Ronnie Pace v. Linda Lashley, Individually D/B/A Texas Hills Investments and D/B/A THI ( 2009 )

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MEMORANDUM OPINION
No. 04-08-00849-CV
Ronnie J. PACE,
Appellant
v.
Linda LASHLEY, Individually, d/b/a Texas Hills Investments, and d/b/a THI,
Appellee
From the 198th Judicial District Court, Kerr County, Texas
Trial Court No. 05-49-B
Honorable Emil Karl Prohl, Judge Presiding
Opinion by: Marialyn Barnard, Justice
Sitting: Sandee Bryan Marion, Justice
Rebecca Simmons, Justice
Marialyn Barnard, Justice
Delivered and Filed: November 4, 2009
AFFIRMED IN PART; REVERSED IN PART
Ronnie J. Pace appeals a judgment awarding damages and a constructive trust to Linda
Lashley, Individually and d/b/a Texas Hills Investments d/b/a THI, after a bench trial. In nine issues
on appeal, Pace challenges the sufficiency of the evidence to support the trial court’s findings on
liability and damages. Pace also contends the trial court erred in imposing death penalty sanctions
and a constructive trust. We partially sustain Pace’s issue with regard to the constructive trust and
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reverse the portion of the trial court’s judgment imposing a constructive trust as to the real property
and improvements that Lashley conveyed. We affirm the remainder of the trial court’s judgment.
BACKGROUND
Lashley, Pace, and Emmett Brandon jointly owned REL Investments, a partnership which
operated or managed certain real property and improvements. Lashley, Chaparral, and Brandon also
equally owned two corporations, Diversified Fabricators, Insulators & Contractors, Inc.
(“Diversified”) and Brandon & Company Industrial Systems, Inc. (“Brandon & Company). Pace
was the sole shareholder of Chaparral.
In February of 2000, Lashley sold her interest in the real property and improvements operated
or managed by REL Investments to Chaparral and Brandon. As part of the same transaction, Lashley
also sold Chaparral and Brandon her stock in Diversified and Brandon & Company. Part of the
consideration for the sale of Lashley’s interest in the real property and improvements was a note
signed by Chaparral and secured by membership interests in DFIC, L.L.C., an entity to which the real
property and improvements operated or managed by REL was to be transferred. Part of the
consideration for the sale of the stock was a note signed by Chaparral and secured by stock in
Diversified and Brandon & Company.
In May of 2000, DFIC Holding Company was formed, and it became the owner of 100% of
the stock of Diversified and Brandon & Company. In December of 2002, Chaparral stopped making
payments to Lashley on the notes. In September of 2006, Chaparral agreed to the entry of an order
finding it liable to Lashley for the balance remaining on both notes. After a bench trial, Pace also
was found individually liable for the balance remaining on the notes.
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SUFFICIENCY OF THE EVIDENCE
All of Pace’s issues except two challenge the sufficiency of the evidence to support the trial
court’s findings regarding his individual liability and damages. In his first issue, Pace addresses the
sufficiency of the evidence to support the trial court’s findings that he was liable for common law
fraud and fraud in a real estate transaction. In his second issue, Pace contends the evidence is
insufficient to support the trial court’s piercing of the corporate veil of various entities to hold Pace
individually liable for a corporate obligation. In his third issue, Pace contends the evidence is
insufficient to support a finding that DFIC Holding Company was an empty shell corporation. In
his fourth issue, Pace asserts the evidence is insufficient to support a finding that he was liable for
fraud for failing to disclose a material fact. In his fifth issue, Pace contends the trial court erred in
finding that he owed Lashley a fiduciary duty. In his sixth issue, Pace challenges the sufficiency of
the evidence to support a finding of damages. Finally, in his eighth issue, Pace contends Lashley’s
testimony was misleading which we construe as a challenge to Lashley’s credibility and the factual
sufficiency of the evidence.
In order to prove fraud by failure to disclose, the following elements must be established:
(1) a party conceals or fails to disclose a material fact within the knowledge of that party; (2) the
party knows that the other party is ignorant of the fact and does not have an equal opportunity to
discover the truth; (3) the party intends to induce the other party to take some action by concealing
or failing to disclose the fact; and (4) the other party suffers injury as a result of acting without
knowledge of the undisclosed fact. Bradford v. Vento, 48 S.W.3d 749, 754-55 (Tex. 2001). As a
general rule, a failure to disclose information will constitute fraud when there is a duty to disclose
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the information. McCarthy v. Wani Venture, 251 S.W.3d 573, 585 (Tex. App.—Houston [1st Dist.]
