to identify any actionable misrepresentations concerning conduct after June 19, 1998; and (3) Heller has failed to establish damages.
Boyes filed on February 19, 2002 evidentiary objections to portions of Heller's appendix accompanying Heller's response to Boyes' motion for summary judgment. These objections challenge evidence in Heller's appendix as improperly authenticated under Fed.R.Evid. 901 and as inadmissible hearsay. On April 22, 2002, with leave of court, Boyes filed a supplemental appendix. The court now considers Boyes' objections in light of the matter contained in that appendix. To the extent the court has relied on evidence to which Boyes objects, the objections have been considered on the merits and are overruled. As to evidence to which an objection has been made but on which the court has not relied for any purpose in deciding the Boyes' motion, the objections are overruled as moot.
Heller has adduced evidence indicating that Boyes signed each Certificate submitted to Heller. It has also introduced proof that would permit a reasonable trier of fact to find that every Certificate up to June 29, 1998 misrepresented the true amount of the accounts receivable. See P. App. (Boyes MSJ) 140-41, 439-52, 473-76, 480-81, 498-99, 565-69, 599-600, 636-49. Heller has produced evidence that each Certificate included in the total of eligible receivables certain Medicare receivables that should have been reduced by the amount of Payments received. Heller asserts that the effect of including these accounts in the total of eligible receivables was to overstate the maximum amount of credit available under the revolving credit line. It maintains that the overstatement of eligible receivables resulted in an over-advance on the loan of approximately $960,000. See P. App. (Boyes MSJ) 599, 636-49.
Boyes admits signing the great majority of the Certificates, but contends that Iglehart stamped his name on some of them. See P. App. (Boyes MSJ) 51-52. Nevertheless, the apparent presence on these Certificates of Boyes' signature creates a genuine issue of material fact concerning whether he signed them.
Heller has also introduced evidence that would support the finding that, although each Certificate explicitly represented that "[a]s of the date hereof, the representations and warranties contained in the Loan Agreement are true in every material respect, with the same effect as though such representations and warranties had been made on the date hereof[,]" material breaches existed with regard to a variety of Loan Agreement representations as of the date every Certificate was issued. See, e.g., P. App. (Boyes MSJ) 64-72, 77-79, 82-108, 141-42, 477-86, 601-28.
Heller has produced proof sufficient to warrant a reasonable conclusion that the July 13, 1998 Certificate that Boyes signed overstated the amount of eligible receivables by including money from a Medicare settlement that had already been collected a month earlier. See P. App. (Boyes MSJ) 398-401, 549-52. It has presented evidence that is sufficient to warrant a reasonable finding that Boyes did not use reasonable care or competence in obtaining and communicating the information contained on the Certificates. Therefore, absent a valid statute of limitations defense, Heller may maintain a cause of action against Boyes for negligent misrepresentation arising from the issuance of every Certificate submitted to Heller.
The court holds that none of the alleged misrepresentations at issue may be conclusively held to constitute, as Boyes argues, mere puffery or statements of opinion. Heller has adduced evidence that Boyes made representations regarding past or present facts that were material to Heller's decision to advance funds under the Loan Agreement. Misrepresentations of this character go beyond mere puffery or opinion and therefore may be the basis for a negligent misrepresentation action. See Trentholm v. Ratcliff, 646 S.W.2d 927, 930 (Tex. 1983); Angelo Broad, Inc. v. Satellite Music Network, Inc., 836 S.W.2d 726, 735-36 (Tex.App. 1992, writ denied).
As the court has already held, to avail itself of tolling under the doctrine of fraudulent concealment, Heller must raise a genuine issue of material fact regarding (1) actual knowledge by Boyes that a wrong had occurred, and (2) a fixed purpose on Boyes' part to conceal the facts necessary for Heller to know it had a cause of action. See Santanna, 954 S.W.2d at 890. Heller has adduced evidence sufficient to warrant a reasonable conclusion that Boyes acquired knowledge as of April 30, 1998 that the accounting treatment of Payments on the Certificates consistently and substantially overstated the amount of eligible receivables and therefore resulted in over-advances under the loan. See P. App. (Boyes MSJ) 8-16, 26-28. It has introduced proof that Iglehart was the party within Chartwell who informed Boyes of this category of misrepresentation. See Id. Heller has also introduced evidence that Iglehart documented and relayed to Boyes information regarding a large number of legal and regulatory actions that were in progress against Chartwell during the period the Certificates were being submitted to Heller. See id. at 17-18, 30-46.
