David Penny v. El Patio, LLC D/B/A El Patio Motel , 2015 Tex. App. LEXIS 5634 ( 2015 )

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-11-00420-CV
David Penny, Appellant
v.
El Patio, LLC d/b/a El Patio Motel, Appellee
FROM THE DISTRICT COURT OF TOM GREEN COUNTY, 119TH JUDICIAL DISTRICT
NO. B-09-0977-C, HONORABLE BEN WOODWARD, JUDGE PRESIDING
OPINION
David Penny appeals from a district-court judgment in favor of El Patio, LLC
on claims involving the alleged mismanagement of the El Patio Motel in San Angelo, Texas. In
three issues, Penny challenges the district court’s (1) denial of Penny’s motion to show authority,
(2) imposition of discovery sanctions striking Penny’s pleadings, and (3) award of joint and several
exemplary damages. For the reasons set forth below, we will reverse and remand the district court’s
award of exemplary damages, but affirm the remainder of the judgment.
Background
The underlying legal dispute began as a response to the non-judicial foreclosure of
the El Patio Motel under a deed of trust securing a $460,000 loan borrowed by the motel’s parent,
appellant El Patio, LLC. Specifically, LLC members Penny and Richard Cheroske filed suit against
the trustee of the sale, Richard Rauber (another LLC member), to invalidate the deed of trust and
set aside the foreclosure. But as occasionally happens, the scope of the underlying suit expanded
to include additional parties and claims that, although related in that they involved the alleged
mismanagement of the motel in the months before the foreclosure, soon overtook the foreclosure
itself. In fact, the foreclosure-related claims were resolved during the course of litigation, while
the claims involving the pre-foreclosure management of the motel survived and are the subject of
this appeal.
At the outset, we will review the formation of the LLC and its purchase of the motel.
In 2003, several business investors—including, relevant here, Penny, Cheroske, Stephen Hyde, and
Rauber—formed the El Patio, LLC to purchase and own the El Patio Motel, a 100 room extended-
stay residence located in San Angelo, Texas. Hyde was named as the LLC’s operating manager, and
the LLC, in turn, hired Blue Castle Property Management, LLC to operate and manage the motel’s
day-to-day business, such as collecting rents, maintaining bank accounts and records, and paying
property and other expenses. Blue Castle was owned by 190 Orange Avenue, which itself was
separately owned by LLC members Penny and Cheroske. In 2004, LLC member Rauber loaned the
LLC $460,000 under a promissory note secured by a deed of trust in the motel, the same deed of trust
under which the motel was later foreclosed. In hopes of a picture saving a thousand words (or at
least making them easier to understand), the following is a general depiction of the relationship web
described above.
2
In July 2009, after Blue Castle (in its management capacity) failed to make
consecutive loan payments on the $460,000 loan, Rauber foreclosed on the note and sold the
motel at a trustee’s sale. One month later, Penny and Cheroske filed the underlying suit—as a
derivative proceeding in their capacity as members of El Patio, LLC, see Tex. Bus. Orgs. Code
§§ 101.451–.463 (describing circumstances under which member owners of limited liability
corporation may maintain “civil suit in the right of a domestic limited liability company,” i.e.,
a “derivative proceeding”)—to challenge the foreclosure on the ground that the deed of trust securing
the loan was invalid. And soon thereafter, the LLC intervened in the foreclosure suit to assert several
third-party claims against Penny, Cheroske, Blue Castle, Blue Castle’s accountant, and 190 Orange
Avenue for conversion, theft liability, breach of fiduciary duty, breach of contract, fraud, negligent
misrepresentation, unjust enrichment, money had and received, and related declaratory and injunctive
relief regarding the management and occupation of the motel.
3
Penny, Cheroske, and the other third-party defendants, believing that the LLC’s
attorney did not have the requisite authority under the entity’s governing documents to intervene on
behalf of the LLC, filed a Rule 12 motion with the district court that required the LLC’s attorney
to demonstrate to the court that he had the authority to prosecute the suit on the LLC’s behalf. See
Tex. R. Civ. P. 12 (“A party in a suit or proceeding pending in a court of this state may, by sworn
written motion stating that he believes the suit or proceeding is being prosecuted or defended without
authority, cause the attorney to be cited to appear before the court and show his authority to act.”).
