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UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
__________________
No. 90-2882
__________________
IN RE: FIGGIE ACCEPTANCE CORPORATION,
DOUGLAS CHERRY,
Appellant,
versus
WOODSMALL FINANCIAL SERVICES, INC.,
f/k/a/ ENERGY ASSURANCE, INC.,
Appellee.
* * * * * *
__________________
No. 91-2069
__________________
IN THE MATTER OF: FIGGIE ACCEPTANCE CORPORATION,
Debtor.
FIGGIE ACCEPTANCE CORPORATION, ET AL.,
Appellees,
versus
DOUGLAS CHERRY, JONATHAN C. S. COX,
and MICHAEL WHITE,
Appellants.
______________________________________________
Appeals from the United States District Court for the
Southern District of Texas
CA H 88 1155
______________________________________________
March 31, 1993

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* Local Rule 47.5 provides: "The publication of opinions that
have no precedential value and merely decide particular cases on
the basis of well-settled principles of law imposes needless
expense on the public and burdens on the legal profession."
Pursuant to that Rule, the Court has determined that this opinion
should not be published.
2
Before REYNALDO G. GARZA, GARWOOD, and DUHÉ, Circuit Judges.*
GARWOOD, Circuit Judge:
A lender brought suit to collect on guaranty agreements signed
by three individuals as part of their investment in an oil and gas
venture. The guarantors brought cross-claims for fraud and
securities violations against the organizers and promoters of the
venture, raised suretyship and breach-of-contract defenses against
the lender, and brought counterclaims of breach of fiduciary duty,
breach of good faith, and negligence against the lender. The
district court rendered summary judgment against the guarantors on
their counterclaims and cross-claims, and granted summary judgment
in favor of the lender for the full amount of the guaranties. On
this appeal by the guarantors, we affirm.
Facts and Proceedings Below
Energy Assets International Corporation (EAIC) was a publicly
held corporation that organized a joint venture in 1984 to
purchase, develop, and resell oil and gas properties. It did so by
creating a new corporation, West Basins Exploration, Inc. (Webex),
and offering Webex stock for sale through a private placement. The
price of the stock was $1 per share, and in purchasing the stock
investors agreed to guarantee, severally, a part of Webex's line of
credit proportionate to their ownership of Webex's common stock.

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3
The money borrowed by Webex and guaranteed by the investors was to
constitute 90% of the joint venture's operating funds; EAIC was to
contribute the remaining 10%, as well as transfer some of the oil
and gas prospects it then held to the joint venture in exchange for
reimbursement of their cost. EAIC, the managing partner of the
venture, was to receive 55 percent of the profits over the
venture's 3-year term, and Webex the remaining 45 percent.
Douglas Cherry (Cherry) was a personal injury attorney who
invested in Webex, allegedly on the advice of his accountant Carol
Cantrell (Cantrell) and on the representations of Fred Hofheinz
(Hofheinz) and Donald Reiser (Reiser). Hofheinz was a director and
major shareholder of EAIC; together with Reuben Askanase
(Askanase), he held a controlling interest in EAIC through Fargo
Partnership (Fargo). Reiser was an officer of Tangent, a company
affiliated with EAIC.
Michael White (White) and Jonathan Cox (Cox) were two other
Webex investors. White was vice-president of EAIC in 1984, and Cox
was his attorney. After the formation of Webex, White became an
officer and chairman of the board of Webex. Cherry also became a
Webex director.
All three of these investors signed irrevocable subscription
agreements in July or August of 1984--Cherry for 500 shares of
Webex, White for 100, and Cox for 200. The subscription
agreements, in addition to obligating the investors as guarantors,
provided that the investor "further understands that the Webex Bank
Line will be further secured by a surety bond issued by a national
insurance underwriter." On October 31, 1984, Webex and Figgie

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1 In their subscription agreements, investors agreed to
guarantee $1000 of debt for each share they purchased. Four
thousand six hundred shares of Webex stock were sold, so the
shareholders ended up guaranteeing 1/4600 of a $4 million credit
line for each share they owned.
4
Acceptance Corporation (Figgie) entered into a three-year credit
agreement under which Figgie gave Webex a revolving line of credit
with a $4 million ceiling. Webex gave Figgie a promissory note
evidencing the debt and, pursuant to their subscription agreements,
Cherry, White, and Cox signed guaranty agreements for Figgie, also
dated October 31st, guaranteeing their portion of the debt.1 Webex
paid $140,000 at closing as a premium for a surety bond. Figgie
had its affiliate Waite Hill Services hire third-party defendant-
appellee Energy Assurance Co. (now named Woodsmall Financial
Services, Inc., and hereinafter referred to as "Woodsmall") to
investigate whether Figgie should make the bond itself (through an
affiliated company) or should seek out another surety. Woodsmall
reviewed financial information on EAIC and the joint venture and
concluded that Figgie should make the bond. Figgie decided to do
so through its affiliate Colony Insurance Company (Colony).
Woodsmall kept $20,000 of Webex's premium, and Figgie split the
remainder with Colony.
Amid the sustained drop in oil and gas prices in the mid-
1980s, the joint venture was a failure almost from the outset.
Webex's draws on the line of credit consistently exceeded its
payments of principal and interest, and its indebtedness to Figgie
grew steadily from 1984 to 1987. In late 1986, White resigned from
EAIC and the Webex board of directors, a decision he now claims was

