Michael D. Karns v. Jalapeno Tree Holdings, LLC Mark S. Parmerlee And Paul Bambrey , 459 S.W.3d 683 ( 2015 )

COURT OF APPEALS
EIGHTH DISTRICT OF TEXAS
EL PASO, TEXAS
§
MICHAEL D. KARNS, No. 08-13-00314-CV
§
Appellant, Appeal from the
§
v. County Court at Law No. 5
§
JALAPENO TREE HOLDINGS, L.L.C., of Dallas County, Texas
MARK S. PARMERLEE, and PAUL §
BAMBREY, (TC# CC-11-06890-E)
§
Appellees.
O P I N I ON
Appellant Michael Karns, owner of the El Fenix chain of Mexican food restaurants in the
Dallas-Fort Worth Metroplex, sought to purchase a competing chain of Mexican food restaurants
from Appellees Jalapeno Tree Holdings, L.L.C., Mark S. Parmerlee, and Paul Bambrey
(collectively “Jalapeno Tree”). Although the parties initially agreed to certain terms outlined in a
letter of intent (“LOI”), negotiations stalled and the deal ultimately collapsed. The question here
is whether Karns can hold Jalapeno Tree liable for breach of the LOI when the parties’
subsequent attempts to reach a final, “definitive” sales agreement failed. Under these facts, the
trial court held that Karns cannot. We affirm.1
1
This case is on transfer to us from the Fifth Court of Appeals in Dallas. We decide this case in accordance with
that court of appeals’ precedent. See TEX.R.APP.P. 41.3; Oceanus Ins. Co. v. White, 372 S.W.3d 700, 702 n.1
(Tex.App.--El Paso 2012, no pet.).
BACKGROUND
FACTUAL HISTORY
Initial Offers and Preliminary Negotiations
In August 2011, after several months of discussions, two companies made competing
offers to purchase the Jalapeno Tree chain of restaurants. The first company was TaMolly’s and
the second was El Fenix, owned by Karns through Firebird Restaurant Group, L.L.C., a holding
company. On August 14, Mark Parmerlee, Jalapeno Tree’s owner, sent Karns an e-mail
informing him that Jalapeno Tree received two offers from TaMolly’s and stating that if Karns
wished to move forward with the sale, it was “imperative” that the parties reach an agreement
“as soon as possible” at a meeting scheduled for August 15.
The next day, Parmerlee and his team met with Karns, Firebird CFO Brian Livingston,
and Firebird general counsel Bob Morrison to discuss terms of the parties’ LOI. At the time of
the proposed sale, Jalapeno Tree operated sixteen restaurants throughout the Dallas-Fort Worth
area. Ten restaurants were located in buildings with long-term leases personally guaranteed by
Parmerlee and his associate, Paul Bambrey. Jalapeno Tree owned the remaining six restaurant
buildings, which were subject to various liens. The parties discussed numerous terms of sale
before executing an LOI (“the August 15th LOI”). The parties revised the August 15th LOI
numerous times over the next several days, but ultimately agreed to terms on August 25,
executing a new LOI that superseded the previous LOI (“the August 25th LOI” or “the operative
LOI”). Neither party disputes that the August 25th LOI is the document that governed this
transaction.
The August 25th LOI
The August 25th LOI is broken up into seven sections based on subject matter. Section 1
2
identified the assets to be sold and their proposed valuation. Jalapeno Tree’s assets and
operations excluding real estate were estimated to be worth $3.4 million. Jalapeno Tree’s real
estate holdings were valued at almost $8.75 million. The valuation was based on an
understanding “that the assets of at least twelve (12) restaurants and real property (when
conveyed) are and will be free and clear of any and all liens and that the real property is
otherwise unencumbered except for such encumbrances that are standard for similar properties
and which do not adversely affect such valuation.” Jalapeno Tree promised to use “reasonable
best efforts to obtain releases of liens on equipment for other four (4) locations[.]”
Section 2 of the LOI established the structure and mechanics of the proposed transaction.
