Hazlewood Patterson Company and Travis Hazlewood v. Michael P. Hancock

IN THE TENTH COURT OF APPEALS No. 10-03-00274-CV Hazlewood Patterson Company and Travis Hazlewood, Appellants v. Michael P. Hancock, et al., Appellee From the 18th District Court Johnson County, Texas Trial Court # 46-96 MEMORANDUM Opinion Five investors (“Plaintiffs”) in the King No. 1 gas well sued the operator, Hazlewood Patterson (“HP”), and its president, Travis Hazlewood (Travis) for fraud and breach of fiduciary duty arising out of the settlement of an earlier lawsuit. The case was tried to a jury, which returned a verdict against HP and Travis and awarded actual and punitive damages. HP and Travis bring this appeal. BACKGROUND Plaintiffs are five of eighteen investors in the King No. 1 gas well. The well was only marginally profitable, so a contractor was hired to perform a “squeeze job” on the well. As a result of the squeeze job, tubing inadvertently became cemented in the well. One of the investors, Mike Hancock, met with Travis, Tom Hazlewood (an investor who did not join this suit), and Robert Sparks, an attorney. Sparks was retained to sue the contractor on behalf of HP. Sparks sought $1 million in actual damages, $5 million in punitive damages for negligence and gross negligence, and damages under the DTPA. The case was ordered to mediation. Travis and Sparks attended the mediation. The contractor and HP agreed to settle for $600,000. Travis testified that a decision was made to pay $407,204 to the investors and to pay the balance ($192,796) to HP. Travis did not inform the investors that the case had settled for $600,000, and he told Hancock that the case had settled for $407,204. Suspecting that the settlement had been larger than $407,204, the Plaintiffs brought this action, alleging breach of fiduciary duty and fraud. On summary judgment, the trial court ruled that HP had acted as the investor’s agent. The jurors unanimously found that HP had breached its fiduciary duty and that Travis had knowingly participated in that breach. They also found that Travis, individually, had been the investor’s fiduciary and that he had breached his fiduciary duty. They found that both HP and Travis had committed fraud. The jurors found that the investors had suffered actual damages of $192,796, and they assessed punitive damages of $192,796 against HP and $192,796 against Travis. The trial court reduced the $192,796 in actual damages to $83,470 to reflect the percentage of the plaintiffs’ working interest in the well. HP and Travis bring twelve issues on appeal. Damages HP’s and Travis’s first issue argues that there is “no evidence” to support the damages finding. They claim that the jury’s finding that the replacement cost of the well was $408,003 established the maximum amount, by law, that the investors and the working interests of the well could recover. They argue that the investors could not have recovered, in the underlying litigation, damages above that amount, and that all damages above that amount were damages sought by HP that were unique to it and could not be recovered by the investors and the working interests. They contend that because the investors recovered all of the damages to which they were entitled, the Plaintiffs could not carry their burden of proof on fiduciary duty, fraud or damages. The Plaintiffs claim that the proper measure of damages is not the $408,003 replacement cost and that the jury’s finding of damages of $192,796 is controlling. HP and Travis rely primarily on Atex for their contention that the investors could recover no more than the replacement cost of the well. Atex Pipe & Supply, Inc. v. Sesco Production Co., 736 S.W.2d 914 (Tex. App.—Tyler 1987, writ denied). In Atex, a production company sued a supply company alleging that defective tubing sold by the supply company collapsed, causing damage to an oil well. The Tyler Court of Appeals held that loss of production was an improper measure of damages. Id. at 917. The proper measure of damages for a damaged well is the cost of drilling and equipping another such well, less the value of any salvage; if this cost exceeds the value of the well, the proper measure of damages is the difference in the market value of the well, as equipped, immediately before and immediately after the damage. Id. Atex sets forth the measure of damages for a damaged well. We reject HP’s and Travis’s contention that the Atex rule, as a matter of law, caps the amount of money the investors could have received in the settlement negotiation. It is undisputed that additional claims other than damage to the well were made in the suit between HP and the cement contractor. The fact that the contractor settled the case for $600,000, a figure much higher than the replacement cost of the well, demonstrates that other claims were in consideration. The Atex holding would not preclude the investors from settling their claims for whatever amount the contractor was willing to pay. HP and Travis assert that all of the claims other than those for damage to the well are for damages unique to HP. They point out that the suit against the contractor included DTPA claims, and argue that those claims must be unique to HP because the interest owners are not consumers under the DTPA.