Maggie Feng Hong, Bo Hong, IAE Supply, Inc. and IAE Energy & Supplies, Inc. v. Integrated Applications Engineering, Inc. and David Howe ( 2008 )

Reversed and Remanded and Memorandum Opinion filed March 11, 2008

Reversed and Remanded and Memorandum Opinion filed March 11, 2008.

In The

Fourteenth Court of Appeals

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NO. 14-06-00579-CV

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MAGGIE FENG HONG, BO HONG, IAE SUPPLY, INC. AND IAE ENERGY & SUPPLIES, INC., Appellants

V.

INTEGRATED APPLICATIONS ENGINEERING, INC. AND DAVID HOWE, Appellees

On Appeal from the 268th District Court

Fort Bend County, Texas

Trial Court Cause No. 04-CV-138184

M E M O R A N D U M   O P I N I O N

Appellants appeal from the trial court=s judgment awarding appellees $9,186,835.50 in damages based on the unchallenged testimony of appellees= expert, and certain other orders recited in the judgment.  In two issues, appellants contend that (1) the evidence is legally insufficient to support the judgment, and (2) the trial court rewrote portions of the parties= settlement agreement.  We conclude that the expert testimony on which the court relied is not supported by legally sufficient evidence.  In addition, both parties agree that the judgment does not accurately reflect one aspect of the parties= agreement.  As a result, we reverse and remand.

Factual and Procedural Background

I.        The Factual Background

For twenty years, David Howe has been the president, a director, and a shareholder of Integrated Applications Engineering, Inc. (AIAE@), a Houston-based company that provides oil field equipment to customers in China.  In 1995, Maggie Feng Hong came to Houston from China, and began working for IAE on its Chinese equipment sales.  Several months later, Howe and Hong were married. Hong continued to work for IAE, eventually serving as the vice-president of the company and obtaining fifty percent of the shares of IAE.

Not long after the marriage, Howe and some partners began a new company in Nigeria called IAE Nigeria.  The purpose of IAE Nigeria was to assist Chinese oil companies with Nigerian oil contracts.  Howe spent much of his time living in Nigeria and working on IAE Nigeria=s business. Eventually, Howe bought out his partners, and had all of the company=s shares transferred to Hong.^[1]

While Howe was in Nigeria, Hong and her brother, Bo Hong, formed IAE Supply, Inc. and IAE Energy & Supplies, Inc., allegedly to compete with IAE.  They ran these companies out of Howe=s home in Sugar Land.  Hong contacted the buyers and vendors of IAE and diverted IAE=s business to IAE Supply, Inc. and IAE Energy & Supplies, Inc.  Hong also deposited IAE money into the bank account of Chinatech Services, Ltd., a Chinese company owned by Hong=s mother and uncle.^[2]

Howe and Hong divorced in 2003, but they agreed to continue owning their property jointly and sharing the earnings of the business fifty-fifty.  However, in 2004, Howe discovered the competing companies.  He suspected that profits from contracts diverted from IAE were going to Hong=s companies, while IAE was being charged with the associated expenses.  He also suspected that Hong used Chinatech to divert funds from IAE.

II.       The Procedural Background

In the fall of 2004, Howe and IAE sued Hong, her brother Bo Hong, IAE Supply, Inc. and IAE Energy & Supplies, Inc., alleging several causes of action and seeking temporary and permanent injunctions against the defendants.  Trial began on August 30, 2005.  At the start of the trial, numerous exhibits were admitted without objection, including an expert report and supplemental report prepared by IAE and Howe=s damages expert. Four witnessesCHowe, Hong, Bo Hong, and, by deposition, the financial controller for IAE NigeriaCtestified during four days of trial.  On September 7, 2005, the parties entered into a Rule 11 agreement that was read into the record.  The Rule 11 agreement resolved most of the issues between the parties, providing that assets would be divided and a receiver would be appointed to collect receivables and money from the sale of certain of the assets.  At the time of the settlement, no expert witnesses had testified concerning damages.