After two hearings on the issue—the second in response to a motion by the third-party defendants
to set aside the district court’s first denial of their motion—the district court found that the LLC’s
attorney had the authority to prosecute the suit and denied the third-party defendants’ motion,
allowing the LLC’s third-party claims to continue.
Eventually, after Rauber had resolved his claims with the third-party defendants and
agreed with the LLC to set aside the foreclosure, the only remaining claims were El Patio, LLC’s
claims against the third-party defendants. During the course of the litigation of these remaining
claims, the third-party defendants refused to respond to the LLC’s discovery requests and discovery-
related motions until—after issuing an injunction, granting several motions to compel, awarding
significant monetary sanctions, and repeatedly warning the third-party defendants about the
consequences of their continued failure to respond—the district court struck the third-party
defendants’ pleadings and awarded judgment to El Patio, LLC on all its claims. Ultimately,
following a trial on the damages issues only, the district court entered final judgment awarding
El Patio, LLC the declaratory and injunctive relief it had requested, as well as $302,591.47 in actual
damages, $419,506.86 in exemplary damages, pre- and post-judgment interest, and costs of court.
4
Relevant to an issue raised on appeal, the judgment made the third-party defendants jointly and
severally liable for the economic and exemplary damages, pre-judgment interest, and the costs of
court. It is from this final judgment that Penny appeals here.1
Rule 12 motion to show authority
In his first issue, Penny challenges the district court’s denial of the third-party
defendants’ Rule 12 motion challenging the authority of David Mirazo (El Patio, LLC’s attorney)
to prosecute the LLC’s suit. See Tex. R. Civ. P. 12. Specifically, Penny asserts that the
district court’s denial was in error because Mirazo failed to introduce evidence establishing his
authority and, in the alternative, that Mirazo did not have the LLC’s authorization to litigate.
Because an attorney’s authority to file or maintain a suit is a question of law, we review a
district court’s decision on such a matter de novo. See State v. Evangelical Lutheran Good
Samaritan Soc’y, 981 S.W.2d 509, 511 (Tex. App.—Austin 1998, no pet.) (citing Gulf Reg’l Educ.
Television Affiliates v. University of Houston, 746 S.W.2d 803, 806 (Tex. App.—Houston
[14th Dist.] 1988, writ denied)); see also Metz v. Lake LBJ Mun. Util. Dist., No. 03–01–000312–CV,
2002 WL 31476887, at *4 (Tex. App.—Austin Nov. 7, 2002, no pet.) (mem. op., not designated
for publication).2
1
According to El Patio, LLC, various bankruptcy filings in California have left Penny as the
only party remaining in this matter.
2
The parties here insist that our standard of review on this motion is an abuse of discretion
as set forth in the supreme court’s opinion in Urbish v. 127th Judicial Dist. Court, 708 S.W.2d 429,
432 (Tex. 1986) (orig. proceeding), and in two opinions from our sister courts that likewise rely
on Urbish, In re Guardianship of Benavides, 403 S.W.3d 370, 373 (Tex. App.—San Antonio 2013,
pet. denied) (“Appellate courts review a trial court’s ruling on a motion to show authority for an
abuse of discretion.”) and R.H. v. Smith, 339 S.W.3d 756, 762 (Tex. App.—Dallas 2011, no pet.).
But a close reading of Urbish shows that it, at most, supports the application of an abuse-of-
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Penny and Cheroske’s Rule 12 motion asserted that Mirazo lacked authority because
he lacked the authorization from a majority of the members that is required by the LLC’s governing
documents. The LLC, offering an affidavit from Hyde and a copy of its operating agreement,
responded that Hyde, as operating manager, had the authority under the operating agreement to
hire an attorney to prosecute a suit on behalf of the LLC and, further, that more than 70% of
the ownership interest in the LLC had approved the LLC’s petition in intervention. See Tex. R. Civ.
