Wise Electric Cooperative, Inc. v. American Hat Company , 2015 Tex. App. LEXIS 9791 ( 2015 )

COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 02-13-00439-CV
WISE ELECTRIC COOPERATIVE, APPELLANT/APPELLEE
INC.
V.
AMERICAN HAT COMPANY APPELLEE/APPELLANT
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FROM THE 97TH DISTRICT COURT OF MONTAGUE COUNTY
TRIAL COURT NO. 2007-0000383M-CV
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OPINION
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I. INTRODUCTION
Appellee and Cross-Appellant American Hat Company (AHC) sued
Appellant and Cross-Appellee Wise Electric Cooperative, Inc., for negligence
following a catastrophic grass fire that consumed roughly 1,200 acres and was
caused by an overhead service wire becoming disconnected at a Wise Electric
utility pole. Thick smoke from the fire damaged AHC’s inventory of 490,092 hats
and “hat bodies”; much of this inventory was stored in twelve forty-foot sea
containers parked outside AHC’s western-hat manufacturing plant in Bowie,
Texas. Following a five-day bench trial, the trial court issued sixty-four findings of
fact and seventeen conclusions of law1 and signed a judgment awarding AHC
$13,385,969.37 in personal property damages and $5,100,379.00 for past lost-
profits damages. The judgment also awarded Wise Electric a $49,188.31 credit
and an offset of $2,578,067.00. AHC and Wise Electric both perfected appeals.2
Wise Electric raises seven issues on appeal; six issues challenge various
aspects of the trial court’s damage findings, and one issue challenges the trial
court’s finding that Wise Electric was negligent.3 AHC appeals the $2,578,067.00
offset. We will affirm the trial court’s judgment on negligence and damages, and
we will reverse the judgment’s offset award and remand that claim to the trial
court.
1
A copy of the trial court’s findings of fact and conclusions of law is
attached to this opinion as Appendix A.
2
We note at the outset that this case was previously tried and appealed.
See Am. Hat Co. v. Wise Elec. Coop., Inc., No. 02-09-00368-CV, 2010 WL
4028098, at *8–9 (Tex. App.—Fort Worth Oct. 14, 2010, pet. denied) (mem. op.).
In the first appeal, we reversed the trial court’s judgment and remanded the case
for a new trial. Id.
3
The arguments and authorities section of Wise Electric’s brief is not
tethered to the specific issues raised by Wise Electric; some of the headings in
the arguments and authorities section raise arguments not subsumed within any
issue, and some issues raise arguments not discussed in the arguments and
authorities section. We liberally construe Wise Electric’s issues and address
every argument fairly subsumed in them. See Tex. R. App. P. 38.1(f) (providing
that issue will be treated as covering every subsidiary question fairly included).
2
II. OVERVIEW OF FACTUAL BACKGROUND4
The fire giving rise to this lawsuit originated at Wise Electric pole meter
number 04610 located on Charles Anderson’s property in Wise County. In 1998,
Wise Electric had installed an overhead service line at the pole utilizing a Burndy
Insulink connector. The electrically-charged overhead service line became
disconnected from one end of the Insulink connector, and the disconnected line
contacted the ground wire on the pole, which caused electrical arcing. The
arcing melted the ends of the metal wires in the disconnected line, and molten
metal fell to the underlying dry grass. It was a dry, windy day, and the grass
ignited, resulting in the fire.5 In addition to approximately 900 to 1,200 acres of
native grass, several structures, vehicles, and campers were consumed. Thirty-
three fire trucks, an EMS vehicle, twenty other types of vehicles, and over one
hundred fire-fighting personnel responded to assist in containing and
extinguishing the fire.
The fire burned past the back of AHC’s western-hat manufacturing plant,
burning barrels of lacquer located behind the factory and generating heat
4
A more detailed review of the evidence pertinent to Wise Electric’s
sufficiency challenges is set forth in connection with our disposition of those
issues.
5
The Fire Chief for the Bowie Fire Department—Doug Page, Wise
Electric’s assistant manager—Kelly Myers, AHC’s electrical engineer and
certified fire and explosion experts—John Stewart and Freeman Reisner all
testified that they had investigated the fire and that the above sequence was how
the fire started.
3
sufficient to cause bricks to pop from the building. Heavy smoke from the fire
engulfed the plant, which housed machinery, some hat inventory, and some
completed hats awaiting shipping. The smoke was so dense around the plant
that visibility in that area was limited to ten feet and surrounding roads were
blocked off. The smoke, soot, and ash penetrated AHC’s plant, entering through
the ventilation system and from under the doors and sullying the plant’s walls,
floors, and machinery. The smoke also penetrated the twelve forty-foot sea
containers that were filled with additional hat inventory.6 A strong smoke stench
saturated AHC’s entire inventory of 490,092 western hats that were in various
stages of completion and were stored either in the plant or in the sea containers.
Photos were introduced into evidence showing the devastation wrought by the
fire at and around AHC’s plant. An outside company was hired to clean the
plant, and AHC had to stop its manufacturing processes until the plant and
equipment had been cleaned and until it had obtained new hat inventory.
III. ATTACK ON PRIOR JUDGMENT
In its seventh issue, Wise Electric requests that we reinstate the jury’s
damages findings from the first trial. Wise Electric asserts that this court erred in
6
AHC’s commercial property and casualty insurer—Traveler’s Lloyds
Insurance Company—later rented five additional sea containers to store the hat
inventory from AHC’s plant while the plant and equipment were cleaned after the
fire. Traveler’s Lloyds Insurance Company merged with Saint Paul Fire and
Marine Insurance Company in 2004 to become Saint Paul Lloyds.
Consequently, in the record, AHC’s insurer is referred to both as The Travelers
Lloyds Insurance Company and Saint Paul Travelers. For purposes of this
opinion, we refer to AHC’s insurer as Travelers.
4
the reverse-and-remand judgment we issued after the first appeal in this case. 7
But Wise Electric petitioned the Texas Supreme Court to review that judgment,
the Texas Supreme Court denied Wise Electric’s petition, our mandate issued,
and the case was remanded to the trial court and retried. Thus, our plenary
jurisdiction over our judgment in the first appeal has expired. See Tex. R. App.
18.1, 19.1; Tex. Gov’t Code Ann. § 22.225 (West Supp. 2014). We lack
jurisdiction to reinstate the jury’s damage findings from the first trial. See Tex. R.
App. P. 19.3 (listing limited actions appellate court may take after expiration of
plenary power over judgment), 43.2 (listing types of judgment an appellate court
can render); see also Browning v. Prostok, 165 S.W.3d 336, 345–47 (Tex. 2005)
(recognizing that only void judgments are subject to collateral attack and that a
judgment is void only when court had “no jurisdiction of the parties or property,
no jurisdiction of the subject matter, no jurisdiction to enter the particular
judgment, or no capacity to act”). We overrule Wise Electric’s seventh issue.
IV. WISE ELECTRIC’S EVIDENTIARY-SUFFICIENCY CHALLENGES
Wise Electric’s first, second, third, and fifth issues challenge the legal and
factual sufficiency of the evidence to support the trial court’s findings of fact
concerning Wise Electric’s negligence and AHC’s damages.
7
See Am. Hat Co., 2010 WL 4028098, at *8–9.
5
A. Standards of Review
A trial court’s findings of fact have the same force and dignity as a jury’s
answers to jury questions and are reviewable for legal and factual sufficiency of
the evidence to support them by the same standards. Catalina v. Blasdel, 881
S.W.2d 295, 297 (Tex. 1994); Anderson v. City of Seven Points, 806 S.W.2d
791, 794 (Tex. 1991); see also MBM Fin. Corp. v. Woodlands Operating Co., 292
S.W.3d 660, 663 n.3 (Tex. 2009). We defer to unchallenged findings of fact that
are supported by some evidence. Tenaska Energy, Inc. v. Ponderosa Pine
Energy, LLC, 437 S.W.3d 518, 523 (Tex. 2014). We review de novo the
conclusions of law drawn by the trial court from the facts to determine their
correctness. See BMC Software Belg., N.V. v. Marchand, 83 S.W.3d 789, 794
(Tex. 2002). Because a trial court’s conclusions of law are not binding on us, we
will not reverse a trial court’s judgment based on an incorrect conclusion of law
when the controlling findings of fact support the judgment on a correct legal
theory. See, e.g., Karns v. Jalapeno Tree Holdings, L.L.C., 459 S.W.3d 683, 690
(Tex. App.—El Paso 2015, pet. denied) (citing Quick v. City of Austin, 7 S.W.3d
109, 116 (Tex. 1998)).
We may sustain a legal-sufficiency challenge only when (1) the record
discloses a complete absence of evidence of a vital fact, (2) the court is barred
by rules of law or of evidence from giving weight to the only evidence offered to
prove a vital fact, (3) the evidence offered to prove a vital fact is no more than a
mere scintilla, or (4) the evidence establishes conclusively the opposite of a vital
6
fact. Uniroyal Goodrich Tire Co. v. Martinez, 977 S.W.2d 328, 334 (Tex. 1998),
cert. denied, 526 U.S. 1040 (1999); Robert W. Calvert, “No Evidence” and
“Insufficient Evidence” Points of Error, 38 Tex. L. Rev. 361, 362–63 (1960). In
determining whether there is legally-sufficient evidence to support the finding
under review, we must consider evidence favorable to the finding if a reasonable
factfinder could and disregard evidence contrary to the finding unless a
reasonable factfinder could not. Cent. Ready Mix Concrete Co. v. Islas, 228
S.W.3d 649, 651 (Tex. 2007); City of Keller v. Wilson, 168 S.W.3d 802, 807, 827
(Tex. 2005).
Anything more than a scintilla of evidence is legally sufficient to support the
finding. Cont’l Coffee Prods. Co. v. Cazarez, 937 S.W.2d 444, 450 (Tex. 1996);
Leitch v. Hornsby, 935 S.W.2d 114, 118 (Tex. 1996). When the evidence offered
to prove a vital fact is so weak as to do no more than create a mere surmise or
suspicion of its existence, the evidence is no more than a scintilla and, in legal
effect, is no evidence. King Ranch, Inc. v. Chapman, 118 S.W.3d 742, 751 (Tex.
2003), cert. denied, 541 U.S. 1030 (2004) (citing Kindred v. Con/Chem, Inc., 650
S.W.2d 61, 63 (Tex. 1983)). More than a scintilla of evidence exists if the
evidence furnishes some reasonable basis for differing conclusions by
reasonable minds about the existence of a vital fact. Rocor Int’l, Inc. v. Nat’l
Union Fire Ins. Co., 77 S.W.3d 253, 262 (Tex. 2002).
When reviewing an assertion that the evidence is factually insufficient to
support a finding, we set aside the finding only if, after considering and weighing
7
all of the evidence in the record pertinent to that finding, we determine that the
credible evidence supporting the finding is so weak, or so contrary to the
overwhelming weight of all the evidence, that the answer should be set aside and
a new trial ordered. Pool v. Ford Motor Co., 715 S.W.2d 629, 635 (Tex. 1986)
(op. on reh’g); Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986); Garza v. Alviar,
395 S.W.2d 821, 823 (Tex. 1965).
B. Negligence
In a portion of its fifth issue, Wise Electric argues that the evidence is
legally and factually insufficient to prove that it was negligent and that its
negligence was the proximate cause of the fire. Wise Electric’s fifth issue
indicates that it challenges findings of fact 12, 13, 15(2), 19, 20 through 25, and
39 and conclusions of law 1, 2, 3, 5, 7, and 8. 8
1. The Elements of Negligence
To sustain a negligence action, the plaintiff must produce evidence of a
legal duty owed by the defendant to the plaintiff, a breach of that duty, and
damages proximately caused by that breach. See, e.g., Lee Lewis Constr., Inc.
v. Harrison, 70 S.W.3d 778, 782 (Tex. 2001). The components of proximate
cause are cause in fact and foreseeability. See, e.g., Doe v. Boys Clubs of
8
Wise Electric’s brief fails to include any discussion of most of the findings
of fact and conclusions of law that Wise Electric purports to challenge by listing
them parenthetically after its issues. Despite this absence of a discussion of
evidence, we nonetheless liberally construe Wise Electric’s brief as challenging
the sufficiency of the evidence to support the findings listed parenthetically after
each of Wise Electric’s issues. See Tex. R. App. P. 38.1(f).
8
Greater Dallas, Inc., 907 S.W.2d 472, 477 (Tex. 1995). The test for cause in fact
is whether the negligent “act or omission was a substantial factor in bringing
about injury,” without which the harm would not have occurred. Id.
Foreseeability requires that a person of ordinary intelligence should have
anticipated the danger created by a negligent act or omission. Id. (citing Nixon v.
Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 549–50 (Tex. 1985)). The danger of
injury is foreseeable if its “general character . . . might reasonably have been
anticipated.” Nixon, 690 S.W.2d at 551 (quoting Carey v. Pure Distrib. Corp.,
124 S.W.2d 847, 849 (Tex. 1939)).
2. Evidence of Breach and Causation
The evidence conclusively established that the fire started when an
overhead service line at a Wise Electric utility pole located on the Anderson
property (pole number 04610) became disconnected from one end of a Burndy
Insulink connector. The dispute at trial centered on why the service line became
detached from the connector. AHC asserted that the service line became
detached because a Wise Electric lineman had negligently installed the service
line into the Burndy Insulink connector by failing to crimp one end of the
connector––the end from which the wire became disconnected—and by failing to
perform a tug test on the line. Wise Electric, on the other hand, asserted that
several possibilities could not be eliminated, including that the service line had
become disconnected by high winds or by someone intentionally disconnecting it
or that the service line had failed prior to the fire.
9
a. Testimony of Doug Page
Doug Page is the Fire Chief for the City of Bowie, Texas. He responded to
the November 27, 2005 fire that started around noon that day; he finally cleared
the fire scene at approximately 10 p.m. that night. Page investigated the cause
and origin of the fire and generated a report that was admitted into evidence. He
testified that the fire started at Wise Electric utility pole number 04610; at the top
of that pole, he “could see a connector that was loose from an electrical line.”
The loose line grounded and started the fire. He had no doubt how the fire
started; the proximate cause of the fire was the electrical short at the utility pole.
The resultant fire was a wildland fire; wildland fires generate “a lot of ash.” Page
said that wind gusts reached sixty miles per hour that day.
b. Testimony of Kelly Myers
Wise Electric’s assistant manager Kelly Myers testified that he had worked
at Wise Electric for thirty-one years; he said that he was the person at Wise
Electric most knowledgeable about the November 27, 2005 fire that started
around noon at utility pole number 04610 on the Anderson property in Wise
County. Myers explained how a Wise Electric lineman attaches a service line to
a utility pole using a Burndy Insulink connector, as was used to connect the
overhead service wire at Wise Electric pole number 04610 when it was installed
in 1998. The Insulink is an insulated metal barrel containing a conducting gel, its
two ends have caps, and it is used for “end-to-end” connections. Myers
explained that Wise Electric’s linemen strip the insulation from the ends of the
10
service line and insert the uninsulated ends of the lines through the cap into each
end of the Insulink and then “crimp” the Insulink on both sides with a tool to
ensure a good connection and to ensure that the service line does not
disconnect.
Two crimping tools were available in 1998—a ratchet masher and a black-
handle Kearney tool. A ratchet masher is a special tool that is designed to
mechanically ratchet down to apply a certain amount of compression pressure,
and it does not release until the crimp is complete; Myers explained that “[e]ach
time you squeeze that handle, it [the ratchet masher] moves a segment to crimp
and it holds that.” The ratchet masher makes one large crimp. The black-handle
Kearney tool is more like pliers and has smaller jaws, and a lineman using it must
make three individual crimps with it on each side of the Insulink. Myers
explained that a Wise Electric lineman installing a service line on a pole in 1998
would have used the ratchet masher for crimping.
During his testimony, Myers identified various photos of the wires on pole
number 04610 after the fire, as well as photos of the actual Insulink from which
the overhead service wire had become detached. Myers testified repeatedly that
although the photos showed visible crimping on the left-hand side of the Insulink,
there was no crimping visible on the right-hand side of the Insulink—the side
from which the service wire had become disconnected.
A plastic bag containing the actual service wire, which had been cut from
pole number 04610 with the Insulink still attached to one side, was introduced
11
into evidence. Myers was asked to try to pull the wire out of the Insulink, and
although he pulled––and was asked to pull harder––he was unable to pull the
wire out of the Insulink. He again agreed that the other side of the Insulink, the
side from which the service wire had become disconnected, did not have any
markings showing that a ratchet masher or any other type of instrument that
would crimp that side had been applied to it. The trial court, acting as the finder
of fact in this bench trial, requested that this exhibit be handed to him to look at.
