Guggenheim Corporate Funding, LLC, Orpheus Holdings LLC, Stellar Funding Ltd., and Orpheus Funding LLC v. Valerus Compression Services, L.P.

Affirmed and Opinion filed April 23, 2015.
In The
Fourteenth Court of Appeals
NO. 14-13-00809-CV
GUGGENHEIM CORPORATE FUNDING, LLC, ORPHEUS HOLDINGS
LLC, STELLAR FUNDING LTD., AND ORPHEUS FUNDING LLC,
Appellants
V.
VALERUS COMPRESSION SERVICES, L.P., Appellee
On Appeal from the 157th District Court
Harris County, Texas
Trial Court Cause No. 2011-36283
OPINION
This appeal arises from the trial court’s judgment, following a bench trial,
rescinding a 2009 amended warrant agreement involving Valerus Compression
Services, L.P., Guggenheim Corporate Funding, LLC, Orpheus Holdings, LLC,
Stellar Funding Ltd., and Orpheus Funding LLC (collectively, Guggenheim).
Valerus filed the underlying suit seeking rescission of the amended warrant due to
its factual mistake about the parties’ mutual intent in executing the original warrant
agreement. Guggenheim appeals and asserts that (1) the trial court erred by
holding the parties’ original and interim warrants were ambiguous, (2) the trial
court erred by finding in favor of Valerus on its mistake theories, (3) there is
legally and factually insufficient evidence to support Valerus’s mistake claims,
(4) the trial court erred in granting judgment for Valerus because the record
conclusively establishes that Valerus bore the risk of mistake, and (5) the trial
court erred in denying Guggenheim’s counterclaim for breach of contract and
attorney’s fees. We determine that (1) the warrants at issue were ambiguous,
(2) Valerus’s unilateral mistake claim is supported by legally and factually
sufficient evidence, (3) Valerus did not bear the risk of mistake, and (4) the trial
court did not err in denying Guggenheim’s counterclaim for breach of contract and
attorney’s fees. Accordingly, we affirm the trial court’s judgment.
I. BACKGROUND
The Original Warrant
Valerus, a gas compression limited partnership that is a capital-intensive
business, needed a cash influx in 2006. In August, Valerus entered into a $165
million credit agreement negotiated with and funded by Guggenheim Corporate
Funding (GCF). In return, Valerus proposed to issue GCF a warrant to purchase
shares in Valerus at a fixed price (the Original Warrant).1 During the negotiations,
Valerus was represented by outside counsel Stephenson Snokhous & Fournier
1
The trial court’s findings of fact and conclusions of law describe a warrant as follows:
A warrant is a derivative security that gives the holder the right to purchase
securities from the issuer at a specific price within a certain time frame. Warrants
are often included in a new debt issue as a “sweetener” to entice investors. The
main difference between warrants and call options is that warrants are issued and
guaranteed by the company, whereas options are exchange instruments not issued
by the company. In addition, the lifetime of a warrant is often measured in years,
while the lifetime of a typical option is measured in months.
2
(SS&F) and investment banking firm Sanders Morris Harris (SMH). 2 Guggenheim
was represented by Jeffrey Nichols, who moved to Greenberg Traurig, LLP, during
the pendency of the transaction.
The parties, including outside counsel and investment bankers, exchanged
numerous emails and redlined-versions of the Original Warrant during a very short
period of time before the transaction closed. One of the major issues between the
parties was that GCF sought protection from dilutive events by requesting a
blanket 3.5% interest in Valerus calculated at the time of exercise of the Original
Warrant. Valerus objected, asserting that the original deal term sheet contemplated
that GCF would receive a 3.5% interest in Valerus calculated at the time of the
closing of the deal.
The parties ultimately agreed that GCF would receive a five-year warrant
term that specified the number of shares to which GCF would be entitled and
provided GCF limited dilution protection, i.e., the right to receive additional shares
beyond the initially agreed amount for certain narrowly defined events. Under the
final terms of the Original Warrant, GCF had the right to purchase a minimum of
954,292 Valerus shares at $0.01 per unit at any time until August 10, 2011. In
2008, Valerus split the Original Warrant into three warrants (the Interim Warrants)
so that the warrant could be divided among three Guggenheim entities: Orpheus
Holdings, Stellar Funding, and Orpheus Funding. Again, GCF remained the
administrative agent for Orpheus Holdings, Stellar Funding, and Orpheus Funding.
The provisions of the Original Warrant remained substantively the same in the
2
At the time of the negotiations, Jim Stephenson, a principal in SS&F, was also serving
as Valerus’s general counsel.
