Autodynamics Inc. v. Mitchell Vertvoort ( 2011 )

Affirmed and Memorandum Opinion filed April 5, 2011.

In The

Fourteenth Court of Appeals

NO. 14-10-00021-CV

Autodynamics Inc., Appellant

V.

Mitchell VErvOORt, Appellee

On Appeal from the 151st District Court

Harris County, Texas

Trial Court Cause No. 2009-10687

MEMORANDUM  OPINION

Autodynamics Inc. filed a petition for bill of review seeking to overturn a default judgment rendered in favor of Mitchell Vervoort in an underlying suit.  The trial court granted summary judgment in favor of Vervoort, and Autodynamics appeals.  We affirm.

BACKGROUND

I.         Underlying Suit

Vervoort sued Autodynamics and Ilkem Sahin on September 28, 2007, claiming damages for fraud, breach of contract, and suit under a promissory note.  The petition recited the address for Autodynamics’s registered agent, Sanjay Varma, as “10912 Fawnlily Street, The Woodlands, Texas 77380.” Citation for Autodynamics was issued on October 10, 2007.  A Harris County Constable attempted service of process on Autodynamics at the Fawnlily address by certified mail on October 15, 2007, but the constable’s return shows that service was unsuccessful; the envelope was marked “return to sender, not deliverable as addressed, unable to forward.”  A private process server attempted in-person service of process at the same address, but her attempts also were unsuccessful.

Vervoort filed a motion for substituted service on the Texas Secretary of State on June 11, 2008.  See Tex. Bus. Orgs. Code Ann. § 5.251 (Vernon Supp. 2009) (effective Jan. 1, 2006).  The trial court granted the motion, and Vervoort served process on the Secretary of State.  The Secretary of State forwarded the citation and original petition to Varma by certified mail on July 18, 2008.  It was returned to the Secretary of State stamped “undeliverable as addressed, unable to forward.”

Autodynamics failed to file an answer when it became due on August 11, 2008.  Vervoort filed a motion for default judgment against Autodynamics on September 9, 2008.  The trial court granted default judgment in favor of Vervoort on October 7, 2008.[1] Vervoort dismissed all claims that same day against the only other defendant, Ilkem Sahin, thus making the default judgment final. 

II.        Petition for Bill of Review

Autodynamics filed its petition for bill of review on February 20, 2009.[2] Autodynamics alleged that the default judgment was issued in violation of due process because Autodynamics was not served with process.  Vervoort filed a motion for summary judgment arguing that Autodynamics could not establish its entitlement to a bill of review as a matter of law.  Autodynamics filed a response to the motion, as well as a motion for continuance and a motion to compel.  The trial court denied Autodynamics’s motions and granted summary judgment in favor of Vervoort on October 27, 2009.

Autodynamics argues in its first issue on appeal that the trial court erred in granting summary judgment because disputed issues of material fact exist as to whether Autodynamics was properly served in the underlying lawsuit.  In its second and third issues, Autodynamics contends that the trial court erred in denying its motion to compel and motion for continuance. Vervoort raises one issue on cross-appeal, arguing that this court should award damages and attorney’s fees against Autodynamics because this appeal is “frivolous and brought in bad faith.”

ANALYSIS

A bill of review is an equitable proceeding brought by a party seeking to set aside a prior judgment that is no longer appealable or subject to a motion for new trial.  Caldwell v. Barnes, 154 S.W.3d 93, 96 (Tex. 2004).  It requires pleading and proof of three elements: (1) a meritorious defense to the underlying cause of action; (2) that was not asserted due to fraud, accident, or wrongful act of an opponent or official mistake;
(3) unmixed with any fault or negligence by the movant.  Id. 

If a party petitioning for a bill of review seeks to set aside a default judgment based on lack of proper service, the petitioner need not prove the first two requirements.  Id.  A petitioner alleging lack of proper service still must prove that the default judgment was unmixed with any fault or negligence by the petitioner.  Id. at 97.  Proof of non-service will establish this element conclusively if the petitioner asserts lack of service of process as the only defense.  Id.