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2 The only bond in the record is one dated March 3, 1988, well
after Webex's default.
5
prompted by his realization that the venture was being managed in
EAIC's interest and in the personal interests of Hofheinz and
Askanase, rather than in the Webex shareholders' interests.
On January 30, 1987, Cherry sued EAIC, Webex, the joint
venture, Hofheinz, and Askanase in state district court in Harris
County, Texas, alleging that he had been fraudulently induced to
invest in Webex and guarantee Webex's indebtedness.
Upon maturity of the note on October 31, 1987, at which time
Webex's indebtedness to Figgie equalled approximately $3.6 million,
Webex was unable to pay, and Figgie promptly demanded payment on
the guaranties from the Webex investors. Apparently no surety bond
had been issued.2 On November 5, 1987, Cherry amended his petition
in the state case to name Figgie and others as defendants. On
February 4, 1988, Figgie commenced 18 separate collection suits in
the Eastern District of Virginia against the guarantors, including
Cox, White, and Cherry. The cases were transferred on March 29,
1988 to the Southern District of Texas. On April 20, 1988, Cherry
filed a plea in abatement in the federal suit, and also offered an
affirmative defense and counterclaim alleging misrepresentations
and omissions by Figgie in obtaining the guaranty. All of the
collection suits in the Southern District of Texas were
consolidated on June 13, 1988. Although Cherry's plea apparently
was not formally ruled upon, no further action was taken on
Figgie's suit against him for the next twenty-two months.
On August 24, 1988, a group of Webex investors including Cox

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3 Webex was later substituted for the investors on the
derivative claims. The claims were dismissed on August 29, 1990
for want of prosecution and are not a subject of this appeal.
6
and White filed an answer, counterclaim against Figgie, and third-
party complaint against EAIC and Webex, alleging that those
entities had conspired to induce them to enter into the guaranty
agreement through misrepresentations about the structure of the
investment and marketing of the transaction. Through several
motions by EAIC and Webex for a more definite statement as required
by Federal Rule of Civil Procedure 9(b), and several amendments by
the Webex investors, it was clarified that the investors were
bringing shareholders' derivative claims against EAIC for breach of
fiduciary duty and negligence,3 and were also suing EAIC directly
for breach of the subscription agreement, securities fraud under 15
U.S.C. §§ 77l and 78j(b), securities fraud under section 33 of the
Texas Securities Act, Tex. Rev. Civ. Stat. Ann. art. 581-33 (Vernon
Supp. 1992), and statutory fraud under Tex. Bus. & Com. Code §
27.01 (Vernon 1987). In addition, they alleged that EAIC and
Figgie together had committed common-law fraud, civil conspiracy,
negligent misrepresentation, and RICO violations under 18 U.S.C. §§
1962(c) and (d). The investors also brought separate claims for
relief against Figgie. They argued that in continuing to lend
money to Webex despite Webex's noncompliance with the terms of the
credit agreement, including the obligation to periodically furnish
financial statements, Figgie (1) materially breached the guaranty
agreement, releasing the investors from all obligations, (2) was
guilty of negligence, and (3) breached the duty of good faith and

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4 In the final judgment issued on October 19, 1990, the amounts
were $224,496.99 from Cox and $119,748.28 from White.
7
fair dealing owed to the Webex investors.
By February 1990, all of the Webex investors who had brought
those claims had agreed to settle with Figgie and EAIC, except for
Cox and White. Following a hearing on February 21st, the district
court issued an order directing that Cox and White take nothing
from EAIC, and granting Figgie a judgment against Cox and White for
the full amount of the guaranties.4
At the same hearing, the court announced that it would again
proceed with Figgie's suit against Cherry, which had been
informally abated pending the state court action. On May 4, 1990,
Cherry filed a cross-claim against EAIC and third-party complaint
against the joint venture, its promoters, and other entities
involved, namely Fargo, Hofheinz, Askanase, EAIC executive vice-
president Donald Lehto (Lehto), Colony, and Woodsmall. Cherry
alleged violations of the registration and anti-fraud provisions of
the Securities Act of 1933, 15 U.S.C. §§ 77e, 77l, and 77o, and of
the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78o;
violations of the registration and anti-fraud provisions of the
Texas Securities Act, Tex. Rev. Civ. Stat. Ann. arts. 581-7, 581-
12, and 581-33 (Vernon 1964 & Supp. 1992); breach of the
subscription agreement; statutory fraud under Tex. Bus. & Com. Code
§ 27.01 (Vernon 1987); common-law fraud; civil conspiracy;
negligence; and violations of the Texas Deceptive Trade Practices
Act (DTPA), Tex. Bus. & Com. Code Ann. § 17.46 (Vernon 1987). At
hearings in September and October 1990, the district court granted

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8
summary judgment against Cherry on his counterclaim against Figgie,
on his cross-claim against EAIC, and on all of his third-party
complaints, and entered judgment against Cherry and in favor of
Figgie in the amount of $559,733.
Cox, White, and Cherry (Guarantors) bring this appeal.
Discussion
We review a summary judgment de novo to determine whether,
when viewed in the light most favorable to the party opposing the
motion, the record discloses no genuine issue of material fact and
demonstrates that the moving party is entitled to judgment as a
matter of law. Crenshaw v. General Dynamics Corp., 940 F.2d 125,
127 (5th Cir. 1991). Summary judgment is proper "against a party
who fails to make a showing sufficient to establish the existence
of an element essential to that party's case, and on which that
party will bear the burden of proof at trial." Celotex Corp. v.
Catrett, 106 S.Ct. 2548, 2552 (1986).
I. Guarantors' Third-Party Claims Against EAIC and the Other
Promoters
A. Fraudulent inducement
The essence of the Guarantors' complaint against EAIC and the
other promoters is that the joint venture was conceived and managed
entirely for the benefit of the persons and entities who controlled
EAIC and Tangent, namely Hofheinz, Askanase, Lehto, and Reiser.
Specifically, the Guarantors suggest that by transferring worthless
or high-risk properties to the venture, these persons could recoup
their costs and spread the risk over all the Webex investors. The
Guarantors contend that the true purpose of the venture was

