Heller Financial, Inc. v. Grammco Computer Sales, Inc.

the circumstances.”12 regarding information taxpayer’s 1983 tax Recognizing return. difficulty of recon- professional Good faith reliance on structing 10-year transactions, old as- concerning advice tax laws is a defense.13 suming taxpayer’s available, files were sought professional Here the Durretts advice such might an allowance result in a resolu- attorney, accountant, from their tax piecemeal fashion, tion of this in ease with president of parent the vice finance for the potential prejudice to po- the Commissioner’s corporation subsidiary employed sition. must taxpayers We conclude that had Joseph In Durrett. Chamberlain we stated ample time to raise this issue before the eve imposition negligence pen that “for the of a trial, they failed do so without an alty, taxpayer we ask acting whether reason, adequate and that the Tax Court did reasonably claiming in the loss.”14 We con not err or abuse its in refusing discretion adequately clude that the record establishes allow the amendment. that it was for reasonable the Durretts to of the Tax Court is AF- rely on the advice of experts. these As we FIRMED IN PART and REVERSED IN Chamberlain, held require “[t]o the tax PART, as set forth herein. payer challenge [expert], to seek a opinion,’ try ‘second or to [the monitor

expert] provisions would Code

nullify very purpose seeking the advice presumed expert place.”15 in the first

We must therefore conclude that the Tax finding taxpayers

Court erred negligent claiming

for imposition the loss and that the negligence penalty must be reversed. FINANCIAL, INC., HELLER Plaintiff-Appellee, Denial Motion Leave to Amend v. The Tax Court’s taxpay denial of er’s motion for petition SALES, leave to amend GRAMMCO COMPUTER their INC. is reviewable Grammer, under abuse of and Donald B. discretion DBG d/b/a exercising Leasing, standard.16 Defendants-Appellants. In its discretion the Tax Court consider such must factors No. 94-50043. motion, timeliness of the reasons delay, granting whether the motion would United States Court of Appeals, result being presented in issues in a seriatim Fifth Circuit. fashion, and party whether the opposing the Jan. 1996. motion unduly prejudiced.17 would be persuaded are not that the Tax Court abused application discretion of these fac

tors to the facts of this case.

A motion for leave to amend was filed

eight trial; days taxpayers before offered no

valid delay. reasons for such a In order to

determine whether the tax carryback credit

is valid the Commissioner would have needed Chamberlain, 732; 12. Heasley 66 F.3d at v. Com- Id. Revenue, missioner Internal 902 F.2d (5th Cir.1990). Chevron, Exploration, U.S.A., 16. Avatar Inc. v. Inc., (5th Cir.1991). 933 F.2d 314 Boyle, 13. United States v. 469 U.S. 105 S.Ct. (1985). 83 L.Ed.2d 622 Payless Cashways, Daves 661 F.2d Chamberlain, Cir.1981). at 733. Jaworski, rights and all Grammco purchased this lease Hall, Fulbright & W. Wendell equipment for 1.2 million Kruse, held the leased Fulbright & Antonio, TX, Layne San Houston, TX, dollars. appellants. Jaworski, Torrado, Jr., Glynn, C. William A. Rene financing for this trans- obtained Kammholz, Price, Chica-

Vedder, & Kaufman Financial, Inc., a com- through Heller action Banaek, Jr., Kir- Emerson, Roger D. IL, go, had financed lease pany with Grammco which Lewis, & Foster, Langley, Gardner stein, forma- past. Prior to the transactions Antonio, TX, appellee. Banaek, San lease, Heller of the new consolidated tion not extend could

