William E. King and Jericho Graphics Corporation v. Henry H. Haynes

Opinion Issued November 10, 2004  

    In the  

Court of Appeals  

For The

First District of Texas

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  NO. 01-03-00987-CV

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JERICHO GRAPHICS CORPORATION and WILLIAM E. KING,

Appellants

V.

HENRY H. HAYNES, Appellee

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On Appeal from the 11th District Court

Harris County, Texas

Trial Court Cause No. 2002-29685

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MEMORANDUM OPINION

          Appellants, Jericho Graphics Corporation and William E. King, appeal a judgment awarding damages to appellee, Henry H. Haynes, for breach of contract. We determine whether the trial court erred in entering a take-nothing judgment against appellants’ statutory fraud counterclaim. We affirm.

  Facts and Procedural History

          On June 1, 2001, King and Haynes entered into a stock purchase agreement (“the agreement”) whereby King agreed to purchase all of Haynes’s stock in Achecubo, Inc., which conducted business as Industrial Printers. When the agreement was signed, King already owned and operated Jericho Graphics, a printing company. After the agreement was signed, Industrial Printers began operating as Jericho Graphics.

          In section 4.15 of the agreement, Haynes made representations about the amounts of cash, accounts payable, accounts receivable, work in progress, and inventory on hand at the time of the agreement’s closing date. However, Haynes’s representations in the agreement were based on Industrial Printers’s balance sheet account values as of March 31, 2001. Section 4.09 of the agreement provided that the purchaser had the right to cause the acquired corporation to offset any undisclosed liabilities discovered after closing. The agreement’s actual date of closing was June 1, 2001. In July 2001, after the closing of the agreement, another balance sheet was prepared, which reflected the account values as of the actual closing date. The new balance sheet reflected a $10,000 decrease in cash, a $15,000 increase in accounts payable, and an approximately $38,500 decrease in accounts receivable and work in progress from the values stated in the agreement. Altogether, the account values in the agreement (based on the March 31 data) were overstated by approximately $63,500, compared to the values at the actual date of closing.

          However, during this same time, Industrial Printers experienced a loss of $8,000 in equity, approximately a $4,000-per-month loss. This loss was consistent with losses sustained by the company during the previous three months of operation. Also during this period, the working capital of the company actually increased by $31,000.

          On the same date that the agreement was signed, King and Haynes also entered into an employment and non-competition agreement (“the employment agreement”), which stated that Industrial Printers would continue to employ Haynes as general manager of Industrial Printers for a period of five years, at a salary of $55,000 per year. The employment agreement further stated that, beginning April 1, 2004 and continuing thereafter for a period of 24 months, Industrial Printers would pay Haynes a monthly consulting fee of $3,189.72. Thus, Haynes was guaranteed a total of approximately $76,500. King guaranteed the consulting fees as the chairman of Industrial Printers, and also in an individual capacity, thereby personally guaranteeing payment of the consulting fees to Haynes. The employment agreement required 30 days’ notice to terminate Haynes.

          On January 25, 2002, King closed down Jericho Graphics. Haynes subsequently received a paycheck that compensated him for the payroll period ending January 25, 2002. Although he was officially terminated on January 25, Haynes continued to work for Jericho Graphics until February 2, helping to complete the outstanding orders. At the time of Haynes’s termination, Jericho Graphics owed Haynes outstanding business expenses; Haynes was never compensated for any of these expenses. Haynes also never received any of the contracted-for consulting fees.           At the conclusion of the trial, the trial court asked King’s attorney whether scienter was an element of both statutory and common-law fraud. Appellant’s attorney responded affirmatively. Then, the trial court specifically asked again if the plaintiff had to have knowledge of the misrepresentation, and King’s attorney again answered, “correct.”

          In its oral pronouncement, the trial court ruled that Jericho Graphics had to reimburse Haynes for his outstanding business expenses and for one-half month’s salary to cover the additional work that he had performed for the company after his termination. The trial court refused to award Haynes any other post-termination compensation, ruling that Haynes’s request for that compensation had been waived pursuant to the terms of the employment agreement.

          Further, the trial court ruled against King’s counterclaim for statutory fraud because the element of scienter had not been proven. The court stated that it was “unable to find, frankly, that he knew that any of the accounting problems or difficulties in the records or the representations were made knowingly. Therefore . . . while you have proven the inaccuracy of the representations made, you have not proved they were done knowingly.”