P. 12 (“At the hearing on the motion, the burden of proof shall be upon the challenged attorney to
show sufficient authority to prosecute or defend the suit on behalf of the other party.”). After an
initial hearing on the issue, the district court found that Mirazo had authority to prosecute and denied
Penny and Cheroske’s motion. The district court later reaffirmed that finding and denied a second
motion on the issue after a hearing prompted by Penny and Cheroske’s allegations that they had been
denied the opportunity to present evidence and that Mirazo had presented no evidence that he was
authorized to prosecute El Patio, LLC’s suit.
discretion standard only where the court is otherwise obligated to consider the best-interests of the
party whose attorney is being challenged and the remedy sought is to replace the attorney, not strike
the pleadings as required under Rule 12. In Urbish, a father sought to replace his ex-wife as next
friend in their minor son’s personal-injury suit on the ground that she lacked authority under a
divorce decree, but the supreme court, emphasizing that “[w]hen minors sue, trial courts have the
responsibility to protect the minor’s best interest,” held that the trial court’s decision to deny motion
was not an abuse of its discretion because mother had authority when the suit was initiated, the
suit had been prosecuted two years, and because the father had not shown that the mother’s interests
were adverse to the minor’s. See Urbish, 708 S.W.2d at 431–32. Similarly, Benavides involved the
capacity to hire an attorney in a guardianship proceeding, see 403 S.W.3d at 376–77, and R.H.
addressed whether a minor’s next friend should be removed as his attorney and replaced with the
movant, see 339 S.W.3d at 762–63. Here, we have no best-interest consideration, only a question
of law under Rule 12. Thus, we follow this Court’s holding in Evangelical, 981 S.W.2d at 511.
Cf. Abbott v. G.G.E., No. 03–11–00338–CV, 2015 WL 1968262, at *5 (Tex. App.—Austin Apr. 30,
2015, no pet. h.) (using abuse-of-discretion standard because best interests at issue).
6
On appeal, Penny argues initially that the district court erred in denying his motion
to show authority because Mirazo, El Patio, LLC’s attorney, had “introduced no evidence or
testimony at the hearing in support of his authority.” A cursory examination of the record shows that
this assertion lacks merit. El Patio, LLC’s response (and its response to the motion to set aside the
district court’s first denial of its Rule-12 motion) included an affidavit from Stephen Hyde in which
he averred that he had the authority to retain an attorney to prosecute El Patio, LLC’s claims because
he is the operating manager and the LLC’s operating agreement gives the operating manager “all
powers and rights necessary, proper, convenient, or advisable to effectuate and carry out the
purposes, business and objectives of the Company, and to maximize Company profits.” The LLC
also provided the district court with copies of its operating agreement, bank records, membership
assignments, and three written consents to litigation signed by certain member owners. And at the
second hearing on the attorney-authorization issue, the district court was presented with essentially
the same evidence, plus additional testimony from several live witnesses, including Hyde and
Mirazo. See Boudreau v. Federal Trust Bank, 115 S.W.3d 740, 742 (Tex. App.—Dallas 2003,
pet. denied) (holding that attorney satisfied Rule-12 burden with affidavit from bank’s vice
president); Spigener v. Wallis, 80 S.W.3d 174, 184 (Tex. App.—Waco 2002, no pet.) (attorney
satisfied Rule-12 burden with testimony and affidavit from clients).
With regard to the merits of the authorization issue, Penny argues that the
district court should have granted the motion because Hyde’s position as operating manager of
El Patio, LLC did not vest him with the authority to hire Mirazo to prosecute El Patio, LLC’s
petition. Specifically, Penny contends that because the LLC’s operating agreement does not contain
express language authorizing litigation and because Hyde lacked specific approval from a majority
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interest of the members to conduct the litigation, Hyde lacked the authority under Texas law. In
support of these assertions, Penny cites to what he describes as “a long line of Texas cases which
hold that in the absence of either board of director approval or express authorization in the bylaws
or by special board resolution, the officers of a corporation do not have authority to employ counsel
or initiate litigation.” See Square 67 Dev. Corp. v. Red Oak State Bank, 559 S.W.2d 136 (Tex. Civ.