3
“interested in revising the warrant to make it easier to keep [G]uggenheim at the
right percentage without doing brain-damaging calculations” and that he “agree[d]
110%.” Cunningham then spoke with Nichols by telephone and told him that there
were questions about the warrants from Metalmark’s attorneys. Cunningham
informed Nichols that the warrants were confusing. Cunningham told Nichols that
Kendrick thought the warrant was supposed to provide Guggenheim “3.5% for
always”; she explained to Nichols that she did not want to change the substance of
the warrants, but she wanted to clarify the language to clearly reflect the original
intent.
Nichols emailed Cunningham after this conversation to follow-up on the
call. In this February 20th email, Nichols explained that he had looked at the
Original Warrant and “did not see any language regarding the cushion.” Nichols
stated that Jim Stephenson, Valerus’s counsel at the time the Original Warrant was
negotiated, “would have wanted something in the warrant if that was the intent.”
Nichols informed Cunningham that he would check to see if he had any notes from
the original transaction, but that “a lot” of the work had been done at his former
law firm. Nichols never provided Cunningham any further information regarding
the original transaction. But later that same day, Nichols had an associate send
Cunningham proposed warrants that provided that Guggenheim would be awarded
a flat, undesignated percentage interest in Valerus on the exercise of the warrants
and removing all the adjustment provisions contained in section 8. Cunningham
believed this change fixed the “drafting problem” in the Original and Interim
Warrants. In April 2009, after nine weeks of negotiating various terms of the
proposed warrants unrelated to the “percentage at exercise” intent, Cunningham
authorized the execution of new warrants with clear language providing for an
7
Valerus Seeks to Confirm Intent of Original Warrant
Because she was uncertain about the dilution protection provided in the
Interim Warrants, Cunningham sought to confirm as a factual matter what the
parties’ original intent had been regarding dilution protection. She had not been
employed by Valerus at the time the Original Warrant was executed, so she spoke
to Valerus’s Chief Financial Officer Ruben Kendrick, who had been involved in
the 2006 transaction. Kendrick understood the Original Warrant language
provided Guggenheim with an undilutable 3.5% equity interest in Valerus. The
record reflects that Co-Chief Executive Officer Mike McGhan could neither recall
nor was he ever aware of the specifics of the dilution protection afforded in the
Original Warrant; he had left negotiating the specifics of the 2006 deal with
Kendrick and Valerus’s investment bankers. And Co-Chief Executive Officer
Chet Erwin, although admittedly aware in 2006 of the nature of the financial
transaction with GFC including the dilution protection provided in the Original
Warrant, could not recall the specifics of the deal when asked about it by
Cunningham in 2009.5
Cunningham asked her contact at Sanders Morris Harris about the 2006
Guggenheim transaction, but this individual was unaware who at Sanders Morris
Harris had worked on the 2006 deal. Cunningham also reached out to Valerus’s
attorneys—Jim Stephenson or Julie Fournier at SS&F—who had been involved in
the GFC transaction that resulted in the Original Warrant. But these attorneys
could not shed light on the original intent regarding dilution protection; they told
Cunningham if they could find any files regarding the transaction, they would
5
Erwin testified in a deposition that, in 2006, it was “clear” to him what the “business
guys had agreed to” in the Original Warrant—i.e., Guggenheim was entitled to 3.5% equity in
Valerus at closing of the transaction, with dilution protection only for management
compensation—but that “[a] lot happened between 2006 and 2009” and there was “no way” he
could recollect “precisely” the deal that Valerus and Guggenheim negotiated in 2006.
5
forward them to her. Cunningham did not receive any files from outside counsel
regarding the transaction. In Cunningham’s view, the Original Warrant and
Interim Warrants, which specified a number of shares, contained a “cushion”
providing anti-dilution protection,6 and additional anti-dilution provisions intended
to keep Guggenheim at a fixed percent, were unnecessarily confusing and
needlessly complicated. Kendrick suggested that Cunningham contact Jeff
Nichols, who had been one of GFC’s outside counsel during the 2006 negotiations,
to confirm GFC’s understanding of the original intent of the warrant’s dilution
clause and to discuss amending the warrant to clarify that intent. In February
2009, Cunningham contacted David Ronn, a former colleague of hers, at the law
firm Greenburg Traurig.
Cunningham explained to Ronn that she was seeking to understand and
clarify the warrants. She explained to Ronn that she had reached out to the lawyers
who represented Valerus during the transaction and that they could not recall the
specifics. She informed Ronn that Kendrick suggested that she speak with Jeffrey
Nichols, a partner at Greenberg Traurig who had represented GFC in the original
transaction, to clarify GFC’s original intent regarding the dilution issue.
Cunningham told Ronn that if Nichols agreed that the intent was what Kendrick
remembered, she had an “easy drafting fix” for the warrants. Ronn confirmed that
Cunningham should speak with Nichols.