[1] They also refer to a demand letter sent by Sparks to the contractor which claims $300,000 for “[o]ther damages including injury to reputations, lost goodwill, lost opportunity costs and attorney’s fees.” However, the demand letter does not say that these claims are unique to HP. At trial, the Plaintiffs each testified that he or she never knew that HP was seeking any damages of its own. More significantly, the settlement agreement does not indicate which damages—and in what amount—the $600,000 represents. The Plaintiffs presented evidence that the attorney’s fees for the litigation against the contractor were paid by the investors. The Plaintiffs presented evidence that there were claims in the demand letter over and above the replacement cost of the well that were not unique to HP. HP and Travis argue that there is no evidence for the amount of damages awarded in the judgment. When the complaining party raises a "no-evidence" point challenging the legal sufficiency of the evidence to support a finding that favors the party who had the burden of proof on that finding, we must sustain the finding if, considering only that evidence and the inferences which support the finding in the light most favorable to the finding and disregarding evidence and inferences to the contrary, any probative evidence supports it. Browning-Ferris, Inc. v. Reyna, 865 S.W.2d 925, 928 (Tex. 1993). If there is more than a scintilla of evidence to support the finding, the no-evidence challenge fails. Id. As stated above, the Plaintiffs presented evidence that they were seeking damages in addition to the replacement cost of the well. Each testified that he or she understood HP to be seeking only damages on behalf of the working interest owners and not damages unique to HP. Thus we find more than a scintilla of evidence to support the jury’s damage findings. We overrule the first issue. Having overruled the first issue, we need not consider HP’s and Travis’s second issue of whether the damage award could be justified under a theory of forfeiture or disgorgement. Imputed Knowledge HP’s and Travis’s third issue argues that because Sparks was the investor’s lawyer, his knowledge of the full settlement of $600,000 is imputed to the investors. They argue that because the recovery for breach of fiduciary duty and fraud was based on nondisclosure, the judgment should be reversed. Knowledge or notice to an attorney, acquired during the existence of the attorney-client relationship and while acting in the scope of his authority, may be imputed to the client. See McMahan v. Greenwood, 108 S.W.3d 467, 480-81 (Tex. App.—Houston [14th Dist.] 2003, pet. denied); Lehrer v. Zwernemann, 14 S.W.3d 775, 778 (Tex. App.—Houston [1st Dist.] 2000, pet. denied). Sparks represented both HP and the investors in the litigation against the cement contractor. According to Travis, Sparks suggested that they accept the $600,000 settlement, pay $407,204 to the investors, and pay $192,796 to HP. Travis testified that Sparks warned him that he could not disclose the terms of the settlement to anyone. Sparks did not testify at trial. However, HP and Travis introduced a letter from Sparks to Hancock, written in reply to Hancock’s request for disclosure of the full settlement, in which Sparks refuses that request and refers any accounting questions to HP. Based on this evidence, the jury could have concluded that Travis and Sparks agreed not to disclose the amount of the settlement to the investors. We will not apply the imputed knowledge doctrine to such a circumstance. See GXC, Inc. v. Taxacal Oil & Gas, 977 S.W.2d 403, 410 (Tex. App.—Corpus Christi 1998, pet. denied) (where an agent represented both a purchaser and a seller, his knowledge was not automatically imputed to the seller); Lowe v. Lowe, 971 S.W.2d 720, 724 (Tex. App.—Houston [14th Dist.] 1998, pet. denied) (holding that the imputed knowledge doctrine did not apply where the lawyer had misled the client, or wholly failed to perform his or her professional duties); First Fin. Dev. Corp. v. Hughston, 797 S.W.2d 286, 292 n.2 (Tex. App—Corpus Christi 1990, writ denied) (agent’s knowledge of a dangerous condition could not be imputed where he concealed the dangerous condition from his principal); Jacks v. Manning, 297 S.W. 588, 590 (Tex. Civ. App.