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5 This representation, like many of the ones alleged, was made
to Cox only indirectly, through White.
9
concealed from them through a number of material omissions from the
Confidential Memorandum given to prospective Webex investors, and
through oral misrepresentations by the Webex promoters.
Cherry alleges that some of the oil and gas prospects
designated for assignment to the joint venture were ones that
Hofheinz, Askanase, and Lehto had previously attempted to develop
through other entities in which they held substantial interests,
namely Allegro Exploration, Inc. (Allegro) and Northstar Resources,
Inc. (Northstar), and that the Memorandum failed to disclose that
these were high-risk "wildcat" areas. Cherry alleges that Sohio
Petroleum Company (Sohio), engaged in a joint venture with Allegro,
had begun to abandon leases in a region called the Salinas Valley
play after considerable expenditures there had failed to yield any
production, and that Northstar assumed some of those leases. He
further contends that Northstar did not have enough money to pay
the delay rentals on all of those prospects, that Webex was formed
in part to assume these obligations, and that some leases from the
Salinas play were transferred to the EAIC-Webex joint venture. Cox
and White contend that the Gatchell Channel and Schutti Shot
prospects were ones that EAIC had already decided to drop. Cox and
White further claim that they were told that some of the prospects
to be transferred to the venture had already been presold, i.e.,
that buyers had already committed to buy them from the venture.5
The Guarantors also point to the Memorandum's statement that the
prospects would be transferred to the venture "at cost," claiming

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10
that it misleadingly implied a bargain when in fact the market
value for some of the prospects had fallen below their cost basis.
Cherry notes that the Memorandum failed to divulge that some of the
prospects that were to be transferred to the venture produced
"heavy" oil, which is more expensive to refine and thus more
vulnerable in a weak market.
The Guarantors claim that although the Memorandum noted the
joint venture's plan to reassemble a team of geologists previously
used by Allegro, and provided detailed information about the
results obtained by that team for Allegro (mainly dry holes), it
failed to explain that this history would adversely affect the
marketability of the joint venture's prospects.
Cox and White contend that there were other conflicts of
interest, in addition to the promoters' financial stake in deciding
which prospects would be transferred to the venture, that the
Confidential Memorandum failed to disclose: these included the
significant investments in EAIC by Webex presidents Lehto and
Thomas Martin (Martin), and a plan to place Webex funds in Texas
American Bank as compensating balances for loans to other entities.
The Guarantors also all claim that they detrimentally relied
upon the promoters' characterization of the investment as a special
deal that was being offered only to EAIC insiders and that promised
profits with little or no risk. They contend that Hofheinz and
Askanase told them that the lender had agreed to look first to
Webex, then to the assets acquired by the joint venture, and
finally to EAIC for repayment, so that the investors' guaranties
were virtually riskless. Cox and White claim that the promoters

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11
indicated that EAIC would see to it that the investors would never
be called upon to pay on the guaranties. Cox and White also claim
that the Memorandum inaccurately characterized the California gas
market as "very strong and stable."
Finally, Cherry contends that Hofheinz and his affiliates were
secretly paying Cherry's accountant Cantrell a commission to
recommend their investments, and that Cherry's reliance on
Cantrell's recommendation, which he believed represented her
independent and disinterested assessment, was therefore
fraudulently induced.
1. Federal securities law
Of their fraud claims based on federal securities law, the
Guarantors press in this appeal only their argument under section
10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),
and SEC Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.
In order to establish a violation of Rule 10b-5, a plaintiff
must show:
"(1) a misrepresentation or omission or other fraudulent
device; (2) a purchase or sale of securities in connection
with the fraudulent device; (3) scienter by defendant in
making the misrepresentation or omission; (4) materiality of
the misrepresentation or omission; (5) justifiable reliance on
the fraudulent device by plaintiff (or due diligence against
it); and (6) damages resulting from the fraudulent device."
Fine v. American Solar King Corp., 919 F.2d 290, 294 (5th Cir.
1990) (quoting Warren v. Reserve Fund, Inc., 728 F.2d 741, 744
(5th Cir. 1984)), cert. dismissed sub nom. Hurdman v. Fine,
112 S.Ct. 576 (1991).
Information is "material" for purposes of a 10b-5 action if a
reasonable investor would view it as significantly altering the
total mix of information available concerning the value of the
security. Securities & Exchange Commission v. Fox, 855 F.2d 247,

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12
252 (5th Cir. 1988). Materiality is a mixed question of law and
fact, TSC Industries, Inc. v. Northway, Inc., 96 S.Ct. 2126, 2132-
33 (1976), and though ordinarily a determination for the jury, a
misstatement may be immaterial as a matter of law if the facts are
so obviously unimportant to an investor that reasonable minds
cannot differ on the question of materiality. Huddleston v. Herman
& MacLean, 640 F.2d 534, 544 n.14 (5th Cir. Unit A 1981), aff'd in
part and reversed in part on other grounds, 103 S.Ct. 683 (1983).
For the most part, the statements or omissions relied upon by the
Guarantors are not misrepresentations at all; to the extent that
the Guarantors have identified statements or omissions with some
potential to mislead, the alleged misrepresentations are not
significant enough that a reasonable juror could regard them as
significantly altering the total mix of information about the Webex
investment.
Regarding the prospects that were to be transferred to the
joint venture, the Confidential Memorandum listed each prospect and
the costs attributable thereto through June 30, 1984. Once
investors were told which prospects were to be transferred and the
cost of each, the full and fair disclosure sought by the securities
laws had been achieved. The investors' failure to ascertain
whether or not the listed prices were favorable cannot be
attributed to a misrepresentation by the borrowers, especially
when, as here, the only alleged misrepresentation is the true
statement that the prospects were to be transferred "at cost."
Moreover, the Guarantors tendered no evidence of the prospects'
market value in 1984 that would support the conclusion that the

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13
value was below the cost basis. The Memorandum also did not
indicate that any prospects had been presold; it merely listed the
companies that had purchased prospects from Allegro, and indicated
that in addition EAIC had "been approached by several new
prospective purchasers." If the promoters made a more definite
representation about prospective purchasers, it was an oral one,
and the Guarantors in their subscription agreements expressly
disavowed any reliance on representations other than those in the
Memorandum and attached exhibits. The Memorandum further stated
that since EAIC itself had not conducted any prior operations, the
results of the Allegro exploration staff were the best available
track record for investors to examine. It then gave a table
showing the prospects in California and Colorado that Allegro had
sold, the sales price for each, the cost for each prospect, the
drilling costs for carried wells, and the results for the wells
(primarily dry holes). To further include in the Memorandum
speculation about how this performance history would affect
marketability of the joint venture's prospects is beyond the
requirements of the securities laws.
The only concrete allegations of this nature made by the
Guarantors are that the Confidential Memorandum failed to disclose
that specific prospects had already been rejected by EAIC or one of
the affiliated ventures. In support of his contention that the
Salinas Valley acreage was such a prospect, Cherry furnished an
affidavit from a manager with Sohio during the 1983-84 joint
venture between Sohio and Allegro. The affiant stated that in his
opinion, after the initial well in the Salinas Valley had been

