Gerry McCrainie and Dewayne Hutcheson v. Chamberlain, Hrdlicka, White, Williams & Martin, P.C. and Barry Atkins

Affirmed and Memorandum Opinion filed February 7, 2006

Affirmed and Memorandum Opinion filed February 7, 2006.

In The

Fourteenth Court of Appeals

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NO. 14-04-00793-CV

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GERRY MCCRANIE AND DEWAYNE HUTCHESON, Appellants

V.

CHAMBERLAIN, HRDLICKA, WHITE, WILLIAMS & MARTIN, P.C. AND BARRY ADKINS, Appellees

On Appeal from the 215th District Court

Harris County, Texas

Trial Court Cause No. 02-59131

M E M O R A N D U M   O P I N I O N

This is an appeal from a summary judgment based on limitations.  Appellants Dewayne Hutcheson and Gerry McCranie complain that the trial court erred in granting summary judgment in favor of appellees Barry Adkins and his law firm, Chamberlain, Hrdlicka, White, Williams & Martin, P.C. (AChamberlain, Hrdlicka@).  We affirm.

Factual and Procedural Background

In November 1997, Dewayne Hutcheson and Gerry McCranie retained Barry Adkins of Chamberlain, Hrdlicka to represent them in the merger of their respective medical businesses into a larger acquiring entity, Auxi Health, Inc.  Auxi sought to form a health provider and services conglomerate by acquiring businesses from appellants and others  (hereinafter collectively Athe Founders@).  During negotiations, two issues surfaced that eventually led to this suit:  (1) the definition of Aexcess working capital@ (AEWC@) and (2) the conditions under which appellants= stock Aput@ options could be exercised. 

The original definition of EWC was contained in section 6.08 of the Uniform Provisions to the closing documents and used a method called Aquick ratio@ to calculate EWC.  Because some of the Founders had difficulty understanding the quick ratio method, Adkins notified them that Auxi had agreed to execute individual Aside letters@ with each Founder that would specify how EWC would be calculated. Adkins drafted side letters for appellants, but Auxi rejected Hutcheson=s side letter and never executed McCranie=s. Subsequently, Adkins sent Auxi a redraft of Hutcheson=s original side letter that preserved the original=s terms and added a new EWC term providing for accounts receivable less accounts payable.^[1]  Auxi did not further negotiate the terms of the side letters, but instead directly sent appellants each a AMemorandum of Amendment@ (the AMemo@) that defined EWC without including accounts receivable less payable.  Neither McCranie nor Hutcheson discussed the Memo with Adkins before signing it a few days before closing.  However, both claim that during negotiations, they told Adkins the side letters must provide for accounts receivable less payable or they wanted out of the merger.

Appellants also received Auxi stock as partial consideration for the merger. Auxi planned to hold an initial public offering (AIPO@) of its stock within two years of the merger.  As protection against the IPO=s nonoccurrence, appellants were given put options on their stock for twelve dollars per share, which were exercisable two years after closing if no IPO occurred.  A condition on the puts made them unable to be exercised if repurchasing them would cause Auxi to default under its financing agreement.  Adkins told appellants this rendered the puts worthless. However, American Capital, one of Auxi=s financiers, required the puts to be conditional before they would finance the merger.  On March 2, 1999, Adkins faxed appellants a document entitled AWaiver of Rights,@ which conditioned the exercise of the puts on Auxi=s complete repayment of all obligations owed American Capital under their financing agreement.  On the fax cover sheet, Adkins explained that by signing the Waiver of Rights, appellants agreed they A[would] not exercise their put rights until the >Obligations= are repaid in full to ACS.  Obligations means principal and interest on the Notes as well as all other monetary obligations.@  Appellants signed the waiver.

During the first days of March 1999, appellants signed closing papers.  Adkins told appellants that Auxi would fax them closing documents and advised them to sign and return the documents to Auxi. Appellants complied and admittedly signed the documents without reading them.  The merger officially closed on March 9, 1999.

After closing, appellants served as directors on Auxi=s board until they were asked to resign in September 2000. During August 1999, while they were still directors, appellants corresponded with Auxi=s Steve Curtiss regarding the amount owed them from closing.^[2]  At that time, no mention was made of accounts receivable less payable.  In early November 2000, over a year later and two months after their resignation, appellants renewed their collection efforts. At that time, appellants requested their side letters from Adkins, who notified them on November 20, 2000 that the Memo had replaced the side letters.  Thereafter, on March 20, 2001, appellants tried to exercise their puts, but Auxi refused to repurchase them.  Auxi subsequently sued appellants, who countersued against Auxi, and the parties settled in August 2002.  On November 18, 2002, appellants filed this malpractice suit against appellees.  The trial court granted appellees= motion for summary judgment based on limitations, and this appeal followed.