Heller has also produced proof that is sufficient to warrant a reasonable finding that Boyes acted according to a fixed purpose to conceal the facts necessary for Heller to learn that these misrepresentations had been made. It has presented copies of several handwritten memoranda that Morehead sent to Boyes that may reasonably be construed as describing the mechanism by which various misrepresentations regarding accounts receivable were to be concealed from Heller. These Morehead-authored memoranda included the suggestion to Boyes that "[w]e need to remove [Heller] from the Chartwell loan." P. Supp. App. (Morehead/Iglehart MSJ) 52. In a handwritten June 28, 1998 memorandum that Boyes wrote in response to a memorandum from Morehead, Boyes stated: "I do agree it's time to move away from [Heller]." Id. at 83. This evidence, coupled with proof that Boyes continued to sign and deliver to Heller Certificates containing misrepresentations, even after he learned of the falsity of past representations of a similar nature, creates a genuine issue of material fact regarding whether Boyes possessed a fixed purpose to conceal the facts necessary to learn that past misrepresentations had been made. See Santanna, 954 S.W.2d at 890-91.
When a plaintiff establishes the elements of fraudulent concealment, the statute of limitations is tolled "until the fraud is discovered or could have been discovered with reasonable diligence." Velsicol Chem., 956 S.W.2d at 531. Heller filed suit on June 19, 2000. It is obligated to adduce at the summary judgment stage evidence that would support a reasonable conclusion that it did not discover, and could not with reasonable diligence have discovered, the misrepresentations at issue until after June 19, 1998. See Prieto, 132 F. Supp.2d at 515 (quoting Porter v. Charter Med. Corp., 957 F. Supp. 1427, 1436 (N.D. Tex. 1997) (McBryde, J.)). Heller has introduced proof that would permit a finding that it did not learn, and could not reasonably have learned, of the improper inclusion of Payments in the eligible receivables figure until June 29, 1998. See P. App. (Boyes MSJ) 13-14, 140-41, 439-52. Concerning the Certificate misrepresentations related to Chartwell's continuing compliance with representations originally made in the Loan Agreement, Heller has adduced evidence that would enable a reasonable finder of fact to conclude that Heller did not know, and should not reasonably have known, of these misrepresentations until after June 19, 1998. See P. App. (Boyes MSJ) 597-98. The court holds that Heller has raised a genuine issue of material fact regarding whether Boyes engaged in fraudulent concealment of the negligent misrepresentations he is alleged to have made, and that Heller has adduced evidence sufficient to warrant a reasonable finding that it did not discover and, in the exercise of reasonable diligence, could not have discovered the existence of these misrepresentations until after June 19, 1998. The court therefore holds that the doctrine of fraudulent concealment prevents summary judgment from being granted in Boyes' favor with respect to those claims asserted by Heller that would otherwise have accrued under the legal injury rule before June 19, 1998.
The court addresses infra at § VI the part of Boyes' motion for summary judgment that addresses damages.
IV
The court now considers Morehead's motion for summary judgment. Morehead moves for summary judgment on grounds similar to those that Boyes advances.
Heller has adduced evidence sufficient to warrant a reasonable finding that Morehead supplied false information for Heller's guidance in connection with the preparation of Certificates both before and after June 19, 1998. See P. App. (Morehead/Iglehart MSJ) 541-42. As outlined above, Heller has produced sufficient proof to warrant a reasonable finding that false information contained in these Certificates proximately caused financial injury to Heller. Heller has also produced evidence that Morehead, in connection with the submission of each Certificate, orally represented to a Heller loan officer that the accounts receivable figures contained in the Certificates were accurate. See P. App. (Morehead/Iglehart MSJ) 140. By producing proof that Morehead knew these representations were false at the time they were made, see P. App. (Morehead/Iglehart MSJ) 490-91, 498, 584-89, 8-16; P. Supp. App. (Morehead/Iglehart MSJ) 29, 41, Heller has presented sufficient evidence to warrant a finding that Morehead did not use reasonable care or competence in obtaining and communicating the information contained in the Certificates. Heller has also raised a genuine issue of material fact regarding inter alia Morehead's liability for negligent misrepresentations made on April 29, 1998 related to Chartwell's presentation of its accounts receivable figures and its compliance with the lockbox agreement. See P. App. (Morehead/Iglehart MSJ) 498, 490-91, 584-89.