Valerus and Guggenheim Amend the Interim Warrants in an Attempt to Clearly
Reflect the Intent of the Original Warrant
Shortly after Cunningham’s discussion with Ronn, on February 19, 2009,
Nichols emailed her, informing her he understood that Cunningham was
6
Nothing on the face of the warrant shows that there is any “cushion,” as described by
Cunningham.
6
“interested in revising the warrant to make it easier to keep [G]uggenheim at the
right percentage without doing brain-damaging calculations” and that he “agree[d]
110%.” Cunningham then spoke with Nichols by telephone and told him that there
were questions about the warrants from Metalmark’s attorneys. Cunningham
informed Nichols that the warrants were confusing. Cunningham told Nichols that
Kendrick thought the warrant was supposed to provide Guggenheim “3.5% for
always”; she explained to Nichols that she did not want to change the substance of
the warrants, but she wanted to clarify the language to clearly reflect the original
intent.
Nichols emailed Cunningham after this conversation to follow-up on the
call. In this February 20th email, Nichols explained that he had looked at the
Original Warrant and “did not see any language regarding the cushion.” Nichols
stated that Jim Stephenson, Valerus’s counsel at the time the Original Warrant was
negotiated, “would have wanted something in the warrant if that was the intent.”
Nichols informed Cunningham that he would check to see if he had any notes from
the original transaction, but that “a lot” of the work had been done at his former
law firm. Nichols never provided Cunningham any further information regarding
the original transaction. But later that same day, Nichols had an associate send
Cunningham proposed warrants that provided that Guggenheim would be awarded
a flat, undesignated percentage interest in Valerus on the exercise of the warrants
and removing all the adjustment provisions contained in section 8. Cunningham
believed this change fixed the “drafting problem” in the Original and Interim
Warrants. In April 2009, after nine weeks of negotiating various terms of the
proposed warrants unrelated to the “percentage at exercise” intent, Cunningham
authorized the execution of new warrants with clear language providing for an
7
Contemporaneous internal Guggenheim e-mails describe the oral
compromise and acknowledge the understanding that Guggenheim
would have no dilution protection for share issuances to equity
investors. In an August 10 e-mail exchange between Mr. Kenney and
his boss, Tim Murray, Mr. Murray first wrote, “I thought we were
going to allow for some dilution for employee [incentive
compensation programs]. Looks like we didn’t, which is better for
us.” Mr. Kenney replied:
[N]o that was part of the compromise, we[’]re not
diluted unless they go out and raise cash equity.
[E]mployee comp[ensation], reorg[anizations] and
[stock] splits were protected.
This is the only contemporaneous document that clearly stated the
parties’ understanding that Guggenheim would not have dilution
protection in connection with the issuance of shares to an equity
investor. . . .
Unlike Guggenheim, Valerus had no contemporaneous documents in
its files that clearly confirmed the oral compromise the parties had
reached.
***
There is no evidence that anyone with SMH had knowledge of the
2006 intent in early 2009. There is no evidence that Mr.
Mockenhaupt, the Valerus representative who negotiated the
compromise, was even with the SMH firm at that time. There is no
evidence that the scope of SMH’s agency in connection with the
Credit Agreement and the Original Warrant extended beyond when
those transactions were consummated in 2006. Upon the closing of
the 2006 transaction, SMH had no duty to ascertain or transmit any
further information to Valerus with respect to the warrant or the
Credit Agreement. Furthermore, there is no evidence SMH was
engaged to represent Valerus in 2009 in connection with the warrant
amendments. Ms. Cunningham testified that Goldman Sachs was
Valerus’s banker in 2009, and that Barclay’s was involved as well.
SMH was providing only a fairness opinion in connection with
Metalmark. There is no evidence showing the subject matter of the
opinion, the terms of any engagement of SMH, or any other
information relating to the scope of that project. . . . SMH was not
16
injunction was denied in August. Thereafter, Guggenheim requested that Valerus
transfer all the Amended Warrants to Orpheus Holdings. Orpheus Holdings then
exercised the Amended Warrants in exchange for a total of 5,862,351 Valerus
shares, which represented a 3.5% interest in Valerus on that date, i.e., on the
exercise date. Had Guggenheim instead exercised the Interim Warrants on that
date, it would have been entitled to 1,071,746 shares in Valerus—a difference of
4,790,605 shares.
In December 2011, the trial court granted Guggenheim partial summary
judgment, dismissing Valerus’s claim that the Amended Warrants should be
rescinded due to lack of consideration. In August 2012, the trial court granted
summary judgment in favor of Valerus on Guggenheim’s claim for attorney’s fees.
In April 2013, the trial court denied Guggenheim’s second motion for summary
judgment; the case proceeded to a bench trial that month. Prior to trial, the parties
entered into a Rule 11 agreement, in which Valerus agreed that that it would not
seek damages for the value of the extra 4,790,605 shares Orpheus Holdings
received as a result of the Amended Warrants and that cancellation of those shares
would be Valerus’s remedy in the event it prevailed on any of its claims for relief.