Summary Judgment

The standard of review for a traditional motion for summary judgment is whether the successful movant at the trial level carried its burden of showing that there is no genuine issue of material fact and that judgment should be granted as a matter of law. Tex. R. Civ. P. 166(c); KPMG Peat Marwick v. Harrison County Hous. Fin. Corp., 988 S.W.2d 746, 748 (Tex. 1999); Oliphant v. Richards, 167 S.W.3d 513, 515 (Tex. App.CHouston [14th Dist.] June 7, 2005, pet. denied).  To be entitled to summary judgment, a defendant must conclusively negate at least one essential element of each of the plaintiff=s causes of action or conclusively establish each element of an affirmative defense.  Sci. Spectrum, Inc. v. Martinez, 941 S.W.2d 910, 911 (Tex. 1997).  Under this traditional standard, we must take as true all evidence favorable to the nonmovant and must make all reasonable inferences in the nonmovant=s favor.  See id.

Appellees moved for summary judgment on the statute of limitations, claiming the statute of limitations began to run well before November 18, 2000, two years before appellants filed their malpractice suit.  In eight issues, appellants advance several arguments in support of their claim that the trial court erred in granting appellees= motion for summary judgment.  First, they contend the Adiscovery rule@ brings their suit within the statute of limitations. Alternatively, they raise the limitations defense of fraudulent concealment and also claim limitations was tolled during appellees= continued representation of them and during the pendency of appellants= underlying claim against Auxi.  Finally, appellants argue that they are not charged with knowledge of the Memo=s contents.  We address each of these arguments in turn.

The Discovery Rule

In their first four issues, appellants argue the discovery rule brings their claims within the statute of limitations.  The discovery rule applies to legal malpractice cases. See Willis v. Maverick, 760 S.W.2d 642, 645B46 (Tex. 1988).  In such cases, the limitations period begins when the claimant Adiscovers or should have discovered through the exercise of reasonable care and diligence the facts establishing the elements of his cause of action.@  Id. at 646.  A defendant moving for summary judgment on the affirmative defense of limitations has the burden of conclusively establishing that defense.  Rh_ne-Poulenc, Inc. v. Steel, 997 S.W.2d 217, 223 (Tex. 1999); Lewis v. Nolan, 105 S.W.3d 185, 187 (Tex. App.CHouston [14th Dist.] 2003, pet. denied).  Where the plaintiff pleads the discovery rule as an exception to limitations, the defendant must negate the exception as well.  Lewis, 105 S.W.3d at 187.

Appellants claim they were unaware of their injury, which was Adkins=s failure to obtain their definition of EWC in the side letters, until November 20, 2000, when Adkins informed Hutcheson that the Memo replaced the side letters.  Appellants contend that before that date, they believed the side letters were included in the closing documents and entitled them to accounts receivable less payable.  However, assuming appellants= claim is true, a review of the record reveals that prior to November 20, 2000, appellants first should have discovered through the exercise of reasonable care and diligence that the side letters were not part of their closing documents.  Considering the size of the transaction, appellants= sophistication in business matters, and the fact that the side letters contained terms appellants deemed nonnegotiable, appellants should have ensured their terms were in the closing documents.  For these reasons, we disagree with appellants= contention that they could not have known the side letters were not part of their closing documents until Adkins specifically told them the Memo replaced the side letters.  See Taub v. Houston Pipeline Co., 75 S.W.3d 606, 619B20 (Tex. App.BTexarkana 2002, pet. denied) (considering sophistication of parties when determining application of discovery rule).  Thus, we find appellees conclusively established that, through the exercise of reasonable care and diligence, appellants should have discovered their injury before November 18, 2000. 

Moreover, even if appellants= injury was not discoverable at closing, their August 1999 correspondence with Curtiss should have led to its discovery.  The record shows three writings between Hutcheson and Curtiss.  These writings address the amount owed Hutcheson from closing and specifically refer to closing documents.  Curtiss itemized the amount owed Hutcheson without including accounts receivable less payable, a significant term during negotiations.  Even if Hutcheson believed, as he alleges, that cash at closing differed from accounts receivable less payable, the fact that no mention of accounts receivable less payable was made during these discussions should have led him to discover, in the exercise of reasonable care and diligence, that no closing documents or side letters provided for accounts receivable less payable. Curtiss also wrote McCranie in August, discussing EWC in terms of the Aquick ratio calculation,@ which McCranie told him was wrong.  The record does not indicate that McCranie took any further action about Curtiss=s erroneous calculation or notified Adkins about it until over a year later.  These correspondences between appellants and Curtiss should have alerted appellants to the possibility that the merger terms differed from what they expected. 

