Kent Davis and D. Kent Davis, P.C. v. Ledford White and M & M Joint Venture ( 2014 )

COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 02-13-00191-CV
KENT DAVIS AND D. KENT DAVIS, APPELLANTS AND APPELLEES
P.C.
V.
LEDFORD WHITE AND M & M APPELLEES AND APPELLANTS
JOINT VENTURE
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FROM THE 96TH DISTRICT COURT OF TARRANT COUNTY
TRIAL COURT NO. 096-257264-11
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MEMORANDUM OPINION 1
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This appeal involves the validity and amount of an exemplary damages
award in a suit by one former law partner against another, arising from the failure
to properly distribute a firm receivable. In three issues, Kent Davis and D. Kent
Davis, P.C. challenge the trial court’s allowing Ledford White and M & M Joint
1
See Tex. R. App. P. 47.4.
Venture to amend their answer post-trial to plead the exemplary damages cap in
section 41.008 of the civil practice and remedies code and the trial court’s
subsequent application of the cap to the jury’s exemplary damages award. Tex.
Civ. Prac. & Rem. Code Ann. § 41.008 (West Supp. 2014). In a cross-appeal,
appellees challenge the sufficiency of the evidence to uphold the jury’s finding
that White’s fraud caused Davis harm. We reverse the trial court’s reduced
award of exemplary damages and render judgment reinstating the jury’s
exemplary damages award of $2.8 million. We affirm the remainder of the
judgment.
Background
White and Davis were partners in a law firm (the Partnership) who had
agreed to split profits equally. The Partnership operated a closing office for a title
insurance company, prepared loan documents for a mortgage company, and
represented individual clients. 2 One of White’s primary clients was Alton Isbell, a
real estate investor and developer.
White, who is board certified in real estate law, did not keep time records
for any of his clients, including Isbell. Instead, White allowed Isbell to pay the
Partnership what he could when he was able. Additionally, the Partnership
received fees when Isbell’s development entities closed on the sale or purchase
of real property.
2
White ran the title office, and Davis was primarily responsible for the loan
document preparation for the mortgage company.
2
White and Isbell formed M & M Joint Venture on August 12, 2003 for the
purpose of purchasing and owning a piece of real property in Crowley (the
Crowley Tract). Each owned fifty percent of the joint venture, but both Isbell and
White testified that White’s ownership was held for the Partnership. Isbell had
given the interest to the Partnership in payment for legal work that White had
already completed. On August 13, 2003, Isbell signed a deed from one of his
companies, Stone Gate Village, Inc., conveying the Crowley Tract to M & M. The
conveyance did not reserve any part of the mineral estate. White did not tell
Davis about M & M, but he testified that “the full intention was to split it with”
Davis.
Also in August 2003, White and Isbell formed a partnership, Lucky IW, with
the same 50/50 ownership, for the purpose of purchasing mineral interests. In
contrast to his ownership of M & M, White considered his ownership interest in
Lucky IW to be his own property. According to White, he did not pay anything for
his interest in Lucky IW because Isbell wanted to take advantage of White’s good
credit. However, White testified that it was possible that Isbell also gave him at
least part of the interest in Lucky IW to satisfy any debt to the Partnership that
might have been left over after giving it the M & M interest, but there was no way
to know.
When White and Isbell formed Lucky IW, the Barnett Shale development
was not as widespread as it later became. White testified that he did not think he
would get paid for any mineral interests in 2003 and that he was not even
3
thinking about mineral interests with respect to the Crowley Tract in 2003.
Nevertheless, White testified at trial that at the time he received the interests in
M & M and Lucky IW, he considered only the surface estate of the Crowley Tract
to be a Partnership receivable. White also did not tell Davis about Lucky IW.
In March 2005, Isbell signed a mineral deed from another of his
development companies, Deer Creek Estates, Inc., to Lucky IW, conveying all of
the mineral estate in the Crowley Tract 3 but specifically reserving the right of
ingress and egress on the surface for the purpose of oil and gas development.
The County Clerk’s registration page lists “White and Davis, LLP,” at the
Partnership’s mailing address.
In 2006, when Davis asked White about what Isbell owed the Partnership,
White told Davis: “I exchanged a receivable for an interest in this joint venture
property over in Crowley, and they - - he can’t sell the property unless I sign off
on it, so we’re taken care of.” White told Davis that he had it covered and Davis
did not need to worry about it. However, White did not tell Davis the name of the
joint venture. They did not discuss the matter again until after the dissolution of
the Partnership, which occurred in early 2007. 4
3
There is evidence that Deer Creek, rather than Stone Gate Villages,
owned the Crowley Tract before the attempted conveyance to M & M, but the
status of M & M’s title is not relevant to the issues on appeal.
4
The Partnership lost its mortgage document preparation business in early
2006; by summer, the Partnership’s receipts were down sixty to seventy percent.
4
The evidence showed that in 2006 White deposited $98,228.31 attributable
to M & M into the Partnership’s real estate escrow account without telling Davis. 5
White could not explain what this money was for. White said that he did not give
any of that money to Davis because he had no memory of depositing that money;
he admitted, however, that if the money really had been paid to M & M, he should
have reimbursed Davis his fifty percent.