informed Grammer containing purchase a lease loan secured modi- in without option terms substantial loan documents. Grammer fication of the POLITZ, Judge, and Chief Before would not the new lease represented BARKSDALE, Circuit and REAVLEY option and that modifica- purchase a contain Judges. would not be neces- documents tion understanding, Heller sary. With this POLITZ, Judge: Chief a 2.65 million agreed to extend Grammer Computer and Grammco Donald Grammer basis, taking a a non-recourse dollar loan on in judgment Sales, appeal a favor Inc. rights to the security in Grammer’s interest RICO, Financial, on its civil Inc. Heller and the lease income equipment leased in fraud, We affirm claims. and contract guarantee the agreed to stream. Grammco part. part and reverse in loan to Grammer. closing process, BACKGROUND Gram- part of the loan As “original” of with Heller an provided mer as a position left his In Grammer however, L3177; did not “original,” this lease IBM, Inc. representative with computer sales option had been purchase include the Sales, a Computer Grammco to start signed by and Grammco included in the lease marketing and specializing company a Mas- also entered Rosa. Santa Grammer Shortly af- computer equipment. leasing of pledging the leased Security Agreement ter Grammco, solicited Grammer organizing ter as secu- lease income stream equipment and Rosa Medical Cen- of the Santa the business agreement, Gram- In this rity for the loan. which, Antonio, through its Texas ter in San (1) good title to that he: had mer warranted Joseph Dix- systems, director of information (2) provided Hel- had equipment; the leased equipment exclu- on, leasing computer began (3) L3177; related -with all documents ler competitive bids No sively Grammco. from first, perfect- prior, granted had relationship This exclusive were solicited. (4) collateral; and in all interest security ed and, by years eight for the next continued the lease modify the terms would not leas- in a total of 54 Grammco resulted Af- of Heller. approval express without the $124,000. monthly cost of at a es by Grammer reviewing provided the lease ter lease reexamined its In 1987 Rosa Santa Security Agreement, and the Master reducing costs. view to obligations with a loan, closing the loan formally approved consolidating existing proposed to Gram- releasing the funds on June 15 single lease with into a 36-month leases income Heller received mer on June 26. $84,841, thereby reduc- monthly payment of loan for the payment on the from lease by ap- monthly payments Rosa’s Santa four months. next $40,000. proposal This included proximately change in man- 1987 a pur- In the Rosa summer Santa option which allowed a review prompted Rosa agement at Santa lease at the end equipment chase the re- equipment expenditures. computer accept- Rosa sum. Santa for a nominal term paying Rosa Santa and, view revealed May consolidated proposal on ed computer on its market rates well-above single lease denominated into a its leases con- the lease with Grammco. Because Grammer, then lease Leasing, DBG L3177. d/b/a option, purchase Rosa viewed against Santa nonsuited its counter-claim tained Santa Rosa; installment sales rather summary L3177 as an contract then judg- received lease; moreover, usury ment against than a true concluded on Rosa’s claim Santa it. high remaining trial, rates on the lease were usuri- As the claims headed to Hel- usury Texas ler against ous and violated laws. Santa nonsuited its cross-claim Gram- making stopped Rosa mer and Subsequently, the lease Grammco. Heller, Dixon,1 Rosa, arranged Grammer, Grammco, Joseph to dismiss Dixon against suit whereby and filed reached DBG a settlement Santa Rosa d/b/a Grammco, Leasing, alleging and Heller received to all title of the lease equipment, Grammco, was a usurious $7,500 L3177 sales con- 1.7 million dollars installment from Dixon, entry judgment tract. from stating that Santa Rosa had satisfied the terms During ensuing litigation in Texas the lease and that the lease was terminated. court,2 state Heller and Santa Rosa uncov- monthly payments ered from Grammer to After final the Santa Rosa starting September Dixon of 1983 and litigation, Heller filed the instant action in continuing until departure Dixon’s from San- against federal court Grammer and Grammco ta October of 1987. Grammer main- alleging breaches of the warranties found in payments compensated these tained Security Agreement, the Master breach computer Dixon for programming services he guarantee, contract on the loan fraud in- performed services, for Grammco. Those loan, ducing Heller to make the and viola- however, approximately were later valued at tions of Racketeering Influenced and $15,000 $171,804. while the totaled Corrupt Organizations (RICO), Act 18 U.S.C. and Santa Rosa also Dix- uncovered 1962(a) (e). § By and parties, consent of the participation on’s in a series of lease transac- the district court referred mag- the case to a tions provided significant with Grammer that judge jury istrate for a trial.3 tax to Dixon benefits at no and Dixon’s cost Prior trial the court issued an order $14,900 receipt royalties from Grammer prohibiting Grammer and Grammco from in- computer for shelving equipment sales of troducing evidence at trial regarding Heller’s designed. that Dixon had On the basis of mitigate damages, failure to impairment of information, this Santa Rosa amended its collateral, and waiver of claims. At the close complaint to include a claim of commercial case, of the defendants’ the court instructed bribery against Grammer, Grammco, and a verdict in Heller’s favor on one Dixon. warranty breach of jury claims. The re- Heller also discovered that lease L3177 special turned a series of verdicts for Heller purchase option contained a and that ICS fraud, contract, on the and civil claims. RICO Cybernetics, vendor, computer another judgment court rendered for Heller processing the central owned unit the com- against Leasing Grammer DBG in the d/b/a puter equipment leased to Rosa. $14,665,866.63 amount plus costs and at- Thus, Heller realized despite Grammer’s 1962(a). torneys’ violating § fees for RICO contrary, warranties to the did not Grammer judgment outlined three alternative have equipment. Heller, title to the leased 1) against $1,950,446.01 awards Grammer: codefendant with Grammer and Grammco on plus attorneys’ costs and violating fees for claim, usury against filed a cross-claim 2) 1962(c); $1,650,148.67 § pre- with Grammer and Grammco for breach of con- judgment interest on that Sep- amount from tract against and a counter-claim Santa Rosa tember 1987 at the rate of per 10% for recovery of sums due under lease. $2,000,000 annum and punitive damages To fraud; 3) avoid actions that plus could be construed as $4,888,622.21 costs for and illegal “charging” interest, of usurious plus attorneys’ costs and fees for breach of Dixon, 1.Santa Rosa decided to but terminate litiga- Referred herein as the "Santa Rosa resigned tion.” officially Dixon before Santa ter- minated him. 636(c). § 3. 28 U.S.C. never been if the claim had position as same rendered court warranty. The Therefore, adverse to was not $4,888,622.21plus costs filed.8 against Grammco agreed when the guaran- Grammco Grammer attorneys’ fees breach judicata res does judgment was entered loan. of Grammer’s tee in this bar Heller’s claims operate to appealed. timely and Grammco Grammer action. Analysis II. RICO Claims Res Judicata I. that Heller contends next Grammer first seek and Grammco alleged that Grammer’s to establish failed of Heller’s claims dispose of all bribery and mail and wire acts of commercial these have could asserted that Heller ground racketeering “pattern amount to litigation Santa Rosa in the earlier claims support a verdict for required to activity” as therefore judicata of res principles 1962(a) (c). Because § or violations claims. of these assertion Heller’s bar now post- denial of his appeals from a judicata res Texas disagree. Under judgment as a matter verdict motion for judgment precludes prior principles,4 using the same law, appeal review this we identical, the parties are only if the claim court; factual issues the district standard as by a court rendered judgment was prior presence of sub only for the reviewed are judg final and was a jurisdiction competent while supporting the verdict stantial merits, challenged claim and the ment reviewed de novo.9 litigat legal issues are subject matter of the same out