Karns agreed to form a shell company that would buy all of Jalapeno Tree’s assets except for
real estate for $2.4 million in cash and a $1 million promissory note personally guaranteed by
Karns. Karns also agreed to retain two Jalapeno Tree executives for one year. The shell
corporation would buy the six buildings owned outright by Jalapeno Tree over a scheduled
seven-year period in a lease-to-own arrangement. With respect to the remaining locations
subject to long-term leases, Karns agreed to assume and personally guaranteed the leases through
the shell corporation, provided that Firebird Restaurant Group, L.L.C., could assume his
guarantee obligations in the event the L.L.C. continued to perform as well as it did at the time of
the LOI. According to Karns, this was a compromise move stemming from Jalapeno Tree’s
concerns about securing the transaction. Jalapeno Tree initially wanted to retain liens on the six
buildings Karns purchased and foreclose on them in the event Karns defaulted on the remainder
of the agreement. Karns rejected this proposal and proposed the shell corporation indemnity
provision that appears in the August 25 LOI accepted by all parties. The security terms of the
loans were vital to Jalapeno Tree and, as discussed below, they would later prove to be grounds
3
for dispute in later negotiations.
Sections 3 and 4 outlined the due diligence procedure leading up to the formal purchase.
Jalapeno Tree agreed to furnish financial information and other due diligence information within
seven days of a final agreement. Thereafter, Karns would have forty-five days to conduct a due
diligence review. Closing would occur within forty-five days after the due diligence period
expired, unless the parties agreed to extend that time period. Karns agreed to deposit $150,000 in
earnest money with a title company as a show of good faith. If there were “any material adverse
change in the Company or its operations[,] or if the information obtained during due diligence
shows that the Company and/or its operations and assets are materially different that [sic] what
has been represented by Company [sic],” Karns had the right to terminate the LOI and receive a
refund of the earnest money deposit. The parties also agreed to maintain confidentiality
throughout the process in Section 5.
In Section 6, the parties agreed that they “will use their reasonable good faith efforts to
enter into a definitive agreement regarding the transaction on or before the expiration of twenty
(20) days from the date this LOI is executed by each party. The definitive agreement will be on
commercially reasonable terms and will include such representations, warranties, covenants,
indemnities, conditions and post-closing cooperation . . . as are customary and usual for
transactions of the nature described in this LOI.” Jalapeno Tree, “in consideration of the
convents contained herein and the Deposit” of earnest money, agreed to refrain from negotiating
or entering into agreements with other buyers unless a definitive agreement could not be
reached2 “or this LOI is terminated by consent of each party or by default by Buyer in the
performance of its obligations hereunder . . . .” Finally, Section 7 established that “[i]f either
2
Section 6 allows either party to terminate the LOI in the event a definitive agreement could not be reached within
20 days.
4
party breaches its obligations under and pursuant to this LOI, the other party shall have such
remedies as may be available at law or in equity.”
Further Negotiations Stall
Following execution of the August 25th LOI, the parties continued negotiations. On
September 9, Jalapeno Tree sent Karns a proposed draft for a definitive agreement. In response,
Morrison, Firebird’s general counsel, sent Jalapeno Tree an “issues list.” The list contains more
than thirty topics, some of which contain multiple sub-topics that Morrison wished to discuss
further. At trial, Morrison testified that he believed all the terms outlined in the issues list were
significant. Jalapeno Tree representatives agreed to meet Morrison and discuss terms further on
September 16. Parmerlee testified that after several hours of discussion, the parties had made
progress on several points, but further negotiation was needed to resolve other terms, including
the security terms of the loans. During this meeting, Jalapeno Tree provided Morrison with a
proposed “security outline,” to which Morrison later provided an itemized response agreeing to
certain terms, but not others. Parmerlee continued to express concern about the security terms of
the loans, but he and Morrison discussed several alternate options for the security terms. The
negotiation period set by the LOI was set to expire on September 20. However, both parties
agreed to extend negotiations until September 30.
Following the extension, negotiations continued. On September 28, Morrison proposed a
new security agreement which eliminated Karns’ prior personal guarantee, but he would now
agree to increase the purchase price by $170,000. Parmerlee declined that proposal and testified
at trial that he thought the proposed offer would leave him personally liable for $30 million in
lease payments in exchange for what was essentially a five-percent down payment which he
considered “ridiculous.” Consequently, Parmerlee sent a counter-proposal, testifying that he was
5
beginning to have doubts about the deal. Morrison did not accept Parmerlee’s proposal, but
instead asked for another extension of the negotiation period. Parmerlee said he was interested
in pursuing a deal, but did not want to extend the negotiation period any further.
The September 30 deadline passed without the parties reaching a definitive agreement.
