Nancy Heagerty v. John F. K. McGill

HEAGERTY-final IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,

AT AUSTIN









NO. 3-92-014-CV





NANCY HEAGERTY,

APPELLANT

vs.





JOHN F. K. MCGILL,

APPELLEE

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 299TH JUDICIAL DISTRICT

NO. 485,308, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING

Nancy Heagerty appeals the trial court's rendition of a take-nothing judgment on a jury verdict in her legal malpractice suit against John F. K. McGill. We will affirm the trial court's judgment.

BACKGROUND

This dispute arises from a residential real-estate transaction in which the buyer and seller set out to structure their deal to mislead the lender and to conceal the true details of the transaction. Heagerty, the seller, and Tom Hutchison, who was the buyer together with his spouse, were both experienced real-estate brokers. Heagerty hired McGill, an attorney, to prepare and review certain documents pertaining to the transaction. The scope of McGill's employment and the extent of his involvement in the transaction and knowledge of its true nature are disputed.

Heagerty and the Hutchisons entered into a fairly complicated transaction for the sale of Heagerty's Austin home (the "Austin property"). Basically, the Hutchisons would obtain seventy-five percent of the purported purchase price by a loan from Capitol City Savings Association ("Capitol City"), which would be secured by a first lien on the Austin property and would represent to the lender that the Hutchisons were making a twenty-five percent down payment. This representation was false.

Instead, Heagerty planned to owner-finance the remaining twenty-five percent of the purchase price and to receive an undisclosed second lien on the Austin property as well as an undisclosed first lien on property the Hutchisons owned in Fort Bend County (the "Fort Bend property"). As a result, the Hutchisons would not make any cash contribution to the purchase price, and in fact would receive a substantial "refund" or "kickback" of a portion of the Capitol City loan proceeds at closing.

Capitol City's lending policies prohibited this sort of financing; therefore, Heagerty and the Hutchisons went to great lengths to conceal the true nature of their scheme from Capitol City. Separate contracts and closing documents were prepared for submission to Capitol City that did not reflect the owner-financing arrangements of the deal between Heagerty and the Hutchisons, the second lien on the Austin property, or the "refund" to the Hutchisons.

Significantly, as part of the closing documentation, Heagerty and the Hutchisons signed an Affidavit of Purchaser and Vendor ("the affidavit") and a closing statement that indicated that the buyers paid the portion of the purchase price not financed by Capitol City in cash by the buyers and that no secondary financing was involved in the transaction.

Relying on information the Hutchisons provided, McGill prepared a real-estate lien note reflecting the Hutchisons' debt to Heagerty and a single deed of trust covering both the Austin and Fort Bend properties. ⁽¹⁾ The property description of the Fort Bend property in the deed of trust was incorrect. In any event, the deed of trust was recorded in Travis County (apparently by the title company) but was never recorded in Fort Bend County. McGill did not participate in the closing, which was conducted by an officer of the title company retained by Heagerty and the Hutchisons. The parties dispute who had the duty to ensure the proper recording of the deed of trust.

Subsequently, the Hutchisons defaulted on their obligations to Heagerty and Capitol City and filed bankruptcy. Capitol City's foreclosure of its lien on the Austin property extinguished Heagerty's second lien on that property. Heagerty's unperfected lien on the Fort Bend property was avoided in the Hutchisons' bankruptcy proceeding. The Hutchisons' debt to Heagerty was discharged as an unsecured debt.

Heagerty sued McGill alleging legal malpractice. She alleged that McGill was negligent in using an incorrect property description in the deed of trust and in failing to file the deed of trust in Fort Bend County and that he breached his fiduciary duty to her. ⁽²⁾ At trial, the jury returned a verdict finding that (1) Heagerty and McGill were each fifty percent negligent, (2) Heagerty incurred $41,500 in total damages, (3) McGill did not breach his fiduciary duty to Heagerty, (4) Heagerty was not entitled to exemplary damages, and (5) Heagerty had intentionally or knowingly made a materially false or misleading representation to obtain property or credit for herself or others. Based upon these findings, the trial court rendered a take-nothing judgment in favor of McGill. Heagerty now brings five points of error on appeal; McGill brings one cross-point.