2007, pet. denied).
The trial court made the following findings of fact:
Pace failed to disclose to Lashley his intention to create another entity, DFIC
Holding Company, which would become the sole shareholder of Diversified and
Brandon & Company. He also failed to disclose to Lashley his intention to perform
no corporate formalities with regard to DFIC[, L.L.C.] other than its initial formation
and to permit it to forfeit its charter. Accordingly, he failed to disclose that Lashley’s
security interests, which Pace represented to be against the issued and outstanding
shares of DFIC, in a valuable and viable entity, were in reality essentially worthless
or would become worthless long before the Promissory Notes were paid. Had Pace
disclosed his true intentions, Lashley would not have entered into the sale-and-
purchase transactions but would have retained her interests in the real property and
improvements and in Diversified and Brandon & Company. Instead, Lashley entered
into the sale-and-purchase transactions, and suffered injury.
Based on its findings, the trial court made the following conclusions of law:
Pace’s failure to disclose material facts, which were omissions for the purpose
of inducing Lashley to enter into the Sale-and-Purchase Agreements, Promissory
Notes, and Security Agreements and relied on by her in entering into those
agreements, constitute common-law fraud and fraud in a real estate and stock
transaction.
Pace and Chaparral’s wrongful and unlawful actions, both of commission and
omission, or both, separately or collectively, were the proximate cause of Lashley’s
damages sought in this lawsuit.
At trial, Lashley testified that Pace failed to disclose to her his intention to convey the stock
that was pledged as security to another entity.1 Lashley further testified that she would not have
entered the deal if she had known.
Pace challenges the trial court’s findings and conclusions relating to his fraud by failure to
disclose in his fourth issue, asserting:
1
… In his brief, Pace does not challenge the trial court’s implied conclusion that he had a
duty to disclose this information.
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“The great weight and preponderance of the evidence shows this testimony to be a
[sic] least inaccurate and at most self-serving. The letters and agreements speak for
themselves. Evidence with regard to intent to induce the Appellee are absent and
there is no evidence that Appellee relied on any failure to disclose to her detriment.”
We also construe Pace’s eighth issue, i.e., “The Appellee’s Testimony Was Misleading” as a
challenge to the sufficiency of the evidence to support the trial court’s fraud by failure to disclose
findings because the issue challenges Lashley’s credibility.
We initially note that Pace’s fourth issue is inadequately briefed because he fails to provide
record citations to support his assertion. See TEX . R. APP . P. 38.1(i). Similarly, in the argument
supporting his eighth issue, the only record citations provided with regard to Pace’s assertion that
Lashley was aware that a holding company was to be formed are to documents attached to Pace’s
motion for new trial that were not introduced as evidence during trial and, therefore, cannot be
considered in addressing a sufficiency challenge. In his eighth issue, Pace alludes to “letters
mentioning the holding company (the ESOP) already referenced,” but again fails to provide a record
citation.
Setting aside the briefing deficiencies and acknowledging that the trial court took judicial
notice of the documents in the file during the bench trial, the clerk’s record does contain a January
6, 2000 letter to Lashley regarding the transaction. Pace appears to argue that because the letter
discussed the terms of the proposed sale and referred to an ESOP, the letter was evidence that
Lashley knew that a holding company would be created to which the stock would be conveyed. The
trial court, however, was in the position to weigh the evidence and determine the credibility of the
witnesses. Dwairy v. Lopez, 243 S.W.3d 710, 713-14 (Tex. App.—San Antonio 2007, no pet.).
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After stating that Lashley or THI would receive two notes for $750,000.00 each in exchange
for her stock, the letter to which Pace refers states:
In the event a partial payment is made in any one quarter, the escrow agent receiving
payments from the ESOP will make payments to satisfy THI’s note payment first
with the remainder of the funds being paid to Emmet [sic] and Ronnie to satisfy the
notes to them from the ESOP. The escrow agent shall apply subsequent payments
to satisfy any amount due and owing on THI’s notes first and then to satisfy any
deficiency of the oldest outstanding payments on the notes to Emmett and Ronnie.
Emmett and Ronnie will have a security interest in the stock they sell to the ESOP
as collateral for their note. They will assign their interest in 1/3 of this stock security
interest to THI as collateral for your note. If a default should occur on the notes, the
three of you will take the stock back to satisfy the remaining debt from the original
purchase and sale.
