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Lujan v. Navistar, Inc.

Supreme Court of Texas

April 27, 2018

Albert Lujan d/b/a Texas Wholesale Flower Co., Petitioner,
v.
Navistar, Inc., Navistar International Corporation, Navistar International Transportation Corp., International Truck and Engine Corporation, and Santex Truck Centers, Ltd., Respondents

          Argued February 6, 2018

          On Petition for Review from the Court of Appeals for the Fourteenth District of Texas

          OPINION

          James D. Blacklock Justice

         In this commercial dispute, the trial court granted partial summary judgment based on the so-called "sham affidavit rule." Under the rule, if a party submits an affidavit that conflicts with the affiant's prior sworn testimony and does not provide a sufficient explanation for the conflict, a trial court may disregard the affidavit when deciding whether the party has raised a genuine fact issue to avoid summary judgment. Most Texas courts of appeals have recognized the sham affidavit rule as a legitimate component of a trial judge's authority under Rule 166a to grant summary judgment when no genuine issue as to any material fact exists. The rule has long been applied throughout the federal court system under Rule 56, which contains language nearly identical to Rule 166a. We agree with the majority view that a trial court's authority to distinguish between genuine and non-genuine fact issues includes the authority to apply the sham affidavit rule when confronted with evidence that appears to be a sham designed to avoid summary judgment. We affirm the court of appeals' judgment in part, reverse in part, and remand to the court of appeals for further proceedings.

         I. Background

         Albert Lujan purchased Texas Wholesale Flower Company in 2005. The newly purchased company included aging flower delivery trucks, so Lujan purchased five new CF600 trucks manufactured by Navistar, Inc. Lujan testified in his deposition that in June 2006 he incorporated the business as Texas Wholesale Flower Co., Inc. (the Corporation). Later that year, Lujan transferred assets of his business to the Corporation in exchange for 100% of the Corporation's stock, pursuant to section 351 of the Internal Revenue Code. 26 U.S.C. § 351. He was the sole shareholder and was "in control of the corporation." See id. (permitting tax-free exchange if "property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control . . . of the corporation"). He also testified that after forming the Corporation he filed corporate tax returns for the Corporation.

         The document reflecting the section 351 transfer indicates that Lujan transferred the five CF600 trucks to the Corporation. The Corporation's income tax returns from 2006 and 2007 list the five trucks as corporate assets and indicate that the Corporation had sales of over $4 million during that time. Lujan testified at his deposition, however, that he did not transfer ownership of the trucks to the Corporation. In 2008, the Texas Secretary of State declared the Corporation's certificate forfeited due to unpaid franchise taxes.

          In 2009, Lujan sued Navistar over his dissatisfaction with the trucks, alleging breach of express and implied warranties. He claimed that the trucks had recurring mechanical problems that caused disruptions in flower deliveries and the loss of perishable products and customers. He also claimed that the trucks were unsuitable for his business despite the truck salesman's representation that they would be a good fit. Lujan sued in his individual capacity and claimed individual ownership of the vehicles.

         Whether Lujan or the Corporation owned the disputed trucks eventually became a contested issue. After four years of litigation, the Corporation intervened as a plaintiff, incorporating Lujan's pleadings and adding almost $15 million to the claimed damages. Lujan's attorney also represented the Corporation. Navistar moved to strike the intervention as untimely. In response to Navistar's motion to strike, the Corporation stated equivocally that "[Lujan] made an IRS Section 351 transfer . . . [of] all of the assets and liabilities of Texas Wholesale Flower Co. to Texas Wholesale Flower Co., Inc." but that "legal title" to the trucks was not transferred to the Corporation. The Corporation attached a copy of the section 351 transfer, which included the trucks, to its response to Navistar's motion to strike. At the hearing on the motion, the Corporation's attorney, who also represented Lujan, contradicted the Corporation's previous statement regarding the transfer of the vehicles. He claimed that the section 351 election transferred all the assets "lock, stock and barrel" to the Corporation, including the trucks- "absolutely everything [was] transferred over." During this hearing, the attorney did not distinguish between statements he made on behalf of the Corporation as opposed to Lujan. The trial court struck the Corporation's intervention as untimely.

