Texas Mutual Insurance Co. f/k/a/ Texas Workers' Compansation Ins. Fund v. Ray Ferguson Interest, Inc., RFI Brazos Paving Co., Inc. et al--Appeal from 240th District Court of Fort Bend County

Opinion issued March 16, 2006

 

 

In The

Court of Appeals

For The

First District of Texas

 

NO. 01-02-00807-CV

 

TEXAS MUTUAL INSURANCE COMPANY F/K/A TEXAS WORKERS COMPENSATION INSURANCE FUND, Appellant

 

V.

 

RAY FERGUSON INTERESTS, INC., Appellee //

 

On Appeal from the 240th District Court

Fort Bend County, Texas

Trial Court Cause No. 103609

 

MEMORANDUM OPINION

 

Appellant, Texas Mutual Insurance Company ( the Fund ), appeals from a judgment rendered on a jury verdict awarding appellee, Ray Ferguson Interests, Inc. ( RFI ), $2,273,613 in actual damages, $3,500,000 as statutory damages for knowing violation of the Insurance Code, $875,000 in trial and contingent appellate fees, and pre-and post-judgment interest. We determine (1) whether the trial court erred in denying pre-judgment interest to the Fund; (2) whether legally sufficient evidence supported, or judicial immunity barred, the award of damages to RFI; and (3) whether the Fund conclusively proved its attorney s fees in an amount greater than that awarded by the jury. We reverse the judgment in part, affirm it in part, and remand the cause with instructions.

I. Background

Ray Ferguson had been in the paving business since 1976. He incorporated RFI Brazos Paving, Inc. ( Brazos ) in 1989. He incorporated RFI in 1991. Ray Ferguson was the majority owner of RFI at all times pertinent to this suit. He (or a living trust for which he was trustee) was also the majority owner of Brazos through June of 1996, when he became a minority owner of Brazos. RFI generally operated as a general contractor, subcontracting out the physical work to other companies, including Brazos. Brazos operated as a subcontractor performing concrete-paving work. Brazos performed the vast majority of its work for RFI.

For five years, from 1993 to 1998, RFI carried workers compensation insurance through the Fund for its employees. Brazos, on the other hand, was a non-subscriber under the Texas workers compensation system.

In 1997, RFI was working as a subcontractor on a paving job for a general contractor. RFI, in turn, subcontracted with Brazos for a crew of four of Brazos s men to perform the storm-sewer work for RFI s paving project. Ray Ferguson testified that, at some point during the construction work, the general contractor learned that Brazos was a non-subscriber and instructed him that it wanted Brazos s storm-sewer crew to have workers compensation coverage. Ray Ferguson further testified that, in order to comply with the general contractor s requirement, he moved the four Brazos employees to RFI s payroll permanently. The employee transfer happened in about the middle of 1997.

A few days after the employee transfer, one of the transferred employees, Larry Garza, was injured and applied for workers compensation benefits. While processing Garza s claim, the Fund learned that Garza had been moved from Brazos to RFI shortly before the incident. Around December 1997, the Fund s premium-fraud department began looking into whether Brazos was truly an independent subcontractor to RFI or whether RFI owed premiums that it had not paid for Brazos s employees because Brazos was not an independent subcontractor. The Fund disputed the motive behind the moving of the Brazos employees to RFI s payroll, alleging instead that the employees were switched to RFI to obtain coverage without paying sufficient premium. Alternatively, the Fund viewed the employee switch as evidence that RFI controlled Brazos sufficiently for the latter not to be an independent contractor.

Sometime in or soon after December 1997, the Fund informed RFI that it wanted to review Brazos s books and to audit prior policy years as part of its investigation. The Fund never actually conducted the audits of prior policy years, looked at Brazos s books, or billed for or collected the disputed additional premiums before suit was filed. Rather, on February 26, 1998, RFI sued the Fund in Fort Bend County, alleging that the Fund had improperly sought to re-audit RFI with the intention of reassessing premiums for prior policy years. In its suit, RFI sought declarations that the Fund had no contractual right to do these things and that RFI owed no further premium for prior coverage years.

The Fund counter-claimed against RFI and asserted third-party claims against Ray and Pam Ferguson and Brazos for violations of RICO (mail fraud and racketeering), civil conspiracy, breach of contract, fraud and misrepresentation, negligent misrepresentation, and violations of Insurance Code articles 5.65B and 5.65C and sought actual damages, treble damages under RICO, and attorney s fees. //

By the time of trial, RFI had amended its petition to allege causes of action for breach of contract, violations of former Insurance Code article 21.21, // and breach of the duty of good faith and fair dealing // and to seek economic, special and consequential damages, statutory damages for knowing violations of former article 21.21, exemplary damages, and attorney s fees. Also by the time of trial, the Fund had amended its counter-claims and third-party claims to allege causes of action for breach of contract, fraud, civil conspiracy, and violations of Insurance Code article 5.65C(d) and to seek actual damages (additional premiums or, alternatively, out-of-pocket damages), attorney s fees, and exemplary damages. The Fund also asserted the affirmative defenses of statutory immunity // and judicial immunity.

