Rosalind Ng and Intervenor Joshua Wohlstein v. Katy-Washington, L.C. and Avi Ron ( 2018 )

Opinion issued July 31, 2018
In The
Court of Appeals
For The
First District of Texas
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NO. 01-17-00687-CV
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ROSALIND NG AND JOSHUA WOHLSTEIN, Appellants
V.
KATY-WASHINGTON, L.C. AND AVI RON, Appellees
On Appeal from the 151st District Court
Harris County, Texas
Trial Court Case No. 2015-27561
MEMORANDUM OPINION
This appeal concerns the terms of a settlement agreement. The underlying
dispute arises from the sale of real property.
Avi Ron and Rosalind Ng formed Katy-Washington, L.C. (the Company) to
purchase investment property with funds provided by Joshua Wohlstein, who was
Ng’s husband and Ron’s business partner. Wohlstein provided the funds, and the
Company purchased the property. Ron and Ng each owned 50% of the Company.
Years later, the Company sold the property for a profit. Ng, Wohlstein, and Ron
disputed how to allocate the proceeds from the sale. Litigation ensued, and the case
proceeded to trial.
Shortly after trial began, the parties announced that they had settled the case,
and they read the terms of their agreement into the record. But, when the parties
attempted to memorialize their agreement in writing, they disagreed on whether the
agreement released Wohlstein’s claim against the Company for reimbursement for
the Company’s 2016 franchise taxes, which Wohlstein had paid out of pocket.
Ron filed a motion to enforce the parties’ agreement, which, according to
Ron, included Wohlstein’s agreement to release his tax-reimbursement claim. The
trial court granted the motion, construing the parties’ agreement as releasing the
claim. The trial court later entered final judgment, which again found that
Wohlstein had released his claim and appointed Ron as the Company’s liquidator.
In three issues, Ng and Wohlstein contend that (1) the trial court erred in
granting Ron’s motion to enforce the Rule 11 agreement without requiring Ron to
plead and prove a breach-of-contract claim, (2) the trial court erred in construing
the Rule 11 agreement as releasing Wohlstein’s claim for reimbursement for
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payment of the Company’s 2016 franchise taxes, and (3) the trial court abused its
discretion in appointing Ron to serve as the Company’s liquidator. We affirm.
Background
Ron and Ng form the Company
Ron and Wohlstein are former business partners. For twenty-some-odd
years, Ron and Wohlstein purchased and resold real estate through a series of
single purpose entities. In January 1998, Wohlstein’s wife, Rosalind Ng, acting
with Ron, formed the Company to purchase investment property with funds
provided by an entity owned by Wohlstein, Vileria, Ltd.
Ron and Ng were the Company’s only two members, and each owned a 50%
interest. Ron was the sole manager and took care of the Company’s day-to-day
operations. As manager, Ron had the right to “act as liquidator” during the
Company’s winding up. Ng oversaw the Company’s financial matters and bank
account.
The Company purchases property with funds provided by Vileria
After the Company’s formation, Wohlstein, through Vileria, provided the
Company with two tranches of funds, totaling $484,000. The first tranche was for
$180,000, which the Company used to purchase property in west Houston. The
second tranche was for $304,000, which the Company used, along with the
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proceeds from the sale of the west Houston property, to purchase property in
northeast Houston.
The Company sells the property and escrows the disputed funds
The Company held the northeast property for roughly sixteen years. Then, in
March 2015, Ron, acting in his capacity as manager, entered into an agreement on
the Company’s behalf to sell the property to a third-party buyer. The terms of the
sale included a roughly $7.6 million purchase price and a 4% broker’s commission
split equally between the two brokers. An employee of Ron’s real estate firm,
Justin Patchen, served as the Company’s broker in the transaction.
But before the transaction closed, a dispute arose between Ron, Ng, and
Wohlstein concerning whether Ng had consented to the terms of the sale and how
the parties would distribute the net proceeds. Ng and Wohlstein alleged that Ng
never agreed to the 4% broker’s commission and that Wohlstein was owed a “fair
return” on the $484,000 provided by Vileria to purchase the property in 1998. As a
result of the dispute, the parties entered into an escrow agreement, which allowed
the Company to close the sale and deposit the proceeds into escrow pending
resolution of their dispute.
