End Users, Inc. v. System Supply For End Users, Inc.--Appeal from 157th District Court of Harris County

Affirmed as Modified and Memorandum Opinion filed September 27, 2007

Affirmed as Modified and Memorandum Opinion filed September 27, 2007.

In The

Fourteenth Court of Appeals

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NO. 14-06-00833-CV

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END USERS, INC., Appellant/Cross-Appellee

V.

SYSTEM SUPPLY FOR END USERS, INC., Appellee/Cross-Appellant

On Appeal from the 157th District Court

Harris County, Texas

Trial Court Cause No. 2004-65560

M E M O R A N D U M O P I N I O N

Appellant/cross-appellee End Users, Inc. (AEU@) and appellee/cross-appellant System Supply for End Users, Inc. (ASS@) both complain that the trial court erred in refusing to disregard portions of the jury=s verdict in this suit involving claims of breach of contract and unjust enrichment. We modify the judgment and affirm as modified.

I. Background

Alan and Stephen Richardson are twin brothers. In the mid 1980s, Alan and Stephen formed SS. SS=s business is to procure natural gas from natural gas producers and provide that gas to end use customers. Stephen owned fifty-one percent of SS, Alan owned thirty-five percent, and Stephen=s domestic partner William Lessovitz owned fourteen percent. In 1991, Alan became upset with how Stephen was running SS and left the business. Although the record is unclear whether Alan sold his interest in SS or merely ceased participating in operating the business, it is clear that Stephen and Alan thereafter considered SS to be Stephen=s business.

In 1994, Stephen and Alan decided to put their differences behind them and form a second business, EU. EU also provided natural gas to end use customers, but it had a different customer base than SS. Each brother owned fifty percent of EU, and EU=s profits were to be split equally between them. Alan was the president and chief executive officer while Stephen was the chairman and chief financial officer. Because EU was starting from scratch but SS had pre-existing relationships with producers, the brothers decided that SS would initially support EU. SS and EU entered into a service agreement stating that SS would provide EU with Aall administrative, legal, and ancillary services necessary to conduct normal business commerce@ until EU=s capital account reached certain levels. At the heart of this litigation is the service agreement provision that SS would provide EU with ACredit and Market Risk for Commodity and Transportation Services at no cost@ to EU Auntil [EU]=s capital account exceeds $200,000.@ In other words, as explained by both Alan and Stephen, SS would use its credit relationships with producers to procure natural gas for EU=s customers and would provide that gas to EU at cost, thereby allowing EU to retain all profits from the ultimate sale of the gas to EU=s customers, until EU earned $200,000 in profits.

As to EU=s business, the brothers agreed that Alan was to focus more on developing a customer base while Stephen was to be in charge of the financial aspects of the business. As such, Stephen made the payments from EU to SS to pay SS for the gas it had acquired for EU=s customers. In 2002, Alan grew interested in the finances when he became concerned that personal problems between Stephen and Lessovitz might result in Lessovitz attempting to gain some control of EU. Alan claims that when he examined the financial information, he discovered that Stephen had been continually transferring large sums of money from EU to SS. When Alan questioned Naomi Rodriguez, who had started working for SS in 1987 and then later transferred to EU, he discovered that EU was still obtaining gas for its customers through SS instead of going directly to the producers. Alan testified that he believed this procedure had ended years ago in 1995 or 1996 when he stopped receiving copies of invoices for gas costs, which is when he assumed EU had earned $200,000 in profits, thereby ending SS=s obligation to procure gas for EU=s customers at cost under the service agreement. According to Alan, he had not examined the finances and discovered this information during those preceding five or six years because he was too busy running the company and had no reason to believe anything improper was occurring. Stephen testified that he never attempted to hide anything from Alan but continued using SS to procure gas for EU=s customers because EU was not financially strong enough to survive otherwise.