By 2007 the Barnett Shale was “in big play, big-time” around the Crowley
Tract. In March 2007, White, on behalf of M & M as the “surface owner,” granted
Chesapeake Operating, Inc. the use of the surface of three acres from the
Crowley Tract for oil and gas operations. In April 2007, White, on behalf of
M & M, and Isbell, on behalf of Stone Gate, signed a document entitled “Lease
Ratification,” in which M & M and Stone Gate ratified two oil and gas leases
dated March 5, 2005 from Deer Creek to FSOC Gas Co., LTD; at least one of the
leases appears to involve the Crowley Tract. In August 2007, Isbell, on behalf of
M & M, signed a special warranty deed conveying five acres of the Crowley Tract
to Chesapeake Exploration, L.L.C. The deed reserved “all oil, gas and other
minerals” to M & M as the grantor. At the bottom of the first page of the deed is
5
The evidence shows that M & M was paid money from various sources
from the date of its creation; any proceeds from M & M were paid into the real
estate escrow account or White’s personal account. Although the real estate
escrow account was a Partnership account that Davis knew about, it was not the
firm’s title or operating account; White was responsible for the majority of the
transactions in the real estate escrow account, and Davis did not involve himself
with the account at all.
5
the following: “After Recording Return To: White & Davis LLP,” at the
Partnership’s address.
In September 2007, White prepared correction deeds––backdated to be
effective March 5, 2005––conveying the Crowley Tract (plus a contiguous 2.545
acres) to M & M from Deer Creek Estates but reserving all of the mineral estate.
By that time, the Crowley Tract, specifically the mineral estate, had increased
significantly in value. White said that he prepared the correction deeds at
Chesapeake Energy’s request to clear problems with the title.
In 2008, White traded his fifty percent interest in Lucky IW for Isbell’s fifty
percent interest in M & M. According to White, Isbell needed to borrow money
for a project, and the bank would not let him use Lucky IW’s mineral interests as
collateral unless Isbell owned one hundred percent of Lucky IW. After the trade,
White owned one hundred percent of M & M and Isbell owned one hundred
percent of Lucky IW. Shortly thereafter, Davis returned to the former
Partnership’s building to office, but he and White did not resume the Partnership.
On March 30, 2010, but effective April 1, 2010, White, on behalf of M & M,
signed a conveyance of M & M’s “right, title and interest in and to the mineral
interests, royalty interests and/or overriding royalty interests” of the Crowley Tract
to four different entities and one person, in varying percentages. The
conveyance stated that it was M & M’s “intention . . . to assign and sell all of its
interests” in Tarrant County, Texas. The conveyance also included general
warranty language.
6
Additionally, on April 1, 2010, White deposited $180,000 in his personal
bank account, also without telling Davis. White also testified that the $180,000
was for the sale of Lucky IW’s mineral rights and that it belonged to Isbell, but
Isbell told White to keep all of the $180,000 because Deer Creek Estates was in
bankruptcy and Isbell had personally guaranteed Deer Creek’s debts. However,
the date of this deposit corresponds with the date of the assignment of mineral
and royalty interests to St. Andrews.
From 2006 to 2010, M & M also received the following, which White did not
disclose to Davis or disburse him any proceeds: (1) $20,000 from the surface
agreement with Chesapeake; (2) $581,000, along with Deer Creek, from
Chesapeake for the two lease ratifications; and (3) royalties from the leases on
the Crowley Tract and other tracts, of which M & M’s share totaled approximately
$160,616.81 (September 2008 through June 2010). 6 M & M also received
$152,000 from the City of Crowley for the sale of about two and one-half acres of
the Crowley Tract, but White applied the majority of that money to the payment of
back taxes on that small part of the Crowley Tract and on the building that the
Partnership still owned.
In contrast, White paid Davis $50,000 from the sale of five acres of the
Crowley Tract to Chesapeake in August 2007.
6
White contended that the royalties should have been paid to Lucky IW
and that he and Isbell could never get Chesapeake to tell them why it continued
to pay royalties to M & M instead of Lucky IW.
7
Sometime around spring 2010, Davis again asked White about the
Crowley Tract, and White told him that “we” were “still trying to sell it” but that
“nothing’s going on” and things were still “sluggish.” Davis believed he had no
reason to doubt what White was telling him. Also in 2010, Davis became
concerned about the extent of activity related to the mineral estate of the Crowley
Tract after talking to a former client of White’s, Mike Parks. Eventually, after
receiving numerous calls from Parks telling Davis to look into the situation, Davis
asked White about the mineral rights to the Crowley Tract; White told Davis that
the minerals were not part of the Partnership’s deal. At that time, Davis still
trusted White.
Davis finally learned the name of the joint venture when reading Isbell’s
deposition in Deer Creek’s bankruptcy proceeding. Davis did not find out that
White owned and controlled one hundred percent of M & M until 2011 when
Parks and White had a heated argument in White’s office, during which White
confirmed his ownership of M & M.
In December 2011, Davis sued White and M & M claiming breach of
fiduciary duty and fraud; he sought actual and exemplary damages, the
imposition of a constructive trust on the Crowley Tract, and an accounting. A jury
found that White had breached his fiduciary duty to Davis and had committed
fraud, awarding appellants actual damages of $374,672.56 and exemplary
damages of $2.8 million. The jury also found that Davis was entitled to a fifty
percent interest in M & M.
8
Appellants moved for judgment on the jury’s verdict. In their motion,
appellants contended that the exemplary damages award should not be subject
to the cap in section 41.008 because appellees had waived application of the cap
by failing to plead it as an affirmative defense. Appellees responded by arguing
that the cap in section 41.008 is not an affirmative defense that must be pleaded;
however, they also filed a post-trial motion seeking an amendment of their
answer to add the statutory cap. The trial court allowed appellees to amend their
answer.
The trial court signed a judgment awarding appellants actual damages of
$282,084.82, after the application of a stipulated offset. The trial court also
applied the statutory cap to the exemplary damages award, limiting it to
$564,169.64. Finally, the trial court imposed a constructive trust on an undivided
fifty percent of M & M and its assets.
Issues on Appeal
In three issues, appellants contend that the trial court should not have
allowed appellees to amend their answer to plead section 41.008 as an
affirmative defense and should not have applied the section 41.008 exemplary
damages cap as a matter of law. In their cross-appeal, appellees challenge the
sufficiency of the evidence to support the jury’s finding that, for purposes of
awarding exemplary damages, Davis’s harm resulted from White’s fraud.
