Case: 22-11072 Document: 62-1 Page: 1 Date Filed: 12/23/2024
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
FILED
December 23, 2024
No. 22-11072 Lyle W. Cayce
Clerk
In The Matter of Steven Andrew Clem,
Debtor.
Steven Andrew Clem,
Appellant,
versus
LaDainian Tomlinson; LaTorsha Tomlinson,
Appellees.
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:18-CV-1200
Before Elrod, Chief Judge, and Jones, and Barksdale, Circuit Judges.
Edith H. Jones, Circuit Judge:
Defendant-Debtor Steven Andrew Clem, the former owner of a
defunct homebuilding company, appeals a sizeable judgment for
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nondischargeability of a debt incurred in connection with a failed project.
After an arbitration panel found Clem personally liable to Plaintiffs
LaDainian and LaTorsha Tomlinson for breach of contract and violations of
the Texas Deceptive Trade Practices Act (“DTPA”), Clem filed a Chapter
7 bankruptcy case. In this subsequent adversary proceeding brought by the
Tomlinsons, the bankruptcy court determined that because Clem had
obtained over $660,000 from them through “false representation” or “false
pretenses,” the debt was not dischargeable. See 11 U.S.C. § 523(a)(2)(A).
But we conclude that the bankruptcy court erred in failing to apply collateral
estoppel to the findings in an underlying arbitration, see generally In re
Amberson,
73 F.4th 348, 350–51 (5th Cir. 2023), and also erred in its
interpretation of a fraud-by-nondisclosure claim. We REVERSE and
RENDER judgment for Clem.
I. Background
Clem was chief executive officer of Bella Vita Custom Homes, LLC.
In April 2015, the Tomlinsons signed a contract (the “Contract”) with Bella
Vita to construct a $4.5 million luxury home for them north of Dallas, Texas.
The Tomlinsons’ home was planned to be 18,000 square feet and would be
the largest house that Bella Vita had ever built. The project quickly ran into
problems. As one example, the bankruptcy court found that the
“Tomlinsons grew frustrated with Bella Vita for its alleged failure to account
for usages of the Tomlinsons’ 10 [percent] initial deposit and subsequent
draw requests.” Bella Vita failed to inform the Tomlinsons immediately
when it punctured a water line while preparing the foundation and caused
extensive flooding on the building pad and adjacent land. A neighbor first
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advised them about the flooding. Four months after entering into the
Contract, and after they had paid Bella Vita over $650,000, the Tomlinsons
terminated the Contract.
There were other problems. The bankruptcy court also found that,
during construction, Bella Vita “undertook undisclosed/unapproved
construction changes.”
Specifically, Bella Vita made the decision to utilize helical steel
piers on the large Home—something atypical and that [Clem]
and Bella Vita had no experience using in the past—instead of
the concrete piers that were specified in the Contract’s original
design plans. Bella Vita made this decision after encountering
subsurface water when drilling holes for the contemplated
concrete piers.
The choice of helical piers violated the Contract, which provided that any
change in the building plans required disclosure and written approval by the
Tomlinsons.
The Tomlinsons promptly filed suit against Clem and Bella Vita in
state court in Tarrant County, Texas. The state court ordered the parties to
arbitrate through the American Arbitration Association. In the arbitration,
the Tomlinsons asserted claims against Bella Vita and Clem, including
(1) breach of contract/breach of warranty, (2) negligence and malice/gross
negligence, (3) negligent misrepresentation, (4) various violations of the
DTPA, (5) fraud and fraud in the inducement or by nondisclosure, (6) fraud
in a real estate transaction, (7) unconscionable, knowing, or intentional
course of action, and (8) conversion. They also pled other doctrines or
remedies, including estoppel, alter ego, and joint enterprise.
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A year later, the three-person arbitration panel awarded $744,711 in
damages to the Tomlinsons against Bella Vita and Clem jointly and severally.
The state court adopted the arbitration award in a final judgment several days
later. The arbitration award includes twenty very specific findings of fact and
conclusions of law. Relevant here, Finding 16 states that “the actions of Clem
and Bella Vita, acting through Clem, violate the provisions of the DTPA and
they are a producing cause of economic damage to the Tomlinsons.” Finding
17 states that “[t]he actions of Clem and Bella Vita do not constitute a
knowing violation of the DTPA.” (emphasis added).1 Further, although in
Finding 20, the arbitration panel found that “the evidence supports both a
breach of contract cause of action and a DTPA cause of action against Bella
Vita,” it denied the Tomlinsons’ claims for negligence and gross negligence
as barred by the Texas economic loss rule.