Litigation ensues
The parties did not resolve their dispute, and litigation ensued. In May 2015,
Ron and the Company sued Ng. As amended, the petition requested that the trial
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court declare how to distribute the escrowed funds and order the winding up of the
Company. Ng filed an answer and a counterclaim. In her counterclaim, Ng sought
an accounting and asserted claims for money had and received, breach of contract,
and breach of fiduciary duty, among others. Wohlstein intervened, seeking a fair
return on the funds provided by Vileria.
The litigation’s focus was on the proper distribution of the escrowed funds.
Ron argued that Vileria should be repaid its $484,000 without interest, his
employee Patchen should receive his full commission, and Ron and Ng should split
the remainder. Ng and Wohlstein argued that there should be a “fair” distribution
of the proceeds in light of all the circumstances, including Wohlstein’s
disproportionate contribution of funds through Vileria and Ron’s alleged failure to
reimburse Ng for various company expenses. Ng and Wohlstein further argued, in
the alternative, that the funds provided by Vileria should be characterized as a loan
entitling Vileria to statutory interest.
Wohlstein pays the Company’s annual franchise taxes
In April 2016, while suit was pending, Wohlstein emailed Patchen, who had
been acting as Ron’s agent, to coordinate payment of the Company’s annual
franchise taxes. In the email, Wohlstein stated that the Company needed to pay
$33,000 by April 15. Wohlstein further stated he was “laying out the entire
amount” on behalf of the Company and was “making a cash call for half the
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amount,” $16,500. He asked that Ron make a check payable to the Company for
that amount and mail it to Ng. Wohlstein stated that he would forward Patchen and
Ron the “tax extension papers” as soon as he received them from his accountant.
The next day, Patchen responded that he needed a “better understanding
regarding the $33,000 for taxes.” He asked Wohlstein to provide him with “back
up for what exactly the $33,000 is being paid, and a copy of the check [he] sent.”
Patchen further asked Wohlstein to “clarify to which taxing authority” he was
paying the $33,000. Patchen continued:
As this is a LP, any taxes owed would flow thru the K1’s which then
become the responsibility of the partners . . . . Once I have more
detailed information, we will be happy to pay our half of the amount
owed.
In late April, Wohlstein paid $33,000 out of pocket for the Company’s
franchise taxes. Roughly five months later, the Texas comptroller refunded
$12,522.39 to the Company. The refund was deposited into the Company’s bank
account. But Ron never reimbursed Wohlstein for his share of the $33,000 advance
or paid him the $12,522.39 refund, and Wohlstein amended his Rule 194
disclosures to state that his damages should be based on both his contribution of
$484,000 in 1998 to purchase the property and his contribution of $33,000 in 2016
to pay the Company’s franchise taxes.
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The parties enter into a Rule 11 agreement to settle the case
Ng and Wohlstein eventually lost their “fairness” claims on summary
judgment, and the case proceeded to trial. During a break in jury selection, the
parties reached a settlement. Under the agreement, Patchen would reduce his
commission by one-half, Ron would bear sole responsibility for paying Patchen’s
reduced commission, Wohlstein would not receive any return on his $484,000
investment, and the parties would release their claims against each other and
dissolve the Company with the winding-up expenses split evenly. The settlement
was read into the record by the parties’ attorneys:
Ron’s attorney: The parties to the settlement agreement are: Katy
Washington L.C., Avi Ron, Joshua Wohlstein, Rosalind Ng, Vileria
Ltd. and Justin Patchen. The payment terms are $484,000 returned to
Vileria Ltd. by sending it to John McFarland’s Trust Account.
Ng and Wohlstein’s attorney: The funds are going to be paid to Joshua
Wohlstein and/or Rosalind Ng by payment into the trust account for
Joyce and McFarland L.L.P. In full satisfaction of whatever moneys
are owed to Vileria and with an indemnity, I will be flowing back
from either Ms. Ng, or both Ms. Ng and Mr. Wohlstein for any
potential third-party liability to Vileria that may flow from that
payment.
Ron’s attorney: Yes. Also, let’s see. Avi Ron on the one hand, and
then Rosalind Ng and Joshua Wohlstein on the other, will be splitting
50/50 of the remaining assets in escrow—the remaining assets of the
company, including the escrow, except that Avi Ron—50/50, I think I
said that. 50/50 is the split, except that Avi Ron will have his recovery
reduced by $80,000 which shall be paid to Justin Patchen. The parties
will bear the cost to [wind] up Katy-Washington L.C., 50/50. That is
Ng and Wohlstein on the one hand and Avi Ron on the other, and the
split, again, on wind up is 50/50. Let’s see. Justin Patchen’s judgment
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against Katy-Washington L.C., will be satisfied and released. And the
parties to this settlement will enter mutual releases among and
applicable to all the parties releasing all of the other parties—
Ron’s attorney: —related to the claims in this suit.