If a bill of review petitioner claims lack of service, the trial court should
(1) dispense with any pretrial inquiry into a meritorious defense; (2) hold a trial, at which the bill of review petitioner assumes the burden of proving lack of service; and (3) conditioned on an affirmative finding that the petitioner was not served, allow the parties to revert to their original status as plaintiff and defendant with the burden on the original plaintiff to prove the case.  See id. at 97–98.  

I.         Summary Judgment

Autodynamics first argues that summary judgment was improper because disputed fact issues remain on the issue of whether it was served with process.  Autodynamics claims that substituted service through the Secretary of State in this case was defective because Vervoort failed to exercise reasonable diligence in attempting to locate and serve process through Autodynamics’s registered agent.

An appellate court applies de novo review to a grant of a traditional motion for summary judgment, using the same standard that the trial court used in the first instance.   Duerr v. Brown, 262 S.W.3d 63, 68 (Tex. App.—Houston [14th Dist.] 2008, no pet.) (citing Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005)).  The defendant as movant must disprove at least one of the essential elements of each of the plaintiff’s causes of action in order to prevail on summary judgment.  Wright v. Greenberg, 2 S.W.3d 666, 670 (Tex. App.—Houston [14th Dist.] 1999, pet. denied) (citing Lear Siegler, Inc. v. Perez, 819 S.W.2d 470, 471 (Tex. 1991)).  This burden requires the movant to show that no genuine issue of material fact exists and that the movant is entitled to judgment as a matter of law.  Id. (citing Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548–49 (Tex. 1985)).  If the movant satisfies this burden, then the burden shifts to the nonmovant to raise a genuine, material fact issue sufficient to defeat summary judgment.  Walker v. Harris, 924 S.W.2d 375, 377 (Tex. 1996).  In determining whether a material fact issue exists to preclude summary judgment, evidence favoring the nonmovant is taken as true, and all reasonable inferences are indulged in favor of the nonmovant.  Id.

A.        Substituted Service of Process

The Texas Business Organizations Code places upon corporations the duty to maintain a registered agent and office and to notify the Secretary of State of any change in either the registered agent or office. See Tex. Bus. Orgs. Code Ann. §§ 5.201–.202 (Vernon Supp. 2009) (relevant text effective Jan. 1, 2006).  This requirement enables aggrieved citizens to serve the corporation with a lawsuit.  Houston’s Wild W., Inc. v. Salinas, 690 S.W.2d 30, 32 (Tex. App.—Houston [14th Dist.] 1985, writ refused n.r.e.).  A registered agent is required to “accept service of process and otherwise perform the functions of a registered agent.”  See Tex. Bus. Corp. Act Ann. art. 2.09(A)(2) (Vernon Supp. 2006) (former version of Tex. Bus. Orgs. Code Ann. § 5.206 (Vernon Supp. 2009) (effective Jan. 1, 2010)).  When the registered agent of a corporation cannot “with reasonable diligence be found at the registered office,” the Secretary of State acts as agent of such corporation for substituted service of process.  See Tex. Bus. Orgs. Code Ann. § 5.251. 

Autodynamics’s articles of incorporation on file with the Secretary of State include the following statement:

The street address of [Autodynamics’s] initial Registered Office, and the name of its initial Registered Agent at this address is as follows:

            Sanjay Varma

            10912 Fawnlily Street

            The Woodlands, Texas 77380.[3]

The constable’s return states that service of process was attempted through Varma at the Fawnlily address by certified mail, but that it was returned, marked “not deliverable as addressed, unable to forward.”  The private process server’s affidavit states that she attempted in-person service of a copy of the citation and the original petition through Varma at the Fawnlily address, but the current resident informed her that Varma no longer lived at that address and claimed not to have current contact information for Varma.