Despite the fact Alan, as fifty percent owner of EU, directly benefitted from EU=s profits, Alan apparently believed Stephen was using this gas purchasing/payment procedure as a mechanism to improperly transfer excess funds to SS, which would benefit Stephen alone. Therefore, in October 2002, Alan demanded that the purchase/payment relationship between SS and EU end and that both of them refrain from handling any of EU=s money, which they would leave to Rodriguez. Both brothers began to study the financial data, which had not been well kept, to determine who owed what to whom. Their inability to reach an agreement led to this lawsuit.

SS, through Stephen, sued EU. Though it is undisputed that EU, through Stephen, transferred to SS more money than was needed to pay for the gas SS had procured for EU=s customers, Stephen claimed that EU still owed SS money. He asserted that he orally assigned all of his share of the profits from EU to SS, which accounted for a portion of the money he transferred from EU to SS. Despite this assignment, not all of his profits were actually transferred to SS. Stephen also claims that EU did not reimburse SS for the total cost of gas SS procured for EU=s customers. In other words, part of the total money transferred from EU to SS was for a portion of the gas payments owed and the other part was a portion of the profits Stephen assigned to SS, with neither debt being paid in full. Thus, SS sued EU for breach of the service agreement for failing to pay SS the total cost of the gas and also for failing to pay all of Stephen=s assigned EU profits to SS. EU counterclaimed for unjust enrichment. Alan, on behalf of EU, argued that EU had no obligation to pay Stephen=s profits to SS and that SS had been unjustly enriched by the amount of money EU paid to SS in excess of the total amount due for gas costs.

The jury found that EU had breached the service agreement and found damages in the amount of $157,613.65, which is the amount SS=s expert had calculated EU still owed for gas costs. The jury found that Stephen was entitled to half of EU=s profits and had assigned those profits to SS but that EU had not failed to pay those profits to SS. As to the counterclaim, the jury found that SS did not receive unjust enrichment from EU.

Both sides requested that the trial court disregard certain jury findings and enter judgment in their favor. EU argued that the evidence was insufficient to support the jury=s findings that it breached the service agreement and thereby damaged SS in the amount of $157,613.65. EU did not challenge the jury=s findings that Stephen had assigned his profits from EU to SS and that SS had not been unjustly enriched by SS. SS challenged the jury=s finding that EU had not failed to pay SS his profits from EU that he assigned to SS. The trial court rejected these arguments and entered judgment based on the jury=s findings.

Both parties have appealed and reassert these same issues on appeal. They also assert issues regarding the propriety and amount of attorney=s fees and interest awarded.

II. Analysis

A. Standard of Review

In determining whether legally sufficient evidence supports the jury=s findings, we consider the evidence in the light most favorable to the challenged finding and indulge every reasonable inference that would support it. City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005). We must credit favorable evidence if reasonable jurors could and disregard contrary evidence unless reasonable jurors could not disregard it. Id. at 827. We must determine whether the evidence at trial would enable reasonable and fair-minded people to find the facts at issue. Id. Jurors are the sole judge of the credibility of the witnesses and the weight to be given to their testimony. Id. at 819. Evidence is conclusive only if reasonable people could not differ in the conclusions. Id. at 816. When a party attacks the legal sufficiency of an adverse finding when it had the burden of proof on the issue, it must demonstrate on appeal that the evidence establishes, as a matter of law, all vital facts in support of the issue. Dow Chem. Co. v. Francis, 46 S.W.3d 237, 241 (Tex. 2001).

B. Breach of Contract

Question 1 in the jury charged asked if EU Afail[ed] to comply with the Service Agreement dated October 14, 1994,@ and the jury answered AYes.@ In question 2, the jury found that failure damaged SS in the amount of $157,613.65. In its first issue, EU challenges the legal and factual sufficiency of the evidence to support the jury=s answers to these questions.

To preserve a factual sufficiency issue for review, the appellant must include that issue in a motion for new trial. Tex. R. Civ. P. 324(b)(2); Halim v. Ramchandani, 203 S.W.3d 482, 487 (Tex. App.CHouston [14th Dist.] 2006, no pet.). As EU concedes in its reply brief, it failed to do so. Thus, EU=s first issue is overruled to the extent it challenges the factual sufficiency of the evidence.

