in Re Richard Scheller ( 2009 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-05-00629-CV
J.P. Morgan Chase Bank, N.A., successor by merger to Bank One, N.A.; and
Michael Bobinchuck, Appellants
v.
Texas Contract Carpet, Inc.; Gypsum Floors of Texas, Inc.; and Agape Round Rock
Housing, Inc., d/b/a Chandler Creek Apartments, Appellees
FROM THE DISTRICT COURT OF WILLIAMSON COUNTY, 277TH JUDICIAL DISTRICT
NO. 02-737-C277, HONORABLE KEN ANDERSON, JUDGE PRESIDING
OPINION
Appellants J.P. Morgan Chase Bank, N.A., successor by merger to Bank One, N.A.,
(“JP Morgan”) and Michael Bobinchuck appeal from a trial-court judgment in favor of several
parties, including appellees, Texas Contract Carpet, Inc. (“Contract Carpet”); Gypsum Floors of
Texas, Inc. (“Gypsum”); and Agape Round Rock Housing, Inc., d/b/a Chandler Creek Apartments,
(“Agape”). The dispute arises from the contractual relationships established among the parties for
the construction of a low-income apartment complex in Round Rock. The parties’ roles regarding
the project were as follows: JP Morgan was the lender; Agape was the owner; Bobinchuck was the
vice president of AMHC Construction, which was the general contractor; and Contract Carpet and
Gypsum were subcontractors. Agape and several of the subcontractors, including Contract Carpet
and Gypsum, filed suit against JP Morgan, Bobinchuck, and various other parties after JP Morgan
declined to release funds in response to Agape’s thirteenth draw request. After a bench trial, the
trial court ruled in favor of Agape and Gypsum on their claims against Bobinchuck and in favor of
the subcontractors on their claims against JP Morgan.
JP Morgan and Bobinchuck raise several issues on appeal. JP Morgan complains that
the evidence is legally and factually insufficient to support the trial court’s findings of fact and
conclusions of law that JP Morgan (1) served as an agent of Agape and, as an agent, violated a
statutory duty to withhold retainage in the construction account; (2) misapplied trust funds under the
Texas Trust Fund Act; (3) was negligent and grossly negligent in failing to withhold retainage in the
construction account; (4) violated a fiduciary duty to the subcontractors; and (5) converted the
subcontractors’ funds. Bobinchuck complains that the evidence is legally and factually insufficient
to support the trial court’s conclusions that: (1) he was a trustee and misapplied trust funds under the
Texas Trust Fund Act; and (2) his conduct was so egregious as to justify an award of exemplary
damages against him.
Because we conclude that the evidence is legally and factually insufficient to support
the trial court’s judgment on each of the issues raised on appeal, we reverse the trial court’s judgment
with respect to those issues. The remainder of the judgment, which contains several rulings that
were not challenged on appeal, remains intact.
BACKGROUND
In October 2000, JP Morgan entered into a contract with Agape enabling Agape to
access up to $16.2 million for the construction of a low-income apartment complex in Round Rock
called the Chandler Creek Apartments (“the Chandler Creek Project”). The funds became available
2
as a result of a loan agreement between Agape and Capital Area Housing Finance Corporation
(“Capital Area”), a public, nonprofit housing finance corporation authorized under the Housing
Finance Corporations Act (“the Housing Act”) to issue bonds for the purpose of loaning the proceeds
of the bonds to other entities for the development of low-income housing projects. See Tex. Loc.
Gov’t Code Ann. §§ 394.001-.907 (West 2006). Pursuant to the Housing Act, the bonds issued by
Capital Area and any income from the bonds were tax-exempt. See id. § 394.905. In the loan
agreement between Capital Area and Agape, Capital Area agreed to loan the proceeds of the sale of
certain bonds to Agape in order to finance costs of the acquisition, construction, and equipping of
the Chandler Creek Project. Capital Area assigned its rights under the loan agreement to JP Morgan,
who became trustee of the funds pursuant to a trust indenture between Capital Area and JP Morgan.1
Also, in the contract between JP Morgan and Agape (“the construction agreement”), JP Morgan
agreed to issue a letter of credit in the amount of $15.8 million in favor of the owner of the bonds,
Charter MAC Equity Issuer Trust (“the bondholder”). Thus, JP Morgan entered into the construction
agreement in two roles: (1) as trustee of the bonds, and (2) as letter-of-credit provider.
JP Morgan initially deposited $14.1 million into an account from which it would draw
funds to pay Agape for costs related to the Chandler Creek Project (“the construction account”).
Pursuant to the construction agreement, JP Morgan agreed to release the funds to Agape in
installments provided that Agape met certain specified conditions at the time of each of its draw
requests. The construction agreement specifically provided that JP Morgan could withhold or refuse
1
Such a trust indenture is authorized by the Housing Finance Corporations Act, which
further states that a trust indenture “may provide that the remedies and rights to enforcement may
be vested in a trustee, with full power of appointment, for the benefit of all the bondholders.” See
Tex. Loc. Gov’t Code Ann. § 394.054 (West 2006).
3
to fund any of Agape’s draw requests if “any mechanic’s lien or notice of intention to record or file
a mechanic’s lien [had] been filed or established, unless [Agape] [had] posted a bond or other
security acceptable to [JP Morgan] sufficient to discharge such lien in full.”
The construction agreement also included a provision regarding JP Morgan’s
responsibility to disburse “retainage” from the construction account:
In addition to the conditions hereinbefore set forth in this Section, [JP Morgan] shall
approve disbursement of the Retainage thirty-one (31) days after each of the
following events have occurred: (i) Servicer and [JP Morgan] have received evidence
of Completion; and (ii) an Affidavit of Completion that complies with the Texas
Property Code has been filed of record in the County where the Project is located;
provided, however, at the written request of [Agape] and Developer, [JP Morgan]
shall approve disbursement of Retainage for each subcontractor of Contractor thirty
(30) days following final completion of that subcontractor’s work.
The construction agreement defined “Retainage” as “[a] holdback of ten percent (10%) of the Direct
Costs of construction.”
After entering into the construction agreement with JP Morgan, Agape contracted
with AMHC Construction, Inc. (“AMHC”), a general contractor, in which AMHC became
responsible for the construction of the Chandler Creek Project. In the contract, Agape agreed to pay
AMHC $10.2 million for constructing the project. Robert Bobinchuck was the president and sole
shareholder of AMHC, and his son, Appellant Michael Bobinchuck, was vice president.2
Two months later, AMHC entered into a contract with American Multi Construction, Inc.
(“American Multi”) in which American Multi became the prime contractor for the project. Robert
2
Robert Bobinchuck passed away sometime after trial. When we refer to him in the rest of
this opinion, we use his full name. When we use only “Bobinchuck” in the rest of the opinion, we
do so in reference to Appellant Michael Bobinchuck.
4
Bobinchuck was an officer of both AMHC and American Multi and testified at trial that the purpose
of the contract between the two companies was for him to maintain better control over the cash flow
regarding the project. After contracting with AMHC, American Multi entered into contracts with
various subcontractors, including Contract Carpet and Gypsum.
Construction on the Chandler Creek Project began in early 2001 and was completed
in January or February 2002. During that time, Agape submitted twelve draw requests to JP Morgan,
each of which JP Morgan approved, resulting in the release of approximately $9.8 million from the
construction account. Each of the draw requests was submitted to multiple entities before
submission to JP Morgan, and by the time each request reached JP Morgan, it included various
representations made by AMHC and Agape. For example, AMHC stated that it “represent[ed] and
warrant[ed] that all persons or entities who [had] furnished labor or material to [AMHC] in
connection with the Work performed through the date [t]hereof [had] been paid all amounts to which
they [had] become entitled, excepting agreed retainage not yet due and payable.” Agape’s
representations included one in which it stated that it represented and warranted that “with the
exception of any Permitted Liens, there are no liens against any portion of the Project or any other
asset of [Agape].”
After releasing funds in response to Agape’s twelfth draw request, JP Morgan became
aware that several of the subcontractors had not been paid for their work and had filed affidavits
claiming liens on the property. At that point, Agape’s construction consultant advised JP Morgan
and Agape that they should not release any further funds until they received proof that the
subcontractors had been paid and had released their liens. In February 2002, AMHC submitted a
5
thirteenth draw request, this time bypassing intermediaries and submitting it directly to JP Morgan.
Thus, the draw request did not contain the usual representations from Agape. JP Morgan did not
release funds in response to the draw request, and in a letter to Agape in March 2002, JP Morgan
explained that Agape’s failure to complete the project by the completion date constituted an “event
of default” under the construction agreement. JP Morgan also stated in the letter that the remaining
funds in the construction account were insufficient to pay project costs and other costs associated
with the Chandler Creek Project. As a result, JP Morgan demanded that Agape promptly pay all of
the remaining costs of the project, including all amounts necessary to remove the subcontractors’
liens on the property.
