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Jun 18, 2018

Texas Supreme Court Finally Adopts “Sham Affidavit Rule”

By: Kyle Burke

If a party submits an affidavit as evidence to defeat a summary judgment motion but the affidavit contradicts the party’s prior testimony or other evidence, may the trial court disregard the affidavit as a “sham” when deciding the summary judgment motion?  The Texas Supreme Court recently said “yes” in Lujan v. Navistar, Inc., ___ S.W.3d ___, No. 16-0588, 2018 WL 1974473, at *4 (Tex. Apr. 27, 2018), putting to rest any dispute on this issue among Texas’s lower courts.

Lujan purchased trucks manufactured by Navistar for use in his flower delivery business.  Lujan later incorporated his company into Texas Wholesale Flower Company, Inc. (the Corporation) and transferred the assets of the prior company to the Corporation in exchange for 100% of the Corporation’s stock, pursuant to Internal Revenue Code provisions allowing a tax-free exchange.  Lujan—in in his individual capacity—later sued Navistar over his dissatisfaction with the trucks. Four years later, the Corporation intervened in the suit as a plaintiff.  Whether Lujan or the Corporation owned the disputed trucks eventually became a contested issue.

During a deposition, Lujan stated that he did not transfer ownership of the trucks to the Corporation.  In response to Navistar’s motion to strike the Corporation’s intervention as untimely, the Corporation stated that while the prior company transferred all its assets and liabilities to the Corporation, “legal title” to the trucks was not transferred. But at a later hearing, the Corporation’s attorney stated that the tax exchange transferred all of the assets, including the trucks, to the Corporation.  And, evidence showed the Corporation filed tax returns including the trucks as assets.

After the trial court struck the Corporation’s intervention as untimely, Navistar moved for summary judgment against Lujan, arguing that Lujan in his individual capacity did not have standing to assert claims for injury arising from the trucks that occurred after the date on which Lujan allegedly transferred ownership of the trucks to the Corporation. In his opposition to summary judgment, Lujan filed a sworn affidavit stating he did not transfer ownership of the trucks to the Corporation and that the Corporation had no assets or liabilities and “never conducted business.”

The trial court struck the affidavit as a sham after expressing concerns regarding Lujan’s inconsistencies on the Corporation’s assets and liabilities, and granted partial summary judgment.  A divided panel of the court of appeals affirmed and adopted the sham affidavit rule, and the Texas Supreme Court affirmed.

The supreme court described the long use of the rule in federal courts and its adoption by the majority of Texas courts of appeals. “The sham affidavit rule merely recognizes the authority of a trial court charged with weeding out non-genuine fact issues to require litigants to explain conflicting testimony that appears to be a sham designed to avoid summary judgment.”  Under Rule 166a(c), a trial court may conclude that a party does not raise a genuine fact issue by submitting sworn testimony that materially conflicts with the same witness’s prior sworn testimony, unless there is a sufficient explanation for the conflict.

The court cautioned that whether to apply the sham affidavit rule to disregard sworn testimony is a case-specific inquiry, and a court asked to disregard a conflicting affidavit must “examine the nature and extent of the differences in the facts asserted in the documents to determine what effect a conflict should be given in a particular case.”  If the subsequent affidavit clearly contradicts the witness’s earlier testimony involving the suit’s material points, without sufficient explanation, then the sham affidavit rule applies. The court also held that a trial court’s decision to disregard an affidavit as a sham is reviewed under the abuse of discretion standard.

Applying this standard, the supreme court concluded the trial court had not abused its discretion in disregarding Lujan’s affidavit as a sham. While his statement in his affidavit that he did not transfer ownership of the trucks to the Corporation aligned with his deposition testimony, other deposition statements contradicted his affidavit on material points, particularly whether the business incorporated, filed tax returns, and held assets. And, other evidence such as the IRS asset transfer documents and the Corporation’s tax returns contradicted Lujan’s affidavit. In addition to the inconsistencies in the evidence, Lujan’s counsel’s inconsistent statements regarding the truck transfers during several hearings supported the trial court’s decision to strike the affidavit as a sham.

Going forward, Texas litigants will need to carefully compare their summary judgment affidavits with prior testimony and evidence to ensure no material contradiction exists, and if so, provide a sufficient explanation for the inconsistency.  Such explanations might include new evidence or a misunderstanding of the prior questioning.  But, parties should remember that the trial court will be accorded a good deal of deference in determining whether the affidavit is a sham, including the explanation for the inconsistencies.