Federal Services Corporation and Charles R. Leone, Jr. v. Harlan & Boettger, L.L.P., William Boettger and Harry Tweedie--Appeal from 45th Judicial District Court of Bexar County

No. 04-00-00462-CV
FEDERAL SERVICES CORPORATION and Charles R. Leone, Jr.,
Appellants
v.
HARLAN & BOETTGER, L.L.P., William Boettger and Harry Tweedie,
Appellees
From the 45th Judicial District Court, Bexar County, Texas
Trial Court No. 99-CI-07369
Honorable David Peeples, Judge Presiding

Opinion by: Karen Angelini, Justice

Sitting: Alma L. L pez, Justice

Paul W. Green, Justice

Karen Angelini, Justice

Delivered and Filed: August 31, 2001

AFFIRMED

Federal Services Corporation (FSC) and Charles R. Leone (Leone) appeal a summary judgment granted in favor of Harlan & Boettger, L.L.P., William Boettger and Harry Tweedie (H&B). In their sole issue on appeal, FSC and Leone contend the trial court erred in granting summary judgment for three reasons. First, FSC and Leone argue the trial court erred in granting summary judgment on the affirmative defense of agency. Second, they contend the trial court erred in allowing H&B to amend its pleadings on the day of the summary judgment hearing. And, third, they assert that the trial court erred in granting summary judgment on the sole proximate cause defense. Additionally, FSC and Leone contend they offered evidence to support each element of tortious interference with contract. We affirm the judgment of the trial court.

Factual & Procedural History

From 1993 through 1995, FSC and Leone loaned money to Select Switch Services Inc. (SSSI). The loans were secured by promissory notes executed by SSSI. FSC and Leone were shareholders in SSSI at the time the loans were made. In October 1994, Leone's son, Leone III, was the sole shareholder of FSC and a director for SSSI. SSSI was a closely held corporation with approximately fifteen to eighteen shareholders. In 1995, SSSI retained counsel to draft documents allowing for a conversion of the debt to equity in the form of stock. On June 22, 1995, a special shareholders meeting amended the SSSI's articles of incorporation to allow such a conversion. In December 1995, Xecom, Inc. (Xecom), a publicly traded Nevada corporation, acquired 100% of SSSI's stock. H&B provided audit services for Xecom. Therefore, H&B audited SSSI as a subsidiary of Xecom for 1995 and 1996.

FSC and Leone claim to have given SSSI loans of $518,616.72 and $48,000, respectively, from 1993 through 1995. Additionally, they claim SSSI accepted these amounts under promissory notes booked as liabilities to the company. After acquiring SSSI, Xecom took the position that the note liability had been converted to equity interest. Thus, according to Xecom and SSSI, SSSI had no obligation to repay the debts secured by the promissory notes to FSC and Leone. FSC and Leone filed suit ("the original litigation") against SSSI, now a wholly owned subsidiary of Xecom, to collect on the promissory notes. During the time period of the original litigation, H&B completed an audit of SSSI which reflected an adjustment of the financial statements to show conversion of the promissory notes to equity. Then, in the original litigation, FSC and Leone filed a motion for summary judgment. SSSI filed a response, accompanied by an affidavit from Deborah Leonard (Leonard), bookkeeper and Certified Public Accountant for SSSI, which stated the promissory note liability had been converted to equity. In the present suit, FSC and Leone argue that the affidavit, allegedly a result of H&B's audit, compromised their motion for summary judgment and delayed their collection on the promissory notes. Therefore, FSC and Leone consider H&B's audit to have tortiously interfered with the promissory notes. However, the court record indicates the hearing date on the summary judgment motion was either passed or dropped and, therefore, the summary judgment motion was never ruled on. Subsequent to the summary judgment hearing date in the original litigation, SSSI settled with FSC in April 1998 and with Leone in September 1998. Unfortunately, in October 1998 SSSI filed for bankruptcy. As a result of the bankruptcy, FSC was unable to collect the full settlement amount and Leone collected nothing on his settlement agreement.