Also in March 2002 and in response to Agape’s default, the bondholder instructed
JP Morgan to draw on the $15.8 million letter of credit to pay the bondholder the interest due at that
time. JP Morgan did so and took possession of the bonds as collateral for the amount still owed by
Agape under the loan. After consulting with a tax specialist, JP Morgan decided not to release any
further funds to Agape under the construction agreement based on the specialist’s advice that doing
so would cause the bonds to lose their tax-exempt status, jeopardizing JP Morgan’s ability to sell
them.3 In December 2003, JP Morgan sold the bonds for $12 million, accepting a $4 million loss.
Although $864,127.48 remained in the construction account in March 2004, the money was part of
the bond package sold for $12 million in December 2003. The $864,127.48 was subsequently
transferred out of the account.
3
The record does not indicate why further payments to Agape would cause the bonds to lose
their tax-exempt status.
6
Meanwhile, back in December 2002, Agape filed suit against American Multi,
AMHC, Robert Bobinchuck, Michael Bobinchuck, all of the subcontractors, and various other
parties. In its suit, Agape sought to have the trial court quiet title to the Chandler Creek Project,
alleged that the subcontractors filed defective liens, and sought a declaratory judgment that the
subcontractors’ mechanic’s and materialman’s liens were void. Agape also brought claims against
the various other parties, seeking damages for breach of contract, negligent misrepresentation, fraud,
conspiracy, breach of fiduciary duty, and misapplication of trust funds.
In April 2004, Gypsum brought a third-party action against JP Morgan, asserting
claims for breach of contract, misapplication of trust funds, breach of fiduciary duty, negligence per
se, negligence, negligent performance of contract, conversion, and misapplication of fiduciary
property. Two months later, Contract Carpet also brought a third-party action against JP Morgan,
bringing claims for breach of contract and misapplication of trust funds. Several other
subcontractors later filed suit, bringing claims similar to those of Gypsum and Contract Carpet. In
addition, Agape filed cross-claims against JP Morgan for breach of contract, misapplication of trust
funds, breach of fiduciary duties, and misapplication of fiduciary property.
The case was set for a bench trial in May 2005. Before testimony began, AMHC,
American Multi, and various other affiliated entities confessed judgment in the amount of $369,295
on the claims asserted against them by Agape. In addition, Agape non-suited its cross-claims against
JP Morgan. The trial court proceeded with trial, and after Agape rested, the trial court directed a
verdict against Agape with respect to Agape’s defective-lien claims and claims to quiet title and for
declaratory judgment against the subcontractors. After the completion of trial, the trial court
7
rendered a final judgment in favor of the subcontractors on their claims against JP Morgan for
misapplication of trust funds, breach of fiduciary duty, conversion, negligence, and gross negligence.
The trial court awarded damages and exemplary damages to the subcontractors. The trial court also
rendered judgment in favor of Gypsum on its claim against Michael Bobinchuck for misapplication
of trust funds and awarded Gypsum damages and exemplary damages. In addition, the trial court
rendered judgment in favor of Agape on its claim against Michael Bobinchuck for misapplication
of trust funds and awarded Agape damages.
Agape, JP Morgan, and Bobinchuck appealed from the trial court’s final judgment.
After filing notices of appeal, Agape, JP Morgan, and four of the subcontractors filed a joint motion
for partial dismissal of their appeal, asserting that they had resolved all disputes between and among
themselves. Agape also filed a separate motion to dismiss its appeal against another subcontractor.
We granted both motions and dismissed the specified claims. The only claims remaining on appeal
after we severed the dismissed claims are those among Appellants JP Morgan and Bobinchuck and
Appellees Contract Carpet, Gypsum, and Agape. JP Morgan’s claims on appeal challenge the
sufficiency of the evidence to support the trial court’s determinations that JP Morgan: (1) served as
an agent of Agape and, as an agent, violated a statutory duty to withhold retainage in the construction
account; (2) misapplied trust funds under the Texas Trust Fund Act; (3) was negligent and grossly
negligent in failing to withhold retainage in the construction account; (4) violated a fiduciary duty
to the subcontractors; and (5) converted the subcontractors’ funds. Bobinchuck’s claims on appeal
challenge the sufficiency of the evidence to support the trial court’s conclusions that: (1) he was a
trustee and misapplied trust funds under the Texas Trust Fund Act; and (2) his conduct was so
8
egregious as to justify an award of exemplary damages against him. We address each of the
issues below.
STANDARD OF REVIEW
Although the appellants do not so characterize their challenges, it appears from their
arguments that they challenge the sufficiency of the evidence to support several of the trial court’s
findings of fact and conclusions of law. In an appeal from a bench trial, the trial court’s findings of
fact have the same force and dignity as a jury’s verdict and are reviewable for legal and factual
sufficiency under the same standards as are applied to the review of a jury verdict. Anderson v. City
of Seven Points, 806 S.W.2d 791, 794 (Tex. 1991); Ludwig v. Encore Med., L.P., 191 S.W.3d 285,
294 (Tex. App.—Austin 2006, pet. denied).
When reviewing a finding for legal sufficiency, we must credit evidence favorable
to the judgment if a reasonable fact-finder could, disregard contrary evidence unless a reasonable
fact-finder could not, and reverse the fact-finder’s determination only if the evidence presented in
the trial court would not enable a reasonable and fair-minded fact-finder to reach the judgment under
review. City of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex. 2005). We will sustain the appellants’
legal-sufficiency challenges if the record reveals: (1) the complete absence of evidence of a vital
fact; (2) that the court is barred by rules of law or evidence from giving weight to the only evidence
offered to prove a vital fact; (3) that the evidence offered to prove a vital fact is no more than a mere
scintilla; or (4) that the evidence conclusively establishes the opposite of a vital fact. See id. at 810.
More than a scintilla of evidence exists if the evidence rises to a level that would enable reasonable
9
and fair-minded people to differ in their conclusions. Ford Motor Co. v. Ridgway, 135 S.W.3d 598,
601 (Tex. 2004).
When considering a factual-sufficiency challenge, we consider all the evidence and
set aside the judgment only if it is so contrary to the overwhelming weight of the evidence that it is
clearly wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986). Under either standard
of review, we must be mindful that the trial court as finder of fact is the sole judge of the credibility
of the witnesses and the weight to be given their testimony. McGalliard v. Kuhlmann, 722 S.W.2d
694, 696 (Tex. 1986); Raymond v. Rahme, 78 S.W.3d 552, 556 (Tex. App.—Austin 2002, no pet.).
The trial court may choose to believe one witness and disbelieve another, and we must not impose
our own opinion to the contrary. City of Keller, 168 S.W.3d at 819.
We review the trial court’s conclusions of law de novo. BMC Software Belgium,
N.V. v. Marchand, 83 S.W.3d 789, 794 (Tex. 2002). Although appellants may not challenge a
trial court’s conclusions of law for factual sufficiency, we may review the trial court’s legal
conclusions drawn from the facts to determine whether the conclusions are correct. Id.
ISSUES RAISED BY JP MORGAN
Agency Relationship
In its first issue, JP Morgan contends that the trial court erred in determining that
JP Morgan acted as Agape’s agent with regard to the statutory duty to retain ten percent of the
contract price of the project. See Tex. Prop. Code Ann. § 53.101 (West 2007) (imposing duty to
retain funds on owner of project or owner’s agent, trustee, or receiver). The specific finding of fact
challenged by JP Morgan states that “[u]nder the [construction agreement], [JP Morgan] acted as the
10
agent for [Agape] in regard to withholding retainage.” JP Morgan argues that section 53.101
imposes the duty to retain funds on Agape as the owner of the project and that there is no evidence
that Agape delegated the duty to JP Morgan as an agent or that JP Morgan accepted any
such delegation.
To be an agent, a person must (1) act for and on behalf of another person and (2) be
subject to that person’s control. Stanford v. Dairy Queen Prods., 623 S.W.2d 797, 801
(Tex. App.—Austin 1981, writ ref’d n.r.e.). Both elements are required; “the absence of one will
prevent the conclusion that an agency relationship exists.” Id.; see also Daily Int’l Sales Corp.
v. Eastman Whipstock, Inc., 662 S.W.2d 60, 64 (Tex. App.—Houston [1st Dist.] 1983, no writ)
(person is not agent unless subject to another party’s control); Restatement (Second) of Agency § 1
cmt. e (1958) (“‘Agent’ is a word used to describe a person authorized by another to act on his
account and under his control.”). The party claiming agency must prove that the principal has both
the right to assign the agent’s task and the right to control the means and details by which the agent
will accomplish the task. Lyons v. Lindsey Morden Claims Mgmt., Inc., 985 S.W.2d 86, 90 (Tex.
App.—El Paso 1998, no pet.).