Significantly, the arbitration panel also denied the Tomlinsons’ claims
for “misrepresentation, fraud, [and] fraud in the sale of real estate.” The
arbitrators noted (Finding 14) that Clem “failed to inform the Tomlinsons
that steel helical piers were installed rather than the concrete piers called for
by the Contract plans and specifications.” And in Finding 15, “Clem
represented that a builder’s risk policy for the Residence had been purchased
when, in fact, the purchase had not been made.” But the panel found that
the Tomlinsons’ misrepresentation and fraud and other such claims “were
not sustained by a preponderance of the evidence.”
_____________________
1
Knowing violations of the DTPA enable a plaintiff to obtain mental anguish
damages. Tex. Bus. & Com. Code Sec. 17.50(b)(1).
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Shortly after the adverse judgment was entered, Clem filed a Chapter
7 bankruptcy case in December 2016, and the Tomlinsons responded with
this adversary proceeding claiming non-dischargeability of the entire
arbitration judgment owed them under 11 U.S.C. § 523(a)(2)(A). According
to the Tomlinsons’ First Amended Complaint, Clem made multiple false
representations in connection with the Contract on which the Tomlinsons
relied to their detriment. Their pleading alleged pre-contract fraud claims.
The parties filed cross-motions for summary judgment, which the
bankruptcy court denied.
Trial took place on two days in August and October, 2017. According
to the bankruptcy court, a new legal theory “seemed to emerge” over the
course of the two days. Under this theory, after entering the Contract, Clem
and Bella Vita had concealed material information with regard to installing
the helical piers and puncturing the water line, how the initial ten percent
deposit (almost $450,000) had been spent, and whether Bella Vita had
purchased a Builder’s Risk insurance policy for the project. The court raised
as an issue whether the Tomlinsons were fraudulently induced to stay in the
Contract longer than they otherwise would have done. Based on this
“evolution,” the Tomlinsons sought leave to file a second amended
complaint including the new legal theory, and the bankruptcy court granted
the motion over Clem’s objections.
On the same day that it approved the amended complaint, the
bankruptcy court issued findings of fact and conclusions of law awarding the
Tomlinsons $664,590.93 as a nondischargeable debt under
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Section 523(a)(2)(A).2 The court held that its factual findings “form[ed] the
basis for an ultimate finding of fraud or fraud by nondisclosure.” First, Clem
committed fraud by nondisclosure during performance of the Contract by
failing to inform the Tomlinsons of the switch from concrete piers to helical
steel piers and failing to inform them timely about the punctured water line.
Second, Clem committed fraud by “personally supervis[ing] reports going out
to the Tomlinsons . . . that created the false impression that . . . the
Tomlinsons’ money had been used to acquire a Builder’s Risk Policy” when
in reality no such policy had been purchased. Third, Clem committed fraud
by nondisclosure by failing “to provide invoices and other documentation to
the [Tomlinsons] regarding expenditures on their Home project.” The
bankruptcy court concluded that Clem’s debt was not dischargeable and
entered judgment on January 3, 2018.
Clem quickly moved for reconsideration. The court reopened the
record on the two concealment/nondisclosure issues only and set Phase 2 of
the trial on those issues. After hearing evidence, the court denied the motion
for reconsideration because “[t]he supplemental evidence did not persuade
the court to change its earlier findings and conclusions.” The court
reconfirmed its original judgment.
The district court affirmed the bankruptcy court in full in a lengthy
opinion that found no reversible error on any of the issues appealed by Clem.
Clem filed a timely appeal.
_____________________
2
In combination with a previous sanctions award, the total award exceeded
$680,000.
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II. Analysis
Like the district court, this court reviews the bankruptcy court’s
findings of facts for clear error. In re Sims, 994 F.2d 210, 217 (5th Cir. 1993).
Its conclusions of law are reviewed de novo. In re Keaty,
397 F.3d 264, 269
(5th Cir. 2005). Issues concerning collateral estoppel are issues of law. In re
Amberson,
73 F.4th at 350. Clem and the Tomlinsons debate numerous
procedural and substantive issues pertaining to the judgment, but we need
only review Clem’s contentions that the specific grounds of
nondischargeability found by the bankruptcy court are barred by collateral
estoppel arising from the arbitration proceeding or by Texas law.