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14
drilled, tested, and abandoned by Sohio in 1983, Sohio believed the
area was not promising for further development and did not expect
to recover its costs by selling the prospect to another company.
However, Lehto testified in his deposition that only a very small
portion of the Salinas Valley acreage held by Sohio wound up in the
EAIC-Webex joint venture; he stated that the remainder was not
regarded as viable and was let go. There was no contrary evidence.
And, the Guarantors have offered no proof that the particular
acreage transferred to the joint venture had been deemed worthless.
Moreover, the transfers appear to have been decided upon and made
in 1985, after the Webex venture was already a going concern and
Cherry had already committed himself as a guarantor. There is no
contrary evidence. And, Cherry has not produced any evidence that
there were any plans for the Salinas Valley prospects at the time
of his investment that were concealed from the investors.
Cox and White's contention about the Gatchell Channel and
Schutti Shot prospects is based on an EAIC internal prospect review
dated July 9, 1984. For both prospects, the report recommends that
EAIC not spend further money trying to develop them; it suggests
that EAIC either find a driller and retain a small carried
position, or drop the prospect. According to the EAIC-Webex joint
venture agreement, which was attached as an exhibit to the
Confidential Memorandum, the total cost of all the prospects to be
transferred from EAIC to the venture was approximately $170,000.
Combined, the Gatchell Channel and Schutti Shot prospects
represented only $946 of that total. Lehto testified that
acquisition of those prospects for a very small investment, in the

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15
hopes of finding someone to drill the prospects without cost to the
joint venture, was a reasonable business decision. Even if this
business strategy were the type of information that would have been
considered important by the average investor, the information
regarding these two minor prospects does not significantly alter
the total mix of information in the Confidential Memorandum, and
does not support Cox and White's theory that the joint venture was
a scheme by EAIC to get out from beneath its unprofitable
investments.
The specific conflicts of interest alleged by Cox and White
are similarly incapable of supporting a 10b-5 cause of action. The
factual basis for the conflicts is that Martin, the president of
Webex at its formation in October 1984, had borrowed $10,000 from
Fargo and used the money to purchase EAIC stock, and Lehto,
Martin's successor, held a warrant giving him the right to purchase
$375,000 in shares of EAIC. The Confidential Memorandum had a
separate section entitled "Conflicts of Interest," in which it
stated that although as Managing Venturer EAIC had a duty to deal
fairly with Webex, in some situations the interests of EAIC and
Webex might diverge. It noted that several individuals who had
expressed interest in becoming Webex shareholders were also
shareholders in EAIC, including Hofheinz and Askanase, who held a
controlling interest in EAIC. The Memorandum further noted that in
the event any Webex board member or officer was also an EAIC
shareholder, there existed a potential conflict of interest, and
that prior to the formation of the Webex board, a full description
of the candidates would be circulated, and any potential conflicts

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6 Cox and White have offered absolutely no evidence in support
of their contention that Webex funds were deposited at Texas
American Bank as compensating balances for loans to Hofheinz's and
Askanase's other business interests.
16
discussed. Cox and White allege that they were never informed of
Martin's or Lehto's holdings. For a Rule 10b-5 cause of action,
however, they need to demonstrate a material representation that
was false when made and that induced their investment in August
1984. Instead, they have at best alleged (without any supporting
evidence of the information that was distributed when Martin or
Lehto was elected) that EAIC, at a time subsequent to their
investment, failed to comply with a representation in its offering
memorandum. Moreover, since EAIC fully apprised them in the
Memorandum of the possibility of conflicts of interest, they have
not shown that their investment was induced by a material
misrepresentation.6
The Guarantors' claims that the investment was presented to
them as one that was virtually riskless are contrary to the
Confidential Memorandum, which stated in bold capital letters on
the cover that "purchase of common stock in this enterprise and the
proportionate guarantee of the credit line of this enterprise
involve a high degree of investment risk and are suitable only for
a person of substantial means who has no need for liquidity in his
investment." A section of the Memorandum entitled "Certain Risk
Factors" further warned of the speculative nature of oil and gas
operations, and cautioned that participation in the venture was
intended "only for persons who are sophisticated investors able to
evaluate the risks involved and who can afford to lose all, or

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17
substantially all, of their investment." Moreover, we do not
believe that any investor could have reasonably relied upon a
representation that this investment, in which investors put up only
$1 for a 1/4600 share in 45 percent of a $4 million venture, was
risk-free. The specific misrepresentation alleged by the
Guarantors--that the lender had agreed to look to joint venture
assets and to EAIC before attempting to collect on the guaranties--
is contrary to the facially unqualified guaranty agreements signed
by all three Guarantors.
In support of their claim that the Memorandum misrepresented
the strength of the California gas market, Cox and White point out
that the Memorandum neglected to mention oil prices' dramatic
effect on natural gas consumption, the recent availability of large
amounts of cheap hydroelectric power from the Pacific Northwest,
the existence of only two primary pipeline companies in California,
and a then-pending regulatory matter before the California Public
Utilities Commission. The part of the Confidential Memorandum on
which this theory is predicated is the single statement that
prospective purchasers were "especially interested in natural gas
prospects in California because the market for gas is very strong
and stable in California." This statement, even if read to contain
an implicit prediction that the stability of the California market
would help to ensure its continued strength, does not rise to the
level of a securities violation. Although we have recognized that
predictions may be actionable if "false"--judged by whether the
prediction suggested reliability, whether it was made in good
faith, whether it bespoke caution, and whether it had a sound