The jury returned a verdict with the following findings:

Relating to RFI s former article-21.21 claims:

The Fund engaged in six specific unfair and deceptive acts or practices.

RFI suffered $3,670,000 in actual damages from the Fund s unfair and deceptive acts or practices. //

The Fund engaged knowingly in the six unfair and deceptive acts or practices.

Relating to RFI s contract-breach claims:

The Fund did not fail to comply with the insurance policy provisions relating to premiums or audits for the first three coverage years, but the Fund failed to comply with these policy provisions in the last two coverage years.

RFI suffered $5,670,000 in actual damages from the Fund s failure to comply with the insurance policy provisions relating to audits and premiums. //

The Fund waived its right to conduct additional audits in 1998 (for the years 1993-1998) after conducting final audits at the end of each respective policy period, but only for the last two coverage years; the Fund did not waive its right to conduct additional audits for the first three policy years.

Relating to the Fund s statutory immunity defense:

The conduct for which the jury found the Fund liable was conducted by the Fund in bad faith.

Relating to attorney s fees:

RFI was entitled to $750,000 in attorney s fees for preparation and work through trial, $75,000 in fees for an appeal to the court of appeals, and $50,000 in fees for an appeal to the Texas Supreme Court.

The Fund was entitled to $165,551 in attorney s fees for preparation and work through trial, $55,184 in fees for an appeal to the court of appeals, and no fees for an appeal to the Texas Supreme Court.

Relating to the Fund s fraud claims:

Neither Ray Ferguson, RFI, Pam Ferguson, nor Brazos committed fraud against the Fund.

 

The Fund, its representatives, or its agents relied on the Fund s own investigation or audits in deciding whether to enter into insurance contracts with RFI in the first and last policy years, but not in the middle three policy years.

The Fund, its agents, its employees, or its representatives discovered or reasonably could have discovered that the Fund had suffered an injury because of the Fergusons , RFI s, or Brazos s fraud in December 1997.

Relating to the Fund s contract-breach claim:

Brazos was not an independent contractor for the first three years of coverage, but it was for the last two years of coverage.

A written contract existed between RFI and Brazos that specified that Brazos would assume the responsibilities of an employer for performance of the work.

The Fund s damages were $551,836. //

Relating to other matters:

RFI was, in the normal course of its business operations, a contractor preparing to construct, constructing, altering, repairing, extending, or demolishing a commercial structure that does not exceed three stories in height or 20,000 square feet or an appurtenance to such a structure.

RFI apparently elected to recover on the former article-21.21 claims, and the trial court rendered judgment for RFI in the amount of $2,273,613 in actual damages; // $3,500,000 in statutory damages for knowingly committing Insurance Code violations; pre-and post-judgment interest; $750,000 in attorney s fees for trial, an additional $75,000 in attorney s fees in the event of an unsuccessful appeal to the court of appeals by the Fund, and an additional $50,000 in attorney s fees in the event of an unsuccessful appeal to the Texas Supreme Court by the Fund. The trial court denied the Fund s request for a further offset in the amount of pre-judgment interest on its contract-breach claim and rendered a take-nothing judgment on all of the Fund s claims. Both parties filed notices of appeal, but only the Fund asserts any appellate challenges.

II. Pre-Judgment Interest

In issue six, the Fund argues that the trial court erred in failing to award it pre-judgment interest and to offset the amount of pre-judgment interest from RFI s judgment award on its breach-of-contract claim. RFI confesses error. See Chilton Ins. Co. v. Pate & Pate Enters., Inc., 930 S.W.2d 877, 894 (Tex. App. San Antonio 1996, writ denied); see also Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 531 n.12 (Tex. 1998).

We sustain issue six.

III. Sufficiency Challenges to Damages

A. The Fund s Challenges

In part of issues one and two, the Fund argues that the trial court erred in rendering judgment for RFI on RFI s contract-breach and former article-21.21 claims because there was no evidence to support the damages that the jury found; no evidence showed that the Fund s actions for which the jury found the Fund liable caused any of the damages that the jury found; and judicial and statutory immunity protected the Fund from certain of RFI s claims. Specifically, the Fund argues that

1.there is no evidence of loss of value damages (former article-21.21 claim) or of lost equity damages (contract-breach claim);

2.diminution of a business s value is not an appropriate measure of damages for contract breach;

3.with respect to both causes of action, there is no evidence of loss of credit reputation;

4.statutory immunity protects the Fund from liability on either cause of action;

5.damages for lost time due to litigation are not recoverable as a matter of law for either cause of action;

6.judicial immunity protects the Fund from liability on either cause of action; and

7.the acts and omissions that the jury found breached the policies terms and violated former article 21.21 could not, as a matter of law, have caused (and, alternatively, there is no evidence that they caused) RFI s injuries because, among other things, RFI s claimed damages arose, if at all, from defamatory statements, and RFI did not plead defamation or submit a jury question on this claim.