Myers then conducted an in-court demonstration of how a Wise Electric
lineman would have connected the service line to the Insulink in 1998 at pole
number 04610. First, utilizing a knife, Myers peeled back the plastic coating on
two pieces of service wire, exposing about three-quarters of an inch of bare wire
on each. He inserted the exposed ends of the service wires through the caps
into the ends of the Insulink. After inserting the two wires into the ends of the
Insulink, Myers explained that the Insulink then needed to be crimped to make
sure the wires did not come out of the Insulink. Before performing the crimping,
Myers was asked to pull one of the wires out of the Insulink and was able to
easily pull out the wire. Myers then utilized a ratchet masher to crimp both sides
of the Insulink. He thereafter performed a “tug test,” tugging on the service wire
to be sure it was securely crimped in the connector; he was unable to pull the
service wires out of the Insulink. Myers explained that a proper crimp
permanently attaches a service line to the connecter. Once a service line has
12
been inserted into an Insulink and properly crimped, it can never be removed; the
wire must be cut to separate it from the connector.
Myers agreed that Wise Electric’s policies required linemen to crimp both
ends of a crushable connector like the Insulink every time, no exceptions; that a
lineman using ordinary care was required to crimp both sides of an Insulink
connector; and that the failure to do so would be the failure to use ordinary care.
Myers also agreed that Wise Electric’s linemen were taught to perform a tug test
after crimping a line into a connector. Myers agreed that a Wise Electric lineman
using ordinary care would perform a tug test on the line on each side of a
connector to ensure a proper connection and that the failure to perform the tug
test would be a failure to use ordinary care. Finally, Myers agreed that it would
be foreseeable to a lineman installing a service line in 1998 that the failure to
crimp one side of a Burndy Insulink could result in the service line becoming
disconnected from the Insulink.
Upon questioning by Wise Electric’s counsel, Myers testified that the
Burndy Insulink installation instructions do not mention a tug test; the tug test is a
safety practice taught to linemen. Myers said that Wise Electric no longer uses
the Burndy Insulink connectors because the linemen cannot view the connection
inside the barrel of the Insulink, as they can in some other types of crushable
connectors.9 And finally, when asked whether there was “any external evidence
9
Myers also testified that Wise Electric no longer used Burndy Insulink
connectors because of slippage within the barrel of the Insulink, but Myers
13
on the sleeve of the Insulink that would indicate either an attempted or partial
crimp on the end of the Insulink” that the service wire became disconnected from,
Myers testified, “I’m not sure what that is, but that could be where a crimp may
have been made.” He explained that “it’s possible there could have been a
partial crimp” and that the conductive gel inside the Insulink “helped hold it [the
wire] in there.”
On redirect, Myers was impeached with his testimony from the first trial in
which he unequivocally testified that Wise Electric has standards concerning the
work performed by lineman and that crimping both ends of a connector and
performing the tug test were two such standards. He was also impeached with
his prior trial testimony that when asked whether he had observed evidence of
crimping on the end of the Insulink that the service wire became disconnected
from, he answered, “No, sir.”
c. Testimony of Dennis Dale Waugh
Dennis Dale Waugh testified as an expert for AHC. Waugh had worked
forty-two years for a utility company; he was a ground man, a first year through
fourth year apprentice, a journeyman lineman, a lead journeyman lineman, and a
troubleshooter. Waugh testified that the service wire that had become detached
admitted that there was “no material slippage shown by the photograph of the
Insulink” at issue here. Myers also performed a second in-court demonstration
of inserting exposed service wires into an Insulink in an effort to demonstrate the
slippage he had testified sometimes occurred. Despite his efforts, he was unable
to generate slippage during the demonstration.
14
from the Insulink at pole number 04610 became disconnected because there
was no crimp on the side of the Insulink that the service wire became
disconnected from. He said that the disconnected service wire showed signs of
arcing because portions of the wire had melted and that two of the internal
strands of the wire were shorter, indicating that they had burned off.
Waugh said that he had used a Burndy Insulink connector thousands of
times, had utilized the ratchet masher thousands of times, and had used the
black-handle Kearney tool thousands of times. When asked “what is the proper
procedure a lineman must follow to properly install an Insulink connector,”
Waugh responded:
Well, first, he measures his wire, skins the insulation of it off,
and makes sure that he doesn’t have more insulation off than what
the sleeve will accept. And as I said, I usually put in one end, crimp
it, and then install the other end, crimp it. And then do a tug test to
make sure that it’s a good connection, and then usually go to the
meter base or some facility that’s handy and check voltage.
Waugh performed an in-court demonstration of the proper procedure for a
lineman to follow to install an Insulink connector, and he utilized the black-handle
Kearney tool to perform the crimps. After performing the crimps with the black-
handle Kearney tool, Waugh pointed out that three jaw marks of the black-handle
Kearney tool were visible on the exterior of the Insulink connector. Waugh
explained that after crimping both sides of the Insulink, the next step is
performance of a tug test and then a voltage check. Waugh testified that a
voltage check will not let the lineman know if the connector has been properly
15
crimped because voltage may still pass through a service line connected with an
Insulink, even if it is not crimped at all. This is because the conducting gel inside
the Insulink is tacky and permits conduction even in the absence of a crimp.
Waugh explained that a lineman performing crimps with either the black-
handle Kearney tool or the ratchet masher knows whether they have performed
the crimp in the proper place on the barrel of the Insulink because if a crimp is
performed in the wrong place on the Insulink, “you’re crimping air. You’re not
crimping any metal. There’s no resistance to the connector tool.” Waugh said
that a properly-crimped Insulink should be able to support a man hanging from it;
he had seen a service wire connected with an Insulink “hold up poles that are off
the ground, also large tree limbs laying across services.” Waugh further stated
that a properly-crimped Insulink is a permanent connection that will not be blown
apart by wind, even sixty-mile-per-hour wind.
Waugh testified that the foreseeable consequence of the failure to crimp
one side of an Insulink connector is that the electrically-charged service wire will
come out of the connector, come into contact with something, and cause a fire.
He opined that no tug test had been performed on the service line that became
disconnected from the Insulink. And he explained how the service wire had not
become disconnected earlier, despite the lack of a crimp:
Well, I think the cap on the end of this sleeve had something
to do with it. It’s going to hold the wire. Especially if they get a little
bit of insulation in there with it, it’s going to hold that wire. When that
cap gets hot or weather-cracked, a piece of it fell off, that allowed the
16
wire to be in the connector free. We don’t know when that
happened.
d. Testimony of John Stewart
AHC’s expert John Stewart is an electrical engineer, a licensed
professional engineer, and a certified fire and explosion investigator. Stewart’s
testimony from the first trial was admitted as an exhibit during the second trial.
Stewart investigated the November 27, 2005 fire that started at pole number
04610. In addition to offering an opinion on the cause and origin of the fire,
Stewart opined that the energized overhead service line became disconnected
from the Burndy Insulink connector because the connector had not been crimped
on the side from which the wire became disconnected. Stewart reviewed photos
of the Insulink in question and pointed out visible crimping on one side, while the
other side contained no crimping marks whatsoever. Stewart testified that to
properly install an Insulink––using ordinary care in installing the Insulink, that is
the care that a reasonable, prudent electric utility company would use––a
lineman for an electric utility company should follow the manufacturer’s
instructions for installation, which included properly trimming the insulation on the
wires, inserting the wires into the connector to the proper point, crimping both
sides with a proper tool, and then pulling on the wires to ensure that a good
crimp had occurred and that the wires would not pull out of the connector.
Stewart opined that the failure to perform any one of these steps, including
17
crimping both sides of the connector or failing to perform the tug test, would be a
failure to exercise ordinary care.
Finally, Stewart testified that he routinely relied on National Weather
Service reports in conducting fire investigations and did so here; the report for
November 27, 2005 for Decatur, Texas, was introduced into evidence and
showed that the average wind speed at approximately 11:45 a.m. was 20.7 miles
per hour with gusts to 31.1 miles per hour. Stewart opined that wind, no matter
how strong, would not be capable of detaching a service line that had been
properly crimped into a connector.
e. Testimony of Freeman Reisner
AHC’s expert Freeman Reisner testified that he worked as a consulting
engineer for Haag Engineering where he performed failure analysis. Previously,
he had worked for thirteen years for San Angelo Electric Service Company
repairing distribution transformers and motors and other types of electric
equipment. At Haag Engineering, he had performed at least 1,000 fire
investigations. Reisner’s testimony from the first trial was admitted as an exhibit
in the second trial. When asked how a Burndy Insulink connector works, Reisner
explained,
The connector comes with a plastic cover and little caps on each
end. And when two wires need to be connected, the connector,
whoever is doing the connecting, strips the end of the wire so they’re
bare and they insert them one in each end -- typically, one at a time,
and you insert them and then crimp in an area on the connector and
check it; and then put another wire in the other end and crimp it and
then check it. The ends are puncturable real easily by the wire so
18
you don’t have to poke a hole in it or anything. You just poke the
wires in either end.
Reisner testified that to properly join two wires, the connector attaching them
must be crimped on both sides. He said that the Burndy Insulink connector at
issue here showed no evidence that it was crimped on the side from which the
service wire became disconnected. Finally, Reisner opined that the service wire
became detached from the Burndy Insulink connector because it was not
crimped on the side where it detached. According to Reisner, if an Insulink is
properly crimped, it will hold a service line “indefinitely.”
f. Testimony of Forest Smith
Wise Electric’s expert Forest Smith is an electrical engineer who works for
“a company that does investigations primarily for insurance companies but
sometimes other companies as well.” He performed his investigation of the fire
four days after it occurred. He testified that the Insulink that is the subject of the
lawsuit was installed by Wise Electric but also noted that the utility pole had
“Romex”10 installed on it that was not installed by Wise Electric. He opined that
the Romex “possibly could have” played a role in the fire because the person
who installed the Romex would have had to stand on a ladder and therefore
could have reached the overhead service wire and could have forcibly pulled the
service wire from the Insulink in question.
10
Romex is a wire used primarily for residential applications; these
applications are usually not installed by electrical companies.
19
Smith testified that his investigation of the fire followed NFPA 921, which is
a set of guidelines by a national consensus committee outlining the way to
conduct a forensic investigation. Smith said that the investigations are to follow
scientific method, which he described as follows:
The scientific method is something that is taken from academia. It’s
common in classrooms. It’s been adapted for forensic
investigations. It begins by defining a situation, recognizing a need,
then collecting data, and then analyzing the data. And then there’s a
process called inductive reasoning in which hypotheses are
developed, and then there’s a process called deductive reasoning in
which hypotheses are eliminated. And then, finally, there is the stage
in which a hypothesis, if it passed the test, becomes a theory, and
then the theory becomes the basis for perhaps making a call on the
cause of and the origin of a fire.
Applying the scientific method, Smith was unable to make a determination
regarding the cause of the fire because he said an origin had not been
determined. He did not determine that the area of origin was at pole number
04610; that was not in the scope of his investigation. Smith explained that, using
the scientific method, he could not eliminate several hypotheses as possible
causes for the service line becoming disconnected from the Insulink; he could not
eliminate the possibility that the Insulink had failed prior to the fire, that the wind
had caused it to disconnect, or that someone—“a party perhaps putting up this
piece of Romex”—had forcibly pulled the service line out of the Insulink.
Smith testified that the construction of the Wise Electric utility pole
complied with required regulations. He determined that Wise Electric used
ordinary care in the construction of the pole. Although Smith testified in the first
20
trial that the service line disconnected because a lineman had failed to crimp the
Insulink on that side, he asserted in the second trial that, after he had magnified
a photo of the approximately two-inch Insulink into an eight-by-ten photo that was
admitted as Defendant’s Exhibit 1B, he had observed evidence of crimping on
both sides of the Insulink.11 He said that there was one “small indentation” made
by a black-handled Kearney tool on the side of the Insulink where the service
wire had disconnected. Smith was impeached with his prior testimony that the
right side of the Burndy Insulink was not crimped and that it is reasonably
foreseeable to a lineman that if he fails to crimp one side of a connector, the wire
will come out.12
3. The Evidence of Breach and Causation
Is Legally and Factually Sufficient
In its findings of fact and conclusions of law, the trial court found that a
service line will not become disconnected from an Insulink when it is properly
crimped, that the Insulink in question at pole number 04610 was not properly
11
At the trial court’s request, Smith drew black arrows on Defendant’s
Exhibit 1B to point to the places where he purportedly saw evidence of crimping;
no indentations are visible on the copy of the photo in the record.
12
On appeal, Wise Electric proposes that the Insulink’s defective design
caused the fire. In support of this assertion, Wise Electric directs us to Smith’s
testimony that some electric companies have discontinued using the Insulink.
But Smith also testified that many electric companies still use them. And
although there is evidence (set forth in Smith’s report) that other connectors may
provide greater visibility of a crimp within the connector, no evidence exists in the
record before us that the Burndy Insulink is defectively designed or incapable of
proper installation.
21
crimped on both sides, and that Wise Electric had failed to use ordinary care
when it failed to crimp both sides of the Insulink. The trial court found that if a
lineman fails to crimp one side of an Insulink, it is reasonably foreseeable that the
electrically-charged line inserted into the non-crimped end of the connector will
come loose and that an injury of the kind suffered by AHC will occur. The trial
court concluded that Wise Electric was negligent in its installation of the Insulink
and that Wise Electric’s negligence had caused the fire and the damages
sustained by AHC.
Summarizing the evidence concerning these findings, neither Myers,
Waugh, Reisner, nor Stewart could see any indication that the Insulink had been
crimped on the side where the service line disconnected. Although Smith
disagreed, not only with these witnesses but also with his testimony in the
previous trial, the magnified, enlarged photographs of the Insulink show crimp
marks on only the connected side. Moreover, the “slight indentation” that Smith
testified in the second trial was observable on the uncrimped side of the Insulink
could, according to Smith, only have been made by the black-handled Kearney
tool; Myers testified that in 1998 when the Insulink was installed, Wise Electric
linemen were using the ratchet masher. The crimped end of the Insulink in
question was crimped with the ratchet masher, and no explanation was provided
for why one end of the Insulink would be crimped with the ratchet masher while
the other end of the same Insulink would not be crimped with the same tool but
would instead be crimped with the black-handled Kearney tool. And finally,
22
although the black-handled Kearney tool requires three separate crimps, even
Smith purportedly observed only one slight indentation on the uncrimped end of
the Insulink.
Although Smith speculated that the service line could have become
disconnected from the Insulink by someone climbing up a ladder to the overhead
service line and forcibly yanking the service line out of the Insulink, Myers’s in-
court demonstration, during which he attempted to do exactly that from the
witness stand, showed the impossibility of forcibly disconnecting a service line
from a properly-crimped Insulink; it can be disconnected only by cutting the wire
loose from the Insulink. According to Waugh, a service wire connected with a
properly-crimped Insulink will support a man hanging from it, as well as
ungrounded utility poles and tree limbs. Despite Smith’s testimony that possibly
the wind caused the service line to become disconnected, Stewart and Waugh
opined that wind, no matter how strong, would not be capable of detaching a
service line that had been properly crimped into a connector.
Viewing the evidence of the breach and causation elements of negligence
in the light most favorable to the trial court’s fact findings and disregarding the
contrary evidence that a reasonable factfinder could, the evidence is legally
sufficient to support the trial court’s findings of fact 12, 13, 15(2), 19, 20 through
25, and 39. See Rocor Int’l, 77 S.W.3d at 262; Cont’l Coffee Prods. Co., 937
S.W.2d at 450; Leitch, 935 S.W.2d at 118; see also Cmty. Pub. Serv. Co. v.
Dugger, 430 S.W.2d 713, 715–18 (Tex. Civ. App.––Texarkana 1968, no writ).
23
Considering and weighing all of the evidence in the record pertinent to these
findings, the credible evidence supporting the findings is not so weak, nor so
contrary to the overwhelming weight of all the evidence, that the findings should
be set aside and a new trial ordered. See Pool, 715 S.W.2d at 635; Cain, 709
S.W.2d at 176; Garza, 395 S.W.2d at 823. We overrule Wise Electric’s legal and
factual sufficiency challenges to the breach and causation elements of
negligence challenged in Wise Electric’s fifth issue, and we hold that the trial
court’s conclusions of law 1, 2, 3, 5, 7, and 8 are legally correct concerning
breach and causation based on the trial court’s fact findings.
