Richard Alan Haase v. GIM Resources, Inc., and Mr. Chris Bloch

Opinion issued August 19, 2010

In The

Court of Appeals

For The

First District of Texas

NO. 01-09-00696-CV

RICHARD ALAN HAASE, Appellant

V.

GIM RESOURCES, INC. AND CHRIS BLOCH, Appellees

On Appeal from the 240th District Court

Fort Bend County, Texas

Trial Court Cause No. 08-DCV-165688

MEMORANDUM OPINION ON REHEARING

          In this suit for fraud, negligent misrepresentation and professional malpractice, the trial court denied Richard Haase’s motion to compel production of documents and granted summary judgment in favor of Chris Bloch and GIM Resources, Inc. (collectively, GIM).  On appeal, Haase contends that (1) fact issues exist, and (2) the trial court should have granted Haase’s motion to compel and performed an in camera review of any responsive documents.  We withdraw our opinion and judgment dated May 6, 2010 and issue this opinion in its stead to address an argument GIM advances in its motion for rehearing.  Our disposition of the case is unchanged.  We hold that Haase failed to demonstrate that the trial court’s discovery ruling probably caused the rendition of an improper judgment.  We uphold the summary judgment on Haase’s negligence, negligent misrepresentation, and professional malpractice claims because Haase did not raise any evidence showing that GIM owes him a legal duty.  However, because legal duty is not an element of fraud and GIM did not present additional summary judgment grounds to rebut Haase’s fraud claim, we reverse that part of the judgment and remand that claim to the trial court for further proceedings.

Background

In January 2008, Haase, the president and CEO of Clear Value, Inc., met with Element Markets and Chris Bloch, president of GIM, to discuss the possibility of Element Markets investing in the development and production of Haase’s water combustion technology.  Element Markets hired Bloch as a “consulting expert” to evaluate Haase’s technology and provide a recommendation regarding investment.  At this meeting, Bloch represented that he was an “expert in the art of combustion and of combustion science” and agreed to provide documentation of his expertise prior to reviewing Haase’s technology.  Bloch also agreed that if he had any questions about the technology he would confer with Haase and his technical staff.  Bloch never provided Haase with any documentation regarding his expertise.

In arriving at his conclusions and recommendation, Bloch reviewed Haase’s United States patent application for the technology.  Bloch’s report to Element Markets described Haase’s technology, the problems with the technology, and the non-feasibility of combining the technology with current engine designs.  Bloch recommended to Element Markets that it not invest in the technology.  After Element Markets ended investment negotiations with Haase and Clear Value, Haase sued GIM for fraud and negligence.  Haase alleged that Bloch’s report (1) made disparaging remarks about the technology, (2) did not contain confirmation of Bloch’s expertise in combustion and combustion science, and (3) did not “fully reference” Haase’s patent application.  As a result, Haase alleged that he could not determine if Bloch had properly reviewed the patent application to form his opinions about the technology. In addition to the loss of Element Markets’ investment, Haase contended that if Bloch had “properly referenced” the report, he would have been able to present Bloch’s report to the Patent and Trademark Office (PTO) as “very good evidence of non-obviousness of the inventions.”[1]

Haase alleged that GIM committed common-law fraud by misrepresenting Bloch’s skill in the field of combustion and combustion science.  Haase also alleged that GIM was negligent by not (1) properly reviewing Haase’s patent application, (2) properly interpreting the application, (3) referencing the application in the report, and (4) referencing Block’s skill in combustion in the report.  With his original petition, Haase also served requests for disclosure and production of documents.  GIM did not produce any documents in response to the requests for production.  Haase initially requested production of twenty-three categories of documents.  In response, GIM raised the attorney-client privilege as grounds for objection to nine categories, and the work product privilege as grounds for objection to two categories.  For thirteen categories, GIM objected on the grounds that Haase’s requests were overbroad, unduly burdensome, and not reasonably calculated to lead to the discovery of admissible evidence.