The trial court granted Vervoort’s motion for substituted service based on this evidence, finding that Vervoort had “diligently attempted to serve” Autodynamics through its registered agent at the registered office.  The certificate subsequently issued by the Secretary of State states that she received and forwarded a copy of the citation and the original petition by certified mail, and that the process was returned marked “Not Deliverable as Addressed, Unable to Forward.”      

After the trial court granted default judgment and Autodynamics filed its petition for a bill of review, Vervoort filed a motion for summary judgment.  Vervoort argued that its evidence establishes as a matter of law that Autodynamics was properly served through substituted service on the Secretary of State.  See Campus Inv., Inc. v. Cullever, 144 S.W.3d 464, 466 (Tex. 2004) (per curiam) (“A certificate . . . from the Secretary of State [showing effective substituted service] conclusively establishes that process was served.”) (emphasis in original).  In support of its argument that no issue of material fact remained on the issue of “reasonable diligence,” Vervoort attached the evidence submitted to the trial court in its motion for substituted service, as well as Varma’s deposition testimony in which he states that he no longer lived at the Fawnlily address at the time of attempted service.[4] Vervoort argued further that Autodynamics could not, as a matter of law, show entitlement to a bill of review because it negligently failed to update addresses for its registered office and agent as required by statute.  See Tex. R. Civ. P. 166a; Campus Inv., Inc., 144 S.W.3d at 466. 

Autodynamics responded, arguing that a disputed fact issue remains on the issue of “reasonable diligence” because (1) an affidavit of the current resident of the Fawnlily address contradicts the private process server’s affidavit regarding in-person attempts to serve process at that location; and (2) the evidence shows that Vervoort was aware of but failed to attempt service at Autodynamics’s principal place of business.  Autodynamics contends that this disputed fact issue precludes summary judgment on the issue of lack of service.  See Walker, 924 S.W.2d at 377.

B.        Reasonable Diligence

The Texas Supreme Court has stated that absent fraud or mistake, a certificate from the Secretary of State constitutes conclusive evidence that the Secretary of State, as agent of the defendant, received service of process for the defendant and forwarded the service as required by the statute.  Campus Inv., Inc., 144 S.W.3d at 465.  Thus, a certificate from the Secretary of State may conclusively establish that process was served.  See id. at 466. 

However, such a certificate does not establish whether a defendant’s registered agent could not “‘with reasonable diligence be found at the registered office.’”  See Marrot Commc’ns, Inc. v. Town & Country P’ship, 227 S.W.3d 372, 378 (Tex. App.—Houston [1st Dist.] 2007, pet. denied) (quoting Tex. Bus. Corp. Act. Ann. art. 2.11) (previous version of Tex. Bus. Orgs. Code Ann. § 5.251).  “[A] default judgment obtained after an attempted substituted service will not stand absent a showing by the plaintiff that, before it resorted to substituted service, it first used reasonable diligence in seeking service on the registered agent of the corporation.”  Ingram Indus., Inc. v. U.S. Bolt Mfg., Inc., 121 S.W.3d 31, 34 (Tex. App.—Houston [1st Dist.] 2003, no pet.).[5]

Reasonable diligence may be shown by evidence that service of process was attempted but was unsuccessful because the address of the registered office no longer belonged to the registered agent at that time.  See id. at 34 (reasonable diligence was shown because constable’s return of service was “clear that the address on the citation was not the actual address of Ingram Industries, but that this location had been occupied by some other person or entity for the past 10 years”).  The constable’s return, the private process server’s affidavit, and Varma’s deposition testimony establish that service of process was attempted but failed because Varma no longer lived at the registered office address.  See id.; see also Wright, 2 S.W.3d at 670.