Subsequently, on November 7 and 10, 2000, respectively, Hutcheson and McCranie renewed their demands for payment and, for the first time, included accounts receivable less payable in their calculations.  At that point, an Auxi representative told appellants, AI=m being controlled by what the documents were that were executed by the parties.@  A person in appellants= position, exercising reasonable care and diligence, should have discovered their injury based on this statement.

We also disagree with appellants= claim that the discovery rule caused their put option complaint to accrue on March 20, 2001, when Auxi refused to repurchase their shares. Adkins originally advised appellants that their puts were worthless because their exercise was conditioned on whether it would cause Auxi to default in its agreement with its financiers. Consequently, Adkins tried to negotiate more favorable terms for appellants, but Auxi=s financiers demanded such a condition on the puts.  Thereafter, Adkins advised appellants to sign the Waiver of Rights conditioning their puts on Auxi=s complete repayment of all obligations to its financiers, a substantially similar condition to that which Adkins had previously described as worthless.  Here, appellants claim Adkins committed malpractice by failing to repeat his advice that the puts were worthless.  However, appellants argue they had no legal injury until after Auxi failed to hold an IPO within two years of the merger because had an IPO occurred, appellants= puts would never have become exercisable and thus Adkins=s failure to properly advise them would have been inconsequential.  We find Adkins=s failure to advise appellants, not Auxi=s subsequent refusal to repurchase their puts, constitutes their legal injury.  Thus, the discovery rule dates from appellants= signing the Waiver of Rights, both because that is when Adkins failed to repeat his advise that the puts were worthless and because appellants should have known, based on their receipt of the Waiver of Rights and Adkins=s accompanying explanation,^[3] that their puts were potentially unable to be exercised.  See Willis, 760 S.W.2d at 646; Taub, 75 S.W.3d at 619B20. We find, based on this evidence, that appellees conclusively established appellants should have known of their injury when they signed the Waiver of Rights on March 2, 1999.

We overrule appellants= first four issues.

Fraudulent Concealment

In their fifth issue, appellants claim the trial court erred in granting appellees= motion for summary judgment because they raised a fact issue on their fraudulent concealment defense.  Fraudulent concealment is an affirmative defense to the statute of limitations, and the plaintiff bears the burden of coming forward with proof in support of the allegation.  Weaver v. Witt, 561 S.W.2d 792, 793 (Tex. 1977); Ponder v. Brice & Mankoff, 889 S.W.2d 637, 645 (Tex. App.CHouston [14th Dist.] 1994, writ denied).  To prove fraudulent concealment, a plaintiff must demonstrate the defendant had actual knowledge that a wrong occurred, a duty to disclose the wrong, and a fixed purpose to conceal the wrong.  McMahan v. Greenwood, 108 S.W.3d 467, 493 (Tex. App.CHouston [14th Dist.] 2003, pet. denied).  Thus, to toll limitations through a fraudulent concealment defense, appellants must first prove Adkins actually knew a wrong occurred. See id. 

Appellants base their argument on the fact that Adkins received a copy of the Memo but did not discuss it with them.  Appellants contend Adkins failed to disclose the Memo because appellants were Acash cows@ in the merger and Adkins knew they wished to  withdraw if they did not obtain the side letters. Appellants claim Adkins had a duty to disclose the Memo, citing Willis v. Maverick and arguing that Abreach of the duty to disclose is tantamount to concealment.@  760 S.W.2d at 645.  Appellants= argument fails for two reasons.  First, Willis was primarily concerned with the attorneys= failure to disclose facts that were difficult for a layperson not possessing legal acumen to discern.  See id.  That is not the case here, where the definition of EWC was clear on the face of the Memo that appellants independently received and executed without consulting Adkins.  Thus, appellants cannot rely on Adkins=s failure to disclose.  See First City Mortg. Co. v. Gillis, 694 S.W.2d 144, 147 (Tex. App.BHouston [14th Dist.] 1985, writ ref=d n.r.e.) (finding a broker, as fiduciary, had no duty to disclose terms that were disclosed in the document principal was obligated to read).  Second, appellants= argument that Adkins concealed the Memo to keep them in the merger is based on conjecture unsupported by the record.  We find appellants have not raised a fact issue regarding the elements of fraudulent concealment.  Moreover, the estoppel effect of fraudulent concealment ends when a party learns of facts, conditions, or circumstances that would cause a reasonably prudent person to make inquiry which, if pursued, would lead to discovery of the concealed cause of action.  Ponder, 889 S.W.2d at 645.  As discussed above, the August 1999 correspondence with Curtiss should have led to an inquiry that would have caused appellants to discover their side letters were not in the closing documents.  We overrule appellants= fifth issue.