On October 3, Jalapeno Tree sent Karns an e-mail stating that it was exercising its power to
terminate the LOI under Section 6. Karns then brought this suit.
PROCEDURAL HISTORY
The parties consented to appointment of a special judge in this matter. 3 Following trial,
the Special Judge rendered a take-nothing verdict in favor of Jalapeno Tree. In his findings of
fact, the Special Judge found that paragraph six of the LOI expressly conditioned the asset sale
on the parties negotiating and entering a final agreement within the specified time frame. The
Special Judge also found inter alia that the parties did not intend to be bound to the asset sale
absent a final agreement, that the asset sale terms were incomplete, that there was no meeting of
the minds on all material and essential sale terms, that the parties attempted to negotiate a final
agreement in good faith but failed, and that Jalapeno Tree did not breach the terms of the LOI
before terminating it on October 3, 2011.
In his conclusions of law, the Special Judge held that the asset sale described in the LOI
was not legally or equitably enforcement because: (a) the parties lacked the intent to be bound in
the absence of a final agreement; (b) the asset sale did not contain all material and essential
terms; (c) there was no meeting of the minds on all material and essential terms of sale; (d) the
parties did not timely and successfully negotiate a final agreement; (e) the sale required third-
party agreements or consents which were not and could not be compelled; and (f) the LOI was
illusory because paragraph 3 gave Karns the ability to unilaterally terminate the LOI. This
3
See TEX.CIV.PRAC.&REM.CODE ANN. §§ 151.001, 151.003 (West 2011).
6
appeal followed.
DISCUSSION
In four issues, Appellant contends that the trial court’s conclusion that the parties did not
intend to be bound rested on legally and factually insufficient evidence, as no conditions
precedent precluded formation of a binding contract (Issue One), the LOI contains all essential
sales terms (Issue Two), and the LOI’s terms are not vague or illusory (Issue Three). Appellant
also asserts that the evidence underpinning the trial court’s finding that Jalapeno Tree negotiated
in good faith after signing the LOI is legally and factually insufficient (Issue Four). Jalapeno
Tree counters that a final agreement was a condition precedent to sale, that essential contract
terms were omitted from the LOI, and that there is sufficient evidence it negotiated in good faith.
We hold that the LOI created an enforceable agreement similar to an option contract 4 that
froze the status quo between the parties for a period of time, prevented Jalapeno Tree from
engaging in outside negotiations, and required both parties to further negotiate the terms of a
nascent future contract in good faith. We also hold that the trial court’s finding that Jalapeno
Tree fulfilled its obligations under this agreement by negotiating in good faith is supported by
legally and factually sufficient evidence. Finally, we conclude that even if the LOI outlined all
essential terms of sale and would have otherwise bound Jalapeno Tree, no enforceable sales
contract formed because the LOI’s plain language shows that completion of the underlying
transaction hinged on an unfulfilled condition precedent: the achievement of a subsequent,
definitive agreement.
4
An option contract is “[a] contract made to keep an offer open for a specified period, so that the offeror cannot
revoke the offer during that period[.]” Black’s Law Dictionary 1121 (7th ed. 1999)(definition 2 for “option”).
“Typically, option contracts have two components: (1) an underlying contract that is not binding until accepted; and
(2) a covenant to hold open to the optionee the opportunity to accept.” Durrett Dev., Inc. v. Gulf Coast Concrete,
L.L.C., No. 14-07-01062-CV, 2009 WL 2620506, at *4 (Tex.App.--Houston [14th Dist.] Aug. 27, 2009, no
pet.)(mem. op.). In this case, Appellant-the offeror-sought to prevent the offeree from withdrawing from the
transaction while the “option” term remained open.
7
A.
Standard of Review
At the conclusion of a bench trial, the trial court may issue findings of fact and
conclusions of law. “Findings of fact in a nonjury trial have the same force and dignity as a
jury’s verdict.” May v. Buck, 375 S.W.3d 568, 573 (Tex.App.--Dallas 2012, no pet.). We
review the legal and factual sufficiency of those fact findings under the same standards as jury
verdicts. Id. We first review the legal sufficiency of the evidence underpinning the fact-finding
before turning to factual sufficiency. Martin-Simon v. Womack, 68 S.W.3d 793, 796 (Tex.App.--
Houston [14th Dist.] 2001, pet. denied). “In addressing a legal sufficiency challenge, we view
the evidence in a light most favorable to the finding, consider only the evidence and inferences
that support the finding, and disregard all evidence and inferences to the contrary.” May, 375
S.W.3d at 573. “We uphold the finding if more than a scintilla of evidence exists to support it.”