In June 2013, the trial court signed a judgment in favor of Valerus on its
mutual and unilateral mistake claims and denying Valerus’s claims of fraud,
conversion, and violation of the Texas Securities Act. The trial court’s judgment
orders the Amended Warrants rescinded and reinstates the Interim Warrants,
entitling Valerus to cancel the extra 4,790,605 shares it had issued to Guggenheim.
The trial court later signed findings of fact and conclusions of law. After
Guggenheim’s motion for new trial was denied by the trial court, this appeal
followed.
9
II. AMBIGUITY OF THE PRE-AMENDMENT WARRANTS
Guggenheim’s first two issues rest on a conclusion that the Original Warrant
is not ambiguous. Indeed, the parties agree that, if the pre-amendment warrants are
not ambiguous, Valerus’s mistake claims must fail. Thus, we begin by
determining whether the trial court properly concluded that these warrants “were
ambiguous as to Guggenheim’s dilution protection for issuances to equity
investors.” And determining whether a contract is ambiguous is a question of law
we review de novo. Bowden v. Phillips Petroleum Co., 247 S.W.3d 690, 705 (Tex.
2008).
A. Summary of the Parties’ Dispute Regarding the Pre-Amendment
Warrants
The parties’ dispute primarily concerns the following provisions of the pre-
amendment warrants:
8. Adjustments. The number and kind of securities purchasable
upon exercise of this Warrant and the Exercise Price shall be subject
to adjustment from time to time as follows:
8.1 Subdivisions, Combinations and Other Issuances. If the
Company [Valerus] shall at any time prior to the expiration of this
Warrant subdivide the Shares, by split up or otherwise, or combine its
Shares, or issue additional units of its Partnership Interests as a
dividend or as compensation to, or part of an incentive program for,
any current or former employees (e.g., issuances of Class A Shares to
employees or Class B Shares to employees of the Company in
connection with the termination of employment of such employees),
the number of Shares issuable on the exercise of this Warrant shall
forthwith be proportionately increased in the case of a subdivision or
Partnership Interests dividend or issuances to employees or terminated
employees, or proportionately decreased in the case of a combination.
Appropriate adjustments shall also be made to the purchase price
payable per share, but the aggregate purchase price payable for the
total number of Shares purchasable under this Warrant (as adjusted)
shall remain the same. Any adjustment under this Section 8.1 shall
10
become effective at the close of business on the date the subdivision
or combination becomes effective, or as of the record date of such
dividend or issuance, or in the event that no record date is fixed, upon
the making of such dividend issuance.
***
8.4 Other Dilutive Events. In case any event shall occur as to which
the provisions of this Section 8 are not strictly applicable, but the
failure to make any adjustment would not fairly protect the purchase
rights presented by the Warrants in accordance with the essential
intent and principles of this Section 8 (i.e., to maintain the Holder’s
3.5% interest in the Company or the Company’s permitted successor
or assigns as of August 10, 2006), then, in each such case, the
Company shall make a good faith adjustment to the Exercise Price
and the number of Shares or Other Securities in accordance with the
intent of this Section 8 and, upon the written request of the Holder,
shall appoint an independent financial expert, which shall give their
opinion upon the adjustment, if any, on a basis consistent with the
essential intent and principles of this Section 8, necessary to preserve,
without dilution, the right of the Holder to acquire a total of 3.5% of
the Partnership Interests of the Company or the Company’s permitted
successor or assigns as of August 10, 2006.
(emphasis added). Guggenheim asserts that section 8.4 clearly and unambiguously
reflects the parties’ intent that the Original Warrant provides Guggenheim with a
3.5% stake in Valerus based on Valerus’s capital structure on August 10, 2006.
Valerus, on the other hand, contends that this section, when read in concert with
other provisions of the warrant, also can fairly be read to provide Guggenheim
with a 3.5% stake in Valerus when Guggenheim exercises the options.
B. Governing Law
In construing a contract, we must ascertain and give effect to the parties’
intent as expressed in the contract. Italian Cowboy Partners, Ltd. v. Prudential
Ins. Co. of Am., 341 S.W.3d 323, 333 (Tex. 2011). In determining the parties’
intent, we examine and consider the entire contract in an effort to harmonize and
11
give effect to all provisions of the contract so that no provisions are rendered
meaningless. Id. A contract is not ambiguous “merely because the parties disagree
on its meaning.” Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d
342, 345 (Tex. 2006). Likewise, lack of clarity or even inartful drafting will not
alone render an agreement ambiguous. In re D. Wilson Constr. Co., 196 S.W.3d
774, 781 (Tex. 2006). “Rather an ambiguity arises when an agreement is
susceptible to more than one reasonable meaning after application of established
rules of construction.” Universal Health Servs., Inc. v. Renaissance Women’s
Group, P.A., 121 S.W.3d 742, 746–47 (Tex. 2003). A contract may be patently
ambiguous—i.e., the ambiguity is apparent on the face of the contract—or latently
ambiguous, which means that the ambiguity only becomes apparent when a
facially unambiguous contract is applied under particular circumstances. DeClaris
Assocs. v. McCoy Worplace Solutions, L.P., 331 S.W.3d 556, 562 (Tex. App.—
Houston [14th Dist.] 2011, no pet.) (citing Nat’l Union Fire Ins. Co. v. CBI Indus.,
Inc., 907 S.W.2d 517, 520 (Tex. 1995)). Finally, in construing a contract in a
business context, we bear in mind the particular business activity sought to be
served and need not strain to apply construction rules to avoid ambiguity at all
costs. Id.