As part of the settlement agreement, Hong agreed Ato obtain all Chinatech bank records within 20 business days.@  Once the records were obtained, the parties agreed to make a presentation to the trial court to determine whether any money had been diverted from IAE.  Hong would then pay half of the diverted funds to Howe.  However, Hong did not comply with this provision of the agreement; instead, she returned to China.  Before she left, Hong severely damaged the Sugar Land residence awarded to Howe by destroying the interior, spraying brown paint on the walls, removing curtains, chandeliers, and fixtures, and spreading urine on the carpets.  Hong=s counsel moved to withdraw.  His reasons for seeking to withdraw were Hong=s inability to obtain Chinatech=s bank records and her allegedly late payment of attorney=s fees.^[3]

Howe then filed a ASecond Supplemental Petition@ alleging, among other things, breach of the Rule 11 agreement, conversion, and claims for damages and exemplary damages.  Howe also filed a AMotion to Enforce Rule 11 Agreement and Motion to Enter Judgment@ with a notice of hearing set for November 29, 2005.  Hong=s counsel was still counsel of record at the time of these filings.

At the start of the hearing, Hong=s counsel raised the issue of his motion to withdraw.  After admonishing Hong=s counsel that he had Aan obligation to represent [Hong] until you are officially off the case,@ the trial court granted the motion.^[4]

Immediately after granting Hong=s counsel=s motion to withdraw, the trial court took up Howe=s motion to enforce the Rule 11 agreement and the claims in his supplemental petition.  One of the witnesses to testify was Howe=s expert, John Madsen, a Certified Public Accountant.  Madsen testified that he was asked to evaluate the potential for fraud and to calculate the amount of damages with regard to IAE and the related companies.  He testified that he reviewed the financial statements of IAE and the other companies, and all of the supporting documents that were available.  He also had Asignificant discussions@ with Howe regarding how the companies operated.  In addition, Madsen testified that the information he relied upon was the type reasonably relied upon by C.P.A.s in rendering opinions regarding financial matters.  He also stated that his review was Avery extensive@ and estimated that he spent Aprobably four hundred hours@ reviewing the documents. 

Madsen testified without objection that, based on the records and documents provided to him by the companies and Hong, the total amount of funds diverted to Chinatech was $18,329,921.00.  He also testified that the amount of IAE accounts receivable included in that figure was $14,799,299.00.^[5] He did not explain what the remaining $3,530,622.00 in damages represented.  No contracts or other documents were offered into evidence to support these figures.

Howe then testified concerning the breach of the Rule 11 agreement and the damage to the Sugar Land residence awarded to him in the agreement.  Howe testified that the $18 million figure Madsen reached did not represent all of the money that had been diverted to Chinatech, but only that which could be determined from Athe contracts signed and the payments that were made@ in the absence of the Chinatech records that Hong failed to provide as agreed.  Howe added that he believed Hong had actually diverted more than $18 million.

Hong later secured new attorneys, and asserted in additional briefing to the trial court that, among other things, no evidence supported the total amount of damages testified to by Madsen.  Hong also requested that the trial court allow the defendants to present their own evidence at a new evidentiary hearing.  Following the entry of a judgment on December 16, 2005, the trial court held a hearing on the issues Hong raised. The trial court denied most of Hong=s requests, but ordered the amount of damages divided fifty-fifty as provided in the Rule 11 agreement and a remittitur of the punitive damages awarded against Hong.^[6]

On March 24, 2006, the trial court entered an amended final judgment awarding, among other things, actual damages of $9,186,835.50Cone-half of the amount Madsen had testified to at the hearingCagainst Hong.  The trial court also filed findings of fact and conclusions of law.  This appeal followed. 