 

We conclude that we need to discuss only the Fund s fifth, sixth, and seventh challenge listed above: that, as a matter of law, (1) damages for lost time due to litigation are not recoverable for either cause of action; (2) judicial immunity shielded the Fund from liability arising from some of the actions alleged to have caused RFI s damages; and (3) the Fund s acts and omissions found by the jury could not have caused RFI s injuries because those damages arose from defamatory statements and defamation was neither pleaded nor submitted as a question to the jury. The Fund preserved its fifth, sixth, and seventh challenges in a motion for directed verdict, charge objections, and a motion for judgment notwithstanding the verdict ( JNOV ). It is thus the propriety of the trial court s rulings on these motions and objections that we review.

B. Standard of Review

A court may instruct a verdict if no evidence of probative force raises a fact issue on the material questions in the suit. Prudential Ins. Co. of Am. v. Fin. Review Servs., Inc., 29 S.W.3d 74, 77 (Tex. 2000). A directed verdict for a defendant may be proper in two situations. First, . . . when a plaintiff fails to present evidence raising a fact issue essential to the plaintiff s right of recovery. Second, . . . if the plaintiff admits or the evidence conclusively establishes a defense to the plaintiff s cause of action. Id. (citations omitted). Directed verdicts have also been sustained . . . where the substantive law did not as a matter of law permit a plaintiff to recover on his pleaded cause of action. McCall v. Tana Oil & Gas Corp., 82 S.W.3d 337, 343 (Tex. App. Austin 2001), rev d on other grounds, 104 S.W.3d 80 (Tex. 2003). A judgment notwithstanding the verdict is proper when a directed verdict would have been proper. Tex. R. Civ. P. 301; Fort Bend County Drainage Dist. v. Sbrusch, 818 S.W.2d 392, 394 (Tex. 1991).

When made on an evidentiary basis, rulings on motions for directed verdict and on motions for JNOV are reviewed under the same legal-sufficiency test as are appellate no-evidence challenges. See City of Keller v. Wilson, 168 S.W.3d 802, 823, 827 (Tex. 2005). Accordingly, to determine whether there is some evidence to support a jury s finding and, thus, to determine whether a trial court correctly denied a motion for JNOV or motion for directed verdict, we must view the evidence in a light that tends to support the finding of disputed fact and disregard all evidence and inferences to the contrary. Wal-Mart Stores, Inc. v. Miller, 102 S.W.3d 706, 709 (Tex. 2003). The supreme court recently discussed the appropriate standard of review for legal sufficiency challenges in City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005). Chubb Lloyd s Ins. Co. of Tex. v. H.C.B. Mech., Inc., No. 01-04-00572-CV, 2005 WL 3315237, at *2 (Tex. App. Houston [1st Dist.] Dec. 8, 2005, no pet. h.). The [Keller] court concluded that [t]he final test for legal sufficiency must always be whether the evidence at trial would enable reasonable and fair-minded people to reach the verdict under review. . . . [L]egal-sufficiency review in the proper light must credit favorable evidence if reasonable jurors could, and disregard contrary evidence unless reasonable jurors could not. Id. (quoting City of Keller, 168 S.W.3d at 827).

If more than a scintilla of evidence supports the jury s finding, the jury s verdict and not the trial court s judgment must be upheld. Miller, 102 S.W.3d at 709. More than a scintilla of evidence exists if the evidence rises to a level that would enable reasonable and fair-minded people to differ in their conclusions. Ford Motor Co. v. Ridgway, 135 S.W.3d 598, 601 (Tex. 2004) (quoting Merrell Dow Pharm., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex. 1997)). Conversely, evidence that is so weak as to do no more than create a mere surmise is no more than a scintilla and, thus, no evidence. Id. (quoting Kindred v. Con/Chem., Inc., 650 S.W.2d 61, 63 (Tex. 1983)). The jury is the sole judge of witnesses credibility, and it may choose to believe one witness over another; a reviewing court may not impose its own opinion to the contrary. City of Keller, 168 S.W.3d at 819. Because it is the jury s province to resolve conflicting evidence, we must assume that jurors resolved all conflicts in accordance with their verdict. Id. at 819-20.

C. Pertinent Jury Questions

Following are the jury questions pertinent to causation and damages for RFI s former article-21.21 cause of action:

QUESTION NO. 1

Did the Fund engage in any unfair or deceptive act or practice that caused damage to RFI?

False, misleading, or deceptive act or practice means an act or series of acts that have the tendency to deceive an average person, even though that person may have been ignorant, unthinking or gullible.

Unfair or deceptive act or practice means any of the following:

Answer:

 

yes 1.Making or causing to be made any statement misrepresenting the terms, benefits, or advantages of an insurance policy;

yes 2.Making or directly or indirectly causing to be made, an assertion, representation or statement with respect to insurance that was untrue, deceptive or misleading; or

3.Making any misrepresentation relating to an insurance policy by:

yes a.making any untrue statement of a material fact; or

yes b.failing to state a material fact that is necessary to make other statements not misleading, considering the circumstances under which the statements are made; or

yes c.making any statement in such a manner as to mislead a reasonably prudent person to a false conclusion of a material fact; or

yes d.failing to disclose the terms of coverage.

