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IAS Services Group, L.L.C. v. Jim Buckley & Associates, Inc.

United States Court of Appeals, Fifth Circuit

August 17, 2018

IAS SERVICES GROUP, L.L.C., Plaintiff - Appellant
v.
JIM BUCKLEY & ASSOCIATES, INCORPORATED; JAMES BUCKLEY, Individually, and as Co-Trustee of the Buckley Family Trust; BARBARA BUCKLEY, Individually, and as Co-Trustee of the Buckley Family Trust, Defendants - Appellees

          Appeal from the United States District Court for the Western District of Texas

          Before CLEMENT, HIGGINSON, and HO, Circuit Judges.

          STEPHEN A. HIGGINSON, CIRCUIT JUDGE

         This is a case about a business deal gone sour between two insurance-claims-adjusting firms. Looking to expand, Plaintiff-Appellant IAS expressed interest in acquiring Defendant-Appellee James Buckley & Associates. During negotiations, James Buckley, owner of Buckley & Associates, made various representations regarding the strength of his company's business- representations that IAS now contends were fraudulent. Allegedly in reliance on those representations, IAS acquired Buckley & Associates' assets and agreed to employ Buckley. Shortly thereafter, Buckley & Associates lost its largest client, causing it, and IAS, to lose money. IAS made do for a while, but eventually fired Buckley and sued him and Buckley & Associates for, among other things, fraudulent inducement and breach of contract. Buckley countersued for breach of his employment contract with IAS. The district court dismissed IAS's fraud claim and then, after a bench trial, rendered judgment for defendants on all other claims. IAS appealed, and we affirm in part and reverse in part.

         I.

         A.

         In 2010, IAS, a Texas based firm owned and operated by Larry Cochran, was looking to expand. With the help of an investment banking firm, IAS identified California-based James Buckley & Associates as a potential acquisition target. In early 2011, the two firms entered into a non-disclosure agreement in which they each agreed not to "disclose to any third party, or use the existence of this Agreement, or the nature of the transaction contemplated, in any way without the express prior written approval of the other." IAS made an initial offer to purchase Buckley & Associates about a month later, and, after some negotiations, the parties agreed to a $3.6 million purchase price, with $2.4 million due at closing and a $1.2 million note payable in five equal annual installments. They also agreed that IAS would employ James Buckley for five years at a salary of $250, 000 per year. The parties memorialized those terms in a letter of intent that they signed in June. The letter of intent also included a 60-day exclusivity or "no shop" period during which Buckley & Associates would not discuss with any other person the possibility of a sale of Buckley & Associates' stock or assets.

         Prior to closing, IAS did its due diligence, looking into Buckley & Associates' financial statements and customer history performance reports. IAS learned that Buckley & Associates' biggest customer, responsible for approximately 45% of its revenues, was a large insurance company called QBE. Cochran asked if he could meet with Buckley & Associates' key clients, including QBE, but Buckley responded that such a meeting would not be appropriate and that he could "handle that better himself." Cochran did, though, review QBE's contract with Buckley & Associates and was aware that the contract did not guarantee any particular amount of business and that QBE could terminate the agreement for any reason with 45 days' notice. Cochran understood that, as is typical in the industry, the amount of business received from an insurance company depended on the strength of the loss adjuster's relationship with the company and the adjuster's rank among the company's various vendors. And on that score, Buckley painted a rosy picture. He told Cochran that Buckley & Associates was QBE's "number one" adjusting firm, outperforming QBE's eight other vendors, and represented that Buckley & Associates' revenues were likely to grow. And just days before closing, Buckley told Cochran that there was "[g]reat news" from QBE, and that recent developments with respect to a merger between QBE and another insurance company called Sterling "look very good for us."

         But the reality was not so rosy. According to an internal Buckley & Associates memo created in June 2011, and shown to Buckley, Buckley & Associates was ranked eighth out of QBE's nine vendors for the first quarter of 2011. In fact, Buckley & Associates had not been ranked first in total quality among all of QBE's vendors at any time during 2010 or 2011 (although it had been ranked first at times in the past). And following its merger with Sterling, QBE was looking to consolidate its vendor panel by working with fewer, larger firms. Indeed, prior to IAS's acquisition of Buckley & Associates, QBE knew that it was not going to continue doing business with all of its current adjusting firms. It did not, however, make its consolidation plan public until December 2011.

         IAS's acquisition of Buckley & Associates was finalized on October 11, 2011, when the parties executed an asset purchase agreement and Buckley and IAS entered into an employment agreement. Pursuant to the employment agreement, IAS could terminate Buckley either for cause (including fraudulent conduct) or for reasons other than cause. Buckley would be entitled to severance pay upon termination only if he: (1) was terminated for reasons other than cause (or he quit for "good reason") and (2) "execute[d] and deliver[ed] to [IAS] a General Waiver & Release of Claims."