We overrule this portion of Wise Electric’s fifth issue.
C. Inventory Damages
Wise Electric’s first, second, and the remainder of its fifth issue challenge
the legal and factual sufficiency of the evidence to support the trial court’s
findings of fact and conclusions of law concerning AHC’s personal property
inventory damages. Wise Electric challenges findings of fact 36 through 41, 53,
55 through 58, 63, and 64 and the legal correctness of conclusions of law 6, 7,
and 10. The trial court found that AHC’s entire inventory of 490,092 hats and hat
bodies was smoke damaged, that the hats and hat bodies could not be cleaned,
and that that the replacement value of the inventory was $13,385,969.37—the
amount awarded in the judgment. Wise Electric questions the legal correctness
of the trial court’s conclusion of law that the replacement-value measure of
damages applies, challenges the testimony of AHC’s owner Keith Maddox and of
24
AHC’s expert Steven Startz concerning the inventory’s fair market value, and
contends that the evidence is insufficient to support the amount of the inventory
damages award and to establish that the fire was the only cause of damage to
the inventory.
1. No Evidence of Preexisting Damage to Inventory
In the final portion of its fifth issue, Wise Electric argues that the evidence
is insufficient to support the trial court’s findings supporting conclusions of law 2
and 3 that the damage to AHC’s inventory was caused solely or only by the fire.
Wise Electric argues that because AHC had previously stored its large inventory
of hats and hat bodies in a non-air-conditioned facility and because AHC had
kept most of its inventory in sea containers outside its plant at the time of the fire,
AHC’s inventory of hats and hat bodies was already damaged by heat and
moisture before the fire. But Wise Electric points to no evidence, and we have
located none in the record, supporting this contention.
Instead, Maddox testified that, prior to the fire, employees at the AHC plant
in Bowie used the inventory stored in the sea containers on a daily basis and that
although the sea containers had breathe holes, nothing had ever entered the sea
containers prior to the smoke and ash from the fire. Maddox testified that air and
smoke could enter the holes but not moisture or water.13
13
Maddox was not asked any questions about the design of the breathe
holes—where they were located on the containers or whether they were hooded,
screened, or louvered.
25
No witness testified that the inventory contained signs of damage from
exposure to heat or moisture—only that after the fire, the inventory had suffered
smoke damage. Moreover, actual hats and hat bodies from AHC’s smoke-
damaged inventory were introduced into evidence at trial, and the trial court as
the finder of fact had the opportunity to observe the type of damage sustained by
the inventory; no questions were asked at trial of any witness concerning any
heat or moisture damage suffered by the inventory, and no such damage was
pointed out as present on the hats and hat bodies introduced into evidence.
Viewing the evidence in the light most favorable to both the trial court’s
implied finding that no prior damage existed to AHC’s inventory and its express
findings that smoke particles from the fire penetrated AHC’s plant and its storage
containers, as well as the contents of the plant and storage containers, damaging
the inventory contained therein, and disregarding the contrary evidence that a
reasonable factfinder could, the evidence is legally sufficient to support the trial
court’s implied finding and express findings that AHC’s inventory was not
damaged by heat or moisture prior to the fire. See Rocor Int’l, 77 S.W.3d at 262;
Cont’l Coffee Prods. Co., 937 S.W.2d at 450; Leitch, 935 S.W.2d at 118.
Considering and weighing all of the evidence in the record pertinent to these
findings, the credible evidence supporting the findings is not so weak, nor so
contrary to the overwhelming weight of all the evidence, that the findings should
be set aside and a new trial ordered. See Pool, 715 S.W.2d at 635; Cain, 709
S.W.2d at 176; Garza, 395 S.W.2d at 823. Consequently, we hold that the trial
26
court correctly applied the law to these facts in conclusions of law 2 and 3 by
concluding that the fire alone was the proximate cause of damage to AHC’s
inventory. See, e.g., BMC Software Belg., N.V., 83 S.W.3d at 794 (“Appellate
courts review a trial court’s conclusions of law as a legal question”).
We overrule the remainder of Wise Electric’s fifth issue.
2. Evidence Regarding the Value of AHC’s Inventory
a. Testimony of Keith Maddox
Keith Maddox, the owner of AHC, testified that he had been in the western-
wear business for forty years and had been making and selling hats for nineteen
years. He sold boots and hats and then owned and operated The Best Hat
Store, a hat-manufacturing plant and retail hat store. The Best Hat Store sold
cowboy hats manufactured by Stetson, Resistol, Bailey, and American Hat, as
well as by The Best Hat Store. About fifty percent of hats sold by The Best Hat
Store were manufactured by American Hat. The Best Hat Store manufactured
only felt hats—pure beaver and fifty-percent beaver western and dress hats;
these hats sold for between $450 and $800. Maddox purchased the hat bodies
for these hats primarily from Winchester Hat Company.
Maddox purchased AHC in March 2003, but he had previously tried to
purchase it in 1995 before he opened The Best Hat Store. In 1995, he had
called the then-owners of AHC to see if they would consider selling the plant,
inventory, and machinery of AHC. He toured the factory and obtained investors
to fund the asking-price of $10,000,000, but the owners then raised the asking
27
price to $20,000,000, which Maddox knew he could not raise. In 2003, Maddox
learned from a store in Houston that a one-half interest in AHC could be
purchased for $2,700,000; he believed that “was a steal” and called an AHC
salesman. He learned that Compass Bank owned AHC, so he called Compass
Bank. Compass Bank had foreclosed on AHC and told Maddox that AHC would
be sold within the week. Maddox immediately traveled to Conroe to tour the
AHC facility; he was told at that time that he could purchase AHC, including all of
its equipment and inventory, for $350,000 cash, payable within two days.
Maddox borrowed the money, made the purchase, and characterized getting
“$13 million worth of equipment for 300 – and inventory for 350,000 [as] an
excellent deal.” Maddox testified that the day after he purchased AHC in 2003,
the fair market value of the inventory, equipment, and name was $13.5 million
dollars. After operating AHC for about a year in Conroe, Maddox moved AHC’s
plant to Bowie, Texas. The interior of the Bowie facility was smaller, forcing
Maddox to purchase twelve sea containers and place them in the plant’s parking
lot for storage of the majority of AHC’s inventory of hats and hat bodies.
Maddox explained that AHC makes hats from felt or straw. The process of
manufacturing each material is different, but all hats progress from a raw hat
body, which is a stage-one hat; to a stage-two hat; and finally to a stage-three
hat, which is a completed hat. Actual straw and felt hats at each stage of
manufacturing were admitted into evidence.
28
Straw hats are made from rice paper, which is then hand-braided. Stage-
one straw hats are dampened, pressed, lacquered with a petroleum-based
lacquer, spun, baked, and lacquered again before an AHC employee trims the
hat, sews a wire in it, and then bakes and lacquers the hat again to make it a
stage-two hat. According to Maddox, the process of making a stage-one straw
hat into a stage-two straw hat involves “twenty something” steps, about two
hours of labor, and two days of drying time. To make the stage-two straw hat
into a stage-three hat, workers add “trim” to the outside of the hat and sew a
sweatband inside the hat. For straw hats, the transition from stage two to three
requires about one hour of labor.
Manufacturing felt hats is more time consuming. On receiving the
unshaped felt hat body from a manufacturer, AHC shapes the crown using a
manual machine that stretches the crown over a round wooden block. The
machine steams the hat and then blasts it with cold air, which “sets it.” AHC
dampens and irons the brim and the crown and then lets the hat dry for a day.
Next, a trained employee sands the crown with a sander, while the hat is
spinning, feeling the hat to ensure a consistent sanding. If necessary, the
employee represses the hat and restarts the sanding. An employee then hand
sands both sides of the brim. At this point, the felt hat is a “stage[-]two, open
crown.” If a customer prefers a “creased crown,” AHC creases the crown with a
machine. Stage-three felt hats have hand-cut and hand-sewn leather “buckle
29
sets” on them and sweatbands14 and liners sewed inside the hats. An average of
three to four hours of labor is required to transition a stage-two felt hat into a
stage-three felt hat. Some felt hats, however, demand much more labor time; as
an example, Maddox testified that a mink felt hat requires seventeen steps and
twenty-four hours of labor.
The price of a hat and the quality of a hat are partially dependent on the
quality of the raw hat body used. Some types of felt hat bodies have more hair
than others, giving them a better quality and value. Maddox testified that
Belgium and Germany had previously, but no longer, provided felt inventory and
that it was the best quality. At the time of the fire, AHC’s inventory included felt
hat bodies from Belgium and Germany. Maddox also testified that Taiwan had
produced the best straw hat bodies, that AHC had “a big selection” of Taiwanese
hat bodies at the time of the fire, but that Taiwan had stopped producing straw
hat bodies. Since Taiwan’s cessation of straw-hat production, AHC had acquired
straw inventory from China, which Maddox considered inferior in quality to the
Taiwanese hat bodies.
Maddox testified that historically, AHC had made the best hats because
AHC had utilized the finest raw materials and had the best workmanship; AHC
targeted “the more knowledgeable hat wearer[s]” as customers. AHC sold hats
to independent hat stores, department and chain retail stores, as well as to
14
Retailers sometimes request that the sweatband bear their logo or name.
30
individuals. Maddox explained that when one of these department or chain retail
stores placed an order for hats, the hats must ship within about forty-eight hours,
or the order would be cancelled. Consequently, because of the front-end labor
time required to generate a stage-three, ready-to-ship hat, a hat-manufacturing
plant must have a “gigantic inventory” of various types of felt and straw hats
completed up to a stage-two or stage-three level in order to successfully do
business with “the majors”15 and to timely fill incoming orders.
Maddox testified that AHC’s entire inventory was destroyed by the fire; all
of the hats and hat bodies that were inside the plant and that were stored in the
twelve sea containers reeked of smoke. He said that “you can never get the
smoke smell out of a smoke[-]damaged hat.” Maddox testified that “[n]o one
would buy [smoke-damaged hats] and [that] no one with any reputation would
sell them.” Maddox explained that when a hat is cleaned, it then has to be
reshaped with steam and that when the steam hits the hat, the smoke smell
intensifies. He performed an in-court demonstration of how to shape one of
AHC’s smoke-damaged hats with steam, and a smoke smell arose in the
courtroom.
Maddox testified that approximately five years after the fire, the owner of
Outback Traders in Australia was at the AHC factory in Bowie, “and he wanted to
know what was in all of those [sea] containers. We opened one of them up[,] and
15
A major retailer, according to Maddox, was a retailer such as Cavenders
or Baskins that had over ten stores that were stocking AHC hats.
31
it was smoky.” When Maddox was asked what he intended to do with all of the
smoky hats and hat bodies in the containers, Maddox responded, “[T]hey’re
going to the landfill.” The gentleman said that he would take some to Australia to
sell because it is smoky in the outback. Maddox said that he did not think the
smoky hats would sell, but the gentleman said that he was going to try. So
Outback Traders purchased 1,330 of the completed, stage-three smoke-
damaged hats at a “heavily discounted” price of $49,188.31. AHC generated
four invoices to ship the smoky hats to Outback Traders, listing the items being
sold as “inventory written off” followed by the type of hat. The invoices totaled
the prices of the hats, then indicated “minus the total price in the place for
payments or credits,” and stated a balance owed as zero.
Maddox testified that Outback Traders was unable to sell the smoky hats
and had not ordered any more smoky hats although it continued to order regular
hats, as it had in the past. Two years after the sale of the smoky hats, an
individual in Montague paid AHC for Outback Traders’s purchase of the 1,330
smoky hats; Maddox testified that the individual made the payment out of
friendship because the owner of Outback Traders felt bad that he had never paid
for the hats. Maddox testified that AHC was not attempting to be awarded
damages at trial for the inventory Outback Traders had tried to sell.16
16
Consequently, the judgment awards Wise Electric a $49,188.31 credit for
these hats because they were included in AHC’s expert Steven Startz’s inventory
damage calculations.
32
b. Testimony of Steven Startz
After the fire, Travelers hired Steven Startz to document, evaluate, and
liquidate AHC’s damaged hat inventory. Startz owns Startz Insurance Salvage,
and he is a licensed and experienced salvor, which he defined as a
documentation, evaluation, and liquidation specialist. Startz had prior salvor
experience with smoke-damaged clothing. In Startz’s experience, smoke odor
cannot be removed from clothing.
On behalf of Travelers, Startz commissioned a national inventory crew. He
and the inventory crew spent “two or three weeks” counting each and every hat
and hat body that was visibly damaged and those that had a smoke odor. Startz
reported that all 490,092 hats and hat bodies in AHC’s inventory at the time of
the fire had been damaged.
As part of the counting, Startz and his crew classified the damaged hats
into their three stages of production: stage one, stage two, or stage three. They
also categorized the damaged hats by their location at the time of the fire: either
inside the plant or outside in the sea containers. Startz generated a 114-page
spreadsheet itemizing each of the 490,092 hats and hat bodies by stage of
manufacture, type, color, and location; he provided his report and the
spreadsheet to Travelers and to AHC in 2005 after the fire.
Startz testified that while he was at AHC cataloguing AHC’s smoke-
damaged inventory, Servpro was also there; Servpro had been hired by
33
Travelers to attempt to clean the hats. But Servpro reported to Startz that they
were having difficulty getting the smoke smell out of the hats.
In 2008, AHC hired Startz to assess the inventory’s value. Utilizing the
spreadsheet he had previously generated for Travelers that individually
documented each of the 490,092 hats in AHC’s inventory at the time of the fire,
Startz requested invoices for the purchase of the various hat bodies. Purchase
invoices did not exist for most of AHC’s hat inventory because Maddox had
purchased AHC out of foreclosure more than two and one-half years before the
fire and had acquired its inventory without accompanying invoices. To determine
a value for the inventory lacking invoices, Startz “utilized like-similar invoicing to
come up with the values,” which Startz said was standard practice in the salvor
business.
To compile like-similar invoices, Startz compared the specific type of hat
body catalogued in the spreadsheet (but lacking an invoice) to similar hat bodies
offered for sale at the time of the fire by companies from whom AHC had
purchased hat bodies for production. Startz’s report explains that “[i]nvoices of
purchases and price lists were utilized to accumulate values of the hundreds of
types and styles of merchandise affected in your existing inventory.”17 Startz
17
The record reflects that an almost infinite number of types of hat bodies
exist. While the hat bodies are only straw or felt, the variations of hat bodies
within those two categories is innumerable. For example, straw hat bodies are
different sizes and can be made of a variety of types of paper (Chinese glazed or
unglazed, Japanese glazed or unglazed, Collit yarn/paper, and twisted paper to
name a few) and can be a variety of colors (wheat, ivory, ivory/tan, ivory/wheat,
34
averaged the invoice values for all felt hat bodies and for all straw hat bodies to
arrive at an average cost for felt hat bodies of $40.25 each and for straw hat
bodies of $5.43 each.
Then, as reflected in his report, Startz evaluated AHC’s operating
expenses, which he testified salvors commonly rely on in assessing value. He
totaled AHC’s yearly operating expenses, determined the average number of
hats AHC manufactured per day for the calendar year preceding the fire, and
came up with a cost per hat of $29.22 in operating expenses attached to each
hat. He added this $29.22 cost-per-hat figure in computing the value of hats that
had been manufactured into stage-two and stage-three hats but did not add it in
computing the value of stage-one, raw hat bodies.
Next, Startz calculated the average labor costs associated with each stage
of production. He determined that a stage-one hat, whether felt or straw, would
have $0 labor costs added in assessing its value because no labor had yet been
exerted on the raw hat body. Stage-two felt hats had an average labor cost of
$54.11 per hat, and stage-two straw hats had an average labor cost of $4.60 per
natural, and space dyed wheat to name a few). Felt hats are different sizes (the
hat body can only be made up or down one size) and vary by the fur used to
make the felt (for example, rabbit, hare, beaver, and mink), by the amount of the
animal hair that is actually in the felt (10X, 20X, 100X, 500X, or other amounts),
and by color (for example, black, silver belly, and brown).
35
hat. Stage-three felt hats had accrued an average total labor cost of $67.64, and
stage-three straw hats had accrued an average total labor cost of $5.75.