Answer Yes or No to each of the above elements.

 

QUESTION NO. 2

IF YOU ANSWERED ANY ELEMENT OF QUESTION NO. 1 YES, THEN AND ONLY THEN ANSWER QUESTION NO. 2.

What sum of money, if any, if now paid in cash, would fairly and reasonably compensate RFI for its damages, if any, that resulted from such unfair or deceptive act or practice? Damages may be recovered under this question only if they are proved to be a natural, probable, and foreseeable consequence of the Fund s conduct.

In answering questions about damages, answer each question separately. Do not increase or reduce the amount in one answer because of your answer to any other question about damages. Do not speculate about what any party s ultimate recovery may or may not be. Any recovery will be determined by the court when it applies the law to your answers at the time of judgment. Do not add any amount of interest on damages, if any.

Consider the following elements of damages, if any, and none others.

Answer separately in dollars and cents, if any, for each of the following:

1.Loss of value of RFI. $ 3.2 million

2.The lost time spent by the officers and employees of RFI attempting to remedy the problems arising from the Fund s actions. $ 70,000

3.Damage to RFI s credit reputation that was a consequence of the Fund s acts. $ 400,000

 

Following are the jury questions pertinent to causation and damages for RFI s contract cause of action:

QUESTION NO. 7

Did the Fund fail to comply with the insurance policy provisions relating to premiums or audits between [the] Fund and RFI?

You are instructed that under Texas law policies of insurance and their construction are governed by the same rules as other contracts. The terms used in them are to be given their plain, ordinary and generally accepted meaning unless the instrument itself shows them to have been used in a technical or different sense.

You are instructed that under Texas law an insurance company may not demand an insurance premium from an employer for coverage of an independent contractor or an employee of an independent contractor if the independent contractor is under a contract of hire with the employer.

You are instructed that under Texas law an insurance company may charge a premium for a subcontractor who is not an independent subcontractor.

You are instructed that the Fund and RFI agreed to the terms and conditions in the policies from 1993 to 1998 (the expiration of the last policy was issued [sic] effective March, 1997 to March, 1998). RFI was the only named insured under the policies.

Answer YES or NO for each policy.

ANSWER:

April 1993 to March 1994 No

March 1994 to March 1995 No

March 1995 to March 1996 No

March 1996 to March 1997 Yes

March 1997 to March 1998 Yes

QUESTION NO. 8

IF YOU ANSWERED QUESTION NO. 7 YES FOR ANY POLICY, THEN AND ONLY THEN ANSWER QUESTION NO. 8.

What sum of money, if any, if now paid in cash, would fairly and reasonably compensate RFI for its damages, if any, that resulted from the Fund s failure to comply with the insurance policies?

Damages may be recovered under this question only if they are proved to be the natural, probable, and foreseeable consequence of the Fund s conduct.

In answering questions about damages, answer each question separately. Do not increase or reduce the amount in one answer because of your answer to any other question about damages. Do not speculate about what any party s ultimate recovery may or may not be. Any recovery will be determined by the court when it applies the law to your answers at the time of judgment. Do not add any amount of interest on damages, if any.

Consider the following elements of damages, if any, and none other.

Answer separately in dollars and cents, if any, for each of the following:

1.RFI s lost equity. $ 3.2 million

 

2.The lost time spent by the officers and employees of RFI attempting to remedy the problems arising from the Fund s actions. $ 70,000

3.Damage to RFI s credit reputation that was a consequence of the Fund s acts. $ 2.4 million

D. RFI s Liability Theories at Trial

As can be seen from RFI s petition, RFI s questioning of witnesses, the witnesses testimony, RFI s closing argument, and RFI s appellee s brief, RFI s liability theories under both causes of action were that the Fund

never explained (to RFI or to its insurance agents) what criteria it would use to determine whether Brazos was truly an independent contractor;

tried to collect premiums for employees of an independent contractor (Brazos) in contravention of the law, in violation of the policies terms, and when the Fund knew or should have known (by having conducted more thorough audits or by having read more thoroughly the audits that they had already conducted) that RFI used subcontractors in general, that Brazos was one of those subcontractors, and that Brazos was a truly independent subcontractor;

did not explain to RFI or its insurance agents that more than one audit could be conducted for any policy year (in contravention of the policies terms, although allowed by undisclosed internal operating procedures); and

tried to re-audit RFI, allegedly contrary to the policies terms, for years in which a final audit had already been completed.

 

E. Discussion

1. Damages for Lost Time Due to Litigation

RFI presented evidence that it suffered $70,000 in damages due to time that Ray and Pam Ferguson and other employees had lost putting in a lot of hours gathering documents and doing things and going and doing depositions, getting all these documents ready, meaning close to a truckload of documents produced in this case. The jury awarded $70,000 for [t]he lost time spent by the officers and employees of RFI attempting to remedy the problems arising from the Fund s actions.