Concerning Morehead's alleged acts of misrepresentation that took place before June 19, 1998, Heller has adduced evidence sufficient to warrant a reasonable finding that Morehead engaged in fraudulent concealment of these misrepresentations. Heller's proof would permit a reasonable trier of fact to find that Morehead had actual knowledge that the Certificates contained misrepresentations regarding the calculation of eligible receivables. See P. App. (Morehead/Iglehart MSJ) 8-16, 26-28, 14. Heller has also introduced evidence sufficient to warrant a reasonable finding that Morehead acted according to a fixed purpose to conceal the facts necessary to learn that these misrepresentations had been made. See, e.g., id. at 498, 490-91, 584-89. Evidence from handwritten memoranda from Morehead to Boyes supports a reasonable finding that both these elements of fraudulent concealment have been satisfied. These memoranda contain statements by Morehead that, in advance of a scheduled Heller audit, "ALL of the credits must be removed from the A/R Agings for both Chartwell and the Valley. Result: this will increase the borrowing base." P. Supp. App. (Morehead/Iglehart MSJ) at 29. One memorandum also contains the statement: "We need to remove [Heller] from the Chartwell loan." Id. at 51-52. Heller has presented evidence that is sufficient to warrant a reasonable finding that it did not learn, and could not reasonably have learned, of the misrepresentations that Morehead allegedly made until after June 19, 1998.
The court addresses infra at § VI the part of Morehead's motion for summary judgment that addresses damages.
V
The court now turns to Iglehart's motion for summary judgment, which relies on grounds like those that Boyes and Morehead posit.
With respect to Certificates issued before April 30, 1998, Heller has raised a genuine issue of material fact regarding whether Iglehart supplied false information for the guidance of Heller in connection with the preparation of the Certificates. Heller has adduced evidence that Iglehart was the party primarily responsible for preparing the information contained in the Certificates and submitting them to Heller. See P. App. (Morehead/Iglehart MSJ) 51-52, 19. This evidence is sufficient to preclude summary judgment concerning Iglehart's liability inter alia for statements contained in Certificates submitted before April 30, 1998. Heller has adduced evidence that, as of April 30, 1998, Iglehart became convinced that the manner in which Chartwell was presenting its eligible receivables on the Certificates was misleading. See id. at 8-16, 26-28. The record indicates that, as a consequence of his dispute with Boyes and Morehead over this matter, Iglehart resigned as a Chartwell officer. See id. at 20-23, 47. The evidence would permit the reasonable finding that, despite his reservations regarding the representations that Chartwell made in its Certificates, Iglehart took no steps to inform Heller of the basis of his own misgivings.
Heller cites the following deposition testimony of Boyes:
Q. What did you do to make sure that the numbers on the borrowing base certificates were accurate? . . .
A. I relied upon Don Iglehart to prepare these accurately, and he would present them to me, usually with very little notice. I just didn't have the time or the skills to audit this. I had to trust and rely upon him.
Q. Did you ever make any inquiry as to the accuracy of the numbers in the Certificates before you signed them?
A. I can't think of a specific incidence where I did, but I had implicit faith in his ability to be accurate, and he was trustworthy to a fault.
Id. at 53.
