Joslin v. Personal Investments

United States Court of Appeals
Fifth Circuit
F I L E D
March 8, 2004
Charles R. Fulbruge III
Clerk
In the
United States Court of Appeals
for the Fifth Circuit
_______________
m 03-40200
_______________
DENNIS JOSLIN,
Plaintiff-Third Party Plaintiff-
Appellee-Cross Appellant,
VERSUS
PERSONAL INVESTMENTS, INC.,
Defendant-
Cross-Appellee,
BASHER AHMAD,
ALSO KNOWN AS ROBERT HELMAND,
DOING BUSINESS AS PACIFIC LAND EXCHANGE,
Third Party Defendant-
Appellant-Cross-Appellee.
_________________________
Appeal from the United States District Court
for the Southern District of Texas
m C-00-CV-324
_________________________

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Before KING, Chief Judge, JONES AND SMITH,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:*
We consider here the validity of a verdict
awarding plaintiff, an investor in delinquent
loan packages, $50,000 for losses he suffered
in reliance on misleading information that
could have been debunked through a simple
investigation, and that he was told not to rely
on. The common law action for negligent mis-
representation is not an insurance policy entit-
ling unwary investors to a refund whenever
they are injured by their failure to investigate
dubious information.
To prevail in such an action, the plaintiff
must demonstrate that he was justified in rely-
ing on the misrepresentation. Concluding that
the evidence and reasonable inferences drawn
therefrom overwhelmingly favor a finding that
plaintiff’s reliance was not justified, we reverse
and render a take-nothing judgment.
I.
This case involves the market for delinquent
loan pools sold at government auctions. The
defendants are Basher Ahmad, also known as
Robert Helmand, and his wholly owned close
corporation, Personal Investments (“PI”).
Like plaintiff Dennis Joslin, Helmand and PI
are in the business of purchasing packages of
delinquent loans at government auctions.
Because the obligors on these loans are
unlikely to make any further payments, the
investment is valuable only to the extent that
foreclosure affords an opportunity to gain title
to an accompanying security interest.
In 1994, Helmand placed the highest bid on
a package of loans that included a loan (the
“Nix loan”) originally taken out by Jimmy Nix,
a real estate developer. The Nix loan was se-
cured by a deed of trust in a subdivision that
Nix was developing (the “Nix deed”). Soon af-
ter acquiring this interest, Helmand foreclosed
on the Nix deed of trust and purchased the lots
at his own foreclosure sale. Instead of paying
cash for this interest, Helmand credited the Nix
loan $250,000.
A title search revealed, much to Helmand’s
disappointment, that the interest so acquired
was junior to several other encumbrances.
These were collectively valued at a price higher
than the appraised value of the property,
making Helmand’s interest effectively
worthless.
Helmand contacted the federal agency from
which he had purchased the package, seeking a
refund for the Nix loan. Ultimately, that agen-
cy’s successor in interest, the Federal Deposit
Insurance Corporation (“FDIC”), agreed to
refund the purchase price in exchange for an
assignment of the original deed of trust.2
Helmand claims to have protested at length
that he could not assign the extinguished inter-
est represented by the Nix deed, and offered
instead to convey his substitute trustee’s deed.
As he tells the story, however, the FDIC was
not interested and insisted that a refund would
be available only if Helmand assigned that
which he no longer had. Helmand ultimate-
* Pursuant to 5TH CIR. R. 47.5, the court has
determined that this opinion should not be pub-
lished and is not precedent except under the limited
circumstances set forth in 5TH CIR. R. 47.5.4.
2 The Nix deed had more value to the FDIC than
it did to Helmand, because the FDIC already owned
the other encumberances on the land and could pool
all the interests together for sale to a single party.