After SSSI's bankruptcy, FSC and Leone filed the present suit against H&B which is the subject of this appeal. The grounds were negligence and tortious interference with contract. Because H&B had audited SSSI as a subsidiary of its parent corporation, Xecom, FSC and Leone claim H&B's audit, which reflected the promissory notes had been converted to equity, interfered with collection on the promissory notes from SSSI.

H&B filed a motion for summary judgment on three grounds. H&B's motion first asserted the agency defense. Second, they argued no evidence exists to support the willful or intentional interfence element or proximate cause element of the tortious interference of contract cause of action. Third, H&B submitted to the court that the sole proximate cause of any damages was the action of the attorney who drafted, caused to be signed and filed the Leonard affidavit in the original litigation. The trial court granted H&B's motion for summary judgment. FSC and Leone challenge the trial court's grant of summary judgment only on the tortious interference claim.

Pleading Amendment

FSC and Leone contend the affirmative defense of agency is not a proper ground for summary judgment as H&B had not pleaded an agency defense. A properly pled affirmative defense may serve as a basis for summary judgment. Bradt v. West, 892 S.W.2d 56, 65-66 (Tex. App.-Houston [1st Dist.] 1994, writ denied). A summary judgment hearing is subject to the Texas Rules of Civil Procedure addressing pleading amendments. See Sosa v. Central Power & Light, 909 S.W.2d 893, 895 (Tex. 1995). Rule 63 of the Texas Rules of Civil Procedure allows amendment of pleadings within seven days of trial or thereafter with leave of the court, if the amendment does not operate as a surprise to the opposite party. Tex. R. Civ. P. 63. Accordingly, pleading amendments sought within seven days of the time of trial are to be granted unless there has been a showing of surprise by the opposite party. See Brown v. Hopkins, 921 S.W.2d 306, 316 (Tex. App.-Corpus Christi 1996, no writ).

Although H&B did not plead the affirmative defense of agency before filing its motion for summary judgment, its motion for summary judgment notified FSC and Leone of the asserted affirmative defense of agency. As indicated in the record, this motion was delivered on May 23, 2000. FSC and Leone addressed the merits of the agency defense in their response to the motion for summary judgment which was filed with the court on June 19, 2000. H&B requested leave to file an amended answer on June 26, 2000, the day of the summary judgment hearing. The court reviewed the summary judgment motion and response and granted H&B leave to amend at that time. Considering the fact that FSC and Leone argued against the merits of the agency defense in their response to the motion for summary judgment, we find the amended pleading presented no surprise or prejudice to FSC and Leone. See Hopkins, 921 S.W.2d at 316. Therefore, the trial court did not abuse its discretion in allowing the pleading amendment.

Agency

The elements of tortious interference with a contract are: (1) the existence of a contract subject to interference; (2) willful and intentional interference; (3) interference that proximately caused damage; and (4) actual damage or loss. Powell Industries, Inc. v. Allen, 985 S.W.2d 455, 456 (Tex. 1998). The Texas Supreme Court has found "a suit against a corporation's agent posed special problems for the second element of a tortious interference claim, that a non-party to the contract interfered with the contract." Prudential Ins. Co. v. Financial Review Servs., 29 S.W.3d 74, 79 (Tex. 2000) (citing Holloway v. Skinner, 898 S.W.2d 793, 796 (Tex. 1995)). An agent, acting on behalf of the corporation, cannot be sued for interfering with its own contract. Id. Therefore, if H&B proved it was an agent for SSSI, its liability would be eliminated.

To be entitled to a summary judgment on the basis of an affirmative defense, H&B was required to expressly present and conclusively prove each essential element of the affirmative defense. Ryland Group, Inc. v. Hood, 924 S.W.2d 120, 121 (Tex. 1996). H&B incorrectly argues FSC and Leone bore the burden of proof in establishing a fact issue exists concerning the agency defense. See id. As established in case law, however, the burden of proof lies upon the party claiming the agency relationship. Bhalli v. Methodist Hosp., 896 S.W.2d 207, 210 (Tex. App.-Houston [1st Dist.] 1995, writ denied). (1)