Id. “In reviewing a factual sufficiency challenge, we examine all of the evidence and set aside a
finding only if the evidence is so weak or the finding so against the great weight and
preponderance of the evidence that it is clearly wrong and unjust.” Id.
We review the trial court’s conclusions of law de novo. “When conducting a de novo
review, the reviewing tribunal exercises its own judgment and redetermines each issue of . . .
law.” Quick v. City of Austin, 7 S.W.3d 109, 116 (Tex. 1998). “[E]rroneous conclusions of law
are not binding on the appellate court[.]” Heritage Resources, Inc. v. Hill, 104 S.W.3d 612, 621
(Tex.App.--El Paso 2003, no pet.). However, “if the controlling findings of fact will support a
correct legal theory, [and they] are supported by the evidence and are sufficient to support the
judgment, then the adoption of erroneous legal conclusions will not mandate reversal.” Id. In
other words, “[i]f an appellate court determines a conclusion of law is erroneous, but the
8
judgment rendered was proper, the erroneous conclusion of law does not require reversal.” Town
of Sunnyvale v. Mayhew, 905 S.W.2d 234, 243 (Tex.App.--Dallas 1994, writ granted), rev’d on
other grounds, 964 S.W.2d 922 (Tex. 1998).
We review questions of contract construction de novo. Whether contract formation is
reviewed as a question of law or a question of fact hinges on whether the parties’ intent to be
bound is unambiguously expressed on the face of the contract. See John Wood Group USA, Inc.
v. ICO, Inc., 26 S.W.3d 12, 16 (Tex.App.--Houston [1st Dist.] 2000, pet. denied). “[W]here that
intent is clear and unambiguous on the face of the agreement, it may be determined as a matter of
law.” Id.; see also COC Servs., Ltd. v. CompUSA, Inc., 150 S.W.3d 654, 666 (Tex.App.--Dallas
2004, pet. denied)(noting that “in the ordinary case, the writing alone will be deemed to express
the intent of the parties”). However, if the parties’ intentions as expressed in the document are
indefinite and unclear, ambiguity exists, and the issues of contract formation and intent to be
bound become questions of fact. John Wood Group, 26 S.W.3d at 16. “Objective, not
subjective, intent controls.” COC Servs., Ltd., 150 S.W.3d at 666.
B.
Contract Formation and Construction
We first address whether a binding contract between Karns and Jalapeno Tree ever
formed and if so, on what terms.
1. Do the Courts Treat LOIs Differently from Other Contracts?
In its brief, Jalapeno Tree advances the broad theme that LOIs are or should be treated
differently from other types of agreement under Texas contract law, raising both legal and policy
arguments. We deal with these arguments at the outset in order to better ground our decision
conceptually.
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Jalapeno Tree appears to contend that no letter of intent can be made enforceable as a
matter of law and that language stating that LOIs can theoretically be enforceable in several LOI
interpretation cases is dicta undermined by the ultimate outcomes of the cases. See, e.g., John
Wood Group, 26 S.W.3d at 19 (noting that an LOI can be binding but holding that the particular
LOI in the dispute was not binding); see also APS Capital Corp. v. Mesa Air Grp., Inc., 580 F.3d
265, 271 n.8 (5th Cir. 2009)(noting that “not a single case cited on this issue in John Wood
involves a finding that there was a contract as a matter of law: either courts sent the issue to a
jury, or found that there was no contract as a matter of law”). This position is belied by recent
Texas Supreme Court precedent. In McCalla v. Baker’s Campground, Inc., 416 S.W.3d 416,
418 (Tex. 2013), the Court reaffirmed a long-established rule that “[a]greements to enter into
future contracts are enforceable if they contain all material terms.” The Court explained the
rationale underlying this rule, noting that while “agreements to enter into future contracts are
often unenforceable . . . [because] courts have no way to determine what terms would have been
agreed to after negotiation[,] . . . [t]his concern is not present when the agreement to enter into a
future contract already contains all the material terms of the future contract.” Id.