A. General Principles
The doctrine of collateral estoppel (issue preclusion) “bars
relitigation of any ultimate issue of fact actually litigated and essential to the
judgment in a prior suit.” In re Miller, 156 F.3d 598, 601 (5th Cir. 1998)
(quoting In re Garner,
56 F.3d 677, 679 (5th Cir. 1995) (citations omitted)).
Under Texas law,3 “[a] party seeking to invoke the doctrine of collateral
estoppel must establish” three elements. In re Miller,
156 F.3d at 602
(quoting In re Garner,
56 F.3d at 680 (citations omitted)). These elements
are:
_____________________
3
“When giving preclusive effect to a state court judgment, this court must apply
the issue preclusion rules of that state.” In re Keaty, 397 F.3d at 270. A Texas Court of
Appeals has held that the same principles apply to arbitration awards as to state court
judgments. Casa del Mar Ass’n v. Gossen Livingston Assocs.,
434 S.W.3d 211, 219 (Tex.
App.—Houston [1st Dist.] 2014, pet. denied).
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(1) the facts sought to be litigated in the second action were
fully and fairly litigated in the prior action;
(2) those facts were essential to the judgment in the first action;
and
(3) the parties were cast as adversaries in the first action.
Id. “The party asserting issue preclusion bears the burden of proof and
hence would have the burden of bringing forward an adequate state-court
record.” In re King,
103 F.3d 17, 19 (5th Cir. 1997) (internal citations
omitted).
Like prior court judgments, prior “arbitral decisions may have
preclusive effect.” In re Amberson, 73 F.4th at 350 (applying Texas law and
quoting OJSC Ukrnafta v. Carpatsky Petroleum Corp.,
957 F.3d 487, 503 (5th
Cir. 2020)). Here, like the bankruptcy and district courts, we apply the
principles of collateral estoppel to the arbitration ruling, which was
confirmed as a judgment in state court.
“The Supreme Court has explicitly stated that collateral estoppel, or
issue preclusion, principles apply in bankruptcy dischargeability
proceedings.” Id. (quoting In re Schwager,
121 F.3d 177, 181 (5th Cir. 1997)
(citing Grogan v. Garner,
498 U.S. 279, 285 n.11,
111 S. Ct. 654, 658 n.11
(1991))). But in such cases, this court holds that collateral estoppel applies
only in “limited circumstances.” In re Dennis,
25 F.3d 274, 278 (5th Cir.
1994). Dischargeability is determined “in bankruptcy court,” not “earlier in
state court at a time when [dischargeability] concerns ‘are not directly in
issue and neither party has a full incentive to litigate them.’” Archer v.
Warner,
538 U.S. 314, 321,
123 S. Ct. 1462, 1467 (2003) (quoting Brown v.
Felsen,
442 U.S. 127, 134,
99 S. Ct. 2205, 2211 (1979)). For collateral
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estoppel to apply in this context, the first court must have “made specific,
subordinate, factual findings on the identical dischargeability issue in
question—that is, an issue which encompasses the same prima facie elements
as the bankruptcy issue.” In re Dennis, 25 F.3d at 278.