Ron’s attorney: Parties agree to dissolve Katy-Washington L.C., and
file tax returns in a prompt manner.
Patchen’s attorney: And there is one additional condition that the
parties agree and stipulate that: There is no breach of fiduciary
relationship or fraud by any party to this action.
Ron’s attorney: I believe the way we phrased it was: There has been
no finding of any breach of fiduciary duty or fraud in this case.
Patchen’s attorney: That’s fine.
Ng and Wohlstein’s attorney: Correct. And all of these claims are
disputed claims that have been solved.
Patchen’s attorney: And each party is going to pay, I believe, is going
to pay their own attorney’s fees.
Ron’s attorney: Costs and attorney’s fees will be paid by the party.
* * *
Trial court: Okay. So, we have a valid Rule 11 agreement dictated in
open Court.
After the parties’ read their Rule 11 agreement into the record, they agreed
to release the jury.
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The parties dispute whether the settlement agreement released Wohlstein’s claim
for reimbursement for the Company’s taxes
To memorialize and effectuate the parties’ Rule 11 agreement, Ron drafted a
written agreement, entitled “Confidential Settlement and Release Agreement.” The
draft agreement included the following two sections, which addressed the
distribution of the escrowed funds and the winding up of the Company:
3. Distribution of Assets.
The Parties shall submit an agreed order so that the escrowed
funds . . . shall as soon as is practical be distributed as follows:
• $484,000 will be distributed to the IOLTA account of Joyce +
McFarland LLP for the benefit of Vileria;
• $80,000 will be distributed to Patchen;
• $80,000 will be distributed to the Wohlstein Parties;
• One half of the remaining Funds will be distributed to the
Wohlstein Parties; and
• One half of the remaining Funds will be distributed in equal parts
to Avi Ron (or his designee) and [Ron’s wife] (or her designee).
The distributions set forth in this Section 3 and Section 4, below, are
the only amounts owed by Katy-Washington to any Party.
4. Winding Up
Pursuant to sections 11.051(2) and 101.552(a)(1) of the Texas
Business Organizations Code, the Member Parties agree to voluntarily
terminate Katy-Washington’s existence once the distributions required
by Section 3 hereof are completed. In the event the parties are unable
to agree to the conduct of the winding-up of Katy-Washington,
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pursuant to section 11.054 of the Texas Business Organizations Code,
the parties expressly consent to allow a District Court of Harris
County, Texas to supervise the winding-up and to appoint a person to
carry-out the winding up. The Parties agree to equally bear the
reasonably and necessary costs of the wind-up to the extent that they
exceed the cash available from the Company after the distributions set
forth in Section 3 above.
Following the wind-up of Katy-Washington, L.C., any remaining net
assets of Katy-Washington, including without limitation, all cash,
receivables, property, tax credits, or assets of any form shall be
distributed one half (50%) to the Wohlstein Parties and one half in
equal parts (25% and 25%) to Avi Ron (or his designee) and Suzanne
Ron (or her designee).
Ng and Wohlstein objected to the wording, noting that Wohlstein had
“loaned the company funds to pay company expenses”—i.e., the $33,000 for the
Company’s 2016 franchise taxes. They contended that this loan was “not included
in Ng’s capital account” and needed to be “carved out” of the escrowed funds. Ron
disagreed. In an email reply, he stated: “There was no carve out of these ‘loans’
from [Wohlstein] to [the Company]. We specifically discussed that and it almost
blew the deal . . . . We specifically stated that this was going to be a release and
recited it on the record.”
The parties reached an impasse, prompting Ron and the Company to file a
motion to enforce the Rule 11 agreement. The motion requested that the trial court
(1) compel Ng and Wohlstein to execute a release of any claims related to the suit,
including Wohlstein’s claim for reimbursement for payment of the Company’s
franchise taxes as part of the Company’s winding up, and (2) declare that the Rule
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11 agreement released any claim asserted by Wohlstein that might be satisfied by
the escrowed funds or through the Company’s winding up.