          Two months later, Navistar filed a motion for partial summary judgment against Lujan. Navistar argued that Lujan in his individual capacity did not have standing to assert claims for injury arising from the trucks that occurred after June 12, 2006, the date on which Lujan allegedly transferred ownership of the trucks to the Corporation. In his opposition to summary judgment, Lujan asserted that he "did not transfer his assets and liabilities to a corporation at any time." He supported this assertion with a sworn affidavit that stated he did not transfer ownership of the trucks to the Corporation and that the Corporation had no assets or liabilities and "never conducted business."

         At the summary judgment hearing, the trial court pointed out that while Lujan's affidavit denied that the Corporation conducted any business or possessed any assets and liabilities, Lujan's attorney conceded that the Corporation filed tax returns and had assets and liabilities. The attorney admitted that those portions of the affidavit were false. He stated that when he prepared the affidavit his client "didn't recall" and "[m]isunderstood the true facts." He admitted that the Corporation had liabilities and filed tax returns. But Lujan's attorney stated that other than these falsehoods, "everything in the affidavit is true." The court was not satisfied with that explanation: "Other than where it's not true, it's true right? . . . This just goes back to my point counselor. I expect everything in here to be true. . . . I would have a little better time of this if it was a thoughtful affidavit that tried to explain" the false statements, but instead it appeared that "either you're not paying attention to what the facts of the case are, or you're just saying whatever is convenient at the time." The court expressed an interest in striking Lujan's affidavit as a sham and requested briefing on that issue. Navistar's ensuing briefing identified deposition testimony wherein Lujan admitted he incorporated the business in 2006 and filed corporate tax returns for the business in 2006 and 2007. The tax returns include the trucks as assets of the Corporation.

         The trial court struck the affidavit as a sham and granted partial summary judgment. That same day, the trial court also granted summary judgment on a separate issue regarding the merits of Lujan's claims. Lujan timely appealed both rulings. A divided panel of the court of appeals affirmed and "adopt[ed] the sham affidavit doctrine, " which had not previously been explicitly recognized by the Fourteenth Court of Appeals. Lujan v. Navistar, Inc., 503 S.W.3d 424, 434 (Tex. App.-Houston [14th Dist.] 2016, pet. granted). The court of appeals identified several reasons supporting the trial court's conclusion that Lujan's affidavit was a sham, including Lujan's deposition testimony regarding the incorporation, his attorney's statements in the hearing on the Corporation's intervention, the section 351 transfer, and the tax returns and banking documents in the record. Id. at 436-38. The court of appeals declined to reach Lujan's appeal of the summary judgment granted on the merits of his claims. Id. at 439. The dissent argued that the sham affidavit rule conflicts with Texas law and does not apply to Lujan's affidavit. Id. at 439-50. Lujan petitioned to this Court, and we granted the petition.

         II. Analysis

         A. Standard of Review

         We review the trial court's grant of summary judgment de novo. Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex. 2003). A traditional motion for summary judgment requires the moving party to show that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law. Tex.R.Civ.P. 166a(c); Provident Life, 128 S.W.3d at 215-16. If the movant carries this burden, the burden shifts to the nonmovant to raise a genuine issue of material fact precluding summary judgment. Centeq Realty, Inc. v. Siegler, 899 S.W.2d 195, 197 (Tex. 1995). In reviewing the grant of summary judgment, we must credit evidence favoring the non-movant, indulging every reasonable inference and resolving all doubts in his or her favor. Randall's Food Markets, Inc. v. Johnson, 891 S.W.2d 640, 644 (Tex. 1995).

         Although we generally review summary judgments de novo, a trial court's refusal to consider evidence under the sham affidavit rule should be reversed only if it was an abuse of discretion. See, e.g., Corner v. County of Eastland, No. 11-10-00157-CV, 2012 WL 2045949, at *3 (Tex. App.-Eastland June 7, 2012, pet. denied) (mem. op.) ("A trial court's decision to strike an affidavit under the sham affidavit doctrine is reviewed under an abuse of discretion standard."). This standard of review reflects the deference traditionally afforded a trial court's decision to exclude or admit summary judgment evidence. See Starwood Mgmt., LLC v. Swaim, 530 S.W.3d 673, 678 (Tex. 2017) ("We review the rendition of summary judgments de novo. But we review a trial court's decision to exclude evidence for an abuse of discretion.") (citations omitted). Federal courts applying the sham affidavit rule have likewise employed an abuse of discretion standard of review. See, e.g., Daubert v. NRA Grp., LLC, 861 F.3d 382, 389 (3d Cir. 2017) ("[W]e review a district court's decision to exclude materials under the sham-affidavit doctrine ...


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