Analysis

I.        The Legal Sufficiency of the Evidence of Damages

Hong argues the evidence is legally insufficient to support the award of damages of $9,186,835.00 based on Madsen=s testimony, because it was speculative, conclusory, and unsupported by any exhibits. Specifically, Hong challenges the following facts found by the trial court concerning the amount of damages awarded:

The Court finds that the issues addressed in the Court=s determination included the following: the amount of funds deposited into and withdrawn from the Chinatech account(s) and wrongfully diverted by Maggie Feng Hong was the total sum of $18,329,921.00; those funds were generated by IAE or its related companies (as opposed to independent business activities of the owners of Chinatech Services Limited, if any); the amount of funds, if any, used to purchase the Beijing house; the amount of funds paid by Chinatech to Beijing Aieryi Petrotech, Ltd., and whether those payments were a legitimate business expense, the breach of the Rule 11 Agreement of September 7, 2005, the damages to 518 Sugar Creek, Sugar Land, Texas, the conversion of property, diversion of funds and receivables, and theft of property by Maggie Feng Hong in a total sum $21,875.00.

Hong does not challenge the trial court=s finding of fact that Athe testimony of John R. Madsen was reliable, credible and worthy of belief.@

In response, Howe and IAE contend that Madsen=s expert testimony and his reports admitted into evidence during the trial are sufficient evidence to support the damages award, and Madsen=s analysis of IAE and his conclusions were based on reliable methods, complete information, and credible evidence.

A.      Standard of Review and Applicable Law

A trial court=s findings are reviewed for legal and factual sufficiency of the evidence under the same standards as are applied in reviewing evidence supporting a jury=s answer.  Catalina v. Blasdel, 881 S.W.2d 295, 297 (Tex. 1994).  When reviewing the legal sufficiency of the evidence, we review the evidence in the light most favorable to the challenged finding and indulge very reasonable inference that would support it.  See City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005).  We credit favorable evidence if a reasonable fact finder could, and disregard contrary evidence unless a reasonable fact finder could not.  Id. at 827.  The evidence is legally sufficient if it would enable a reasonable and fair-minded person to reach the verdict under review.  Id.  There is Ano evidence@ or legally insufficient evidence when (a) there is a complete absence of evidence of a vital fact; (b) the court is barred by rules of law or evidence from giving weight to the only evidence offered to prove a vital fact; (c) the evidence offered to prove a vital fact is no more than a mere scintilla; or (d) the evidence conclusively establishes the opposite of the vital fact.  See id. at 810; Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex. 1997).

When a challenge to an expert=s reliability requires the court to evaluate the underlying methodology, technique, or foundational data the expert used, an objection must be timely made so that the trial court has the opportunity to conduct this analysis.  See Coastal Transp. Co. v. Crown Cent. Petroleum Corp., 136 S.W.3d 227, 233 (Tex. 2004).  However, when the challenge is that the expert testimony is speculative or conclusory on its face, then a party may challenge the legal sufficiency of the evidence even in the absence of any objection to its admissibility.  Id. Thus, because Hong did not object to the reliability of Madsen=s testimony in the trial court, our review of the evidence is limited to the face of the record.  See Volkswagen of Am., Inc. v. Ramirez, 159 S.W.3d 897, 911 (Tex. 2004); Coastal Transp. Co., 136 S.W.3d at 233.

The Texas Supreme Court has held that conclusory or speculative opinion testimony is Aincompetent evidence@ and cannot support a judgment.  Coastal Transp. Co., 136 S.W.3d at 232.  To avoid being considered conclusory and speculative, the opinion must have a reasoned basis that the expert is qualified to state, based on knowledge, skill, experience, training, or education.  Burrow v. Arce, 997 S.W.2d 229, 236 (Tex. 1999).  An expert opinion is conclusory when it offers an opinion with no factual substantiation.  Sparks v. Booth, 232 S.W.3d 853, 863 (Tex. App.CDallas 2007, no pet.); United Servs. Auto. Ass=n v. Croft, 175 S.W.3d 457, 463 (Tex. App.CDallas 2005, no pet.).  The expert must explain how he reached his conclusion.  Sparks, 232 S.W.3d at 863; Croft, 175 S.W.3d at 464. 