App. Waco—1977, writ ref’d n.r.e.); Terrace Heights Owners Ass’n v. Corn, No. 05–92–02073–CV,
1993 WL 268912 (Tex. App.—Dallas, 1993, writ denied). We disagree.
First, Penny’s interpretation of the LLC’s operating agreement—that it does not give
Hyde, as the operating manager, the authority to litigate on behalf of the LLC—conflicts with the
plain language of that document.3 The operating agreement’s provision regarding management of
the LLC, although it never references litigation, gives the operating manager sole and exclusive
control over the company’s business and grants to the operating manager all the powers and rights
needed to conduct that business:
The Company shall be managed by the Operating Managers,
who shall be paid a fee for serving as Operating Managers, and the
conduct of the Company’s business shall be controlled and conducted
3
Under the well-known principles of contract construction, the primary objective in
construing a written agreement is to determine the intent of the parties as expressed in the
instrument. See J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003); National Union
Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995). In construing the agreement’s
language, we must apply the ordinary and generally accepted meanings of the words used unless the
contract indicates that the language used is intended to impart a technical or different meaning. See
American Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 158 (Tex. 2003). In addition, we must
give effect to all provisions so that none are rendered meaningless. Id. at 157. If the terms used in
the contract can be given a definite or certain legal meaning, the contract is unambiguous and
will be enforced as written. David J. Sacks, P.C. v. Haden, 266 S.W.3d 447, 451 (Tex. 2008); Coker
v. Coker, 650 S.W.2d 391, 394 (Tex. 1983).
8
solely and exclusively by the Operating Managers in accordance with
this Agreement. In addition to and not in limitation to any rights and
power conferred by law or other provisions of this Agreement, the
Operating Managers shall have and may exercise on behalf of the
Company all powers and rights necessary, proper, convenient or
advisable to effectuate and carry out the purposes, business and
objectives of the Company, and to maximize Company profits.4
(Emphasis added.) Further, the agreement undisputedly names Hyde as the LLC’s operating
manager: “Management of the Company shall be vested in the Members who shall serve as
Operating Managers of the Company, initially Stephen Hyde.” The plain intent of this provision is
to grant Hyde, as operating manager, full and sole control over the company’s business and to
give him, as operating manager, all powers and rights necessary to conduct that business. See
Lopez v. Munoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 861 (Tex. 2002). It is hard to imagine
a broader grant of managerial power, but preventing or recovering from losses, whether by
theft, misappropriation, bad management, or otherwise, certainly falls under the umbrella of
“the purposes, business and objectives” of any company. Moreover, maintaining, reasserting, or
regaining control of the company’s real property and other assets—the purpose of the LLC’s claims
here—would likewise fall under the same umbrella. By extension, actions taken to do those things,
including filing suit against the persons and entities believed to have misappropriated funds from the
motel’s bank accounts, mismanaged the motel, and who will not relinquish control of the motel
property are necessary, proper, and advisable for the motel’s business, objectives, and profits. As
4
The referenced limitation on this authority involved the sale or refinance of real property.
9
such, Hyde, as the named operating manager, had the authority under the plain terms of El Patio,
LLC’s operating agreement to litigate the claims at issue here on behalf of the LLC, and we
hold accordingly.
Even if the LLC’s operating agreement did not expressly grant Hyde the authority to
conduct litigation on the LLC’s behalf, however, the cases that Penny cites in support of his
proposition—i.e., that Texas law requires express language in the bylaws or approval from the board
of directors for an officer to litigate on behalf of a corporation—would not inform our decision here
because (1) they involved corporations, not LLCs and, relatedly, (2) were decided under the now-
expired and recodified article 2.31of the Texas Business Corporation Act. See Texas Business
Corporations Act, 54th Leg., R.S., ch. 64, art. 2.31, 1955 Tex. Gen. Laws 239, 256–57, repealed and
recodified by Act of May 13, 2003, 78th Leg., R.S., ch. 183, § 2, 2003 Tex. Gen. Laws 267, 595
(providing that “the business and affairs of a corporation shall be managed by a board of directors”
(emphases added)). The “current” version of article 2.31 is located in the Texas Business
Organizations Code (TBOC) chapter specific to for-profit corporations, which in turn is located
in “Title 2 Corporations,” meaning that it is not applicable to limited-liability corporations such
as El Patio, LLC. See Tex. Bus. Orgs. Code §§ 1.002(14) (defining “corporation”), 21.401(a)
(corporations are managed by board of directors); see also id. §§ 101.001–622 (provisions specific
to LLCs). More important, however, is that the TBOC provisions applicable here—including those
applicable to all business organizations and those specifically applicable to limited-liability
companies—provide that, unless the entity’s governing documents provide otherwise, a limited
liability company’s affairs are managed and directed by managers. See id. §§ 1.002(35)(A)(iii)–(iv)
(defining “governing authority”), 1.002(46) (defining “limited liability company”), 3.101 (governing
10
authority generally), 101.251 (LLC governing authority). Thus, if an LLC’s operating agreement
does not grant its operating manager the powers and rights discussed above, its manager would
manage the company under the gap-filling provisions of the TBOC, not as described in the cases
cited by Penny. See id. §§ 101.052(b), .252 (providing that LLC company agreement governs, but
to extent agreement does not otherwise provide, TBOC governs); see also id. §§ 1.002(35)(A),
101.251, .252 (unless governing documents provide otherwise, managers of LLC manage and
direct affairs).