Because a determination in appellees’ favor would be dispositive of appellants’
appeal, we will review the cross-appeal first.
9
Sufficiency of the Evidence to Support Fraud Causation Finding
Appellees contend that there is no clear and convincing evidence to
support the jury’s finding that the harm to Davis was caused by White’s fraud. 7
See Tex. Civ. Prac. & Rem. Code Ann. § 41.003(a) (West Supp. 2014).
Preservation of Issue
Appellants contend that appellees failed to preserve this issue 8 for appeal
by failing to file a post-trial motion raising this issue or by making only a general
objection at trial.
A no-evidence issue is preserved for appeal by (1) a motion for instructed
verdict, (2) a motion for judgment notwithstanding the verdict, (3) an objection to
the submission of the issue to the jury, (4) a motion to disregard the jury’s answer
to a vital fact issue, or (5) a motion for new trial. Cecil v. Smith, 804 S.W.2d 509,
510–11 (Tex. 1991). Appellees did not raise this issue in a post-trial motion, but
they objected to the submission of Question Number 6 in the jury charge on the
grounds of “no evidence, or legally insufficient evidence, to warrant the
submission of th[e] issue.” Question Number 6 stated, “Do you find by clear and
7
Appellees do not challenge the sufficiency of the evidence to support the
jury’s fraud finding with respect to the actual damages awarded because they
concede that the actual damages are recoverable on appellants’ breach of
fiduciary duty claim. Here, the same evidence that supports the jury’s actual
fraud finding would support its decision to award exemplary damages, as long as
the evidence meets the elevated “clear and convincing” standard. See Sw. Bell
Tel. Co. v. Garza, 164 S.W.3d 607, 621–22, 627 (Tex. 2004).
8
Appellees’ broad challenge to the fraud finding is presented in three
issues.
10
convincing evidence that harm to Davis resulted from fraud as defined in
Question No. 2?” Question Number 2 stated,
Fraud occurs when ––
a. a party makes a material misrepresentation, and
b. the misrepresentation is made with knowledge of its falsity
or made recklessly without any knowledge of the truth and
as a positive assertion, and
c. the misrepresentation is made with the intention that it
should be acted on by the other party, and
d. the other party relies on the misrepresentation and thereby
suffers injury.
“Misrepresentation” means:
a. a false statement of fact,
OR WHEN ––
b. a fiduciary fails to disclose a material fact within the
knowledge of that fiduciary, and
c. the fiduciary knows that the other party is ignorant of the
fact and does not have an equal opportunity to discover
the truth, and
[d.] the fiduciary intends to induce the other party to take some
action by failing to disclose the fact.
Appellants argue that appellees did not preserve the issue because
[f]raud in this case was submitted as either traditional fraud or fraud
by non-disclosure when there was a fiduciary duty to disclose.
Under fraud by failure to disclose, reliance and causation are
submitted differently, and may be satisfied by showing simply that
the injured party suffered damages as a result of acting without
knowledge of the undisclosed fact. . . .
11
....
Nothing about White’s objections specified which option he
believed the evidence to be legally insufficient to support. . . .
. . . Nothing about White’s objections to Questions 2 and 6
apprised the trial court of the nature of this objection.
Appellants thus contend that because Question Number 6 refers back to
Question Number 2, and because Question Number 2 references two different
types of fraud, appellees failed to apprise the trial court which type of fraud
should not be submitted for lack of sufficient evidence.
Generally, a no-evidence objection directed to a single jury issue is
sufficient to preserve error without further detail. Arkoma Basin Exploration Co.
v. FMF Assocs. 1990-A, Ltd., 249 S.W.3d 380, 387 (Tex. 2008). Like all other
procedural rules, those regarding the specificity of post-trial objections should be
construed liberally so that the right to appeal is not lost unnecessarily. Id. at 388.
Appellants’ argument is premised on their interpretation of whether
causation must be shown in fraud by nondisclosure; they contend that it does
not, but appellees contend it does. This issue was not raised or disputed at trial
and is not necessary to the resolution of this appeal. Appellees clearly objected
to the submission of either type of fraud with respect to both actual and
exemplary damages on the grounds that there was insufficient evidence to
support either type of fraud (all of Question Number 2) and that any fraud by
White caused harm to Davis (Question Number 6). We do not think these
general objections failed to make the trial court aware of the nature of appellees’
12
objections. Thus, we conclude and hold that appellees’ general sufficiency
objection to Question Number 6 preserved their complaint on appeal regarding
the sufficiency of the evidence to show causation. See, e.g., Majeed v. Hussain,
No. 03-08-00679-CV, 2010 WL 4137472, at *6 (Tex. App.––Austin Oct. 22, 2010,
no pet.) (mem. op.).
Standard of Review
Clear and convincing evidence is that measure or degree of proof that will
produce in the mind of the trier of fact a firm belief or conviction as to the truth of
the allegations sought to be established. Tex. Civ. Prac. & Rem. Code Ann.
§ 41.001(2) (West 2008); Tex. Fam. Code Ann. § 101.007 (West 2014); U-Haul
Int’l, Inc. v. Waldrip, 380 S.W.3d 118, 137 (Tex. 2012); State v. K.E.W., 315
S.W.3d 16, 20 (Tex. 2010). This intermediate standard of proof falls between the
preponderance standard of proof applicable to most civil proceedings and the
reasonable doubt standard of proof applicable to most criminal proceedings.
In re G.M., 596 S.W.2d 846, 847 (Tex. 1980); State v. Addington, 588 S.W.2d
569, 570 (Tex. 1979). While the proof must be of a heavier weight than merely
the greater weight of the credible evidence, there is no requirement that the
evidence be unequivocal or undisputed. Addington, 588 S.W.2d at 570.