Contract Carpet and Gypsum (“the subcontractors”) allege an agency relationship
specifically with regard to the statutory duty to retain a certain amount of funds in the construction
account. The requirement to withhold “retainage” for the benefit of lien claimants is set forth in the
property code as follows:
(a) During the progress of work under an original contract for which a
mechanic’s lien may be claimed and for 30 days after the work is completed,
the owner shall retain:
11
(1) 10 percent of the contract price of the work to the owner; or
(2) 10 percent of the value of the work, measured by the proportion that
the work done bears to the work to be done, using the contract price
or, if there is no contract price, using the reasonable value of the
completed work.
(b) In this section, “owner” includes the owner’s agent, trustee, or receiver.
Tex. Prop. Code Ann. § 53.101.
The subcontractors concede that Agape, as the owner of the project, would ordinarily
be responsible for retaining funds in the construction account pursuant to the statute. However, the
subcontractors argue that the construction agreement created an agency relationship between Agape
and JP Morgan with regard to the duty to retain funds and that JP Morgan accepted the duty to retain
the funds as Agape’s agent. As support for their position, the subcontractors point to two provisions
of the construction agreement that allegedly demonstrate JP Morgan’s acceptance of Agape’s
statutory duty to withhold retainage. The first provision states that “[JP Morgan] shall make all
decisions in connection with the day-to-day administration of the Construction Matters without the
requirement of any further approval of or consent to such decisions by [Related Charter LP, the
mortgage servicer appointed to service the loan].” The second provision defines “Construction
Matters” as:
All rights and obligations of the Majority Owner and Servicer under this Agreement
and the Bond Documents during the Construction Period concerning the construction
of the Project, including approval of construction draws, inspection of the Project,
holding and disbursing retainage, approving Change Orders, approval of
construction contracts and subcontracts and amendments thereto, and reallocation of
certain amounts set forth in the Development Budget.
12
(Emphasis added.) The subcontractors also point to the deposition of Dana Ogden, JP Morgan’s
construction risk administrator for the project, in which Ogden testified that she was the person at
JP Morgan responsible for verifying the amount retained in the construction account, determining
whether retained funds should be released, and authorizing their release.4 She also testified that she
was responsible for ensuring that JP Morgan complied with the laws of Texas, including laws
regarding retainage, and that she was not aware of any document authorizing JP Morgan to retain
less than ten percent of each draw request.
Considering all of the evidence pertaining to the relationship between JP Morgan and
Agape with regard to the duty to withhold retainage in the construction account, we cannot conclude
that JP Morgan acted as Agape’s agent. Although there is evidence of the first requirement of an
agency relationship, that JP Morgan agreed to act on behalf of Agape in withholding retainage, there
is no evidence of the second requirement, that JP Morgan was subject to Agape’s control in
accomplishing the task. To the contrary, considerable evidence supports a conclusion that it was JP
Morgan, not Agape, that maintained sole control of the funds in the construction account and sole
control over whether to release retainage from the account. For example, the construction agreement
states that JP Morgan could:
make any or all Advances (a) for Direct Costs incurred under the Construction
Contract directly to Contractor for deposit in an appropriately designated special
bank account, (b) through the Title Insurance Company, or (c) to any Person set forth
in a Requisition or to whom [JP Morgan] . . . in good faith determines payment is
due.
4
Ogden later contradicted her deposition testimony at trial, testifying that she was not
responsible for managing and maintaining retainage in the construction account.
13
The construction agreement goes on to state that “[t]he execution of this Agreement by [Agape]
shall, and hereby does, constitute an irrevocable authorization to [JP Morgan] . . . to make such
Advances, and no further authorization from [Agape] . . . shall be necessary.” In addition, the
construction agreement states that JP Morgan would make all decisions in connection with the daily
administration of construction matters, including the withholding of retainage. Thus, according to
the construction agreement, Agape had no control over the duty to withhold retainage.
In addition to the written agreement, testimonial evidence also shows JP Morgan’s
sole control over the construction account and the maintenance of retainage. Brian Tuerff, JP
Morgan’s senior vice president, testified in his deposition and at trial that JP Morgan, and Ogden
specifically, was responsible for calculating and releasing retainage. Further, as previously indicated,
Ogden testified in her deposition that she was the person at JP Morgan responsible for managing and
maintaining retainage in the construction account. Ogden also testified that she received the draw
requests from Agape and that she was responsible for approving or denying the requests. Laura
Wingfield, the executive director of Agape, testified that Agape never had any control over the
construction funds and that the funds were never in an Agape account. She further testified that
Agape relied on JP Morgan to properly distribute the funds, that the sole authority for distributing
money from the account rested with JP Morgan, and that it was her understanding that JP Morgan
was withholding retainage in the account. The record contains no evidence to the contrary.
Given that there is no evidence of the vital fact that JP Morgan was subject to
Agape’s control, we conclude that the evidence is legally insufficient to support the trial court’s
finding that JP Morgan served as Agape’s agent with regard to the duty to withhold retainage. See
14
City of Keller, 168 S.W.3d at 810; Stanford, 623 S.W.2d at 801. Further, because there is no
evidence of Agape’s control over JP Morgan and considerable evidence to the contrary, we also
conclude that the evidence is factually insufficient to support the trial court’s finding.5 See Cain,
709 S.W.2d at 176. Because JP Morgan was not Agape’s agent, it was under no statutory duty to
withhold retainage in the construction account. See Tex. Prop. Code Ann. § 53.101.6
Texas Construction Trust Fund Act
In its second issue, JP Morgan asserts that the trial court erred in applying the Texas
Construction Trust Fund Act (“the Act”) to JP Morgan. See Tex. Prop. Code Ann. §§ 162.001-.033
(West 2007 & Supp. 2009). The trial court first applied the Act to JP Morgan in its finding of fact
tracking the Act’s definition of “trust funds,” stating that “[t]he retainage funds held by [JP Morgan]
in the construction loan account were loan receipts of funds borrowed by [Agape] for the purpose
of constructing the Chandler Creek Apartments on the Property.” The trial court further applied the
Act to JP Morgan in another finding of fact tracking language in the Act, stating that JP Morgan
“intentionally or knowingly, directly or indirectly, retained, used, disbursed or otherwise diverted
trust funds without first paying all current or past due obligations owed to the Subcontractors.” On
5
In another argument against the existence of an agency relationship, JP Morgan asserts that
the retainage referred to in the construction agreement was different from and unrelated to the
statutory retainage required under Chapter 53 of the property code. However, because we have
already concluded that the evidence is insufficient to establish an agency relationship, we need not
address JP Morgan’s additional argument. See Tex. R. App. P. 47.1.
6
As part of this issue, JP Morgan also contends that the funds in the construction account
were the property of the bondholder, not the subcontractors. However, we do not address the
argument here because it is not necessary to do so in order to determine whether an agency
relationship existed. We do, however, address the argument later in this opinion with respect to the
subcontractors’ conversion claim against JP Morgan.
15
appeal, JP Morgan argues that (1) whether the funds were “trust funds” under the Act is irrelevant
because JP Morgan is exempt from the Act’s requirements, and (2) even if JP Morgan were not
exempt, the funds in the construction account were undisbursed bond proceeds held for the benefit
of the bondholder and thus could not be considered “trust funds” under the Act. See id. § 162.001
(West Supp. 2009).7
We first address the question of JP Morgan’s exemption from the Act, which requires
us to construe the Act’s exemption provision. See id. § 162.004(a)(1) (West Supp. 2009). Statutory
construction is a question of law that we review de novo. State v. Shumake, 199 S.W.3d 279, 284
(Tex. 2006). In resolving an issue of statutory construction, we are required, first and foremost, to
follow the plain language of the statute. Texas Health Ins. Risk Pool v. Southwest Serv. Life Ins. Co.,
272 S.W.3d 797, 801 (Tex. App.—Austin 2008, no pet.). We read every word, phrase, and
expression in a statute as if it were deliberately chosen, and we presume that words excluded from
7
Section 162.001 defines “trust funds” as follows:
(a) Construction payments are trust funds under this chapter if the payments are
made to a contractor or subcontractor or to an officer, director, or agent of a
contractor or subcontractor, under a construction contract for the
improvement of specific real property in this state.
(b) Loan receipts are trust funds under this chapter if the funds are borrowed by
a contractor, subcontractor, or owner or by an officer, director, or agent of a
contractor, subcontractor, or owner for the purpose of improving specific real
property in this state, and the loan is secured in whole or in part by a lien on
the property.
Tex. Prop. Code Ann. §162.001 (West Supp. 2009).
