Daniel O'Hare, et al v. Vulcan Capital, et al

Filing

UNPUBLISHED OPINION FILED. [10-50971 Affirmed in Part ] Judge: EGJ , Judge: HRD , Judge: ECP Mandate pull date is 12/08/2011 [10-50971]

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IN THE UNITED STATES COURT OF APPEALS
United States Court of Appeals
FOR THE FIFTH CIRCUIT
Fifth Circuit

FILED
November 17, 2011

No. 10-50971

Lyle W. Cayce
Clerk

DANIEL J. O’HARE, Individually and on Behalf of Nominal Parties TDF &
Coal, Inc. and Vulcan Power Group, L.L.C.; MICHAEL R. STEWART,
Individually and on Behalf of Nominal Parties TDF & Coal, Inc. and Vulcan
Power Group, L.L.C.,
Plaintiffs - Appellees
v.
FORD F. GRAHAM; KEVIN C. DAVIS,
Defendants - Appellants

Appeal from the United States District Court
for the Western District of Texas, San Antonio Division
USDC No. 5:04-CV-566

Before JOLLY, DeMOSS, and PRADO, Circuit Judges.
E. GRADY JOLLY, Circuit Judge:*
This appeal arises from a dispute over a settlement agreement reached
between the respective parties in another lawsuit. O’Hare and Stewart sued
here to enforce the agreement or to recover damages against Graham and Davis
for fraudulently inducing them to enter the agreement. A jury returned a
verdict in favor of O’Hare and Stewart’s fraud claims, which ironically, requires
*

Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.

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Graham and Davis to pay about $6 million more to O’Hare and Stewart than if
they simply had respected the initial settlement. For the following reasons, we
AFFIRM in part, REVERSE in part, and REMAND for entry of an amended
judgment.
I.
Daniel O’Hare, Michael Stewart, Ford Graham, and Kevin Davis at one
time served together on Vulcan Power Group, L.L.C.’s Board of Managers. A
management dispute prompted O’Hare and Stewart to file a lawsuit in 2004
against Graham, Davis, and various corporate entities with which Graham and
Davis were affiliated. That lawsuit resulted in a settlement agreement entered
in October 2004 in which O’Hare and Stewart agreed to accept $1 million each,
payable over four years, in exchange for releasing their ownership interests in
certain companies.

O’Hare and Stewart were each to receive lump sum

payments totaling $250,000 due by March 2005, and monthly payments totaling
$200,000 per year for three years and $150,000 for the final year.

The

agreement further provided that O’Hare and Stewart would remain covered
under the company’s insurance plan until the sums due to each were fully paid;
that O’Hare and Stewart were released from their personal guarantees on
corporate debts; and that Davis personally guaranteed to collect $200,000 of the
total $2 million owed. Several corporate entities (“the Corporate Obligors”), with
Graham and Davis speaking on their behalf, promised to make payments in
satisfaction of the settlement agreement.
By March 2005, O’Hare and Stewart had received only $19,000 each. After
granting the Corporate Obligors time to cure, they sued on the agreement.
O’Hare and Stewart later amended their complaint to add common law and
statutory fraud claims against Graham and Davis, individually. The district
court granted partial summary judgment on the breach of contract claim in
March 2009, holding only that the agreement was enforceable. Before the
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remaining contract issues could proceed to trial, the district court announced
that, in the light of a bankruptcy filing that would delay trial on the contract
claims, it would hold a separate trial on the fraud claims against Graham and
Davis.
At trial, O’Hare and Stewart offered testimony that allowed the jury to
determine that Graham and Davis had, among other things, agreed to the
settlement even though they were contemplating ways to void the agreement in
the future; created at least twelve new corporate subsidiaries for the purpose of
avoiding the settlement; when given the opportunity to cure, repeatedly assured
O’Hare and Stewart that the corporate entities were doing their best to pay; filed
a complaint with the FBI against Stewart; had O’Hare and Stewart removed
from the company healthcare plan; sued O’Hare and Stewart; and ordered that
several corporate subsidiaries be put into bankruptcy in an effort to delay the
proceedings on the breach of contract claim.
The jury returned a verdict of $981,000 in compensatory damages for each
plaintiff and $6 million total in exemplary damages.

