in Re Richard Scheller ( 2009 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-07-00001-CV
Appellant, Texas Energy Innovation, Inc., f/k/a Power Choice, Inc.// Cross-Appellants,
Hino Electric Power Company, Inc. and Hino Electric Holding Company, L.P.
v.
Appellees, Hino Electric Power Company, Inc. and Hino Electric Holding Company, L.P.//
Cross-Appellee, Texas Energy Innovation, Inc., f/k/a Power Choice, Inc.
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 200TH JUDICIAL DISTRICT
NO. GN-04-001109, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING
MEMORANDUM OPINION
Texas Energy Innovation, Inc. (“TEI”), formerly known as Power Choice, Inc., sued
Hino Electric Power Company, Inc. (“Hino Power”) and Hino Electric Holding Company, L.P.
(“Hino Holding”) (collectively, “Hino”) for breach of contract. TEI and Hino Power entered into
a contract whereby TEI agreed to (1) assist Hino Power in obtaining regulatory approval to sell
electricity, (2) supply Hino Power with electricity to sell, and (3) refrain from supplying electricity
to any of Hino Power’s competitors. In return, Hino Power agreed to obtain its full electricity
requirements from TEI for thirty years and to pay TEI a five-percent commission on all electricity
it obtained through TEI. After Hino Power obtained regulatory approval, it began obtaining
electricity from companies other than TEI. TEI sued, and Hino moved for summary judgment on
the basis that TEI could not prove its damages. Hino also countersued, claiming that TEI had
committed fraud, malpractice, and breach of fiduciary duty. TEI moved for summary judgment on
Hino’s counterclaims, arguing that they were time-barred. The trial court granted both parties’
summary judgment motions, and both parties appealed. We will affirm.
FACTUAL AND PROCEDURAL BACKGROUND
In the late 1990s, attorney Robert Webb and his business partners founded TEI to
assist companies wanting to enter Texas’s rapidly changing electricity market. Hino Power, looking
to enter the market, enlisted the aid of Webb and TEI in 1998. In exchange for assistance with
entering the market, Hino Power contractually agreed to obtain all of its electricity through TEI for
thirty years and to pay TEI a five-percent commission on all electricity it obtained through TEI. The
contract provided that TEI would act as a broker and obtain electricity from third parties on Hino
Power’s behalf. The contract also provided, however, that if TEI was unable to supply all of the
electricity Hino Power needed, Hino Power could obtain electricity from other sources without
paying TEI a commission. The contract prohibited TEI from working with any company other than
Hino Power. Indeed, as of the time it appealed, TEI had never conducted any business other than
its relationship with Hino Power.
TEI, Webb, and Hino Power had a somewhat complicated relationship. Between
1998 and 2000, Webb provided legal services to Hino Power in conjunction with its efforts to obtain
regulatory approval. At the same time, Webb pursued the business interests of TEI, including
negotiating the aforementioned contract with Hino Power. Webb drafted the contract, which Hino
would later characterize as “one-sided, illegal, and self-serving.” It appears that Webb disclosed his
potential conflict of interest to Hino Power, but, as discussed below, Hino Power nevertheless
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eventually claimed that Webb (and TEI by proxy) acted improperly in the context of the TEI-Hino
Power relationship.
TEI’s and Webb’s initial efforts to obtain regulatory approval for Hino Power failed,
and Webb requested additional funding for further efforts. Hino Power refused, and in 2000 it hired
a new attorney. In 2002, Texas’s electricity market changed markedly when it was deregulated.
Against that backdrop and with the assistance of its new attorney, Hino Power became a licensed
retail electricity provider in 2003. Once licensed, it obtained its electricity from sources other than
TEI. Hino claims that it did so because it believed the parties’ contract expired when Webb stopped
working for Hino Power in 2000.
In 2003, Hino Power’s principals formed a second company, Hino Holding, whose
relationship to Hino Power is not completely clear. In 2004, TEI sued Hino Power for breach of the
parties’ contract. In 2006, TEI amended its petition to add Hino Holding as a defendant. TEI alleged
that it remained ready, willing, and able to perform under the contract but that Hino had breached
the contract by obtaining electricity from other sources. Hino asserted various affirmative defenses
and also countersued. Apparently holding TEI to the same standard as its attorney-principal Webb,
Hino alleged that TEI had committed fraud, breached fiduciary duties, and committed legal
malpractice in the course of the parties’ relationship. Hino also impleaded Webb as a third-party
defendant, though he is not a party to this appeal.