RFI s evidence set out above can be summarized as financial loss due to time spent by RFI s employees on litigation matters (discovery, depositions, and the like). Such damages are generally not recoverable unless a statute or contract provides for their recovery. See Eberts v. Businesspeople Pers. Servs., 620 S.W.2d 861, 863 (Tex. App. Dallas 1981, no writ). RFI does not claim that a statute or contract provides for the recovery of these damages. Rather, RFI cites to Southland Lloyd s Insurance Co. v. Tomberlain in support. See 919 S.W.2d 822 (Tex. App. Texarkana 1996, writ denied). The Tomberlain court, however, did not depart from the general rule noted above: rather, the court expressly stated that it would not reach the issue of whether such damages could be recovered, and no other court has cited that case on that point. See id. at 830 ( However, inasmuch as this case will be retried, we do not express our approval of allowing recovery for the time and expense of a plaintiff lost by virtue of participation in the trial proceedings. ). We thus hold that the only evidence that RFI offered does not, as a matter of law, support the jury s award of $70,000 for [t]he lost time spent by the officers and employees of RFI attempting to remedy the problems arising from the Fund s actions.

Accordingly, we sustain this challenge under issue one.

2. Claims Barred by Judicial Immunity or for Which Causation Was Not Shown

 

In further support of damages and causation, RFI presented evidence that, in approximately the summer of 1998, the Fund began, either through its allegations in the lawsuit or by separate letters to (or other unspecified contact with) RFI s clients, accusing RFI of being frauds, cheats, and liars and of having committed racketeering, mail fraud, etc. Before the Fund s above-referenced actions, RFI was one of the top five sought-after civil-type contractors in [the] Fort Bend Harris County area and had a real good reputation. Additionally, the market was good in 1998, 1999, and 2000 for paving business, and [t]here was plenty of work for everybody.

Beginning in 1998, however, Ray Ferguson became aware of a change in mood of just about all of his customers in how they dealt with RFI. The clients stopped working with RFI because of fraud accusations and letters going out, and, although RFI s customers still wanted to do business with us, they also wanted this lawsuit over before they would do that. RFI s taxable income and business value dropped beginning in 1998; since then, RFI had not been able to turn a profit and had become insolvent; RFI s bonding capacity (or line) was reduced from $13,000,000 to zero; RFI s value was reduced from $3,200,000 in 1997 to no equity by the time of trial; and RFI had had very good credit of about $400,000 before 1998, but no longer had any credit or working capital afterwards. In sum, RFI presented evidence that it would have been a successful business during that time period but for the Fund s above-referenced actions.

On RFI s former article-21.21 claim, the jury awarded $3,200,000 for the loss of value of RFI and $400,000 for damage to RFI s credit reputation that was a consequence of the Fund s acts. On RFI s contract-breach claim, the jury awarded $3,200,000 for RFI s lost equity and $2,400,000 for damage to RFI s credit reputation that was a consequence of the Fund s acts.

a. Claims based on the Fund s allegations and statements in the lawsuit

 

The jury s award of damages cannot stand to the extent that that award was based on damages, whether to RFI s credit reputation or to its value or equity, resulting from the Fund s actions connected with the lawsuit. Communications made during the course of judicial proceedings are privileged. The privilege also extends to pre-trial proceedings, including affidavits filed with the court. Bird v. W.C.W., 868 S.W.2d 767, 771 (Tex. 1994) (citations omitted). This privilege extends to any statement made by the judge, jurors, counsel, parties, or witnesses, and attaches to all aspects of the proceedings, including statements made in open court, pre-trial hearings, depositions, affidavits, and any of the pleadings or other papers in the case. Helfand v. Coane, 12 S.W.3d 152, 157 (Tex. App. Houston [1st Dist.] 2000, pet. denied). The privilege extends even to perjured testimony. Laub v. Pesikoff, 979 S.W.2d 686, 689 (Tex. App. Houston [1st Dist.] 1998, pet. denied).

As discussed below, although RFI did not plead defamation, its theory of damages was that its clients, creditors, and bonding companies abandoned it, in part, because of the Fund s allegations and assertions i.e., the Fund s alleged defamatory statements made in the course of this judicial proceeding. The [judicial] privilege afforded against defamation actions is founded on the theory that the good it accomplishes in protecting the rights of the general public outweighs any wrong or injury which may result to a particular individual. Bird, 868 S.W.2d at 771. The judicial immunity that was recognized in Bird is not limited only to claims styled as defamation claims, but instead extends to claims arising out of communications made in the course of judicial proceedings, regardless of the label placed on the claim. Crain v. Unauthorized Practice of Law Comm., 11 S.W.3d 328, 335 (Tex. App. Houston [1st Dist.] 1999, pet. denied). Accordingly, we hold that the jury s award of damages for damage to RFI s credit reputation and for loss of value or equity of RFI, awarded under either cause of action, to the extent that those damages resulted from the Fund s actions connected with the lawsuit, cannot be sustained.