16
the statute are done so purposefully. Gables Realty Ltd. P’ship v. Travis Cent. Appraisal Dist.,
81 S.W.3d 869, 873 (Tex. App.—Austin 2002, pet. denied).
The exemption provision states that the Act “does not apply to a bank, savings and
loan, or other lender.” Tex. Prop. Code Ann. § 162.004(a)(1). JP Morgan is a bank and was the
entity loaning the money for the project. Thus, according to the plain language of the provision, the
Act does not apply to JP Morgan. See Republicbank Dallas, N.A. v. Interkal, Inc., 691 S.W.2d 605,
607 (Tex. 1985); Heldenfels Bros., Inc. v. First Nat’l Bank, 657 S.W.2d 883, 885
(Tex. App.—Corpus Christi 1983, writ ref’d n.r.e.); see also Exchanger Contractors Inc.
v. Comerica Bank-Tex, 330 F.3d 339, 341 (5th Cir. 2003) (holding that lender bank had priority over
subcontractor to money held by owner because bank exempted from Act).
The subcontractors assert that Interkal does not apply to this case because the Interkal
court considered a former version of section 162.004 that was later amended. The former version
of section 162.004 stated that “[t]his Act shall have no application to any bank, savings and loan
association or other lender . . . in connection with any transaction to which this Act is applicable.”
See Interkal, 691 S.W.2d at 606 n.1. In the current version of the provision, the clause “in
connection with any transaction to which this Act is applicable” has been removed, leaving language
stating only that the Act “does not apply to a bank, savings and loan, or other lender.” See Tex. Prop.
Code Ann. § 162.004(a)(1). The subcontractors argue that the removal of the clause from the statute
considerably narrows the exemption. However, they do not cite, and we have not found, any legal
authority to support such a proposition. To the contrary, a Texas Attorney General opinion issued
in 1988 cited Interkal as the correct interpretation of the provision even though Interkal addressed
17
the previous version of the provision. See Op. Tex. Att’y Gen. No. JM-945 (1988). Further, the
removal of the clause from the provision does not affect the plain language of the remaining words,
which clearly state that the Act does not apply to banks. See Tex. Prop. Code Ann. § 162.004(a)(1).
Despite the plain language of the statute, the subcontractors contend that the Act
should nevertheless apply to JP Morgan because JP Morgan acted as Agape’s agent, and not as a
bank, with regard to the issue of retainage. However, we have already determined that JP Morgan
was not Agape’s agent in this context.
The subcontractors further argue that we should not follow the plain language of the
provision because doing so would lead to an absurd result. See Texas Dep’t of Protective
& Regulatory Servs. v. Mega Child Care, Inc., 145 S.W.3d 170, 177 (Tex. 2004); Sharp v. House
of Lloyd, Inc., 815 S.W.2d 245, 249 (Tex. 1991). According to the subcontractors, a plain-language
interpretation of the provision would lead to the allegedly absurd result of allowing a bank to take
on the attributes of an owner in a construction project while also permitting the bank to avoid all the
responsibilities imposed upon an owner under the Act. We disagree. In this case, Agape freely
contracted with JP Morgan in such a way as to give JP Morgan control over the construction account.
Later, when the subcontractors took legal action on their unpaid bills, they learned that JP Morgan
is exempt from the Act’s provisions. Although the specific circumstances of this case may have led
to an undesirable result for the subcontractors, the circumstances do not create an absurd result out
of the plain-language of the statute. At most, they demonstrate a gap or oversight in the statute that,
if true, must be corrected by the legislature, not the courts. See Brown v. De La Cruz, 156 S.W.3d
560, 566 (Tex. 2004) (“It is at least theoretically possible that legislators—like judges or anyone
18
else—may make a mistake. That does not give us the power to legislate to fill any hiatus [the
legislature] has left.”).
Further, although the subcontractors may consider the statute unfair under the
circumstances of this case, whether a statute is fair or makes the most sense are questions for the
legislature to consider, not the courts. See Hughes, 246 S.W.3d at 629 (“[O]ur standard for
construing statutes is not to measure them for logic [but to] construe [them] to effectuate the intent
of the [l]egislature, with the language of the statute as it was enacted to be our guide unless the
context or an absurd result requires another construction.”).
Based on our holding that the plain language of the Act exempts JP Morgan from the
Act’s provisions and our rejection of the subcontractors’ arguments that we should depart from a
plain-language interpretation of the Act, we hold that the trial court erred in applying the Act to
JP Morgan. Consequently, we reverse all of the trial court’s findings of fact or conclusions of law
applying the Act to JP Morgan. Because we hold that the Act does not apply to JP Morgan, we need
not reach JP Morgan’s second argument that the funds in the construction account were not “trust
funds” under the Act.
Negligence
In its third issue, JP Morgan contends that the trial court erred in issuing a finding of
fact that “[JP Morgan] was negligent in failing to exercise reasonable care in disbursing retainage
funds from the construction loan account, prior to completion of the project.” To prove negligence,
a party must establish: (1) the existence of a legal duty; (2) a breach of that duty; and (3) damages
proximately caused by the breach. Southwestern Elec. Power Co. v. Grant, 73 S.W.3d 211, 223
19
(Tex. 2002) (Enoch, J., concurring) (quoting Greater Houston Transp. Co. v. Phillips, 801 S.W.2d
523, 525 (Tex. 1990)). Duty is the “threshold inquiry in a negligence case.” Id. “In the absence of
a duty, there can be no negligence.” Id. at 224. JP Morgan challenges only the existence of a legal
duty, arguing that the evidence is insufficient to support the trial court’s conclusion of law that
“[JP Morgan] owed a duty to the Subcontractors to exercise reasonable care in disbursing the
retainage funds from the construction loan account.”
A duty can be assumed by contract or imposed by law. Id. at 223. In their petitions,
the subcontractors alleged that JP Morgan had a duty to the subcontractors based on: (1) the
construction agreement between JP Morgan and Agape; (2) section 53.101 of the property code; and
(3) the Act. On appeal, the subcontractors do not reference the construction agreement,
section 53.101, or the Act, but instead offer a different contention: that this court should adopt a new
common-law duty of reasonable care to be imposed upon financial institutions such as JP Morgan
under the circumstances of this case. We address each of the subcontractors’ allegations in turn.
A. Whether Duty Assumed by Contract
At trial, the subcontractors argued that JP Morgan breached a duty to them that was
established in the contract between JP Morgan and Agape. Because the subcontractors were not
parties to the contract, they bring their claim as third parties. A third party may recover on a contract
made between other parties only if the contracting parties: (1) intended to secure a benefit to the
third party, and (2) entered into the contract directly for the third party’s benefit. Stine v. Stewart,
80 S.W.3d 586, 589 (Tex. 2002). A third party does not have the right to enforce a contract if it
received only an incidental benefit. Id. “A court will not create a third-party beneficiary contract
20
by implication.” Id. (quoting MCI Telecomms. Corp. v. Texas Util. Elec. Co., 995 S.W.2d 647, 651
(Tex. 1999)). An agreement must clearly and fully express an intent to confer a direct benefit on the
third party. Id. Thus, there is a presumption that parties contracted for their own benefit unless it
clearly appears that they intended a third party to benefit from the contract. See MCI, 995 S.W.2d
at 651. Any doubts must be resolved against finding the existence of a third-party beneficiary. See
Raymond, 78 S.W.3d at 561. To determine the parties’ intent, courts must examine the entire
contract and give effect to all the contract’s provisions. See MCI, 995 S.W.2d at 652.
To qualify as a third-party beneficiary, a party must show that it is either a “donee”
or “creditor” beneficiary of the contract. Id. at 651. A party is a donee beneficiary if the
performance promised in the contract, when rendered, is a “pure donation” to that party. Id. On the
other hand, a party is a creditor beneficiary if the performance promised in the contract is rendered
in satisfaction of a legal duty owed to that party. Id. The legal duty may be an indebtedness,
contractual obligation, or other legally enforceable commitment owed to the third party. Id. Based
on the circumstances of this case, we must determine whether the subcontractors qualify as
creditor beneficiaries.
JP Morgan contends that the subcontractors cannot be third-party beneficiaries of the
construction agreement because the plain language of the agreement specifically disavows the
existence of third-party beneficiaries. The parties express the disavowal in a section of the
construction agreement titled “Rights of Third Parties”8:
8
In all quotations from the construction agreement, both the words “Trustee” and “Bank”
refer to JP Morgan, but the use of “Trustee” indicates a reference to JP Morgan in its role as trustee
pursuant to the trust indenture between Capital Area and JP Morgan.
21
(a) All conditions to the performance of the obligations of Servicer, Trustee and
Bank under this Agreement, including the obligation to authorize Advances,
are imposed solely and exclusively for the benefit of Servicer, Trustee and
Bank and the Majority Owner (who shall be a third party beneficiary hereof),
and no other Person shall have standing to require satisfaction of such
conditions in accordance with their terms or be entitled to assume that
Servicer, Trustee or Bank will refuse to approve Advances in the absence of
strict compliance with any or all thereof, and no other Person shall, under any
circumstances, be deemed to be a beneficiary of such conditions, any and all
of which may be freely waived in whole or in part by Servicer, Trustee or
Bank at any time if in its sole discretion it deems it desirable to do so. In
particular, Servicer, Trustee and Bank make no representations and assumes
[sic] no obligations as to third parties concerning the quality of the
construction by [Agape] of the Improvements or the absence therefrom of
defects.