Discovery ensued, and TEI named an accountant as its damages expert. The
trial court eventually struck the accountant as a witness to sanction TEI for various discovery abuses.
After the court did so, Hino moved for partial summary judgment on the basis that TEI could not
establish its damages without an expert witness. Hino styled its motion as both a
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traditional summary judgment motion and a no-evidence summary judgment motion. See Tex. R.
Civ. P. 166a(c), (i).
TEI also moved for summary judgment, claiming that Hino’s counterclaims were
time-barred. TEI alleged that at the latest, Hino’s causes of action accrued when the parties’
relationship soured in 2000, so the statutes of limitations ran on them well before Hino countersued
in 2006. TEI also alleged that Hino Holding could not have had any claims against it because
Hino Holding did not even exist until roughly three years after TEI and Webb stopped working with
Hino Power.
The trial court granted both parties’ motions for summary judgment. TEI appealed,
and Hino cross-appealed.
STANDARD OF REVIEW
A “traditional” motion for summary judgment is properly granted when the movant
establishes that there are no genuine issues of material fact and that it is entitled to judgment as a
matter of law. Tex. R. Civ. P. 166a(c); Lear Siegler, Inc. v. Perez, 819 S.W.2d 470, 471
(Tex. 1991); Holmstrom v. Lee, 26 S.W.3d 526, 530 (Tex. App.—Austin 2000, no pet.). A
defendant seeking summary judgment must negate as a matter of law at least one element of each
of the plaintiff’s theories of recovery or prove as a matter of law each element of an affirmative
defense. Centeq Realty, Inc. v. Siegler, 899 S.W.2d 195, 197 (Tex. 1995).
A party seeking a “no-evidence” summary judgment, on the other hand, does not bear
the burden of establishing its right to judgment by proving a defense or claim, but instead asserts that
there is no evidence of one or more essential elements of a claim on which the opposing party will
have the burden of proof at trial. Tex. R. Civ. P. 166a(i); Holmstrom, 26 S.W.3d at 530. If the
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nonmovant fails to produce more than a scintilla of probative evidence raising a genuine issue of
material fact as to each challenged element on which he has the burden of proof, summary judgment
is proper. Id.
In reviewing a grant of summary judgment, we take as true evidence favorable to the
nonmovant, making every reasonable inference and resolving all doubts in the nonmovant’s favor.
Centeq Realty, 899 S.W.2d at 197.
DISCUSSION
Hino’s Summary Judgment Motion
The elements of a breach-of-contract claim are: (1) the existence of a valid contract;
(2) performance or tentative performance by the plaintiff; (3) breach of the contract by the defendant;
and (4) damage to the plaintiff as a result of the defendant’s breach. Stewart v. Sanmina Tex., L.P.,
156 S.W.3d 198, 214 (Tex. App.—Dallas 2005, no pet.). Hino’s summary judgment motion turned
on the fourth element. If Hino is correct that without expert testimony TEI had no evidence of its
damages, then Hino was entitled to both traditional and no-evidence summary judgment on TEI’s
breach-of-contract claim.1
The parties debate what kind of damages evidence TEI needed in the absence of
1
TEI argues that Hino could not have been entitled to no-evidence summary judgment
because Hino’s argument that TEI needed expert testimony to prove its damages was a “purely legal”
issue. In support of this argument, TEI cites Harrill v. A.J.’s Wrecker Service, Inc., 27 S.W.3d 191,
194 (Tex. App.—Dallas 2000, pet dism’d w.o.j.), in which the court stated in dicta that “purely legal
issues can never be the subject of a no-evidence motion for summary judgment.” Other courts have
disagreed with this statement. See Cone v. Fagadau Energy Corp., 68 S.W.3d 147, 156 n.4
(Tex. App.—Eastland 2002, pet. denied). We express no opinion on it because Hino’s argument was
not “purely legal”; rather, Hino argued both that TEI needed expert testimony as a matter of law and
that TEI could produce no legally sufficient damages evidence. But even if Harrill were correct and
Hino’s argument was “purely legal,” the outcome here would not change because Hino would still
be entitled to traditional summary judgment (as explained below).