As to legal sufficiency, EU claims no evidence supports the jury=s answers to questions 1 and 2 for two reasons. First, EU claims it could not have breached Athe Service Agreement dated October 14, 1994,@ as specifically asked in the charge, because that agreement automatically terminated as a matter of law when EU reached $200,000 in profits, which was sometime in 1996 or 1997.[1] Thus, argues EU, even if the parties= subsequent conduct established a new contract, it could not have breached the original service agreement because it was no longer in effect, meaning no evidence supports the jury=s response. We conclude that EU waived this argument on appeal. EU could have preserved this argument in one of five ways: (1) a motion for instructed verdict, (3) 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, 510B11 (Tex. 1991); Halim, 203 S.W.3d at 487; see also United Parcel Serv., Inc. v. Cengis Tasdemiroglu, 25 S.W.3d 914, 916 & n.4 (Tex. App.CHouston [14th Dist.] 2000, pet. denied) (noting that a motion for judgment notwithstanding the verdict preserves a complaint that a legal principle prevents a party from prevailing on its claim). EU=s motion to disregard the jury=s response to question 1 did not include this ground. Although EU elicited testimony supporting this legal theory and argued it during closing statement, EU never gave the trial court an opportunity to rule on it. EU cannot now assert this theory for the first time on appeal. See Halim, 203 S.W.3d at 487 (finding appellant waived a legal sufficiency argument not included in motion for directed verdict); City of Houston v. Precast Structures, Inc., 60 S.W.3d 331, 335 (Tex. App.CHouston [14th Dist.] 2001, pet. denied) (finding legal sufficiency argument waived because appellant did not raise that argument in motion for new trial).

EU=s second legal sufficiency argument focuses on the evidence presented rather than a legal theory, as with its first issue. EU emphasizes the undisputed fact that the total value of the money transferred from EU to SS exceeded the amount necessary to reimburse SS for gas costs and disputes SS=s theory that the money flow was allocated partially to gas costs and partially to Stephen=s share of EU=s profits that he assigned to SS. These issues were hotly disputed, and the jury had substantial evidence upon which to base its rejection of EU=s theory of the case. For example, EU argues that Stephen=s claim that he assigned his share of EU=s profits to SS was not credible because he did not assert it until his second amended petition. The jury specifically resolved this credibility issue in Stephen=s favor in its response to question 4, which EU did not challenge on appeal, and it is the jury=s province to make such credibility determinations and resolve conflicts in the evidence. See City of Keller, 168 S.W.3d at 819; see also Wilson v. Tex. Parks & Wildlife Dep=t, 853 S.W.2d 825, 832 (Tex. App.CAustin 1993) (unchallenged jury findings binding on appeal), rev=d on other grounds, 886 S.W.2d 259 (Tex. 1994). Not only did Stephen testify that he made these assignments orally during each of EU=s annual meetings, Rodriguez and Calvin Suddeath (another long-term employee), both of whom were present during these meetings, corroborated Stephen=s testimony. EU also argues that SS=s damages evidence was unreliable because it was based in part on data created after the lawsuit was filed. Again, the jury resolved this credibility issue in SS=s favor. Stephen Parkhill, SS=s economic expert, testified that neither company=s financial data was well kept and that a majority of the financial accounting had to be generated based on information available from SS and other outside sources, such as tax returns. Parkhill explained that he spent over 150 hours reconstructing this financial data and preparing his damages opinions and that he believed his reconstructed data was materially accurate and a reliable basis for his opinions. The jury awarded, down to the penny, the breach of contract damages Parkhill calculated, and the jury was entitled to rely on his testimony. Finally, EU argues that Stephen controlled the flow of money from EU to SS and thus could have transferred any money he believed was due for gas costs at any time. Thus, according to EU, it had no control over the transfers and cannot be liable for any deficiency. When Stephen made these transfers, he did so on EU=s behalf, and when Alan learned in 2002 that Stephen had been doing so, he demanded that both he and Stephen cease all transfers. Stephen agreed to Alan=s request, effectively freezing the status quo. Moreover, after Parkhill made his damages calculations, SS sent EU a demand letter for $157,613.65 for gas costs, which EU refused to pay. Based on this evidence, the jury could have reasonably concluded that EU failed to pay SS $157,613.65 due for gas costs.