          On June 17, 2003, the trial court rendered a judgment consistent with its oral ruling, and, on July 11, 2003, King filed a motion to modify the judgment, based on the court’s misstatement of the law regarding scienter’s being an element of statutory fraud. Haynes filed its response on July 24. The trial court did not modify the final judgment, allowing the motion to be overruled by operation of law. Standard of Review

          We review conclusions of law de novo and are free to draw our own legal conclusions. McDermott v. Cronin, 31 S.W.3d 617, 623 (Tex. App.—Houston [1st Dist.] 2000, no pet.). We uphold the trial court’s conclusions if the judgment can be sustained on any legal theory supported by the evidence. Connelly v. Paul, 731 S.W.2d 657, 661 (Tex. App.—Houston [1st Dist.] 1987, writ ref’d n.r.e). An erroneous finding of an immaterial fact or conclusion of law does not mandate reversal of the judgment if the controlling findings support a correct legal theory. Hitzelberger v. Samedan Oil Corp., 948 S.W.2d 497, 503 (Tex. App.—Waco 1997, pet. denied). Although a trial court’s conclusions of law may not be challenged for factual sufficiency, the trial court’s legal conclusions drawn from the facts may be reviewed to determine their correctness. Vannerson v. Vannerson, 857 S.W.2d 659, 667 (Tex. App.—Houston [1st Dist.] 1993, writ denied).

Statutory Fraud Counterclaim

          In a single point of error, appellants contend that the trial court erred in failing to enter a judgment in favor of their statutory fraud counterclaim because the trial court based its decision on a misstatement of the law. Specifically, appellants contend that the trial court’s denial of their counterclaim based on the fact that appellants had failed to show that Haynes had knowingly made false representations was erroneous because a claim for statutory fraud does not require proof of intent.

          A party establishes a statutory fraud claim under section 27.01 of the Business and Commerce Code by showing (1) a false representation of a material fact (2) made to induce a person to enter a contract and (3) relied on by that person in entering into the contract. Tex. Bus. & Com Code Ann. § 27.01(a)(1) (Vernon 2002).         
            A claim for statutory fraud under section 27.01 is “generally less demanding than common law fraud, imposing liability upon the maker of a misrepresentation without proof that he intended to deceive or knew that the representation was false.” Diversified, Inc.v. Walker, 702 S.W.2d 717, 723 (Tex. App.—Houston [1st Dist.] 1985, writ ref’d n.r.e.); Robbins v. Capozzi, 100 S.W.3d 18, 26 (Tex. App.—Tyler 2002, no pet.); Larsen v. Carlene Langford & Assoc., Inc., 41 S.W.3d 245, 249 (Tex. App.—Waco 2001, pet. denied). In other words, “statutory fraud differs from the common law cause of action only in that it does not require proof that the false representation was made knowingly or recklessly.” Robbins, 100 S.W.3d at 26 (citing Fletcher v. Edwards, 26 S.W.3d 66, 77 (Tex. App.—Waco 2000, pet. denied)). It must, however, be made with the intent to induce the claimant into entering the transaction. Id.

          Appellants contend that the trial court erred in denying their statutory fraud claim because the trial court based its denial on the fact that appellants had failed to prove intent on the part of appellee. Appellants rely on the recitation in the trial court’s judgment that appellants had not proved intent. In response, appellee argues that the trial court’s decision was correct because statutory fraud does require some finding of intent and because the evidence shows that Haynes’s misrepresentations were not material. Despite appellants’ reliance on recitations in the judgment, findings of fact and conclusions of law cannot be recited in a judgment. Tex. R. Civ. P. 299a; See also Frommer v. Frommer, 981 S.W.2d 811 (Tex. App.—Houston [1st Dist.] 1998, pet. dism’d).      The trial court made no findings of fact or conclusions of law. When a trial court makes no separate findings of fact or conclusions of law, and an appellant fails to file a notice of past due findings of fact and conclusions of law, we must draw every reasonable inference supported by the record in favor of the trial court’s judgment and must deem the trial court to have based its judgment on any legal theory supported by its implied findings. Black v. Dallas County Child Welfare Unit, 835 S.W.2d 626, 636 (Tex. 1992); Wordford v. Stamper, 801 S.W.2d 108 (Tex.1990). In other words, in the absence of findings of fact and conclusions of law, appellants had the burden to show that the trial court’s judgment was not supported by any legal theory raised by the evidence by proving all of the elements of the claim as a matter of law. Point Lookout West v. Whorton, 742 S.W.2d 277, 279 (Tex. 1987).

          In this case, appellants have failed to challenge the trial court’s implied conclusions or the implied findings underlying them. For example, Haynes points to one reasonable inference supported by the record in favor of the judgment; that Haynes’s misrepresentations were not material. Appellants have failed to show that the trial court’s judgment was erroneous by refuting the trial court’s implied findings relating to the elements (such as materiality) of their claim. We may not reverse a judgment of the trial court for a reason not raised in a point of error. Walling v. Metcalfe, 863 S.W.2d 56 (Tex. 1993). Because appellants have not challenged all inplied findings that could have defeated their counterclaim, we must affirm the judgment of the trial court.

          We overrule appellants’ sole point of error.

Conclusion

          We affirm the judgment of the trial court.   

                                                                        Tim Taft                                                                                                             Justice

Panel consists of Justices Taft, Jennings, and Bland.