Based on these computations, Startz calculated the average replacement
cost for each of the categories of hats in AHC’s inventory––felt and straw hats at
manufacturing stages one, two, and three––by totaling the average purchase-
price cost of the hat body, the $29.22 operating expense per hat, and the
average labor cost per hat, depending on its stage of completion. Startz arrived
at the following 2005 replacement cost values:
Felt hats stage 1 $40.25
Felt hats stage 2 $123.58
Felt hats stage 3 $137.11
Straw hats stage 1 $5.43
Straw hats stage 2 $39.25
Straw hats stage 3 $40.40
Finally, to arrive at the total replacement value for AHC’s entire inventory, Startz
multiplied the number of hats in each of the above categories by the replacement
value calculated for that category. AHC’s inventory on the date of the fire
included: 38,670 stage-one felt hats; 63,381 stage-two felt hats; 4,574 stage-
three felt hats; 345,870 stage-one straw hats; 23,701 stage-two straw hats; and
13,896 stage-three straw hats. Performing the math, the total cost to replace the
inventory AHC had on hand at the time of the fire is $13,385,969.37. The trial
court admitted Startz’s entire report, which included several invoices and
documented his methodology.
36
Startz said that in 2005, as part of his duties for Travelers, he had
attempted to “liquidate” AHC’s inventory of completed hats; he put the
completed, stage-three smoke-damaged hats on the market. But due to the
amount of smoke damage sustained by the hats, interest in the finished hats
waned quickly. Concerning the hat bodies and stage-two hats, Startz said that
“[t]he hats that had not been finished had no market value due to their damage
and their state of manufacture.” Consequently, Startz opined at trial that in this
case, the replacement cost as well as the pre-fire fair market value of all 490,092
hats was the same––$13,385,969.37.
c. Testimony of Gary Moore
Gary Moore testified that he had worked in the western-wear business for
Hat Co. for over twenty-six years. Hat Co. sold a variety of western hats,
including Resistol and Stetson brand hats; during Moore’s last few years at Hat
Co., Hat Co. had about fifty percent of the western-hat market. Moore himself
generated over $2,000,000 in sales for Hat Co. during each of his last few years
of employment by selling new hats to retailers. Moore’s duties with Hat Co. had
also included quality control; he had experience with customers bringing in
smoke-damaged hats to see if anything could be done to restore them.
Travelers had contacted Moore to examine AHC’s inventory of hats that
were smoke damaged by the fire and to express an opinion as to the condition of
the hats, the marketability of the hats, and the refurbishing of the hats. Moore
went to AHC’s plant in Bowie. Moore testified, “Boy, you could smell those
37
trailers. . . . I was standing back from the trailers when they opened them, you
know, roughly, ten feet. And when they opened the doors, it was just, you could
smell that smoke just reeking out of there.” Moore said the hats “were very
smoked.”
Moore explained that from 2005 through trial, there was no process in
existence that would remove the smoke smell from a hat. He explained that heat
“really brings out” the smoke smell from a smoke-damaged hat. Moore said that
“[a]s long as you have that [smoke-damaged] hat, you’re going to have that
smell. Some days less; some days more, but you’re always going to have a
smoke smell.” Moore reported his findings to Travelers: all 490,092 hats were
smoke damaged and could never be effectively cleaned of the smoke smell. A
copy of Moore’s report to Traveler’s was admitted into evidence.
Moore said that no market existed for the 490,092 hats he had inspected
at AHC. He testified that there is no market for smoke-damaged hats; they are
“not re-sellable. I mean, it wouldn’t be reputable to sell them as new hats when
they’re damaged hats.” Moore said that no retailer would be willing to stock
smoke-damaged hats and further stated, “People will pick it up, smell the smoke,
and, you know, that’s it, they’re going to go somewhere else.” Moore testified:
Q. Now, as a result of your observation and investigation
when you went to the American Hat Company at the bequest or
behest of Travelers, did you form an opinion as to what should be
done with those hats?
A. Well, yeah, I did.
38
Q. What was that opinion?
A. Dig a hole and put them in it and cover them up.
d. Testimony of John Corn
John Corn is a retired forensic environmental chemist. He worked for
Armstrong Forensic Laboratory for twenty-three years. Travelers hired
Armstrong Laboratories to analyze AHC’s hats to “determine if there was
damage to these -- to the hats from a grass fire.” Corn testified that Armstrong
Laboratories had purchased two new AHC hats to be used as a control group
and had received forty-two hats from thee different sources: a set of AHC hats
that Blackmon Mooring had attempted to clean by vacuuming and wiping with a
clean sponge; a set of AHC hats that Servpro had attempted to clean by
vacuuming, steaming, and brushing; and a set of AHC hats that had not been
cleaned and had visible dust, smoke residue, and smoke odor. Corn selected
three to four hats from each source to test.
Corn explained that the testing for physical particles present on the hats
was conducted as follows. A three-by-one-half inch rectangle was cut from the
brim of the hats. Some of the brim-cut rectangles were analyzed under a
microscope, some were subjected to a chemical analysis using a gas
chromatograph with a mass spectrometer detector, and some were “desorbed
with a solvent” and “injected a portion of that solvent into a gas chromatograph
mass spectrometer.” Corn explained that “we would analyze the VOC’s [volatile
organic compounds] first with a set of common chemicals. And then the semi
39
volatiles, we injected those into the mass spec again for another composite list of
chemicals that are common to -- in the environment and fire products.” Based on
this analysis, two hats “show[ed] evidence of particulates with a morphology of
soot,” and one of the new hats showed a “one percent level of carbon
particulates.”
Concerning his testing for smoke odor, Corn testified that of the hats
tested, only “one hat [] had a smoke odor but no detectable level of soot or
carbon particulates,” and “[n]one of the other hats had a detectable odor of
smoke.” Corn testified that, to determine whether the hats had a smoke odor,
testing was conducted as follows:
[Y]ou establish the odor you’re looking for, which in this case would
be an odor from burned grass. We gave the panel a couple of other
soot odors like a match or burning wood, and then you -- you get a
panel of five people. And from that panel, you -- they smell the soot
that -- your known soot, and then they clean their nose so their
olfactory won’t have olfactory fatigue. And then they smell each of
the products in a -- in a bag. And so we would use an odorless type
of bag.
Q. Does the -- does the -- does the group consist of people
selected by you?
A. Yes. We have -- we had several employees that were
trained in this particular method[,] and we used people that were
nonsmokers and who had experience doing this.
Q. Did you find evidence in your review of smoke?
A. Yeah, we found it in one.
Corn’s report to Travelers was admitted into evidence; it indicated that
none of the volatile organic compounds found on AHC’s hats were associated
40
with a grass fire and that only one hat had a smoke smell. Corn opined that the
hats he analyzed could be “easily cleaned by brushing with an appropriate
material and [by] vacuuming with a HEPA filtered or remote vacuum.” Corn’s
report stated that “hats with a discernible odor can be treated by placing a hat in
a chamber that can be purged with heated filtered air.”
On cross-examination, Corn conceded that he could not offer an opinion
concerning any of AHC’s 490,092 hats and hat bodies, other than the few he
had analyzed. Corn was asked to open Plaintiff’s Exhibit 95E—the bag
containing AHC stage-three felt hats manufactured before the fire; he did so
and testified that he smelled smoke. Corn agreed that he could not testify about
the market value of anything because he was “not that expert.” And when
asked about the smoke removal process mentioned in his report, Corn
explained that the hats would need to be unstacked and placed in a container
and that
all you’re doing is you’ll have fans with filters on them at one end.
And you’ll either -- you can either blow air into it or you can pull air
out the other end through filters at this end. And just move air
through it, so it’s not a vacuum. It’s just an air movement. And
then you heat up the air inside the -- inside the container. These
containers have been as big as boxcars and as small as a hat box.
Q. So how long would it take 490,000 hats to go through that
process? Hours? Days? Weeks? Months?
A. Usually, we would recommend they do it for seven to
fourteen days.
Q. For each batch?
41
A. Yes.
Q. So two weeks, a boxcar full you say?
A. Yeah. You can -- that’s -- that’s -- you could actually go
with a bigger chamber than that.
Q. Where is a bigger chamber than that?
A. Well, you would construct it.
3. Applicable Law on Valuing Negligently-Damaged Inventory18
The primary principle to be applied in awarding damages for negligent
injuries to property is that the owner shall have actual pecuniary compensation
for the loss sustained. See Int’l-Great N. R.R. Co. v. Casey, 46 S.W.2d 669, 670
(Tex. Comm’n App. 1932, holding approved). When the property negligently
injured is personal property, the general rule in determining the amount of
compensation due for the damage to the personal property is the difference
between its reasonable market value immediately before and immediately after
the damage at the place where the damage occurred. See Thomas v. Oldham,
895 S.W.2d 352, 359 (Tex. 1995); Celanese Ltd. v. Chem. Waste Mgmt., Inc., 75
S.W.3d 593, 598 (Tex. App.—Texarkana 2002, pet. denied). Market value is
defined as the price property would bring when it is offered for sale by one who
18
The cases cited by Wise Electric for the proposition that a fair-market-
value damage model is the only appropriate measure of damages are not
negligent-damage-to-personal-property cases; they are conversion, eminent
domain, or other types of cases. Our discussion and our holdings here are
limited to negligent-damage-to-personal-property cases, so we need not discuss
the other types of cases cited by Wise Electric.
42
desires to sell, but is not bound to do so, and is bought by one under no
necessity to purchase it. See Yzaguirre v. KCS Res., Inc., 53 S.W.3d 368, 374
(Tex. 2001).
Although negligent damage to personal property is usually measured by
the diminishment in the property’s fair market value attributable to the
negligently-inflicted damage, different factual situations may dictate the
application of a different valuation of the damage to the property. See Pasadena
State Bank v. Isaac, 149 Tex. 47, 50, 228 S.W.2d 127, 128 (Tex. 1950);
Celanese Ltd., 75 S.W.3d at 598. For example, the personal property might be
totally destroyed or may have no fair market value, requiring application of a fair-
market-value-at-time-of-destruction valuation, replacement valuation, or repair
valuation. Pasadena State Bank, 149 Tex. at 50, 228 S.W.2d at 128; see also
Waples-Platter Co. v. Comm’l Standard Ins. Co., 156 Tex. 234, 236, 294 S.W.2d
375, 376–77 (1956) (holding that damage to building and personal property as a
result of fire negligently caused by defendant was to be measured by reasonable
cash market value of the property at the time it was destroyed by the fire, or if it
was not totally destroyed, by the diminution in its fair market value before and
after the fire); Hartford Ins. Co. v. Jiminez, 814 S.W.2d 551, 552 (Tex. App.—
Houston [1st Dist.] 1991, no writ) (recognizing that “[t]he measure of damages to
[personal] property that is totally destroyed [by another’s negligence] is its
reasonable market value when destroyed”); Shaw Tank Cleaning Co. v. Tex.
Pipeline Co., 442 S.W.2d 851, 854 (Tex. App.––Amarillo 1969, writ ref’d n.r.e.)
43
(upholding replacement damages awarded by jury for destruction of crude oil
storage tank by fire negligently caused by defendant). When the damaged
property “has neither a market value nor a real value, but it is shown what it
would cost to replace or reproduce the article, then such cost is the measure of
recovery.” Int’l-Great N. R.R. Co., 46 S.W.2d at 670; Pringle v. Nowlin, 629
S.W.2d 154, 157 (Tex. App.––Fort Worth 1982, writ ref’d n.r.e.) (holding plaintiff
entitled to replacement value of gold leaf professional sign located in the window
of his leased law office when defendants intentionally destroyed it). It is the
plaintiff’s burden to show which method of valuation, other than market value, is
appropriate. See Moran Corp. v. Murray, 381 S.W.2d 324, 328 (Tex. Civ. App.––
Texarkana 1964, no writ) (reversing damage award for intrinsic value of trees
because plaintiff failed to establish inapplicability of fair market value and
replacement measure of damages); Smith v. Dye, 294 S.W.2d 452, 465 (Tex.
Civ. App.—Galveston 1956, no writ) (same).
4. The Trial Court’s Conclusion of Law that Replacement Value Was the
Proper Measure of Damages Is Legally Correct
Wise Electric asserts that replacement value is not the proper measure of
damages; Wise Electric insists that fair market value is the only allowable
measure of damages, arguing that AHC’s inventory had an ascertainable market
value after the fire so that the replacement-value measure of damages does not
apply. AHC, on the other hand, characterizes its damages evidence as
supporting the trial court’s award of $13,385,969.37 in replacement-value
44
damages to its personal property (inventory) and, alternatively, diminution-in-
market-value damages from a pre-fire market value of $13,385,969.37 to a post-
fire market value of $0.19
It was AHC’s burden to prove the applicability of a damage valuation other
than the general rule of diminishment-in-market-value-before-and-after-the-
damage valuation. See Pasadena State Bank, 149 Tex. at 52, 228 S.W.2d at
129 (recognizing plaintiff met this burden); Moran Corp., 381 S.W.2d at 328
(stating rule). The trial court found that AHC had met that burden here by
establishing that no post-fire market existed for AHC’s 490,092 smoke-damaged
hats and hat bodies, that the smoke-damaged hats and hat bodies could not be
cleaned to permit their use or sale as cowboy hats, and that the smoke-damaged
hats and hat bodies had a post-fire market value of $0. Wise Electric asserts that
“no evidence” supports these findings—findings of fact 36 through 41, 53, 55
through 58, 63, and 64. Because Wise Electric’s sufficiency challenges impact
the correctness of the trial court’s conclusion of law 6—that AHC’s inventory had
no post-fire market value—and conclusion of law 10—that the replacement-value
damage model is applicable, we address Wise Electric’s sufficiency challenges in
connection with its challenges to the correctness of these conclusions of law.
Wise Electric argues that AHC’s inventory has a post-fire market value
because inventory, “by its very nature, exists to be sold by a seller to a
19
AHC informed the trial court that it was asserting both measures of
damages, in the alternative, out of an abundance of caution.
45
purchaser” and also argues that a post-fire market value exists because Outback
Traders purchased 1,330 smoky hats after the fire. Wise Electric’s arguments,
however, fail to take into account the fact that, as testified to by Startz and
Maddox, AHC’s inventory was comprised predominately of raw hat bodies; “only
a small percentage of the hats had been completed.” The final page of Startz’s
114-page hat-by-hat inventory spreadsheet, which is attached to his report,
shows that of the 490,092 hats and hat bodies in AHC’s inventory at the time of
the fire, 13,896 completed straw hats existed (2.8% of the inventory); 4,574
completed felt hats existed (0.9% of the inventory); 23,701 stage-two straw hats
existed (4.8% of the inventory); 63,381 stage-two felt hats existed (12.9% of the
inventory); 345,870 straw raw hat bodies––stage-one hats––existed (70.6% of
the inventory); and 38,670 felt raw hat bodies––stage-one hats––existed (7.9%
of the inventory).20 Thus, 78.5% of AHC’s inventory at the time of the fire
consisted of raw hat bodies, 17.7% of AHC’s inventory at the time of the fire
consisted of stage-two hats, and only 3.7% of AHC’s inventory at the time of the
fire consisted of completed, stage-three hats.21
20
In finding of fact 53, the trial court found that “[e]ach of the 490,092 hats
in American Hat’s Inventory on the date of the fire was inspected and valued by
Steve Star[t]z.”
21
Because the percentages were rounded to the nearest tenth, instead of
using the exact number calculated by dividing the inventory item into the total
inventory, the total of the percentages equals 99.9% rather than 100.0%.
46
a. No Post-Fire Market Exists
for AHC’s Stage-One or Stage-Two Hats
As a matter of law, no post-fire market existed in Montague County, Texas,
for 96.2% of AHC’s inventory (all but the 3.7% of AHC’s inventory consisting of
completed hats) for four reasons. First, juxtaposing the definition of fair market
value––the price a willing buyer, who desires to buy but is under no obligation to
buy, would pay to a willing seller, who desires to sell but is under no obligation to
sell22––with the above facts concerning AHC’s inventory after the fire, it is
obvious that if the smoke-damaged stage-one raw hat bodies and the partially-
manufactured stage-two hats are sellable, the “willing buyer” of 96.2% of AHC’s
inventory (all but the 3.7% of the inventory consisting of completed hats) is
necessarily limited to hat-manufacturing companies. That is, only one of AHC’s
competitors––a hat-manufacturing company––could ever be a “willing buyer” of
raw straw hat bodies; raw felt hat bodies; partially-completed, stage-two straw
hats; and partially-completed, stage-two felt hats. If AHC as a hat-manufacturing
plant is unwilling to manufacture hats from smoke-damaged hat bodies and to
complete partially-manufactured, smoke-damaged stage-two hats, then why
would one of its competitors be willing to buy smoke-damaged inventory to do
so? Any notion that AHC’s competitors could constitute a market for AHC’s
smoke-damaged stage-one and stage-two hats is wholly unsupported by the
22
See, e.g., City of Pearland v. Alexander, 483 S.W.2d 244, 247 (Tex.