arises first suit.5 ed racketeering prove “pattern a of To all that maintain and Grammco 1962(a) (c), Heller had § and activity” under met judicata have been for res

prerequisites racketeering two acts of prove “at least acknowledge that eodefendants they although within which occurred activity, ... the last of action, and Grammer Heller as were in an prior the eommissidn years ... ten after litigation, the Santa Rosa Grammco In Inc. racketeering activity.”10 H.J. of act pur parties for adverse not considered are Co.,11 Telephone Bell v. Northwestern judicata.6 of res poses narrowed this Supreme clarified Court contending by this bar would avoid Grammco definition, holding prove “to a that statutory asserted cross-claim once Heller activity plaintiff a racketeering pattern of a agree that party. We an adverse became racketeering predi show ... must ad made Heller filing of cross-claim to or they amount are related cates subsequent nonsuit Heller’s party,7 but verse activi criminal threat continued of pose to the parties returned the cross-claim of ("[W]here assert a cross- does defendant Id. Rosa liti- 7. final 4. Because adverse, they co-party, become court, against a claim Texas gation in a Texas state was rendered apply."). judicata principles res and the judicata application based governs of res law v. Ameri- judgment. See Marrese on that earlier Co., 885 S.W.2d Motor Hyundai v. Alvarado 8. Orthopaedic Surgeons, 470 U.S. Academy can 167, (Tex.App.-San 1994) (citing 174 Antonio (1985); 1327, 373, 274 84 L.Ed.2d 105 S.Ct. Appeals, S.W.2d 101 362 Civil v. Court of Crofts Cir.1982). (5th Dwyer, 666 F.2d 141 v. Rollins (Tex. 1962)), grounds, 892 S.W.2d on other rev’d 1995). (Tex. 853 627 Corp., S.W.2d Trust 837 Barr v. Resolution 5. Textron, 32 Helicopter Starnes, v. 9. Robertson Bell (Tex.1992); 14 Holloway S.W.2d v. 840 Cir.1994). (5th F.3d 948 (Tex.App.-Dallas 1992, denied), denied, writ cert. 93, U.S. -, 60 L.Ed.2d 114 S.Ct. 126 - 535, Carlock, 542 States United (1993). 949, 950, denied, Cir.1986), 480 U.S. cert. 796, 1613, 798 94 L.Ed.2d 107 America, S.W.2d 845 Getty Co. N. Oil v. Ins. (1987). ("[R]es only (Tex.1992) applies judicata 800 L.Ed.2d denied, - U.S. -, 106 109 S.Ct. U.S. 492 parties.”), cert. adverse (1989). (1993). L.Ed.2d 114 S.Ct. ty.” “It is this factor of continuity plus him credit. According to Heller’s pleadings, produce. combines to relationship which purpose bribery of the scheme was to pattern.”13 Although proof continuity and maintain Grammeo’s exclusive business rela- may overlap, inqui often relationship the two tionship with Santa competition Rosa free of analytically prongs are distinct ries of the might have caused Santa Rosa to take pattern requiring separate analys element computer business elsewhere. The al- is.14 leged fraud, hand, mail and wire on the other sought to induce making Heller into a loan Grammer asserts that Heller failed on terms that would have not otherwise been allegations to demonstrate that the of com available.19 purposes alleged The bribery mercial and mail and wire fraud sat predicate acts were distinct and dissimilar. prong pattern require isfied either We, however, ment. need address Hel predicate acts also had dissimilar re- relationship prong ler’s satisfaction of the bribery sults. The resulted in Santa Rosa’s pattern requirement.15 The relatedness payment prices of excessive its leases of inquiry interrelationship “focuses on the computer equipment while the mail and wire charged predicates,”16 thereby ensur resulted the extension of a loan on person “subjected that a is not to sanc offering protection terms less to Heller than committing widely tions for separated two normally required. This conclusion is plaintiff and isolated offenses.”17 A criminal reinforced injuries an examination of the satisfy relationship requirement by can alleged the ‘Victims” of the criminal activi- demonstrating alleged predicate acts ty. By paying higher lease rates Santa purposes, results, “have the same or similar Rosa lost paid those sums in excess of the victims, participants, or methods of commis rate; market Heller suffered a default on a sion or otherwise are interrelated distin loan and the loss of yet made. guishing characteristics and are not isolated events.”18 The difference in the “methods of commis- supports sion”