We sustain this challenge under issue one.

b. Damages resulting from the Fund s communications with RFI s clients outside the context of litigation

We further hold that no evidence supports the jury s award of damages for damage to RFI s credit reputation and for loss of value or equity of RFI because no evidence shows that the Fund s actions for which the jury found it liable caused the damages that RFI s evidence proved.

The jury charge required that damages, to be recoverable, be proved to be the natural, probable, and foreseeable consequence of the Fund s conduct. Under common law, to recover damages for the Fund s deceptive acts or practices under former article 21.21, RFI had to prove that the Fund s conduct was a producing cause of any damages sustained. See Crawford & Co. v. Garcia, 817 S.W.2d 98, 101 (Tex. App. El Paso 1991, writ denied) (citations omitted). A producing cause is an efficient, exciting or contributing cause, . . . . Id. (quoting Rourke v. Garza, 530 S.W.2d 794, 801 (Tex. 1975)). Although neither reliance nor foreseeability are necessary elements of recovery under the common law, the causation instruction given in jury Question 2 (damages for the former article-21.21 claim) deviated from the common law in that it required foreseeability. See id. Regardless, RFI s proof had to establish that the damages were factually caused by the Fund s conduct. See id. Also under the common law, to recover compensatory damages for the Fund s breach of contract, RFI had to establish that it suffered some pecuniary loss as a result of the contract s breach. See Prudential Secs., Inc. v. Haugland, 973 S.W.2d 394, 396-97 (Tex. App. El Paso 1998, pet. denied). RFI s evidence had to show that its contract damages were the natural, probable, and foreseeable consequence of the Fund s conduct. See id.

The evidence that RFI presented showed that RFI s damages (other than those caused by time lost participating in the lawsuit) were brought about by what RFI s evidence also showed were, in effect, independent torts: the Fund s sending communications to RFI s customers, with the effect that those customers, RFI s creditors, and its bonding agents would not work with RFI, would not extend credit to RFI, or would not bond RFI. // These are classic defamation allegations and damages. See WFAA-TV, Inc. v. McLemore, 978 S.W.2d 568, 571 (Tex. 1998) ( To maintain a defamation cause of action, the plaintiff must prove that the defendant: (1) published a statement; (2) that was defamatory concerning the plaintiff; (3) while acting with either actual malice, if the plaintiff was a public official or public figure, or negligence, if the plaintiff was a private individual, regarding the truth of the statement. ).

But RFI did not plead, nor did it request a jury question on, defamation. Rather, RFI pleaded and had the trial court submit jury questions on former article-21.21 violations and on breach of contract. As for the former, the jury found (to summarize) that the Fund misrepresented the terms, benefits, or advantages of the policies; made an assertion, representation, or statement regarding insurance that was untrue, deceptive, or misleading; misrepresented the policies either by making an untrue statement of material fact or by failing to state a material fact that was necessary to make other statements not be misleading; made a statement in such a manner as to mislead a reasonably prudent person to a false conclusion of a material fact; and failed to disclose coverage terms. As for the latter, the jury found that the Fund failed to comply with the provisions relating to premiums or audits.

Simply put, RFI s evidence showed no connection between the acts for which the jury found the Fund liable and the damages that it also found, given RFI s causation and damages evidence. There is no connection between, for example, the Fund s not telling RFI or its agents how audits would be conducted or what criteria would be used to determine if premium was owed for subcontractors employees and the demise of RFI s business, when the evidence showed that RFI s demise resulted from the Fund s alleged defamatory statements to RFI s customers. Proper damages for the liability theories that RFI asserted might be, for example, the premiums that RFI actually paid after it was tricked into purchasing coverage that it would not otherwise have purchased had the Fund not made these misrepresentations. Or, if the Fund had actually collected additional premiums based on an invalid theory that Brazos was not independent, then RFI could have had the Fund disgorge those additional premiums. Or, if the Fund had actually re-audited RFI as part of its investigation under an invalid theory that Brazos was not independent, then RFI could have sought the value of its employees time that was expended in participating in the re-audit.

But those are not the damages that RFI sought. Indeed, the Fund never conducted the re-audits or billed RFI for additional premiums. Rather, RFI sought and recovered damages that occurred because of the Fund s informing RFI s customers of the Fund s fraud, RICO, and other allegations against RFI. We hold that, as a matter of law, there is not a sufficient connection given RFI s theories, its evidence of liability and damages, and the jury s liability findings between the acts or omissions that the jury found and the particular damages that it also found.

We sustain these challenges under issues one and two.