Autodynamics argues that the affidavit of the current resident of the Fawnlily address controverts Vervoort’s contention that service of process was, in fact, attempted.  In her affidavit, the current resident states that (1) she has lived at the address since she purchased the home from Varma in 2004; (2) “someone is at [the address] at all times;” (3) “at no time [has she] ever known anyone to attempt service of a lawsuit on Sanjay Varma” at that address; and (4) “[n]o one in my household has talked with any process server attempting to serve papers on Mr. Varma at any time.”    

Taking this evidence as true, the current resident’s affidavit does not controvert the fact that Varma no longer lived at the Fawnlily address at the time of attempted service, or that service of process was, in fact, attempted.  See Ingram Indus., Inc., 121 S.W.3d at 34.  Even if we read the current resident’s affidavit as disputing the fact of attempted in-person service rather than awareness of such an attempt,[6] Vervoort also submitted evidence of the constable’s attempted service by certified mail.  Further, the current resident’s statement that she has lived at the Fawnlily address since purchasing the property from Varma in 2004 confirms rather than contradicts evidence showing that Varma no longer lived at the Fawnlily address at the time of attempted service.  Autodynamics failed to present to the trial court any issue of disputed fact that would preclude summary judgment on the ground that Vervoort exercised reasonable diligence in attempting to locate and serve Autodynamics at the Fawnlily address.[7] See Walker, 924 S.W.2d at 377.

In so far as Autodynamics argues that the current resident’s affidavit contradicts evidence that the private process server attempted to obtain updated contact information for Varma from the current residents, this issue is irrelevant.  The current resident states in her affidavit: “I have Mr. Varma’s phone number and I would call him [if anyone attempted service of process].  I would let a process server know how to get in touch with Mr. Varma.”  However, as this court has said before:

[S]ervice on the Secretary of State is proper if the agent cannot, with reasonable diligence, be located at the registered office.  This language is significant.  Clearly, neither a party nor a constable is required, as a condition precedent to effective substituted service through the Secretary of State, to undertake a search of the yellow pages, or any other source, in an attempt to serve a corporation [at a location other than the registered office].  This would defeat the purpose of requiring a corporation to maintain a registered office. . . .  [The serving party] was not required to take any action other than that prescribed by the statute. 

Houston Int’l Film Festival v. Fogarty and Klein, Inc., No. 14-95-00402-CV, 1996 WL 138299, at *3 (Tex. App.—Houston [14th Dist.] Mar. 28, 1996, no writ.) (not designated for publication) (citations omitted) (emphasis in original).  Whether Vervoort asked for or received updated contact information for Varma does not affect the “reasonable diligence” inquiry.

Autodynamics alternatively argues that Vervoort failed to exercise reasonable diligence because he was aware of the address of Autodynamics’s principal business office, but failed to attempt service of process at that location.[8]

There is no requirement under section 5.251(1)(B) that Vervoort attempt service on Autodynamics at its place of business, in addition to attempting service at the registered office of the registered agent.  See Tex. Bus. Org. Code Ann. § 5.251(1)(B); see also Ingram Indus., Inc., 121 S.W.3d at 35 (“There is no requirement [under the statute] that U.S. Bolt also attempt to serve [the registered agent] at Ingram Industries’s place of business, in addition to serving him at the address filed with the Secretary of State for Ingram Industries.”); Houston’s Wild W., Inc., 690 S.W.2d at 32 (“There is . . . no guarantee that appellee would have found the appropriate persons [to serve] at [the corporation’s place of business].  In any event, we conclude that there is no requirement under [the statute] that such an attempt be made.”); TXXN, Inc. v. D/FW Steel Co., 632 S.W.2d 706, 708 (Tex. App.—Fort Worth 1982, no writ) (“[T]here is a possibility and even a probability in many cases that [a registered agent would not] be found at the corporation’s place or places of business.  We therefore hold that [evidence of appellee’s knowledge of appellant’s place of business] creates no presumption that appellant was amenable to service at that address.”).  Vervoort was not required to attempt service of process at Autodynamics’s principal place of business before resorting to substituted service on the Secretary of State. 