As we explain in detail, we conclude that Madsen=s opinion testimony was conclusory because his opinions were not supported by the evidence.

B.      The Evidence Does No Support the Damages Award

As noted above, at the November 29 hearing, Madsen set forth two damage calculations.  The first was the total damages amount of $18,329,921.00, and the second was for diverted accounts receivable of $14,799,299.00, which was included in the total.  However, Madsen provided no basis for the remaining $3,530,622.00 in damages.  And, although Madsen testified that he conducted an extensive review of many documents in reaching his conclusions, no exhibits were introduced during his testimony to support the damages calculations he reached.  For example, Madsen did not identify any specific contract that was wrongfully diverted from IAE, he provided no evidence that any specific receivables of IAE were diverted, and he failed to provide any evidence that any money was received and deposited by Chinatech.

Howe and IAE respond that Madsen=s testimony is supported by his original and supplemental expert reports, which were admitted without objection during the trial as Plaintiffs= Exhibits 51 and 52, respectively.^[7] However, the figures contained in these reports do not correspond to Madsen=s testimony, and the documents or data Madsen relies upon cannot be ascertained with reasonable certainty from the reports.

To illustrate, in Madsen=s supplemental expert report, Exhibit 52, he states the following:

With regard to Chinatech, for which all requested information has not been provided, we have noted the following:

$ The $880,647 of funds has been inappropriately diverted as described in item #1 above.

$ Receivables of $4,125,000 are due to Chinatech (see Enclosure 2, attachment 3 and Enclosure 9).

$ Amounts known to have been received and deposited by Chinatech total $3,612,500 (see Enclosure 2, attachment 3 and Enclosure 9).

$ Amounts earned from the drilling rigs agreements with CNPC/PDVSA/GWDC/Petrolog total $9,711,774 (see Enclosure 2, page 6 and Enclosure 9).

To summarize Chinatech, there are known funds that belong to IAE, Inc. totaling $18,329,921 in possession by Chinatech.  It is likely that the amount would be greater if the defendants provided the accounting records of Chinatech.  However, the defendants have not provided complete and comprehensive accounting records despite a court order to do so.  If complete accounting records were provided it could be determined if Chinatech is in possession of IAE, Inc. funds in excess of the $18,329,921.

The supporting information Madsen references in parentheses either fails to sufficiently identify the origin of the data used in Madsen=s calculations or fails to explain the facts Madsen relied upon in reaching his conclusions.  For example, to support the first bullet point, Madsen refers to Aitem #1 above.@  This item lists five transfers of money to Chinatech out of either IAE or IAE Supply, Inc. on specific dates in 2002 and 2004.  However, no supporting documentation for these transfers is identified or provided.^[8] Similarly, for the remaining bullet points, Madsen references AEnclosure 2, Attachment #3,@ AEnclosure 2, page 6,@and AEnclosure 9.@  Enclosure 2, Attachment #3, found in Madsen=s original expert report, purports to list receivables for four contracts based on Acontract values and IAE commission agreements@ and receipts for three contracts Abelieved to have been received according to comments from customer representatives and letter dated February 23, 2005.@^[9]  The significance of the reference to page 6 of Enclosure 2 is unclear, although it appears to describe a dispute between the parties concerning the value of the referenced contract and the amount of commission due.  Enclosure 9 simply refers back to the information or data Afrom Enclosure 2, Attachment #3,@ and additionally lists AIAE books and records,@ and the disputed contract information as sources.  These sources provide only cursory information or data concerning the basis for the amounts identified and none of the amounts correspond to the figures Madsen testified to at the hearing.