For an agency relationship to exist, there must be a meeting of the minds between the parties to establish the relationship, and there must be some act constituting appointment of the agent. Lone Star Partners v. NationsBank Corp., 893 S.W.2d 593, 599-600 (Tex. App.-Texarkana 1994, writ denied) (citing Carr v. Hunt, 651 S.W.2d 875, 879 (Tex. App.-Dallas 1983, writ ref'd n.r.e.)). If the facts are disputed, the jury decides the fact issue, and the court determines whether the facts are legally sufficient to establish whether an agency existed. Id. at 600. Therefore, the evidence must conclusively prove a meeting of the minds and an act of appointment. The agency relationship may be established by either direct or circumstantial evidence. Id. (citing Spangler v. Jones, 861 S.W.2d 392, 397 (Tex. App.-Dallas 1993, writ denied)).

While H&B admits being SSSI's independent auditor, H&B also asserts that a dual relationship existed with SSSI where H&B acted as an auditor and an agent. H&B points out the Houston Court of Appeals has held the independent contractor status and agency status are not mutually exclusive. Robles v. Consolidated Graphics, Inc., 965 S.W.2d 552, 558 (Tex. App.-Houston [14th Dist.] 1997, pet. denied); State v. LeBlanc, Inc., 399 S.W.2d 919, 921-22 (Tex. Civ. App.-Houston 1966, no writ). Furthermore, H&B argues work may be entrusted to an independent contractor but control may still be retained so as to create an agency relationship concerning certain parts of the work. Standard Ins. Co. v. McKee, 205 S.W.2d 362, 365 (Tex. 1947)( finding the driller was an independent contractor up to the point of reaching pay lime but then in completing the well he was an employee due to the authoritative control exercised over his work by the oil company superintendent). H&B claims Xecom's management controlled the accounting relay of information to SSSI. Therefore, H&B's communications to Leonard were in its capacity as an agent for SSSI and are not actionable under a tortious interference claim. Arguably, the dual relationship could exist. However to support the summary judgment, H&B must conclusively establish it acted as an agent.

In support of the summary judgment finding on agency, H&B submits the following as evidence. First, H&B points to the letter from the president of Xecom which explains the company's position on the conversion and references the factors supporting the position. The letter attempts to persuade H&B the conversion position is valid. Rather than establishing the agency status, the letter reinforces the concept H&B was an independent auditor. Second, H&B cites as evidence the second Leonard affidavit which discusses the audit activity of H&B. Again, the statements in the affidavit indicate H&B acted as independent auditors. The affidavit fails to prove as a matter of law that H&B was the agent of SSSI or Xecom. Third, H&B points to the July 1997 affidavit of Leonard which discusses SSSI's conversion of debt to equity. This evidence fails to make any mention of H&B. Merely engaging an accountant does not, absent evidence of control, make the accountant an agent of the employer. Lone Star Partners, 893 S.W.2d at 600 (citing Parker v. Carnahan, 772 S.W.2d 151, 157 (Tex. App.-Texarkana 1989, writ denied)). Without any evidence of consent, meeting of the minds, or control, there is no evidence that would support a finding of agency. Id. at 600 (citing Thompson v. Schmitt, 115 Tex. 53, 274 S.W. 554, 557 (1925)). Thus, there are fact issues concerning H&B's affirmative defense. H&B's evidence fails to establish the affirmative defense of agency as a matter of law. Therefore, we cannot affirm the trial court's summary judgment on the affirmative defense of agency.

Tortious Interference with a Contract

FSC and Leone's tortious interference with contract claim is based on its allegation that H&B's audit of SSSI caused Leonard to make the statements in her affidavit which was sufficient to defeat their summary judgment motion in the original litigation had they gone forward with a summary judgment hearing. In the present suit, H&B requested a summary judgment under both the traditional summary judgment standards and no-evidence summary judgment standards. As discussed below, we resolve this case under the no-evidence standard.