The trial court properly concluded as matter of law that Autodynamics could not show lack of service because (1) Vervoort showed that he exercised reasonable diligence in attempting to locate and serve Varma; and (2) the evidence conclusively establishes that substituted service was accomplished.  See Wright, 2 S.W.3d at 670.  Vervoort’s initial attempts to serve process failed because of Autodynamics’s own negligent failure to comply with the statutory requirements, which are designed to assure it receives notice of pending suits.  See Campus Inv., Inc., 144 S.W.3d at 466.  Accordingly, Autodynamics could not show entitlement to a bill of review based on lack of service of process, and the trial court properly granted summary judgment.  See Caldwell, 154 S.W.3d at 97; Wright, 2 S.W.3d at 670.    

We overrule Autodynamics’s first issue.[9]

II.        Motion for Continuance and Motion to Compel

Autodynamics argues in its second and third issues that the trial court erred in denying its (1) motion for continuance to allow time for Vervoort’s deposition to be transcribed; and (2) motion to compel certain documents belonging to Vervoort’s attorney’s file.  Autodynamics states in its brief: “The testimony and documents from the file of [Vervoort’s attorney] were necessary to AUTODYNAMICS INC. because no where else can it be learned what was known to [Vervoort] regarding AUTODYNAMICS INC.’S principal place of business, and when it was known.”  Autodynamics claims that these materials are relevant to show that Vervoort was aware of the address of Autodynamics’s principal business office, but failed to attempt service of process at that location.

We already have noted that Vervoort was under no obligation to attempt service of process at any location other than the address for Autodynamics’s registered agent at his registered office.  See Tex. Bus. Org. Code Ann. § 5.251(1)(B); see also Ingram Indus., Inc., 121 S.W.3d at 35; Houston’s Wild W., Inc., 690 S.W.2d at 32; TXXN, Inc., 632 S.W.2d at 708.  Discovery related to Vervoort’s knowledge about Autodynamics’s principal business office would not have helped Autodynamics avoid summary judgment. 

Moreover, a diligent party may rely on the registered address a corporation has placed on file with the Secretary of State, even when the party knows that the address is no longer correct.  Wright Bros. Energy, Inc. v. Krough, 67 S.W.3d 271, 274 (Tex. App.—Houston [1st Dist.] 2001, no pet.) (citing Harold-Elliott v. K.P./Miller Realty Growth Fund I, 853 S.W.2d 752, 756 (Tex. App.—Houston [1st Dist.] 1993, no writ)).  Even if Vervoort had been aware that Varma no longer lived at the Fawnlily address, he was entitled to attempt service at that location because it was listed as the registered office of its registered agent.  See id.  Discovery relating to Vervoort’s knowledge on this issue also would not have helped Autodynamics avoid summary judgment.

The trial court properly denied Autodynamics’s motion for continuance and motion to compel.  We overrule Autodynamics’s second and third issues. 

III.      Damages and Attorney’s Fees

In his only issue on cross-appeal, Vervoort argues that this court should award damages and attorney’s fees against Autodynamics because this appeal “is frivolous and brought in bad faith.” 

“If a court of appeals determines that an appeal is frivolous, it may — on motion of any party or on its own initiative, after notice and a reasonable opportunity for response — award each prevailing party just damages.”  See Tex. R. App. P. 45.  Whether to grant sanctions is a matter of discretion that we exercise with prudence and caution, and only after careful deliberation.  Conseco Fin. Serv. v. Klein Ind. Sch. Dist., 78 S.W.3d 666, 676 (Tex. App.—Houston [14th Dist.] 2002, no pet.).  Although imposing sanctions is within our discretion, we will do so only in truly egregious circumstances.  Id.  If an appellant’s argument on appeal fails to convince the court, but has a reasonable basis in law and constitutes an informed, good-faith challenge to the trial court’s judgment, sanctions are not appropriate.  Id.  Although the law is clearly contrary to Autodynamics’s issues on appeal, we decline to award damages or attorney’s fees against Autodynamics in this case.