Jalapeno Tree recognizes that McCalla clearly articulates the rule set out “in dicta” in the
LOI cases, but it attempts to distinguish McCalla on the basis that the Court there interpreted a
Rule 11 agreement born from litigation and not an LOI, arguing that this distinction is critical
from a policy perspective. According to Jalapeno Tree, just as Texas courts have a policy in
favor of strongly enforcing Rule 11 agreements, Texas courts by policy are equally “loathe to
enforce letters of intent in complex commercial transactions[.]”
Jalapeno Tree cites no authority in support of this contention, but rather seems to rely on
a policy discussion of LOIs set out in John Wood Group. There, the First Court of Appeals
10
stated that “the basic concept of a letter of intent is to provide the parties with a way to structure
their agreement without entering a binding contract” and noted that “[l]etters of intent play a
valuable role in conducting complex business transactions.” John Wood Group, 26 S.W.3d at
19. However, rather that establishing a policy in favor of treating LOIs as non-contracts, the
Court cautioned that “the use of a letter of intent is not without risk. Absent careful drafting, the
parties may find themselves bound by a letter agreement that does not contain all of the
protections for which they would normally negotiate or for which due diligence is incomplete.”
Id.
The language in John Wood Group provides background information on what an LOI is
and how it functions, but it does not establish any policy or hint at any judicial reluctance to treat
LOIs differently from any other purported contract. Indeed, our review of the case law shows
that our sister courts consistently interpret LOIs based on either a document’s unambiguous
language or based on the surrounding transactional circumstances when the document is unclear.
See, e.g., John Wood Group, 26 S.W.3d at 19-20 (interpreting unambiguous LOI as a matter of
law); cf. Calvary Invs., L.L.C. v. Sunstar Acceptance Corp., No. 05-00-00508-CV, 2001 WL
371545, at *7-*8 (Tex.App.--Dallas Apr. 16, 2001, pet. denied)(not designated for
publication)(reversing summary judgment grant where LOI was ambiguous and fact issues on
intent to be bound existed).
We are mindful of the importance LOIs play in complex, highly-structured business
transactions, but we need not resort to broad policy pronouncements that may affect the legal
context in which these transactions occur. We are charged only with interpreting the intent of
the parties at bar, and regardless of whether an agreement arises in the context of a Rule 11
accord ending litigation or in a multimillion-dollar leveraged buyout such as this, a contract is a
11
contract, and the standard rules of contract interpretation govern.
2. Did the Parties Form a Contract?
We next resolve the question of whether the parties intended to form a contract. “Parties
form a binding contract when the following elements are present: (i) an offer; (ii) an acceptance
in strict compliance with the terms of the offer; (iii) a meeting of the minds; (iv) each party’s
consent to the terms; and (v) execution and delivery of the contract with the intent that it be
mutual and binding.” Calvary Invs., L.L.C., 2001 WL 371545, at *3. Although often treated as a
distinct element, meeting of the minds is a component of both offer and acceptance measured by
“what the parties said and did and not on their subjective state of mind.” Geophysical Micro
Computer Applications (Int’l), Ltd. v. Paradigm Geophysical, Ltd., No. 05-98-02016-CV, 2001
WL 1270795, at *3-*4 (Tex.App.--Dallas Oct. 24, 2001, pet. denied)(not designated for
publication). While a meeting of the minds dispute is usually treated as a question of fact, we
will treat it as a question of law if the intent of the parties is clear from the face of the document.
John Wood Group, 26 S.W.3d at 16.
As we previously stated, the standard rules of contract formation govern letters of intent.
If the letter of intent is indefinite, does not contain essential terms, does not reflect an objective
meeting of the minds, is premised on an unfulfilled condition precedent, or otherwise does not
meet the requisite elements of a contract under state law, then no contract ever formed between
the parties, and the LOI is unenforceable. However, if the LOI contains all essential terms as
contemplated by the parties and the only remaining issue is formalization of the agreement or
negotiation of ancillary terms, then the LOI may be an enforceable contract if the parties
intended to be bound. See Foreca, S.A. v. GRD Dev. Co., Inc., 758 S.W.2d 744, 744-45 (Tex.
1988)(because language on whether formal memorialization of a negotiated agreement was a
12
condition precedent to contract formation was ambiguous, the jury was free to resolve the
parties’ intent to be bound by the agreement as a fact question); John Wood Group, 26 S.W.3d at
19 (recognizing that LOIs must be carefully drafted to avoid premature formation of formal
contract); Geophysical Micro Computer Applications, 2001 WL 1270795, at *3-*4 (reversing
summary judgment where LOI outlined all essential terms, thereby creating a fact issue on the
parties’ intent to be bound). “The material terms of a contract are determined on a case-by-case
basis.” McCalla, 416 S.W.3d at 418.