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lySSand again as he tells it, reluctant-
lySSrelented to the FDIC’s demand and, in
March 1996, assigned to the FDIC the now-
extinguished Nix deed in exchange for a
$177,000 refund. Naturally, he kept his own
recorded interest in the property.
The documents assigning the Nix deed did
not indicate that it had been foreclosed. An
accompanying ledger card should haveSSbut
did notSSreflect the $250,000 credit Helmand
had placed on the loan at foreclosure.
Although that document contained a notation
saying “Send to Foreclosure,” there was no
written indication on the ledger card or the Nix
deed to indicate that the interest had been
foreclosed on and sold at auction. Helmand
knew, at this time, that the FDIC was re-
acquiring the deed assignment and the ledger
card so they could be used as supporting docu-
ments in a subsequent auction of the Nix loan.
In February 1997SSalmost a year after Hel-
mand received his full refundSShis lawyer, Jim
Balis, sent a letter to the FDIC declaring that
Helmand recently had discovered that the
foreclosure in 1994 preceded the assignment
to the FDIC in 1996 and that, as an
unfortunate result, FDIC had paid $177,000
for a worthless interest in real property. Hel-
mand’s disclosure to the FDIC would be a
tautology, however, if he indeed had been
telling the agency all along that he had
foreclosed on the loan and had taken title to
the collateral.
Nevertheless, Balis’s letter offered to ten-
der Helmand’s deed to the FDIC, but
explained that there was a pending tax suit
filed against the property by Nueces County,
Texas. The FDIC did not respond to this
letter or to Helmand’s two attempts to mail it
a deed. The property was sold by the county
at a tax auction, where PI purchased it for a net
investment of $60,000.
In 1996, Joslin participated in an FDIC auc-
tion at which he successfully bid on a package
of loans that included the Nix loan and the now
worthless Nix deed. To formulate his bid,
Joslin was given access to a loan file containing
documentation for many, if not all, the loans in
his pool. He arrived at a bid value by
examining the documents in the loan file and,
without performing any outside investigation,
sharply discounting their paper value to reflect
the inherent risk in purchasing distressed assets.
In this manner, he ultimately placed a value of
$34,483 on the Nix loan and Nix deed as part
of a total bid of more than $1.2 million.
When, in 1999, Joslin discovered that Hel-
mand had stripped the Nix loan of its collateral
before selling it back to the FDIC, Joslin’s
attorney contacted PI and asserted a claim over
the property. PI sued Joslin in state court,
seeking to quiet title to the lot.
Joslin removed the case to federal court, as-
serting diversity jurisdiction, and filed a coun-
ter-claim against PI and a third-party complaint
against Helmand, alleging fraud, negligent
misrepresentation, constructive fraud, and
conspiracy. The district court re-aligned the
parties to make Joslin the plaintiff, dismissed all
the claims against PI, and entered judgment as
a matter of law (“j.m.l.”) in favor of Helmand
on the constructive fraud and conspiracy
claims.
The jury found Helmand liable for negligent
misrepresentation, but not fraud, and awarded
damages of $50,000. Helmand appeals the
verdict against him, and Joslin cross-appeals the
j.m.l. and the calculation of prejudgment
interest.

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II.
We review a verdict only to determine
whether there is a legally sufficient evidentiary
basis for the jury to find as it did. Morante v.
Am. Gen. Fin. Ctr., 157 F.3d 1006, 1009 (5th
Cir. 1998). We draw all reasonable inferences
in favor of the non-moving party, without
weighing the evidence or assessing the
credibility of witnesses. Serna v. City of San
Antonio, 244 F.3d 479, 482 (5th Cir. 2001).
“There is no legally sufficient evidentiary basis
when the facts and inferences point so strongly
and overwhelmingly in favor of one party that
the Court believes that reasonable men could
not arri ve at a contrary verdict.” Wallace v.
Methodist Hosp. Sys., 271 F.3d 212, 219 (5th
Cir. 2001).
Texas courts follow the common law defi-
nition of negligent misrepresentation embodied
in the Restatement (Second) of Torts § 552.
Fed. Land Bank Ass’n v. Sloane, 825 S.W.2d
439, 442 (Tex. 1991). The elements of the
tort are that
(1) the representation is made by a
defendant in the course of his business, or
in a transaction in which he has a pecuniary
interest; (2) the defendant supplies ‘false in-
formation’ for the guidance of others in
their business; (3) the defendant did not ex-
ercise reasonable care or competence in ob-
taining or communicating the information;
and (4) the plaintiff suffers pecuniary loss
by justifiably relying on the representation.
Id.
There are sufficient facts on which a jury
could determine that the first three elements of
this test are met. The representations were the
transfers of a deed of trust failing to reflect
that its value had been eviscerated by
foreclosure, and a ledger card failing to reflect
the $250,000 credit Helmand had used to
purchase the foreclosed property. The record
shows that Helmand had substantial experience
in this business and intended the documents to
be used in future FDIC auctions. That evidence
adequately supports a finding that the
statements contained false information, were
made in the course of Helmand’s business, and
were (at least) negligently given.
We reverse the judgment that is based on the
verdict, however, because the record does not
support a finding of justifiable reliance on the
part of Joslin. Leaving aside the scant evidence
of actual reliance (Joslin’s testimony regarding
his habits minimally establishes that he probably
relied on the documents in preparing his bid.),
it was unreasonable for Joslin to formulate his
bid in reliance on the accuracy of documents in
the loan file.
Under Texas law, a plaintiff must prove rea-
sonable reliance. Clardy Mfg. Co. v. Marine
Midland Bus. Loans Inc., 88 F.3d 347, 358
(5th Cir. 1996). The reasonableness of reliance
is measured in light of the plaintiff’s intelligence
and experience. Id. Moreover, the context in
which information is given will affect the con-
clusion whether a party was justified in relying
thereon.3 Reliance is unjustified where the act
of reliance is itself an act of negligence by the
plaintiff. Scottish Heritable Trust, PLC v. Peat
Marwick Main & Co., 81 F.3d 606, 615 (5th
Cir. 1996).
3 See, e.g., McCamish, Martin, Brown & Loeff-
ler v. F.E. Appling Interests, 991 S.W.2d 787, 794
(Tex. 1999) (finding unreasonable the reliance on an
attorney’s representations in an adversarial context);
Lesikar v. Rappeport, 33 S.W.3d 282, 319 (Tex.
App.SSTexarkana 2000, pet. denied) (same).