—Austin 1927, n.w.h.) (“Where the question arises between one of the principals and a third party, it would seem that the [imputed knowledge rule] is generally followed; but where the controversy is between the two principals with reference to the transaction in which the common agent acted, manifestly the rule would operate unjustly if arbitrarily applied in every case.”); Mays v. First State Bank, 247 S.W. 845, 846 (Tex. Com. App. 1923, judgment adopted) (when an agent acts for the benefit of other persons who are opposed in interest to his principal . . . the presumption that he discloses all facts that have come to his knowledge no longer prevails). We overrule this issue. Travis’s Liability HP and Travis argue that the evidence is legally and factually insufficient to support any finding of individual liability against Travis. In reviewing no evidence issues, we consider only the evidence supporting the verdict and draw all inferences in the light most favorable to the verdict. Checker Bag Co. v. Washington, 27 S.W.3d 625, 633 (Tex. App.—Waco 2000, pet. denied). When considering a factual sufficiency challenge to a jury's verdict regarding an issue on which the appellant did not have the burden of proof, we must consider and weigh all of the evidence, not just the evidence that supports the verdict. Id. Fiduciary Duty and Fraud HP’s and Travis’s fourth issue argues that there is no evidence supporting the jury’s finding in Question 1 that a fiduciary relationship existed between the investors and Travis individually. Because no objection was made to the charge, we review the sufficiency of the evidence based on the charge given. Osterberg v. Peca, 12 S.W.3d 31, 55 (Tex. 2000) (“[I]t is the court’s charge, not some other unidentified law, that measures the sufficiency of the evidence when the opposing party fails to object to the charge.”). The jury was instructed that: “A relationship of trust and confidence existed if the Plaintiffs justifiably placed trust and confidence in Travis Hazlewood, individually and not only as representative of Hazlewood-Patterson, to act in the Plaintiffs’ best interest regarding the settlement of a lawsuit.” HP and Travis point out that most of the plaintiffs had no personal relationship with Travis and had never met him. They argue that Travis attended the mediation as a representative of HP, and that Travis had no relationship with the investors apart from his capacity as president of HP. Plaintiffs argue that they testified that they placed their trust in Travis, and that this “subjective trust” is sufficient to support the jury finding. However, their testimony that they trusted Travis to represent them does not address the issue of whether Travis was representing them in the earlier suit as an individual or whether Travis was representing the investors as president of HP. Plaintiff’s contractual relationship was with HP, not with Travis individually. There is no evidence of substantive dealings between the plaintiffs and Travis that would justify a special relationship of trust and confidence. See Burleson State Bank v. Plunkett, 27 S.W.3d 605, 611 (Tex. App.—Waco 2000, pet. denied). Accordingly, we find no evidence to support the jury’s finding in Question 1. Question 2, regarding breach of fiduciary duty, and Question 5, regarding fraud by Travis individually, were both conditioned on a finding in Question 1 that Travis, individually, was the investor’s fiduciary. Because there is no evidence to support such a finding, the findings in Question 2 and 5 also fail. We sustain this issue. Knowing Participation HP’s and Travis’s fifth issue argues that the evidence is legally and factually insufficient to support the jury’s finding in Question 4 that Travis knowingly participated in HP’s breach of fiduciary duty. They state that there is no evidence that Travis was aware of HP’s fiduciary duty to the interest owners. We disagree. Mike Hancock testified that he, Travis, and Tom Hazlewood agreed that HP would pursue the claim against the contractor as the investors’ agent. Travis signed the settlement documents as the authorized representative of the working interest owners. The evidence is legally and factually sufficient. We overrule this issue. HP’s Liability HP’s and Travis’s sixth issue argues that the evidence is legally and factually insufficient to support any finding of liability against HP. They argue that Question 3, regarding breach of fiduciary duty, and Question 6, regarding fraud, should not have been submitted because HP did not owe a fiduciary duty to the plaintiffs. The trial court decided on summary judgment that HP was the Plaintiffs’ agent in settling the litigation with the cement contractor. The evidence is legally and factually sufficient to support that finding. HP represented the Plaintiffs in the settlement mediation. HP signed the Compromise Settlement Agreement on its own behalf and as the authorized representative of the working interest owners. HP and Travis argue that the court erred in instructing the jury that HP owed plaintiffs a fiduciary duty. However, they did not object to the instruction at trial. Rather, they objected to the submission of Question 3 on the ground that there was no evidence to support its submission. The issue of whether the instruction was error was not preserved for appeal. See Willis v. Donnelly, 118 S.W.3d 10, 33-34 (Tex. App.