Further analysis continues with the Bankruptcy Code, which exempts
from discharge a debt for money obtained by “false pretenses, a false
representation, or actual fraud, other than a statement respecting the
debtor’s or an insider’s financial condition.” 11 U.S.C. § 523(a)(2)(A). To
have a debt excepted from discharge under Section 523(a)(2)(A), a creditor
must prove that: (1) the debtor made a representation or engaged in other
fraudulent conduct; (2) at the time the representation was made, the debtor
knew it was false; (3) the debtor made the representation with the intention
to deceive the creditor; (4) the creditor justifiably relied on such
representation; and (5) the creditor sustained losses as a proximate result of
the representation. Saenz v. Gomez,
899 F.3d 384, 394 (5th Cir. 2018). These
“elements of actual fraud . . . generally correspond with the elements of
common law fraud in Texas[.]” Id.4 Dischargeability is determined in
bankruptcy law by the preponderance of the evidence. Grogan,
498 U.S. at
291,
111 S.Ct. at 661.
_____________________
4
If anything, the elements of nondischargeability may be more onerous than those
for fraud in Texas, as this court applies Section 523(a)(2)(A) only where a debt has been
“obtained by frauds involving ‘moral turpitude or intentional wrong, and any
misrepresentation must be knowingly and fraudulently made.’” In re Acosta, 406 F.3d 367,
372 (5th Cir. 2005) (quoting In re Martin,
963 F.2d 809, 813 (5th Cir. 1995)).
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Under Texas law, fraud occurs when:
(1) the defendant misrepresented a material fact; (2) the
defendant knew the material representation was false or made
it recklessly without any knowledge of its truth; (3) the
defendant made the false material representation with the
intent that it should be acted upon by the plaintiff; and (4) the
plaintiff justifiably relied on the representation and thereby
suffered injury.
United Tchr. Assocs. Ins. Co. v. Union Lab. Life Ins. Co., 414 F.3d 558, 566 (5th
Cir. 2005). “The first requirement of this test can be met if the defendant
concealed or failed to disclose a material fact when a duty to disclose
existed.”
Id.
Fraud by nondisclosure is a subcategory of fraud that requires a
plaintiff to prove that:
(1) the defendant deliberately failed to disclose material facts;
(2) the defendant had a duty to disclose such facts to the
plaintiff; (3) the plaintiff was ignorant of the facts and did not
have an equal opportunity to discover them; (4) the defendant
intended the plaintiff to act or refrain from acting based on the
nondisclosure; and (5) the plaintiff relied on the nondisclosure, which resulted in injury.
Bombardier Aerospace Corp. v. SPEP Aircraft Holdings, LLC, 572 S.W.3d 213,
219–20 (Tex. 2019) (citations omitted).
B. The Bankruptcy Court’s View of Collateral Estoppel
The bankruptcy court conscientiously referenced the general
principles of collateral estoppel and Texas substantive law, but it concluded
that collateral estoppel did not bar its retrial of the Tomlinsons’ claims under
Section 523(a)(2)(A). The court’s reasoning largely relies on this court’s
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decision in In re King, 103 F.3d at 17, culminating in King’s admonition that
“[t]he fact that a state court labels a judgment ‘contract damages’ rather than
‘fraud damages’ does not control the bankruptcy court if the state court’s
determination did not necessarily include a finding regarding the
dischargeability issue (i.e., whether the debt was obtained by false pretenses,
a false representation, or actual fraud).”
Id. at 20.
Several steps precede the bankruptcy court’s conclusion. Initially, the
court noted “confusi[on]” because the arbitration award did not identify
which provisions of the Texas DTPA were combined with Contract
violations. The court found no “discernible record” from the arbitration
proceedings sufficient to persuade it that the panel “made specific,
subordinate, factual findings on the identical dischargeability issue in
question.” See In re Dennis, 25 F.3d at 278. The court declared it could not
discern whether “identical” legal issues had led to the finding of nonidentified DTPA violations. And the court found “most troubling” its
hypothetical speculation that parties to an arbitration may choose to pursue
DTPA claims that are easier to prove than fraud, because of the DTPA’s
lower intent standards. In sum, the court held that there was “no evidence”
that the plaintiffs had fully and fairly litigated common law fraud claims.5
We disagree with the bankruptcy court’s overly narrow interpretation
of the arbitral award. There is no question that several theories of fraudulent
_____________________
5
As the court put it more colloquially: “Is it fair or appropriate—in a situation like
this—to preclude creditors from pursuing Section 523 allegations, in the new venue of
bankruptcy court, simply because they may only have prevailed on DTPA (and breach of
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misrepresentation or omission were placed squarely before the threemember panel, and the panel addressed the facts and legal conclusions as to
each. The fraud claims still in issue here involve the unapproved
replacement of concrete piers with helical piers, in conjunction with the
contractor’s failure immediately to disclose the underground water main
breach, and whether a Builder’s Risk insurance policy had been procured by
Bella Vita. As outlined earlier, the arbitration panel expressly found Clem
did not inform the Tomlinsons about the helical piers (or obtain their
approval), and he misrepresented that the insurance policy had been
purchased. The arbitration panel found breach of contract in a number of
actions by Clem and Bella Vita, several of which are no longer mentioned in
this litigation. And in a single declarative sentence, the panel found both a
breach of contract cause of action and a DTPA cause of action. But critically,
the arbitrators also concluded that the Tomlinsons’ misrepresentation and
fraud claims “were not sustained by a preponderance of the evidence.” And
it found that Clem’s actions “do not constitute a knowing violation of the
DTPA.”