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18
factual or historical basis, Isquith v. Middle South Utilities,
Inc., 847 F.2d 186, 203-04 (5th Cir.), cert. denied, 109 S.Ct. 310
(1988)--the prediction in this instance is not actionable under
those criteria. It was a single, rather vague statement couched
among numerous warnings about the riskiness of this investment. In
addition to the warnings mentioned above, the section of the
Memorandum on risk factors alerted prospective investors in general
terms to the risks of regulatory action, availability of pipeline
facilities, and the level of supply and demand for oil and gas.
Finally, Cherry has failed to make out a cause of action based
on the alleged kickbacks paid to Cantrell by EAIC or the individual
promoters. There was testimony that in 1984 Cantrell referred
customers to Reiser, and that Reiser paid Cantrell a commission
each time one of those customers invested in a Tangent program.
Cantrell stated in her bankruptcy proceeding that Reiser would be
listed as the selling representative on such sales, and that he
would split with her the commission he received. She admitted that
she did not inform her clients of this arrangement and that she and
Reiser disguised the payments as accounting fees rather than
commissions. Although there was testimony that Cantrell received
a commission for Cherry's investment in a Tangent program in 1984,
it was not the Webex venture; neither Reiser nor Cantrell testified
to the payment of any commission in connection with the Webex
investment. Indeed, since Tangent was not part of the Webex
venture, it seems unlikely that Reiser would have received a
commission to split with Cantrell under the arrangement as
described in the testimony. Moreover, Cherry's effort to hold EAIC

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19
or the other promoters vicariously liable for a securities
violation by Cantrell fails because he has not identified any
particular misstatement about the Webex venture made to him by
Cantrell.
2. Other theories
Guarantors alternatively argue that the previously discussed
statements and omissions give rise to liability under a theory of
common-law fraud, under the Texas Securities Act, under the Texas
DTPA, under Texas statutory fraud, or under a theory of negligent
misrepresentation. Our holding that the Guarantors have failed to
demonstrate any material representation made to them that was false
or misleading forecloses liability under all of these theories as
well. See DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 688 (Tex.
1990) (listing the elements of common-law fraud, including "a
material misrepresentation, which was false"), cert. denied, 111
S.Ct. 755 (1991); Tex. Rev. Civ. Stat. Ann. art. 581-33(2) (Vernon
Supp. 1992) (imposing liability for offering or selling a security
"by means of an untrue statement of a material fact or an omission
to state a material fact necessary in order to make the statements
made . . . not misleading"); McCrea v. Cubilla Condominium Corp.,
685 S.W.2d 755, 759 (Tex. App.--Houston [1st Dist.] 1985, writ
ref'd n.r.e.) ("[F]or a party to have a misrepresentation cause of
action under the DTPA, the misrepresentation must have been
material to the transaction."); Haralson v. E.F. Hutton Group,
Inc., 919 F.2d 1014, 1025 & n.4 (5th Cir. 1990) (Tex. Bus. & Com.
Code Ann. § 27.01 imposes the same requirement of materiality as
common-law fraud); Federal Land Bank Association of Tyler v.

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20
Sloane, 825 S.W.2d 439, 442 (Tex. 1991) (Texas cause of action for
negligent misrepresentation is based on Restatement (Second) of
Torts § 552, which imposes liability on one who "supplies 'false
information'").
B. Registration requirements under state law
Cherry argues that EAIC failed to establish its entitlement to
an exemption from the Texas Security Act's registration
requirements. However, the uncontroverted evidence, contained in
an affidavit by Hofheinz, was that the Webex offering involved no
public solicitation or advertising and that it was offered to fewer
than 35 persons. Hofheinz also stated that all investors were
either stock market professionals, were connected to EAIC, or had
some personal connection to EAIC personnel and represented
themselves as persons of economic means and investment experience.
These facts would exempt the transaction from registration under
Tex. Rev. Civ. Stat. Ann. art. 581-5(I)(a) (Vernon Supp. 1992).
C. Breach of contract
Cox and White claim that EAIC breached the subscription
agreement by failing to obtain a surety bond. Although, as
previously mentioned, the subscription agreement did contain a
clause providing that the investor understood that the Webex bank
line was to be secured by a surety bond, we do not read this clause
to contain a promise by EAIC to the investor-guarantor. A surety
bond would have been for the benefit of the lender; the amounts now
owed Figgie by the Guarantors as a result of their investment would
be owed to the surety if one had been obtained. The Shareholders'
Agreement between Webex and the Guarantors stated:

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21
"If required, the borrowing of the Company will be
further guaranteed by third parties, which guarantee may
be in the form of a surety bond . . . . To secure any
surety bond, each Shareholder agrees to furnish the
Company, the Bank generating the Webex Bank Line and any
such third party with such Shareholder's confidential
financial statement."
Given this language in the Shareholders' Agreement, the most
plausible function of the clause in the subscription agreement is
to evidence the investors' awareness that a surety bond for the
lender would be sought and their willingness to cooperate in its
procurement.
In affidavits filed in opposition to Figgie's motion for
summary judgment, Cox and White suggested that the significance of
the representation was its assurance to investors that the Webex
venture would be reviewed by an independent national insurance
underwriter. They stated that had they been informed that no bond
would be supplied, they would not have signed the guaranty
agreements. In a separate affidavit, Cox indicated that the
knowledge that the proposed surety was a Figgie affiliate would
have been important to him in deciding whether to invest in Webex.
These arguments are not persuasive because the subscription
agreement does not purport to say that an independent entity had
reviewed the investment; it is difficult to see what assurance an
investor would derive from the possibility that at some point after
he had signed an irrevocable subscription agreement, a national
underwriter would examine the investment. At best, Cox and White
might be stating another claim of misrepresentation, yet they do
not even suggest that EAIC did not believe in August 1984 that the
lender would seek a surety bond. All of the evidence, including