In evaluating the evidence for legal sufficiency, we must determine
whether the evidence is such that a factfinder could reasonably form a firm belief
or conviction that its finding was true. K.E.W., 315 S.W.3d at 20; Columbia Med.
Ctr. of Las Colinas, Inc. v. Hogue, 271 S.W.3d 238, 248 (Tex. 2008), cert.
13
denied, 290 S.W.3d 873 (2009). We review all the evidence in the light most
favorable to the finding. Waldrip, 380 S.W.3d at 138; Hogue, 271 S.W.3d at 248.
We resolve any disputed facts in favor of the finding if a reasonable factfinder
could have done so. K.E.W., 315 S.W.3d at 20; Hogue, 271 S.W.3d at 248. We
disregard all evidence that a reasonable factfinder could have disbelieved.
Hogue, 271 S.W.3d at 248. We consider undisputed evidence even if it is
contrary to the finding. Id.; City of Keller v. Wilson, 168 S.W.3d 802, 817 (Tex.
2005). That is, we consider evidence favorable to the finding if a reasonable
factfinder could, and we disregard contrary evidence unless a reasonable
factfinder could not. See K.E.W., 315 S.W.3d at 20; Hogue, 271 S.W.3d at 248.
The factfinder, not this court, is the sole judge of the credibility and demeanor of
the witnesses. In re J.O.A., 283 S.W.3d 336, 346 (Tex. 2009).
Applicable Law
Under section 41.003 of the civil practice and remedies code, exemplary
damages may be awarded only if the claimant proves by clear and convincing
evidence that the harm with respect to which the exemplary damages are sought
resulted from fraud, malice, or gross negligence. Tex. Civ. Prac. & Rem. Code
Ann. § 41.003(a). For purposes of section 41.003, fraud does not include
constructive fraud. 9 Id. § 41.001(6) (West 2008). Additionally, a plaintiff’s burden
9
“Constructive fraud is the breach of some legal or equitable duty which,
irrespective of moral guilt, the law declares fraudulent because of its tendency to
deceive others, to violate confidence, or to injure public interests.” Kohannim v.
Katoli, 440 S.W.3d 798, 810 (Tex. App.––El Paso 2013, pet. denied),
14
to prove such fraud, malice, or gross negligence may not be met with evidence of
ordinary negligence, bad faith, or a deceptive trade practice. Id. § 41.003(b).
The evidence must show that the defendant’s acts or omissions were a
cause-in-fact of the plaintiff’s injury, i.e., a substantial factor in bringing about an
injury which otherwise would not have occurred. See Formosa Plastics Corp.
USA v. Presidio Eng’rs & Contractors Inc., 960 S.W.2d 41, 47 (Tex. 1998) (op.
on reh’g). Like common-law fraud, fraud by nondisclosure includes the elements
of justifiable reliance and damage. BP Am. Prod. Co. v. Zaffirini, 419 S.W.3d
485, 506 (Tex. App.––San Antonio 2013, pets. denied); Horizon Shipbuilding,
Inc. v. BLyn II Holding, LLC, 324 S.W.3d 840, 850 (Tex. App.––Houston [14th
Dist.] 2010, no pet.).
Analysis
The evidence shows that Davis trusted White and relied on him to collect
and distribute receivables attributable to work done for Isbell, as well as White’s
other clients. Instead of naming the Partnership as the other owner of M & M
with Isbell, White named himself. White did not give Davis any information that
would have allowed Davis to discover the owner of the property, and he knew
that Davis could not have done so. Not only did White not tell Davis about the
Partnership’s interest in M & M when asked by Davis, he referenced it only
disapproved of on other grounds by Ritchie v. Rupe, 443 S.W.3d 856, 870–71 &
n.17 (Tex. 2014). Thus, to prove entitlement to exemplary damages under
section 41.003, a plaintiff must show causation. Tex. Civ. Prac. & Rem. Code
Ann. § 41.003(a). Here, appellants did not plead constructive fraud.
15
vaguely 10 and without any limitation regarding the surface or mineral estate. He
also misrepresented in 2010 that he and Isbell still held ownership of the property
and were trying to sell it after he had transferred the remainder of the ownership
of the surface tract of M & M to himself. The evidence thus shows that White
failed to disclose the true nature of the Partnership’s interest to his partner, either
at the inception of the interest or during the dissolution of the Partnership, and he
also affirmatively misrepresented the nature of that interest. Both the
nondisclosure and misrepresentation facilitated White’s ability to deposit funds
from M & M into an account he controlled without any accountability to Davis.
White’s own testimony about the nature of M & M’s interest in the Crowley
Tract conflicted: he agreed that he was not even thinking about minerals in
2003, but he nevertheless asserted that the Partnership receivable was for the
surface estate only. As an attorney board certified in real estate law, White was
aware of the effect of failing to reserve the mineral estate in the deed to M & M.
It stands to reason that if M & M had not intended to own the mineral estate,
White would have reserved the mineral estate in that deed. And although he
likely prepared, or at the very least knew of the 2005 deed putting the mineral
estate of the Crowley Tract into Lucky IW, he did not inform Davis at the time.
White did not tell Davis about the M & M receivables being paid into the
escrow account and his personal account, about the backdated correction deeds,
10
White said he told Davis “there was a piece of property that we would get
paid out of.”
16
or about any of the mineral activity that was occurring with respect to the Crowley
Tract. This activity and the beginning of payments corresponds to the time the
Partnership’s receipts were down sixty to seventy percent. White gave
conflicting testimony about the royalty money: he testified in his deposition that
he did not pay any of it to Isbell, but he later testified at trial that the money went
to Lucky IW, which at that time belonged wholly to Isbell. He had no proof to
show payments to Lucky IW, however. When asked about the approximately
$160,000 in royalties paid to M & M, Isbell stated, “It wasn’t mine,” and he did not
think he was entitled to any of it.