Penny next argues that, regardless of the authority granted by the LLC’s operating
agreement, the second sentence in the following paragraph of the operating agreement requires that
every action by the LLC must be voted on and approved by a majority interest of the member owners
including, he asserts, the hiring of an attorney:
Management of the Company shall be vested in the Members who shall serve
as Operating Managers of the Company, initially Stephen Hyde, or a company
controlled by him. Except as otherwise provided in this Agreement, all decisions of
the Operating Managers shall be by a majority in interest of the Members. All
Operating Managers must be Members of the Company, or a company controlled by
a member. . . .
(Emphasis added.) We disagree.
Considering the agreement as a whole and harmonizing its provisions with an eye to
the particular business activity sought to be served, we conclude that the language Penny relies on
here merely explains the method by which, in a situation where there is more than one operating
manager and they are not in complete agreement, the managers reach a decision. The paragraph’s
first sentence provides that management of the company will be vested in operating managers,
11
that only members can serve as operating managers, and that Hyde will be the first member to
serve as operating manager. The second sentence, staying within the context of their management
of the LLC, explains that the operating managers’ decisions—i.e., “decisions of the Operating
Managers”—are achieved based on their membership interest. Penny’s interpretation—i.e., to
require a majority vote on every company decision—would render the operating agreement
unreasonable, inequitable, and oppressive, see Reilly v. Rangers Mgmt., Inc., 727 S.W.2d 527, 530
(Tex. 1987) (“Courts will avoid when possible and proper a construction which is unreasonable,
inequitable, and oppressive.”), because it would have the effect of making the agreement’s creation
of operating managers and their duties meaningless given that a member vote would be required for
any and every action. Stated another way, why have operating managers if all decisions must be
made by the members? Penny’s interpretation would likewise render redundant the agreement’s
requirement that a majority in interest of the members approve the selling or refinancing of
real property.
Based on our determination that the operating agreement vests Hyde with authority
to litigate on the LLC’s behalf, we hold that Mirazo satisfied his burden by offering El Patio, LLC’s
operating agreement and Hyde’s affidavit. We overrule Penny’s first issue.
Discovery sanctions
In his second issue, Penny challenges the district court’s decision to strike the third-
party defendants’ pleadings and render judgment for El Patio, LLC as a form of discovery sanctions.
We review a trial court’s imposition of sanctions for an abuse of discretion. Cire v. Cummings,
134 S.W.3d 835, 838 (Tex. 2004). We will reverse this ruling only if the district court acted
12
“without reference to any guiding rules and principles,” such that its ruling was arbitrary
or unreasonable. Id. at 839. In determining whether the trial court abused its discretion,
we must ensure that the sanctions were appropriate or just. TransAmerican Natural Gas Corp.
v. Powell, 811 S.W.2d 913, 917 (Tex. 1991). Imposition of sanctions is appropriate (1) if there is
a direct relationship between the improper conduct and the sanctions imposed—i.e., the sanctions
must be directed against the abuse and abuser and be tailored to remedy any prejudice the abuse
caused—and (2) if the sanctions are not excessive—i.e., the punishment should fit the crime. Id.
The imposition of severe sanctions—such as the death-penalty sanctions assessed here—is also
limited by constitutional due-process concerns because it adjudicates the merits of a party’s claims
or defenses. As such, severe sanctions are not appropriate unless the offensive conduct justifies a
presumption that the party’s claims or defenses lack merit. Id.