1972) (setting forth definition of fair market value).
47
record. And no evidence exists that raw hat bodies or partially-manufactured
hats can be used for or manufactured into anything but hats.
Second, a fair-market-value damage model is based on the property’s
price on the open market at the place where the damage occurred; we have
located no cases supporting the proposition that a small market limited to a
company’s competitors is a satisfactory market for determination of fair market
value of unmanufactured or partially-manufactured property.
Third, a fair-market-value damage model is based on the difference in the
property’s fair market value before and after the damage “at the place where the
damage occurred.” See Thomas, 895 S.W.2d at 359 (requiring fair market value
to be established at the place where the damage occurred); Bass v. McClung
Roofing Co., 575 S.W.2d 342, 344 (Tex. Civ. App.—Fort Worth 1978, no writ)
(same). AHC is the only hat-manufacturing company in Montague County,
Texas; there is no market in Montague County, Texas, besides AHC for raw hat
bodies and stage-two hats.
Fourth, and most importantly, the only evidence Wise Electric points to as
establishing that a post-fire market exists for AHC’s stage-one and stage-two
hats is the sale of 1,330 smoke-damaged stage-three hats to Outback Traders.
But the sale of a small number of completed, stage-three smoky hats is no
evidence of a post-fire market for smoky, raw hat bodies or for smoky, partially-
manufactured, stage-two hats. AHC cannot be forced to manufacture the
smoke-damaged raw hat bodies into completed hats and to finish manufacturing
48
the smoke-damaged stage-two hats into completed hats in order to enter the
“market” that Wise Electric contends exists. See, e.g., Wicker v. Hoppock, 73
U.S. 94, 99 (1867) (“The general rule is, that when a wrong has been done, and
the law gives a remedy, the compensation shall be equal to the injury. . . . The
injured party is to be placed, as near as may be, in the situation he would have
occupied if the wrong had not been committed.”). Basing AHC’s damages on its
future consummation of the finished manufacturing of 96.2% of its inventory into
stage-three hats for purported sale in the Australian Outback does not return
AHC to the position it occupied before the fire.
b. No Post-Fire Market Exists for AHC’s Stage-Three Hats
Concerning the 3.7% of AHC’s inventory consisting of completed, stage-
three hats, Maddox testified that at the time of the fire, AHC had $1.2 million of
completed hat inventory ready to ship to fill orders that had already been placed.
The evidence concerning whether a post-fire market existed for the stage-three
hats included the following. Maddox testified, “No one would buy [smoke-
damaged hats,] and no one with any reputation would sell them.” When asked
whether he had discussed with his customers the possibility of purchasing the
smoke-damaged hats, Maddox testified that “I had customers assuring me that
they didn’t want smoke-damaged hats.” After the fire, AHC even changed the
color of the hat boxes their hats were sold in because customers were adamant
that they did not want smoke-damaged inventory. Moore testified that the AHC’s
post-fire inventory in the sea containers reeked of smoke; he said that at the time
49
of trial, there was no process in existence to remove the smoke smell from a
smoke-damaged hat. He testified that no market existed for smoke-damaged
hats; they should be put in a hole in the ground and covered with dirt.
Maddox explained that after a hat is cleaned, it must be reshaped with
steam; he conducted an in-court demonstration of how to put a crown in a hat by
steaming it. As he was applying steam to the hat in the courtroom, a smoke
smell emanated from the hat, intensifying as more steam was applied. Maddox
testified that the smoke smell of a smoke-damaged hat will intensify as its wearer
sweats and becomes hot. Likewise, Moore testified concerning the smoke smell
of a smoke-damaged hat, “You’re going to smell it any day, but you’re going to
smell it more when it is hot.”
Corn testified about debris and microscopic particles on one-half-inch by
three-inch rectangles that he had cut from the brims of eleven to fourteen hats.
His conclusion was that particles associated with a grass fire were not present on
the rectangles of these hats, but he agreed that he could not offer an opinion or
conclusions concerning any untested hats. Concerning smoke damage, Corn
testified that utilizing his panel of five Armstrong Lab employees sniffing the hats
that had been placed in individual bags in a procedure performed in the air-
conditioned laboratory, only one hat registered a smoke smell. He said that the
smoke smell could be eradicated from all 490,092 hat bodies and hats by
separating them from the stacked, nested position they were stored in; placing
them in a yet-to-be-built, large warehouse-sized chamber in a position where air
50
surrounded all sides of the hats; heating air and pulling it or pushing it from end-
to-end through the chamber; and leaving the batches of hats in the chamber for
ten to fourteen days per batch.
Wise Electric argues that AHC’s sale of 1,330 completed, stage-three
smoke-damaged hats to Outback Traders in Australia for attempted sale in
Australia is evidence that a post-fire market exists for AHC’s smoke-damaged
stage-three hat inventory. But Maddox testified this sale was a one-time trial
sale; Outback Traders thought it could sell smoke-damaged hats in the
Australian Outback because it was smoky there and because Maddox was willing
to let them try. But the hats did not sell. Although Outback Traders continued to
order new, non-smoke-damaged hats from AHC, it never again ordered any
more smoke-damaged hats. And Startz testified that back in 2005 when he
placed AHC’s smoke-damaged stage-three hats on the market, interest in them
waned when buyers learned they were smoke damaged.
c. Replacement Value Is a Proper Measure of Damages
Because, as a matter of law, no post-fire market value existed in Montague
County, Texas, for 96.2% of AHC’s inventory (all but the 3.7% of AHC’s inventory
consisting of completed, stage-three hats), we overrule the portions of Wise
Electric’s first and second issues challenging the sufficiency of the evidence to
support the trial court’s fact finding that no post-fire market value existed for any
of AHC’s smoke-damaged inventory to the extent this finding includes the 96.2%
of AHC’s inventory consisting of stage-one and stage-two hats. Having
51
determined that as a matter of law no post-fire market existed in Montague
County, Texas, for the 96.2% of AHC’s inventory consisting of hat bodies and
stage-two hats, we need not address Wise Electric’s challenge to the factual
sufficiency concerning this finding.
Viewing all of the evidence in the light most favorable to the trial court’s
fact findings that no post-fire market existed for any of AHC’s smoke-damaged
inventory and that the post-fire fair market value of AHC’s smoke-damaged
inventory was $0, to the extent these findings include the 3.7% of AHC’s
inventory consisting of completed, stage-three hats, and disregarding the
contrary evidence because a reasonable factfinder could, we hold that the
evidence is legally sufficient to support the trial court’s finding of fact that no post-
fire market existed for any of AHC’s inventory to the extent it includes this 3.7%
of AHC’s inventory.23 See Cent. Ready Mix Concrete Co., 228 S.W.3d at 651;
City of Keller, 168 S.W.3d at 807, 827; see also Rocor Int’l, 77 S.W.3d at 262
(explaining that a mere scintilla of evidence constitutes legally sufficient evidence
and defining scintilla). Considering and weighing all of the evidence in the record
23
If AHC’s single sale––five years after the fire––of 1,330 stage-three
smoky hats to Outback Traders can somehow be construed as establishing a
market for all of AHC’s remaining 17,140 completed, stage-three smoke-
damaged hats, the trial court’s judgment could be modified by lowering AHC’s
inventory damage award by $1,139,351.23. This figure is computed as follows:
by taking the total value of all stage-three smoke-damaged hats––$1,188,539.54,
and subtracting the credit already given to Wise Electric to exclude the 1,330
smoky hats sold to Outback Traders from AHC’s inventory damage award––
$49,188.31, the total equals $1,139,351.23.
52
pertinent to the trial court’s finding that no post-fire market existed for any of
AHC’s smoke-damaged inventory and that the post-fire fair market value of
AHC’s smoke-damaged inventory was $0, to the extent these findings include the
3.7% of AHC’s inventory consisting of completed, stage-three hats, the credible
evidence supporting the finding is not so weak, nor is the contrary evidence so
overwhelming, that the finding should be set aside and a new trial ordered. See
Pool, 715 S.W.2d at 635; Cain, 709 S.W.2d at 176. We overrule the potions
Wise Electric’s first and second issues challenging the legal and factual
sufficiency of the evidence to support the trial court’s findings of fact 36 through
41, 53, 55 through 58, 63, and 64.24
Because AHC met its burden of establishing that no post-fire market exists
for any of its smoke-damaged inventory, the general rule for measuring
negligently-inflicted damages to personal property––that being the difference
between its market value immediately after the injury at the place where the
damage occurred––does not apply here. See Pasadena State Bank, 149 Tex. at
50, 228 S.W.2d at 128 (recognizing “that the personal property destroyed might
not have a market value” triggering “variations in the way in which the method of
determining damages may be stated” to achieve proper compensation for the
24
For these same reasons, we reject Wise Electric’s free-standing
argument (not asserted in connection with any issue) that a distinction exists in
this case between proof that AHC’s smoke-damaged inventory had a post-fire
market value of $0 and proof that AHC’s smoke-damaged inventory had “no
[post-fire] ascertainable market.”
53
injury inflicted as a proximate result of the wrongful act complained of); Int’l-Great
N. R.R. Co., 46 S.W.2d at 670 (recognizing that replacement valuation is proper
to compensate an owner for damage to personal property when no market value
exists for the personal property damaged); Pringle, 629 S.W.2d at 157 (same).
AHC elected application of the replacement-value damage model, and the trial
court correctly concluded in conclusion of law number 10 that a replacement
valuation applied to AHC’s smoke-damaged inventory. See, e.g., Pasadena
State Bank, 149 Tex. at 50, 228 S.W.2d at 128; Int’l-Great N. R.R. Co., 46
S.W.2d at 670; Celanese Ltd., 75 S.W.3d at 598 (recognizing different factual
situations may dictate application of a different valuation [i.e., other than fair
market value] of the damage to the property); Pringle, 629 S.W.2d at 157 (same).
We overrule the portions of Wise Electric’s first and second issues challenging
the legal correctness of the trial court’s conclusion of law number 6—that AHC’s
inventory had no post-fire market value—and conclusions of law 10—that “the
proper measure of damages [for all of AHC’s inventory] is the replacement value
of the inventory.”
5. Wise Electric’s Challenges to
Maddox’s and Startz’s Fair-Market-Value-at-the-Time-of-Fire Testimony
In a portion of its first issue and in a portion of its second issue, Wise
Electric challenges Maddox’s testimony that the fair market value of AHC’s
54
inventory at the time of the fire was $13.5 million dollars25 and Startz’s market-
value testimony about AHC’s inventory at the time of the fire.26 Concerning
Startz’s testimony, Wise Electric asserts that “(1) Startz’s testimony lacked any
reliable foundation, (2) Startz was never properly designated to testify as to the
market value of American Hat’s inventory, and (3) Startz was not qualified to
testify on the market value of American Hat’s inventory.” But, as discussed
above, as a matter of law no post-fire market value exists for AHC’s inventory of
stage-one and stage-two hats, and legally and factually sufficient evidence exists
to support the trial court’s finding that no post-fire market value exists for AHC’s
stage-three hat inventory; therefore, the trial court correctly concluded that the
replacement-value damage model applied. In the absence of a post-fire market
value and applying a replacement-value damage model, a challenge to the
25
In one sentence, Wise Electric also challenges Maddox’s testimony that
the post-fire market value of AHC’s inventory was $0. Because Moore––an
expert with a background similar to Maddox’s––testified without objection that
there was no post-fire market for AHC’s inventory of hats, if the trial court did
somehow err by permitting Maddox to testify that AHC’s inventory had a post-fire
market value of $0, any such error was harmless. See Mancorp, Inc. v.
Culpepper, 802 S.W.2d 226, 230 (Tex. 1990) (holding any error in admitting
testimony of expert witness was harmless because it was cumulative of same
testimony given by six other expert witnesses who testified at trial); McKinney v.
Nat’l Union Fire Ins. Co., 772 S.W.2d 72, 76 (Tex. 1989) (holding any error in
admitting testimony of witness describing chemical pump was harmless because
it was cumulative of admitted exhibit displaying pump and trial testimony of other
witness about pump’s function).
26
Wise Electric does not challenge Startz’s replacement-value testimony;
instead, as set forth and addressed above, Wise Electric claims that replacement
value is an incorrect measure of damages.
55
testimony concerning the pre-fire market value of AHC’s inventory is
meaningless. That is, the general rule of diminishment in fair market value
before and after the damage cannot be applied if there is no post-injury fair
market value. See, e.g., Pasadena State Bank, 149 Tex. at 50, 228 S.W.2d at
128; Int’l-Great N. R.R. Co., 46 S.W.2d at 670; Pringle, 629 S.W.2d at 157.
Likewise, because the trial court correctly applied the replacement-value
damage model, a challenge to Startz’s qualifications to offer alternative fair-
market-value opinion testimony is meaningless; Startz’s qualifications to offer
replacement-value testimony are not challenged on appeal. Consequently,
because no post-fire market value exists for AHC’s inventory of 490,092 hats and
hat bodies, we need not address the portions of Wise Electric’s first and second
issues challenging the alternatively-presented, pre-fire fair-market-value
testimony of Maddox and Startz or the qualifications of Startz to offer
replacement-value testimony.27 See Tex. R. App. P. 48.1 (requiring appellate
court to address issues necessary for final disposition of appeal).
27
In the interest of judicial economy and because this case has been tried
and appealed twice, we alternatively construe Wise Electric’s brief as challenging
Startz’s qualifications to offer replacement-value testimony. The determination of
whether a witness is qualified to testify as an expert is left largely to the trial
court’s discretion. See Tex. R. Evid. 702; Broders v. Heise, 924 S.W.2d 148, 151
(Tex. 1996). We will not disturb the trial court’s determination that an expert is
qualified unless the trial court abuses its discretion. See Broders, 924 S.W.2d at
151. A trial court abuses its discretion when it acts “without reference to any
guiding rules or principles.” Id. (quoting E.I. du Pont de Nemours & Co. v.
Robinson, 923 S.W.2d 549, 558 (Tex. 1995)); see Larson v. Downing, 197
S.W.3d 303, 304–05 (Tex. 2006). In close cases, we defer to the trial court’s
56
To the extent that Wise Electric’s complaint—that “Startz’s testimony
lacked any reliable foundation”—can be liberally construed to encompass a
challenge to Startz’s replacement-value testimony, we address it next.28 In
determining the admissibility of expert testimony, the trial court has broad
discretion, and accordingly, we review its ruling for an abuse of discretion. Mack
Trucks, Inc. v. Tamez, 206 S.W.3d 572, 578 (Tex. 2006). In its role as
resolution of expert qualifications and will not reverse its judgment. See Larson,
197 S.W.3d at 304.
Here, Startz’s testimony and résumé, which was admitted into evidence,
establish that he possessed over twenty years’ experience acting as a
documentation, evaluation, and liquidation specialist—called a salvor—for
insurance companies and large corporations concerning a variety of types of
industries, including manufacturing, retail, food, and industrial. He has performed
salvor work for insurance companies such as Travelers, Hanover, Zurich, AIG,
Lloyds of London, and others and for companies such as Walmart, Coca-Cola,
and Walt Disney. He has previously worked as a salvor concerning smoke-
damaged clothing.
Based on Startz’s testimony concerning his qualifications and his résumé
chronicling his extensive experience as a salvor, we alternatively hold that the
trial court did not abuse its discretion by determining that Startz’s knowledge,
skill, experience, and training concerning the documentation, evaluation, and
liquidation of a variety of types of damaged goods qualified Startz to give an
opinion that would be helpful to the finder of fact on that subject––his
documentation, replacement valuation, and attempt to liquidate AHC’s inventory
of smoke-damaged hats. We overrule the portion of Wise Electric’s second issue
to the extent that it may be construed as complaining of Startz’s qualifications to
offer replacement-value testimony. See, e.g., Helena Chem. Co. v. Wilkins, 47
S.W.3d 486, 500 (Tex. 2001) (holding that trial court did not abuse its discretion
by determining expert witness was qualified to testify).
28
Wise Electric states that “Startz’s report and testimony are based on
calculations that, even if supported by evidence, would only be probative of
replacement value or lost profits, but not fair market value.”