F. Conclusion

We sustain the Fund s challenges under issues one and two to all of the jury s damages awarded under either cause of action (jury questions 2 and 8) for the reasons set out above and to the Fund s challenges to the jury s liability findings (jury questions 1 and 7) to the extent that those findings were based on the Fund s statements made in the context of litigation. Given this disposition, we need not reach the remaining challenges under the Fund s issues one and two, // issue three (error in admission of testimony of injury personal to the Fergusons and their family, rather than to RFI), and issue four (arguing that court erred in awarding attorney s fees to RFI because fees were not properly segregated). //

IV. The Fund s Attorney s Fees

The jury awarded the Fund $165,551 for trial, $55,184 for appeal to our Court, and $0 for appeal to the Texas Supreme Court for a total of $220,735 in attorney s fees. In its judgment, the trial offset the amount of trial fees awarded to the Fund ($165,551) from the jury s award to RFI, also providing that, should the Fund prevail on appeal, the Fund would be entitled to an additional credit of the amount of appellate fees awarded to it ($55,184) against the amount awarded to RFI. In issue five, the Fund argues that, as a matter of law, it established its right to $676,546 in fees for trial, $100,000 in fees for appeal to our Court, and $50,000 in fees for appeal to the Texas Supreme Court for a total of $626,546 in attorney s fees.

The Fund s challenge rests on the uncontradicted testimony of David Rowe, one of the Fund s trial attorneys, as to the reasonableness and necessity of fees and expenses. Rowe testified as to the hours that his firm had expended in the case, his firm s attorneys and paralegals hourly rates, the difficulty of the case, and the amount of the firm s out-of-pocket expenses (about $96,000) in the suit and opined that, calculated at an hourly rate, a total amount of $626,546 in attorney s fees was reasonable and necessary. However, Rowe also testified about the contingency contract that his firm had with the Fund. Rowe testified that the contingent-fee contract was for one-third of the total recovery through trial, increasing to 40 percent in the event of an appeal, with reimbursement for out-of-pocket expenses. Rowe further testified as follows:

Counsel:So, the fee arrangement, the contingency-fee arrangement and those that amount of fees, in conjunction with the expenses that you explained, in your opinion, are those reasonable fees and expenses to handle this particular case?

Rowe:Absolutely. Actually, they re very reasonable from the client s perspective. On a simple case like a car wreck, dog bite, or something like that, a typical fee agreement would be, say, 25 percent to a third, and we have a third of this case. On more complicated business dealings, a contingent fee agreement, first of all, is the exception rather than the norm. Most people bill by the hour for this kind of case. And those lawyers that do take these on contingent fee bases will often charge 40 and even 50 percent contingent fee. So, the fact that, you know, comparing our one third fee to what some of the other lawyers might charge as a contingent basis or similar kind of work, leads me to conclude that our fees are reasonable.

Counsel:Is there another way that you look at fee arrangements?

Rowe:One of the things that you want to do or [sic] required to do when you re comparing with other fee arrangements, is to compare it. I used the example, if we win a million dollars, and a guess, a third fee. If it only took us 20 minutes of time to get the million dollars, it wouldn t be reasonable for us to recover a [$]333,000 fee. You always have to measure that against your actual investment in this case, which I ve done.

 

Rowe then testified as to the hours that his firm had expended in the case and the total amount of fees that his firm generated based on an hourly rate. The following exchange then completed Rowe s direct testimony:

Counsel:Are both measures of fees, the contingency fee figure and the hourly rate figure customary in the State of Texas for this type of work?

Rowe:Yes, they are. . . .

Counsel:And is it your opinion that both numbers represent a reasonable fee for work on this case?

 

Rowe:Yes, whether the y all were to consider the cost of the fees on an hourly basis or the contingent fee basis, either one would be, in my opinion, a reasonable and necessary attorney s fee for the amount of work that we ve done for our client.

 

(Emphasis added.) In its closing argument, the Fund reiterated that the jury could use either method to calculate its attorney s fees, although it also requested that, if the jury used the contingency-fee method, that the jury take into consideration the out-of-pocket expenses in assessing fees.

The court s charge instructed the jury that, in determining what reasonable attorney s fees to award the Fund, it had to consider the following factors:

a.the time and labor involved, the novelty and difficulty or the questions involved, and the skill required to perform the legal services properly;

b.the likelihood that the acceptance of the particular employment preclude[d] other employment by the lawyer;

c.the fee customarily charged in the locality for similar legal services;

d.the amount involved and the result obtained;

e.the time limitations imposed by the client or the circumstances;

f.the nature and length of the professional relationship with the client;

g.the experience, reputation, and ability of the lawyer or lawyers performing the services; and

h.whether the fee is fixed or contingent on results obtained or uncertainty of collection before the legal services had been rendered.

 

See Tex. Disciplinary R. of Prof l Conduct 1.04, reprinted in Tex. Gov t Code Ann., tit. 2, subtit. G app. A (Vernon 2005) (Tex. State Bar R., art. X, 9) (establishing similar criteria to be considered in determination of reasonableness of attorney s fee).