Tolling of Limitations

In their sixth issue, appellants argue that the statute of limitations was tolled until April 2001 because appellees continued to represent them in their put option claims against Auxi.  Appellants argue that Adkins=s failure to disclose the Memo=s replacement of the side letters tolled the limitations period, citing McClung v. Johnson, 620 S.W.2d 644 (Tex. App.BDallas 1981, writ ref=d n.r.e.).  McClung held that if a duty to disclose exists, failure to disclose tolls the statute of limitations.  Id. at 647.  However, that holding was subsequently modified by the Supreme Court in Willis v. Maverick, which held that the discovery rule applies to the failure to disclose.  760 S.W.2d at 645 n.2.  As previously discussed, appellants should have discovered that the Memo replaced the side letters either at closing or at least by the August 1999 correspondence with Curtiss.  Thus, we find no merit in appellants= claim that limitations were tolled until all aspects of appellees= representation of them concluded.  We overrule appellants= sixth issue.

In their eighth issue, appellants argue the limitations period was tolled during the pendency of their underlying claim against Auxi.  Appellants cite the Hughes rule, which tolls limitations Awhen an attorney commits malpractice while providing legal services in the prosecution or defense of a claim which results in litigation@ because of the risk of forcing a client to take inherently inconsistent legal positions while litigating both cases.  Hughes v. Mahaney & Higgins, 821 S.W.2d 154, 156 (Tex. 1991). However, the alleged malpractice in this case did not occur during appellees= prosecution or defense of a claim.  Therefore, the Hughes rule does not apply.  See id.; Vacek Group, Inc. v. Clark, 95 S.W.3d 439, 447 (Tex. App.CHouston [1st Dist.] 2002, no pet.) (holding Hughes rule inapplicable in transactional legal malpractice case).  Moreover, at oral argument, appellants conceded that Hughes does not apply here until the Supreme Court modifies the rule to include transactional malpractice.  We overrule appellants= eighth issue.

Knowledge of the Memo=s Content

Finally, in their seventh issue, appellants claim they are not charged with knowledge of the contents of the Memo they signed on March 4, 1999.  Appellants argue that under Thigpen v. Locke, 363 S.W.2d 247 (1962), they are excused from reading the documents because they had a fiduciary relationship with appellees.  However, this is a misapplication of Thigpen, which states that A[i]f there is a confidential relationship, respondents would be relieved of the duty of reading the instruments and could justifiably rely on their fiduciary . . . to treat them with the utmost fairness.@ Id. at 252.  This applies when a fiduciary is a party to a contract, not whenever an ancillary fiduciary relationship exists with retained counsel.  Furthermore, Texas law charges parties with knowledge of what they sign, absent fraud. See In re Media Arts Group, Inc., 116 S.W.3d 900, 908 (Tex. App.BHouston [14th Dist.] 2003, no pet.).  We are unpersuaded by appellants= argument that retaining counsel obviates the duty to read what they signed. Such a policy would encourage contracting parties to hire attorneys to avoid contractual liability and would undermine the Ashould have discovered@ component of the discovery rule because parties would not be charged with knowledge of contracts upon which they relied on attorneys to review. Thus, we overrule appellants= seventh issue.

We affirm the trial court=s summary judgment.

/s/        Leslie Brock Yates

Justice

Judgment rendered and Memorandum Opinion filed February 7, 2006.

Panel consists of Chief Justice Hedges and Justices Yates and Anderson.

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^[1]  To facilitate reading, we refer to accounts receivable less accounts payable simply as accounts receivable less payable.

^[2]  Appellants claim they did not originally demand payment due from closing because they knew that Auxi was experiencing cash flow problems.

^[3]  When Adkins sent appellants the Waiver of Rights, he clearly explained their puts could not be exercised until Auxi=s monetary obligations were paid in full.