57
gatekeeper, the trial court is required to ensure only that the expert testimony is
based on a reliable foundation and is relevant to the issues in the case. Gammill
v. Jack Williams Chevrolet, Inc., 972 S.W.2d 713, 728 (Tex. 1998). The trial
court does not determine whether the expert’s opinion is correct but only whether
the analysis used to reach the expert’s conclusion is reliable. Id.; Exxon Pipeline
Co. v. Zwahr, 88 S.W.3d 623, 629 (Tex. 2002).
Under rule of evidence 703, an expert’s replacement-value opinion may be
based on facts or data “perceived by, reviewed by, or made known to the expert
at or before the hearing.” Tex. R. Evid. 703. Such facts or data need not be
admissible in evidence if they are “of a type reasonably relied upon by experts in
the particular field.” Id. Personal knowledge of the underlying facts or data is not
required. See Tex. R. Evid. 602, 703; Henderson v. State, 14 S.W.3d 409, 412
(Tex. App.—Austin 2000, no pet.); 2 Steven Goode et al., Guide to the Texas
Rules of Evidence § 703.3 (3d ed. 2002).
After Travelers hired Startz, for approximately three weeks Startz and his
inventory crew painstakingly counted and categorized each and every hat body
and hat in AHC’s inventory of 490,092 hat bodies and hats. When AHC hired
Startz to value this inventory, Startz familiarized himself with AHC’s
manufacturing process, and he requested information from AHC of the type that
an expert in his field would customarily use and rely upon. The information
consisted of his prior documentation of each item in AHC’s hat inventory,
invoices, like-similar invoices for invoice-lacking items transferred to Maddox with
58
the purchase of AHC, and average operating costs and labor costs incurred by
AHC per-hat to manufacture the 87,082 stage-two hats and the 18,480 stage-
three hats that were included, along with 384,540 stage-one hats, in AHC’s total
smoke-damaged inventory of 490,092 hats and hat bodies. In its role as
gatekeeper, the trial court was required to ensure only that Startz’s expert
testimony was based on a reliable foundation and was relevant to the inventory
damage issue in the case. See Gammill, 972 S.W.2d at 728. The trial court’s
role was not to determine whether Startz’s opinion was correct but only whether
the analysis used to reach his conclusion was reliable. See id.; see also Zwahr,
88 S.W.3d at 629. For the reasons detailed above, we hold that Startz’s
replacement-cost analysis was sufficiently reliable. See Gulley v. State Farm
Lloyds, 461 S.W.3d 563, 576 (Tex. App.—San Antonio 2014, pet. denied)
(holding opinion testimony of civil engineer expert that movement of foundation
was caused by seasonal moisture, not plumbing leak, was sufficiently reliable).
We overrule the portions of Wise Electric’s first and second issues to the extent
they assert that Startz “did not use reliable foundational data” and that his
methodology is a “simple summation of numbers without any factual basis.”
6. The Evidence Is Legally and Factually Sufficient to Support the Amount
of the Replacement-Value Damages Found by the Trial Court
In portions of its first and second issues, Wise Electric complains that
legally and factually insufficient evidence exists to support the amount of the trial
court’s inventory damage award––$13,385,969.37—as set forth in finding of fact
59
58 and conclusion of law 7. Wise Electric’s sufficiency analysis is premised
solely on two facts that it contends render the amount of the trial court’s damage
award against the great weight and preponderance of the evidence: (1) Maddox
purchased AHC’s equipment and inventory out of foreclosure in 2003 for only
$350,000, and (2) Montague County Appraisal District’s 2005 personal property
appraisal of AHC’s personal property was $200,000.29 We review the evidence
concerning the amount of the inventory damage award, and we address Wise
Electric’s two contentions in turn.
In 1995, eight years before he successfully purchased AHC out of
foreclosure, Maddox raised $10,000,000 to purchase AHC, but the owner then
raised the price to $20,000,000. In 2003, Maddox was told a one-half share in
AHC could be purchased for $2,700,000 and believed this “was a good deal.”
When Maddox learned that AHC had been foreclosed on by Compass Bank, as
AHC’s landlord, he purchased AHC out of foreclosure by Compass Bank for
$350,000 in a two-day, cash-only transaction.
Jeff Biggars, AHC’s plant manager, testified by deposition at the first trial,
and his deposition testimony was offered by Wise Electric as Defendant’s Exhibit
29
Wise Electric presented no expert testimony on the value of AHC’s
smoke-damaged hat inventory controverting Startz’s valuation; it presented only
Corn’s testimony that no particles associated with a grass fire were present on
the hats he had examined, that the five-person-smell-test revealed only one of
the tested hats smelled like smoke, and that the smoke smell could be removed
from the hats by the hot-air-being-forced-through-a-warehouse-for-seven-to-
fourteen-days method.
60
127 at the second trial. Biggars testified that Maddox had purchased AHC out of
foreclosure and agreed that AHC was a foreclosed entity no longer doing
business at the time Maddox had purchased it.
Maddox characterized his purchase of AHC as “an excellent deal.” He
testified that at the time he purchased AHC, its inventory was worth $13,000,000
dollars. Moore testified that he did not know what Maddox had paid for AHC, but
that if he had purchased it for $350,000, he had gotten a good deal; “I would
have guessed he would have paid more than that.”
Startz’s testimony and report documented the replacement value of AHC’s
490,092 hat bodies and hats through invoice prices and “like-similar invoice”
prices of various types of AHC’s hat bodies: invoice number 00607006—dated
March 29, 2004, from Bollman Hat Company—for the purchase of 236 dozen hat
bodies of three different types; invoice number 00638634—dated June 22, 2004,
from Bollman Hat Company—for the purchase of 423 dozen hat bodies; invoice
number SO-05302—dated August 5, 2005, from Sunflower Mercantile H.K.
Limited in Hong Kong—for the purchase of 950 dozen straw hat bodies of
assorted types; a July 25, 2005 faxed letter to AHC showing an increase in the
purchase price of thirteen types of hat bodies of which AHC had ordered a total
of 1,500 dozen from Sunflower Mercantile for the months of December 2004 and
January 2005; invoice number AM 007-08—dated January 18, 2007, from Japan
Braid Hat Mfg. Co., Ltd. in Japan—for the purchase of 700 dozen Bangkok paper
hat bodies; and invoice number 01046893—dated March 11, 2008, from Bollman
61
Hat company—for 155 dozen wool felt hat bodies. The record also contains
numerous pictures showing the enormous quantity of hats and hat bodies in
AHC’s inventory. And Startz’s report details his hat-by-hat counting and
cataloging of each of AHC’s 490,092 hat bodies and hats, as well as his
calculations (set forth above), to arrive at a total replacement value of
$13,385,969.37.
Wise Electric asserts that the price at which Maddox purchased AHC is
evidence of the inventory’s fair market value––the amount at which the property
(American Hat’s inventory) was offered for sale by a willing seller (Compass
Bank) and purchased by a willing buyer (Maddox). That is, Wise Electric claims
the inventory cannot be worth $13,385,969.37 because Maddox paid only
$350,000 for it. But a foreclosure purchase price is, as a matter of law, not “fair
market value.” See BFP v. Resolution Trust Corp., 511 U.S. 531, 537, 114 S. Ct.
1757, 1761 (1994). In BFP, the United States Supreme Court explained,
Market value, as it is commonly understood, has no applicability in
the forced-sale context; indeed, it is the very antithesis of forced-sale
value. “The market value of . . . a piece of property is the price
which it might be expected to bring if offered for sale in a fair market;
not the price which might be obtained on a sale at public auction or a
sale forced by the necessities of the owner, but such a price as
would be fixed by negotiation and mutual agreement, after ample
time to find a purchaser, as between a vendor who is willing (but not
compelled) to sell and a purchaser who desires to buy but is not
compelled to take the particular . . . piece of property.”
Id. at 537–38, 114 S. Ct. at 1761. Thus, we hold that the evidence of Maddox’s
purchase price of AHC after Compass Bank’s foreclosure is not evidence of the
62
fair market value or of the replacement value of AHC’s inventory at the time of
the fire. Although Wise Electric argues that if AHC, “which is wholly owned by
Keith Maddox, is able to collect on the judgment entered below, he will have
turned his $350,000 investment into a windfall,” the record reflects that the
windfall occurred when Maddox purchased AHC out of foreclosure.
Concerning the Montague County Appraisal District’s personal property
valuation for purposes of ad valorem taxes, Maddox testified that it was his
understanding he could elect to report his personal property on either a fair-
market-value basis or on a cost basis. He elected to report under the cost basis,
which he testified was based on the portion of the $350,000 purchase price he
attributed to the inventory––$200,000 for the inventory and $150,000 for the
equipment and name. Shannon Shipp, a sales, marketing, and business
professor at Texas Christian University and founding member and partner for a
firm that specializes in damages calculations, explained that it is proper to report
business personal property value at the “[l]ower of cost or market” for county tax
appraisals. Shipp also testified that he had consulted the Montague County
Appraisal District’s office and was told that business personal property could be
properly valued at the lower of cost or market value.30 Thus, in light of the
30
At Wise Electric’s request, the trial court took judicial notice of sections
23.01 and 23.12 of the Texas Tax Code, governing, respectively, appraisals
generally and appraisals of inventory by the chief appraiser and stating the
general rule that appraisals are set at market value. See Tex. Tax Code Ann.
§§ 23.01, .12 (West 2015). Rendition statements made by a business owner on
the business’s personal property, however, are made pursuant to section 22.01,
63
evidence––which the trial court was free to believe––that the appraised value of
AHC’s business personal property in the 2005 statement from the Montague
County Appraisal District was based on cost, not on fair market value, the
statements do not constitute evidence that the fair market value or the
replacement value of AHC’s inventory at the time of the fire was less than
$13,385,969.37. And no testimony or evidence exists valuing the damage to
AHC’s hat inventory at a dollar amount lower than $13,385,969.37.
Viewing all of the evidence in the light most favorable to the trial court’s
award of $13,385,969.37 replacement-value damages for AHC’s inventory of
490,092 hat bodies and hats, and disregarding any contrary evidence because a
reasonable factfinder could, we hold that the award is supported by more than a
scintilla of evidence. See Rocor Int’l, 77 S.W.3d at 262; Cont’l Coffee Prods. Co.,
937 S.W.2d at 450; Leitch, 935 S.W.2d at 118. Considering and weighing all of
the evidence in the record pertinent to the trial court’s finding that the
replacement value of AHC’s smoke-damaged inventory of 490,092 hat and hat
bodies is $13,385,969.37, the credible evidence supporting the finding is not so
weak, nor is the contrary evidence so overwhelming, that the finding should be
set aside and a new trial ordered. See Pool, 715 S.W.2d at 635; Cain, 709
S.W.2d at 176. We overrule the portions of Wise Electric’s first and second
which authorizes a “good faith estimate of the market value of the property
(including inventory), or at the option of the owner, the historical cost when new.”
Id. § 22.01(5) (West 2015).
64
issues challenging the legal and factual sufficiency of the evidence to support the
trial court’s finding of fact 58 and challenging the legal correctness of conclusion
of law 7 determining that the replacement value of AHC’s inventory is
$13,385,969.37.
D. Lost-Profits Damages
In its third issue, Wise Electric argues that the evidence is legally and
factually insufficient to support the trial court’s award of lost profits, challenging
findings of fact 42 through 52 and the legal correctness of conclusions of law 8
and 11. Having already determined that replacement value was a proper
measure for the personal-property damages awarded, we need not address Wise
Electric’s contentions that lost profits are not available in cases in which fair-
market-value damages are awarded.31
1. Evidence of Lost Profits
a. Testimony of Keith Maddox
The fire required AHC to stop manufacturing until the plant and machines
were cleaned and AHC had received new inventory. The fire occurred on
November 27, 2005. After the fire, according to Maddox and AHC’s plant
31
The cases relied upon by Wise Electric preclude a recovery of lost profits
only to the extent lost-profits damages are encompassed in a fair-market-value
damage recovery; the cases do not preclude the recovery of future, unaccounted
for lost profits if such are necessary for fair compensation to an injured party.
And the lost-profits summary, which is set forth in Exhibit F in the report of AHC’s
lost-profits expert Shipp, explicitly states that inventory value is not included in
the lost-profits analysis; it states, “This analysis assumes that a separate claim
will be filed for the value of the inventory.”
65
manager, AHC ceased manufacturing altogether for several months following the
fire. Production did not recommence until January 2006 and then only partially.
Maddox quantified AHC’s January 2006 operational capacity to have been only
fifteen percent. In contrast to that low capacity, Maddox testified that AHC had
been operating at eighty percent capacity immediately before the fire, and he
asserted that AHC did not regain that capacity until late 2010 because it lacked
adequate inventory.
Maddox testified that hat sales are seasonal and that AHC’s best sales
months are December, January, and February, as demonstrated by the $1.2
million worth of completed, stage-three hats that AHC had ready to ship at the
time of the fire on November 27, 2005.
Maddox explained that it takes three to six months to receive new felt hat
bodies and six months to a year, sometimes even two years, to receive new
straw hat bodies. Because the major retailers require prompt delivery of hat
orders; because the major retailers often place large hat orders; and because of
the time required to perform the multiple, labor-intensive manufacturing steps
involved in transforming the hat bodies into completed, stage-three hats ready for
shipment, AHC must maintain a large inventory of stage-one and stage-two hats
on hand. As an example, Maddox said that if a major retailer places an order for
hats on a Monday, it expects AHC to ship the order by Wednesday. If AHC
misses that deadline, the retailer cancels the order and does not return for
business.
66
Maddox stated that before the fire, AHC had never failed to meet an
order’s deadline. But because the ordered, ready-to-ship stage-three hats in
AHC’s plant were smoke damaged, they were never shipped. Customers told
Maddox that they did not want the smoke-damaged hats, and because AHC had
no inventory that was not smoke damaged, it could not fill orders.
After the fire, when AHC ordered inventory, it was forced to order the
inventory in smaller quantities because AHC’s income from hat sales had ceased
and because inventory is expensive; AHC was also forced to pay extra to have
the smaller inventory quantities air-freighted to minimize the typical three- to six-
month delivery time associated with shipping by sea container. Consequently,
after the fire, AHC received and manufactured inventory haltingly; it would make
hats for about five or six days but then have to stop and wait for a week or two
until new inventory arrived. Because AHC lacked adequate inventory to timely fill
orders, it lost all of its major-retailer customers and the weekly orders that the
major retailers had placed. It took five years for AHC to regain most of its
customers and to regain its pre-fire level of production. At the time of the second
trial, AHC had an inventory of 50,000 hat bodies, and Maddox considered even
that to be a limited inventory.
67
b. Testimony of Shannon Shipp32
Shipp calculated AHC’s total profits lost as a result of the fire to be
$5,100,379; Shipp’s fifteen-page report, with thirteen exhibits totaling an
additional twenty-one pages, was admitted into evidence. Shipp’s testimony and
report explain that his analysis of AHC’s lost profits for each year “includes the
following elements: the duration of the future lost profits, but-for sales, but-for
expenses, and but-for net income[;] mitigating sales, mitigating expenses, and
mitigating net income[;] lost profits[;] and discount to present value.” A narrative
portion of the report explains the meaning of each of these terms and the
methodology Shipp utilized to arrive at the number associated with each term for
each year that AHC’s lost profits continued. Shipp noted in his report that “[a]s of
the date of this report, AHC has seven years of sales data since the fire.”
The thirteen exhibits attached to Shipp’s report detail the mathematical
calculations he utilized and contain charts documenting the supporting data for
each underlying calculation. In addition to setting forth Shipp’s valuation
methodology and result, Shipp’s report lists ninety-nine documents that Shipp
reviewed in conducting his lost-profits analysis. Shipp calculated AHC’s lost
profits for 2005 and for the five years following the fire up through December 31,
32
Wise Electric challenges discrete aspects of Shipp’s testimony and
computations. Our factual recitation of Shipp’s testimony and the computations
in his lengthy report is not exhaustive; we focus on providing a factual
background concerning the specific areas of Shipp’s testimony challenged by
Wise Electric.
68
2010, when AHC regained its pre-fire manufacturing capacity; the results of his
computations are set forth in Exhibit F of his report, the final page of the report.33
Exhibit F of Shipp’s report shows that for each year from 2005 through 2010,
Shipp calculated figures for twelve categories of data; he calculated but-for
figures and mitigating/actual figures for the twelve categories and subtracted the
mitigating/actual figures from the but-for figures to arrive at the lost-profits
figures. Shipp’s final lost-profits computations correlate with the trial court’s
findings of fact concerning the yearly lost profits suffered by AHC for the years
2005 through 2010.