         The asset purchase agreement provided for the transfer of Buckley & Associates' assets, including its contracts, to IAS. Two of its provisions are particularly relevant to this appeal. First, in section 2.3, Buckley and Buckley & Associates represented and warranted to IAS that:

Neither the execution and delivery by [Buckley & Associates or Buckley] of this Agreement and the other agreements contemplated hereby, nor the performance by [Buckley & Associates or Buckley] of their respective obligations under this Agreement and such other agreements, nor the consummation by [Buckley & Associates] of the Purchase Transaction, will . . . violate, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any authorization, consent, approval, execution or other action by, or notice to, any third party under, any Contract or any Encumbrance to which [Buckley & Associates or Buckley] is a party or by which such Person is bound or to which any of such Person's assets are subject, provided that the Parties acknowledge that consents of the landlords under the Lease Agreements . . . to assignments of the Lease Agreements to [IAS] have not been obtained on or prior to the [effective date of the asset purchase agreement], and the Parties Shall use their commercially reasonable efforts after [that date] to obtain such consents.

         Second, section 4.2 sets forth the following covenant regarding "Non-Assignable Contracts":

If any consent, waiver or approval required to be made or obtained for the valid and effective assignment of any Assumed Contract by [Buckley & Associates] to [IAS] has not been obtained as of the [effective date of the asset purchase agreement], (such Assumed Contracts being the "Non-Assignable Assumed Contracts"), [Buckley & Associates and Buckley] will use their respective commercially reasonable efforts to . . . cooperate with [IAS] in arrangements designed to provide the benefits of such Non-Assignable Assumed Contract (including, without limitation, the right to receive all amounts owing to [Buckley & Associates] thereunder) to [IAS] . . . .

         As is relevant here, the contract between Buckley & Associates and QBE provided that "[n]either party may assign this agreement or any of the rights hereunder or delegate any of its obligations hereunder without the prior consent of the other party." It further provided that "any such attempted assignment shall be void." Buckley did not obtain QBE's consent to assign its contract to IAS, believing that the nondisclosure agreement he had entered with IAS prevented him from disclosing the pending sale. But Cochran assumed that Buckley had obtained QBE's consent. It was not until he received a call from Buckley six days after closing that Cochran learned that QBE had not consented to assigning its contract to IAS. At that time, Buckley told Cochran that there was "a problem with . . . QBE and the assignment," but that "they weren't really giving him any answers."

         About one week after the parties executed the asset purchase agreement, QBE made the decision to terminate its relationship with Buckley & Associates and, by extension, IAS. An internal QBE email explaining the decision stated that QBE was "recently made aware that IAS had purchased [Buckley & Associates]," and that "[t]his action put QBE . . . in a position of having to decide whether to bring on an additional new firm under contract or terminate the existing contract with the former [Buckley & Associates]." QBE decided to terminate, as it did not want to invest in bringing a new vendor on board. Although it appears that the decision to terminate was triggered by IAS's acquisition of Buckley & Associates, QBE's vice president of claims did testify at trial that QBE "likely would have reached a similar outcome, just later in time," as part of its planned vendor consolidation. Two months later, in December 2011, QBE sent Buckley a letter officially giving notice of its intent to terminate the relationship. The termination was effective February 1, 2012.

         Even prior to the official termination notification, IAS did not receive any new claims from QBE. Rather, IAS worked only on "tail files" that remained from claims assigned to Buckley & Associates prior to its acquisition. Buckley did bring in some new business for IAS, but, in 2012, revenue of the former Buckley & Associates was down 50% below what had been projected at the time IAS acquired it, and it dropped another 27% in 2013. Between acquisition and early 2014, IAS incurred approximately $950, 000 in losses from Buckley's division.

         IAS suffered other losses, too. Business was down 25 to 40% industry wide in 2012. By 2013, IAS claimed it did not have the cash on hand to make the second annual payment owed to Buckley on the $1.2 million note. IAS then terminated Buckley in early 2014, taking the position that his termination was "for cause" based on his failure to get consent to assign the QBE contract to IAS. As noted above, Buckley was entitled to severance pay only if he was terminated for reasons other than for cause and if he "execute[d] and delivere[d] to [IAS] a General Waiver & Release of Claims." While the parties dispute whether Buckley was actually terminated for cause, it is undisputed that he never delivered a release of claims to IAS. IAS never made any severance payments.

         B.

         IAS filed this suit against Buckley and Buckley & Associates in early 2014, asserting claims for fraud, fraudulent inducement, fraud by nondisclosure, and breach of contract. Buckley and Buckley & Associates moved to dismiss all claims and filed counterclaims alleging (among other things not relevant here) that IAS breached the employment agreement by failing to pay Buckley any severance pay. The district court granted the motion to dismiss with respect to IAS's fraud-based claims, and the parties proceeded to a bench trial on IAS's breach-of-contract claim and Buckley and Buckley & Associates' counterclaim. After trial, the district court ...


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