To determine whether the district court’s sanctions were an abuse of discretion under
the above guidelines, we begin by reviewing the discovery events leading up to the district court’s
decision. Early in the litigation, El Patio, LLC filed multiple forms of written discovery directed at
each of the third-party defendants, including interrogatories, requests for disclosure, requests for
admission, depositions on written questions, and requests for production. Given that many of its
claims involved allegations of mismanagement of the motel and misappropriation of funds from the
motel’s bank accounts, El Patio, LLC focused certain of its discovery requests on obtaining
information and records regarding the motel’s bank accounts. The following is a chronological
accounting of the discovery motions and orders related to the LLC’s efforts to get the third-party
defendants to respond to these discovery requests.
13
December 31, 2009 Temporary injunction issues—includes order that third-party
defendants turn over bank information and records.
February 23, 2010 El Patio, LLC files motions to compel, for contempt, and for
sanctions. Penny does not file a response.
March 3, 2010 Hearing on motion for sanctions—district court warns third-
party defendants that failure to respond to discovery requests
“could result in striking pleadings,” and sets a March 18
deadline for the responses.
March 8, 2010 El Patio, LLC files motion for sanctions.
March 25, 2010 District court issues order compelling discovery responses.
April 14, 2010 District court imposes discovery sanctions of $810 and orders
third-party defendants to appear and show cause why they
should not be held in contempt.
April 23, 2010 El Patio, LLC files motion to compel and for sanctions.
Penny does not file a response.
May 5, 2010 District court imposes discovery sanctions of $11,185.57.
June 28, 2010 Hearing on El Patio, LLC’s motions to compel and for
sanctions—district court orders third-party defendants to
appear at July 14 show-cause hearing and explain “why the
Court should not at this point strike all of the plaintiff’s
pleadings, as well as Blue Castle’s pleadings, for failure to
complete discovery. That is somewhat of a—that’s kind of a
final solution, to strike pleadings, but the Court has entered
many discovery orders prior to this, and so it’s gotten to the
point where the—the final solution may be the only solution.”
July 21, 2010 Penny and Cheroske file motion to show authority.
August 16, 2010 El Patio, LLC files motions for contempt, to compel, and for
sanctions. Penny files no response.
October 22, 2010 El Patio, LLC files motions to compel and for sanctions.
Penny files no response.
14
October 26, 2010 El Patio, LLC files motion to strike third-party defendants’
pleadings and motion for sanctions. Penny files no response.
November 1, 2010 District court issues order compelling discovery responses by
certain deadline, admissions deemed, and to show cause
regarding contempt.
January 7, 2011 Hearing on various motions for contempt, to compel, and for
sanctions, including motion to strike pleadings. El Patio,
LLC presents extensive evidence. Penny offers none.
February 26, 2011 District court issues orders for pending discovery motions,
granting motions for contempt and to compel, and awarding
sanctions of $16,370, $450, $450, and $900; and grants El
Patio’s motion to strike pleadings.
In addition to the above, the record suggests that the third-party defendants delayed court-ordered
mediation by not responding to discovery or producing the requested documents. Further, at one
point, the third-party defendants told El Patio, LLC that the bank records would be at their
accountant’s office, but the documents were not there when El Patio, LLC went there to obtain them.
But, with the exception of a printout of a computer program that the LLC already had and one set
of unsigned responses to admissions, the third-party defendants systematically avoided responding
to the LLC’s discovery requests and, in fact, never produced the requested records.
In its order granting the motion to strike pleadings, the district court found that
defendants “have abused the discovery process, have failed to comply with El Patio’s discovery
requests, and have disregarded th[e] Court’s orders regarding discovery.” The district court also
concluded that lesser-assessed “sanctions have failed,” and then awarded additional monetary
sanctions and entered judgment in favor of El Patio, LLC on all its claims.
15
On appeal, Penny does not dispute the events as set forth above or that he and the
other third-party defendants failed to produce the bank account documents as ordered. Instead, he
argues that the trial court abused its discretion in striking the pleadings because Penny “had a
legitimate reason to delay responding to discovery until the court had ruled on the authority of
Mirazo to file the [petition in] intervention” and because “the discovery sought was basically in the
possession of Stephen Hyde.” We disagree.