Shipp testified that the standard in his field is to calculate the losses
sustained until the company is able to accomplish what it would have
accomplished as of the date of the loss. Shipp originally determined the duration
would last through 2011, but before the second trial, he modified his assessment
downward because AHC had, in fact, rebounded quicker than he had expected.
Shipp and Maddox agreed that by December 2010, AHC was operating at a pre-
fire level and was no longer suffering lost profits.
Shipp explained how he had computed the elements of his lost profits
analysis. For example, in calculating AHC’s December 2005 but-for sales, Shipp
included the loss of sales of the completed, stage-three hats that had been
ordered and were ready to be shipped on November 27, 2005, when the fire
33
A copy of Exhibit F from Shipp’s report is attached hereto as Appendix B.
69
occurred. Shipp added to that number an estimated sale of one-third of the
stage-two hats that AHC had stored inside the plant, which he projected would
sell based on his analysis of AHC’s January 2005 and February 2005 high-
season sales pattern. The methodology, assumptions, and calculations
performed by Shipp to determine 2005 but-for sales are set forth in Exhibits A
and A-1 attached to his report. Shipp projected AHC’s but-for sales for 2005 to
be $1,150,377. As a “reality check” to test the validity of his 2005 forecast, Shipp
compared his 2005 but-for sales projection to the actual sales achieved by AHC
in 2006 despite the fire; the actual sales that AHC was able to achieve in 2006
during its significantly-reduced manufacturing capability established that Shipp’s
2005 but-for sales figure was accurate.34
To calculate but-for sales for the years 2006 through 2010, Shipp talked
with Maddox and the employees in AHC’s finance department and reviewed
AHC’s financial statements; Startz’s report; and “the sales break out that [AHC’s
finance department] prepared showing sales to independents, individuals, and
the chain retailers.” Shipp verified information that he had received from AHC by
consulting books, articles, relevant seminar materials, and competitor
information. Because sales to individuals were random and too difficult to
34
Shipp testified that but-for sales for 2005 were calculated differently than
but-for sales for the years 2006 through 2010 because the 2005 lost profits were
concrete, constituting the already-ordered completed, stage-three hats awaiting
shipping and approximately one-third of the stage-two hats stored inside AHC’s
plant.
70
predict, Shipp omitted them from his calculus. He testified that his lost-profits
analysis was understated to the extent that it does not include AHC’s lost sales to
individuals. Shipp calculated a sales average for the remaining two markets––
chain retailers and independent stores––by analyzing AHC’s 2005 sales. Shipp
explained that analyzing a whole year took into account seasonal sales.
Next, Shipp calculated a sales growth rate for each of the two markets for
2006 through 2010. Shipp found the growth rate in sales for independent stores
by reviewing AHC’s growth in that market before the fire. AHC had added fifty-
two independent stores since mid-2004.35 Shipp incorporated that rate of growth
because the market supported it; according to Shipp, there are many
independent stores, “a lot of smaller stores.” Shipp calculated the estimated
future growth in sales for the chain-retailer market to be ten percent, which
reflected a growth in the number of hats and the styles of hats sent to each store
as well as a growth in the number of stores within each chain to stock the hats.
The methodology, assumptions, and calculations that Shipp specifically utilized
to arrive at AHC’s but-for sales for the years 2006 through 2010 are set forth in
Exhibit B attached to his report.
Shipp then determined AHC’s but-for expenses for the years 2005 through
2010—the expenses AHC would have incurred had the fire not occurred. In
35
Shipp counted the number of independent stores added from the time
AHC had relocated to Bowie, Texas, in March or April 2004 until the fire in
November 2005.
71
computing but-for expenses for December 2005, Shipp considered the actual
expenses AHC had incurred from January through November 2005. Shipp’s
calculations, methodology, and assumptions to determine but-for expenses for
the years 2006 through 2010 are set forth in Exhibits C and C-1 attached to his
report. Shipp estimated AHC’s gross margin for 2005 and for the years 2006
through 2011 and calculated AHC’s actual gross margin for the year 2011; these
calculations are set forth in Exhibit E attached to his report. As a “reality check”
on his but-for expense model and his gross-margin analysis, Shipp reviewed
financial statements that existed for AHC before Maddox had purchased it two
and one-half years earlier; Shipp examined the expenses, cost of goods sold,
and gross margin for the company for that time period because the company had
used the same production equipment and had many of the same customers and
hat styles. He then compared the numbers from AHC’s predecessor company
with AHC’s current numbers as a reality check that the current numbers were in
line with the prior numbers.
After calculating the but-for expenses, Shipp subtracted them from the but-
for sales to calculate but-for profits. Shipp subtracted from the but-for profits
AHC’s mitigating/actual profits for each year to reach the yearly lost-profits total.
Shipp explained that prior to the present suit by AHC against Wise Electric,
AHC had sued Travelers to recoup fire damages covered by AHC’s commercial
property and casualty insurance policy with Travelers. Pursuant to the terms of
AHC’s insurance policy, each party selected an appraiser, and the trial court
72
appointed Frank Douthitt as an umpire to appraise AHC’s damages. Shipp
appraised for AHC. The coverage page of AHC’s policy with Travelers was
introduced into evidence, and it shows limits of $1,500,000 on the building AHC
rented for its manufacturing plant; $2,000,000 for business personal property;
and $500,000 for business income and extra expense. Shipp and Douthitt
agreed that as of February 28, 2007, AHC’s “business profit loss”—which
Douthitt also characterized as payment for “business interruption”—computed
according to the terms of, and the coverage provided by, AHC’s policy was
$332,921.80, and the trial court’s judgment in AHC’s suit against Travelers
awarded that amount. During this trial, Shipp explained that the $332,921.80
figure was calculated in the context of the terms and coverage of AHC’s
commercial property and casualty insurance policy with Travelers. Shipp
testified that the actual lost profits suffered by AHC during the “business
interruption” loss period covered by its policy exceeded $332,921.80 and referred
to his report as including a correct computation of AHC’s lost profits during that
period.
c. Testimony of Dennis Ray McBay
Dennis Ray McBay—a retired partner emeritus with an international
accounting firm and certified public accountant, certified valuation analyst, and
certified financial forensics analyst—disagreed with Shipp. McBay testified that
he was hired by Travelers and stated that “my charge was to calculate lost
earnings due to the partial interruption of business as a result of the smoke
73
damage.” McBay worked with Scott Dau of Travelers in assessing this loss;
McBay prepared a report for Travelers dated February 27, 2006, and it was
introduced into evidence.
McBay concluded that AHC had suffered a partial business interruption for
only three months. McBay determined that AHC’s “business income loss” was
$101,934.50 for the three-month period following the fire. McBay expressed his
opinion that AHC was able to return to pre-fire sales and production in March
2006—three months after the fire, but he conceded that he had not seen or
reviewed any March 2006 numbers.36 According to McBay, Shipp’s calculations
were wrong because “the driver for his [Shipp’s] calculation is the lost inventory”
and the time and expense required to replace it. In performing his calculations,
McBay assumed that “raw material that’s already in-house is not the only raw
material available.”
McBay testified that he did not analyze the fire’s long-term effect on AHC’s
profits. McBay authored his report for Travelers on February 27, 2006, and he
acknowledged during cross-examination that he had not returned to AHC’s plant
since February 2006 and had no personal knowledge of its level of productivity
after February 2006. On cross-examination, McBay’s testimony that he had
36
McBay agreed that in February 2005, AHC had total sales receipts of
$114,531 and that in February 2006, that number was $53,487, but he insisted
that by February 2006, AHC was operating at pre-fire capacity and sales. He
admitted that he was using low sales months to compute average sales for the
seasonal high-sales months of December, January, and February. He conceded
that he did not take into account seasonal sales whatsoever.
74
determined AHC’s three-month business interruption period was impeached;
McBay admitted that he had testified at the first trial that the three-month time
period had been dictated to him by Travelers. And subsequently in the second
trial, he reverted to his prior testimony and agreed that “partial suspension for
three months” was a term dictated to him by Travelers.
McBay admitted that his calculations did not account for seasonal sales,
and unlike Shipp, who had reviewed sales for all of 2005, McBay’s computations
of lost sales––for the three-month business interruption period covered in his
report––averaged sales based only on sales during the eighty-seven days
preceding the fire. McBay admitted that his report expressly states that it is not
to be used for any other purpose other than evaluating AHC’s insurance claim for
three months of business-interruption coverage; he agreed that the report was
never intended to be used at trial. Also unlike Shipp, McBay did not factor into
his calculation the $1.2 million worth of completed, stage-three hat inventory
ready for shipment at the time of the fire; McBay testified that he was unaware
that this inventory existed until he reviewed Shipp’s report. Neither did McBay
account for different market types.
McBay acknowledged that his lost-profits assessment assumed two things:
(1) AHC did not lose any customers, and (2) AHC could timely obtain new
inventory. McBay did not know how long it actually took for new inventory to
arrive; he was unaware of the testimony that it took months or years to obtain
75
inventory. He agreed that his numbers “might” change if these two assumptions
were incorrect.
d. Testimony of Scott Dau
Scott Dau’s testimony from the first trial was admitted as an exhibit in the
second trial. As part of his duties for Travelers, Dau was to collect facts
concerning “what [AHC]’s business or lost-business claim was from the period
after the fire.” Dau observed that in February 2006, AHC’s plant was in
operation. Dau worked with McBay and utilized McBay’s business-interruption
loss calculation in the statement of loss he prepared. On cross-examination, Dau
explained that the $101,934.80 business-interruption loss on his statement of
loss was for three months of business interruption. When asked what business-
interruption loss described, Dau said, “Business interruption is a downtime after
the loss.” According to Dau, the loss is the net loss of income during that
downtime.
2. Applicable Law on Past Lost Profits
“[W]here it is shown that a loss of profits is the natural and probable
consequence of the act or omission complained of, and their amount is shown
with sufficient certainty, there may be a recovery therefor.” Sw. Battery Corp. v.
Owen, 131 Tex. 423, 426, 115 S.W.2d 1097, 1098 (1938). “Recovery for lost
profits does not require that the loss be susceptible to exact calculation.
However, the injured party must do more than show that it suffered some lost
profits. The loss amount must be shown by competent evidence with reasonable
76
certainty.” Helena Chem. Co., 47 S.W.3d at 504 (citations omitted).
“Reasonable certainty” in the proof of lost damages “is intended to be flexible
enough to accommodate the myriad circumstances in which claims for lost profits
arise.” Tex. Instruments, Inc. v. Teletron Energy Mgmt., Inc., 877 S.W.2d 276,
279 (Tex. 1994). It is a fact-intensive determination. Helena Chem. Co., 47
S.W.3d at 504; Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 84 (Tex.
1992). At a minimum, opinions or lost-profits estimates must be based on
objective facts, figures, or data from which the lost-profits amount may be
ascertained. Helena Chem. Co., 47 S.W.3d at 504; Holt Atherton Indus., Inc.,
835 S.W.2d at 84. It is not necessary, however, to produce in court the
documents underlying the opinions or estimates. Holt Atherton Indus., Inc., 835
S.W.2d at 84.
“Profits which are largely speculative, as from an activity dependent on
uncertain or changing market conditions, or on chancy business opportunities, or
on promotion of untested products or entry into unknown or unviable markets, or
on the success of a new and unproven enterprise, cannot be recovered.” Tex.
Instruments, Inc., 877 S.W.2d at 279; see Sw. Battery Corp., 131 Tex. at 426,
115 S.W.2d at 1098. “Enterprise” does not mean business entity; it refers to the
activity that is alleged to have been damaged. Tex. Instruments, Inc., 877
S.W.2d at 280. “The focus is on the experience of the persons involved in the
enterprise and the nature of the business activity[] and the relevant market.” Id.
77
Proof of lost damages can be accomplished with evidence of profit history.
Helena Chem. Co., 47 S.W.3d at 504. The Texas Supreme Court has explained
that
[p]re-existing profit, together with other facts and circumstances,
may indicate with reasonable certainty the amount of profits lost. It
is permissible to show the amount of business done by the plaintiff in
a corresponding period of time not too remote, and the business
during the time for which recovery is sought.
Tex. Instruments, Inc., 877 S.W.2d at 279 (quoting Sw. Battery Corp., 131 Tex.
at 426, 115 S.W.2d at 1099). “Furthermore, in calculating the plaintiff’s loss, it is
proper to consider the normal increase in business which might have been
expected in the light of past development and existing conditions.” Id.
3. Legally and Factually Sufficient Evidence
Supports the Lost-Profits Award
Wise Electric’s sufficiency challenge focuses on Shipp’s report and
testimony. Wise Electric asserts that Shipp’s calculus is flawed because he
relied upon Startz’s report’s tabulation of AHC’s inventory. Because we have
already determined that Startz’s report was not unreliable, and because Shipp
testified that a damages analyst typically relies on such data and information
provided by others, the tabulations of inventory in Startz’s report was not an
improper source for Shipp to have used. See Tex. R. Evid. 703 (authorizing
expert to base opinion on facts or data in the case that the expert has been made
aware of or has reviewed if experts in his field would rely on the facts in forming
an opinion).
78
Wise Electric challenges Shipp’s computation of a particular element of his
lost-profits analysis—AHC’s 2005 “but-for” sales. To calculate AHC’s 2005 but-
for sales, Shipp totaled the sales of the completed, stage-three hats in the plant
and the sales of one-third of the stage-two hats in the plant. Wise Electric argues
that Shipp merely speculated that AHC would sell all of the stage-three hats
stored in AHC’s plant at the time of the fire. But Maddox testified that the stage-
three hats in the plant awaiting shipping had been manufactured in response to
orders. And Shipp’s and Maddox’s testimony established that AHC converted
stage-two hats to stage-three hats only to fill orders; the sweat bands sewn into
the hats frequently bore the label of the retailer purchasing the hat, which would
not be known until the retailer placed an order for the hats. Therefore, it was not
speculative that AHC would sell the completed, stage-three hats that Maddox
testified had been ordered and were awaiting shipping. And although Wise
Electric faults Shipp for not supporting his December 2005 valuation with
purchase orders, it is not necessary that such documents be produced in court to
establish lost profits with reasonable certainty. See Holt Atherton Indus., Inc.,
835 S.W.2d at 84 (explaining that “[a]lthough supporting documentation may
affect the weight of the [lost-profits] evidence, it is not necessary to produce in
court the documents supporting the opinions or estimates”).
79
Wise Electric also faults Shipp’s determination in computing the element of
2005 but-for sales that AHC would sell one-third of the 15,78637 stage-two hats
that were stored in the factory (approximately 5,262 hats). But that determination
came from Shipp’s assessment of the market for the peak season of December
through February. Given that from January 2005 through November 27, 2005,
AHC had sales of $938,333 and was manufacturing 360 hats per day at the time
of the fire, the projected completed manufacture and sale of 5,262 stage-two hats
(263 per day assuming only twenty work days in December) during a peak sales
month is in line with past production. And to ensure the overall reasonableness
of his 2005 December “but-for” sales figure, Shipp compared his projected 2005
sales to AHC’s actual 2006 sales, accounting for AHC’s then-diminished
operational capacity, and concluded that his 2005 assessment, including
December, was accurate. Shipp’s use of AHC’s past profits to forecast future
ones was appropriate. See Helena Chem. Co., 47 S.W.3d at 504 (holding past
profits, coupled with other facts and circumstances, may establish lost profits);
Tex. Instruments, Inc., 877 S.W.2d at 279 (same).
Wise Electric next asserts that Shipp’s report and testimony are devoid of
facts, figures, or data. Shipp listed the numerous sources of information and
37
As previously mentioned, Startz’s spreadsheet detailed for each of AHC’s
490,092 hats and hat bodies whether it was stored inside AHC’s plant or in a sea
container outside at the time of the fire. Shipp’s report indicates that 15,786
stage-two hats were stored inside AHC’s plant at the time of the fire; one-third of
15,786 is 5,262.
80
data that he had utilized in reaching his conclusions; he listed ninety-nine
documents that he had reviewed in reaching a lost-profits computation. In his
report and in the exhibits attached to it, he explained his calculus and the steps
he took to ensure its reasonableness. Shipp’s report, including back-up figures
and data, was admitted into evidence. We cannot agree that Shipp’s report and
testimony are devoid of facts, figures, or data. Compare Helena Chem. Co., 47
S.W.3d at 504 (explaining proper calculation of lost profits), with Holt Atherton
Indus., Inc., 835 S.W.2d at 84 (explaining that plaintiff’s mere statement that he
“lost out on” $200,200 in income coupled with a statement as to profits shown on
an income tax return constituted insufficient evidence of lost profits), and Capital
Metro. Transp. Auth. v. Cent. of Tenn. Ry. & Navigation Co., 114 S.W.3d 573,
581 (Tex. App.––Austin 2003, pet. denied) (holding evidence insufficient to
support jury’s $1.5 million lost-profits award when expert’s computations were not
based on facts, figures, or data because computations ignored reality that plaintiff
company “had a history of losses and had never made a profit on its operations”).