—Houston [14th Dist.] 2003, no pet. h.). We overrule this issue. Attorney’s Fees HP’s and Travis’s seventh issue argues that the evidence is legally and factually insufficient to support the amount of attorney’s fees awarded. They claim that the trial court should have adjusted the attorney’s fees when it reduced the actual damages to reflect the Plaintiffs’ percentage of ownership in the well. However, the evidence is sufficient to support the amount awarded even after the actual damages have been reduced. The evidence at trial was that the Plaintiffs’ attorneys charged an hourly rate until the bill reached $25,000, plus 15% of the recovery. The Plaintiffs recovered $83,469.73 in actual damages, $68,353.79 in prejudgment interest, plus $385,592.66 in exemplary damages. The award of $82,838.90, which the jury found to be reasonable and necessary, does not exceed $25,000 plus 15% of the total recovery in the suit. We overrule this issue. Exemplary Damages and Malice HP’s and Travis’s eighth and ninth issues argue that because the evidence was legally and factually insufficient to support a finding that either HP or Travis acted with “malice,” the judgment for exemplary damages should be reversed. HP and Travis did not object to the “malice” charge. We therefore review the sufficiency of the “malice” finding against the charge as submitted. Osterberg, 12 S.W.3d at 55. In Question 15, regarding HP’s conduct, “malice” was defined as either: a. conduct specifically intended by Hazlewood-Patterson to cause Plaintiffs substantial injury, or b. an act carried out by Hazlewood-Patterson with a flagrant disregard for the rights of others and with actual awareness on the part of Hazlewood-Patterson that the act will, in reasonable probability, result in damage. The evidence is legally and factually sufficient to support the finding that HP specifically intended to cause Plaintiffs substantial injury. HP and Travis intended to keep the amount of the settlement secret. HP intended to keep the $192,796 for itself and not pay it to the investors. There is some evidence of specific intent to injure the plaintiffs. HP and Travis claim that because Travis was acting on Sparks’ advice, he could not have the specific intent to injure the plaintiffs. However, Travis’s testimony regarding his motivation was uncorroborated, and the jury could have disbelieved it. Considering the evidence for and against the finding, the evidence is factually sufficient to support the jury’s answer to the charge. We overrule the issue as to HP. Question 14, however, is predicated on two jury findings against Travis individually that, as discussed above, are not supported by the evidence. Question 14 states: You found that Travis Hazlewood engaged in certain conduct in your answers to Questions 2, 4, and 5. Did Travis Hazlewood engage in any such conduct with malice? The same conduct—Travis’s participation in concealing the full amount of the settlement from the investors—was the basis for all three jury findings in Questions 2, 4, and 5. The jury’s answers to Questions 2 and 5, establishing Travis’s individual liability for breach of fiduciary duty and fraud respectively, are not supported by the evidence and therefore cannot support exemplary damages against Travis individually. Question 4 is based on Kinzbach Tool, which held that where a third party knowingly participates in the breach of a fiduciary duty he may become liable as a joint tortfeasor with the fiduciary. Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 574, 160 S.W.2d 509, 514 (1942). Exemplary damages may be imposed upon a finding that such conduct was engaged in with malice. See Taiwan Shrimp Farm Village Ass’n v. U.S.A. Shrimp Farm Dev., 915 S.W.2d 61, 73 (Tex. App.