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22
EAIC's subsequent payment of $140,000 of Webex funds as a premium
for a surety bond, indicates the contrary.
D. Fraud claim against Woodsmall
Woodsmall is an insurance and surety bond broker whose role in
the transaction was limited to acting as a broker in arranging
financing for the Webex venture. Woodsmall was approached in 1984
by certain officers and directors of EAIC. Woodsmall sought
financing for the venture from Figgie, and at Figgie's request
collected financial data on the venture and on the individual
investors. The ultimate decisions of whether to fund the venture
and whether to obtain a surety bond rested solely with Figgie.
Cherry alleges that in its investigation Woodsmall reached the
conclusions that poor prior performance by EAIC technical staff
would create problems in trying to market Webex prospects, and that
an independent program monitor for the venture would be very
valuable to the underwriter. Cherry contends that in failing to
see that this information was communicated to Webex investors,
Woodsmall committed or aided common-law fraud or a deceptive trade
practice. We held in part I(A) that the evidence would not sustain
a finding that the sales of the Webex securities to these investors
were effected through fraud or deception; this necessarily
forecloses the argument that Woodsmall aided EAIC in one of these
offenses. Furthermore, because Woodsmall acted only as a broker
between EAIC and Figgie, and played no part in the solicitation of
investors for Webex, we find no conceivable grounds to impose upon
Woodsmall a duty of disclosure to investors. By Cherry's own
admission, Woodsmall made no representations to him. We therefore

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23
likewise reject Cherry's claim that Woodsmall independently
committed fraud or a deceptive trade practice.
II. Figgie's Suit Against the Guarantors
The Guarantors' arguments to resist Figgie's collection suit
fall into three categories: alleged breaches of the guaranty
agreements, alleged material modifications of the underlying credit
agreement that excuse performance by the guarantor under common-law
principles, and alleged breaches of a duty of good faith and fair
dealing. In addition, the Guarantors argue that the district court
erred in failing to reduce Figgie's judgment against them by
$500,000, which Figgie recovered from EAIC under a reimbursement
agreement.
A. Breach of the guaranty agreements
The Guarantors' breach-of-contract arguments focus on two
provisions of the guaranty agreements they entered into with
Figgie. Paragraph 4 states that Figgie "may renew, extend, modify,
change or waive the time of payment and/or the manner, terms or
place of payment, and may upon prior written notice to and written
consent from Guarantor, renew, extend, modify or waive any part of
any other obligations referenced in this Guaranty without effecting
[sic] the Guarantor's liability under this Guaranty." Paragraph 6
states that Figgie "agrees that upon the occurrence of an Event of
Default as defined in the Promissory Note or Credit Agreement, it
shall immediately notify Guarantor in writing."
The Guarantors first argue that Webex continually failed to
make timely interest payments, which constituted an Event of
Default under the credit agreement, yet Figgie failed to notify the

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7 See, e.g., Carr v. Norstok Building Systems, Inc., 767 S.W.2d
936, 939 (Tex. App.--Beaumont 1989, no writ); Joseph v. PPG
Industries, Inc., 674 S.W.2d 862, 867 (Tex. App.--Austin 1984, writ
ref'd n.r.e.).
24
Guarantors as required by Paragraph 6 of the guaranty agreements.
Events of Default are defined in Article VII of the credit
agreement between Figgie and Webex; section 7.01(a) lists events
that constitute Events of Default if not cured within 30 days after
written notice from Figgie to Webex, and section 7.01(b) lists
events that "shall also be deemed to constitute an Event of Default
within this Agreement." One of the events listed in section
7.01(b) is that Webex "shall default in the making of any payment
of principal or interest when due on any debt owed to [Figgie]."
The Guarantors argue that Figgie therefore breached Paragraph 6 of
the credit agreement and, under the basic principle that a party
cannot recover on a contract after materially breaching it,7 should
now be precluded from collecting on the guaranties.
The record reveals that although some of Webex's quarterly
interest payments to Figgie were not paid on the first of the
month, as specified in the credit agreement, they were all paid in
the month they were due, and Figgie accepted them as timely.
Reading Paragraph 6 in conjunction with Paragraph 4, we find it
highly doubtful that Figgie's duty to notify the Guarantors was
intended to be triggered by technical Events of Default such as
this one. Paragraph 4 gives Figgie the right, without notice to
the Guarantors, to waive or modify the time allowed Webex for
interest payments. Here, insofar as the record reflects, Figgie
did not even expressly make this type of a modification of the

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8 Section 8.10 of the credit agreement requires an amendment or
waiver to be evidenced by a written instrument signed by the party
against whom enforcement of the change is sought. Figgie delivered
no such signed writing to Webex. Thus, Figgie's acceptance of late
payments did not constitute a modification of the contract.
25
agreement8; it simply accepted individual late payments.
Even if we accepted the reading of the two clauses suggested
by the Guarantors' argument, i.e., that Figgie was entitled under
Paragraph 4 to accept the late payments without resorting to its
contractual remedies, but was still obligated under Paragraph 6 to
notify the Guarantors of this fact, we would be unable to find that
Figgie's noncompliance excused the Guarantors from their basic
obligation to guarantee Webex's performance on the note. It is a
prerequisite to the remedy of excuse of performance that the
covenants in the contract be mutually dependent promises. Hanks v.
GAB Business Services, Inc., 644 S.W.2d 707, 708 (Tex. 1982).
Although reciprocal promises in a contract are presumed to be
mutually dependent absent intentions to the contrary, Dallas Market
Center v. The Swing, Inc., 775 S.W.2d 838, 842 (Tex. App.--Dallas
1989, no writ), the relation of the covenant to the overall
contract may furnish evidence of a contrary intention. See Hanks,
644 S.W.2d at 708 (when a covenant goes only to part of the
consideration on both sides and a breach may be compensated for in
damages, it is to be construed as an independent covenant if the
expressed intent of the parties permits that construction); Hampton
v. Minton, 785 S.W.2d 854, 857 (Tex. App.--Austin 1990, writ
denied) (performance is excused when the other party's breach is
"of such materiality as to indicate an intention to repudiate the