Wise Electric also challenges Shipp’s computation of the 2006 to 2010
“but-for” sales element of his lost-profits analysis, claiming that Shipp’s numbers
are overly speculative, especially regarding AHC’s estimated growth rates for the
chain retailer market and the independent store market. But Shipp’s proffered
growth rates stemmed from AHC’s prior increases in sales in these two markets,
and Shipp detailed the differences between the growth rates for the two markets
and the method he had used to accommodate them. Shipp’s growth rates
81
accorded with AHC’s trending sales and the overall hat market. See White v.
Sw. Bell Tel. Co., 651 S.W.2d 260, 262 (Tex. 1983) (stating that “in calculating
the loss in profits, the normal increase in the business which might have been
expected in the light of past developments and existing conditions may be
considered”); Sw. Battery Corp., 131 Tex. at 427, 115 S.W.2d at 1099 (same);
see also Fleming Mfg. Co. v. Capitol Brick, Inc., 734 S.W.2d 405, 407–08 (Tex.
App.––Austin 1987, writ ref’d n.r.e.) (including analysis of sales projections
derived from past sales in lost-profits analysis). Moreover, no controverting
evidence exists in the record showing any other growth rate should be applied or
undermining the data utilized or the computations performed by Shipp to arrive at
the growth rates he utilized.
Additionally, the western-hat market is neither new nor uncertain, and
cowboy hats are not untested products. Compare White, 651 S.W.2d at 262
(holding that evidence showed Hewlett-White florist shop had been an
established business for thirty-three years and that the sale of flowers was not an
uncertain or speculative business so as to preclude lost-profits award), with Tex.
Instruments, Inc., 877 S.W.2d at 279 (holding lost-profits award based on
projected sales of a product not yet developed to the point of a working model
too speculative because no evidence existed that the product had been sold to
anyone). To the contrary, Maddox testified that AHC had been making hats
since he was a child and that the first cowboy hat he had owned was an AHC
hat. Maddox also testified that the materials and processes for manufacturing
82
cowboy hats had not changed in a hundred years. AHC’s hat-manufacturing
business falls squarely within the line of cases for which lost profits may be
proved with reasonable certainty. See, e.g., White, 651 S.W.2d at 262 (flower
sales); Sw. Battery Corp., 131 Tex. at 426, 115 S.W.2d at 1098 (battery sales).
In summary, Shipp’s testimony and report demonstrate that his
calculations of AHC’s lost profits are damages for the loss of net income to AHC.
See Miga v. Jensen, 96 S.W.3d 207, 213 (Tex. 2002). His calculations
appropriately reduce AHC’s lost profits by the but-for expenses AHC would have
incurred to attain those profits. See generally Capital Metro. Transp. Auth., 114
S.W.3d at 581–82 & n.7 (considering both income projections and specific
expenses when evaluating proof of lost profits). And Shipp’s lost-profits
computations––as reflected in Exhibit F of his report, which pulls forward figures
calculated in detail on other Exhibits attached to his report––constitute one
complete lost-profits calculation. See Holt Atherton Indus., Inc., 835 S.W.2d at
85 (stating that “[r]ecovery of lost profits must be predicated on one complete
calculation”). And finally, Shipp’s fact-intensive lost-profit analysis shows AHC’s
lost profits for the years of 2005 through 2010 with reasonable certainty. See,
e.g., Helena Chem. Co., 47 S.W.3d at 504.
Viewing all of the lost-profits evidence in the light most favorable to the trial
court’s judgment and disregarding the contrary evidence that a reasonable
factfinder could, we hold that the trial court’s yearly lost-profit awards are
supported by more than a scintilla of evidence. See Rocor Int’l, 77 S.W.3d at
83
262; Cont’l Coffee Prods. Co., 937 S.W.2d at 450; Leitch, 935 S.W.2d at 118.
Considering and weighing all of the evidence in the record pertinent to the lost-
profits award, the credible evidence supporting the finding is not so weak, nor is
the contrary evidence so overwhelming, that the finding should be set aside and
a new trial ordered. See Pool, 715 S.W.2d at 635; Cain, 709 S.W.2d at 176.
Accordingly, we overrule Wise Electric’s third issue challenging the legal and
factual sufficiency of the evidence to support findings of fact 42 through 52 and to
the legal correctness of conclusions of law 8 and 11.38
V. COLLATERAL ESTOPPEL
Wise Electric’s sixth issue argues that AHC is collaterally estopped from
recovering lost profits because AHC already recovered them—specifically the
$332,921.80 business-interruption loss awarded in AHC’s suit against Travelers.
The trial court found in conclusions of law 12 and 13 that the evidence was
insufficient to support applying collateral estoppel. Whether collateral estoppel
bars AHC’s recovery is a question of law that we review de novo.39 See
38
Because we have held that the evidence is legally and factually sufficient
to support the trial court’s inventory and lost-profits damages, we need not
address Wise Electric’s fourth issue, arguing that the evidence is insufficient to
support damages exceeding $2.6 million. See Tex. R. App. P. 47.1 (requiring
appellate court to address issues necessary for final disposition of appeal).
39
Because whether or not collateral estoppel applies is a question of law,
we disagree with Wise Electric’s assertion that AHC judicially admitted––in a
motion for partial summary judgment––that collateral estoppel applied to lost-
profit damages; even if AHC’s motion could be so construed, judicial admissions
are statements of fact rather than law. See, e.g., H2O Solutions, Ltd. v. PM
Realty Grp., LP, 438 S.W.3d 606, 617 (Tex. App.—Houston [1st Dist.] 2014, pet.
84
Quanaim v. Frasco Rest. & Catering, 17 S.W.3d 30, 44–45 (Tex. App.—Houston
[14th Dist.] 2000, pet. denied).
Collateral estoppel is an affirmative defense, giving defendants the burden
of pleading and proving it. See Sysco Food Servs. v. Trapnell, 890 S.W.2d 796,
802 (Tex. 1994). To carry that burden, a party must establish that (1) the facts
sought to be litigated in the second action were fully and fairly litigated in the first
action, (2) those facts were essential to the judgment in the first action, and (3)
the parties were cast as adversaries in the first action. See Allen v. McCurry,
449 U.S. 90, 94–95, 101 S. Ct. 411, 414–45 (1980); Sysco Food Servs., 890
S.W.2d at 801; Am. Hat Co., 2010 WL 4028098, at *7. “Full and fair litigation”
means actual litigation in the previous suit of the same fact issues. See Puga v.
Donna Fruit Co., 634 S.W.2d 677, 680 (Tex. 1982).
The record shows that Douthitt’s appraisal award was calculated pursuant
to the provisions in AHC’s commercial property and casualty insurance policy.
Shipp explained that the appraisal award did not reflect AHC’s actual lost profits,
even for the period it covered. Because the fact issue of AHC’s lost profits
caused by the fire (as opposed to the amount of the business-interruption loss
denied); see also Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562,
568 (Tex. 2001) (defining judicial admissions as factual statements). Moreover,
Wise Electric did not object to AHC’s evidence of greater lost-profits evidence,
waiving any judicial-admission argument. See, e.g., Marshall v. Vise, 767
S.W.2d 699, 700 (Tex. 1989) (“[A] party relying upon an opponent’s pleadings as
judicial admissions of fact must protect the record by objecting to the introduction
of controverting evidence and to the submission of any issue bearing on the facts
admitted.”).
85
covered under the terms of AHC’s commercial property and casualty policy with
Travelers) was not fully litigated in AHC’s prior lawsuit against Travelers,
collateral estoppel does not apply to this element of damages. See Allen, 449
U.S. at 94–95, 101 S. Ct. at 414–45; Sysco Food Servs., 890 S.W.2d at 801;
Puga, 634 S.W.2d at 680. We overrule Wise Electric’s sixth issue.
VI. OFFSET
AHC perfected its own appeal and raises a single issue. AHC asserts that
the judgment erroneously awards Wise Electric an offset of $2,578,067.00. AHC
argues that Wise Electric did not plead offset and did not put on evidence
establishing its right to an offset.40
A. Facts and Law Relating to Offset
After AHC sued Wise Electric, Travelers intervened and asserted a
subrogation claim against Wise Electric for $2,578,067.00. Subsequently,
Travelers and Wise Electric entered a mediated settlement agreement whereby
Wise Electric paid $1,900,000.00 to settle Travelers’s claims in intervention, and
Travelers assigned its “entire priority claim interest” in the amount of
$2,578,067.00 from any recovery by AHC in the present suit. Immediately prior
to resting its case, Wise Electric offered the one-page mediated settlement
agreement into evidence and read it in toto to the trial court.
40
AHC challenges finding of fact 61 and conclusions of law 14 and 15 to
the extent they may also be construed as findings of fact.
86
B. The Law Concerning Pleading Offset
Courts are to construe pleadings so as to do substantial justice. Tex. R.
Civ. P. 45. The purpose of pleadings is to give adversaries notice of each party’s
claims and defenses, as well as notice of the relief sought. Perez v. Briercroft
Serv. Corp., 809 S.W.2d 216, 218 (Tex. 1991). Generally, courts will construe
pleadings as favorably as possible to the pleader. Gulf, Colo. & S.F. Ry. v. Bliss,
368 S.W.2d 594, 599 (Tex. 1963); Henderson v. Henderson, 694 S.W.2d 31, 36
(Tex. App.—Corpus Christi 1985, writ ref’d n.r.e.). If pleadings fairly notify the
other party of the basis of the pleader’s claims, they are sufficient. Tex. R. Civ.
P. 45, 47; Schoellkopf v. Pledger, 778 S.W.2d 897, 899 (Tex. App.—Dallas 1989,
writ denied). “The right of offset is an affirmative defense. The burden of
pleading offset and of proving facts necessary to support it are on the party
making the assertion.” Brown v. Am. Transfer & Storage Co., 601 S.W.2d 931,
936 (Tex.), cert. denied, 449 U.S. 1015 (1980).
C. Wise Electric’s Pleadings Are Sufficient to Support Offset
In the list of affirmative defenses asserted in its Third Amended Original
Answer, Wise Electric pleaded:
Defendant affirmatively asserts its rights pursuant to Chapters
32 and 33 of the Texas Civil Practice and Remedies Code with
regard to contribution and/or a settlement credit election in the event
either the Plaintiff or the Plaintiff/Intervenor settles with any individual
or entity for damages arising out of the incident made the basis of
this suit.
87
At least one court has held that this type of pleading, liberally construed,
constitutes a claim for an offset. See Hartnett v. Hampton Inns, Inc., 870 S.W.2d
162, 167 n.6 (Tex. App.––San Antonio 1993, writ denied) (liberally construing
pleading for settlement credit that cited civil practice and remedies code section
33.014 as pleading affirmative defense of offset). Because we are to liberally
construe pleadings to do substantial justice and because the record establishes
that AHC was on notice of Wise Electric’s claim for a discount on the judgment
based on its mediated settlement agreement with Travelers, we hold that Wise
Electric sufficiently pleaded offset.41 See Tex. R. Civ. P. 45; Perez, 809 S.W.2d
at 218; Bliss, 368 S.W.2d at 599; Hartnett, 870 S.W.2d at 167 n.6.
D. Factually Insufficient Evidence Exists Concerning Amount of Offset
The evidence relating to the amount of offset comes from the one-page
memorialization of the confidential mediated settlement between Wise Electric
and Travelers,42 limited testimony by Maddox, and one statement by Shipp. The
settlement agreement simply states that Travelers paid AHC $2,578,067.00. It
does not contain attachments, explanations, or breakdowns of Travelers’s
payments. Maddox testified that Travelers had paid “nearly $2.7 million” total on
AHC’s claim under its policy. It is clear that Travelers paid AHC the policy’s $2-
41
Because offset was sufficiently pleaded, we need not address the issue
of whether offset was tried by consent.
42
Travelers’s plea in intervention is in the record, but it provides no details
or attachments showing how the alleged $2,578,067.00 number was reached.
88
million-dollar limit for AHC’s “business personal property” damages, but AHC’s
business-personal-property damages included equipment and items other than
inventory. And the total monies paid by Travelers included cleaning expenses,
building loss, business-personal-property damages, and business-interruption
damages. Payments were also made for fence repair, trailer rentals, and air-
conditioning work. Wise Electric asked Shipp if he knew that AHC had received
$2.7 million from its insurer, and Shipp responded, “[T]he exact number, I didn’t
know, but it was over $2 million.” The number $2,578,067.00 was not mentioned
at trial except when Wise Electric read the settlement agreement as it moved to
admit it.
We recognize that an insurance policy may provide contractual, first-
priority, dollar-for-dollar subrogation rights. See, e.g., Fortis Benefits v. Cantu,
234 S.W.3d 642, 648 (Tex. 2007) (holding subrogation clause that granted
insurer a right of recovery against “any and all” third-party settlements authorized
insurer to recoup first-priority, dollar-for-dollar recovery from plaintiff’s
settlement); Hartnett, 870 S.W.2d at 167 (construing similar policy language
similarly); see also Gotham Ins. Co. v. Warren E & P, Inc., 455 S.W.3d 558, 563–
64 (Tex. 2014) (limiting intervenor insurer’s recovery from third party sued by
insured to contractual provisions of insurance policy). But here, only a few pages
of AHC’s commercial property and casualty policy with Travelers were offered
into evidence, and those pages do not include whatever contractual subrogation
provisions may exist in the policy. So we are not able to discern the terms of the
89
subrogation rights that Travelers assigned to Wise Electric by virtue of the
mediated settlement agreement or to determine the propriety of the amount of
the offset awarded under the controlling terms of AHC’s policy.
Under these circumstances, viewing the evidence in the light most
favorable to the trial court’s findings, Wise Electric established its entitlement to
some amount of offset. But given that the evidence does not show how the
intervenor or Wise Electric arrived at the $2,578,067.00 number; its relation to
the alleged $2.7 million briefly referenced at trial; the fact that this number
included payments under the policy for damages other than those at issue in the
trial—the only personal-property damages sought at trial were for inventory; and
the fact that AHC’s insurance policy was not introduced into evidence,
considering and weighing all of the evidence concerning the amount of the offset
Wise Electric is entitled to, we hold that the evidence concerning the proper
amount of an offset is so weak that the trial court’s finding of an offset amount of
$2,578,067.00 must be set aside and a new trial ordered on Wise Electric’s offset
counterclaim. See Pool, 715 S.W.2d at 635; Cain, 709 S.W.2d at 176; see also
Edlund v. Bounds, 842 S.W.2d 719, 732 (Tex. App.––Dallas 1992, writ denied)
(affirming judgment for plaintiff but reversing and remanding defendant’s
counterclaim for conversion). Because the evidence is factually insufficient to
support an offset in the amount of $2,578,067.00, we sustain AHC’s sole issue in
its appeal.
90
VII. CONCLUSION
Having overruled Wise Electric’s seven issues, we affirm the trial court’s
judgment as to liability, personal property damages, and lost-profits damages.
Having sustained AHC’s sole issue in its appeal, we reverse the trial
court’s $2,578,067.00 awarded to Wise Electric on its counterclaim for offset, we
sever the counterclaim, and we remand it to the trial court for further
proceedings.43
/s/ Sue Walker
SUE WALKER
JUSTICE
PANEL: GARDNER and WALKER, JJ.44
DELIVERED: September 17, 2015
43
See, e.g., 7979 Airport Garage, L.L.C. v. Dollar Rent A Car Sys., Inc.,
245 S.W.3d 488, 493 (Tex. App.—Houston [14th Dist.] 2007, pets. denied) (op.
on reh’g) (affirming judgment on jury verdict as to liability and damages but
reversing, severing from judgment, and remanding claim for attorney’s fees);
Rogers v. Gen. Motors Acceptance Corp., 567 S.W.2d 576, 577 (Tex. Civ.
App.—Beaumont 1978, no writ) (“We sever Rogers and Ward’s counterclaim,
and reverse this portion of the judgment for further proceedings.”).
44
Justice McCoy was a member of the original panel but has retired.
91
APPENDIX A
92
2
3
4
5
6
7
8
9
APPENDIX B
10
11