At the close of the

plaintiffs’ evidence, and again after the adverse jury verdict was announced,
Graham and Davis moved for judgment as a matter of law. Each time it was
denied. Following the denial of the renewed motion and after the district court
entered a judgment in accordance with the verdict, Graham and Davis requested
a new trial. This motion was also denied. Graham and Davis appeal.
II.
Graham and Davis argue that numerous errors committed by the district
court require reversal. We consider each claimed error in turn.
A.
Graham and Davis contend that the evidence at trial was insufficient to
establish every element of common law and statutory fraud. Common law fraud
consists of six elements:
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(1) a material representation was made; (2) the representation
was false; (3) when the representation was made, the speaker
knew it was false or made it recklessly without any knowledge
of the truth and as a positive assertion; (4) the representation
was made with the intention that it be acted upon by the other
party; (5) the party acted in reliance upon the representation;
and (6) the party suffered injury.
Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 524
(Tex. 1998).

“The elements of statutory fraud in the sale of stock are

substantially the same, except that to recover actual damages, a plaintiff does
not have to prove that the defendant knew a statement was false.” Perenco
Nigeria, Ltd. v. Ashland, Inc., 242 F.3d 299, 306 (5th Cir. 2001) (interpreting
TEX. BUS. & COM. CODE ANN. § 27.01). Graham and Davis specifically contend
that the elements of false representation, fraudulent intent, and injury are
lacking.
“We accord great deference to the jury's verdict when evaluating the
sufficiency of the evidence, viewing all the evidence and drawing all reasonable
inferences in the light most favorable to the verdict.” Thomas v. Tex. Dep’t of
Criminal Justice, 220 F.3d 389, 392 (5th Cir. 2000).
1.
Graham and Davis argue that neither made any representation or
promise, individually, in connection with the settlement agreement: when they
spoke, they spoke on behalf of the Corporate Obligors, not individually; hence
the first element of fraud is missing. This argument misconstrues the nature of
agency. A corporate agent may not “direct or participate in tortious acts. A
corporate agent who knowingly participates in tortious or fraudulent acts may
be held individually liable to third persons even though he performed the act as
an agent for the corporation.” Grierson v. Parker Energy Partners 1984-I, 737
S.W.2d 375, 377 (Tex. App. 1987). “A corporation’s [agent] is personally liable
for tortious acts which he directs or participates in during his employment.”
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Leyendecker & Assocs., Inc. v. Wechter, 683 S.W.2d 369, 375 (Tex. 1984). The
jury found that the promises made in forming the settlement agreement were
fraudulent and that Graham and Davis participated in and directed the making
of those promises. That the promises were made by corporations is no shield for
the agents who acted on the corporations’ behalf; it certainly does not mean that
no promise or representation was made at all. The evidence demonstrated that
Graham and Davis falsely represented that the Corporate Obligors would fulfill
the settlement. The evidence is sufficient to support the first element of fraud.
2.
Graham and Davis next contend that the evidence does not establish the
existence of fraudulent intent at the time the settlement was reached, especially
in the light of the partial payment of $19,000 made to O’Hare and Stewart. We
are unpersuaded. Evidence adduced at trial fully supported an intent not to pay.
A former co-worker of Graham and Davis testified that, shortly before entering
the settlement agreement, Graham announced that he would create new
corporate entities through which to channel money to prevent O’Hare and
Stewart from receiving payment. After entering the settlement, Graham and
Davis triggered an FBI probe of Stewart and claimed inability to afford the
settlement while racking up legal bills to contest it. Although some of these
events may have occurred after the settlement was entered, “[s]light
circumstantial evidence of fraud, when considered with the breach of promise to
perform, is sufficient to support a finding of fraudulent intent.” Spoljaric v.
Percival Tours, Inc., 708 S.W.2d 432, 435 (Tex. 1986) (internal marks omitted).
We will not substitute our judgment for that of the jury, which apparently found
the evidence of fraudulent intent more persuasive than the small payment
O’Hare and Stewart received.

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3.
Graham and Davis next contend that O’Hare and Stewart suffered no
injury, as any financial loss they experienced was from a breach of the
settlement, not from fraud in the inducement of that settlement. To the extent
that Graham and Davis argue that Texas law requires that O’Hare and Stewart
suffer some injury distinct from their contract damages in order to recover for
fraud, they are mistaken. “Allowing the recovery of fraud damages sounding in
tort only when a plaintiff suffers an injury that is distinct from the economic
losses recoverable under a breach of contract claim is inconsistent with . . .
well-established law, and also ignores the fact that an independent legal duty,
separate from the existence of the contract itself, precludes the use of fraud to
induce a binding agreement.”