Because we conclude the evidence is legally sufficient to support the jury=s answers to questions 1 and 2, we overrule EU=s first issue.

C. Assignment of Profits

The jury answered ANo@ to question 5, which asked, ADid [EU] fail to pay one half of its annual profits to [SS]?@ In its third cross-issue, SS claims that no evidence supports this finding and that the contrary was established as a matter of law, based on the evidence and the jury=s other findings.[2] SS argues that because (a) the total amount of money transferred between EU and SS was undisputed and was greater than was needed to pay all the gas costs, (b) the jury, by finding a breach of contract and awarding damages, rejected EU=s theory that the transferred money was not all for gas costs, (c) the jury found that the remaining portion of money transferred to SS did not constitute unjust enrichment (and this finding has not been appealed), (d) the jury found that Stephen assigned his EU profits to SS (which is also unappealed), and (e) the total amount of Stephen=s share of EU=s profits was undisputed, the jury must necessarily find that EU failed to transfer the remaining amount of Stephen=s profits to SS. In short, SS argues that the jury=s answers to the other questions mandate a finding that EU owed SS Stephen=s remaining profits, and thus no evidence supports the jury=s contrary finding.

Though SS has framed its argument as a no evidence issue, its argument is based on the premise that the jury=s answers are inconsistent. See Dori v. Bondex Int=l, Inc., No. 11-04-00179-CV, 2006 WL 1554614, at *4 (Tex. App.CEastland June 8, 2006, no pet.) (mem. op.). Texas Rule of Civil Procedure 295 provides a procedure for resolving conflicting jury answers, but it must be invoked before the jury is discharged or any error based on conflicting jury answers is waived. See id.; Coastal Chem Inc. v. Brown, 35 S.W.3d 90, 99 (Tex. App.CHouston [14th Dist.] 2000, pet. denied). SS did not raise this conflict before the jury was dismissed, and therefore its issue is waived. See Dori, 2006 WL 1554614, at *4B5 (finding appellant=s argument that Athe jury=s liability finding required a damage award@ to be Aanother way of saying the jury=s verdict contained conflicting answers@ and concluding appellant waived issue on appeal by failing to bring conflict challenge before jury dismissed); see also Spring Windows Fashions Div., Inc. v. Blind Maker, Inc., 184 S.W.3d 840, 867 (Tex. App.CAustin 2006, pet. granted, judgm=t vacated w.r.m.) (refusing to conduct limited sufficiency review based on reconciliation of conflicting jury answers when appellant waived conflict argument, noting A[t]o hold otherwise would create an end-run around the modern error preservation requirement that parties object to conflicting jury findings before the jury is discharged and the sound policies that underlie that requirement@). Thus, we overrule SS=s third cross-issue.

 D. Attorney=s Fees

SS presented expert testimony that it reasonably and necessarily incurred $75,000 in attorney=s fees for preparation and trial and that a reasonable fee for appeal to the court of appeals and the Texas Supreme Court would be $30,000 and $25,000 respectively. In question 8, the jury found $75,000 was reasonable and necessary for attorney=s fees for preparation and trial but failed to find any amount for reasonable appellate attorney=s fees. The trial court entered judgment for that exact amount of attorney=s fees. In its second issue, EU argues that the trial court erred in awarding SS any attorney=s fees. We review a trial court=s award of attorney=s fees for an abuse of discretion. Broesche v. Jacobson, 218 S.W.3d 267, 277 (Tex. App.CHouston [14th Dist.] 2007, no pet. h.). Section 38.001 of the Civil Practice and Remedies Code provides that A[a] person may recover reasonable attorney=s fees@ on a claim for breach of contract. Tex. Civ. Prac. & Rem. Code Ann. ' 38.001(8) (Vernon 1997). EU argues that SS was not entitled to attorney=s fees because the evidence was legally insufficient to support the jury=s finding that EU breached the service agreement. We have already rejected this argument and concluded that the evidence is legally sufficient.