Examining predicate further our alleged by acts conclusion that framework, alleged predicate within this we acts conclude were not related. they sufficiently bribery employee are not of Santa Rosa Joseph interrelated to pattern racketeering activity. competitive constitute a Dixon eliminated pressures by essentially complains types causing betray of two Dixon to fiduciary of his rela- activity: alleged tionship criminal Grammer’s com- with Santa Rosa. Grammer de- bribery mercial employee of Santa Rosa Jo- frauded refusing Heller to disclose mate- seph Dixon and his use of the aspects mail and wires rial of serving the lease security as fraudulently induce extending Heller into for the It loan. is manifest alleged 239, 12. Id. at 109 S.Ct. at predicate 2900. to the bribery part acts of to be Visconsi, racketeering pattern. same See Vild v. (6th Cir.), denied, 956 F.2d 560 Id. cert. 506 13.. U.S. 832, 99, (1992). 113 S.Ct. 121 L.Ed.2d 59 14. Id. Eufrasio, 16. United States v. 564- (3d Cir.1991), denied, cert. 502 U.S. Normally, the existence of a sufficient rela (1991). 116 L.Ed.2d 280 tionship predicate between the' acts is either ob vious or and our assumed review focuses the on Inc., (citing Id. at 565 H.J. 492 U.S. at continuity requirement. e.g., See Calcasieu Ma (quoting legislative S.Ct. at Grant, 2900-01 from rine Nat'l Bank v. 943 F.2d 1453 (citations omitted)). history) Cir.1991). approach We reverse that here in light complete of Heller’s reliance on the evi Calcasieu, bribery (quoting dence of F.2d at 1463 Grammer’s of Santa Rosa H.J. em ployee 2901). Joseph support 492 U.S. at finding Dixon to 109 S.Ct. at a of continuity. bribery Even if we assume that this activity independently provides sufficient conti 19. Heller’s witnesses testified that the loan to nuity "pattern,” pattern for a RICO such a can Grammer could have pur- been made with the support not Heller's option claim unless Heller demon chase required but that Heller would have predicate strates that causing injuty, the significant acts modifications in the terms of the loan fraud, the mail and wire sufficiently are security agreement. related above, we outlined than those substantively istics” other dif- only not involved activities pat- relationship prong of the functionally interpret the different also crimes but ferent require than an requirement more tern of commission. methods take the factual nexus.20 We articulable the participants in the note that alsoWe admoni- import Supreme the Court’s of clear activity alleged Hel- criminal types of two the Inc. to consider whether in H.J. tion activity in- bribery were different. ler or similar “have the same predicate acts Dixon, princi- employee Rosa Santa cluded victims, results, or participants, purposes, without whom in the scheme pal player require that a commission” methods of Only place. taken bribery could not have relationship be- prove a plaintiff must RICO alleged on participated in the Grammer predicate aspects the criminal of tween inter- Heller; nor a substitute neither Dixon acts, thereby supporting the conclu- criminal necessary to in or was mediary participated “ ‘ordered’ or criminal acts are sion that the fraud. ”21 ‘arranged.’ types of two Finally, we note a stroke. paint with broad Heller too would into a to connect seeks which Heller conduct theory describes “reaping profits” different victims. at were directed pattern loan, that loan every financing whether lease directly affected bribery Dixon of Grammer’s Through such or wire fraud. involved mail acts his fraudulent only Rosa while Santa acquisi- finances his own financing, a lessor not consider We do injured Heller. goods realizes sold of leased or tion similarly Rosa to be situat- and Santa fi- debt profit while the service his occupied position victims; Rosa ed payments from the by the nancing is satisfied while services consumer of Grammer’s aof (consumer), which is account all debtor creditor. served as Grammer’s Nothing pursuit. legitimate business purely relationship out some to make In an effort suggests or in this scenario acts, maintains that between related were fraudulent acts that Grammer’s the extraction bribery allowed Grammer’s bribery Dixon.22 to his from its Santa profits supra-eompetitive bribery be Finding the fraud and the then leases, leases Grammer one of which unrelated, has that Heller we must conclude fraudulently in- collateral for as used acts that Grammer’s to demonstrate failed by using contends that loan. Heller duced pattern racketeer- part against it loan, for the lease collateral Heller’s activity. The verdicts on profits his fraud immediately reaped the be reversed.23 therefore claims must time doing so over than Rosa rather on Santa con- from the thereby insulated himself Warranty III. Breach discovery Rosa’s sequences of Santa persuaded. bribery. areWe challenges verdicts next breached that claims Grammer can on Heller’s plaintiff Although that recognize we security agreement made in the by dem- warranties relationship requirement satisfy the loan with his contemporaneously acts executed alleged predicate onstrating the that the dis that He first asserts Heller. from by distinguishing character- interrelated “are finding allow a ignore effect. To us to its against of allow (holding