Formosa Plastics Corp. USA v. Presidio Eng’rs

& Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998). This claimed error is without
merit.
B.
Graham and Davis argue that the district court did not submit the
elements of common law fraud to the jury, and therefore a jury verdict based on
common law fraud cannot be sustained. Specifically, they contend that the jury
was not asked to find that Graham and Davis acted with knowledge that the
promise made was false. We find no merit in this argument. The district court
gave instructions for common law fraud and statutory fraud separately, and each
set of instructions contains the proper elements. The jury interrogatories
included

Interrogatory

Number

Seven,

which

addressed

knowledge.

Interrogatory Number Seven asked, “Do you find by clear and convincing
evidence that Ford Graham or Kevin Davis made the false promise to the
Plaintiffs with actual awareness of the falsity thereof?” Below that question,
Graham and Davis’s names were listed separately along with blank spaces on
which the jury could answer the interrogatory. The jury answered “Yes” as to
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both Graham and Davis. Although Interrogatory Number Seven came after
Interrogatories One through Four, which were clearly the interrogatories
addressing the elements of fraud, the jury still answered Interrogatory Number
Seven affirmatively. The jury, therefore, reached the issue whether Graham and
Davis made a promise with knowledge of its falsity, even if they reached the
issue in a later segment of the interrogatories. We hold that common law fraud
was submitted to the jury.
C.
During the charge conference, Graham and Davis requested that the
district court enter instructions on comparative responsibility and ratification.1
The court declined to do so, and Graham and Davis assign this as a point of
error.

“[O]ur review of [the district court’s] charge to the jury and jury

interrogatories is deferential. We will reverse a judgment only when the charge
as a whole leaves us with substantial and ineradicable doubt whether the jury
has been properly guided in its deliberations.” Stine v. Marathon Oil Co., 976
F.2d 254, 259 (5th Cir. 1992) (internal citation and marks omitted).
1.
Under Texas law, juries should be asked to evaluate the comparative
responsibility of “(1) each claimant; (2) each defendant; (3) each settling person;
and (4) each responsible third party who has been designated under Section
33.004.” TEX. CIV. PRAC. & REM. CODE ANN. § 33.003(a). Graham and Davis’s
position is that they were not the only defendants named in O’Hare and
Stewart’s complaint, and the jury should have been instructed to consider the
responsibility of the defendants named in the pleadings who did not participate
in this trial.

1

Graham and Davis also sought an instruction on waiver. On appeal, they group
ratification and waiver together. We will do the same.

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The problem with Graham and Davis’s argument is that Texas law “does
not allow a submission to the jury of a question regarding conduct by any person
without sufficient evidence to support the submission.” TEX. CIV. PRAC. & REM.
CODE ANN . § 33.003(b). The only trial evidence to which Graham and Davis
point that supports the commission of fraud by other defendants was testimony
by O’Hare on cross examination. Defense counsel listed off the other defendants
named in the pleadings and asked O’Hare whether they, too, had defrauded him.
He answered affirmatively. One witness’s conclusory statements that he was
defrauded, elicited in cross examination, hardly qualify as sufficient evidence on
which to base a jury instruction. It would not have been proper to instruct the
jury to weigh conduct unsupported by evidence.
2.
“‘Ratification is the adoption or confirmation by a person with knowledge
of all material facts of a prior act which did not then legally bind him and which
he had the right to repudiate.’” Fortune Prod. Co. v. Conoco, Inc., 52 S.W.3d 671,
678 (Tex. 2000) (citation omitted). Graham and Davis argue that even if the
settlement was fraudulently induced, O’Hare and Stewart ratified the
settlement by accepting partial payment and by stating, in their pleadings, that
their fraud claim was an alternative claim in the event the settlement was
unenforceable. Graham and Davis argue that the jury should have been so
instructed. Graham and Davis point to no evidence, however, that O’Hare and
Stewart knew all of the material facts pertaining to their fraud claim at the time
they accepted partial payment of the settlement or filed their complaint. Suing
to enforce the contract while pleading fraud as an alternative theory of recovery
did not serve to ratify Graham and Davis’s fraud. Neither is accepting partial
payment, by itself, ratification of a fraudulent agreement. Id. at 679. Graham
and Davis were not entitled to this instruction.