Haase moved to compel production of nine categories of documents.[2]  In his motion to compel, Haase stated GIM’s objections to each request and his contentions for why each request was proper.  Haase repeatedly stated that he was not seeking any documents protected by the attorney-client or work product privileges, and he only sought documents within GIM’s control and that would not be overly broad or burdensome to produce. Haase prefaced six of his responses with the statement that “[t]his is a negligence lawsuit.”  The trial court denied Haase’s motion to compel.

GIM moved for traditional and no-evidence summary judgment.  GIM contended that, although Haase sued for both negligence and common law fraud, Haase judicially admitted that his suit was only for negligence by stating in his motion to compel that “[t]his is a negligence lawsuit.”  According to GIM, Haase’s negligence claim failed because GIM and Haase were not in privity of contract and GIM owed Haase no legal duty.  Aside from contending that Haase’s statements in his motion to compel constituted judicial admissions that the suit was only for negligence, GIM did not address Haase’s fraud claim.

After GIM moved for summary judgment, Haase amended his petition to add claims for negligent misrepresentation and professional malpractice.  In his summary judgment response, Haase contended that the most important factor in determining whether a defendant owes a legal duty is foreseeability of the harm, and it was foreseeable that GIM’s false information and misrepresentations in the report to Element Markets would affect Haase’s business dealings and the likelihood that the PTO would issue a patent for Haase’s technology.  Haase attached his own affidavit, plus declarations made by Chester Vaughan and Colin Walker, an expert and one of ordinary skill in combustion science, respectively, who opined for the purpose of Haase’s patent application that the technology “answers a long felt need of humanity” to raise a fact issue on whether GIM acted in a reasonably prudent manner in reviewing and reporting on Haase’s technology.

In reply, GIM contended that Haase lacked standing to file suit in his individual capacity because the injuries that Haase alleged were suffered by his corporation, Clear Value, and not by Haase individually.  GIM argued that only the corporation can sue for damage to its property, and Haase, as a shareholder of Clear Value, cannot bring an independent cause of action for harm suffered by the corporation.

In response, Haase contended that the technology at issue was owned by Haase himself and not Clear Value.  Haase pointed to the patent application and a previous patent issued by Great Britain, neither of which indicates an assignment of ownership in the technology from Haase to Clear Value or any other corporation.  Haase also contended that he was a necessary part of any business discussions between Clear Value and Element Markets, and Clear Value “would only have been a commercialization vehicle for Plaintiff’s [t]echnology.”

The trial court granted GIM’s summary judgment motion “on all claims asserted by [Haase].”

Discussion

Standard of Review

We review de novo the trial court’s ruling on a motion for summary judgment. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex. 2009).  In a traditional motion for summary judgment, the movant must establish that no genuine issue of material fact exists and the movant is thus entitled to judgment as a matter of law.  Tex. R. Civ. P. 166a(c).  A genuine issue of material fact exists if the non-movant produces more than a scintilla of probative evidence regarding the challenged element.  See Ford Motor Co. v. Ridgway, 135 S.W.3d 598, 600 (Tex. 2004); see also Forbes Inc. v. Granada Biosciences, Inc., 124 S.W.3d 167, 172 (Tex. 2003) (“More than a scintilla of evidence exists if it would allow reasonable and fair minded people to differ in their conclusions.”).  We examine the evidence in the light most favorable to the non-movant and we indulge all reasonable inferences and resolve all doubts in the non-movant’s favor.  See Goodyear Tire & Rubber Co. v. Mayes, 236 S.W.3d 754, 756 (Tex. 2007) (per curiam).