fraud marketer Vild See 20. would this case relationship the facts development to of to be "unrelated” of estate real relationship any meaningful de targeted against effectively consumers the the eliminate Anderson, McLaughlin Supreme 962 F.2d velopment); interpret v. Court’s requirement. We the 1992). (2d prong relationship Cir. teaching in HJ. Inc. an untena "analytically to that distinct” make is 2900. at at 492 U.S. H.J. 21. panels We to future See Vild. leave ble result. defining of this test. limits the the task further attempt give mean holding, to some we In so 22. pattern relationship prong the re to the pattern of out a fails to make 23.Because Supreme by the quirement. The “test” stated any support required RICO racketeering as “admittedly relationship prong is for the Court claims, other Grammer's Wolk, not consider need we apply," difficult to Banks claims. assignments the of error on (3d 1990), difficulty not that does Cir. but instructing jury trict against court erred the claim Grammer for a breach of war- warranty breached his not to ranty,28 modi- Grammer contends that modifica- the fy the he lease when entered the settlement tion of proximate the lease is not the cause of agreement releasing Santa Rosa from all of damages recover, which Heller seeks to lease, obligations including its under the namely owing the balance due and on the obligation payments.24 to make underlying note to Grammer. any contends that such modification could not person breaching “A a contract can rights against affect Heller’s Rosa be held damages liable for such may fairly as damages that Heller therefore suffered no reasonably be naturally considered as a result of the modification. arising from the breach light thereof in of the security first agree note facts known or which should have been subject containing ment warranties in known or may such as reasonably sup be provision cludes a choice of law designating posed to have been contemplation within the controlling of Illinois as interpre law parties probable as a result of a breach agreement.25 tation of the Under Illinois thereof.”29 Common sense dictates that if law, security agreement is a contract inter the lessor releases making the lessee from preted by reference to Article of the Com payments note, the lessee’s failure to Code, otherwise, applicable, by mercial if ref payments make naturally those arises from erence to the law of contracts.26 and is connected the lessor’s release.30 starting point analysis Further, for our of the agreement a review of the and the is, course, agreement security plain promissory underlying note lead tous con 3(n) language.27 Paragraph agree- clude that damages precisely those (Grammer) ment states that the “Debtor contemplated will by parties in the event of a not any any make modifications to Lease warranty against breach of the modification. prior 3(n), without written consent of Paragraph Secured which sets forth the warran (Heller).” Party In ty the event that this or against modification, specifically discusses Grammer, other warranties are breached amount reduction in the agreement provides that Grammer is Heller from proper the lessee as the measure then fully considered default and liable for damages after a modification. In Gram “any damage or loss incurred note, or suffered promissory mer’s parties agree (Heller), Party arising Secured out of or in in the case of a warranty, breach of Gram connection with the breach.” Although these mer be payment would liable for the provisions clearly allow bring Heller to a principal. trial court held that this modification any Grammer contends that modification he contemporaneously breached Grammer's war- binding made not on Heller because Gram- ranty obligation of Santa to make already assigned mer had the lease to Heller and payments on the lease would remain absolute sought Heller therefore should have recov- subject any unconditional and not claims ery evidence, however, from Santa Rosa. The rights against or Grammer. supports only the conclusion that Grammer as- signed right payment his to Heller. The para. ch. 26 Ill.Rev.Stat. 1-105. Because the agreements between Heller and Grammer of transaction, whether as a characterized condi- which there is promis- evidence are Grammer's lease, interest, security tional sale or a created a sory note and security agreement. the related governed by the transaction is Article 9 of the Grammer's assignment notification of to Santa adopted Uniform Commercial Code as in Illinois. support Rosa can finding assignment of an See para. Ill.Rev.Stat. ch. 26 9-102. lease; provides of the agree- no evidence anof part ment on the of Heller. 26, 1-201(3). para. 26. ch. Ill.Rev.Stat. Prestressing Corp. Case Chicago College v. Bysom Enterprises, of Ltd. v. Peter Carlton Enter Medicine, Osteopathic 782, Ill.App.3d 118 74 Ill. Ltd., 1, prises, 408, Ill.App.3d 267 204 Ill.Dec. 382, 387, 811, (1983). Dec. 455 N.E.2d 816 414, 838, (1994) (“The 641 N.E.2d parties’ 844 scope intent as to the of a contract is irrelevant language where the Bysom 30. See Enterprises, contract is clear (rejecting argu- and Ltd. denied, unambiguous."), 564, appeal 159 Ill.2d ment similar to Grammer's in context of breach (1995). 207 Ill.Dec. 647 N.E.2d express warranty). 1007 of an