When an issue “that forms the basis for the creditor’s theory of
nondischargeability has been actually litigated in a prior proceeding, neither
the creditor nor the debtor may relitigate those grounds.” RecoverEdge L.P.
v. Pentecost, 44 F.3d 1284, 1294 (5th Cir. 1995), abrogated on other grounds by
Husky Int’l Elecs., Inc. v. Ritz,
578 U.S. 356,
136 S. Ct. 1581 (2016). Although
_____________________
contract) claims in prepetition litigation/arbitration? This court thinks not.” (footnote
omitted).
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other cases may pose challenges in identifying the extent to which issues were
“actually litigated” in arbitration proceedings, the structure of this
arbitration award satisfies the collateral estoppel standard our court has
repeatedly laid out: “specific, subordinate, factual findings on the identical
dischargeability issue in question.” See In re Dennis, 25 F.3d at 278 (cited by
In re King,
103 F.3d at 19; In re Keaty,
397 F.3d at 271). The bankruptcy court
erred in holding that more specific DTPA findings were required, when the
panel explicitly held there was no “knowing” DTPA violation by Clem. The
absence of any “knowing” violation necessarily precludes a finding of
recklessness, much less an intentional violation. Consequently, the
bankruptcy court erred in theorizing that issues that were litigated in the
arbitration were not identical to the fraud issues underlying the Section
523(a)(2)(A) claim. Saenz,
899 F.3d at 394.6
Further, “[t]he requirement that an issue be ‘actually litigated’ for
collateral estoppel purposes simply requires that the issue is raised, contested
by the parties, submitted for determination by the court, and determined.”
In re Keaty, 397 F.3d at 272 (citing McLaughlin v. Bradlee,
803 F.2d 1197, 1201
(D.C. Cir. 1986); James Talcott, Inc. v. Allahabad Bank, Ltd.,
444 F.2d 451,
_____________________
6
In re King, relied on by the bankruptcy court and the Tomlinsons, is factually
distinguishable because in that case, a state court had refused to render judgment on the
creditor’s fraud claim after a jury trial. In federal court, therefore, there was no final and
binding ruling on an issue of fraud that could preclude relitigation under the
nondischargeability provision. As this court stated, “the bare fact that the state court
awarded only contract rather than fraud damages does not preclude the bankruptcy court
from inquiring into the true nature of that debt.” In re King, 103 F.3d at 19. Here, in
contrast, the arbitration award negates “knowing” DTPA violations as well as the fraud
claims. There is no “gap” in the award for the bankruptcy court to fill.
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459–460 (5th Cir. 1971)). The arbitration panel’s findings and conclusions
covered the necessary issues. As Clem argues, it would be illogical to
conclude that the issues pertinent to nondischargeability were not presented
to and determined by the arbitrators when precisely such issues were
referenced in their award. The bankruptcy court’s concern about a lack of
full and fair litigation is contrary to the arbitration award, and in any event it
proves too much. Even a default judgment’s recitations may be issue
preclusive in Texas law. See, e.g., In re Jones, 655 B.R. 868, 879 (Bankr. S.D.
Tex. 2023).
For these reasons, the Tomlinsons are collaterally estopped from
relitigating whether Clem’s conduct amounted to intentional fraud, false
pretenses or misrepresentations under Section 523(a)(2)(A) as to the helical
piers and water line break or the failure to obtain Builder’s Risk insurance.
On one remaining issue, however, the arbitration award lacks specific
findings. The sole fact that the Tomlinsons’ Statement of Claims in the
arbitration asserts that Clem and Bella Vita failed to provide fiduciary
management of construction funds is insufficient to show that the issue was
actually “determined” by the arbitration panel. In re Keaty, 397 F.3d at 272.
Instead, for collateral estoppel to apply, the party asserting preclusion must
show a final determination of the issue on the face of the arbitration award.