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expert testimony to survive summary judgment. TEI argues that the five-percent-commission clause
in the parties’ contract was enough, as it quantified what TEI stood to gain if Hino had not breached.
In support of this position, TEI cites cases holding that a breached commission contract itself serves
as prima facie evidence of damages. See, e.g., Park v. Swartz, 222 S.W. 156, 156-57 (Tex. 1920);
Genitempo v. Chardee, Inc., 822 S.W.2d 824, 826 (Tex. App.—Houston [14th Dist.] 1992,
writ denied); McDonald v. Davis, 389 S.W.2d. 494, 497 (Tex. Civ. App.—Houston 1965, no writ).
Hino, on the other hand, argues that TEI needed evidence that it would have netted a profit under the
parties’ contract. In support of this position, Hino cites cases holding that “the correct measure of
damages is lost net profit.” Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 83 n.1 (Tex. 1992);
see also Wade v. Southwestern Bell Tel. Co., 352 S.W.2d 460, 462 (Tex. Civ. App.—Austin 1961,
no writ) (plaintiff must show loss of net profits to recover for breach of contract).
The parties suggest that their respective cases employ different evidentiary standards,
but in fact the cases simply illustrate that sometimes a commission contract can be legally sufficient
evidence of damages. See McDonald, 389 S.W.2d. at 497 (prima facie, plaintiff’s reasonable profit
would have equaled his commission). Thus, in a sense, both parties are correct: TEI must present
evidence of damages to survive summary judgment, but that evidence may include the commission
clause of the parties’ contract.
We say “include” rather than “consist of” because in this case the parties’ contract
is not sufficient by itself to establish that TEI incurred damages. Some Texas courts have found
commission contracts themselves to be prima facie evidence of damages when they related to
discrete transactions of readily quantifiable value. See, e.g., Park, 222 S.W. at 156 (commission on
sale of real property); Genitempo, 822 S.W.2d at 824 (commission on sale of vessel); McDonald,
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389 S.W.2d. at 497 (commission on sale of real property); see also Midas Fins., Inc. v. SCH-Trident,
Inc., No. 05-08-00751-CV, 2009 Tex. App. LEXIS 4812, at *1 (Tex. App.—Dallas June 25, 2009,
no pet.) (mem. op.) (commission on acquisition of loan). Here, the parties’ commission contract
concerns unspecified quantities of a fungible asset in a rapidly changing market, endures for a very
long time (thirty years), and even expressly acknowledges that TEI may not be able to meet Hino
Power’s needs. Given these variables, TEI needed to show more than just its five-percent
commission rate to establish that it was damaged.
We turn, then, to considering what sort of damages evidence TEI needed to produce
to survive summary judgment. Generally speaking, whether a plaintiff has incurred any lost profits
is determined by subtracting a plaintiff’s operating expenses from the gross profits the plaintiff
would have earned under a contract had the defendant not breached. See Springs Window Fashions
Div., Inc. v. Blind Maker, Inc., 184 S.W.3d 840, 884 (Tex. App.—Austin 2006, pet. granted, judgm’t
vacated w.r.m.) (“Lost profits are damages for the loss of net income to a business, and, broadly
speaking, reflect[] income from lost business activity less expenses that would have been attributable
to that activity.”) (citations omitted). A plaintiff’s figures do not need to be exact, but they do need
to approximate lost profits with “reasonable certainty.” Texas Instruments, Inc. v. Teletron Energy
Mgmt., Inc., 877 S.W.2d 276, 279 (Tex. 1994).
The requisite level of certainty cannot be established for “[p]rofits 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.” Id. All of these descriptions aptly
apply here; the entire purpose of the parties’ contract was to facilitate the entry of a new business
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(Hino Power) into a rapidly changing market, and that entry turned on the success of a new and
unproven enterprise (TEI). Nevertheless, for the sake of thoroughness, we will still analyze TEI’s
damages evidence.