White deposited money into the Partnership’s real estate escrow account
with the name M & M on the deposit slip, yet he did not keep track of what the
money was for and later said it was Lucky IW’s money. He did not document
transactions related to M & M in the Partnership’s escrow account, nor did he
keep records of what may have been owed to Isbell or his entities, including
Lucky IW or Deer Creek. Moreover, the evidence shows that White did not
distribute to Davis his share of all payments to M & M related to the Crowley
Tract’s surface. 11
11
When asked about the $20,000 for the surface agreement, White then
testified that the Partnership’s interest extended only to “sales” of all or part of the
Crowley Tract and not all transactions related to White’s ownership, through
M & M, of the surface. There is no evidence that White ever explained this
distinction to Davis until after receiving money attributable to the mineral estate.
17
White’s expert agreed that the March 2010 mineral interest assignment
should not have included a general warranty of the mineral interests if M & M did
not actually own them. He also agreed that White, as a thirty-five year attorney
board certified in real estate, would have understood and appreciated the effect
of the document.
The evidence thus shows that White failed to disclose the name of the
entity holding the receivable, the structure of that entity, and the transactions
affecting the structure and income stream of the receivable. He also
misrepresented the ownership of the entity. Because of his position of trust in
dealing with the real estate escrow account and monies owed by Isbell––and the
dissolution of the Partnership––White was able to effectively keep this
information from Davis, knowing that without this information, Davis would have a
difficult time finding out the true nature of the deals between White and Isbell.
Additionally, the evidence shows that White affirmatively represented to Davis
that “nothing’s going on” and that he and Isbell were having trouble selling the
property when White was the sole owner of M & M at that time.
Accordingly, the evidence shows that White––by both misrepresentation
and nondisclosure––was able to facilitate transactions in such a way that he not
only could conceal them from his former partner but also prevent his former
18
partner from discovering what the Partnership was truly owed. 12 We conclude
and hold that this evidence is sufficient under the clear and convincing standard
to uphold the jury’s findings as to both reliance and causation. See Bazan v.
Muñoz, 444 S.W.3d 110, 120 (Tex. App.––San Antonio 2014, no pet.); Cooper v.
Cochran, 288 S.W.3d 522, 532–33 (Tex. App.––Dallas 2009, no pet.) (op. on
reh’g).
Evidence Not Mere Bad Faith
Appellees argue that the above evidence amounts to nothing more than
bad faith and thus does not meet the requirements of section 41.003. Bad faith
has been defined as the conscious doing of a wrong for a dishonest,
discriminatory, or malicious purpose. Bd. of Adjustment of City of Dallas v.
Billingsley Family Ltd. P’ship, 442 S.W.3d 471, 477 (Tex. App.––Dallas 2013, no
pet.); Robson v. Gilbreath, 267 S.W.3d 401, 407 (Tex. App.––Austin 2008, pet.
denied); see also City of Austin v. Whittington, 384 S.W.3d 766, 786 (Tex. 2012)
(involving jury charge defining bad faith as requiring improper motive). Bad faith
is not simply bad judgment or negligence. Falk & Mayfield L.L.P. v. Molzan, 974
S.W.2d 821, 828 (Tex. App.––Houston [14th Dist.] 1998, pet. denied); Elbaor v.
Sanderson, 817 S.W.2d 826, 829 n.1 (Tex. App.––Fort Worth 1991, no writ).
12
White himself testified that he did not know what happened to much of
the money attributable to M & M or what payments purportedly to M & M were
for.
19
As we have explained, the evidence supports the conclusion that White’s
initial structuring of M & M, the initial deed of the Crowley Tract to M & M, his
failure to inform his partner––and affirmative misrepresentations to his partner––
of the nature of M & M’s ownership of the Crowley Tract, and his inability to
account for the nature of payments to M & M show his specific intent to deprive
Davis of money owed him from the former Partnership and to keep the bulk of
the income generated from the former Partnership’s asset for himself, without
any accountability to Davis. See Johnson & Higgins of Tex., Inc. v. Kenneco
Energy, Inc., 962 S.W.2d 507, 526 (Tex. 1998) (op. on reh’g) (“Proof that a
defendant made a statement knowing of its falsity or without knowledge of its
truth may be proved by direct or circumstantial evidence.”); JJJJ Walker, LLC v.
Yollick, No. 14-13-00161-CV, 2014 WL 4933040, at *7 (Tex. App.––Houston
[14th Dist.] Sept. 25, 2014, no pet. h.) (op. on reh’g). Accordingly, we conclude
and hold that the evidence is sufficient to support the jury’s finding that the harm
to Davis resulted from fraud such that the jury’s award of exemplary damages
was authorized by section 41.003. We overrule the three issues in appellees’
cross-appeal.
Propriety of Post-Trial Amendment to Apply Exemplary Damages Cap
Appellants challenge the trial court’s allowing appellees to amend their
pleadings after the jury verdict to plead the cap on exemplary damages in section
41.008(a) of the civil practice and remedies code.
20
Preservation
Appellees contend that appellants failed to preserve their complaint about
the application of the cap because they did not challenge every independent
ground upon which the trial court could have limited the jury’s exemplary
damages award. Appellees list those grounds as follows:
• Subsection 41.008(b) caps punitive damages at two-times actual
damages.
• An award of more than two-times actual damages would be excessive
under state law principles.
• An award of more than two-times actual damages would violate federal
constitutional principles.