C. Application
The trial court concluded that section 8.4 was ambiguous. First, the trial
court determined that this provision establishes the “essential intent and principles”
for all of section 8. The trial court went on to reason that this “essential intent” to
maintain Guggenheim’s 3.5% interest in Valerus conflicts with section 8.1, which
provides, in pertinent part, that Guggenheim would be entitled to additional shares
in the event that Valerus issued shares as incentive compensation to its employees
after August 2006.
12
The problem in reconciling these two provisions becomes apparent with the
second iteration of the “essential intent and principles of this Section 8”: to
preserve, without dilution, the right of Guggenheim to acquire a total of 3.5% of
the shares of Valerus as of August 10, 2006.” If more shares were issued to
employees after August 2006, and under the terms of section 8.1, more shares were
also issued to Guggenheim, then Guggenheim would necessarily have the right to
acquire more than a total of 3.5% of the shares of Valerus outstanding on August
10, 2006. This conflict occurs because the 3.5% of shares Guggenheim is entitled
to receive “as of August 10, 2006” can be read to establish a number of shares set
in stone on that particular date. The fact that the Original Warrant specifies a
number of shares, rather than a percentage of equity, indicates that this reading of
the provision could be the one the parties intended. If Guggenheim were to receive
shares in excess of that specific number, then it would be by default receiving the
right to acquire more than a total of 3.5% of the shares of Valerus calculated on
August 10, 2006. We thus conclude that this interpretation of the Original Warrant
is reasonable.
However, this conflict could be resolved if this provision is read to establish
a starting date for the number of shares that Guggenheim is entitled to receive.
Thus, if we read “as of” to mean “beginning on” August 10, 2006, then this
conflict between these two provisions is resolved because the number of shares
that Guggenheim is entitled to receive under section 8.4 can change over time, so
long as Guggenheim’s equity interest in Valerus remains at 3.5%. Although this
reading of the contract does not necessarily align with the fact that the Original
Warrant provides a specific number of shares to Guggenheim, the warrant clearly
contemplates that additional shares will be awarded to Guggenheim in certain
13
circumstances. Thus, we conclude that this interpretation of the warrant is also
reasonable.
Because these two interpretations are both reasonable, the trial court did not
err in determining that the Original Warrant is ambiguous. See Universal Health
Servs., Inc., 121 S.W.3d at 746–47. We thus overrule Guggenheim’s first two
issues and turn to Guggenheim’s challenges to Valerus’s mistake claims.
III. VALERUS’S MISTAKE CLAIMS
A. Valerus Did Not Possess Documents Establishing the Meaning of
Section 8.4
Guggenheim asserts in its third issue that, regardless of ambiguity, Valerus
possessed information conclusively showing what section 8.4 meant and thus is
precluded from relying on the mistake doctrine. In support of this issue,
Guggenheim relies primarily on an email from Valerus’s investment banker, SMH
representative Gregg Mockenhaupt, sent to Guggenheim representatives during the
negotiations of the Original Warrant. This email was copied to Valerus’s
Kendrick, who then forwarded the email to co-CEO’s Erwin and McGhan.
In this August 9, 2006, email, Mockenhaupt stated that he had “conferred
with the company with respect to the warrant language” and was “hopeful that this
is just a matter of aligning expectations.” Mockenhaupt stated that, during the
previous negotiations, none of the parties was “of the impression” that Valerus was
agreeing to “a completely non-dilutable 3.5% equity interest.” Mockenhaupt
acknowledged that dilution protection in the event of a reorganization or stock split
was “standard for a warrant agreement” and that there “may even be some middle
ground with respect to an anti-dilution adjustment if the company establishes or
increases any management incentive stock option plans.” However, Mockenhaupt
emphasized that “[t]he real issue from the company’s perspective has to do with
14
their ability to use their equity as a financing tool or as acquisition consideration.”