Capacity to Sue

          GIM contends that Haase’s summary judgment evidence conclusively establishes that Haase was acting in his capacity as president and CEO of Clear Value when he negotiated with Element Markets, and thus he lacks standing to sue in his individual capacity.  Standing and capacity to sue are related but distinct legal concepts: “[a] plaintiff has standing when it is personally aggrieved, regardless of whether it is acting with legal authority; a party has capacity when it has the legal authority to act, regardless of whether it has a justiciable interest in the controversy.”  Nootsie, Ltd. v. Williamson County Appraisal Dist., 925 S.W.2d 659, 661 (Tex. 1996). Standing is a component of subject matter jurisdiction and can never be waived.  Tex. Ass’n of Bus. v. Tex. Air Control Bd., 852 S.W.2d 440, 443, 446 (Tex. 1993).  In contrast, “an argument that an opposing party does not have the capacity to participate in a suit can be waived.”  Nootsie, Ltd., 925 S.W.2d at 662.  A challenge to who owns a particular claim raises the issue of capacity, not standing. Prostok v. Browning, 112 S.W.3d 876, 921 (Tex. App.—Dallas 2003), rev’d in part on other grounds, 165 S.W.3d 336 (Tex. 2005).  Although GIM frames its contention as a lack of standing, the basis of its complaint is that Haase, in negotiations with Element Markets, was acting in his capacity as president and CEO of Clear Value, and Clear Value owned the technology at issue.  GIM contends that Haase, as a shareholder of Clear Value, cannot personally recover damages for wrongs done to the corporation, and therefore lacks the authority to bring this suit.  GIM challenges Haase’s authority to sue in his individual capacity, it does not challenge whether he has been personally aggrieved by GIM’s alleged conduct.  This challenge, therefore, is appropriately one of capacity, not standing.  See Mackie v. Guthrie, 78 S.W.3d 462, 465–66 (Tex. App.—Tyler 2001, pet. denied) (“In other words, Mackie argues that Guthrie, as an individual shareholder, was without authority to act, irrespective of whether he was aggrieved. . . . [T]he underlying facts upon which Mackie bases his contention are inescapably related to the issue of capacity.”).

          Rule 93 of the Texas Rules of Civil Procedure requires that pleadings asserting certain defenses be verified by affidavit “unless the truth of such matters appear[s] of record.”  Tex. R. Civ. P. 93.  A party must file a verified pleading when arguing that the plaintiff does not have the legal capacity to sue or that the plaintiff cannot recover in the capacity in which he sues.  Id. 93(1)–(2); Sixth RMA Partners, LP v. Sibley, 111 S.W.3d 46, 56 (Tex. 2003) (“When capacity is contested, Rule 93 requires that a verified plea be filed unless the truth of the matter appears of record.”); Pledger v. Schoellkopf, 762 S.W.2d 145, 146 (Tex. 1988) (per curiam) (“Rule 93(2) requires that a verified plea be filed anytime the record does not affirmatively demonstrate the plaintiff’s or defendant’s right to bring suit or be sued in whatever capacity he is suing.”).  The Texas Supreme Court has “not hesitated in previous cases to hold that parties who do not follow Rule 93’s mandate waive any right to complain about the matter on appeal.”  Nootsie, Ltd., 925 S.W.2d at 662; see also Nine Greenway Ltd. v. Heard, Goggan, Blair & Williams, 875 S.W.2d 784, 787 (Tex. App.—Houston [1st Dist.] 1994, writ denied) (“A party who fails to raise the issue of capacity through a verified plea waives that issue at trial and on appeal.”).

Here, GIM raised the issue of Haase’s capacity to sue in its unverified summary judgment reply.  A party may properly raise the issue of capacity in an unverified pleading if “the truth of such matters appear[s] of record.”  Tex. R. Civ. P. 93.  For example, the Dallas Court of Appeals recently held that an unverified supplemental answer properly raised the question of a party’s individual liability when the “unambiguous language” of a settlement agreement included in the summary judgment record demonstrated that the party did not assume personal liability.  Investin.com Corp. v. Europa Int’l, Ltd., 293 S.W.3d 819, 825 (Tex. App.—Dallas 2009, pet. denied).  Because the “matter of Brigg’s capacity appears of record in the summary judgment evidence,” the Dallas Court did not require verification of the supplemental answer as a prerequisite to addressing the capacity question on appeal.  Id.; see also Cantu v. Holiday Inns, Inc., 910 S.W.2d 113, 117 (Tex. App.—Corpus Christi 1995, writ denied) (“[We] hold that if the asserted defect in parties appears of record in the summary judgment evidence in the case at bar, no verification is necessary.”).