The award is silent, however, about Clem’s failure to account to the
Tomlinsons for his disposition of several hundred thousand dollars from their
Initial Deposit under the Contract. Accordingly, we cannot conclude that
the bankruptcy court erred in allowing relitigation of this issue that was not
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collaterally barred by the arbitration proceeding. But that does not end the
matter.
C. Fraudulent Misrepresentation While Performing a Contract
Unlike the Tomlinsons’ First Amended Complaint in the adversary
proceeding, which asserted that Clem knowingly made false
misrepresentations to induce the Tomlinsons to enter into the Contract, their
Second Amended Complaint alleges that Clem fraudulently induced them to
stay in a contract. Clem challenged whether this new theory of fraudulent
nondisclosures made to string out the performance of a contract is viable
under Texas law. But, accepting this new theory, the bankruptcy court held
that Clem fraudulently failed to disclose invoices and documentation
necessary to show that the Tomlinsons’ up-front payments were used only
on their house project. As the bankruptcy court put it, “during the
performance of the Contract, the Defendant-Debtor personally participated
in concealing how the Tomlinsons’ funds had been spent with the intention
of inducing his famous clients to stay in the lucrative Contract.”
The bankruptcy court could not have been clearer that there was no
fraudulent intent at the time Clem and the Tomlinsons entered into the Contract.
Nor did it deny that the charged conduct breached the Contract. Instead, the
bankruptcy court concluded that Clem was under a duty to disclose how the
Tomlinsons’ funds were being spent because Clem had previously
represented that their Initial Deposit had been spent on “soft costs.” The
Tomlinsons were led to believe the money had actually been expended
properly under the Contract. This, the bankruptcy court concluded, meant
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that Clem had made “partial disclosure[s] that convey[ed] a false
impression.”
More specifically, the bankruptcy court found that:
[A]fter the contract was signed, Bella Vita repeatedly failed to
fully account for the Initial [10%] Deposit, even after repeated
requests from Mrs. Tomlinson. [emphasis added]. Specifically,
the court makes note of at least two or three costreconciliations that were sent to the Plaintiffs-Creditors, in
which there was a failure to fully account for where the Initial
Deposit was actually spent (despite previously representing to
the Plaintiffs-Creditors in prior draw requests that the entire
Initial Deposit had been expended on “soft costs”).
The court went on to reason as follows:
. . . Texas courts have held that there is a duty to disclose
“when one makes a partial disclosure and conveys a false
impression.” Here, such a duty clearly existed in light of the
fact that the first two draw requests showed that the Initial
Deposit had been completely utilized on “soft costs,” creating
a false impression that the Initial Deposit had actually been
spent on the Plaintiffs-Creditors’ home. Yet, in subsequent
reconciliations produced by the Defendant-Debtor, it became clear
that Defendant-Debtor was unable to account for a significant
portion of the Initial Deposit. Thus, the Defendant-Debtor was
clearly under a duty to disclose to the Plaintiffs-Creditors how he
had or had not spent the Initial Deposit. [emphasis added].
Under these facts, it is impossible to distinguish breach of contract
from what the court thought “slipped into the category of fraudulent
disclosure.” First, as highlighted above, Mrs. Tomlinson repeatedly
requested an accounting for the use of the Initial Deposit—an accounting
clearly required by the Contract. Therefore, the Tomlinsons knew that the
Debtor was not showing them how he utilized their Initial Deposit. Second,
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as highlighted above, the Debtor’s subsequent reconciliations just as clearly
showed his unwillingness or inability to account for the Initial Deposit, again
in plain breach of the Contract. That the theories of contract breach and
fraudulent nondisclosure are identical is reinforced by the bankruptcy court’s
finding that damages, equaling the amount of two subsequent draw requests
that the Tomlinsons paid before pulling out of the Contract, are based only
on the Contract.
Texas law generally holds that a failure to disclose information does
not constitute fraud unless there is a duty to speak. Insurance Co. of N. Am.
v. Morris, 981 S.W.2d 667, 674 (Tex. 1998). Whether a duty to disclose arises
poses a question of law. Bradford v. Vento,
48 S.W.3d 749, 755 (Tex. 2001).
Such a duty may arise under several limited categories, including, inter alia,
whether the parties share a confidential or fiduciary relationship, or,
pertinent here, where one party voluntarily discloses some but less than all
material facts, so that he must disclose the whole truth “lest his partial
disclosure convey a false impression.” Lewis v. Bank of Am., N.A.,
347 F.3d
587, 588 (5th Cir. 2003) (quotation and citations omitted).