Given the conflict between the terms set forth in the letter and the final documents reflecting the
transaction, the trial court could have decided to give little or no weight to the letter. Instead, the
trial court could have determined that the final terms of the sale had changed from the date of the
letter and that the closing documents themselves accurately reflected that Lashley was to receive a
security interest in the stock of Diversified and Brandon & Company. For example, the promissory
note provided for 40 quarterly installments and did not mention any partial payments or payments
from escrow agents. In addition, the security agreements expressly pledged stock in Diversified and
Brandon & Company as security. Moreover, no evidence was presented that would link the ESOP
referenced in the letter to DFIC Holding Company, and no evidence was introduced of any
subsequent assignment of stock in DFIC Holding Company or an interest in that stock to Lashley
from Pace or Brandon. Finally, the final documents contain a merger clause; therefore, the substance
of any pre-execution negotiations, including the text of any prior drafts, is not a permissible
consideration. See Bandera Drilling Co. v. Sledge Drilling Corp., No. 11-08-00284-CV, 2009 WL
2401779, at *3 (Tex. App.–Eastland Aug. 6, 2009, no pet. h.).
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Therefore, Lashley’s testimony supports the trial court’s finding that Pace failed to disclose
his intention to transfer the stock pledged to secure the note to another entity. In addition, the trial
court could infer from the circumstances that Pace concealed the intended conveyance to induce
Lashley to enter the sale and purchase transactions, including the fact that the stock was transferred
to DFIC Holding Company only three months after the transactions closed. See Matis v. Golden, 228
S.W.3d 301, 310 (Tex. App.—Waco 2007, no pet.) (noting intent to induce party to act can be
inferred from circumstances); IKON Office Solutions, Inc. v. Eifert, 125 S.W.3d 113, 124 (Tex.
App.—Houston [14th Dist.] 2003, pet. denied) (same). Finally, Lashley’s testimony that she would
not have entered into the deal if she had known of the intended conveyance is evidence supporting
the trial court’s reliance finding.
With regard to Pace’s issue challenging the sufficiency of the evidence to support the trial
court’s damage findings, the trial court took judicial notice of the documents in the file which
included Lashley’s affidavit regarding the notes being in default and the balance owing on the notes.
This evidence was sufficient to support the trial court’s damage findings because Lashley testified
that she would not have entered into the transactions if Pace had disclosed his intention to convey
the stock. Moreover, the conveyance of the stock compromised Lashley’s ability to foreclose on her
security interest in the stock when Chaparral defaulted on the notes. Because we find the evidence
sufficient to support the trial court’s findings with regard to liability and damages under the fraud
by failure to disclose claim, we do not address the other alternative causes of action.
DEATH PENALTY SANCTIONS
In his seventh issue, Pace contends the trial court erred in imposing death penalty sanctions.
The order about which Pace complains precluded him from introducing any document into evidence
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that was not produced to Lashley as discovery. The order also precluded Pace from objecting to the
introduction at trial of documents Lashley obtained from other sources. Finally, the order provided
that the jury would be instructed to presume certain evidentiary matters supported Lashley’s claims.
The presumption would apply to evidentiary matters subject to proof by documents that existed but
Pace filed to produce.
“[W]hether an imposition of sanctions is just is measured by two standards.” TransAmerican
Natural Gas Corp. v. Powell, 811 S.W.2d 913, 917 (Tex. 1991). “First, a direct relationship must
exist between the offensive conduct and the sanction imposed.” Id. “Second, just sanctions must
not be excessive.” Id.
“A just sanction must be directed against the abuse and toward remedying the prejudice
caused to the innocent party, and the sanction should be visited upon the offender.” Spohn Hosp.
v. Mayer, 104 S.W.3d 878, 882 (Tex. 2003). “The trial court must attempt to determine whether the
offensive conduct is attributable to counsel only, to the party only, or to both.” Id. In this case, the
trial court was informed that Pace personally stated in a deposition that he would produce the
discovery that he had failed to produce in response to the trial court’s first discovery order. The trial
court was further informed that Pace provided his personal assurance to avoid having to testify at his
deposition regarding those documents. Although Pace asserts in his brief that he was following the
advice of counsel in failing to produce the documents, no evidence of any reliance on the advice of
counsel was introduced at the hearing before the trial court. Accordingly, the trial court did not err
in determining that the sanction should be visited upon Pace.