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26
contract"); Greenstein v. Simpson, 660 S.W.2d 155, 160 (Tex. App.--
Waco 1983, writ ref'd n.r.e.) (covenants are mutually dependent,
making excuse-of-performance defense available, only when "each
covenant is such an indispensable part of what both parties
intended that the contract would not have been made with the
covenant omitted").
The guaranty agreements in this case indicate that the
promises at issue here, at least as regards reporting this
character of late interest payment, were not mutually dependent
covenants. The agreements state on the first page that the
investor deems it in his interest that Figgie lend money to Webex,
and that he understands that Figgie is willing to do so only upon
certain terms and conditions, including the investors' pro rata
guaranty of Webex's performance. The agreements then state that
"Now, therefore, the undersigned, hereby agrees as follows:" and
list the various promises, including that "[f]or the valuable
consideration, set forth above . . . the undersigned hereby
unconditionally and absolutely guarantees the faithful and prompt
performance by Webex of the Guaranteed Portion of Webex's
obligations . . ." (emphasis added). Paragraph 6 is the only one
of the listed agreements imposing an affirmative obligation on
Figgie. And it must be read in context with paragraph 4. The
agreements are signed only by the Guarantors, not by Figgie. By
their terms, then, the agreements list the obligations of the
Guarantors given in exchange for Figgie's extension of credit to

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9 The arguable breach of Paragraph 6 by Figgie is not comparable
to the breach found to be of a "material provision," in Premier
Bank, National Association v. Mosbacher, 959 F.2d 562 at 567 n.2
(5th Cir. 1992). In that case, the breached provision prohibited
the creditor from agreeing to any modification of any obligation of
a party to the agreement without the prior written consent of the
guarantor. See id. at 566-67. Here, by contrast, the provision
dealt only with notice following an event of default by the debtor
(under a credit agreement in which "event of default" was defined
very expansively). The protection that the clause provided to the
creditor was not the basic right to consent to modifications to the
agreement, but merely the chance to take steps to protect itself
after default. See infra.
27
Webex.9
Clauses like Paragraph 6 embody an important protection for
guarantors. They ensure that, when a default has occurred, the
guarantor has an opportunity to cure it by making the payment and
thereby forestalling acceleration of the note, or if acceleration
has occurred, that the guarantor can immediately pay the debt and
exercise his right of subrogation before the debtor's financial
position further deteriorates. In the present context, to view
this clause, so far as it applies to the late interest payments
that Figgie was empowered to waive under paragraph 4, as not being
mutually dependent with the basic obligation to guarantee the debt,
however, effectuates the general rule regarding necessity to
provide notice: although failure by a creditor to provide notice
of default may reduce or defeat his ability to recover, the
guarantor is released only to the extent that he was prejudiced or
damaged by the lack of notice. 38 Am. Jur. 2d Guaranty § 107
(1968).
In this case, no consequences to the debtor or the Guarantors
arose from the tardiness of the interest payments. Any violation

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10 See McKnight v. Virginia Mirror Co., 463 S.W.2d 428, 430 (Tex.
1971).
28
of paragraph 6 in regard thereto was immaterial here. To allow
Paragraph 6 to release the Webex investors from their entire
obligation, when no harm resulted from Figgie's alleged
noncompliance on this matter, and when the clause's inclusion in
the guaranty agreement was not such as to make the covenant in this
respect a mutually dependent one with the basic obligation to
guarantee the debt, would expand the clause dramatically beyond its
ordinary and intended scope. Even under the principle of
strictissimi juris, mandating a strict construction in favor of the
Guarantors,10 we cannot hold that this character of possible
violation of Paragraph 6 under these circumstances would excuse the
Guarantors' performance.
The Guarantors argue that they were harmed by the lack of
notice of late interest payments because Figgie's notification
responsibilities under Paragraph 6 also served the crucial purpose
of alerting them to any deterioration in Webex's financial
condition. They argue that they were damaged by Figgie's failure
to give notice because, had they known of Webex's difficulty in
making interest payments on time, they could have taken action as
Webex shareholders to curtail Webex's draws on the line of credit
and check the increase in their liability on the guaranties. In
the present context, this argument is not persuasive. Both White
and Cherry were involved in the Webex venture at the outset,
serving on its board of directors, and White was a Webex officer
until late 1986. It is not plausible that Paragraph 6 served the

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29
role of keeping them abreast of Webex's financial condition. They
are, in effect, complaining of the unchecked progress of Webex
policies that they may have helped to implement and were certainly
in a position to influence. Cf. Federal Deposit Insurance Corp. v.
Coleman, 795 S.W.2d 706, 709 (Tex. 1990) (observing that guarantors
who held controlling interests in the debtor "were fully able to
protect themselves from any increased liability resulting from a
decline in the market value" of the collateral).
The Guarantors also allege that Figgie failed to notify them
of an Event of Default under section 7.01(b)(4) of the credit
agreement, which states that an Event of Default occurs if Webex
"shall be unable, or admit in writing its inability to pay its
debts as they mature." The Guarantors point out that as early as
1985, it became clear to Figgie that Webex was struggling and was
able to pay its debts only through further draws on the line of
credit. They do not, however, refer to any actual failure by Webex
to pay its debts to other entities, or to any collection efforts by
such entities. The Guarantors are essentially arguing that an
Event of Default under section 7.01(b)(4) could arise solely from
Figgie's concern about Webex's condition, even if not acted upon.
Such a construction would be at odds with other provisions of the
credit agreement. For instance, although section 3.06 gave Figgie
the right to refuse further advances under the line of credit if,
in its "sole determination," a "material adverse change" in Webex's
financial condition had occurred, the role of that clause was to
give Figgie discretion to halt advances. The Guarantors are
arguing that despite Figgie's decision not to halt advances, an

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11 Section 7.02(b) provided that upon the happening of any Event
of Default, Figgie's obligations would "immediately and
automatically cease and terminate unless and until [Figgie] shall
reinstate the same in writing." The inclusion of the word
"immediately" in this clause offers further evidence that the
parties contemplated that Events of Default would be concrete
events, not the type of general, incremental financial decline
relied upon by the Guarantors.
12 The Confidential Memorandum noted that it was expected that in
the first years of the venture, Webex would operate at a loss.
30
Event of Default occurred and, necessarily, all of the attendant
consequences under the credit agreement followed. One of these was
that Figgie's obligations were immediately and automatically
terminated unless and until reinstated by Figgie in writing.11 To
give section 7.01(b)(4) this construction would be essentially
inconsistent with the discretion afforded Figgie by section 3.06,
and would also place a start-up venture such as Webex in a nearly
impossible position.12 We therefore reject this interpretation.
Finally, the Guarantors allege that Figgie breached Paragraph
4 of the credit agreement by waiving material provisions of the
credit agreement without notice to or consent from the Guarantors.
Section 7.01(a) provides that if Webex defaults in any material
respect in the performance of any of its covenants under the
guaranty agreement, then such failure shall be deemed an Event of
Default if not cured within 30 days after written notice by Figgie
to Webex. Sections 5.02 and 5.04 of the credit agreement required
Webex to submit quarterly financial statements and "no default"
certificates. Based on the absence of several of these documents
in Figgie's files, the Guarantors argue that Figgie unilaterally
waived or modified those requirements in violation of Paragraph 4.