But appellees did not raise these grounds in the trial court; instead, they
relied solely on their arguments that (a) the cap applies whether pled or not or (b)
they were entitled to a trial amendment to plead the cap as an affirmative
defense. Because appellees did not seek limitation of the exemplary damages
on either a federal or state excessiveness theory, the trial court could not have
properly granted the reduction on those grounds. Compare Britton v. Tex. Dep’t
of Crim. Justice, 95 S.W.3d 676, 681 (Tex. App.––Houston [1st Dist.] 2002, no
pet.) (stating general rule that appellate court must affirm trial court judgment
when appellant fails to “attack all independent bases or grounds that fully support
a complained-of ruling or judgment”), with Tex. R. Civ. P. 301 (providing that
judgment must conform to pleadings unless issues tried by express or implied
21
consent), Tex. R. Civ. P. 324(b)(4), and Hawthorne v. Guenther, 917 S.W.2d
924, 937 (Tex. App.––Beaumont 1996, writ denied) (requiring complaint about
excessiveness of exemplary damages award to be raised at trial). 13 Therefore,
appellants did not have to challenge those grounds on appeal.
Standard of Review
A party may amend its pleadings at any time unless the amendment will
operate as a surprise. Tex. R. Civ. P. 63. But a party must obtain leave of court
to amend its pleading within seven days of trial or thereafter. Id. The trial court
may not refuse an amendment unless the opposing party presents evidence of
surprise or prejudice or unless the amendment on its face is calculated to
surprise or “would reshape the cause of action, prejudicing the opposing party
and unnecessarily delaying the trial.” Greenhalgh v. Serv. Lloyds Ins. Co., 787
S.W.2d 938, 939–40 (Tex. 1990); Dunnagan v. Watson, 204 S.W.3d 30, 38 (Tex.
App.––Fort Worth 2006, pet. denied). This applies even to post-trial
amendments. See generally Greenhalgh, 787 S.W.2d at 939–40. An amended
pleading is not prejudicial as a matter of law merely because it asserts a new
cause of action. Dunnagan, 204 S.W.3d at 37–38; Smith Detective Agency &
Nightwatch Serv., Inc. v. Stanley Smith Sec., Inc., 938 S.W.2d 743, 749 (Tex.
13
See also Schexnayder v. Bonfiglio, 167 Fed. App’x 364, 368 (5th Cir.
2006); Owens-Corning Fiberglas Corp. v. Malone, 972 S.W.2d 35, 50 (Tex.
1998); Riedell v. Hoffman Controls Corp., No. 05-00-00658-CV, 2001 WL
832342, at *2 (Tex. App.––Dallas July 25, 2001, no pet.) (not designated for
publication).
22
App.––Dallas 1996, writ denied). The burden of showing surprise or prejudice is
on the party resisting the amendment. Greenhalgh, 787 S.W.2d at 939.
Factors that courts have considered in determining whether a party has
shown surprise sufficient to preclude a pleading amendment include (1) how long
the suit had been on file before the amendment was filed, (2) how soon before
trial the amendment was made, (3) whether the amendment presented a new
claim or cause of action, (4) whether the new cause of action was based on
recently discovered matters, and (5) whether the resisting party alleged surprise
and that he was not prepared to try the new cause of action. Dunnagan, 204
S.W.3d at 38–39; Stevenson v. Koutzarov, 795 S.W.2d 313, 321 (Tex. App.––
Houston [1st Dist.] 1990, writ denied) (op. on reh’g).
Applicable Law
Appellees argued at trial, and they argue on appeal, that the cap in section
41.008 need not be pled at all and that the trial court must automatically apply
the cap to any such award. We disagree. We have previously held in a case
involving a cap under the labor code that “[a]s a general rule, where maximum
damages are provided in statutes in Texas, and a defendant wants to rely on the
cap, it is considered a defense that must be pleaded and proved.” O’Dell v.
Wright, 320 S.W.3d 505, 515–16 (Tex. App.––Fort Worth 2010, pet. denied)
(citing section 41.008 and Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d
887, 896–97, 904–05 (Tex. 2000), in which the supreme court held that a party’s
mistakenly pleading the wrong section number of the cap as an affirmative
23
defense did not preclude application of the section 41.008 cap). 14 Appellees
challenge our holding in O’Dell, as well as our holding in the underlying Auld
appeal, as dicta and argue instead that we should follow the Amarillo Court of
Appeals’s conclusion that the exemplary damages cap is not an affirmative
defense that must be pled and proven at trial. See THI of Tex. at Lubbock I, LLC
v. Perea, 329 S.W.3d 548, 588 (Tex. App.––Amarillo 2010, pet. denied). 15
In Auld, we noted the nature of the application of the cap as a partial
avoidance of the total exemplary damages that could be awarded; thus, we
concluded that such a cap is in the nature of an affirmative defense. 985 S.W.2d
at 233; see Tex. R. Civ. P. 94. In its opinion on direct appeal in Auld, the
supreme court referred to the statutory cap on actual damages in the former
version of the healthcare liability statute as an affirmative defense. 34 S.W.3d at
904; cf. Daniel B. Tukel, The Best Defense or a Good Offense? Are the Damage
Caps in 42 U.S.C. § 1981A Waivable Affirmative Defenses?, 24 Lab. Law. 303,
14
See also Marin v. IESI TX Corp., 317 S.W.3d 314, 332–33 (Tex. App.––
Houston [1st Dist.] 2010, pet. denied) (op. on reh’g); Wackenhut Corrections
Corp. v. de la Rosa, 305 S.W.3d 594, 651, 653 (Tex. App.––Corpus Christi 2009,
no pet.); Horizon/CMS Healthcare Corp. v. Auld, 985 S.W.2d 216, 233 (Tex.
App.––Fort Worth 1999) (op. on reh’g) (“A defendant who pleads the intent to
rely at trial on a statutory cap of anticipated punitive damages is simply pleading
a defensive theory by which the defendant will try to avoid a portion of the
damages the plaintiff seeks.”), rev’d in part on other grounds, 34 S.W.3d 887
(Tex. 2000).