527 trial was damages at only of The evidence that argument reject Grammer’s alsoWe Payne who John testimony by Heller witness recovery of the sought should have on the at the due damages balance Rosa. the placed from Santa note on the due balance con- Although Grammer underlying action debt. pursued an have could Whether presented extensive evidence that he for the tends against Santa the most of the breaches inquiry showing into he cured our that to irrelevant note is to no complains, points he against Gram- action which Heller cause of of existence that the Code section the conclusion supporting Commercial The Illinois evidence mer. assignments of modification warranty against after the modifications of governing breach that due on provides than the balance specifically damages less payment to rights caused modification make a in the trial agree perceive no error can debt.34 We parties the the lease) (the a judgment; the rec- underlying contract amendment the court’s of allowing The a right.31 any the assignor of evidence by the is devoid of breach ord in warranty intention of such an the breach verdict on parties here manifested lesser Accordingly, we security agreement. claim. by Heller damages sought that the conclude breach caused proximately Fraud V. modification warranty against can not that Heller this issue asserts verdict on directed court’s

the trial arises from that claim when recover not erroneous. the success supporting transaction same Damage Award Adjustment rV. Contending claim. breach contract ful breach simply recast one even argues that Grammer next claim, Grammer warranty into a fraud stands, claims warranty if the breach jury’s fraud verdict maintains increasing the dam court the trial erred damages can punitive associated award jury’s claim from on this age award not stand. million dol 1 dollars 4.7 of million award underlying debt. lars, due on the balance rule, failure to general “the As a in award jury great discretion accord a a breach of a contract is the terms perform range damages shown ing within statement, contract, a tort.”35 This circumstance infrequent In the evidence.32 difficulty Texas however, belies jury’s for the rational basis is no there where had determin this court have courts and however, may impose verdict, court a trial action in may a assert tort party reasonably can when damages only award In South action.36 to a contract addition the evidence.33 drawn from

be to which 34. Even if we assume Bank para. See 26 9-318. ch. Ill.Rev.Stat. award, damage justifies points a lower Texas, One, Specialists, v. Communication N.A. only warranties of relevant that evidence is title, (Tex.App. 1991 755 813 S.W.2d — Texarkana interest, provisions of prior perfected writ) provision under (commenting on same no Security Agreement See Rock, all relevant documents. Code). Southern Commercial Texas Cf. ¶ 3(a), 3(c), 3(g). (5th Supply, 683 711 F.2d & B Inc. v. B Auto 1983) security agreement to cre (interpreting Cir. Co-op., 829 Farmers v. Austwell 35. Schindler rather than security accounts ate interest Christi (Tex.App. Corpus S.W.2d 289 — accounts). assignment complete of title those (Tex. 1992), modified, 853 841 S.W.2d aff'd Reed, Homes, 1992); v. 711 Inc. Jim Walter Dworkin, Group, 919 Inc. v. 32. Neiman-Marcus (Tex.1986). agree parties 617 S.W.2d 1990). (5th F.2d 368 Cir. governs Heller’s fraud claim. law Texas DeLanney, Co., Co. v. Tel. Indemnity Bell 36. See Southwestern Great American 33. See v. (5th Shaffer (“We (Tex.1991) have mud- 1945) (allowing S.W.2d substitu Cir. 147 F.2d 981 encompass- all and an of ‘contorts’ possible if dled the law damage is amount one tion when constitutes ing bright of what line demarcation attaches); Kennesaw liability United States Cir.1938), proven has of contract Ass’n, breach tort distinct from Mountain Battlefield concurring). elusive.") (Gonzalez, J. denied, to be U.S. rt. ce by complicated instance in this is further (1939); Compensation matter Ins. Texas 83 L.Ed. prom- underlying of the (5th Cir.1937). nature Heard, non-recourse the 93 F.2d Co. v. DeLanney,37 Bell Tel. Co. v. western the was the note; balance due on the defaulted indeed, Supreme up Court cleared Texas some of the Heller notes in brief that the default by endorsing step inquiry only confusion two for amount was the damages evidence of First, presented even such determinations. a court jury. posited should the The then, injury, faulted conduct examine the to determine if is that Heller was promised imposed by law, indepen duties precisely violates never the received — subject imposed of the by Although dent of those duties the contract. contract. fraud damages may Next, it be measured in should examine the nature of the “benefit terms,40 bargain” alleged injury, recognizing the Texas split that courts are “[w]hen the on the issue whether only damages is these injury subject the economic loss to the must be independent damages from of a contract the action itself sounds in con breach by the contract affected tract fraud.41 alone.”38 majority of the appear, however, Texas cases inquiry first militates favor of allow- require proof damages beyond some essentially Heller’s fraud claim. Heller subject economic losses to the matter proved claimed and at trial that Grammer contract. Bound by as we are law on Texas Heller to extend him induced a loan mis- issue, this finding damages no attribut- representing material regarding facts able to contract, rather than the we presence purchase option of a dollar in lease perforce must conclude that Heller is not L3177 and Grammer’s ownership of the entitled to a verdict on its fraud claim.42 equipment. leased Texas courts have held Because Heller’s fraud claim necessary is party misrepresents that when one a materi- support finding punitive damages, the al to induce another to fact enter an other- award of punitive damages must also va- be contract, wise party may normal the induced cated.43 assert an action for fraud based on duties imposed separate apart from the con- VI. Exclusion Evidence tract.39 finally contends that inquiry The second is more troublesome. district court erred in excluding his evidence injury, Heller’s asserted both in pleadings mitigate Heller failed to damages, trial, reflected adduced at impaired loan, the collateral for the that col- Thus, issory co-existing case, note. however, breach of con- That dealt with the fraudulent security agreement tract claim is based on the inducement contract inducing where the incorporates promissory which note. party perform. never intended to In that in- stance, agree we that the law of Texas is (Tex.1991). 37. 809 S.W.2d 493 support action will a fraud claim as well as a Tours, contract Spoljaric claim. See v. Percival Homes, 38. Jim Walter 711 S.W.2d at 618. (Tex.1986). 708 S.W.2d 432 The instant suit misrepresentation deals with a material in- Ratcliff, (Tex. Trenholm v. See 646 S.W.2d 927 ducing parties a contract the perform. intend to 1983) (tracing damages to losses on resale after facts, On those majority appears rule to be misrepresentation sale). induced contract for separate damages proven. must be 40. American Nat’l Petroleum v.Co. Transconti recognize holding gives that this a narrow (Tex. Pipe Corp., nental Gas Line 798 S.W.2d 274 reading our decision in National Union Fire 1990). Ins. party Co. we where held that a could assert a conversion claim in addition to a claim. contract 41. National Union Fire Flight Ins. Co. v. Care That decision relied on the fact that no Texas Ambulance, (5th Cir.1994) 327 n. 1 required separate cases had ever damages (noting split cases). collecting Compare He conversion claim. 18 F.3d at In the Co., 327-28. (Tex. bisen Nassau Dev. 754 S.W.2d 345 claims, however, case of fraud majority App. denied) [14th Dist.] writ — Houston precedent requires separate damages. (no claim damages of fraud when are to the contract) subject (no and Schindler re Karnes, 43.See Nat’l quirement Texas Bank v. separate S.W.2d injuries be shown to (Tex.1986) (contract claim). sup claim alone support fraud cannot port punitive damages). Because we conclude 42. Heller cites stand, Schindler v. Austwell Farmers Co- the fraud verdict can not we need not op., proposition for the damages directly address challenge Grammer’s to the award of attributable to the fraud need prejudgment not be shown. damages. interest on the fraud

