Billy Lewis v. Bank of America, N.A.

Bank of America, formerly known as NationsBank of Texas
("the Bank"), and its former employee, Mark Thomason, appeal a
jury verdict holding them jointly liable for fraud and breach of
contract and awarding damages of $380,101.75 to Billy Lewis.
Lewis cross-appeals, arguing that the jury instructions
improperly limited the scope of compensable damages. We have
jurisdiction pursuant to 28 U.S.C. § 1291, and we REVERSE.

FACTS

1. Billy Lewis's Defined Benefit Plans

Billy Lewis was employed by the General Cable Corporation
("General Cable") from 1958 to 1992.1 During his employment with
General Cable, Lewis participated in the General Cable 401(k)
defined benefit retirement savings plan, accumulating a balance
of $96,200.71. In 1986, Lewis founded the Billy Lewis Sales
Company, a plastics trading business. In connection with this business, Lewis created a second defined benefit plan. By 1991,
Lewis had accumulated a balance of approximately $428,000 in his
Billy Lewis Sales Company defined benefit plan.

2. Loan Negotiations Between Lewis and the Bank

In 1992, Lewis's son started Eau De Vie., Inc., a wholesale
and retail liquor business operating as "Spirits Liquor." In
order to help his son's new business obtain financing, Lewis
contacted the Bank to discuss the possibility of a $100,000 loan.
The Bank arranged a meeting at the Spirits Liquor facility
between Lewis and loan officer Mark Thomason. During this
meeting, Lewis offered to pledge either the Spirits Liquor
inventory or his personal land holdings as collateral. Thomason
rejected both suggestions, and informed Lewis that the Bank would
be willing to execute the proposed loan only on a cash-secured
basis. Thomason proposed that Lewis liquify his defined benefit holdings and place the funds into CDs at the Bank.2 Thomason
told Lewis that, by doing so, the funds could be used as collateral for a loan at the rate of two percent over the rate of
return on the CD.

Lewis agreed to the terms offered by Thomason, and entered
into a written loan agreement with the Bank. The documents
forming the written loan agreement between Lewis and the Bank
included a letter requiring Lewis to secure the loan with
collateral "in a form satisfactory" to the Bank. Between
December 10, 1992, and January 21, 1993, Lewis transferred a
total of $528,496.76 from his Billy Lewis Sales Company defined
benefit plan to the Bank. On January 4, 1993, the Bank issued a
$100,000 loan to Lewis for the Spirits Liquor business. Shortly
thereafter, the Bank agreed to provide additional financing to
Spirits. By January 28, 1993, the loan balance was $528,000. On August 12, 1993, Spirits Liquor sought an additional $100,000
loan to cover an overdraft on the company's checking account.
Lewis agreed to secure the loan by transferring funds to the Bank
from his General Cable 401(k) plan. Between August 19, 1993, and
October 5, 1993, Lewis withdrew a total of $96,200.71 from his
General Cable 401(k) plan and used the funds to purchase CDs at the Bank.

Lewis maintained the CDs until 1996, when Spirits Liquor
concluded its relationship with the Bank. Lewis redeemed the CDs
at that time, using the proceeds to satisfy the outstanding
balance on the Spirits Liquor loans.

3. Tax Consequences of the Spirits Liquor Loans

In early 1994, Lewis's accountant Bud Lowry discovered a
series of 1099 tax forms characterizing Lewis's 1992 and 1993
withdrawals from his Billy Lewis Sales Company and General Cable
401(k) retirement plans as taxable income. Lowry immediately
contacted the Bank to request written documentation that the
funds had been transferred to tax-deferred IRA accounts at the
Bank. The Bank refused the request, and notified Lowry that
Lewis's funds were held in non-IRA CDs. Lowry's subsequent
attempts obtain documents designating Lewis's accounts as IRA CDs
were similarly unsuccessful. When Lewis filed his 1993 tax
return, he did not declare the withdrawals from his defined benefit plans as income.

In the Spring of 1996, Lewis received a notice of deficiency from the IRS in the amount of approximately $700,000.3
Subsequent negotiations between the IRS and Lewis's accountants
ultimately resulted in a settlement reducing Lewis's liability to
$323,000.

4. Procedural History of the Instant Lawsuit

On August 1, 1996, Lewis filed a complaint in Dallas County
District Court. On December 4, 1996, Lewis amended his complaint
to allege, inter alia, that the Bank was a custodian of Lewis's
defined benefit plan. On January 2, 1997, the defendants removed
the action to federal court on the grounds that the Employee
Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq.
("ERISA") created federal question jurisdiction. Lewis
subsequently amended the complaint to specifically state claims
arising under ERISA.

On March 11, 2002, a jury trial commenced in the District
Court for the Northern District of Texas. At the conclusion of Lewis's case in chief, Lewis withdrew his ERISA claims. The
defendants rested their case, and moved for judgment as a matter
of law as to all claims. The district court denied the motion as
to the Bank and Thomason, granted the motion as to Bank employees
Walter Smith and Sally Walters, and submitted Lewis's fraud and
breach of contract claims to the jury.

The jury entered a verdict in favor of Lewis on March 14,
2002. The district court entered judgment on March 29, 2002. On
April 8, 2002, the Bank and Thomason renewed their motion for
judgment as a matter of law. On April 9, 2002, the district
court denied the motion and entered an amended final judgment.
Defendants timely appealed.