He noted that, in SMH’s experience, “it is highly unusual to see a lender get a non-
dilutable interest” in that instance and that “it’s not something [Valerus] can
accept.” Mockenhaupt closed the email as follows:
We could talk about some sort of pre-emptive right that will allow the
warrant holder to participate in future financings at such a level to
keep their pro forma ownership interest at their pro rata share of 3.5%,
and establish some similar provision in the event of an acquisition
using the company’s equity securities.
We’re obviously close to completion of this financing and [Valerus] is
most eager to get the Guggenheim relationship underway. Let’s
discuss a resolution tomorrow at your convenience.
This email establishes that Valerus was negotiating with Guggenheim
regarding dilution protection and that Valerus was not amenable to “completely
non-dilutable” equity protection, It does not detail the conclusion of such
negotiations; taken alone, it does not establish the meaning of section 8.4. And as
discussed above, this provision was open to interpretation.
Importantly, we defer to unchallenged findings of fact that are supported by
the record. McGalliard v. Kuhlmann, 722 S.W.2d 694, 696 (Tex. 1986). Here,
Guggenheim has not challenged the following findings made by the trial court:
The dispute [regarding dilution] was resolved . . . in a conversation
between Mr. Mockenhaupt [of Sanders, Morris, Harris] and a
Guggenheim representative, Andrew Kenney. In that conversation,
Mr. Mockenhaupt and Mr. Kenney orally agreed that the warrants
would (i) grant a specific number of shares that represented 3.5% of
Valerus on the date the warrants were issued and (ii) include
adjustment provisions that protected Guggenheim from dilution in the
event Valerus entered certain non-cash transactions (such as grants of
shares to Valerus employees as incentive compensation) that would
otherwise dilute the economic value of the original grant of shares.
***
15
unilateral mistake because if the funds were not returned, appellees would acquire
a windfall and be unjustly enriched).
• The mistake relates to a material feature of the contract.
In this case, the mistake at issue relates to the intent of the parties relative to
the dilution protection provided in the Original Warrant. As noted above, warrants
are often added as a “sweetener” to entice investors. The Original Warrant was
negotiated as part of a large credit agreement between Valerus and GFC, but the
value of the warrant was the primary concern of the parties during their warrant
negotiations. Thus, the dilution protection afforded GFC was a factor that both
parties discussed and negotiated in multiple conversations and communications,
albeit in a very short amount of time. In unchallenged findings supported by the
record, the trial court found that GFC initially drafted a warrant containing full
dilution protection by entitling GFC to additional shares in the event Valerus
issued shares to equity investors. The trial court further found as follows regarding
the dilution issue:
Throughout the next day, August 9, the parties exchange[d] e-mails
debating whether the warrant should be 3.5% of Valerus at exercise or
3.5% at issuance of the warrant. There was no resolution by the end
of the business day. In an e-mail at 5:04 p.m., Mr. Nichols
[representing GFC] maintained that the 3.5% was to be calculated “at
the time of exercise, not now. We discussed this with [Guggenheim]
and they felt that this was the deal.” At 6:12 p.m., in responding to a
Valerus e-mail arguing that the term sheet contemplated 3.5% at
issuance, Mr. Nichols argued, “[Guggenheim] gets warrants at
closing, not 3.5% equity (which is given at exercise). The difference
is whether ‘at time of closing’ refers to ‘warrants’ or ‘3.5%’” The day
ended with a final note from Valerus’s financial advisor, Gregg
Mockenhaupt of Sanders Morris Harris (“SMH”), who told
Guggenheim that Valerus did not wish to accept such an obligation,
because it would penalize existing owners if Valerus sold new equity
to raise capital from third parties. IF Valerus sold new equity after the
24
Taylor test and focusing particularly on ordinary care element). Thus, we conclude
that this factor supports Valerus’s unilateral mistake claim.
• Rescission does not result in prejudice to Guggenheim except for the loss of
its bargain.
Rescission of the Amended Warrants would place Guggenheim in the
position it would have been in had these warrants not been executed. In other
words, the only loss to Guggenheim is the loss of its bargain based on the mistake
of Valerus. Guggenheim would be placed in the position it was before the
Amended Warrants were issued and would be entitled to the benefits under the
Original Warrant. In short, after examining the trial court’s findings relative to the
James T. Taylor factors described above, we conclude that legally and factually
sufficient evidence supports rescission of the Amended Warrants based on
Valerus’s unilateral mistake claim. See James T. Taylor & Son, 335 S.W.2d at
372–73. We thus overrule Guggenheim’s fourth issue.
IV. VALERUS DID NOT BEAR THE RISK OF MISTAKE
In Guggenheim’s fifth issue, it urges that the trial court erred in finding for
Valerus on Valerus’s mistake claim because the record conclusively established
that Valerus bore the risk of mistake and insufficient evidence supports the trial
court’s findings and conclusions on this issue. Guggenheim first asserts that
because Valerus was subject to the “conscious ignorance” doctrine, it cannot rely
on the doctrine of mistake. Guggenheim then contends that Valerus assumed the
risk of mistake by contract. Finally, Guggenheim argues that it was not
unreasonable to allocate the risk of mistake to Valerus. We address each of these
arguments in turn.