The amount of fees that the jury awarded both for trial and for appeal totaled $220,735. That total amount is almost exactly 40 percent of the recovery that the jury awarded the Fund: 40 percent of $551,836 is $220,734.40, which is only 60 cents less than the total amount of attorney s fees that the jury awarded the Fund. Rowe told the jury that it could consider either the hourly rate or the contingency-fee contract in determining the amount of attorney s fees to award, and Rowe opined that his firm s 40-percent contingency interest was both reasonable and necessary. He backed up this opinion with testimony that, for example, the case was difficult; the case involved many hours work, sometimes in short time frames; and the contract s contingent percentage interest was less than that usually requested in the locality for similar cases. Additionally, the percentage amount that the jury awarded did not exceed the dollar amount that Rowe suggested be awarded if the jury chose to award fees on an hourly basis, rather than as a percentage interest in the recovery. This testimony sufficed to prove the reasonableness and necessity of attorney s fees in the amount of counsels percentage interest under its contingency contract with the Fund. See Aquila Southwest Pipeline, Inc. v. Harmony Exploration, Inc., 48 S.W.3d 225, 241 (Tex. App. San Antonio 2001, pet. denied) (in case post-dating Arthur Andersen & Co. v. Perry Equip. Corp, holding that sufficient evidence supported jury s fee award in contract-breach case when claimant s counsel testified to his contingent-fee interest and described, among other things, his work, the number of hours worked, and the hourly rate for his work, were he to charge an hourly rate); // see Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 818 (Tex. 1997) (concluding that contingent-fee agreement alone cannot support fee award under Deceptive Trade Practices Consumer Protection Act and that claimant must also give evidence of factors identified in Disciplinary Rules 1.04, so that jury has meaningful way to determine reasonableness and necessity of those fees). Because the jury s finding on attorney s fees comports with the contingency-fee amount, there was some evidence to support that jury finding, and the Fund cannot be said to have proved conclusively a higher amount of fees.

The Fund relies on a line of authority holding that, when the amount and reasonableness of attorneys fees is supported by uncontroverted, clear, direct, and positive testimony from an interested witness, the amount is established conclusively, and judgment may be rendered in that amount. See, e.g., Brown v. Bank of Galveston, Nat l Ass n, 963 S.W.2d 511, 515 (Tex. 1998); Ragsdale v. Progressive Voters League, 801 S.W.2d 880, 882 (Tex. 1990). But, as we have already discussed, the evidence of attorney s fees was not conclusively proved as being in the greater amount. Rather, the Fund s own evidence which the Fund offered to the jury as an alternative method of calculating reasonable and necessary attorney s fees controverted the amount that the Fund now seeks.

The Fund responds that the evidence of its counsel s contingency-fee interest could not, as a matter of law, controvert counsel s testimony of a specific dollar amount calculated on an hourly basis because fees must be measured by the amount reasonably necessary to represent a party, rather than by the amount that counsel may actually be paid. However, the case that the Fund cites in support is distinguishable: in it, there was no testimony, as there is here, that the contingent-fee interest was reasonable and customary. See Cale s Clean Scene Carwash, Inc. v. Hubbard, 76 S.W.3d 784, 787-88 (Tex. App. Houston [14th Dist.] 2002, no pet.). // Indeed, the reasoning of the Hubbard court highlights this distinction:

To demonstrate that the testimony of Hubbard s attorney was not conclusive, Cales relies on cross-examination testimony that the amount that would actually be paid to Hubbard s lawyer under the contingent fee agreement was uncertain and would likely differ from the amount Hubbard was requesting to be awarded. Again we disagree. Although there is no single amount of attorney s fee that would have alone been reasonable, the amount requested by Hubbard and awarded by the trial court was the only one for which testimony was elicited in this case to show its reasonableness. In the absence of testimony controverting or impeaching the reasonableness of that amount or showing the reasonableness of a competing amount (such as the contingent fee amount), the mere fact that Hubbard s lawyer would actually be paid a different amount than that awarded does not controvert, impeach, or otherwise render inconclusive the evidence showing the reasonableness of the amount awarded.

 

Id. at 788 (emphasis added). The supporting testimony of the contingency interest s reasonableness that was lacking in Hubbard is present here.

Moreover, on direct examination, Rowe told the jury that a reasonable and necessary attorney s fee could be calculated either on an hourly basis or by a contingency interest. In closing argument, the Fund reiterated that the jury could use either method to calculate its attorney s fees, although the Fund did request that expenses be added onto the contingency amount, if the jury employed that method. The Fund cannot tell the jury that it may award fees on either of two bases and then, on appeal, challenge the fees that the jury awarded on the ground that the jury chose one of the bases that the Fund itself suggested.

We overrule issue five. //

V. Conclusion

We reverse those portions of the judgment awarding any recovery to RFI, denying the Fund pre-judgment interest, and rendering a take-nothing judgment on the Fund s claims on which the jury found for the Fund. We affirm the remainder of the judgment. We remand the cause to the trial court for entry of a take-nothing judgment on all of RFI s claims against the Fund and on its request for attorney s fees, for entry of judgment in accordance with the jury s findings for the Fund on its claims against RFI, for entry of pre-judgment interest for the Fund, and for the opportunity to re-evaluate the assessment of costs of court and to assess said costs.

 

Tim Taft

Justice

 

Panel Consists of Justices Taft, Keyes, and Hanks.