Under Rule 166a(i), a party may move for a no-evidence summary judgment on the ground that there is no evidence of one or more essential elements of a claim or defense on which an adverse party would have the burden of proof at trial. Tex. R. Civ. P. 166a(i). "In a no-evidence summary judgment, the movant must specifically state the elements as to which there is no evidence." Macias v. Fiesta Mart, Inc., 988 S.W.2d 316, 316 (Tex. App.-Houston [1st Dist.] 1999, no pet.). "The burden then shifts to the nonmovant to bring forth evidence that raises a fact issue on the challenged elements." Id. at 317. In reviewing the no-evidence motion, we apply the same legal sufficiency standard of review as applied to a directed verdict. Cole v. Central Valley Chemicals, Inc., 9 S.W.3d 207, 210 (Tex. App.-San Antonio 1999, pet. denied) (citing Moore v. K-Mart Corp., 981 S.W.2d 266, 269 (Tex. App.-San Antonio 1998, pet. denied)). In deciding whether there was a fact issue raised to preclude summary judgment, we view evidence favorable to the nonmovant as true, indulge every reasonable inference in favor of the nonmovant, and resolve all doubts in the nonmovant's favor. Reynosa v. Huff, 21 S.W.3d 510, 512-13 (Tex. App.-San Antonio 2000, no pet.) (citing Nixon v. Mr. Property Management Co., Inc., 690 S.W.2d 546, 548-49 (Tex.1985) and Montgomery v. Kennedy, 669 S.W.2d 309, 310-11 (Tex.1984)). The trial court must grant the motion if the nonmovant fails to bring forth more than a scintilla of probative evidence to raise a genuine issue of material fact as to an essential element of the nonmovant's claim on which the nonmovant would have the burden of proof at trial. See Tex. R. Civ. P. 166a(i); Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex. 1997). If the evidence supporting a finding rises to a level that would enable reasonable, fair-minded persons to differ in their conclusions, then more than a scintilla of evidence exists. Reynosa, 21 S.W.3d at 512. Less than a scintilla of evidence exists when the evidence is "so weak as to do no more than create a mere surmise or suspicion" of a fact, and the legal effect is that there is no evidence. Kindred v. Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex. 1983). Additionally, a no-evidence summary judgment is reviewed de novo. Reynosa, 21 S.W.3d at 512.

As stated previously, the elements of tortious interference with an existing contract are: (1) an existing contract subject to interference, (2) a willful and intentional act of interference with the contract, (3) that proximately caused the plaintiff's injury, and (4) caused actual damages or loss. Prudential Ins. Co., 29 S.W.3d at 77 (citing ACS Investors, Inc. v. McLaughlin, 943 S.W.2d 426, 430 (Tex. 1997)). We agree with the statement in H&B's motion for summary judgment that, "the facts simply do not fit a cause of action for tortious interference." Typical cases alleging tortious interference involve a defendant's interference with a contract between parties which results in a breach of the contract. For example, in Graham v. Mary Kay Inc., 25 S.W.3d 749 (Tex. App.-Houston [14 Dist.] 2000, pet. denied), a former Mary Kay beauty consultant actively solicited Mary Kay salespersons to sell cosmetics to her for resale which breached their contracts with Mary Kay. (2) The court of appeals upheld the trial court's judgment finding this action to be tortious interference with a contract. Mary Kay Inc., 25 S.W.3d at 753; see also Hill v. Heritage Resources, Inc., 964 S.W.2d 89, 125 (Tex. App.-El Paso 1997, pet. denied) (supporting a jury finding of tortious interference with contract based on working interest owners' act of interference with oil and gas participation agreement); Lassiter v. Wilkenfeld, 930 S.W.2d 803, 808 (Tex. App.-Beaumont 1996, writ denied) (finding evidence established an issue of material fact existed as to whether a doctor induced hospital board to fire administrator over his failure to dismiss the doctor's mistress).

In this case, FSC and Leone complain of actions taken by H&B after FSC and Leone sued SSSI on the promissory notes in the original litigation. SSSI had already breached their agreement to repay the loans evidenced by the promissory notes. FSC and Leone do not allege that H&B took actions which caused a breach of the contracts, that is , the promissory notes obligating SSSI to repay FSC and Leone for the loans made to SSSI. FSC and Leone complain that their recovery on the promissory note litigation was delayed and interfered with by H&B's audit which resulted in the financial statements showing that some promissory note liability had been converted to an equity position in the company, thereby interfering with the original litigation. This case is distinguishable from other tortious interference cases and, as we proceed through the analysis of the issues, the incompatibility of the facts and evidence in this case will show why the cause of action cannot be sustained.