529 income rights in the lease impairing his and payments, right to lease being the lateral Sections 3- stream, persuaded. we Citing sec- are him. against its claims waived protect the designed to Com- are the Illinois and 9-207 of and 9-207 606 3-606 tions after Hel- the collateral that to act on Code, rights maintains of sureties Grammer mercial collat- party.47 of possession in to the secured ler, party satisfying a owed debt as a secured however, commercially Grammco, up gave reasonable in a eral, act had to of collateral.44 they the value preserve entered to L3177 when any rights manner in to so failed Heller that Rosa. contends Santa agreement with settlement against Santa claims impair it nonsuited to Thus, nothing act when there was enti- was therefore and that Grammer Rosa through its acts.48 regarding possible special issue a tled to reject argument Finally, Grammer’s we to failure collateral impairment excluding in Gram- court erred the trial that con- further damages. Grammer mitigate alleged Heller’s regarding evidence mer’s 3-606, non- Heller’s section that under tends by against Grammer of its claims waiver dis- against Santa Rosa claims of suit in object participate Grammer’s failing or liability on its Grammco’s charged pro tanto Rosa. As- with Santa discussions settlement this that note and of Grammer’s guaranty erred trial court suming, arguendo, that the of evi- admission warranted point further on in limine evidence a motion granting in mitigation issue. dence waiver, the record alleged this related we will we note that outset At the in fact introduce parties did reflects rulings evidentiary trial court’s a reverse and that regarding settlement evidence right of a substantial they prejudiced only if overwhelmingly supports the evidence such argu Grammer’s complaining party.45 We occurred.49 no waiver conclusion assumption that rely on the ments right. to a substantial prejudice perceive no the collateral obligated pursue in of judgment favor We REVERSE after Santa Rosa then held lease and the RICO claims Illinois making payments. Rosa ceased judgment on the AFFIRM the claims. however, clearly provides, Code Commercial warranty claims. breach pursu the choice party has secured (Gram- against the debtor ing a concurring: REAVLEY, Judge, Circuit collateral, in mer) than the rather on default by the ma- result reached I concur in collateral, in combination or to the addition analysis. in jority, differ but I agree with We therefore therewith.46 decision of Heller’s trial court Tele- Bell Inc. v. Northwestern In H.J. Rosa was against Santa its claims 2893, to nonsuit 229, 106 Co., 109 S.Ct. U.S. phone 492 trial. litigated at to the claims irrelevant that a (1989), held the Court 195 L.Ed.2d activity” racketeering embraced “pattern argues Hel- that Grammer To the extent and a requirement “relationship” both injured him of Santa ler’s nonsuit Co. and Trust Ramsey Bank v. First Nat. 48. See para. 3-606 & 9-207. Ill.Rev.Stat. (dis- Corbin, (Ky.Ct.App.1984) 947 683 S.W.2d 103; Sales v. de- impairment E.E.O.C. Manville of collateral cussing 45. Fed.R.Evid. purpose Cir.1994) ("In (5th Corp., F.3d 1093 claims of fense). 27 Grammer’s note We also on an error judgment based to vacate impairment order mitigate collateral failure find that ruling, evidentiary ‘this court must an possession of lease upon Heller’s depend parties affect rights the substantial at trial introduced The evidence stream. income ”) Massey-Ferguson, (citing Carter v. ed.’ never that Heller supports the conclusion also denied, Cir.1983)), (5th - 349 cert. up making L3177 all the documents received -, L.Ed.2d 131 115 U.S. possession of the arguably never therefore was (1995). by Grammer. as contended stream lease income 26, para. 9-501. ch. Ill.Rev.Stat. Corp., Bank v. Interstate See First Interfund Cir.1991) (noting waiver Co., F.2d 588 Investment Bank Circle 47. See North to no intention proof unequivocal requires Ill.App.3d N.E.2d 60 Ill.Dec. question). right longer assert (1982). 530 “continuity” requirement. As to the relation- insulating him from a loss bribery should the