Howe and IAE also point to Enclosure 10 of Madsen=s supplemental report as an itemized list of damages.  However, Enclosure 10 purports to calculate damages based on values assigned to Ajoint assets,@ including accounts, condominiums, and vehicles unrelated to the issue on appeal.  The list of assets does include Chinatech and assigns a value of $18,329,921 for this asset.  However, this value merely corresponds to the total damages Madsen calculated in his report; it does nothing to shed light on the data or other information Madsen relied upon in reaching the conclusions to which he testified to at the hearing.  Thus, Madsen=s reports provide no evidence to support his conclusions. 

Howe and IAE also identify forty-four of their other exhibits admitted into evidence and, in a conclusory manner, assert that these exhibits support Madsen=s damage calculations.  However, Madsen does not refer to them in his testimony, so the record does not reflect whether he reviewed or relied on any of these documents, or, if he did rely on them, how they related to his calculations.  At most, Madsen testified that he spent a lot of time reviewing a lot of documents.  Therefore, it would be speculative to conclude that his review included these exhibits or that these exhibits in fact supported his calculations.

Next, Howe and IAE assert that A[i]t was apparent that Mr. Madsen was certain about the $18,329,921 due from Chinatech, but [he] speculated that the amounts could exceed $33 million.@  Therefore, according to Howe and IAE, the trial court Aobviously based its judgment on the amount certain@ and so its judgment must be affirmed.  However, without documentation to support it, Madsen=s subjective certainty is not a legally sufficient foundation for his conclusions.  See Havner, 953 S.W.2d at 712 (AWhen the expert >br[ings] to court little more than his credentials and a subjective opinion,= this is not evidence that would support a judgment.@) (quoting Viterbo v. Dow Chem. Co., 826 F.2d 420, 421 (5th Cir. 1987)).

Therefore, because Madsen=s testimony concerning damages relating to Chinatech did not explain how he reached his conclusions, is inconsistent with the calculations and conclusions presented in his expert reports, and lacks factual substantiation in the record, we hold that this evidence is legally insufficient to support the award of $9,186,835.50 in the trial court=s judgment.  See Coastal Transp. Co., 136 S.W.3d at 232B33 (holding that expert=s testimony concerning conscious indifference prong of gross negligence claim was too conclusory to defeat a motion for directed verdict); James L. Gang & Assocs., Inc. v. Abbott Labs., Inc., 198 S.W.3d 434, 439 (Tex. App.CDallas 2006, no pet.) (holding expert=s affidavit testimony was conclusory when expert provided no facts or figures to support approximation of expenses, attached exhibit contained no fact or figures related to purchase order at issue, and figures did not match damage estimates for alleged breach of purchase order as testified to by expert); Lefton v. Griffith, 136 S.W.3d 271, 276B77 (Tex. App.CSan Antonio 2004, no pet.) (holding that plaintiff=s testimony describing alleged losses from sale of her inventory and home was conclusory when it failed to provide a factual basis to support her conclusions and so was legally insufficient to support damages award).

Having concluded that Madsen=s conclusions are not supported by legally sufficient evidence, we look to the rest of the record to determine whether other evidence supports the damages awarded in the judgment.  It does not.

At trial, Howe testified that Hong was a signatory on Chinatech=s bank account and that she told him that there was over $5 million dollars in the account in May of 2003.  Howe also testified that he believed Hong had diverted much more than $18 million to Chinatech. Although this testimony may be relevant to Howe and IAE=s claims, it does not provide any factual support for the amount of damages awarded, which was far in excess of $5 million.

We hold that, based on the record before us, the evidence is legally insufficient to support the $9,186,835.50 in damages awarded to appellees, and we therefore sustain appellants= first issue. Because the parties= Rule 11 agreement contemplated that any damages relating to Chinatech would be determined by the trial court, and appellants have requested that the case be reversed and remanded for a new trial on these damages, we agree that reversal and remand, rather than reversal and rendition, is appropriate in this case.

