Texas Capital Securities, Incorporated, et al v. J. D. Sandefer, III and Stephen F. Smith--Appeal from 280th District Court of Harris County

In The
Court of Appeals
Sixth Appellate District of Texas at Texarkana
______________________________
No. 06-02-00042-CV
______________________________
TEXAS CAPITAL SECURITIES, INC., ET AL., Appellants
V.
J. D. SANDEFER, III, AND STEPHEN F. SMITH, Appellees
On Appeal from the 280th Judicial District Court
Harris County, Texas
Trial Court No. 97-62171
Before Morriss, C.J., Ross and Cornelius,* JJ.
Opinion by Justice Cornelius

*William J. Cornelius, C.J., Retired, Sitting by Assignment
O P I N I O N

Texas Capital Securities, Inc., appeals the trial court's denial of Texas Capital's motion to deem a liability judgment satisfied. The issue presented is whether a joint tortfeasor is entitled to a credit for the amount of a post-verdict, bankruptcy court settlement between the plaintiff and a codefendant. Texas Capital asks this Court to reduce the liability award against it by the bankruptcy settlement amount between the plaintiffs and one of its codefendants in the underlying cause of action. For the reasons set forth below, we reverse the trial court's judgment and remand the case to the trial court for further proceedings consistent with this opinion.

A. Background

J. D. Sandefer, III, and Stephen F. Smith (collectively referred to herein as Sandefer) bought stock in Titan Resources, Inc., at the urging of Stephen Johnson, a stock broker for Texas Capital. The Titan stock eventually plummeted, and Sandefer sued Titan, Texas Capital, Johnson, and Butch Ballow (a stock promoter who worked with Johnson to sell the stock) for common-law and statutory fraud. The plaintiffs' petition alleged the defendants knowingly and recklessly made false and material misrepresentations intended to persuade Sandefer to buy the stock. Sandefer further alleged violations of the Texas Securities Act. Defendants Johnson and Titan settled out of the suit before trial. Tex. Capital Sec., Inc. v. Sandefer, 58 S.W.3d 760, 767-68 (Tex. App.-Houston [1st Dist.] 2001, pet. denied).

At trial, the jury found against the remaining defendants, finding Texas Capital and Ballow had defrauded the plaintiffs. Id. The jury held all four defendants jointly and severally liable for the value of the plaintiffs' stock purchases totaling $359,063.25. Id. The jury also found Texas Capital solely liable for $61,000.00 in attorney's fees and $77,287.01 in prejudgment interest. Additionally, Ballow was found solely liable for $8,000,000.00 in punitive damages, plus postjudgment interest. On direct appeal, the First Court of Appeals affirmed the judgment based on the jury's verdict. Id. at 780.

Almost two years after the securities fraud verdict, Ballow settled his obligations to Sandefer in federal bankruptcy court. In the settlement, Ballow agreed to (1) pay the plaintiffs' attorney's fees and legal costs, (2) make an initial $600,000.00 payment, and (3) issue a promissory note secured by real property deeds to be held in trust by the bankruptcy court for the remainder of the settlement amount. The bankruptcy settlement did not state whether the settlement represented payment for punitive damages or fulfillment of Ballow's joint obligations with Texas Capital.

Texas Capital subsequently filed a motion with the state trial court asking that Texas Capital's liability for the judgment in the case at bar be reduced by the amount of Ballow's bankruptcy settlement with Sandefer. The trial court denied the request; Texas Capital appealed. The Texas Supreme Court subsequently transferred the appeal of the instant matter to this Court. See Tex. Gov't Code Ann. 73.001, et seq. (Vernon 1998 & Supp. 2003).

B. Standard of Review

A trial court's determination of the existence of, or the amount of, a settlement credit is reviewed for an abuse of discretion. Goose Creek Consol. Indep. Sch. Dist. v. Jarrar's Plumbing, Inc., 74 S.W.3d 486, 504 (Tex. App.-Texarkana 2002, pets. denied [2 pets.]).

C. Analysis

Texas Capital contends it should be discharged from its obligation based on the "one satisfaction rule," or in the alternative, be given a settlement credit for any amount, if any, that was allocated to the portion of damages for which Texas Capital and Ballow were held jointly and severally liable. On the other hand, Sandefer argues that Chapter 33 of the Texas Civil Practice and Remedies Code controls, and under the applicable provisions of that chapter, Texas Capital is not entitled to a settlement credit because the settlement was effectuated after the charge was submitted to the jury, and indeed, long after judgment.