The Tomlinsons’ relationship with Bella Vita and Clem arose solely
from their Contract, and the omissions in question constituted express
breaches of contract. Despite its recitation of the general principles
surrounding fraudulent nondisclosure, the bankruptcy court’s conclusion
was not supported by any remotely similar Texas case law. Nor have the
Tomlinsons’ briefs nor this court’s considerable research uncovered
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fraudulent nondisclosure cases that so comprehensively overlap mere breach
of contract actions.7
The reason for this dearth of relevant law probably lies in the
distinction that the Supreme Court of Texas has drawn between contract and
tort causes of action. See Formosa Plastics Corp. USA v. Presidio Eng’rs &
Contractors, Inc., 960 S.W.2d 41, 44–45 (Tex. 1998). In Southwestern Bell
Telephone Co. v. DeLanney,
809 S.W.2d 493, 494 (Tex. 1991), the state court
explained:
If the defendant’s conduct—such as negligently burning down
a house—would give rise to liability independent of the fact
that a contract exists between the parties, the plaintiff's claim
may also sound in tort. Conversely, if the defendant’s
conduct—such as failing to publish an advertisement—would
give rise to liability only because it breaches the parties’
agreement, the plaintiff's claim ordinarily sounds only in
contract. In determining whether the plaintiff may recover on
a tort theory, it is also instructive to examine the nature of the
plaintiff’s loss. When the only loss or damage is to the subject
matter of the contract, the plaintiff’s action is ordinarily on the
contract.
_____________________
7
Cases cited by the bankruptcy court involve fundamentally different facts or bare
statements of the generally applicable principles of Texas fraudulent nondisclosure. See
Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 341 (5th Cir. 2008) (fraudulent inducement
to enter a contract); Lewis, 347 F.3d at 588 (no justifiable reliance on banker’s tax advice);
Hamilton v. Segue Software, Inc.,
232 F.3d 473, 481 (5th Cir. 2000) (no employer duty to
disclose to employee); Rimade Ltd. v. Hubbard Enters., Inc.,
388 F.3d 138, 143 (5th Cir.
2004) (affirming verdict in favor of defendant on fraudulent nondisclosure in commercial
transaction).
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Case: 22-11072 Document: 62-1 Page: 19 Date Filed: 12/23/2024
No. 22-11072
Applying that law here, the Tomlinsons’ claims for accounting deceptions
sound in breach of contract but not fraud. As such, they are not
nondischargeable under Section 523(a)(2)(A).
Clem’s failure to provide accurate and timely accounting of how the
Tomlinsons’ money was spent does not give rise to liability independent of
the Contract and yielded losses only to two further progress payments, i.e.,
the subject matter of the underlying Contract. But “the mere failure to
perform a contract is not evidence of fraud.” Formosa Plastics Corp. USA,
960 S.W.2d at 48. We must disagree with the bankruptcy court’s adherence
to the theory of fraudulent nondisclosure in this case.
Further support for our conclusion is found in this court’s decision in
Union Pacific Resources Group v. Rhone-Poulenc, Inc., 247 F.3d 574, 590 (5th
Cir. 2001). The defendant contended, citing DeLanney, that its alleged
omissions related only to the parties’ contract and could not be the subject of
fraudulent nondisclosure. Rejecting that argument for purposes of summary
judgment,
id. at 591, this court held that the defendant had voluntarily
undertaken disclosures above and beyond the parties’ contractual
requirements and thus “assumed an obligation . . . to correct any false
impressions conveyed by [its] partial disclosures.”
Id. at 590. Whether
Rhone-Poulenc applied the law properly to the facts may be debated. See 247
F.3d at 591–93 (Garwood, J., dissenting). In any event, there is no
evidence here that Clem undertook any extracontractual obligation and
thereby submitted to any addition tort-based duty of disclosure. The
bankruptcy court’s conclusion that Clem’s breach of contract amounted to
nondischargeable fraudulent nondisclosure must be reversed.
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Case: 22-11072 Document: 62-1 Page: 20 Date Filed: 12/23/2024
No. 22-11072
IV. Conclusion
For the foregoing reasons, we REVERSE the bankruptcy court’s
judgment and RENDER judgment for Clem.
20