27
315, 321 (Tex. App.—Houston [14th Dist.] 2013, no pet.). In reviewing the legal
sufficiency of the evidence, we view the evidence in the light most favorable to the
finding, crediting favorable evidence if a reasonable fact finder could, and
disregarding contrary evidence unless a reasonable fact finder could not. City of
Keller v. Wilson, 168 S.W.3d 802, 822, 827 (Tex. 2005). When the appellant
attacks the legal sufficiency of a finding on which it did not have the burden of
proof, it must demonstrate that there is no evidence to support the finding. Id. at
810. We may not sustain a legal sufficiency, or “no evidence” point unless the
record demonstrates that: (1) there is a complete absence of a vital fact; (2) the
court is barred by the rules of law or of evidence from giving weight to the only
evidence offered to prove a vital fact; (3) the evidence to prove a vital fact is no
more than a scintilla; or (4) the evidence established conclusively the opposite of
the vital fact. Id.
To evaluate the factual sufficiency of the evidence, we consider all the
evidence and will set aside the finding only if the evidence supporting the finding
is so weak or so against the overwhelming weight of the evidence that the finding
is clearly wrong and unjust. Mar. Overseas Corp. v. Ellis, 971 S.W.2d 402, 406–
07 (Tex. 1998); Cain v. Bain, 709 S.W.2d 175, 176 (Tex.1986) (per curiam). The
trial court is the sole judge of the credibility of the witnesses and the weight to be
given their testimony. Barrientos v. Nava, 94 S.W.3d 270, 288 (Tex. App.—
Houston [14th Dist.] 2002, no pet.).
Finally and importantly, as discussed above, unchallenged findings of fact
are binding on an appellate court unless the contrary is established as a matter of
law or there is no evidence to support the finding. McGalliard, 722 S.W.2d at 696;
Reich & Binstock, 2014 WL 6851606, at *3.
18
2. Governing Law
Valerus sought rescission of the warrants under theories of both mutual and
unilateral mistake. Because the doctrine of unilateral mistake supports the trial
court’s judgment, 7 we turn first to the elements of this defense. A unilateral
mistake will support equitable relief when a plaintiff shows: (1) the mistake is of
so great a consequence that to enforce the contract as made would be
unconscionable; (2) the mistake relates to a material feature of the contract; (3) the
mistake must have been made regardless of the exercise of ordinary care; and (4)
the parties can be placed in status quo in the equity sense; i.e., rescission must not
result in prejudice to the other party except for the loss of his bargain. James T.
Taylor & Son, Inc. v. Arlington Indep. Sch. Dist., 160 Tex. 617, 335 S.W.2d 371,
373 (1960); Ross v. Union Carbide Corp., 296 S.W.3d 206, 219–20 (Tex. App.—
Houston [14th Dist.] 2009, pet. denied) (en banc). Each of these elements is a fact
issue. James T. Taylor & Son, Inc., 335 S.W.2d at 376. Further, other
circumstances, “such as the acts and extent of knowledge of the parties” are also
relevant. Id. at 373. 8
7
See Matter of Marriage of Merrikh, No. 14-14-00024-CV, 2015 WL 1247064, at *5
(Tex. App.—Houston [14th Dist.] Mar. 17, 2014, no pet. h.) (mem. op.) (explaining that we must
affirm the judgment if it can be upheld on any legal theory supported by the evidence).
8
Unilateral mistake is a doctrine that is similar but legally distinct from a “mistake-plus-
knowledge” claim. Mistake-plus-knowledge is a subset of the mutual mistake doctrine. See,
e.g., Davis v. Grammar, 750 S.W.2d 766, 768 (Tex. 1988) (“Unilateral mistake by one party, and
knowledge of that mistake by the other party, is equivalent to mutual mistake.”). However, the
trial court made several challenged findings that support Valerus’s mistake-plus-knowledge
claim: (1) Valerus told Guggenheim that it wanted to amend the warrants because
Guggenheim’s interests were implicated in the Metalmark transaction, and Guggenheim’s
interests in this equity sale transaction would only be implicated if Guggenheim had dilution
protection in this situation; (2) Valerus sent Guggenheim its financial statements that clearly set
forth Valerus’s mistaken view on Guggenheim’s dilution protection; (3) Valerus’s Kendrick and
Guggneheim’s Kenney spoke regularly about the Metalmark transaction, and Kendrick was
mistaken about the dilution protection afforded by the warrants; and (4) when Cunningham
suggested that the warrants be amended to more clearly reflect the parties’ original intent,
19
3. Application
The mistake found by the trial court is that the parties intended that the
Original Warrant give Guggenheim a 3.5% interest in Valerus upon the exercise of
the warrants. In fact, it is now undisputed that at the time the parties entered into
the Original Warrant, it was their intent to give Guggenheim a 3.5% interest in
Valerus calculated on August 10, 2006. The trial court made numerous findings
relevant to the unilateral mistake doctrine, many of them unchallenged. We next
place these findings in context with the elements of unilateral mistake. 9
• The mistake is of so great a consequence that to enforce the contract as
made would be unconscionable.