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ERISA PREEMPTION

ERISA preempts "any and all State laws insofar as they may
now or hereafter relate to any employee benefit plan." 29 U.S.C.
§ 1144(a). Although the term "relate to" is intended to be
broad, "pre-emption does not occur . . . if the state law has
only a tenuous, remote, or peripheral connection with covered
plans, as is the case with many laws of general applicability."
New York State Conf. of Blue Cross & Blue Shield Plans v.
Travelers Ins. Co., 514 U.S. 645, 661 (1995) (internal citation
and quotation omitted).

Where, as here, the facts underlying a state law claim bear
some relationship to an employee benefit plan, our task is to
evaluate the nexus between the state law and ERISA, in view of
ERISA's statutory objectives. Travelers, 514 U.S. at 656.
Relevant statutory objectives include establishing uniform
national safeguards "with respect to the establishment,
operation, and administration of [employee benefit] plans," 29
U.S.C. 1001(a), and "establishing standards of conduct,
responsibility, and obligation for fiduciaries of employee
benefit plans." 29 U.S.C. 1001(b). Lewis's fraud and contract claims against the Bank, a non-fiduciary,4 and its employees bear
little relationship to these objectives. Congress clearly did
not intend to broadly immunize non-fiduciary parties such as the
Bank from liability under traditional state law contract and tort
causes of action. The district properly determined that Lewis's
claims were not preempted.

BREACH OF CONTRACT

At trial, Lewis argued that the Bank breached an oral
contract to place Lewis's funds in tax-deferred IRA CDs. The
elements of a breach of contract claim under Texas law are: 1)
the existence of a valid contract; 2) performance or tendered
performance by the plaintiff; 3) breach of the contract by the
defendant; and 4) damages to the plaintiff resulting from the
breach. Palmer v. Espey Huston & Assocs., 84 S.W.3d 345, 353
(Tex. App. 2002). The jury entered a verdict in favor of Lewis
on the contract claim, finding that the Bank had "agreed to place
the funds from the Billy Lewis Sales Company Defined Benefit Plan [and 401(k) plan] in tax-deferred IRA CDs." On appeal, the Bank
contends that the breach of contract claim should not have been
submitted to the jury because Lewis did not present evidence that
he suffered damages as a result of the alleged breach.

Pursuant to 26 U.S.C. § 408, if an individual pledges an IRA
"as security for a loan, the portion so used is treated as
distributed to that individual" and is taxed accordingly. 26
U.S.C. § 408(e)(4). Pledging IRA funds as security for a loan
thus has the same tax effect as withdrawing the same funds from
an IRA and investing them in non-IRA CDs. Accordingly, the Bank
correctly observes that performance of the alleged contract to
place Lewis's funds in an IRA account would have created
precisely the same mandatory tax consequences as the Bank's
alleged breach. Because a causal link to economic damages is a
requisite element of an action for breach of contract, the district court erred by submitting the contract claim to the
jury.

FRAUDULENT INDUCEMENT

At trial, Lewis argued that the defendants fraudulently induced him "to withdraw funds from the Billy Lewis Sales Company
Defined Benefit Plan [and 401(k) plan] and place it [sic] in nontax
deferred CDs." The jury entered a verdict in Lewis's favor.
The elements of a fraudulent inducement claim are: 1) a material
misrepresentation was made; 2) when the misrepresentation was
made, the speaker knew it was false or made it recklessly without
any knowledge of the truth and as a positive assertion; 3) the
speaker made the misrepresentation with the intent that the other
party should act on it; 4) the plaintiff detrimentally relied on
the misrepresentation. In re FirstMerit Bank, N.A., 52 S.W.3d
749, 758 (Tex. 2001).

In order for a reasonable jury to have concluded that the Bank
committed fraud, the jury must have identified a material
misrepresentation by the Bank. Lewis's counsel suggested in his
closing argument that the relevant misrepresentation was the Bank's
alleged statement that it would place Lewis's funds into IRA CDs.
If this was the relevant misrepresentation, however, Lewis's fraud
claim suffers from a similar defect as his contract claim. As
noted above, a pledge of IRA funds as collateral for a loan is treated as a premature withdrawal and renders such funds taxable.
26 U.S.C. § 408(e)(4). Accordingly, any misrepresentation as to
whether Lewis's funds would be deposited in IRA CDs, as opposed to
regular CDS, had no practical consequence and was therefore
immaterial. See Gen. Am. Life Ins. Co. v. Martinez, 149 S.W.2d
637, 641 (Tex. App. 1941)("One could hardly be said to rely on an
immaterial misrepresentation. If he does, he is not entitled to
relief.").5

Lewis also argues that the Bank misrepresented its ability to
shelter Lewis from taxes and early withdrawal penalties. As we have previously noted, mere failure to disclose information is not
actionable "misrepresentation" under Texas law, absent a fiduciary
relationship. Mitchell Energy Corp. v. Samson Resources Co., 80
F.3d 976, 985 (5th Cir. 1996) (citing Tempo Tamers, Inc. v. Crow-
Houston Four, Ltd., 715 S.W.2d 658, 669 (Tex. App. 1986)).
Therefore, Lewis had the burden of proving not only that the Bank
failed to disclose the tax consequences of pledging his funds as
collateral, but also that the Bank actively misrepresented such
consequences, and did so either intentionally or recklessly.
Moreover, Lewis bore the burden of proving that he justifiably
relied on any such misrepresentation.

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