Iglehart contends that any misrepresentations he allegedly made before June 19, 1998 are time-barred. Heller has raised a genuine issue of material fact regarding Iglehart's actual knowledge that misrepresentations had been made to Heller. Heller alleges that Iglehart's silence after arriving at the conclusion that the Certificates contained misrepresentations is sufficient proof to raise a genuine issue of material fact regarding a fixed purpose on Iglehart's part to conceal the facts necessary for Heller to know it had a cause of action. Santanna observed that the "[t]he gist of the fraudulent concealment defense is the defendant's active suppression of the truth or its failure to disclose the truth when it is under a duty to speak." Santanna, 954 S.W.2d at 890 (citing Leonard v. Eskew, 731 S.W.2d 124, 128 (Tex.App. 1987, writ ref'd n.r.e.)). Thus "[f]raud may consist of both active misrepresentation and passive silence." Id. "A party relying on passive fraud to sustain a fraudulent concealment defense to the statute of limitations must demonstrate the existence of a special relationship that creates a duty to speak." Id. "When one makes a representation, he has a duty to disclose new information when he is aware the new information makes the earlier representation misleading or untrue." Hendrix v. Thornton, 973 S.W.2d 348, 363 (Tex.App. 1998, pet. denied) (citing Susanoil, Inc. v. Cont'l Oil Co., 519 S.W.2d 230, 236 n. 6 (Tex.Civ.App. 1975, writ ref'd n.r.e.)).
Because Heller has adduced evidence sufficient to warrant a reasonable finding that Iglehart supplied false information for Heller's guidance in connection with the preparation of the Certificates issued before April 30, 1998, and later obtained actual knowledge of the falsity of that information, Heller has created a fact issue regarding whether Iglehart had a duty to disclose his knowledge that the prior representations were untrue. By producing evidence that Iglehart violated this duty by failing to make Heller aware of the falsity of the prior Certificate representations, Heller has raised a genuine issue of material fact regarding the applicability of the fraudulent concealment exception to the statute of limitations. Heller has also introduced evidence sufficient to warrant a reasonable finding that it did not learn, and could not reasonably have learned, of the false information supplied by Iglehart until after June 19, 1998.
The court addresses infra at § VI the part of Iglehart's motion for summary judgment that concerns damages.
VI
The court now turns to the parts of defendants' motions for summary judgment in which they seek relief concerning Heller's proof of damages.
Defendants argue that (1) Heller is not entitled to damages because it has not adduced evidence of any damage suffered independent of Chartwell's contractual breach, and (2) even if Heller is legally permitted to submit proof of its out-of-pocket damages, it has adduced insufficient evidence to support recovery of such damages. Morehead and Iglehart have also filed a May 3, 2002 motion to limit plaintiff's presentation of evidence and to strike portions of pleadings based upon undisclosed documents. Because the court grants in part the relief requested by the motion to limit evidence, it denies without prejudice the parts of defendants' motions for summary judgment that relate to damages. It will consider, however, a joint supplemental motion for partial summary judgment concerning damages according to the schedule set out infra at § VIII.
Defendants filed the motion on an "emergency" basis. The court on May 8, 2002 declined to treat the motion as an "emergency" in view of its order resetting the trial date.
Morehead and Iglehart base their motion to limit plaintiff's presentation of evidence and to strike portions of pleadings based upon undisclosed documents on their recent acquisition of documents that Heller produced in the Chartwell bankruptcy. They contend that Heller unjustifiably withheld production of these documents in the instant litigation. The documents at issue include Heller's internal loan activity statements regarding the Chartwell loan, its internal loan activity statements regarding a transaction with an entity known as 22 Acquisition Corp., and memoranda written by Jeff Hoffman ("Hoffman"), a Heller officer who was the primary loan officer for the Chartwell loan. Morehead and Iglehart contend the newly discovered documents are directly at odds with the Hoffman affidavit that Heller submitted in response to defendants' motions for summary judgment regarding the damages that Heller contends it sustained in connection with its loans to Chartwell. Morehead and Iglehart maintain that a previously undisclosed loan activity statement dated August 30, 1998 reflects a downward adjustment by Heller of the Chartwell loan balance in the amount of $4,512,000. See Morehead/Iglehart Br. at 3. They contend that the presence of this credit proves that the maximum amount owed by Chartwell as of August 4, 1998 was $779,873.26 rather than $3,725,477.54, as reflected in the Hoffman affidavit. Id. Morehead and Iglehart argue that a previously undisclosed memorandum that Hoffman authored provides further support for this contention. Id. at 4.