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Joslin had between two and five weeks in
which to formulate his bid and perform the
necessary due diligence. The FDIC’s loan sale
agreement warned Joslin and other investors
not to rely on any documents provided by the
FDIC, and urged that the investor perform
whatever investigations he “deems to be
warranted.”
Joslin used his time to review the doc-
uments in the various loan files to arrive at a
bid price, but he did not run title searches on
the properties listed as security. Instead, it
was his custom to enter numerous bids,
discounting the value of the assets to account
for the likelihood that some loans in a pool
would be worthless. By discounting in this
manner, Joslin, in his bid, valued the Nix loan
at only $34,483, or around one-tenth of the
land’s appraised value of $346,000.
It was only after he placed a winning bid at
auction that Joslin assigned his employees the
task of investigating his interest in the
collateral he had purchased. As a result, it was
not until 1999 that Joslin discovered the Nix
deed had been extinguished by the
foreclosure.4
Joslin argues that a reasonable jury could
find his reliance justified, because the nature of
the market for delinquent loans requires him to
assume that the documents contain some
minimal semblance of accuracy. He points out
that the loans are auctioned off in large pools,
each containing too many parts to allow for
detailed due diligence.
Although acknowledging he takes a risk that
any individual loan will turn out to be
worthless, Joslin argues that he did not take a
corresponding risk “that one of his fellow bid-
ders would rig the auction by stripping the asset
of its collateral,” causing buyers to place
unrealistic bids on completely worthless proper-
ty. Joslin reasons that by injecting deliberately
false information into the marketplace, Hel-
mand distorted the normal balance of risks and
rewards on which Joslin and others relied in
formulating their bids.
This explanation is unavailing. Joslin was
unable to persuade the jury, by a preponderance
of the evidence, that there was fraud. As a re-
sult, the reasonableness of Joslin’s reliance can-
not be established by an argument that no
reasonable investor should be punished for hav-
ing failed to anticipate fraud. Indeed, had
actual fraud been shown, Joslin would not have
needed to prove the reasonableness of his reli-
ance.5
4 Consequently, his negligent misrepresentation
claim would have been barred by the statute of
limitations, had that been raised. See Milestone
Props., Inc. v. Federated Metals Corp., 867
S.W.2d 113, 119 (Tex. App.SSAustin, 1993, no
writ) (two-year limitations period applies to negli-
gent misrepresentation claims); Heci Exploration
Co. v. Neel, 982 S.W. 2d 881, 886-87 (Tex. 1998)
(discovery rule does not toll two-year limitations
period where misrepresentation was discoverable in
the title records). Federal courts sitting in diversity
apply state statutes of limitations. Vaught v.
Showa Denko K.K., 107 F.3d 1137, 1145 (5th Cir.
1997). But, we do not decide the case on this
(continued...)
4(...continued)
ground, because Helmand did not argue the point, as
was his burden to do. Woods v. William M. Mer-
cer, Inc., 769 S.W.2d 515, 517 (Tex. 1988).
5 The elements of common law fraudulent mis-
representation in Texas are that (1) the defendant
made a material representation to the plaintiff;
(2) the representation was false; (3) the defendant
knew of the representation’s falsity when it was
(continued...)