(b) All of the obligations of [Agape] under this Agreement are imposed for the
benefit of Trustee, Servicer and Bank.
In another section of the construction agreement, a separate provision further
expresses the intended beneficiaries:
The covenants and agreements of Servicer, Bank and Trustee under this [article] are
intended exclusively for the benefit of such parties, and no covenant, warranty,
representation or undertaking of Trustee, Servicer or Bank, or any of them, under this
[article] shall be deemed to create any duty or obligation on the party [sic] of such
party for the benefit of any other party, including the Obligors, except for Trustee,
Servicer or Bank, respectively; and no act or omission on the party [sic] of Trustee,
Servicer or Bank under this [article] shall create any liability on the party [sic] of
such party to or be the basis for a claim against such party by, through or under the
Obligors, or any of them.
The Texas Supreme Court considered a contractual disavowal of third-party
beneficiaries in MCI and stated that “[i]n light of the clear language in the contract that the
agreement not be construed as being for the benefit of any nonsignatory, we conclude that [the
plaintiff] is not a third-party beneficiary.” 995 S.W.2d at 651. We reach the same conclusion here,
22
holding that the clear language in the construction agreement disavowing third-party beneficiaries
other than the bondholder defeats the subcontractors’ third-party claims.
Further, none of the other provisions in the construction agreement clearly and fully
express an intent to confer a direct benefit on the subcontractors. See Stine, 80 S.W.3d at 589. In
fact, the subcontractors do not cite to any specific provisions of the construction agreement that
would support their contention that they were third-party beneficiaries. In the trial court, they argued
generally that “the provisions of the [construction agreement] that allowed for payment directly to
parties entitled to receive payment was a direct reflection of intention that third parties such as the
Subcontractors would be paid directly.” In reviewing the construction agreement with that
contention in mind, we have determined that the following provisions are the only ones to which the
subcontractors could have been referring:
At its option, Bank may direct Trustee to make any or all Advances (a) for Direct
Costs incurred under the Construction Contract directly to Contractor for deposit in
an appropriately designated special bank account, (b) through the Title Insurance
Company, or (c) to any Person set forth in a Requisition or to whom Bank . . . in
good faith determines payment is due.
[Agape] will diligently pursue construction of the Improvements in accordance with
the Construction Schedule, will attain Completion on or prior to the Completion Date
as may be extended in accordance with this Agreement, and will pay all sums and
perform all such acts as may be necessary or appropriate to complete such
construction . . .
[Agape] will duly pay and discharge, or cause to be paid and discharged, before the
same shall become overdue all claims for labor, materials, or supplies that if unpaid
might by law become a lien or charge upon any of its property . . .
[Agape] will use the proceeds of the Tax-Exempt Bonds solely for the purpose of (i)
funding the Debt Service Reserve Fund and (ii) paying for Project Costs (as defined
23
in the Indenture) related to activities that do not constitute unrelated trades or
businesses of [Agape] . . .
[Agape] will furnish or cause to be furnished to Bank or Servicer, upon written
request at any time, and from time to time, affidavits listing all laborers,
subcontractors, materialmen, and any other Persons who might or could claim
statutory or common law liens and are furnishing or have furnished labor or material
to the Project or any part thereof, together with affidavits, or other evidence
satisfactory to Bank or Servicer, showing that such parties have been paid all
amounts then due for labor and materials furnished to the Project.
Although the provisions acknowledge that subcontractors would be paid out of the funds in the
account, none of the provisions clearly and fully express an intent to confer a benefit on the
subcontractors. See id.
Because the construction agreement in this case contains an explicit disavowal of any
third-party beneficiaries, and because there is no clear indication in the agreement that Agape and
JP Morgan intended to confer a direct benefit on the subcontractors, we conclude that the
subcontractors were not third-party beneficiaries of the agreement and that the subcontractors
therefore cannot recover under the construction agreement. See MCI, 995 S.W.2d at 651; Stine,
80 S.W.3d at 589.
B. Whether Duty Imposed by Chapter 53 of the Property Code
The subcontractors contend that the retainage provision in Chapter 53 of the property
code imposed a duty on JP Morgan to withhold retainage in the construction account. See Tex. Prop.
Code Ann. § 53.101 (requiring owner of project or owner’s agent, trustee, or receiver to withhold
ten percent of contract price of work or ten percent of value of work during progress of work and for
thirty days after work is completed). In the trial court, the subcontractors argued that JP Morgan had
24
a duty to retain funds under section 53.101 because JP Morgan acted as Agape’s agent. However,
we have already determined that JP Morgan did not act as Agape’s agent because Agape had no
control over JP Morgan’s actions with regard to retainage. See Stanford, 623 S.W.2d at 801
(requiring party to be subject to other party’s control in order to be other party’s agent). Accordingly,
section 53.101 of the property code did not impose a duty on JP Morgan.
C. Whether Duty Imposed by Texas Trust Fund Act
The subcontractors also contend that the Act imposed a duty on JP Morgan to not
misapply trust funds. See Tex. Prop. Code Ann. § 162.002 (West 2007), §§ 162.003, 162.031
(West Supp. 2009). However, as previously indicated, the Act does not apply to JP Morgan because
JP Morgan, as a bank and lender, is explicitly exempted from the chapter. See id. § 162.004 (stating
that the Act does not apply to “a bank, savings and loan, or other lender”). Even if JP Morgan were
not exempt, the chapter still would not impose a duty on JP Morgan because the bank does not fall
within the chapter’s definition of “trustee.” See id. § 162.002 (West 2007) (defining “trustee” as “[a]
contractor, subcontractor, or owner or an officer, director, or agent of a contractor, subcontractor,
or owner, who receives trust funds or who has control or direction of trust funds”). The
subcontractors do not contend that JP Morgan was the contractor, subcontractor, or owner of the
project, nor do they contend that JP Morgan was the agent of the contractor or subcontractors. They
contend only that JP Morgan was the agent of the owner, Agape, and we have already determined
that no agency relationship existed between the two entities. Accordingly, we conclude that the Act
does not impose a duty on JP Morgan.
25
D. Whether Common-Law Duty Should Exist
The subcontractors contend on appeal that this court should impose a new common-
law duty on financial institutions that administer construction accounts as JP Morgan did in this case.
In deciding whether to impose a new common-law duty, courts must first consider the risk,
foreseeability, and likelihood of injury, and then weigh those factors against the social utility of the
actor’s conduct, the magnitude of the burden of guarding against the injury, and the consequences
of placing the burden on the defendant. See Nabors Drilling, Inc. v. Escoto, 288 S.W.3d 401, 410
(Tex. 2009). The most important factor to consider is the foreseeability of the risk. See Texas Home
Mgmt. v. Peavy, 89 S.W.3d 30, 36 (Tex. 2002). The test for foreseeability is what a party should,
under the circumstances, reasonably anticipate as a consequence of its conduct. Foster v. Denton
Indep. Sch. Dist., 73 S.W.3d 454, 465 (Tex. App.—Fort Worth 2002, no pet.). However,
foreseeability alone is not enough to create a duty. See Golden Spread Council, Inc. No. 562 of Boy
Scouts v. Akins, 926 S.W.2d 287, 290-91 (Tex. 1996).
In addition to the balancing test, courts must also consider (1) whether one party had
superior knowledge of the risk; (2) whether one party had a right to control the actor who caused the
harm; (3) whether societal changes require recognition of new duties; (4) whether the creation of a
new duty would be in conflict with existing statutory law; and (5) whether there are countervailing
concerns that would support or hinder the recognition of a new duty. See Nabors, 288 S.W.3d at
410; Thapar v. Zezulka, 994 S.W.2d 635, 639-40 (Tex. 1999); Bird v. W.C.W., 868 S.W.2d 767, 769
(Tex. 1994); Graff v. Beard, 858 S.W.2d 918, 920 (Tex. 1993); Otis Eng’g Corp. v. Clark,
668 S.W.2d 307, 310 (Tex. 1983).
26
We first address the initial considerations: the risk, foreseeability, and likelihood of
injury. Here, the subcontractors’ injury was that they were not paid for some of their work on the
Chandler Creek Project. Although JP Morgan could have anticipated this injury, it could have done
so only in the same way that every party to every construction contract could foresee the possibility
that a contractor, for whatever reason, may not pay subcontractors for their work. In fact, the danger
of subcontractors remaining unpaid in construction projects is so well known that the Texas
legislature recognized and responded to it by enacting the Trust Fund Act, which we have previously
discussed in this opinion. See Tex. Prop. Code Ann. §§ 162.001-.033. The Act was specifically
created for the protection of laborers and materialmen and imposes fiduciary duties on contractors
to ensure that Texas subcontractors, mechanics, and materialmen are paid for completed work. See
Exchanger, 330 F.3d at 345. However, as previously indicated, the Act does not apply to JP Morgan.