As a remedy for this discovery violation, Morehead and Iglehart request that the court (1) limit Heller's damage recovery in connection with the Chartwell revolving loan to the amount of the $770,484.76 shown on the August 30, 1998 loan interest statement, less any additional credits that Heller received in connection with the loan after that date; (2) strike the portion of the Hoffman affidavit that Heller offered in support of its damages claim; (3) require that Heller produce a corporate representative and that Hoffman explain the discrepancy between Heller's damage claims and credits reflected on the previously undisclosed loan interest statements; (4) grant them leave to supplement their motion for summary judgment with respect to the issue of damages; and (5) grant them leave to designate additional experts to rebut Heller's damage theory based on the previously undisclosed documents. See id. at 7-8. In its response brief, Heller contests the evidentiary significance of the undisclosed documents, but it concedes that the August 10, 1998 Hoffman memorandum that Morehead and Iglehart cite was subject to a valid discovery request and should have been produced. See P. Br. (Mot. to Limit Evidence) at 7. While continuing to assert that other documents were not subject to valid discovery requests, Heller proposes that it make available additional documents for defendants' inspection; that defendants be permitted to depose Hoffman on the subject of his memoranda; that defendants be permitted to depose a Heller representative on the subject of Heller's internal accounting records; and that defendants be permitted to file a summary judgment motion on the issue of Heller's damages. See P. Br. (Mot. to Limit Evidence) at 9. Because the court should not lightly invoke the types of preclusive sanctions that Morehead and Iglehart urge, see FDIC v. Conner, 20 F.3d 1376, 1380 (5th Cir. 1993); EEOC v. General Dynamics Corp., 999 F.2d 113, 118 (5th Cir. 1993), and because the court in its discretion finds the remedy that Heller proposes to be just and equitable under the circumstances, the court grants defendants the following relief and otherwise denies the relief requested: (1) Heller must make available for defendants' inspection any as yet undisclosed documents that are the subject of the motion to limit plaintiff's presentation of evidence and that Heller has not previously produced to defendants in response to a proper request for production; (2) defendants may depose Hoffman concerning newly-produced documents and any topic related to the documents within the scope of Fed.R.Civ.P. 26(b)(1) (3) defendants may depose a Heller representative concerning newly-produced documents and any topic related to the documents within the scope of Rule 26(b)(1); (4) within 60 days after this memorandum opinion and order is filed, defendants may designate additional experts to rebut Heller's damage theory based on the previously undisclosed documents; and (5) within 60 days after this memorandum opinion and order is filed, defendants may file a joint supplemental motion for partial summary judgment as set out infra at § VIII.
Rule 26(b)(1) provides:
Parties may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things and the identity and location of persons having knowledge of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence. All discovery is subject to the limitations imposed by Rule 26(b)(2)(i), (ii), and (iii).
VII
Defendants move to challenge Heller's expert witness, Joseph Brooks, C.P.A. ("Brooks"), and preclude him from testifying at trial. This motion presents the question whether Brooks' proposed testimony is reliable.
A
The court may consider preliminary questions concerning the admissibility of evidence before trial. See Fed.R.Evid. 104(a). In performing this function, the court must at times act as a gatekeeper in determining the admissibility of expert testimony. See Watkins v. Telsmith, Inc., 121 F.3d 984, 988-89 (5th Cir. 1997); Garcia v. Columbia Med. Ctr. of Sherman, 996 F. Supp. 617, 620 (E.D. Tex. 1998). Fed.R.Evid. 702 guides the court in the screening process. See Cuevas v. E.I. DuPont de Nemours Co., 956 F. Supp. 1306, 1308 (S.D. Miss. 1997). The court may admit proffered expert testimony only if the proponent, who bears the burden of proof, demonstrates that (1) the expert is qualified, (2) the evidence is relevant to the suit, and (3) the evidence is reliable. See Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147 (1999); Watkins, 121 F.3d at 988-89. Defendants do not contest Brooks' qualifications or the relevance of his testimony.