Penny and the third-party defendants did not file the motion to show authority until
July 21, 2010. By that time, the discovery deadlines had already passed and the district court had
imposed sanctions totaling $11,995.57 against the third-party defendants for their failure to produce
the documents. In fact, the third-party defendants did not raise the lack-of-authority issue as a
“defense” to these discovery requests until well after they had filed the motion to show authority.
Further, when questioned at the various hearings by the district court about the failure to respond to
discovery, Penny’s attorney responded by saying either that he thought the documents had already
been produced or that he expected that they soon would be, but not that his clients were refusing to
comply based on their assertion that Mirazo lacked the authority to seek discovery.
Even if we were to accept that the third-party defendants thought they could ignore
the discovery requests because Mirazo lacked the authority to prosecute the case, however, Penny
does not explain what excused them from observing the injunction and orders of the district court,
whose authority here is undeniable. Finally, Penny cites to no authority, and we have found none,
supporting his argument that a pending Rule 12 motion excuses a party from obeying discovery
requests, much less injunctions and other court orders. Nor does the record show that the
district court suspended discovery, abated discovery, or did anything else that would provide an
16
excuse, while the motion to show authority was pending. To the contrary, the record shows that the
district court specifically denied Penny’s request to abate the matter pending a decision on the
motion to show authority and, for that matter, that each time the district court addressed the third-
party defendants’ failure to produce the documents, it expressly warned them that their continued
failure to comply with the discovery-related orders could result in additional sanctions, including the
possibility of having their pleadings struck. The district court also gradually increased the sanctions
against them.
Penny also argues that the district court’s sanctions were an abuse of discretion
because “the discovery sought was basically in the possession of Stephen Hyde.” In support of this
argument, Penny directs us to certain exhibits submitted by El Patio, LLC in the damages portion
of the trial. These exhibits include various El Patio Motel bank statements, cancelled checks, and
other financial documents, but also documents that appear to have been generated by El Patio, LLC
for litigation—e.g., summary of payments to third-party defendant lawyers; summary of unlawful
management fees after termination; summary of excessive management fees; and summary of
missing cash. But again, Penny cites to no authority, and we can find none, that would excuse a
party from responding to discovery requests and complying with court orders because the other party
might already have the documents that are the subject of the discovery requests and orders.
Likewise, he cites no authority supporting his implied assertion that a trial court may only impose
discovery sanctions where the underlying discovery requests sought information about matters
unknown to the requestor. But the lack of authority is not surprising given that the purpose of
discovery is to provide parties with notice of the evidence that the opposing party intends to present
17
and to prevent trial by ambush, and not merely to gain new information. See Ersek v. Davis & Davis,
P.C., 69 S.W.3d 268, 274 (Tex. App.—Austin 2002, pet. denied).
Nevertheless, to the extent that Penny’s argument could be considered a general
allegation that the district court’s imposition of death-penalty sanctions here was unjust or
inappropriate, or somehow failed to meet the supreme court’s standards for death-penalty sanctions,
we also disagree. The district court allowed the parties to enter into an agreed temporary injunction
covering the relevant bank documents. Then, after being presented with several motions regarding
the failure to comply with the discovery requests, the district court began issuing orders compelling
the discovery by certain deadlines and imposing smaller sanctions after the third-party defendants
completely refused to respond to the discovery requests and failed to offer any reasons for that
failure. Over time, the district court continued ordering compliance, gradually increasing the
sanction amounts, while also warning the third-party defendants about the consequences of their
continued failure. Finally, the district court, when it determined that nothing else would work,
struck the offending parties’ pleadings. See Cire, 134 S.W.3d at 842–43; Spohn Hosp. v. Mayer,
104 S.W.3d 878, 882–83 (Tex. 2003); Transamerican, 811 S.W.2d at 917.
We are also satisfied that the district court’s sanctions do not run afoul of
Penny’s due-process rights given that the sanctioned conduct—repeated refusal to turn over
key documents—justifies a presumption that the party’s claims or defenses lack merit. See
TransAmerican, 811 S.W.2d at 917. According to the record, Penny and the third-party defendants
refused to respond to any of the discovery requests, with the exception of one summary document
from a computer program, and filed no responses to El Patio, LLC’s multiple motions. The principal
documents at issue in this discovery—i.e., the bank-account information, bank records, and other
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financial information for the El Patio Motel—go to the heart of El Patio, LLC’s mismanagement
claims against Penny and the other third-party defendants. Without all the bank records to trace the
motel’s funds, especially possibly incriminating ones withheld by the third-party defendants, it seems
unlikely that El Patio, LLC would be able to prove the claims asserted in its live petition in
intervention, all of which rely in some part on assertions involving transactions with motel funds.