See Tex. Prop. Code Ann. § 162.004(a).
We turn now to the second set of considerations: the social utility of JP Morgan’s
conduct, the magnitude of the burden of guarding against the injury, and the consequences of placing
the burden on JP Morgan. Regarding the first consideration, we find significant social utility in JP
Morgan’s general conduct of entering into a contract in which it agreed to lend money to a non-profit
organization for the construction of a low-income apartment complex. Regarding the second and
third considerations, we find the magnitude of the burden of protecting subcontractors and the
consequences of placing that burden on lenders such as JP Morgan significant. Lenders currently
do not carry such a burden unless they explicitly agree to do so. Thus, they are currently able to
assess their liability at the time of entering into the contract. The more they can limit their liability,
27
the more freely they can lend money for projects such as the one here. If we were to impose a duty
on them to withhold retainage and ensure that subcontractors were paid, we would be exposing them
to a considerable number of costly lawsuits brought by parties that they may not even be able to
identify at the time of entering into the contract. Also, placing the burden on lenders such as JP
Morgan would interfere with their freedom to contract as they see fit, which is a strongly favored
public policy in Texas. See Gym-N-I Playgrounds, Inc. v. Snider, 220 S.W.3d 905, 912 (Tex. 2007)
(“Texas strongly favors parties’ freedom of contract”). In Gym-N-I, the Texas Supreme Court
emphasized the importance of the policy, stating:
Public policy requires . . . that men of full age and competent understanding shall
have the utmost liberty of contracting, and that their contracts when entered into
freely and voluntarily shall be held sacred and shall be enforced by Courts of justice.
Therefore, you have this paramount public policy to consider—that you are not
lightly to interfere with this freedom of contract.
Id. (citing BMG Direct Mktg., Inc. v. Peake, 178 S.W.3d 763, 767 (Tex. 2005)) (quoting Wood
Motor Co. v. Nebel, 238 S.W.2d 181, 185 (Tex. 1951)). JP Morgan and Agape explicitly disavowed
the existence of any third-party beneficiaries of the construction agreement other than the
bondholder. If we were to impose a duty on JP Morgan with regard to subcontractors, we would
void the disavowal in this case and prohibit similar language in future contracts.
We now address the final set of considerations: whether one party had superior
knowledge of the risk; whether one party had a right to control the actor who caused the harm;
whether societal changes require recognition of new duties; whether the creation of a new duty
would be in conflict with existing statutory law; and whether there are countervailing concerns that
28
would support or hinder the recognition of a new duty. Regarding the first consideration, whether
JP Morgan had superior knowledge of the risk, we first note that the risk of harm in this case was
allegedly created by the fact that JP Morgan was in control of the construction account but was not
under a statutory obligation to withhold retainage in the account. Because the subcontractors did not
know that JP Morgan had control over the construction account, we conclude that JP Morgan had
superior knowledge of the risk associated with the arrangement between JP Morgan and Agape.
With respect to the second consideration, whether the subcontractors had a right to control JP
Morgan, there is no evidence in the record that the subcontractors had a right to exert control
over JP Morgan.
Although the first two considerations weigh against JP Morgan, the remaining three
do not. For instance, there are no societal changes implicated in this case that would require our
recognition of a new duty. In addition, the creation of a new duty would be in conflict with existing
statutory law. As previously indicated, the Act and section 53.101 of the property code were created
to protect subcontractors, but they do not apply to entities such as JP Morgan. Specifically, the Act
makes subcontractors the beneficiaries of trust funds in construction accounts but exempts banks
from the Act’s provisions. See Tex. Prop. Code Ann. §§ 162.003-.004. Similarly, section 53.101
of the property code delineates the type of entities required to withhold retainage in construction
accounts but does not include entities such as JP Morgan. See id. § 53.101. If there is a gap in either
of the statutes that the legislature mistakenly failed to fill, it is still the legislature, not the courts, that
must correct that mistake. See Brown v. De La Cruz, 156 S.W.3d 560, 566 (Tex. 2004). Finally,
as a countervailing concern that hinders the recognition of a new duty, we note our reluctance, as an
29
intermediate court of appeals, to recognize a new common-law duty that has no existence in
established law. See Lubbock County v. Trammel’s Lubbock Bail Bonds, 80 S.W.3d 580, 585
(Tex. 2002).
Having considered all the relevant factors, we conclude that the factors weighing
against the imposition of a new duty outweigh those in favor. Accordingly, we decline to recognize
a new common-law duty under the circumstances of this case.
E. Conclusion Regarding Negligence
Because we have determined that JP Morgan did not owe a duty to the subcontractors,
and because the existence of a legal duty is an essential element of negligence, we conclude that the
trial court erred in finding that JP Morgan was negligent in failing to exercise reasonable care in
disbursing retainage funds from the construction account prior to the completion of the project. See
City of Keller, 168 S.W.3d at 810; Southwestern Elec., 73 S.W.3d at 224 (“In the absence of a duty,
there can be no negligence.”).
Further, because a defendant cannot be grossly negligent without being negligent, the
trial court also erred in concluding that JP Morgan was grossly negligent in disbursing the retainage
funds from the construction account. See Driskill v. Ford Motor Co., 269 S.W.3d 199, 206
(Tex. App.—Texarkana 2008, no pet.); Trevino v. Lightning Laydown, Inc., 782 S.W.2d 946, 949
(Tex. App.—Austin 1990, writ denied).
In addition, because we hold that there is no evidence of gross negligence, and
because the trial court’s award of exemplary damages was based on its finding of gross negligence,
30
we also hold that the trial court erred in awarding exemplary damages. See Tex. Civ. Prac. & Rem.
Code Ann. § 41.003 (West Supp. 2009).
Fiduciary Duty
In its fourth issue, JP Morgan contends that the trial court erred in concluding that
JP Morgan owed a fiduciary duty to the subcontractors. Specifically, JP Morgan argues that it did
not owe a fiduciary duty to the subcontractors because a fiduciary duty requires a special relationship
between the two parties, and there was no relationship between JP Morgan and the subcontractors.
We agree with JP Morgan that the imposition of fiduciary duties requires a special relationship. See
National Plan Adm’rs, Inc. v. National Health Ins. Co., 235 S.W.3d 695, 700 (Tex. 2007)
(“Fiduciary duties are imposed on parties to certain relationships based on the special nature of the
relationships.”); Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 199 (Tex. 2002) (“Fiduciary
duties are imposed by courts on some relationships because of their special nature.”).
The special relationship alleged by the subcontractors is that of a trustee and trust
beneficiary. Texas courts have long held that certain fiduciary duties are owed by a trustee to a
beneficiary of the trust. See Johnson, 73 S.W.3d at 199; Huie v. DeShazo, 922 S.W.2d 920, 923
(Tex. 1996). The subcontractors contend that JP Morgan was the trustee of funds in the construction
account pursuant to the Act and that the subcontractors were the beneficiaries of the funds. See Tex.
Prop. Code Ann. § 162.002 (defining “trustee” as contractor, subcontractor, or owner, or officer,
director, or agent of contractor, subcontractor, or owner). The subcontractors allege that JP Morgan
falls within the Act’s definition of “trustee” because JP Morgan acted as Agape’s agent in controlling
the construction account and deciding whether to withhold retainage. However, we have already
31
determined that there is no evidence to establish an agency relationship between JP Morgan and
Agape. Thus, JP Morgan is not a trustee under the Act.
Further, we have also previously concluded that the plain language of the Act exempts
banks and other lenders from its requirements. See id. § 162.004. Therefore, even if there were
evidence of an agency relationship between JP Morgan and Agape, JP Morgan still could not be held
liable under the Act. Because there is no relationship between JP Morgan and the subcontractors to
which fiduciary duties could attach, the trial court erred in concluding that JP Morgan
owed a fiduciary duty to the subcontractors. See City of Keller, 168 S.W.3d at 810; Cain,
709 S.W.2d at 176.
Conversion
In its fifth issue, JP Morgan asserts that the trial court erred in concluding that
JP Morgan converted the retainage funds in the construction account. In order to establish
conversion, plaintiffs must prove that: (1) they owned or had legal possession of the property or
entitlement to possession; (2) the defendant unlawfully and without authorization assumed and
exercised dominion and control over the property to the exclusion of, or inconsistent with, the
plaintiffs’ rights as owners; (3) the plaintiffs demanded return of the property; and (4) the defendant
refused to return the property. Augillard v. Madura, 257 S.W.3d 494, 500 (Tex. App.—Austin 2008,
no pet.). On appeal, JP Morgan disputes only the first element, arguing that the subcontractors did
not own, have legal possession of, or have entitlement to possession of, the funds in the
construction account.