Ng and Wohlstein filed a response to Ron’s motion to enforce, arguing that
the Company’s obligation to repay Wohlstein for the $33,000 loan remained a
liability to be addressed during the winding up process. According to Ng and
Wohlstein, the parties had always contemplated a winding up process whereby
they would settle any remaining liabilities of the Company before splitting the
assets, and nothing in the parties’ Rule 11 agreement impugned Wohlstein’s right
to be repaid on a loan for a legitimate company expense paid after the lawsuit was
filed but before the settlement. Ng and Wohlstein noted that, “if the funds had
come from an unrelated party—e.g., a financial institution—no one would argue
that the company should not have to repay the loan.” Ng and Wohlstein requested
that the trial court deny the motion to enforce, order the disbursement of the
escrowed funds not in dispute, and appoint a third-party receiver to preside over
the Company’s winding up.
The trial court granted Ron and the Company’s motion to enforce:
“Plaintiffs’ Motion to Enforce Rule 11 Agreement is granted. Defendants Rosalind
Ng and Joshua Wohlstein released all claims against Plaintiffs to be paid out of the
escrowed funds or upon the winding-up of Katy-Washington. This includes any
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claims that Wohlstein paid franchise taxes for or on behalf of Katy-Washington.
Ng and Wohlstein shall execute a formal release of these claims.”
Ng and Wohlstein filed a motion to reconsider. In the motion, Ng and
Wohlstein argued, for the first time, that the motion to enforce was not the proper
procedure for resolving the parties’ dispute and that Ron and the Company were
required instead to plead and prove a breach-of-contract claim.
The trial court denied Ng and Wohlstein’s motion to reconsider and, after
additional briefing from both sides, entered final judgment, which enforced the
Rule 11 agreement. The trial court expressly found that Wohlstein’s claim for the
$33,000 loan had been released and appointed Ron to serve as the Company’s
liquidator:
Katy-Washington shall be dissolved and wound-up in accordance with
its Regulations, including the provision thereof designating its
manager, Avi Ron, as liquidator. Ron and Ng shall each bear half the
costs of the winding-up of Katy-Washington. These costs shall not
include the $33,000 claim referenced Ng and Wohlstein’s May 25,
2017 Response to Motion to Enforce Rule 11 Agreement because that
claim was settled and released in the parties’ Rule 11 Agreement.
Katy-Washington shall file all required tax returns in a timely manner.
Ng and Wohlstein appeal.
Propriety of Motion to Enforce
In their first issue, Ng and Wohlstein argue that the trial court erred in
granting Ron’s motion to enforce the Rule 11 agreement because the motion was
not the proper procedural vehicle for resolving the parties’ dispute over whether
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the Rule 11 agreement released Wohlstein’s claim for reimbursement for the
Company’s 2016 franchise taxes. Instead, Ng and Wohlstein argue, Ron was
required to amend his petition to assert a breach-of-contract claim, and the trial
court was required to permit the parties to conduct discovery before resolving the
claim through summary judgment or a conventional trial.
Ng and Wohlstein did not raise this issue in their response to Ron’s motion
to enforce the Rule 11 agreement. Instead, they waited until the trial court granted
Ron’s motion to enforce and then raised the issue in their motion to reconsider. By
failing to raise the issue in their response to Ron’s motion to enforce, Ng and
Wohlstein waived error. See Guevara v. WCA Waste Corp., No. 01-15-01075-CV,
2017 WL 1483320, at *6 (Tex. App.—Houston [1st Dist.] Apr. 25, 2017, pet.
dism’d) (mem. op.). We overrule Ng and Wohlstein’s first issue.
Construction of Rule 11 Agreement
In their second issue, Ng and Wohlstein contend that the trial court erred in
construing the Rule 11 agreement as releasing Wohlstein’s claim for
reimbursement for payment of the Company’s 2016 franchise taxes.
A. Standard of review
The interpretation of an unambiguous contract is a question of law we
review de novo using well-settled contract-construction principles.1 URI, Inc. v.
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Neither party contends that the Rule 11 agreement is ambiguous.
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Kleberg Cty., 543 S.W.3d 755, 763 (Tex. 2018). When a contract’s meaning is
disputed, our primary objective is to ascertain and give effect to the parties’
expressed intent. Id. Objective manifestations of intent control, not what the parties
allege they intended to say but did not. Id. at 763–64.