Rule 166a of the Texas Rules of Civil Procedure governs summary judgment procedure before the trial court. Under Rule 166a, a trial court cannot grant summary judgment for a reason that the movant does not present to the trial court in writing. Tex. R. Civ. P. 166a; Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 625 (Tex. 1996). In an appeal from a summary judgment, an appellate court may review only those issues the movant actually presented to the trial court. Cates, 927 S.W.2d at 625 (citing Travis v. City of Mesquite, 830 S.W.2d 94, 100 (Tex. 1992)). H&B urged the no-evidence summary judgment only on the two elements, willful and intentional interference and proximate causation. As the movant must specify which elements are being challenged in a no-evidence summary judgment motion, only those two issues will be reviewed to determine if more than a scintilla of evidence was presented by FSC and Leone. Macias, 988 S.W.2d at 316-17.

Interference with contract is tortious only if it is intentional. Southwestern Bell Telephone Co. v. John Carlo Texas, Inc., 843 S.W.2d 470, 472 (Tex. 1992). While a party's action may be intentional, the critical issue is whether the act was intended to interfere with the contract. See id. at 472 (explaining that the judgment for the plaintiff could only be upheld if it was proven that the defendant's acts were intended to interfere with the contract). Therefore, some evidence must be presented on these issues showing a fact issue exists.

FSC and Leone contend H&B created SSSI's position on the conversion of debt to equity which resulted in delay and eventually their inability to collect on later agreed settlements. FSC and Leone offer H&B's audit notes as evidence showing the auditors "proposed...to reclassify the notes payable" thus showing their intent to interfere with the contract. The audit notes indicate that "H&B proposes" the financial documents should reflect the conversion which was the position of the SSSI's management. The audit notes contain the statement, "[m]anagement contends the note amounts were to be reclassed to equity as part of the Xecom/Select purchase agreement. The Company has treated these amounts as equity for Financial Statement purposes." Further the notes reveal "[t]here are ongoing lawsuits regarding this issue. See legal confirms and [l]itigation [f]ootnote." The notes provide evidence that Xecom considered the promissory notes converted at the time of acquisition. Litigation over the promissory notes had already begun. Before the audit, FSC and Leone considered the promissory notes in breach and had commenced the suits to recover on the notes. The audit notes provide no evidence that H&B wilfully and intentionally interfered with the contract but rather provide evidence that Xecom and SSSI were already taking the position that the conversion had occurred and that SSSI was not liable on the promissory notes.

The other evidence offered by FSC and Leone to show H&B's wilful and intentional interference is a fax H&B sent to Deborah Leonard. The fax contains financial accounting statements which include pages indicating the adjustments to reclassify various notes payable to an equity position. These financial statements incorporate the previously discussed claims and positions of the management at the time of the audit. Leonard asserts in her second affidavit that she would have never signed the first affidavit without those instructions, but this affidavit fails to provide a scintilla of evidence supporting the element of wilful and intentional interference with the promissory notes by H&B. The second affidavit stated; H&B was Select Switch's auditors. I relied on their audit of Select Switch's books and records. I received written instruction from H&B, on or near May 21, 1997 telling me that the debt to FSC and Leone had been converted from debt into preferred stock. I relied on H&B's instructions to have the books reflect the conversion of FSC's and Leone's debt to preferred stock. I would have never signed Exhibits 1.1 and 1.2 without those instructions. (3)

The affidavit also states H&B knew about the promissory notes and audited SSSI. While the affidavit establishes Leonard's reliance on the financial statements H&B drafted and their knowledge of the litigation concerning the note, it fails to provide evidence that H&B intended to interfere with the notes. There is not a scintilla of evidence presented by the second Leonard affidavit on the requisite "willful and intentional act of interference."