ship requirement it concluded that later “criminal be discovered. pattern conduct forms a if it embraces crimi- However, argues separate as a nal acts that have the same or pur- similar ground 1962(a) rejecting § for results, poses, participants, victims, or meth- judgment, by not reached majority opin commission, ods of or otherwise are interre- ion, that Heller prove did not an “investment by distinguishing lated characteristics and injury.” agree. 1962(a) I Section makes are not isolated events.” Id. at 109 any “unlawful person who has received added). (emphasis S.Ct. at 2901 Particularly any income derived ... pattern from a or context, when read I believe activity racketeering ... use or invest ... Court intended this relationship requirement any part income, of such proceeds or the to be a income, minimal one. The recognized Court acquisition such any in, interest concerns that or RICO has too sweep of, broad a operation establishment or any being enterprise_” 1962(a). pursue “legitimate” § used to 18 U.S.C. have held that organized criminals, recovery businesses as a civil well under but 1964(c) § premised on a concluded that this result violation of compelled by is 1962(a) § requires plaintiff expansive prove language statute, and the injury his by was caused failure defendant’s use Congress to scale it back. Id. at or 235-37, investment racketeering at income. S.Ct. 2899. It concluded that “[A]ny 1962(a) injury under section legislative must history “the flow Congress shows that from the use or of racketeering investment knew doing what it was adopted when it income.” Parker & Parsley Petroleum Co. v. language commodious capable of extending Indus., Dresser 972 F.2d beyond organized Cir. crime.” Id. at 1992). Accord, Henry, Crowe v. at rejected 2904. The Court Eighth an (5th Cir.1995) (“For (a), subsection this requirement Circuit “pattern that a of racke- means that injury must flow from the teering activity” requires multiple illegal investment of racketeering income into schemes, as opposed single to a fraudulent enterprise.”). agree I with the majority that effort or 233-34, scheme. Id. at 109 S.Ct. at Heller’s only evidence of damages was the 2898-99. It concluded instead that “Con- unpaid amounts due on the note. Heller’s gress fairly indeed had concept flexible of a injury did not flow from the manner which pattern in mind.” Id. at 109 S.Ct. at Grammer invested proceeds used the or loan once he had by-false obtained pre them I would hold that Grammer’s conduct met tenses. Heller did injury not tie its to Gram- this requirement. relationship predicate mer’s use or loan, investment of the but (1) acts included repeated Dixon, bribes to instead injury claimed only on the basis of (2) misrepresenting to Heller that there was the initial making act of the loan to Gram- purchase (3) no option, and misrepresenting Likewise, mer. Heller did not establish that to Heller that Grammer equip- owned the the bribes to Dixon caused Grammer to re ment. These events; acts are not isolated ceive income and then invest or use that they are they related because part all income in a manner that injury caused ongoing by scheme Grammer to obtain Heller. Heller did not link Grammer’s use of the benefits of an above-market lease the income leases, from the about which deceiving hospital and his lender. The there was if any little presented at loan facilitated this trial, scheme allowing to Heller’s decision to make its loan to Grammer to up front, cash receive thereby Grammer.1 out, majority points 1. As the pattern Heller also won a racketeering activity....” I need not judgment 1962(c) §on based of RICO. Unlike 1962(c) consider § whether the judgment should 1962(a), § this require subsection does stand majority even agreed if with me that defendant’s use or racketeering investment of relationship (which requirement applies to income, but instead makes it any 1962(a) (c)) §§ "unlawful First, both was met here. person employed by or any with associated enter- clearly district court awarded this prise ... to conduct or participate ... in the in the larger alternative to the breach of warran- conduct enterprise's of such through ty affairs judgment. argument Heller makes no reluctantly concur Furthermore, I fol- must damages. We punitive

holding of it. we think what law, matter no

low Texas duty aris- the breach why I understand contract, where of the terms ing out con- precisely

damages are measured an predicate as the

tract, may be treated an than as rather on the contract

action However, ele- proof of the tort.

independent should for fraud action a cause

ments tort, independent certainly establish damages of actual the amount or not

whether claim were if the the same be would courts if the Texas But of contract.

breach de- much as damages so punitive dislike Erie to it. law, I am bound

cree Gary MORALES, Guardian

Pamela Plaintiff-Appellant, Thompson, MOTOR HONDA

AMERICAN INC.,

COMPANY, Defendant-

Appellee. 94-5885.

No. Appeals, Court States

United Circuit.

Sixth 22, May

Argued Sept. 1995*

Decided warranty 1962(c) judgment to the breach § judgments awarding these court erred district recovery. them, to a double stacking would amount rather than alternative (which Supplies, jury County awarded Interstate v. U.S. argument that the Alcorn See no makes 1962(c)) Cir.1984) (noting that $500,000 court § or the under F.2d 1962(c). § damages calculating under state damages [under erred "duplicative 1962(c) § trebling by allowed.”). court after Even be law] should common the breach than smaller judgment was still * "unpub- originally as an issued was This decision be should warranty judgment, September filed lished decision” judgment. larger elected the have deemed Second, designated the court above, only proof On November explained Heller's as publi- for full-text opinion one recommended unpaid on the note. balance damages warranty judgment awards cation. the breach Since note, adding the due amount the full

Case Details

Case Name: Heller Financial, Inc. v. Grammco Computer Sales, Inc.

Court Name: Court of Appeals for the Fifth Circuit

Date Published: Jan 4, 1996

Citation: 71 F.3d 518

Docket Number: 94-50043

Court Abbreviation: 5th Cir.