Rule 702:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.
The dispositive question is whether the evidence is reliable. Expert testimony must be based on "scientific, technical, or other specialized knowledge." Fed.R.Evid. 702. It must rest on a reliable foundation. See Kumho, 526 U.S. at 147. Because of the unique effect of an expert witness and the advantageous position he holds at trial, the proponent of the evidence must demonstrate that "the principle supports what it purports to show." United States v. Posado, 57 F.3d 428, 433 (5th Cir. 1995). This ensures that the expert "employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field." Kumho, 526 U.S. at 152; see Garcia, 996 F. Supp. at 620 (noting that reliability requirement ensures that knowledge offered is "supported by appropriate validation" and "establishes a standard of evidentiary reliability"). Although Rule 702 does not require absolute certainty, it does mandate that the proffered knowledge be based on "good grounds." Posado, 57 F.3d at 433 (quoting Daubert, 509 U.S. at 590). The testimony must constitute "more than belief or unsupported speculation." Daubert, 509 U.S. at 590.
In fulfilling its gatekeeping role, the court must make an objective, independent validation of the principles and methods used by the expert to ensure that he has a sound and reliable basis in the knowledge and experience of the discipline at issue. Garcia, 996 F. Supp. at 622. The court is not to focus on the conclusions generated by the expert's methodology. Watkins, 121 F.3d at 989. Instead, it must review only the reasonableness of the expert's use of such an approach, together with his particular method of analyzing the data so obtained, to draw a conclusion regarding the specific matter to which the expert testimony is directly relevant. Kumho, 526 U.S. at 152; see Watkins, 121 F.3d at 989.
When analyzing the reliability of an expert's testimony, the court may consider the following non-exclusive factors: (1) whether the expert's technique can be or has been tested; (2) whether the method has been subjected to peer review and publication; (3) the known or potential rate of error of a technique or theory when applied; (4) the existence and maintenance of standards and controls; and (5) the degree to which the technique or theory has been generally accepted in the scientific community. Daubert, 509 U.S. at 593-94. "[T]he factors identified in Daubert may or may not be pertinent in assessing reliability, depending on the nature of the issue, the expert's particular expertise, and the subject of the testimony." Kumho, 526 U.S. at 151.
B
The court first considers the admissibility of Brooks' testimony in light of Daubert. Neither party has briefed the Daubert factors individually, so the court resolves the motion based on Heller's responses to defendants' specific arguments alleging deficiency and on its proof that the testimony complies with the general Daubert standards.
Brooks' testimony relates to two issues: the proper presentation of eligible receivables on the Certificates and whether various Chartwell financial records were maintained in accordance with generally accepted accounting principles ("GAAP"). Defendants argue that Brooks' opinion on the issue of eligible receivables fails under Daubert because he has no experience with the types of payments at issue or payment accounting other than in connection with the present litigation. They also maintain that Brooks' testimony is allegedly contradicted by the testimony of Bruce Jennings ("Jennings"), an auditor whom Heller employed and who worked on the Chartwell loan. In support of their argument that Brooks' testimony on the issue of eligible receivables is unreliable, defendants point to Brooks' deposition testimony that he is not an expert on the nursing home business, see Ds. App. (Mot. to Preclude Expert Testimony) 100, and that he is unaware of any source documents in existence that may document unique standards associated with Medicare receivables and payments, see id. at 101. Defendants also challenge the reliability of Brooks' testimony based on his stated assumption that the Payments constituted payments for services rendered rather than an unbilled expense reimbursement permitted under Medicare. See id. at 93-95.