TEI argues that the record contains evidence of its lost gross profits in the form of
Hino Power’s post-2003 ledgers, which show the amount of electricity Hino Power purchased from
parties other than TEI. TEI argues that its gross profits would have equaled a five-percent
commission on those purchases (or at least an identifiable subset of them) if Hino Power had not
breached. TEI also argues that the record contains evidence of its operating expenses in the form
of figures that Webb generated to assist TEI’s stricken expert in formulating his opinion.
We need not reach TEI’s operating-expense evidence, as it is clear from TEI’s gross-
profit evidence alone that TEI’s claims could not survive summary judgment.2 Contrary to TEI’s
assertion, Hino Power’s ledgers do not provide a measure of TEI’s lost gross profits. Even if we
assume, as TEI says we must, that TEI was ready, willing, and able to perform under the parties’
contract, TEI provided no evidence from which a fact-finder could determine with reasonable
certainty the amount of TEI’s gross profits. TEI offered no evidence to support the conclusion that
it could have brokered Hino’s power purchases at the prices or from the sources reflected in Hino
Power’s ledgers. TEI’s performance depended on the cooperation of third-party electricity
suppliers,3 and those suppliers could have chosen not to deal with TEI or to charge it prices different
from those reflected in Hino Power’s ledgers. Absent evidence that TEI would have obtained the
2
We note, however, that as Justice Patterson’s concurrence demonstrates, TEI’s operating-
expense evidence may also be insufficient as a matter of law.
3
Because TEI was not a “load serving entity,” it could not directly sell electricity to Hino
Power.
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power at the rates reflected in the ledgers, TEI has not established what its revenues would have been
and whether they would have exceeded its operating costs. Because TEI did not establish even its
gross profits, it follows that it did not establish its lost profits with reasonable certainty. Therefore,
the trial court properly granted Hino’s summary judgment motion.
TEI’s Summary Judgment Motion
The trial court granted TEI’s summary judgment motion on the basis that Hino’s
counterclaims for fraud, breach of fiduciary duty, and legal malpractice were time-barred. Assuming
that these claims are cognizable,4 we hold that summary judgment was proper.
The statute of limitations for fraud and breach of fiduciary duty is four years.
Tex. Civ. Prac. & Rem. Code Ann. § 16.004(a)(4)-(5) (West 2002). The statute of limitations for
legal malpractice is two years. Sotelo v. Stewart, 281 S.W.3d 76, 81-82 (Tex. App.—El Paso 2008,
pet. denied). Hino brought its counterclaims in 2006. Thus, Hino’s fraud and breach of fiduciary
duty claims were time-barred if they accrued before 2002, and its malpractice claim was time-barred
if it accrued before 2004. Hino argues that all of its claims accrued when TEI filed suit in 2004. TEI
argues that Hino’s claims accrued in 2000, when Hino Power terminated its dealings with TEI and
hired a new attorney.
Generally, claims accrue when “when a wrongful act causes some legal injury.” Via
Net v. TIG Ins. Co., 211 S.W.3d 310, 313 (Tex. 2006) (per curiam). The “discovery rule,” however,
dictates that the clock does not start to run on claims that are inherently difficult to perceive
until the plaintiff “discovers, or through the exercise of reasonable diligence should have
4
It is not clear how TEI, a corporation, could have breached a fiduciary duty on these facts
or committed legal malpractice, but the parties have not briefed the issue.
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discovered, the facts establishing the elements of a cause of action.” Sotelo, 281 S.W.3d at 82.
Courts have held that the discovery rule applies to fraud, breach of fiduciary duty, and legal
malpractice claims, either because (as with fraud) the wrongs are by definition covert or because (as
with breach of fiduciary duty and legal malpractice) people are entitled to rely on those who owe
them special legal duties. See S.V. v. R.V., 933 S.W.2d 1, 6 (Tex. 1996).