32
Specifically, JP Morgan contends that the subcontractors could not have owned any
of the funds in the construction account because the funds were at all times owned by and held for
the benefit of the bondholder. We agree. The trust indenture between Capital Area and JP Morgan
and the construction agreement between JP Morgan and Agape make it clear that the funds in the
construction account were the proceeds of tax-exempt bonds owned by the bondholder and that the
funds in the account were to be disbursed to Agape only if certain conditions were met. The
character of the funds as bond proceeds that were to be held for the benefit of the bondholder is
explained in the trust indenture, which states that the bond proceeds were to be held “[i]n Trust
Nevertheless, upon the terms and conditions herein set forth for the equal and proportionate benefit,
security and protection of all present and future Owners of the Bonds Outstanding . . . .” The trust
indenture also provides that “[a]ll moneys from time to time received by the Trustee and held in the
Funds and Accounts created hereby (other than the Rebate Fund) shall be held in trust as security for
the benefit of the Owners of the Bonds.”9
The construction agreement between JP Morgan and Agape maintains the same
characterization of the funds. Initially, the construction agreement defines the “construction fund”
as “[t]he fund, established under the Indenture and containing, among other amounts, the proceeds
of the purchase of the Bonds, held and disbursed by the Trustee.” The agreement then goes on to
explicitly disavow any third-party beneficiaries with the exception of the bondholder, stating that
9
The trust indenture’s characterization of the bond proceeds as being held for the benefit of
the owners of the bonds is consistent with the text of the Housing Finance Corporations Act, which,
as previously indicated, states that a trust indenture “may provide that the remedies and rights to
enforcement may be vested in a trustee, with full power of appointment, for the benefit of all the
bondholders.” See Tex. Loc. Gov’t Code Ann. § 394.054.
33
“[a]ll conditions to the performance of the obligations of Servicer, Trustee and Bank under this
Agreement, including the obligation to authorize Advances, are imposed solely and exclusively for
the benefit of the Servicer, Trustee and Bank and the Majority Owner (who shall be a third party
beneficiary hereof) . . . .” The agreement defines the ‘Majority Owner’ as “[t]he entity or entities
constituting the “Majority Owner” of the Bonds pursuant to the Indenture.” Thus, only the
bondholder had third-party beneficiary status under the construction agreement.
The subcontractors respond to JP Morgan’s arguments by citing Security State
Bank v. Valley Wide Electric Supply Company, 752 S.W.2d 661 (Tex. App.—Corpus Christi 1988,
writ denied), and contending that “[m]oney can be converted if a bank, with knowledge of its trust
character, applies the money to reduce a debt of the bank.” However, Valley Wide and similar cases
are distinguishable from this case. Those cases address only the situation in which a party deposits
money into a bank account and the bank uses the money to offset the party’s existing debt even
though the bank has knowledge of the trust character of the money. See Mauriceville Nat’l Bank
v. Zernial, 892 S.W.2d 858, 859-60 (Tex. 1995); Alon USA, LP v. State, 222 S.W.3d 19, 30-31
(Tex. App.—Austin 2005, pet. denied); Valley Wide, 752 S.W.2d at 664. In this case, the
subcontractors did not deposit money into the construction account. Rather, the funds in the account
were bond proceeds that were under the control of JP Morgan, held for the benefit of the bondholder,
and disbursed to Agape only if Agape met certain conditions specified in the construction agreement.
Further, the funds were not trust funds that benefitted the subcontractors. They were trust funds only
with respect to the relationship between JP Morgan and the bondholder, not with respect to the
relationship between JP Morgan and the subcontractors. In addition, JP Morgan did not use the
34
funds to offset the subcontractor’s existing debt. The funds of which the subcontractors complain
are funds that JP Morgan declined to release to Agape because Agape no longer met the conditions
necessary to receive funds as described in the construction agreement. Thus, because Valley Wide
and similar cases are distinguishable, we find them inapplicable to our analysis.
The subcontractors also argue that they established ownership of some of the
remaining funds in the construction account because testimony at trial established that they earned
the money based on the services they provided to Agape, and that JP Morgan considered the money
as belonging to them. Specifically, as evidence that they rightfully earned the money, the
subcontractors point to the following testimony of Robert Bobinchuck, the president of AMHC:
Counsel: With respect to the subcontractors, they were paid up to a
certain point in time. Isn’t that true?
Robert Bobinchuck: That’s correct.
Counsel: And the reason that these contractors that have subcontract
agreements were not paid was because the funding stopped?
Robert Bobinchuck: The funding stopped, and there were some overruns. It was
a combination of those two things.
Counsel: It wasn’t because the subcontractors didn’t do their work?
Robert Bobinchuck: No, it was not.
Counsel: The subcontractors did their work and did it satisfactorily as
far as you are concerned?
Robert Bobinchuck: Yes.
35
As evidence that JP Morgan considered some of the money as belonging to the subcontractors, the
subcontractors point to the following testimony of Brian Tuerff, senior vice president of JP Morgan,
in which Tuerff addressed the money remaining in the construction account at the time that JP
Morgan refused to disperse any more funds to Agape:
Counsel: You don’t question, you don’t dispute that [some of the remaining
money] is owed to somebody, be it the subcontractors, do you?
Tuerff: No.
Counsel: And so what you did when you transferred this $864,000, which
includes the two eighty-two, is basically transfer at least $282,931 of
subcontractors’ monies. Isn’t that true?
Tuerff: That was — sure.
Counsel: [JP Morgan] hadn’t earned it. [JP Morgan] didn’t go out there and put
up those sticks and stones, did it?
Tuerff: No.
Counsel: And so you’re basically transferring monies that belonged to third
parties?
Tuerff: It was never transferred. The money was always in the construction
loan account.
As further evidence that JP Morgan recognized some of the funds as belonging to the
subcontractors, the subcontractors cite to a letter sent from JP Morgan to Agape after Agape
defaulted on the loan, in which JP Morgan stated that some of the funds in the account would be
used to pay project costs. The relevant provisions state:
36
Section 7.9 of the Construction Facility Agreement provides, among other things,
that the balance of the “developer overhead” line item in the Development Budget,
in the amount of $250,000.00, shall not be advanced unless and until the Letter of
Credit is returned to [JP Morgan]. This $250,000.00 sum has been reallocated to the
contingency reserve and will be disbursed by [JP Morgan] for Project Costs.
Section 7.8 of the Construction Facility Agreement provides, among other things,
that the balance of the “developer’s fee” line item in the Development Budget, in the
amount of $1,050,000.00, shall not be advanced unless and until the Project has
achieved Stabilization. Of this amount, the sum of $488,346.00 in the Development
Budget has been reallocated to the contingency reserve and will be disbursed by [JP
Morgan] for Project Costs.
However, even assuming that the cited passages establish each of the propositions
that the subcontractors contend they do—that the subcontractors earned some of the money
remaining in the construction funds, that JP Morgan acknowledged that some of the remaining
money belonged to the subcontractors, and that JP Morgan agreed to settle the subcontractors’ claims
out of the construction funds—the subcontractors do not cite to any authority showing how the
propositions demonstrate that the subcontractors owned, had possession of, or were entitled to
possession of the funds. We have already determined that the trust indenture between Capital Area
and JP Morgan and the construction agreement between JP Morgan and Agape show that the funds
in the construction account were owned by and held for the benefit of the bondholder alone. Without
a legal theory on which to base a determination that any of the statements cited by the subcontractors
alter the ownership of the funds, our conclusion that the funds were owned solely by the bondholder
remains the same.
Because there is no evidence that the subcontractors owned, had legal possession of,
or had entitlement to possession of any of the remaining construction funds, the trial court erred in
37
concluding that JP Morgan converted the retainage funds in the account.10 See City of Keller,
168 S.W.3d at 810; Cain, 709 S.W.2d at 176.
Conclusion Regarding Issues Raised by JP Morgan
Given our determinations that the evidence is legally and factually insufficient to
support all of the trial court’s findings of fact and conclusions of law challenged by JP Morgan, we
also conclude that the trial court erred in holding that the subcontractors were entitled to recover
damages and exemplary damages against JP Morgan.
ISSUES RAISED BY MICHAEL BOBINCHUCK
“Trustee” Under Texas Trust Fund Act
In his first issue, Bobinchuck contends that the trial court erred in finding that he was
a “trustee” of the construction funds under the Act. See Tex. Prop. Code Ann. § 162.002. The
trial court awarded damages to both Agape and Gypsum based on its conclusion that Bobinchuck
violated the Act. The Act defines a “trustee” as “[a] contractor, subcontractor, or owner or an
officer, director, or agent of a contractor, subcontractor, or owner, who receives trust funds or who
10
In addition to its other issues, JP Morgan also contends that the trial court erred in finding
that JP Morgan violated the construction agreement by failing to withhold retainage in the
construction account. To the extent that JP Morgan raises this issue with regard to the claims of the
subcontractors, we agree that the trial court erred in this instance because: (1) we have already held
that the subcontractors are not third-party beneficiaries of the construction agreement and thus do
not have standing to bring a claim under the agreement; and (2) JP Morgan did not have a duty to
withhold retainage under Chapter 53 of the property code because it was not the owner of the project
or the owner’s agent. See Tex. Prop. Code Ann. § 53.101 (West 2007); MCI Telecomms. Corp.
v. Texas Utils. Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999). To the extent that JP Morgan raises this
issue with regard to claims brought by Agape, we need not address the issue because Agape non-
suited its cross-claims against JP Morgan, and the two parties agreed to dismiss any claims between
them on appeal.