DISCUSSION AND HOLDING

To recover in a suit for legal malpractice, the plaintiff must show that she would have prevailed on its underlying claim but for the attorney-defendant's negligence. Cosgrove v. Grimes, 774 S.W.2d 662, 665-66 (Tex. 1989); Jackson v. Urban, Coolidge, Pennington & Scott, 516 S.W.2d 948, 949 (Tex. Civ. App.--Houston [1st Dist.] 1974, writ ref'd n.r.e.); Gibson v. Johnson, 414 S.W.2d 235, 238-39 (Tex. Civ. App.--Tyler 1967, writ ref'd n.r.e.), cert. denied, 390 U.S. 946 (1968). Any defense that would have been available to defeat the underlying claim is available to the attorney-defendant to defeat the legal malpractice claim. Gibson, 414 S.W.2d at 239. As a defense to the malpractice claim, McGill urged that the transaction between Heagerty and the Hutchisons was tainted with illegality that rendered the lien on the Fort Bend property unenforceable. McGill argued that, therefore, Heagerty could show no damages resulting from his alleged negligence. The trial court agreed and, based on the jury finding that Heagerty intentionally or knowingly made a false or misleading statement to obtain property or credit for herself or others, rendered a take-nothing judgment.

In her first point of error, Heagerty contends that the jury verdict did not support the take-nothing judgment. ⁽³⁾ We initially determine whether the trial court was correct in concluding that McGill was entitled to a take-nothing judgment based upon the jury finding that Heagerty had intentionally or knowingly made materially false or misleading representations to obtain property or credit for herself or others.

McGill relies on Kokernot v. Gilstrap, 187 S.W.2d 368 (Tex. 1945), for his theory that a taint of illegality in the transaction bars enforcement of any aspect of the transaction. See also Cain v. Franklin, 476 S.W.2d 952 (Tex. Civ. App.--Austin 1972, writ ref'd n.r.e.). The alleged illegality is Heagerty's concealment of the owner-financing scheme from Capitol City. The jury was asked to answer a question that mirrored the language of section 32.32(b) of the Texas Penal Code. ⁽⁴⁾ Assuming for this discussion that the evidence is sufficient to support the jury findings, the affirmative jury finding on this question indicates that Heagerty's representations to Capitol City were illegal. The question therefore is whether this illegal aspect of the transaction would have prevented enforcement of the lien on the Fort Bend property and now precludes any damages for McGill's alleged negligence.

In Kokernot and numerous other cases, the courts have taken the position that when faced with an illegal contract, the court will leave the parties where it finds them and not enforce the contract provisions. The facts in Kokernot are similar to those here. Upon the sale of their home to the Kokernots, the Gilstraps retained a second lien in violation of Federal Housing Administration rules. Nonetheless, the parties signed a statement to the FHA to the contrary. Kokernot, 187 S.W.2d at 369. The court refused to enforce the Gilstraps' second lien. Id. at 370; see also Dominguez v. Trent, 836 S.W.2d 677, 679 (Tex. App.--El Paso 1992, no writ).

The courts have not, however, applied this rule to prevent enforcement of every claim connected to an illegal transaction. The test for whether a claim connected with an illegal transaction may be enforced at law is whether the claim may be established without reliance on the illegal transaction. Kokernot, 187 S.W.2d at 370; Pioneer Mut. Compensation Co. v. Diaz, 177 S.W.2d 202, 203 (Tex. 1944); Tubb v. Kramer Bros. Nurseries, 237 S.W.2d 680, 682 (Tex. Civ. App.--Waco 1951, writ ref'd n.r.e.). Even if a transaction is illegal, a recovery may still be had if the plaintiff requires no aid from the illegal transaction to establish his case. Morrison v. City of Fort Worth, 155 S.W.2d 908, 910 (Tex. 1941); see also Plumlee v. Paddock, 832 S.W.2d 757, 759 (Tex. App.--Fort Worth 1992, writ denied); International Aircraft Sales, Inc. v. Betancourt, 582 S.W.2d 632, 635 (Tex. Civ. App.--Corpus Christi 1979, writ ref'd n.r.e.). In other words, the fact that a claim is shown to be incidentally connected with an illegal transaction does not necessarily defeat the right to recovery on that claim. Frost Nat'l Bank v. Mitchell, 362 S.W.2d 198, 200 (Tex. Civ. App.--Waco 1962, no writ).

McGill's defense that a taint of illegality bars enforcement of the underlying claim requires both a finding that an illegal act was committed in connection with a contract and a finding that proof of this illegal act is necessary to the claim under the contract. In the immediate case, the first element was submitted to the jury, but the second was not.