In contrast to both Investin.com and Cantu, the summary judgment record here does not contain uncontroverted evidence that Clear Value owned Haase’s technology or that GIM’s actions solely injured Clear Value and not Haase individually.  In response to GIM’s summary judgment reply, in which it first raised the issue of capacity, Haase stated that he was not suing in the capacity of a shareholder of Clear Value, and he contended that he, and not Clear Value, owned the technology. Haase attached excerpts from his International and United States patent applications and his Great Britain patent, none of which reflected an assignment of the ownership of the technology from Haase to Clear Value.  In his affidavit, Haase averred that Clear Value had no ownership interest in the technology, and because Haase solely owns the technology, all “business arrangements” and negotiations involving the use of and investments in the technology must involve Haase.  We hold that the summary judgment record does not establish that Haase lacks capacity.  As a result, we do not consider GIM’s capacity argument on appeal.  See Nootsie, Ltd., 925 S.W.2d at 662.

Legal Duty

Haase contends that GIM owed him a legal duty in its reporting on his technology for Element Markets; GIM breached this duty by (1) misrepresenting information about the technology in its report to Element Markets, (2) not adequately reviewing Haase’s technology, and (3) failing to demonstrate Bloch’s skill in the field of combustion.  Although Haase labeled his causes of action as separate claims for negligence and negligent misrepresentation, he complains solely of GIM’s conduct in preparing a report on Haase’s technology at the request and for the benefit of a third party, Element Markets.  Haase therefore alleges a claim for negligent misrepresentation.  See Farmers Tex. County Mut. Ins. Co. v. Griffin, 955 S.W.2d 81, 83 (Tex. 1997).

A party may be liable for negligent misrepresentation if:  (1) the defendant makes the representation in the course of his business, or in a transaction in which he has a pecuniary interest; (2) the defendant supplies “false information” for the guidance of others in their business; (3) the defendant did not exercise reasonable care or competence in obtaining or communicating the information; and (4) the plaintiff suffers pecuniary loss by justifiably relying on the representation.  Fed. Land Bank Ass’n of Tyler v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991); see also Restatement (Second) of Torts § 552 (1977); McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787, 791 (Tex. 1999) (acknowledging the application of section 552 to other professionals and extending the application to attorneys). Liability for negligent misrepresentation is “based upon the professional’s manifest awareness of the nonclient’s reliance on the misrepresentation and the professional’s intention that the nonclient so rely.”  McCamish, 991 S.W.2d at 792, 794 (“This formulation limits liability to situations in which the attorney who provides the information is aware of the nonclient and intends that the nonclient rely on the information.”).

Here, Element Markets hired GIM to evaluate Haase’s technology and recommend whether Element Markets should invest in the technology.  GIM conducted the review and report solely for Element Markets’ benefit to provide guidance on investing.  Haase does not contend that GIM intended for him to rely on the report or knew that Element Markets would supply the information to Haase for his benefit or guidance.  In this circumstance, we hold that Haase fails to raise a fact issue whether GIM owed Haase any legal duty.  See id.

On appeal, Haase further contends that he and GIM were in privity due to a verbal agreement formed at their meeting with Element Markets, but does not describe its terms.  In his trial court affidavit, Haase averred that at the meeting, “Mr. Bloch represented to [Haase] that he was one of expert skill in the art of combustion and of combustion science and that he would provide [Haase] documentation as to his level of skill.”  Haase also stated that Bloch agreed “that if he had any issue with or understanding of the technology within [Haase’s patent application] that he would conference with technical personnel with whom [Haase] works.”  These statements do not establish that an enforceable verbal contract existed between the parties.  See Williams v. Unifund CCR Partners, 264 S.W.3d 231, 236 (Tex. App.—Houston [1st Dist.] 2008, no pet.) (stating necessary elements to form a binding contract).  Because Haase does not establish that an enforceable contract existed between the parties, no contractual duty to Haase arose in evaluating the technology.