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D.
Graham and Davis contend that the jury’s exemplary damages award is
erroneous in several respects: O’Hare and Stewart did not request exemplary
damages in their complaint; exemplary damages cannot, as here, be assessed
jointly and severally; and the amount of exemplary damages exceeds the
statutory cap.
1.
Graham and Davis are mistaken that O’Hare and Stewart failed to request
exemplary damages. The prayer for relief in their Consolidated and Third
Amended Complaint states that, “O’Hare and Stewart . . . seek . . . exemplary
damages . . . .” This prayer is not made in reference to any specific defendant.
The fact that this prayer was made as an alternative to the prayer to enforce the
settlement has no bearing on our review of the exemplary damages award.
2.
Graham and Davis are correct that exemplary damages should not have
been assessed against them jointly. “In any action in which there are two or
more defendants, an award of exemplary damages must be specific as to a
defendant, and each defendant is liable only for the amount of the award made
against that defendant.” TEX. CIV. PRAC. & REM. CODE ANN. § 41.006. Although
the jury verdict contravenes this statutory directive by assessing exemplary
damages jointly, Graham and Davis invited the error. Graham and Davis’s
proposed Interrogatory Number Eleven reads: “What sum of money, if any, paid
now in cash, should be assessed against Defendants and awarded to Plaintiffs
as exemplary damages, if any, for the conduct found in response to Interrogatory
No. Ten?” Below that question, O’Hare and Stewart’s names, not Graham and
Davis’s, were listed separately along with blank spaces on which the jury could
answer the interrogatory. This proposed interrogatory would not have allowed
jurors to allocate exemplary damages to specific defendants, but would have
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instead left the jurors to split a joint assessment between two plaintiffs. Because
their proposed interrogatory invited a joint assessment of exemplary damages,
Graham and Davis cannot now complain that the interrogatory given to the jury
did the same. See Flores v. Cameron Cnty., 92 F.3d 258, 270 n.9 (5th Cir. 1996).
We will not disturb the verdict based on this invited error.
3.
Graham and Davis further point out that the exemplary damages award
exceeds Texas’s statutory cap. Indeed, Texas Civil Practice and Remedy Code
§ 41.008 provides, in pertinent part: “[e]xemplary damages awarded against a
defendant may not exceed . . . two times the amount of economic damages.” TEX.
CIV. PRAC. & REM. CODE ANN. § 41.008(b). An exemplary damages award may,
however, exceed the cap where the plaintiff seeks recovery for certain conduct
described as a felony by the Texas Penal Code, including securing the execution
of a document by deception. TEX. CIV. PRAC. & REM. CODE ANN. § 41.008(c)(11);
TEX. PENAL CODE ANN. § 32.46. The jury awarded a total of $1,962,000 in
economic damages, so the exemplary award, if capped, should not have exceeded
two times that, or $3,924,000.
Instead, the jury awarded $6 million in exemplary damages, but without
making specific findings pertaining to any of the exceptions to the exemplary
damages cap. The jury instructions and interrogatories did not prompt the jury
to make findings on any one of the exceptions, and O’Hare and Stewart did not
propose instructions or interrogatories that would have done so. When the jury
returned its verdict, Graham and Davis moved twice to cap the damages in
accordance with Texas law, but the district court denied these motions. The
court reasoned that because Graham and Davis secured a document, in this case
a settlement agreement, by deception, their conduct constituted a felony under
the Texas Penal Code, which satisfied an exception to the cap and permitted the