In essence, then, the question of when Hino’s causes of action accrued is really the
question of when Hino discovered or should have discovered TEI’s alleged wrongs. We find no
merit in Hino’s argument that it did not discover and should not have discovered TEI’s wrongs until
TEI filed suit. First of all, to the extent that Hino argues the filing of a suit was itself a legal wrong,
it is incorrect. See RRR Farms, Ltd. v. American Horse Protection Ass’n, Inc., 957 S.W.2d 121, 134
(Tex. App.—Houston [14th Dist.] 1997, pet. denied) (“Filing a complaint is not an improper or
illegal use of the process.”). If filing suit against a client were legal malpractice per se, as Hino
seems to contend, then attorneys could never sue their clients no matter how their clients wronged
them. Second, to the extent that Hino’s claims arise from the parties’ contractual dealings, the
evidence is clear that Hino Power became concerned about those dealings in 2000. Indeed, Hino
Power went so far as to terminate TEI’s and Webb’s services and get a new attorney in 2000. The
record also indicates that in 2000 or 2001 Hino Power was advised by its new attorney that TEI
might have wronged it. At the latest, then, Hino Power was alerted to a potential need to protect its
legal rights in 2000 or 2001. Its counterclaims were therefore time-barred in 2006.
To the extent that Hino Holding’s counterclaims were merely derivative of Hino
Power’s, they too were time barred. See Guillot v. Hix, 838 S.W.2d 230, 235 (Tex. 1992) (derivative
claim accrues at same time as claim it derives from). Hino argues, however, that regardless of when
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Hino Holding’s counterclaims accrued, they were saved by section 16.069 of the Texas Civil
Practice and Remedies Code. That statute provides that time-barred counterclaims may be
maintained if they (1) arise out of the same transaction or occurrence that underlies the plaintiff’s
suit and (2) are pleaded within thirty days of when the counterclaimant’s answer is due. Tex. Civ.
Prac. & Rem. Code Ann. § 16.069 (West 2008).
TEI first named Hino Holding as a defendant in the amended petition that it filed on
March 1, 2006, and Hino Holding asserted its counterclaims in the answer it filed on
March 30, 2006. Hino Holding’s counterclaims therefore met the timeliness requirement of
section 16.069.5 The remaining question is whether they also met section 16.609's same-transaction-
or-occurrence requirement.
We hold that they did not. To determine what constitutes a “transaction” under
section 16.609, “we employ the logical relationship test, which asks whether the essential facts on
which the claims are based are significantly and logically relevant to both claims.” Wells v. Dotson,
261 S.W.3d 275, 281 (Tex. App.—Tyler 2008, no pet.). Hino Holding’s counterclaims were based
on TEI’s and Webb’s actions between 1998 and 2000—specifically, (1) Webb’s efforts to induce
Hino to contract with TEI and (2) Webb’s subsequent legal representation of Hino despite his
conflicting interests. TEI’s claims, on the other hand, were based on Hino’s procurement of
electricity from third parties in 2003 and 2004. Because Hino’s and TEI’s claims turn on completely
distinct sets of facts, we conclude that Hino Holding’s counterclaims were time-barred. See Tex.
Civ. Prac. & Rem. Code § 16.609.
Finally, the Hino entities argue that TEI’s summary judgment motion was
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Section 16.069 could not have saved Hino Power’s counterclaims, on the other hand, as
Hino Power was first sued in 2004 and did not counterclaim until 2006.
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procedurally defective because TEI did not properly give Hino notice of the hearing on it. We reject
this argument. Regardless of TEI’s allegedly defective notice, Hino actually knew of TEI’s motion,
responded to the motion, and participated in the hearing on the motion without seeking a
continuance. Hino therefore suffered no prejudice from the allegedly deficient notice and cannot
complain of it on appeal. See Goode v. Avis Rent-A-Car, Inc., 832 S.W.2d 202, 204
(Tex. App.—Houston [1st Dist.] 1992, writ denied) (affirming summary judgment despite
technically deficient notice because appellant responded to motion and participated in hearing).
CONCLUSION
Because TEI’s damages evidence was insufficient as a matter of law, Hino was
entitled to summary judgment on TEI’s claims. TEI was entitled to summary judgment on Hino
Power’s counterclaims because they were time-barred, and it was entitled to summary judgment on
Hino Holding’s counterclaims because they were not saved by section 16.069 of the Texas Civil
Practice and Remedies Code. We affirm the summary judgments against all parties.
__________________________________________
David Puryear, Justice
Before Justices Patterson, Puryear and Pemberton;
Concurring Opinion by Justice Patterson
Affirmed
Filed: December 18, 2009
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