Here, we find that the LOI’s language unambiguously creates a contract, albeit one that is
limited in scope. Section 7, dealing with breach, makes clear that the parties contemplated that
the agreement would be mutually binding. However, as in John Wood Group, the LOI contains
two types of covenants: those relating to the negotiation process (“the negotiation covenants”)
and those relating to the underlying sale (“the sale covenants”). The negotiation covenants
establish the legal framework around the nascent sale and are of independent legal significance.
While Jalapeno Tree is correct in stating that an “agreement to agree” is generally unenforceable
under Texas law, see Fort Worth Indep. Sch. Dist. v. City of Fort Worth, 22 S.W.3d 831, 846
(Tex. 2000), the negotiation covenants as written show that the parties contemplated something
more than a mutual desire to deal. When Sections 5 and 6 are read together, it becomes clear
that in consideration of an earnest money deposit and mutual promises to negotiate confidentially
and in good faith, Jalapeno Tree agreed to refrain from entertaining other offers for a set period
of time. In this way, the LOI functioned almost as a reverse option contract. See Durrett Dev.,
Inc., 2009 WL 2620506, at *4 (defining an option contract as an overarching agreement
preventing an offeror from revoking his offer for a period of time, and an underlying contact that
is effective upon the offeree’s timely acceptance). Instead of the offeree purchasing the right to
13
keep an offer open, Karns, the offeror, obtained the right to keep Jalapeno Tree, the offeree, at
the bargaining table for a period of time. As the United States Seventh Circuit Court of Appeals
noted in Feldman v. Allegheny Int’l, Inc., 850 F.2d 1217, 1221 (7th Cir. 1988)(cited by First
Court in John Wood Group), while “[n]either party has committed himself to the exchange[,]” by
obtaining acceptance of the LOI, “the buyer secures the seller’s undivided attention as long as
progress continues in ironing out the points of the transaction.” Id. at 1221. The LOI is
enforceable insofar as the parties agreed to confidentially negotiate a final sales agreement in
good faith and refrain from engaging other parties during that process.5
Karns argues that we should go one step further and hold that the LOI was sufficient to
create a sales contract, since all terms essential to the sale were included and preliminarily agreed
to by all parties. Jalapeno Tree vigorously disputes Karns’ contention and maintains that
numerous essential terms remained outstanding, as evidenced by subsequent discussions on
numerous points. We need not delve into the fray here. Assuming arguendo that the sales
covenants listed all essential sale terms, a contract will not become enforceable if a mutually
agreed-upon condition precedent remains unfulfilled. See Hohenberg Bros. Co. v. George E.
Gibbons & Co., 537 S.W.2d 1, 3 (Tex. 1976)(noting that a condition precedent may be “a
condition to the formation of a contract”).
Section 6 provides: “If the parties are unable to conclude the negotiation of a definitive
agreement within the time provided herein, then either party may terminate this LOI and the
5
Jalapeno Tree contends that the entire contract is illusory because Karns had the power to unilaterally terminate the
LOI under Section 3 if there were a material adverse change in the company’s financial situation, or the information
that came out during due diligence was materially different. We disagree. An agreement that one party conditioned
upon a satisfactory performance of another party is not illusory where the first party’s ability to terminate is made in
good faith or the “exercise of honest judgment.” See Cotten v. Deasey, 766 S.W.2d 874, 878 (Tex.App.--Dallas
1989, writ denied); Atomic Fuel Extraction Corp. v. Slick’s Estate, 386 S.W.2d 180, 185 (Tex.Civ.App.--San
Antonio 1965, writ ref’d n.r.e.). Here, Karns only had the ability to terminate under Section 3 if there was a
“material adverse change” in Jalapeno Tree’s financial situation. As such, Karns’ ability to unilaterally terminate
the agreement is restricted, and whether he exercised that power in good faith had the parties reached that point
would be a fact question to be resolved by the trial court. See Cotten, 766 S.W.2d at 878.
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Deposit shall be returned to Buyer.” Although the LOI does not explicitly state that it is non-
binding as in John Woods Group, this language, which grants either side the option to terminate
the LOI, clearly indicates that the parties intended to go through with the sale only if they
reached a “definitive agreement.” In other words, both parties conditioned acceptance of the sale
on completion of a final agreement.