15
See also Hall v. Diamond Shamrock Refining Co., 82 S.W.3d 5, 22–23
(Tex. App.––San Antonio 2001), rev’d on other grounds, 168 S.W.3d 164 (Tex.
2005) (op. on reh’g); Seminole Pipeline Co. v. Broad Leaf Partners, Inc., 979
S.W.2d 730, 758–59 (Tex. App.––Houston [14th Dist.] 1998, no pet.).
24
311 (2009) (“Cases in which federal courts of appeal have found that a statutory
damage cap is an affirmative defense that is waived if not timely asserted have
two important elements in common: (1) The damage cap is found in a statute
distinct from the authority on which the cause of action itself––whether statutory
or common-law––was based and (2) the courts found that prejudice would result
from allowing the late assertion of the statutory cap defense because it would
prevent the plaintiff from having the opportunity to develop facts or present
evidence that might mitigate or defeat the defense.”).
We are not persuaded by appellees’ arguments that practical concerns
dictate a different result. 16 We are guided by our prior characterization in Auld––
whether or not necessary to the ultimate outcome of that appeal––and our
repetition of the same reasoning in O’Dell, that the application of the cap is
tantamount to a plea in at least partial avoidance, which can be alternately
defined as “[t]he act of evading or escaping,” “refraining from,” or “voidance.”
Black’s Law Dictionary (9th ed. 2009). Our conclusion is also supported by the
nature of the pleading of the cap, which would put a plaintiff on notice of the
potential applicability of a capbuster, thus injecting a potential fact issue into the
trial that may not be resolved by an appellate court. See, e.g., In re T.N., 180
16
Likewise, appellees’ reliance on other statutes and cases interpreting
them is misplaced. See In re Islamadora Fish Co. Tex., L.L.C., 319 S.W.3d 908,
912–13 (Tex. App.––Dallas 2010, orig. proceeding) (op. on reh’g) (determining
applicability of section 41.005 of civil practice and remedies code need not be
pled as affirmative defense when defendant pled general applicability of caps in
section 41).
25
S.W.3d 376, 382–83 (Tex. App.––Amarillo 2005, no pet.) (“[T]he fact finder, as
opposed to the reviewing body, enjoys the right to resolve credibility issues and
conflicts within the evidence.”).
The parties dispute the effect that appellees’ failure to plead the cap before
trial had on appellants’ pleading and proof of exemplary damages in this case.
Additionally, appellees attempt to cast appellants’ alternative arguments for
reversal as judicial admissions. See Holy Cross Church of God in Christ v. Wolf,
44 S.W.3d 562, 568 (Tex. 2001) (“Assertions of fact, not [pled] in the alternative,
in the live pleadings of a party are regarded as formal judicial admissions.”
(emphasis added)). We are likewise not persuaded by these arguments. We
recognize that there is a definite split of authority regarding whether statutory
damages caps in general must be pled as affirmative defenses––in state and
federal cases as well as in different statutory schemes. However, appellees’
arguments and cited authority do not convince us to abandon this court’s prior
holdings. 17 Thus, we will review whether the trial court abused its discretion by
allowing appellees to amend their pleadings post-trial to include the cap.
17
Appellees also contend that the supreme court impliedly held that the cap
is absolute, and not an affirmative defense, in In re Columbia Med. Ctr. of Las
Colinas, 306 S.W.3d 246, 247–48 (Tex. 2010) (orig. proceeding), by vacating a
trial court’s new trial order, which it issued in the face of a supreme court opinion
remanding for a new determination of punitive damages when the actual
damages award had been reduced. The supreme court held, “[R]egardless of
whether an appellate court judgment expressly commands it, trial courts must
give effect to statutory caps on damages when the parties raise the issue.” Id. at
248. We agree with the Corpus Christi Court of Appeals’s opinion in Zorrilla v.
AYPCO Constr. II, LLC, 421 S.W.3d 54, 68 (Tex. App.––Corpus Christi 2013,
26
Analysis
At the hearing regarding the applicability of the cap, the trial court
appeared to be persuaded that the cap is not an affirmative defense and
therefore that it was unnecessary for appellees to amend their pleadings. The
trial judge asked the attorneys at the hearing if appellants would have an
obligation to plead any applicable capbuster in their initial pleadings, regardless
of whether appellees had pled the cap as an affirmative defense in their answer.
Appellants’ counsel argued that although he did not plead facts supporting the
application of a capbuster listed in section 41.008(c), he would have pleaded and
introduced proof of the applicability of penal code section 32.45 had he known
that appellees intended to rely on the cap. Tex. Penal Code Ann. § 32.45 (West
Supp. 2014). Instead, he asked only for exemplary damages within jurisdictional
limits. Additionally, he would have asked for a jury instruction on the capbuster
and tried to obtain a specific finding.
Although appellees contend that appellants pled the capbuster by alleging
in their pleadings that White knowingly and intentionally misapplied fiduciary
property, a fair reading of that pleading shows that appellants pled these facts in
connection with their breach of fiduciary duty and fraud by nondisclosure claims
pet. filed), in which it held that Columbia did not overrule its prior opinion in
Wackenhut, because it is unclear whether the parties raised the issue properly in
Columbia by initially pleading the statutory cap as an affirmative defense. In the
absence of a more clear pronouncement from the supreme court, we decline to
rely on Columbia to hold that the cap is not an affirmative defense; likewise, the
result in this case is dictated by appellees’ failure to timely plead the cap.
27
and, thus, that they did not anticipate the defensive cap in their own pleadings.