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$6 million award. See TEX. CIV. PRAC. & REM. CODE ANN. § 41.008(c)(11); TEX.
PENAL CODE ANN. § 32.46.
We hold that the district court erred by deciding in a bench ruling without
jury findings that Graham and Davis’s conduct satisfied the exception to the
damages cap. To exceed the cap, the jury, the sole fact finder in this case, would
need to have found that Graham and Davis (1) possessed an “intent to defraud
or harm [a] person;” (2) acted “by deception;” (3) “cause[d] another to sign or
execute;” (4) a “document affecting property or service or the pecuniary interest
of [a] person.” TEX. PENAL CODE ANN. § 32.46(a)(1); Madison v. Williamson, 241
S.W.3d 145, 161 (Tex. App. 2007) (“Before a court will apply the exception to the
statutory damage caps . . . a plaintiff must obtain jury findings that the
defendant violated one of the criminal code provisions listed in the statute . . . .”);
Signal Peak Enters. of Tex., Inc. v. Bettina Invs., Inc., 138 S.W.3d 915, 927 (Tex.
App. 2004). The jury also would have been required to find that Graham and
Davis committed this conduct “knowingly or intentionally.” TEX. CIV. PRAC. &
REM. CODE ANN. § 41.008(c). Here, the jury answered interrogatories on the
elements of fraud and the prerequisites for awarding exemplary damages, but
answered no interrogatories on these additional considerations.2 Findings of
fraud are not, per se, findings that permit exceeding the cap on exemplary
damages. Marin v. IESI TX Corp., 317 S.W.3d 314, 331 (Tex. App. 2010) (“The
finding of fraud here . . . does not conform with . . . the penal code sections . . .
that allow[] the cap to be exceeded.”); Madison, 241 S.W.3d at 161; Signal Peak,
138 S.W.3d at 927 (“We . . . hold that a showing of malice or fraud . . . does not
2

An argument can be made that, through the interrogatories given, the jury implicitly
reached every element necessary to exceed the cap. Although the interrogatories come very
close to many of the elements necessary to exceed the cap, we are not confident that they
reached every element. In particular, the jury was not asked to find that anyone signed or
executed a document, nor was the jury asked to find that every element of securing a
document by deception was committed knowingly or intentionally. See TEX. CIV. PRAC. & REM.
CODE ANN. § 41.008(c); TEX. PENAL CODE ANN. § 32.46(a)(1).

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as a matter of law establish one of the statutory exceptions in section
41.008(c).”).
Without any jury findings to support uncapped exemplary damages,
O’Hare and Stewart are not entitled to an uncapped award. Neither are they
entitled to a new trial on the exemplary damages issue, as they made no
objection to the instructions and interrogatories given on exemplary damages.
We hold that Texas’s statutory cap on exemplary damages applies, and we
instruct the district court to reduce the exemplary damages award to $3,924,000,
in accordance with that cap.3
E.
Lastly, Graham and Davis contend that the district court erred in entering
judgment on the fraud claims without requiring O’Hare and Stewart to elect
which cause of action—fraud or contract—they would like to serve as the basis
of their recovery. Graham and Davis’s stated concern is the risk of double
recovery for the same wrong. We are unmoved by that risk in this case. The
authorities Graham and Davis cite involve alternative theories being tried before
juries and an election of remedies occurring before entry of judgment. Here, the
fraud claims against Graham and Davis were tried separately, pursuant to
Federal Rule of Civil Procedure 42(b) and judgment was entered on the fraud
claims alone pursuant to Federal Rule of Civil Procedure 54(b). The contract
claims have not been tried before a jury. The risk of double recovery that the
election of remedies doctrine is meant to protect against does not fit in this

3

We are aware that O’Hare and Stewart raised the exception to the exemplary
damages cap in their Third Amended Complaint. That does not excuse their failure to propose
jury instructions or interrogatories bearing on the elements of one of the exceptions to the cap.
We are also aware of a split among Texas appellate courts concerning whether the
exemplary damages cap is an affirmative defense. Compare THI of Tex. at Lubbock I, LLC v.
Perea, 329 S.W.3d 548, 588 (Tex. App. 2010) with Wackenhut Corr. Corp. v. de la Rosa, 305
S.W.3d 594, 653-55 (Tex. App. 2009). Given the disposition of this case, we have no reason to
address that issue.

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context. We find no reversible error in the procedural discretion exercised by the
district court.
III.
Here, a jury found that Graham and Davis fraudulently induced O’Hare
and Stewart to enter a settlement agreement. Graham and Davis complain that
the evidence of fraud was insufficient to support the jury’s verdict, that the jury
was not properly instructed, that the jury’s award of exemplary damages was
improper, and that the district court erred in entering judgment without an
election of remedies.
We have rejected each of these arguments, except one. Because the jury’s
findings do not support an uncapped award of exemplary damages, we reverse
the judgment as to the award of exemplary damages, and remand for the district
court to amend the judgment reducing the exemplary damages award to
$3,924,000. Otherwise, we affirm the judgment. The district court’s judgment
is
AFFIRMED in part and REVERSED in part, and the case is
REMANDED for entry of an amended judgment.

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