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13 Section 8.06 of the credit agreement stated that "[n]o course
of dealing on the part of [Figgie] . . ., nor any failure or delay
by [Figgie] with respect to exercising any of its rights, powers or
privileges under this Agreement, the Note or the Guaranty
Agreements shall operate as a waiver thereof."
31
Also, they allege that Webex suffered a "material adverse change in
condition," as defined in section 5.05, but never submitted a
statement describing such change to Figgie, as required by that
section. They do not allege that Figgie ever gave the written
notice to Webex required to make those occurrences Events of
Default.
The record does not reflect, and the Guarantors do not allege,
that Figgie ever indicated to Webex that the requirements of
sections 5.02, 5.04, or 5.05 were waived or modified. The
Guarantors appear to be relying on what was at most nonenforcement.
Figgie had the right under the credit agreement to give written
notice to Webex upon failing to receive any such statement, and
then resort to acceleration or other remedies if the problem was
not cured in 30 days. However, nothing in the contract as written
suggests that Figgie was obligated to follow that course. If
Figgie merely declined to avail itself of a particular remedy, as
it had discretion to do under the contract, and never relinquished
that remedy as to any future violations, we fail to see how Figgie
modified the contract or waived Webex's obligations.13 The
Guarantors similarly note that under section 8.01 Webex granted
Figgie a security interest and agreed to provide Figgie with
documents required by Figgie to perfect the security interest, but
that Figgie never acted to perfect the security interest. Again,

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32
no waiver or modification has been shown.
B. Common-law suretyship defense
The Guarantors argue that even if this inactivity by Figgie
did not constitute a breach of the guaranty agreements, it
materially altered the terms of the underlying debt arrangement,
excusing the Guarantors from their obligation. Under the common
law, guarantors may invoke a suretyship defense of material
alteration of contract: "if the creditor and principal debtor vary
in any material degree from the terms of their contract, then a new
contract has been formed and the guarantor is not bound to it."
Vastine v. Bank of Dallas, 808 S.W.2d 463, 464 (Tex. 1991) (per
curiam); United States v. Vahlco Corp., 800 F.2d 462, 465 (5th Cir.
1986).
Initially, we note that, unlike the situation in Vastine, the
agreement between the creditor and Guarantors in this case did
authorize modifications of the underlying credit agreement on such
matters as time of payment (Paragraph 4). We cannot regard the
remaining complained of matters, such as failure to take action to
strictly require the submission of financial statements and "no
default" certificates, as altering the Guarantors' obligation to
any material degree. Although in McKnight v. Virginia Mirror Co.,
463 S.W.2d 428 (Tex. 1971), the Texas Supreme Court did release a
guarantor because of somewhat similar violations--failure to
require weekly payments and inventories--in that case those
conditions were affirmatively imposed on the guaranteed creditor by
the express terms of the guaranty itself.

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33
C. Affirmative claims against Figgie
The Guarantors further argue that the district court erred in
granting summary judgment against them on their counterclaims
against Figgie because the conduct described above, especially
Figgie's failure to perfect its security interest in Webex's
assets, assertedly violated a duty of good faith and fair dealing
or constituted negligence. They argue that Figgie's willingness to
continue to permit draws on the line of credit despite Webex's
obviously dire financial condition showed a bad-faith or negligent
disregard for their rights. In addition, they argue, Figgie
assumed duties beyond the written guaranty agreement--for instance,
by undertaking to obtain a surety bond from an independent bonding
company--which it failed to pursue with ordinary diligence.
For the reasons explained above, we are not persuaded there is
any evidence to sustain a finding that any of the conduct
complained of caused any loss to the Guarantors. The surety bond
would have enhanced only Figgie's security, and both the timing of
the Guarantors' investments and their roles as Webex insiders belie
the contention that they were depending upon independent, external
review. Moreover, the Guarantors have not shown any special
relationship with Figgie warranting the imposition of fiduciary
duties. See Coleman, 795 S.W.2d at 709 ("[T]he relationship
between a creditor and guarantor does not ordinarily import a duty
of good faith.").
D. Entitlement to credit for $500,000 received from EAIC
The Reimbursement Agreement upon which the Guarantors rely is
an agreement between Colony and EAIC in which EAIC, in exchange for

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34
Colony's execution of surety bonds guaranteeing payment of the loan
guarantees of the Webex investors, agrees to pay Colony up to
$500,000 to reimburse it for any loss occasioned thereby, including
the expenses of bringing suit to collect on the guaranties. As
previously discussed, apparently no surety bond was executed in
time to be effective. In any event, the substance of the agreement
between EAIC and Colony was that EAIC would reimburse Colony for
losses caused by failures of the Guarantors to pay. This is
consistent with the descriptions in the record of the $500,000
payment from EAIC to Figgie; the money was stated to have been
placed in escrow while Figgie was continuing its collection efforts
against the Guarantors. Therefore, the Guarantors cannot rely on
the Reimbursement Agreement or on the $500,000 payment to offset
their liability.
Conclusion
Because the Guarantors have failed to raise a genuine issue of
material fact on any of their cross-claims against the promoters of
the Webex venture, their defenses against Figgie's collection suit,
or their counterclaims against Figgie, the judgment of the district
court is
AFFIRMED.

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