For example, El Patio, LLC’s conversion and theft-liability claims assert that the third-party
defendants “paid themselves excessive and unauthorized management fees and have taken other
funds.” The third-party defendants’ refusal to produce the very documents that would be at the core
of the claims asserted against them justifies a presumption that their defenses against those claims
lack merit. See id. at 918.
In sum, considering the record and the district court’s actions leading up to and
including striking the third-party defendants’ pleadings, we cannot agree the district court’s
imposition of death-penalty sanctions was an abuse of discretion. We overrule Penny’s second issue.
Exemplary damages
In his third and final issue, Penny asserts that the district court’s award of exemplary
damages jointly and severally against Penny and the other third-party defendants was improper
under section 41.006 of the Texas Civil Practices and Remedies Code. We agree. By its plain terms,
section 41.006 prohibits joint and several liability for exemplary damages by requiring that the award
of exemplary damages be specific as to a defendant and that the defendant be liable only for the
amount of the award against him: “[I]n any action where there are two or more defendants, an
award of exemplary damages must be specific as to a defendant, and each defendant is liable only
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for the amount of the award made against that defendant.” Tex. Civ. Prac. & Rem. Code § 41.006;
see Carlton Energy Grp., LLC v. Phillips, 369 S.W.3d 433, 465 (Tex. App.—Houston [1st Dist.]
2012) (rejecting argument that alter ego finding trumps 41.006’s plain language), aff’d in part, rev’d
in part, __S.W.3d__, No. 12–0255, 2015 WL 2148951 (Tex. May 8, 2015) (section 41.006 issue
was not raised appealed to supreme court); Computek Computer & Office Supplies, Inc. v. Walton,
156 S.W.3d 217, 223–24 (Tex. App.—Dallas 2005, no pet.) (“By its plain terms, section 41.006
provides that there is no joint and several liability for exemplary damages.”); see also, e.g., City of
Rockwall v. Hughes, 246 S.W.3d 621, 625 (Tex. 2008) (noting “we ascertain and give effect to the
Legislature’s intent as expressed by the language of the statute” and “we construe the statute’s words
according to their plain and common meaning”). Accordingly, it was error for the district court to
make Penny jointly and severally liable for these damages.
El Patio, LLC urges us to apply an exception to section 41.006 for closely-related
defendants or for interrelated companies with common decision makers. See Transfer Products, Inc.
v. Texpar Energy, Inc., 788 S.W.2d 713, 717 (Tex. App.—Corpus Christi 1990, no writ) (affirming
joint and several award of exemplary damages against interrelated companies with the same decision
makers). In fact, El Patio, LLC suggests that the Houston Court of Appeals considered and approved
of such a solution in Carlton, and that we should go one step further and adopt it here. But a close
reading of Carlton reveals that First Court of Appeals was merely offering a “suspenders” argument
to support its main holding. See Carlton, 369 S.W.3d at 465 (“However, even if such a finding might
in some circumstances permit joint and several liability for exemplary damages, . . . .”) (emphases
added). Regardless, cases such as Texpar, which allowed the exception, were decided before section
41.006 became applicable and, thus, were governed by the common-law rules for exemplary
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damages. Computek, 156 S.W.3d at 224. Having been enacted by the Legislature, section 41.006
now controls this issue. We sustain Penny’s third issue.
Conclusion
Having sustained Penny’s third issue, we reverse the district court’s joint and several
award of exemplary damages and remand the issue of exemplary damages to the district court for
its reconsideration. We affirm the remainder of the judgment.
__________________________________________
Jeff Rose, Chief Justice
Before Chief Justice Rose, Justices Goodwin and Field
Affirmed in part; Reversed and Remanded in part
Filed: June 4, 2015
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