—Corpus Christi 1996, writ denied). The evidence is legally and factually sufficient to support the jury’s finding that Travis participated in HP’s breach of fiduciary duty with malice. Travis intended to conceal the full amount of the settlement, keep the $192,796 for HP, and not pay it to the investors. The evidence is sufficient to support a finding that Travis specifically intended to cause the Plaintiffs substantial injury. We overrule the issue as to Travis. Excessive Exemplary Damages HP’s and Travis’s tenth and eleventh issues argue that the jury’s exemplary-damages award was excessive under Texas law and the due process clauses of the United States and Texas constitutions. Under Texas law, exemplary damages must be reasonably proportioned to actual damages. Alamo Nat’l Bank v. Kraus, 616 S.W.2d 908, 910 (Tex. 1981). No set rule or ratio exists to make the determination; it depends on the facts of each particular case. Id. The amount of an award of punitive damages rests largely in the discretion of the jury. United States Sporting Products, Inc. v. Johnny Stewart Game Calls, Inc., 865 S.W.2d 214, 223 (Tex. App.—Waco 1993, writ denied). Factors to consider in determining whether an award of punitive damages is excessive include: (1) the nature of the wrong, (2) the character of the offending conduct, (3) the degree of culpability of the person against whom the damages were awarded, (4) the relative situation and sensibilities of the parties, (5) the extent to which the conduct offends a public sense of justice and propriety, and (6) the net worth of the defendant. Alamo Nat’l Bank, 616 S.W.2d at 910. The jury found that HP committed fraud and breached its fiduciary duty with malice. The jury also found that Travis knowingly participated in HP’s breach with malice. The jury could have chosen to disbelieve Travis’s testimony that he acted upon Sparks’ advice. The jury could have believed Mike Hancock’s testimony that he requested to be at the mediation but Travis would not let him come. It is uncontroverted that the full amount of the settlement was kept secret until this litigation was brought. The jury awarded $192,796 in actual damages, which the trial court reduced to $83,470. As a result, the ratio of exemplary damages to actual damages for each defendant is $192,796 to $83,470, or roughly 2.3 to 1. We do not believe that the award is unreasonably proportioned to the actual damages. See Alamo Nat’l Bank, 616 S.W.2d at 910. We overrule this issue. The United States Constitution prohibits a State from imposing “grossly excessive” punishments on a tortfeasor. BMW of North America, Inc. v. Gore, 517 U.S. 559, 562, 116 S.Ct. 1589, 1592, 134 L.Ed.2d 809 (1996). The U.S. Supreme Court has identified three “guideposts” for deciding whether a punitive damage award is constitutional: (1) the degree of reprehensibility of the conduct; (2) the disparity between the harm or potential harm suffered and the punitive damage award; and (3) the difference between this remedy and the civil penalties authorized or imposed in comparable cases. Id. at 574-75. As stated above, the jury found that HP breached its fiduciary duty with specific intent to harm the plaintiffs and that Travis knowingly and maliciously participated in that breach. They also found that HP committed fraud. The award of exemplary damages was not unreasonably proportioned to the actual damages. Nor is the award out of line with awards in similar cases. E.g., Konkel v. Otwell, 65 S.W.3d 183, 185 (Tex. App.—Eastland 2001, no pet.) (upholding actual damages of $258,400 and $775,200 in exemplary damages for breach of fiduciary duty); Apache Corp. v. Moore, 960 S.W.2d 746, 749 (Tex. App.—Amarillo 1997, writ denied) (4 to 1 ratio in case involving property damage resulting from oil well blowout); Cantu v. Butron, 921 S.W.2d 344, 352-53 (Tex. App.—Corpus Christi 1996, writ denied) (5 to 1 ratio upheld in case of breach of fiduciary duty and attorney’s fees). See also State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408, 425, 123 S.Ct. 1513, 1524, 155 L.Ed.2d 585 (2003) (Single-digit multipliers are more likely to comport with due process than ratios of 500 or 145 to 1). The exemplary damage award is not unconstitutionally excessive. We overrule this issue. Defendants’ Attorney’s Fees HP and Travis argue that if there is no fraud or fiduciary duty, releases signed by the investors serve as a complete bar to claims brought by the Plaintiffs, and HP and Travis would be entitled to recover attorney’s fees. Because we will affirm the findings of fraud and fiduciary duty as to HP and the finding of knowing participation as to Travis, we do not reach this issue. CONCLUSION We sustain the fourth issue as it pertains to Travis’s individual liability for breach of fiduciary duty and fraud. Having overruled all of the other issues, we affirm the judgment. BILL VANCE Justice Before Chief Justice Gray, Justice Vance, and Justice Reyna Affirmed Opinion delivered and filed December 15, 2004 [CV06] [1] In support of this proposition, HP and Travis cite Johnston v. American Cometra, Inc., 837 S.W.2d 711, 717 (Tex. App.—Austin 1992, writ denied), and Anderson v. Vinson Exploration, Inc., 832 S.W.2d 657, 665 (Tex. App.—El Paso 1992, writ denied).