While Karns correctly notes that “[i]t is a rule of construction that a forfeiture by finding
a condition precedent is to be avoided when possible under another reasonable reading of the
contract[,]” Schwarz-Jordan, Inc. of Hous. v. Delisle Constr. Co., 569 S.W.2d 878, 881 (Tex.
1978), no such reading is possible here. We must construe the document as a whole to determine
if a clause is conditional and not merely a covenant, but “[t]erms such as ‘if,’ ‘provided that,’ or
‘on condition that,’ usually indicate an intent that the provision be a condition precedent rather
than a promise[.]” Id. By establishing an escape clause triggered by a failure to reach a
definitive agreement in a proscribed period of time, Section 6 makes clear that the definitive
agreement is a condition precedent that absolutely must be fulfilled before either party is bound
to the sale.
Karns is correct that the contract created by the LOI is not vague or illusory, and that it
contained terms essential to its subject matter. However, Karns has overestimated the LOI’s
scope, as the agreement as written only creates an enforceable set of rules pertaining to the
negotiation process. Because of this, and because the condition precedent of a definitive
agreement never occurred, Karns’ three appellate points pertaining to the sales covenants’
enforceability are without merit.
Issues One, Two, and Three are overruled.
C.
Breach of the LOI
15
Finally, we turn our attention to whether Jalapeno Tree breached the LOI’s enforceable
negotiation terms. In his fourth issue, Karns attacks the legal and factually sufficiency of the
trial court’s findings that Jalapeno Tree did not breach the LOI and negotiated in good faith.
Karns maintains that the evidence shows Jalapeno Tree engaged in bad faith by revisiting and
insisting on security terms that differed from the preliminary sales covenants in the LOI. By
doing so, Karns alleges that Jalapeno Tree deliberately prevented the condition precedent of a
definitive agreement from occurring in order to escape the impending sales obligation. Karns
maintains that where a party prevents the occurrence of a condition precedent, the condition is
deemed to be fulfilled as a matter of law, and as such, the nascent sales contract became fully
consummated and enforceable. See Dorsett v. Cross, 106 S.W.3d 213, 217 (Tex.App.--Houston
[1st Dist.] 2003, pet. denied).
Assuming without deciding that Karns could hold Jalapeno Tree liable on the sales
covenants based on bad faith obstructionist tactics that prevented a condition precedent from
being reached, there is legally and factually sufficient evidence to support the trial court’s
finding that Jalapeno Tree did, in fact, act in good faith, thereby performing on its promise under
the LOI and leaving the condition precedent intact and unfulfilled.
While there was some evidence to show that Jalapeno Tree sought to revisit the issue of
security, we note that the plain language of the LOI did not prevent the parties from revisiting
this issue or any of the sales covenants. The only limitation placed on the parties with respect to
the sales covenants was that they negotiate in good faith. Furthermore, although Parmerlee
stated in an e-mail the day after signing the LOI that he realized he had concerns about ensuring
the shell corporation actually purchased the properties and that Karns guaranteed the full amount
of leases and purchases, both parties actively engaged in the negotiation process, exchanging e-
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mails about mutual concerns and meeting to discuss terms. Morrison stated in an e-mail that he
believed the parties made real progress after their initial meeting, and Parmerlee also agreed to
initially extend negotiations ten days past the LOI deadline. The deal only collapsed when the
parties reached an impasse after Karns suggested that he increase his offer by $170,000 in
exchange for release from personal liability on the leases, which Jalapeno Tree believed was
commercially unreasonable. Karns did not continue negotiating after that point, and the LOI
time period expired. There is nothing in the record that indicates to us that this was anything but
an arms-length transaction between sophisticated parties.
In sum, viewing the evidence in the light most favorable to Jalapeno Tree, there is more
than a scintilla of evidence showing Jalapeno Tree’s good faith efforts to negotiation, and while
the record as a whole is convoluted and conflicting, we cannot say that the trial court’s finding
that Jalapeno Tree negotiated in good faith went against the great weight and preponderance of
the evidence.
Issue Four is overruled. The judgment of the trial court is affirmed.
February 20, 2015
YVONNE T. RODRIGUEZ, Justice
Before McClure, C.J., Rodriguez, and Hughes, JJ.
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