EU also argues that the trial court=s attorney=s fee award was improper because SS failed to segregate the attorney=s fees expended pursuing its breach of contract claim, for which attorney=s fees are recoverable, from those expended in proving EU owed SS money for Stephen=s unpaid distributions that he assigned to SS, for which attorney=s fees are not recoverable. This argument is without merit. The Texas Supreme Court recently reaffirmed the principle that Aif any attorney=s fees relate solely to a claim for which fees are unrecoverable, a claimant must segregate recoverable from unrecoverable fees.@ Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 313 (Tex. 2006). However, Awhen discrete legal services advance both a recoverable and unrecoverable claim[,] . . . they are so intertwined that they need not be segregated.@ Id. at 313B14. In this case, to prove that EU still owed SS money under the service agreement for gas costs, even though EU had transferred more money to SS than was needed to pay all the gas costs, SS had to prove that some of the funds transferred from EU to SS were to pay a portion of Stephen=s assigned profits. In other words, SS could not prevail on its breach of contract claim without proving the existence and amount of the assignment. See Broesche, 218 S.W.3d at 277B78. Thus, because SS=s attorney=s fees expended to prove the assignment issue Awere necessary to recover on their contract, they are recoverable.@ Varner v. Cardenas, 218 S.W.3d 68, 69 (Tex. 2007). Accordingly, we overrule EU=s second issue.

In its first and second cross-issues, SS argues that the trial court erred in failing to award it any appellate attorney=s fees. We agree. An award of attorney=s fees under section 38.001 is mandatory. See Lee v. Perez, 120 S.W.3d 463, 469 (Tex. App.CHouston [14th Dist.] 2003, no pet.). SS presented uncontested testimony that $30,000 is a reasonable fee for an appeal to this court and $25,000 for an appeal to the Texas Supreme Court. AWhile the trial court had discretion to award a smaller or larger fee, it did not have discretion to award nothing.@ Id. We therefore sustain SS=s first and second cross-issues and modify the judgment in accordance with the uncontested evidence. See id. at 469B70.

E. Interest

The trial court assessed prejudgment interest on the damages it awarded SS for EU=s breach of the service agreement. In its third issue, EU argues that SS is not entitled to interest because the evidence was insufficient to support the jury=s finding that EU owed SS any money for gas costs. We have already determined that the evidence is legally sufficient to support this finding, and thus we overrule this issue.

III. Conclusion

We conclude that the evidence is sufficient to support the jury=s finding that EU breached its contract with SS, causing $157,613.65 in damages. SS has waived any argument that the jury erred in failing to find that EU failed to pay additional profits Stephen assigned to SS. We also conclude that SS has shown it is entitled to the interest and $75,000 in attorney=s fees awarded by the trial court. However, the trial court failed to award SS reasonable attorney=s fees for a successful appeal to this court and the Texas Supreme Court. Thus, we modify the judgment in accordance with the uncontested evidence to add $30,000 for the services of SS=s attorneys in this successful appeal and $25,000 in the event EU makes an unsuccessful appeal to the Texas Supreme Court, and we affirm the judgment as modified.

/s/ Leslie B. Yates

Justice

Judgment rendered and Memorandum Opinion filed September 27, 2007.

Panel consists of Justices Yates, Seymore, and Edelman.*

* Senior Justice Richard H. Edelman, sitting by assignment.

[1] Though it does not label it as such, EU appears to argue that the language of the service agreement stating that SS would procure gas for EU=s customers at cost Auntil@ EU attained $200,000 in profits constituted a condition subsequent, the happening of which would automatically terminate the contract. See Black=s Law Dictionary 312 (8th ed. 2004) (defining Acondition subsequent@ as A[a] condition that, if it occurs, will bring something else to an end; an event the existence of which, by agreement of the parties, discharges a duty of performance that has arisen@).

[2] In its fourth cross-issue, SS argues the evidence is also factually insufficient for the same reason. However, it failed to raise this issue in a motion for new trial, and thus it is waived. SeeTex. R. Civ. P. 324(b)(2); Halim, 203 S.W.3d at 487.