38
has control or direction of trust funds.” Id. Bobinchuck argues that he was not a trustee because:
(1) he was not the owner of the project or an officer of American Multi,11 and (2) he did not have
control or direction of the trust funds.
In response, Agape and Gypsum concede that Bobinchuck was not the owner of the
project or an officer or director of American Multi but assert that he nonetheless falls within the
statutory definition of “trustee” because (1) he was an agent of American Multi, as evidenced by his
authority to sign checks on behalf of the company, and (2) he had direction of the trust funds because
he signed several of the checks that were paid out of American Multi’s account. We discuss each
sub-issue separately below.
A. Agency Relationship
As previously indicated, a person is an agent if he (1) acts for and on behalf of another
entity and (2) is subject to that entity’s control. See Stanford, 623 S.W.2d at 801. Here, there is
more than a scintilla of evidence of both elements. First, regarding whether Bobinchuck acted for
and on behalf of American Multi, the record shows that he did so by co-signing checks on behalf of
the company. Specifically, the record reveals that Bobinchuck co-signed at least nine checks on
11
Agape and Gypsum contend that Bobinchuck waived the argument that he was not an
officer of American Multi because he did not assert the argument in a verified pleading in the trial
court after suit was filed. They argue that Bobinchuck’s argument is equivalent to an argument that
he is not liable in the capacity in which he was sued, and they cite Texas Rule of Civil
Procedure 93(2), which requires a defendant who claims not to be liable in the capacity in which he
is sued to assert the claim in a verified pleading. See Tex. R. Civ. P. 93(2). However, Bobinchuck
does not assert that he is not liable in his individual capacity and that he should have been sued in
some other capacity. Rather, he argues that Agape’s and Gypsum’s claims under the Texas Trust
Fund Act (“the Act”) do not apply to him because he was not a trustee under the Act. Thus, we
reject Agape and Gypsum’s contention.
39
behalf of American Multi. Second, regarding whether Bobinchuck was subject to American Multi’s
control, the record indicates that he was under the control of Mike Parr, the president of American
Multi. Bobinchuck testified that all of the checks he signed on behalf of American Multi had already
been signed by Parr and that Parr was “always” the person who determined whether, when, and how
a person was paid. Robert Bobinchuck also testified that Parr was the person at American Multi who
made the decisions about who was paid. In addition, Jeananne Gafford, the person responsible for
issuing checks at American Multi, testified that Parr was “somewhat jealous of his territory” and that
he “very, very seldom” let anyone intrude upon his decision-making process regarding who was to
be paid. Thus, based on Bobinchuck’s authority to sign checks on behalf of American Multi and
Parr’s control over who was paid from American Multi’s account, we conclude that there was an
agency relationship between Bobinchuck and American Multi.
B. Control or Direction of Trust Funds
To be a trustee under the Act, a person must receive trust funds or have control or
direction of trust funds. Agape and Gypsum do not provide arguments or citations to the record
regarding Bobinchuck’s alleged receipt of trust funds or control or direction of trust funds. In our
own review of the record, we find nothing to suggest that Bobinchuck received any of the funds in
American Multi’s account. Thus, we turn to whether there is evidence that he had control or
direction of the funds in the account. In that regard, the record shows only that Bobinchuck co-
signed some of the checks on behalf of American Multi. However, cases finding sufficient evidence
of a person’s control or direction of trust funds have required more than signatory authority. See
Nuclear Corp. v. Hale, 355 F. Supp. 193, 195, 197 (N.D. Tex. 1973), aff’d, 479 F.2d 1045 (5th Cir.
40
1973) (court found control or direction of trust funds where defendants were stockholders and
officers of company; signed most checks paid out of company account; and possessed and exercised
power to direct which creditors were paid); C & G, Inc., 165 S.W.3d at 452, 455 (court found control
or direction of trust funds where defendants were principal officers of company, had signatory
authority on checking account, and played some part in decision of who was paid); Lively v. Carpet
Servs., Inc., 904 S.W.2d 868, 870, 873 (Tex. App.—Houston [1st Dist.] 1995, writ denied) (court
found control or direction of trust funds where defendant was sole shareholder, officer, and director
of company and had control over funds in company account); McCoy v. Nelson Utils. Servs.,
736 S.W.2d 160, 165 (Tex. App.—Tyler 1987, writ ref’d n.r.e.) (court found control or direction of
trust funds where defendant was co-owner of company, had control of funds within company, signed
checks for company, and directed to whom checks should be paid).
Here, Bobinchuck was not an officer of American Multi, and there is no evidence that
he maintained American Multi’s account or had any involvement in decisions regarding the funds
or who was to be paid from the account. To the contrary, the testimony already referenced in this
opinion—that Parr was the president of American Multi, that he signed checks before Bobinchuck
did, that he “always” decided who would be paid, and that he “very, very seldom” let anyone intrude
upon his payment decisions—suggests that it was Parr, not Bobinchuck, who had control and
direction of the funds in American Multi’s account.12 There was no such evidence offered with
regard to Bobinchuck. Accordingly, we conclude that the evidence is legally and factually
insufficient to establish that Bobinchuck controlled or directed trust funds. See Nuclear Corp.,
12
Parr was not named as a defendant in the subcontractors’ suit.
41
355 F. Supp. at 195, 197; C & G, Inc., 165 S.W.3d at 452, 455; Lively, 904 S.W.2d at 870, 873;
McCoy, 736 S.W.2d at 165.
C. Conclusion Regarding Whether Bobinchuck was a “Trustee”
Because the evidence was legally and factually insufficient to establish that
Bobinchuck controlled or directed trust funds, the trial court erred in finding that he was a trustee
under the Act.13 See Tex. Prop. Code Ann. § 162.002. By extension, the trial court also erred in
finding that Bobinchuck misapplied trust funds under the Act. See id. §§ 162.002, 162.031. Thus,
the trial court further erred in concluding that Agape and Gypsum were entitled to recover damages
from Bobinchuck based on their claims under the Act and that Gypsum was entitled to recover
exemplary damages from Bobinchuck.14
CONCLUSION
In light of our conclusions that the evidence is legally and factually insufficient to
support each of the trial court’s findings and conclusions challenged on appeal, we reverse the
portions of the trial court’s judgment awarding judgment to Contract Carpet and Gypsum against JP
13
Because we conclude that the claims of Agape and Gypsum under the Act must fail based
on our determination that Bobinchuck was not a trustee under the Act, we need not address
Bobinchuck’s additional arguments as to why he should not be found liable under the Act. See Tex.
R. App. P. 47.1.
14
Although the trial court’s conclusion of law regarding the award of exemplary damages
does not specifically reference Gypsum’s claim under the Act, and although the trial court issued
conclusions of law regarding other claims—that Bobinchuck breached a fiduciary duty to Gypsum
and that Bobinchuck converted funds belonging to Gypsum—the claim under the Act is the only
claim raised against Bobinchuck by Gypsum in its petition and throughout trial and thus the only
claim under which Gypsum could recover exemplary damages. The record is unclear as to why the
trial court addressed the other claims that were not asserted by Gypsum.
42
Morgan and the portions awarding judgment to Agape and Gypsum against Michael Bobinchuck.
Consequently, we also reverse the portions of the trial court’s judgment ordering: (1) JP Morgan to
pay $50,051.20 and pre-judgment interest to Contract Carpet; (2) JP Morgan to pay $61,748, pre-
judgment interest, and court costs to Gypsum; (3) JP Morgan to pay $30,000 to Contract Carpet as
exemplary damages; (4) JP Morgan to pay $30,000 to Gypsum as exemplary damages;
(5) Michael Bobinchuck to pay $15,235.37, post-judgment interest, and court costs to Agape;
(6) Michael Bobinchuck to pay $15,235.27, pre-judgment interest, and court costs to Gypsum; and
(7) Michael Bobinchuck to pay $15,000 to Gypsum in exemplary damages. The remaining portions
of the trial court’s judgment remain intact.
__________________________________________
Diane M. Henson, Justice
Before Chief Justice Law, Justices Puryear and Henson
Chief Justice Law Not Participating15
Reversed and Rendered
Filed: December 11, 2009
15
Because Chief Justice Law was originally assigned to author this opinion, authoring duties
were reassigned as of July 2, 2009.
43