But cf. Phillips v. Phillips, 820 S.W.2d 785, 789 (Tex. 1991) (holding that
defendant may rely on plaintiff’s anticipatory pleading in response to unpled
defensive matters). Although the exemplary damages are based on appellants’
fraud claims, they do not link the knowing and intentional misapplication of
property allegations to their claim for exemplary damages such that a reliance on
penal code section 32.45 as a capbuster is evident:
White’s conduct as set forth above was intentional in that
White intended to gain an additional and unwarranted benefit above
and beyond that of his partner Davis. Additionally, because White
knew his representations were false at the time they were made, the
representations were fraudulent and malicious and constitute
conduct for which the law warrants the imposition of exemplary
damages. Accordingly, Plaintiffs sue for exemplary damages in a
sum within the jurisdictional limits of this court.
See Boyles v. Kerr, 855 S.W.2d 593, 601 (Tex. 1993) (op. on reh’g).
We conclude and hold that appellants showed that they were surprised
and prejudiced by appellees’ failure to plead the cap before trial in that appellants
would and could have pled and introduced proof of a capbuster. Appellees
contend that even so, the trial court nevertheless had discretion to grant the
amendment. See State Bar of Tex. v. Kilpatrick, 874 S.W.2d 656, 658 (Tex.) (“If
the trial amendment is not mandatory, then the decision to permit or deny the
amendment rests within the sound discretion of the trial court.”), cert. denied, 512
U.S. 1236 (1994). But after making this statement in Kilpatrick, the supreme
court went on to analyze whether there was a showing of surprise or prejudice,
28
finding none. Id. at 658–59. Here, appellants have shown that appellees’ failure
to plead the cap prejudiced their pleading and proof of a capbuster.
We conclude and hold that the trial court abused its discretion by granting
the trial amendment in the face of evidence of surprise and prejudice to
appellants. We sustain appellants’ sole issue on appeal.
Ethical Concerns Raised By Evidence
Although neither party has raised the troubling ethical concerns inherent in
this appeal––and we do not consider them for purposes of the resolution of the
liability issues as indicated in the Preamble to the Disciplinary Rules of
Professional Conduct––we nevertheless are duty-bound to address and report
potential ethical violations when they come to our attention. See Tex.
Disciplinary Rules Prof’l Conduct preamble ¶ 15, reprinted in Tex. Gov’t Code
Ann., tit. 2, subtit. G, app. A (West 2013) (Tex. State Bar R. art. X, § 9). Below,
we list the following parts of the Disciplinary Rules of Professional Conduct that
the evidence potentially implicates in this case:
• “A consequent obligation of lawyers is to maintain the highest standards of
ethical conduct.” Tex. Disciplinary Rules Prof’l Conduct preamble ¶ 1.
• “A lawyer’s conduct should conform to the requirements of the law, both in
professional service to clients and in the lawyer’s business and personal
affairs.” Tex. Disciplinary Rules Prof’l Conduct preamble ¶ 4.
29
• “A lawyer shall not assist or counsel a client to engage in conduct that the
lawyer knows is criminal or fraudulent.” Tex. Disciplinary Rules Prof’l
Conduct R. 1.02(c) & cmt ¶ 7.
• “When a lawyer has confidential information clearly establishing that a
client is likely to commit a criminal or fraudulent act that is likely to result in
substantial injury to the financial interests or property of another, the
lawyer shall promptly make reasonable efforts under the circumstances to
dissuade the client from committing the crime or fraud.” 18 Tex. Disciplinary
Rules Prof’l Conduct R. 1.02(d).
• “When a lawyer has confidential information clearly establishing that the
lawyer’s client has committed a criminal or fraudulent act in the
commission of which the lawyer’s services have been used, the lawyer
shall make reasonable efforts under the circumstances to persuade the
client to take corrective action.” Tex. Disciplinary Rules Prof’l Conduct R.
1.02(e).
• “A lawyer shall not prepare an instrument giving the lawyer or a person
related to the lawyer as a parent, child, sibling, or spouse any substantial
gift from a client, including a testamentary gift, except where the client is
18
“Debtors in a bankruptcy action have an absolute duty to report whatever
interests they hold in property, even if they believe the asset is worthless or
unavailable to the bankruptcy estate.” Stewart v. Hardie, 978 S.W.2d 203, 208
(Tex. App.––Fort Worth 1998, pet. denied) (op. on reh’g) (citing In re Yonikus,
974 F.2d 901, 904 (7th Cir. 1992)).
30
related to the donee” except for “standard commercial transactions
between the lawyer and the client for products or services that the client
generally markets to others.” Tex. Disciplinary Rules Prof’l Conduct R.
1.08(b), (j).
• “In the course of representing a client a lawyer shall not knowingly: (a)
make a false statement of material fact or law to a third person . . . .” Tex.
Disciplinary Rules Prof’l Conduct R. 4.01(a).
• “A lawyer shall not . . . (1) violate these rules . . . ; [or] (3) engage in
conduct involving dishonesty, fraud, deceit or misrepresentation.” Tex.
Disciplinary Rules Prof’l Conduct R. 8.04(a)(1), (3).
Having identified potential violations of the above rules, we are compelled
to report them by forwarding a copy of this opinion and the appellate record to
the Texas State Bar’s Chief Disciplinary Counsel’s Office.
31
Conclusion
Having sustained appellants’ issue on appeal, and having overruled
appellees’ issues in their cross-appeal, we reverse the trial court’s award of
exemplary damages and render judgment on the jury’s verdict that appellants
recover from appellees $2.8 million in exemplary damages. We affirm the
remainder of the trial court’s judgment. 19
/s/ Terrie Livingston
TERRIE LIVINGSTON
CHIEF JUSTICE
PANEL: LIVINGSTON, C.J.; MCCOY and MEIER, JJ.
DELIVERED: December 29, 2014
19
Although appellants pled for a constructive trust on M & M as an
alternative to their request for the entire exemplary damages amount, appellees
have not asked this court for any relief regarding the constructive trust,
dependent on the outcome of the appeal.
32