When a ground of recovery or a defense consists of more than one element, if some elements are submitted and other elements are omitted from the charge, the omitted elements will be deemed found by the trial court to support the judgment, provided no objection is made and the omitted element is supported by some evidence. Tex. R. Civ. P. 279; Ramos v. Frito-Lay, Inc., 784 S.W.2d 667, 668 (Tex. 1990); Turner, Collie & Braden, Inc. v. Brookhollow, Inc., 642 S.W.2d 160, 165 (Tex. 1982); Bank of Austin v. Barnett, 549 S.W.2d 428, 429 (Tex. Civ. App.--Austin 1977, no writ). Neither Heagerty nor McGill objected to the omission of the second element of the defense. Therefore, any objection to the omission is waived. Tex. R. Civ. P. 279; Rodgers v. RAB Invs., Ltd., 816 S.W.2d 543, 550 (Tex. App.--Dallas 1991, no writ).

We must determine whether there is some evidence to support a deemed finding that Heagerty must rely on an illegal aspect of the transaction to prove her claim on the Fort Bend property. On this issue, Kokernot is distinguishable from the immediate case because there the seller sought to enforce the second lien. In the immediate case, however, Heagerty seeks damages resulting from the elimination of her lien on the Fort Bend property, not the second lien on the Austin property.

Heagerty argues that the only illegal aspect of the transaction was her execution of the affidavit. Heagerty contends that there is no evidence that she had the requisite intent when she signed the affidavit, that she did not read it, and that she relied on McGill to review the legality of the transaction and the affidavit. Heagerty urges that, because the second lien was not an important element of the transaction, its illegality was not such as to prevent enforcement of other aspects of the transaction. We disagree.

The record shows a deliberate scheme by Heagerty to conceal the true nature of the deal from Capitol City. Her signing of the affidavit was merely one aspect of the subterfuge. As part of their loan application, the Hutchisons presented a contract to Capitol City that did not reflect the owner-financing and directed the title company to prepare closing documents that did not include the information of this aspect of the deal. There is evidence that Heagerty knew this and participated in the concealment. Heagerty also signed two documents used to perpetuate the misrepresentation: the affidavit and the closing statement.

The important information that was withheld from Capitol City was not only the existence of the second lien on the Austin property or the first lien on the Fort Bend property. Rather, it was the existence of the entire owner-financing arrangement that allowed the Hutchisons to purchase the Austin property with no down payment whatsoever. In fact, as a result of the owner-financing arrangement, the Hutchisons not only made no down payment, but also received a large "refund" from the Capitol City loan proceeds at closing. Accordingly, the Hutchisons had a negative equity position in the Austin property.

In itself, the second lien had no effect on Capitol City's security; indeed, Capitol City was able to extinguish this lien by foreclosure of its superior interest. The lack of any equity in the Austin property undermined Capitol City's security for its loan, not the fact that a second lien existed on the Austin property.

The evidence shows that both the lien on the Fort Bend property and the lien on the Austin property served as collateral for Heagerty's owner-financing. A single deed of trust covered both properties. We do not believe that isolating the undisclosed second lien from consideration eliminates the taint from this transaction. Heagerty's lien on the Fort Bend property is an integral and inseparable part of the owner-financing scheme, the non-disclosure of which the jury found illegal.

We conclude that there is some evidence to support a deemed finding that proof of an illegal aspect of the transaction was required to enforce the lien on the Fort Bend property. Accordingly, the trial could properly have made the deemed findings to support the take-nothing judgment. We overrule Heagerty's first point of error.

In her third point of error, Heagerty contends that the trial court erred in submitting the jury question of whether she intentionally or knowingly made materially false and misleading statements to obtain property or credit for herself or others because no evidence supports this submission. In deciding a no-evidence point, we must consider only the evidence and inferences tending to support the finding of the trier of fact and disregard all evidence and inferences to the contrary. Alm v. Aluminum Co. of Am., 717 S.W.2d 588, 593 (Tex. 1986), cert. denied, 111 S. Ct. 135 (1990); Garza v. Alviar, 395 S.W.2d 821, 823 (Tex. 1965); see generally William Powers, Jr. & Jack Ratliff, Another Look at "No Evidence" and "Insufficient Evidence," 69 Tex. L. Rev. 515 (1991). The affidavit and closing statement Heagerty signed are in the record, as is extensive testimony about all aspects of the transaction. The record contains circumstantial evidence from which Heagerty's state of mind could be inferred. We conclude that there is some evidence in the record to support the submission of this issue to the jury. We overrule Heagerty's third point of error.