Fraud

The trial court granted final summary judgment on all of Haase’s claims.  A summary judgment motion must “stand or fall on the grounds expressly presented in the motion.”  McConnell v. Southside Indep. Sch. Dist., 858 S.W.2d 337, 341 (Tex. 1993); Tex. R. Civ. P. 166a(c) (“The motion for summary judgment shall state the specific grounds therefor.”).  If summary judgment on one claim is proper, but the summary judgment order grants more relief than the movant requests, we must remand the claims not addressed in the summary judgment motion.  See Bandera Elec. Coop. v. Gilchrist, 946 S.W.2d 336, 336 (Tex. 1997) (per curiam); Postive Feed, Inc. v. Guthmann, 4 S.W.3d 879, 881 (Tex. App.—Houston [1st Dist.] 1999, no pet.) (“When, as here, a trial court grants more relief by summary judgment than requested, by disposing of issues never presented to it, the interests of judicial economy demand that we reverse and remand as to those issues, but address the merits of the properly presented claims.”).

Although the motion for summary judgment mentions fraud in the introduction, it does not list the elements of fraud or move for summary judgment on one of them.  See Tex. R. Civ. P. 166a(i) (“The motion must state the elements as to which there is no evidence.”); Thomas v. Omar Invs., Inc., 156 S.W.3d 681, 685 (Tex. App.—Dallas 2005, no pet.) (“In a no-evidence motion for summary judgment, the movant must specifically state which elements of the nonmovant’s claims lack supporting evidence.”).  On rehearing, GIM argues that summary judgment is proper on the fraud claim for the same reason it was granted on the negligence claim—that GIM had no duty to Haase.  But legal duty is not an element of fraud based on intentional misrepresentation.  See Aquaplex, Inc. v. Rancho La Valencia, Inc., 297 S.W.3d 768, 774 (Tex. 2009) (“The elements of fraud are:  (1) that a material misrepresentation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the speaker made the representation with the intent that the other party should act upon it; (5) the party acted in reliance on the representation; and (6) the party thereby suffered injury.” (quoting In re FirstMerit Bank, N.A., 52 S.W.3d 749, 758 (Tex. 2001))).  To the extent GIM contends that legal duty is subsumed within the justifiable reliance element of fraud, GIM did not present this argument to the trial court in its summary judgment motion, and thus cannot raise it for the first time on rehearing.  See Tex. R. Civ. P. 166a(c) (“The motion for summary judgment shall state the specific grounds therefor.”).  We therefore remand the fraud claim.  See Bandera Elec. Coop., 946 S.W.2d at 336.

GIM responds that Haase judicially admitted that this lawsuit is only for negligence because he stated “[t]his is a negligence lawsuit” in six responses in his motion to compel and by repeated it in his appellate brief.  Yet, Haase pleaded fraud, negligent misrepresentation, and professional malpractice claims in his first amended petition.

In his summary judgment response, Haase disputes GIM’s contention that this is only a suit for negligence, pointing out that his original petition included claims for negligence and fraud, and his amended petition added claims for negligent misrepresentation and professional malpractice.  Although, in his appellate brief, Haase included the responses from his motion to compel, he also contended that the trial court improperly granted summary judgment because GIM’s summary judgment motion did not address his fraud and negligent misrepresentation claims.  Haase did not unequivocally state that this is a negligence suit only; rather, he continually has asserted causes of action in addition to negligence.  Mendoza v. Fid. & Guar. Ins. Underwriters, Inc., 606 S.W.2d 692, 694 (Tex. 1980) (stating that a judicial admission is a “formal waiver of proof usually found in pleadings or the stipulations of the parties. . . . [It] is conclusive upon the party making it, and it relieves the opposing party’s burden of proving the admitted fact, and bars the admitting party from disputing it.”); Regency Advantage Ltd. v. Bingo Idea-Watauga, 936 S.W.2d 275, 278 (Tex. 1996) (per curiam) (“A judicial admission must be a clear, deliberate, and unequivocal statement.”).  Accordingly, we conclude that Haase’s statements that “this is a negligence suit” do not constitute judicial admissions limiting his causes of action solely to negligence.