II.       Conflict Between the Rule 11 Agreement and the Judgment

In their second issue, appellants contend that, in its judgment, the trial court Arewrote@ portions of the Rule 11 agreement.  They complain that certain provisions of the judgment conflict with the parties= agreement or were not contemplated in it.  Although Howe and IAE dispute this claim generally, they do concede that, with regard to the issue of taxes, the trial court=s intent is not reflected in the judgment, and have asked that this Court reform the judgment accordingly.  However, because we are reversing and remanding for a new trial as discussed above, we conclude that the better solution is for the trial court to correct any error in the judgment at the time of a new trial.

We therefore sustain appellants= second issue.

Conclusion

Accordingly, we reverse and remand for further proceedings consistent with this opinion.

/s/      Wanda McKee Fowler

Justice

Judgment rendered and Memorandum Opinion filed March 11, 2008.

Panel consists of Justices Fowler, Seymore, and Guzman.

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^[1]  According to Hong, ten percent of IAE Nigeria was given to her brother, Kevin.

^[2]  Chinatech was set up so that Hong=s mother and uncle were named Chinatech=s directors, and neither Hong nor Howe owned any shares in the company.  The company was created to proved an offshore bank account to shelter income from the foreign projects from being taxed in the United States, and Howe knew that IAE money was deposited in Chinatech=s bank account.  However, Howe testified that Hong was the sole signatory on Chinatech=s bank account, and that in 2003, she told him there was over $5 million in Chinatech=s account.

^[3]  Attached to the motion was correspondence from Chinatech and its representatives, indicating that Chinatech refused to provide the records to Hong because she was neither a shareholder nor director of the company and was not otherwise entitled to demand them.

^[4]  Although Hong apparently requested that another lawyer represent her, and this lawyer was also present at the hearing, he had not yet agreed to represent Hong. 

^[5]  The trial court then asked Bo Hong if he had any questions of the witness.  Bo Hong, who had already been called to testify by Howe=s counsel at the hearing and did so without representation, stated that he did not have any questions.

^[6]  The trial court=s original judgment awarded punitive damages of $1 million against Hong in addition to actual damages of $18,351,796.00.  However, the amended judgment included a separate award of $21,875.00 as damages arising from Hong=s actions at the Sugar Land residence and exemplary damages of two times that amount, or $43,750.00.

^[7]  Appellants take the position that the trial court should not have considered these exhibits, which were admitted during the trial but not at the November 29 hearing.  However, they cite no authority to support this position, and we are aware of none.  Further, it is evident that the trial judge, who presided over both the trial and the hearing, considered all the evidence before it, as stated in the following unchallenged fact finding:  AThe Court finds that upon consideration of the testimony and exhibits admitted during the trial and in the hearing on November 29, 2005, the Court should order Maggie Feng Hong to pay to David Howe and IAE, Inc. Damages in the sum of Nine Million One Hundred Eighty Six Thousand Eight Hundred Thirty Five and 50/100 ($9,186,835.50) (emphasis added).

^[8]  We note that Enclosure 9 of Exhibit 52 also lists these transfers, and identifies the source of the data merely as AIAE books and records.@

^[9]  Concerning the letter, Madsen states in a footnote that Hong Aacknowledges only a portion of Shell East and Shell West funds have been deposited.@  Madsen further states AHowever, plaintiff believe (sic) that the clients have paid these amounts.  Where have the funds gone?  Plaintiff believes this is an obvious attempt by the defendant to misappropriate funds.@  These comments concerning the plaintiff=s Abelief@ does not constitute the type of objective facts or data required to support an expert=s damages calculation.  See A.B.F. Freight Sys., Inc., v. Austrian Imp. Serv., Inc., 798 S.W.2d 606, 615 (Tex. App.CDallas 1990, writ denied) (AThere can be no recovery for damages which are speculative or conjectural.  The damages must be ascertainable in some manner other than by mere speculation or conjecture, and by reference to some fairly definite standard, established experience, or direct inference from known facts.@).