In her fifth point of error, Heagerty contends that the trial court erred in allowing expert testimony that she violated section 32.32 of the Texas Penal Code because the expert was not qualified as an expert in criminal law and his testimony was speculative, consisted of inadmissible legal issue testimony, and was not based on proper legal definitions.

To show reversible error in the admission of testimony, Heagerty must show that the admission was erroneous and was reasonably calculated and probably did cause the rendition of an improper judgment. McKinney v. National Union Fire Ins. Co., 772 S.W.2d 72, 75 (Tex. 1989); Gee v. Liberty Mut. Fire Ins. Co., 765 S.W.2d 394, 396 (Tex. 1989). The proffered expert, an attorney, gave his opinion on the actions of the parties to this suit. Heagerty complains of his opinion testimony that she violated section 32.32 by signing the affidavit. The opinion testimony was based on evidence previously admitted. As discussed above, there is extensive evidence in the record other than this opinion testimony demonstrating Heagerty's actions and her state of mind. If the complained-of evidence is cumulative of other evidence properly admitted, any error in its admission is harmless. Gee, 765 S.W.2d at 396; McInnes v. Yamaha Motor Corp., U.S.A., 673 S.W.2d 185, 188 (Tex. 1984), cert. denied, 469 U.S. 1107 (1985). The question of whether Heagerty made an intentional or knowing misrepresentation was ultimately presented to the jury without reference to section 32.32. Considering the record as a whole, we conclude that Heagerty has failed to show a probability of an improper verdict resulting from this testimony. We overrule her fifth point of error.

In her second point of error, Heagerty contends that there is no evidence to support the finding that she was negligent. In light of our disposition of the points of error discussed above, we need not reach this point of error.

In her fourth point of error, Heagerty contends that the trial court abused its discretion in denying her the opportunity to show good cause for not supplementing her interrogatory answers and in excluding evidence for such failure to supplement under Rule 215(5) of the Texas Rules of Civil Procedure. The excluded evidence consisted of testimony on the Texas Disciplinary Rules of Professional Conduct as the rules apply to the alleged breach of fiduciary duty. The trial court disallowed the testimony under Rule 215(5) because Heagerty had failed to respond to a discovery request for her expert witnesses' anticipated testimony.

Heagerty unsuccessfully alleged good cause for failing to supplement her discovery responses. She now alleges that the trial court erred in refusing to allow an offer of proof on good cause. However, the trial court expressly gave Heagerty an opportunity to make an offer of proof on the excluded testimony on breach of fiduciary duty, and Heagerty declined. Thus, even assuming that good cause existed for Heagerty's failure to supplement and the trial court erred in excluding the testimony on the disciplinary rules, the error is waived. Tex. R. Civ. Evid. 103; Texas Employers' Ins. Co. v. Garza, 557 S.W.2d 843, 847 (Tex. Civ. App.--Corpus Christi 1977, writ ref'd n.r.e.). We overrule Heagerty's fourth point of error.

In one cross-point, McGill contends there is no properly admitted evidence of the value of the Fort Bend property in the record. Having found no error in the rendition of the take-nothing judgment, we do not reach this cross-point.

CONCLUSION

We affirm the judgment of the trial court.

Jimmy Carroll, Chief Justice

[Before Chief Justice Carroll, Justices Jones and Kidd]

Affirmed

Filed: May 12, 1993

[Do Not Publish]

1.   The paper work for the Capitol City loan was prepared by its counsel.

2.   McGill brought in several entities and individuals as third-party defendants. These defendants have either settled the claims against them and been dismissed or have had the cause of action against them severed from this cause for separate trials.

3.   Heagerty argues that the standard of review for an instructed verdict applies to a take-nothing judgment and this Court should reverse the judgment if there is some evidence that she did not sign the affidavit intentionally or knowingly. We do not believe that this is the proper standard of review in the immediate case, where we are presented with a take-nothing judgment rendered on jury findings that the trial court found precluded recovery. We will apply the proper standard of review and presumptions to each issue presented.

4.   This section provides, in part, "A person commits an offense if he intentionally or knowingly makes a materially false or misleading written statement to obtain property or credit for himself or another." Tex. Penal Code Ann. § 32.32(b) (West 1989).