Court of Appeals Affirms Summary Judgment Motion in Favor of Bank on Fraud Claim
In Magna Equities II, L.L.C. et al. v. Heartland Bank, 787 Fed.Appx 223 (5th Cir. 2019), the 5th Circuit Court of Appeals affirmed the district court’s grant of summary judgment in favor of Heartland Bank (“Heartland”) on an action claiming, among other things, fraud and negligent misrepresentation.
In the underlying case, the investors in Magna Equities II, L.L.C. (the “Magna Investors”) alleged that Heartland promised that it would allow a company known as HII Technologies (“HII”) to acquire an oilfield water management company known as Water Transfer LLC on the condition that HII raise approximately $3 million in additional equity. The Magna Investors further alleged that, in reliance on that promise, the Magna Investors made an equity investment in HII. Several months passed after the closing of the equity investment without the finalization and closing of the acquisition having been completed. HII defaulted on its obligations under its loan documents with Heartland, and Heartland swept HII’s accounts. Several months later, HII filed for Chapter 11 bankruptcy, and shortly thereafter the Magna Investors sued Heartland.
In granting summary judgment in favor of Heartland, the district court noted that the elements of fraud and negligent misrepresentation include actual and justifiable reliance by the affected party, and that existing case law specified that a person may not justifiably rely on a representation if there are red flags indicating that such reliance is unwarranted. The district court found that, although Heartland may have made statements about allowing HII to consummate the acquisition subject to receipt of the equity investment, several such red flags existed because neither the credit documents nor the documentation governing the Magna Investors’ investment in HII indicated that HII’s acquisition of Water Transfer LLC was to be permitted or was anticipated. The district court therefore concluded that the Magna Investors could not justifiably rely on Heartland’s statements with respect to the acquisition and that Heartland was entitled to summary judgment. On appeal, the Court of Appeals affirmed.
Article courtesy of Andrew Thomison (Baker Botts L.L.P.)