FSC and Leone also assert Dan Hanks, their expert witness regarding accounting, is a proper witness who establishes the requisite intent. Hanks's affidavit states that he reviewed approximately 7,300 pages of H&B's work papers. Hanks further states that upon review of the work papers, it is apparent H&B concluded that the SSSI notes were notes payable but that H&B prepared a journal entry showing conversion of the notes to stock. Hanks concludes that the journal entry was false and misleading. These determinations by the expert fail to qualify as valid evidence supporting the element as "[c]onclusory statements by an expert are insufficient to support or defeat summary judgment." Wadewitz v. Montgomery, 951 S.W.2d 464, 466-67 (Tex. 1997) (citing Anderson v. Snider, 808 S.W.2d 54, 55 (Tex. 1991), Mercer v. Daoran Corp., 676 S.W.2d 580, 583 (Tex. 1984), and Brownlee v. Brownlee, 665 S.W.2d 111, 112 (Tex.1984)). Hanks's affidavit also states H&B was aware that a lawsuit had commenced to collect the note and that management wished to assert a claim that a conversion had occurred. Thus, the affidavit establishes a breach of the promissory notes had already occurred, not that H&B willfully and intentionally interfered with payment on the promissory notes. Additionally, the affidavit alleges it was "clearly foreseeable" by H&B the journal entry would be used by Xecom to defeat FSC and Leone's claim. This assertion, likewise, fails to establish a fact issue exists as to the willful and intentional interference with the promissory note.

The audit notes, Leonard's affidavit and the expert accountant's affidavit pointed out by FSC and Leone fail to qualify as evidence of H&B's willful and intentional interference with the contracts. As FSC and Leone were unable to present more than a scintilla of evidence on this element, we affirm the trial court's no-evidence summary judgment on this basis.

Additionally, proximate causation of the tortious interference claim was an essential element challenged in the no-evidence summary judgment motion. H&B claim FSC and Leone failed to adduce competent and probative summary judgment proof of proximate causation to create a fact issue.

A board certified specialist in appellate practice testified the Leonard affidavits were the proximate cause of delay in obtaining judgments against SSSI but not the cause of the breach. He asserts the June 1997 judgments probably would have been collectible or superseded. Then he states if the H&B information were false then this was the proximate cause of damage to FSC and Leone. "Speculation cannot create a fact issue." American Tobacco Co. v. Grinnell, 951 S.W.2d 420, 436-37 (Tex. 1997) (citing Duff v. Yelin, 751 S.W.2d 175, 176 (Tex.1988)). The legal expert speculated on the impact of the Leonard affidavits which fails to provide evidence on the element of causation. Additionally, his legal opinions only show a possible delay in the litigation due to Leonard's affidavit, not a breach of any contractual agreement between the parties. This evidence constitutes no evidence on proximate causation. Thus, we also affirm the trial court's no-evidence summary judgment on the proximate cause element. Because we find that the summary judgment can be upheld on the no-evidence basis, we need not consider sole proximate cause. See Ransom v. Center For Health Care Services, 2 S.W.3d 643, 645 (Tex. App.-San Antonio 1999, pet. denied).

Conclusion

Relevant case law on tortious interference with a contract reveals that the facts and circumstances of this case are inappropriate for this cause of action. As previously stated, the evidence offered to counter H&B's no-evidence summary judgment motion fails to show facts which would enable reasonable, fair-minded persons to differ in their conclusions as to the willful and intentional element and the proximate cause element. We affirm the trial court's summary judgment as to the tortious interference claims based on the no-evidence grounds.

Karen Angelini, Justice

DO NOT PUBLISH

1. In Bhalli, the court found that the doctor established, as a matter of law, he was an agent of Methodist Hospital. The doctor "was Chief of Nephrology and Director of the Dialysis Unit at Methodist; he was subject to the rules and regulations of Methodist; he reported to Methodist's Vice-President for Patient Services and to its Trustees; [he] received compensation from Methodist; [he] had the responsibility to oversee employees in his section, including the power to hire and fire them." Bhalli, 896 S.W.2d at 211. The doctor successfully carried the burden of proof on agency with this evidence.

2. Mary Kay was a direct sales organization and consultants signed an agreement to sell only to end users and not to people intending to re-sell the products.

3. Exhibit 1.1 is Leonard's affidavit signed June 4, 1997 which was prepared for FSC's suit against SSSI . Exhibit 1.2 is Leonard's affidavit signed Juned 4, 1997 which was prepared for Leone's suit against SSSI.