Motion to Compel Discovery

          Finally, Haase contends that the trial court erred by (1) denying his motion to compel and (2) failing to review in camera any responsive documents.  We review a trial court’s discovery rulings for abuse of discretion.  Austin v. Countrywide Homes Loans, 261 S.W.3d 68, 75 (Tex. App.—Houston [1st Dist.] 2008, pet. denied); In re Colonial Pipeline Co., 968 S.W.2d 938, 941 (Tex. 1998) (orig. proceeding). A trial court abuses its discretion if it “issues a discovery order that is arbitrary and unreasonable, or without reference to guiding rules and principles.”  In re BP Prods. N. Am., Inc., 263 S.W.3d 106, 111 (Tex. App.—Houston [1st Dist.] 2006, orig. proceeding).  To reverse a trial court’s ruling on a motion to compel, the appellant must demonstrate not only that the trial court abused its discretion, but that the erroneous discovery order probably caused the rendition of an improper judgment.  See Tex. R. App. P. 44.1(a); Austin, 261 S.W.3d at 75.

          Haase moved to compel production of nine categories of documents.  GIM objected to eight of those requests on the grounds that the requests were overbroad, unreasonably burdensome, not reasonably calculated to lead to admissible evidence, and sought information outside the permissible scope of discovery. GIM also objected to Haase’s request for any books, documents, or other tangible things that may be introduced at trial on work product grounds, and objected to Haase’s request for documents or tangible evidence of conversations with Haase on attorney-client privilege grounds.  GIM objected to Haase’s request for published treatises, periodicals, or pamphlets claimed by GIM to be reliable authority solely on attorney-client and work product grounds.  In response to the requests for documentation regarding conversations with Haase and for treatises or periodicals, GIM responded that no responsive documents existed. Although Haase requested a hearing on GIM’s objections, he did not request a “privilege log” or an in camera inspection of all withheld documents.  See Tex. R. Civ. P. 193.3(b).  In its order denying Haase’s motion to compel, the trial court denied the motion “upon the express findings that the responses of Defendants are adequate” and sustained all of GIM’s objections.

          On appeal, Haase does not contend that GIM possessed specific responsive documents and yet failed to disclose these documents. See Austin, 261 S.W.3d at 75 (upholding denial of motion to compel when movant did not specify undisclosed responsive documents or how these documents were relevant).  In its summary judgment motion and reply, GIM presented two grounds for granting summary judgment:  lack of duty and lack of capacity to sue.  Haase does not contend that the documents sought in his motion to compel are relevant to the determination of either of these two issues.  Thus, Haase fails to demonstrate that the trial court’s denial of the motion to compel probably caused the court to improperly grant summary judgment in favor of GIM.  See Tex. R. App. P. 44.1(a); Austin, 261 S.W.3d at 75.

Conclusion

Haase’s inability to sue GIM in his individual capacity was not raised in a verified pleading, nor established in the summary judgment evidence; thus, we do not address it on appeal.  We hold that Haase did not produce evidence that GIM owed him a legal duty in its review of Haase’s technology for Element Markets.  Further, Haase did not establish that the trial court’s denial of his motion to compel production probably caused the rendition of an improper judgment.  The trial court therefore correctly granted summary judgment on Haase’s claims for negligence, negligent misrepresentation, and professional malpractice.  Because GIM only asserted capacity and lack of a legal duty as grounds for summary judgment, and legal duty is not an element of fraud, we reverse the part of the judgment on that claim and remand to the trial court for further proceedings.

                                                          Jane Bland

                                                          Justice

Panel consists of Justices Jennings, Hanks, and Bland.

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[1] The PTO subsequently denied Haase’s patent application for the water combustion technology, primarily on grounds that the technology was “obvious.”  See 35 U.S.C. § 103(a) (2006).

[2] Specifically, Haase sought to compel production of:  (1) all diaries, logs, calendars, or other notes concerning the intellectual property that is the basis of the suit; (2) all correspondence, communications, or transactions relating to the intellectual property; (3) all books, documents, or tangible things that have a bearing on the suit and may be introduced at trial; (4) all published treatises, periodicals, and pamphlets claimed to be reliable authority; (5) all documents and tangible evidence of any conversations with Haase; (6) transcript showing Block’s secondary education and degree; (7) a complete work history; (8) any and all publications; and (9) Block’s up-to-date resumé and curriculum vitae.