First, Chapter 33 does not apply in this case. Section 33.002 sets forth the applicability of Chapter 33, and it provides that Chapter 33 only applies to "any cause of action based on tort in which a defendant, settling person, or responsible third party is found responsible for a percentage of the harm for which relief is sought." Tex. Civ. Prac. & Rem. Code Ann. 33.002(a) (Vernon Supp. 2003) (emphasis added). Texas Capital and Ballow were held jointly and severally liable; therefore, by its express terms, Chapter 33 is not applicable. (1)

On the other hand, the Texas Supreme Court has recently held that when codefendants are found to be jointly and severally liable and one defendant settles, the nonsettling defendant is entitled to a settlement credit based on the one satisfaction rule to the extent the settlement was allocated to joint and several damages. Crown Life Ins. Co. v. Casteel, 22 S.W.3d 378, 392 (Tex. 2000). In Casteel, the jury returned a verdict holding Casteel jointly and severally liable with Crown for damages in the amount of $1,366,983.00. After the verdict but before the judgment was rendered, Crown settled with the plaintiffs in exchange for Crown's dismissal and for an assignment of the plaintiffs' right to collect judgment from Casteel. Subsequently, judgment was rendered against Casteel for $1,366,983.00, and Casteel claimed it was entitled to a settlement credit based on the one satisfaction rule. In response, Crown argued that Casteel was not entitled to a settlement credit because any credit given must first be assessed against damages Crown would have been solely liable for had a settlement not been reached. The Texas Supreme Court held that Crown's argument was unfounded. When a defendant settles after the verdict but before the judgment is rendered, the trial court should look to the judgment that was actually rendered before applying established principles governing settlement credits, and in accordance with the one satisfaction rule, the nonsettling defendant is entitled to a credit for any settlement amount that can be traced to the joint and several damages. Id.

In the present case, the trial court found Texas Capital and Ballow jointly and severally liable for damages in the amount of $359,063.25, and Ballow settled with the plaintiffs, postjudgment, paying in excess of $600,000.00. In Casteel, the Texas Supreme Court found that, when codefendants are held jointly and severally liable and one defendant settles, any settlement credit given to the nonsettling defendant should be assessed against the judgment that was actually rendered. Id. Therefore, Texas Capital, as the nonsettling defendant, is entitled to a settlement credit based on the judgment rendered in the underlying lawsuit, regardless of when Ballow settled.

However, before Texas Capital can obtain a settlement credit, there must be a determination of how much of the settlement was allocated to the joint and several damages portion of the judgment. It is well settled that the nonsettling defendant may only claim a credit based on the damages for which he was held jointly and severally liable. Id. at 391; First Title Co. v. Garrett, 860 S.W.2d 74, 78 (Tex. 1993). Further, defendants may not receive credits for settlement amounts representing punitive damages. Mobil Oil Corp. v. Ellender, 968 S.W.2d 917, 927 (Tex. 1998). Therefore, the nonsettling defendant is entitled to a credit in the amount that settlement was intended to satisfy the joint and several damages portion of the judgment.

In order to reach such a determination, Texas Capital, as the nonsettling defendant, has the burden of proving the total amount of the settlement. See Goose Creek Consol. Indep. Sch. Dist. v. Jarrar's Plumbing, Inc., 74 S.W.3d at 501. Once Texas Capital meets its burden, the burden would shift to Sandefer, who would be obligated to present evidence showing whether any of the settlement proceeds were used to satisfy the joint and several portion of the judgment. See Crown Life Ins. Co. v. Casteel, 22 S.W.3d at 392. If it is determined that a portion of the settlement was used to satisfy the joint and several damages, Texas Capital is entitled to a settlement credit in that amount.

 

For the reasons stated, we reverse the trial court's judgment and remand the case to the trial court for a determination on how much of the settlement proceeds were used to satisfy the joint and several damages portion of the judgment.

 

William J. Cornelius*

Justice

 

*Chief Justice, Retired, Sitting by Assignment

 

Date Submitted: August 5, 2002

Date Decided: March 26, 2003

1. Further, even if Chapter 33 were applicable, it does not preclude a settlement credit merely because settlement was effectuated after the case was submitted to the jury. Under the provisions set forth therein, a codefendant who settles after the case has been submitted to the jury is no longer considered to be a settling person. Tex. Civ. Prac. & Rem. Code Ann. 33.011(5) (Vernon 1997). However, this merely affects the manner in which a settlement credit is administered. If a party settles post-submission, the nonsettling defendant is entitled to a credit based on Section 33.013, as opposed to the formula provided in Sections 33.012 and 33.014 for presubmission settlements. Tex. Civ. Prac. & Rem. Code Ann. 33.012, 33.013, 33.014 (Vernon 1997); Knowlton v. United States Brass Corp., 864 S.W.2d 585, 596-98 (Tex. App.-Houston [1st Dist.] 1993), aff'd in part and rev'd in part on other grounds sub nom. Amstadt v. United States Brass Corp., 919 S.W.2d 644 (Tex. 1996).