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Measured by the jury’s decision to absolve
Helmand of responsibility for the alleged inten-
tional actSSa finding Joslin does not challenge
as being erroneousSSHelmand’s statements are
nothing more than an inadvertent mistake,
negligently made. In this respect, nothing
distinguishes those statements from the bevy
of other inaccurate documents in the loan files,
many of which place an unrealistic paper value
on the assets to which they correspond.
Joslin took the same risk with respect to
each of those documents: He chose to invest
without investigating the accuracy of any of
the statements contained therein, hoping that
his profit from the accurate documents out-
weighed his losses on the inaccurate ones.
The evidence, viewed in the light most fa-
vorable to Joslin, fails to demonstrate a legally
sufficient justification for his reliance on the
documents in the loan files. He was expressly
warned not to rely on any statements found in
the files, and he easily could have dispelled any
lingering doubt over the accuracy of the
statements by performing a simple title search.
He chose instead to apply a discount factor to
the value represented in the loan files, and it is
unreasonable for him now to fault the
negligence of another for his losses from the
investment.
Reliance under those circumstances is itself
an act of negligence, insufficient to support a
verdict. See Clardy Mfg., 88 F.3d at 358.
Joslin cannot now supplement his profits from
the risks that panned out with tort judgments
for the risks that did not. The verdict and dam-
age award are vacated.6
III.
Joslin cross-appeals the j.m.l. on his claims
of constructive fraud and conspiracy, and the
court’s partial failure to award prejudgment
interest. There is no error.
In Texas, constructive fraud lies where a
party breaches a “legal or equitable duty which,
irrespective of moral guilt, the law declares
fraudulent because o f its tendency to deceive
others, to violate confidence, or to injure public
interests.” Archer v. Griffith, 390 S.W.2d 735,
740 (Tex. 1965). State appellate courts
frequently intimate that this occurs only where
there is a fiduciary relationship between the
parties,7 and a “decision by an intermediate
appellate state court is a datum for ascertaining
state law which is not to be disregarded by a
federal court unless it is convinced by other
persuasive data that the highest court of the
state would decide otherwise.” First Nat’l
Bank v. Trans Terra Corp. Int’l, 142 F.3d 802,
5(...continued)
made; (4) the defendant made the representation
with the intention that the plaintiff act on it; and (5)
the plaintiff detrimentally relied on the mis-
representation. See T.O. Stanley Boot Co. v. Bank
of El Paso, 847 S.W.2d 218, 222 (Tex. 1992).
6 As a result, we do not reach Helmand’s argu-
ment that, under Trans-Gulf Corp. v. Performance
Aircraft Servs., Inc., 82 S.W.3d 691 (Tex.
App.SSEastland 2002, no pet.), Joslin lacks stand-
ing to sue Helmand for negligent misrepresentation.
7 See, e.g., Jean v. Tyson-Jean, 118 S.W.3d 1, 9
(Tex. App.SSHouston 2003, pet. filed) (“Construc-
tive fraud is the breach of a legal or equitable duty
which the law declares fraudulent because it violates
a fiduciary relationship.”); Connell v. Connell, 889
S.W.2d 534, 542 (Tex. App.SSSan Antonio 1994,
writ denied) (“To prove constructive fraud
appellants must introduce evidence that Alvin
breached a legal or equitable duty, which the law
declares fraudulent because it violated a fiduciary
relationship.”).

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809 (5th Cir. 1998).
Joslin does not dispute that there is no evi-
dence of such a relationship here, but instead
relies on dictum in Vickery v. Vickery, 999
S.W.2d 342 (Tex. 1999), for the proposition
that a fiduciary relationship is not necessary.
His argument has no merit. In Vickery, id. at
378, the court indicated that constructive fraud
is “most frequently” found only in cases where
such a relationship exists, but it did not cite a
single instance where a fiduciary relationship
was not present and the tort was nevertheless
found to lie.
Joslin does not cite any such cases either,
nor has our research revealed any. In any
event, Joslin fails to point to anything that
would qualify as a commensurate “legal or
equitable duty,” Archer, 390 S.W.2d at 740,
that would justify excusing his inability to
prove an intent to deceive on Helmand’s part.
The district court properly granted j.m.l. on
this ground.
Joslin concedes that the above stated
analysis also forecloses his claim of conspiracy
to commit constructive fraud, because the
alleged conspiracy would have, as its object,
the commission of a non-tortious act. More-
over, there can be no conspiracy here, because
Joslin asserts nothing more than that Helmand
directed his wholly-owned close corporation
to act for his benefit, and there is, accordingly,
no allegation of a meeting of two independent
minds. See Elliott v. Tilton, 89 F.3d 260, 265
(5th Cir. 1996). The district court properly
granted j.m.l. on this ground, as well.
Inasmuch as we reverse all damages award-
ed to Joslin, the question of prejudgment inter-
est is moot. The judgment is REVERSED in
part and AFFIRMED in part, and we
RENDER a take-nothing judgment against
Joslin.

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