Heller contends that Brooks' testimony regarding the presentation of eligible receivables is reliable because the accounting principles related to the collection of accounts receivable and how to account for them in company records are not industry-specific, but are covered by GAAP. Heller has introduced evidence to this effect, see P. App. (Mot. to Preclude Expert Testimony) at 31-32, and defendants have not countered with proof that any industry-specific standard applies. Ample evidence supports the conclusion that Brooks is qualified to render opinions regarding GAAP, and defendants do not contend otherwise. Moreover, Heller has adduced evidence indicating that Brooks' opinion regarding proper presentation of Payments is supported both by a memorandum authored by Iglehart and by the Medicare and Medicaid Guide addressing payments for providers involved in the Payments program. See id. at 31. That Brooks' expressed opinion may be contradicted by Jennings' testimony in this context goes to the weight of Brooks' testimony, not its reliability or admissibility. "As a general rule, questions relating to the bases and sources of an expert's opinion affect the weight to be assigned that opinion rather than its admissibility and should be left for the [trier of fact's] consideration." Viterbo v. Dow Chem. Co., 826 F.2d 420, 422 (5th Cir. 1987). "Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence." Daubert, 509 U.S. at 596. Any deficiencies in Brooks' explicitly-stated assumption regarding the nature of Payments as payments for services rendered may be highlighted at trial by these same means. For these reasons, the court holds that Brooks' testimony regarding the presentation of eligible receivables is reliable.
Defendants argue that Brooks' opinion on whether various Chartwell financial records were maintained in accordance with GAAP fails under Daubert because he did not perform a compilation, review, or audit of Chartwell's financial statements and because he does not state an opinion regarding whether Chartwell's outside accountants were negligent. As evidence that Brooks' testimony is unreliable, defendants point to his statement that the work done in connection with his presently-expressed opinion regarding the compliance of Chartwell financial records with GAAP did not rise to the level of a compilation, review, or audit. See Ds. App. (Mot. to Preclude Expert Testimony) at 98. Heller does not contend that the work performed by Brooks qualifies as a compilation, review, or audit under the standards promulgated by the American Institute of Certified Public Accountants ("AICPA"). Instead, Heller has adduced evidence that the relevant AICPA standard governing Brooks' expression of an opinion in the present litigation context is given by the AICPA's Statement on Standards for Consulting Service, and that Brooks has fully complied with these applicable standards. See P. App. (Mot. to Preclude Expert Testimony) 29. Moreover, Heller has adduced evidence that Brooks and two other certified public accountants who assisted him collectively spent between 450 and 600 hours reviewing and analyzing a wide variety of relevant documents in connection with the opinions he rendered. See id. at 2, 27. Heller asserts that the reason it did not seek an opinion on accounting malpractice as part of its engagement with Brooks is because Chartwell's public accountants are no longer parties to this action. Because the question whether financial statements comply with GAAP is merely related to, but not coterminous with, the question whether an outside accountant's failure to detect noncompliance with GAAP rises to the level of malpractice, the court does not consider Brooks' failure to opine regarding malpractice to be an indicator of unreliability. The court holds that Brooks' testimony regarding whether various Chartwell financial records were maintained in accordance with GAAP is reliable.
The court therefore denies defendants' motion to challenge and preclude the expert testimony of Brooks.
VIII
No later than 60 days after this memorandum opinion and order is filed, defendants may file a joint supplemental motion for partial summary judgment, a brief (not to exceed 25 countable pages), and an appendix (if applicable) on the issue of Heller's damages. Heller may file a response, a brief (not to exceed 25 countable pages), and an appendix (if applicable) within the time permitted by N.D. Tex. Civ. R. 7.1(e). Defendants may file a reply brief (not to exceed 15 countable pages) within the time permitted by Rule 7.1(f).
* * *
The court denies Iglehart's January 2, 2002 motion for summary judgment, denies Morehead's January 2, 2002 motion for summary judgment, denies Boyes' January 14, 2002 motion for summary judgment, and denies defendants' January 2, 2002 motion to challenge and/or exclude the expert testimony of Brooks. The court grants in part and denies in part defendants Morehead's and Iglehart's May 3, 2002 motion to limit plaintiff's presentation of evidence and to strike portions of pleadings based upon undisclosed documents. The court directs the parties to proceed with defendants' joint supplemental motion for partial summary judgment in accordance with § VIII of this memorandum opinion and order.
Defendant Boyes' February 19, 2002 objections to plaintiff's summary judgment evidence are addressed supra at note 9. The court is deciding today by separate memorandum opinion and order Heller's April 22, 2002 motion for leave to redepose Morehead.
SO ORDERED.