“[A] sanction imposed for discovery abuse should be no more severe than necessary to satisfy
its legitimate purposes, which include securing compliance with discovery rules, deterring other
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litigants from similar misconduct, and punishing violators.” Spohn Hosp., 104 S.W.3d at 882.
Courts must consider less stringent sanctions in determining whether lesser sanctions would fully
promote compliance. Id.
The record reflects that the trial court initially ordered Pace to produce the documents without
imposing sanctions. The order required the documents to be produced by October 24, 2006. Pace
subsequently promised to produce documents by October 13, 2006 to avoid any further deposition
questions regarding those documents. The hearing on Lashley’s request for sanctions was held on
October 27, 2006, and trial was set for November 7, 2006. At the time the trial court imposed
sanctions (which was one week before the start of trial), Pace had ignored the prior court order and
his own promises in “callous disregard for the responsibilities of discovery under the rules.”
TransAmerican Natural Gas Corp., 811 S.W.2d at 918. We hold, therefore, that the sanctions
imposed by the trial court were just.
CONSTRUCTIVE TRUST
“A constructive trust is an equitable remedy created by the courts to prevent unjust
enrichment.” Baker Botts, L.L.P. v. Cailloux, 224 S.W.3d 723, 736 (Tex. App.—San Antonio 2007,
no pet.). “A constructive trust is a relationship with respect to property, subjecting the person by
whom the title to the property is held to an equitable duty to convey it to another, on the ground that
his acquisition or retention of the property is wrongful and that he would be unjustly enriched if he
were permitted to retain the property.” Id. “To obtain a constructive trust, the proponent must
prove: (1) breach of a special trust, fiduciary relationship, or actual fraud; (2) unjust enrichment of
the wrongdoer; and (3) tracing to an identifiable res.” Troxel v. Bishop, 201 S.W.3d 290, 297 (Tex.
App.—Dallas 2006, no pet.).
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In this case, the trial court imposed a constructive trust on the real property and
improvements conveyed by Lashley as part of the sale and purchase transaction. However, no
evidence was introduced at trial to establish who currently holds legal title to that property. We note
that during opening arguments, Pace’s attorney stated, “DFIC still owns – well, owned up until Mr.
Brandon recently transferred the ownership – owned a very significant piece of real property in
Center Point, Texas.” Although this statement was not evidence, Lashley did not introduce a title
report or other testimony to support a finding that DFIC, L.L.C. currently owns the property Lashley
conveyed to Chaparral and Brandon who then conveyed it to DFIC, L.L.C. Without evidence of the
current ownership, the trial court erred in imposing a constructive trust on the property. See Cote
v. Texcan Ventures, II, 271 S.W.3d 450, 453-54 (Tex. App.—Dallas 2008, no pet.) (noting
circumstances in which transfer of property to third party precludes imposition of constructive trust);
Baker Botts, L.L.P., 224 S.W.3d at 737 n.16 (noting constructive trust may not be imposed upon the
property in the hands of the third party who is a bona fide purchaser for value without notice).
The trial court also imposed a constructive trust on the shares of common stock in Diversified
and Brandon & Company that Lashley conveyed. In his brief, Pace makes an argument that the
imposition of a constructive trust was improper because he only held “the value of the stock in his
name as it was valued in the market at the time the company was liquidated.” Pace provides no
record citations to any evidence of a liquidation. Pace also asserts the terms of the note only entitled
Lashley to the return of her collateral in the event of a default. It would appear that Pace is
contending that a trial court cannot impose a constructive trust if a security agreement only entitles
a secured party to the return of the collateral. Pace does not cite any authority to support this
contention, and we note that it was the conveyance of the stock to DFIC Holding Company that
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compromised Lashley’s security interest in the stock. See Baker Botts, L.L.P., 224 S.W.3d at 736
(noting scope and application of constructive trust is left to discretion of court imposing it). Finally,
Pace contends that the evidence failed to trace the property to an identifiable res. The evidence at
trial, however, traced the stock in Diversified and Brandon & Company that Lashley conveyed to
Chaparral and Brandon to DFIC Holding Company. Accordingly, Pace’s complaints regarding the
constructive trust relating to the stock conveyed by Lashley are overruled.
CONCLUSION
The portion of the trial court’s judgment imposing a constructive trust with regard to the real
property and improvements that Lashley conveyed is reversed, and judgment is rendered denying
Lashley’s request for a constructive trust as to the real property and improvements. The remainder
of the trial court’s judgment is affirmed.
Marialyn Barnard, Justice
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