B. Analysis
Ng and Wohlstein contend that the trial court’s construction of the Rule 11
agreement was erroneous because it (1) conflicts with the plain meaning of the
parties’ agreement and (2) results in a forfeiture of Wohlstein’s claim against the
Company, which is disfavored under Texas law. We consider each reason in turn.
First, Ng and Wohlstein contend that the trial court’s construction of the
Rule 11 agreement conflicts with the agreement’s plain meaning. The parties’ Rule
11 agreement, as read into the record, contemplated four steps: First, Vileria would
be paid $484,000 from the escrowed funds. Second, Ron, on the one hand, and Ng
and Wohlstein, on the other, would each receive 50% of the remaining escrowed
funds, except that Ron’s recovery would be reduced by $80,000 to pay Patchen’s
commission. Third, the parties would wind up the Company, splitting any
outstanding debts or expenses. Finally, the parties would execute mutual releases
“related to the claims in this suit.” Thus, Ng and Wohlstein argue, the parties
agreed to wind-up the Company—and, as part of the wind-up, to discharge the
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Company’s obligation to repay Wohlstein—before executing mutual releases. We
disagree.
Ng and Wohlstein’s proposed construction defeats the purpose of the
parties’ agreement, which was to settle the parties’ claims. During the litigation,
Wohlstein sought a disproportionate share of the proceeds because he had provided
the funds to purchase the property and the funds to pay the Company’s 2016
franchise taxes. Ng sought a disproportionate share of the proceeds because she
had allegedly paid expenses like the Company’s taxes without reimbursement from
Ron. And they both sought interest allegedly due under the “loan contract” with
Vileria. Under Ng and Wohlstein’s proposed construction of the Rule 11
agreement, after the parties paid Vileria and divided the remaining escrowed funds,
Ng and Wohlstein could simply re-assert their claims during the winding up of the
Company, characterizing their claims as debts owed to them by the Company per
their payment of Company expenses. If the Rule 11 agreement permitted the
parties to recover on their claims against the Company during the winding-up
process, then the agreement would not have actually settled the parties’ claims
against each other. Under these circumstances, and looking at the entirety of the
Rule 11 agreement, the trial court did not err in concluding that the release of
claims by Ng and Wohlstein released all their claims to reimbursements and that
the winding-up process was for expenses paid to third parties.
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Next, Ng and Wohlstein contend that the trial court’s construction of the
Rule 11 agreement was erroneous because it results in a forfeiture of Wohlstein’s
claim against the Company. Again, we disagree.
“Forfeitures are not favored in Texas, and contracts are construed to avoid
them.” Fischer v. CTMI, L.L.C., 479 S.W.3d 231, 239 (Tex. 2016) (quoting
Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768, 774 (Tex. 2009)).
But the Rule 11 agreement did not result in a forfeiture. “Forfeiture” is variously
defined as “the divestiture of property without compensation,” “the loss of a right,
privilege, or property because of a crime, breach of obligation, or neglect of duty,”
and “a destruction or deprivation of some estate or right because of the failure to
perform some contractual obligation or condition.” Forfeiture, BLACK’S LAW
DICTIONARY (10th ed. 2014). The Rule 11 agreement did not divest Wohlstein of
his claim without compensation. Under the Rule 11 agreement, Wohlstein released
his claim against the Company in exchange for a payment to Vileria, half of the
Company’s remaining assets, and the release of Ron’s claims against him,
including his claim for attorney’s fees. Thus, the Rule 11 agreement functioned
like any other settlement agreement: Wohlstein gave something up (his franchise
tax claim and other claims) and received something in return (payment to Vileria,
half the remaining escrowed fund, and a release of his liability for attorneys’ fees).
We overrule Ng and Wohlstein’s second issue.
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Appointment of Receiver
In the third issue raised in their brief, Ng and Wohlstein contend that the trial
court abused its discretion in appointing Ron, and not an independent, third-party
receiver, to preside over the Company’s winding up. However, at oral argument,
Ng and Wohlstein conceded that the trial court did not abuse its discretion because
the company agreement gave Ron, as manager, the right to “act as liquidator”
during the Company’s winding up. Accordingly, we overrule Ng and Wohlstein’s
third issue.
Conclusion
We affirm the trial court’s judgment.
Harvey Brown
Justice
Panel consists of Justices Higley, Brown, and Caughey.
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