We overrule Vervoort’s issue on cross-appeal.

CONCLUSION

Having overruled all of Autodynamics’s issues on appeal, and Vervoort’s issue on cross-appeal, we affirm the judgment of the trial court.

                                                            /s/                    William J. Boyce

                                                                                    Justice

Panel consists of Justices Brown, Boyce, and Jamison.

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[1] See Tex. R. Civ. P. 107 (“No default judgment shall be granted in any cause until the citation, or process . . . with proof of service . . . shall have been on file with the clerk of the court ten days . . . .”); Tex. R. Civ. P. 239 (“[A]t any time after a defendant is required to answer, the plaintiff may . . . take judgment by default against such defendant if he has not previously filed an answer . . . .”).

[2] The petition was brought against Vervoort, Vervoort’s attorney Kenneth Zimmern, and the constable who executed the default judgment.  Zimmern and the constable were dismissed from the case on March 31, 2009.

[3] Autodynamics’s Texas Franchise Tax Public Information Reports list the same “[r]egistered agent and registered office currently on file [with the Secretary of State].”  The reports also list the corporation’s principal office and principal place of business as “5723 Star Lane, Houston, Texas, 77057.” Autodynamics filed to change the address of its registered office to the “5723 Star Lane, Houston, Texas, 77057” on March 12, 2009.

[4] Varma answered affirmatively to the following question: “So [the Fawnlily address] was no longer a good address for Sanjay Varma as of 2004, right?” 

[5] In reviewing the trial court’s judgment in a bill of review action, we are not limited to “errors apparent on the fact of the record” and may consider “affidavits, depositions, testimony and exhibits” submitted by the parties to the trial court.  See Marrot, 227 S.W.3d at 379 (citing Fidelity & Guar. Ins. Co. v. Drewery Constr. Co., Inc., 186 S.W.3d 571, 573–74 (Tex. 2006)).

[6] The private process server did not state in her affidavit that she informed the residents that she was attempting to serve process through Varma.

[7] Autodynamics relies on two cases to support its argument that Vervoort did not exercise reasonable diligence: Wright Bros. Energy, Inc. v. Krough, 67 S.W.3d 271 (Tex. App.—Houston [1st Dist.] 2001, no pet.), and Nat’l Multiple Sclerosis Soc’y–N. Tex. Chapter v. Rice, 29 S.W.3d 174 (Tex. App.—Eastland 2000, no pet.).  Both cases are distinguishable.  Wright Brothers Energy, Inc. involved attempted service that failed because the envelope was incorrectly addressed.  Wright Bros. Energy, Inc., 67 S.W.3d at 274. The record in National Multiple Sclerosis Society contained no explanation as to why the attempted service was unsuccessful.  Nat’l Multiple Sclerosis Soc’y, 29 S.W.3d at 177.  In contrast, Autodynamics does not argue that the Fawnlily address used by Vervoort in attempting service was not the same address registered with the Secretary of State, and the record shows that the attempt was unsuccessful because Varma no longer lived at the Fawnlily address at the time of attempted service.  

[8] Autodynamics refers to the address of its principal place of business as the address of its “registered” office.  Although the address of the principal place of business appears in some of the documents filed with the Secretary of State, it is never listed as the address for the registered office of the registered agent.

[9] Autodynamics briefly argues that “[a] person bringing suit must not only file the suit within the statute of limitations, he must use due diligence in serving the Appellee with process. . . .  A fact question exists regarding diligence which must be submitted to the trier of fact.”  The record shows that a Harris County Constable first attempted service of process by certified mail less than a month after suit was filed, and that this attempt was unsuccessful because of Autodynamics’s negligent failure to update the address of its registered agent or office.  Autodynamics cannot show entitlement to a bill of review based on this argument.  See Caldwell, 154 S.W.3d at 97; Wright, 2 S.W.3d at 670.