The parties agree that, under the intended terms of the Original Warrant,
Guggenheim would have been entitled to 3.5% of Valerus’s equity calculated on
August 10, 2006. Under the terms of the Amended Warrants, however,
Guggenheim was entitled to 3.5% of Valerus’s equity on the date that it exercised
the warrants. Further, the trial court made the following findings relative to this
element:
Valerus did not need to amend the warrants to facilitate the
Metalmark transaction. It received nothing of value in exchange for
promising to issue Guggenheim, as it happened, millions of dollars’
worth of additional shares that would dilute the holdings of innocent
Nichols agreed “110%” and quickly had draft warrants affording full dilution protection prepared
and sent to Cunningham. These findings, although contested, are supported by the record; thus,
they are binding on this court. See McGalliard, 722 S.W.2d at 696. Indeed, many of these
findings are based on the trial court’s determination about the credibility and the weight to be
given the testimony of various witnesses. And these findings lie solely within the purview of the
trial court as the finder of fact. See Barrientos v. Nava, 94 S.W.3d 270, 288 (Tex. App.—
Houston [14th Dist.] 2002, no pet.).
9
Guggenheim relies heavily on Fina Supply, Inc. v. Abilene National Bank, 726 S.W.2d
537 (Tex. 1987). But Fina Supply involved unambiguous contract extensions, not an ambiguous
contract that was amended in an effort to reflect the parties’ original intent. See id. at 539–40.
The holding in Fina Supply thus has no bearing on the unique facts of this case.
20
shareholders. There is no commercial reason to justify this result; it
simply resulted from Valerus’s reasonable mistake. There is a gross
disparity in values exchanged. The contract is oppressive and
unreasonable. Moreover, the economic cost of this windfall is born
entirely by the legacy shareholders of Valerus, principally founders
and employees. Additionally, and as an independent basis for finding
unconscionability, the circumstances surrounding the negotiation of
the Amended Warrants render enforcement unconscionable. The
Valerus agents involved in the original negotiations who were still
Valerus agents at the time of the amendments in 2009 (including Mr.
Kendrick), were unsophisticated with respect to warrants and were
mistaken about the scope of Guggenheim’s dilution protection.
Guggenheim was very sophisticated with respect to warrants and was
fully aware of the Valerus agents’ unsophistication and mistaken
understanding. Valerus’s representatives in the amendment
negotiations . . . were not present for the drafting of the Original
Warrants while Guggenheim’s representatives . . . were. Ms.
Cunningham was in and out of the office dealing with recovering
from major surgery and tests relating [to] the recurrence of her cancer.
Guggenheim was aware of Ms. Cunningham’s health issues during the
negotiation of the amendments. Guggenheim was also aware that
Valerus was in the midst of a liquidity crisis and was under
tremendous pressure to complete the transaction with Metalmark.
Guggenheim has challenged these findings, but numerous other unchallenged fact
findings underlie these particular findings. For example, Guggenheim has not
challenged the trial court’s earlier finding that “[i]n negotiating with Guggenheim
in 2006, Mr. Erwin, Mr. McGhan, and Mr. Kendrick relied extensively on
Valerus’s legal and financial advisers” and were not “sophisticated” regarding
warrant transactions. Similarly, Guggenheim has not challenged the trial court’s
finding that Valerus’s existing limited partners went from 100% ownership to less
than 20% ownership as a result of the TPG transaction. Guggenheim likewise has
not challenged the trial court’s finding that Valerus did not receive any financial
compensation from Guggenheim in exchange for amending the warrants, nor has it
challenged the finding that “none of the changes had any value to Valerus and the
21
change in the method of calculating shares issuable under the warrants was of
significant detriment to Valerus.” Further, it is undisputed that Valerus’s
representatives during the negotiation of the Amended Warrants were not involved
in the drafting of the Original Warrant and that Nichols, Guggenheim’s
representative, was. Finally, it is undisputed that Cunningham was having serious
health issues during the negotiation of the Amended Warrants. Several findings,
supported by the record, establish these facts; thus, they are binding on this court.
See McGalliard, 722 S.W.2d at 696. All of these factors support the trial court’s
finding of unconscionability.
Guggenheim, however, asserts that Valerus failed to show that enforcing the
contract as made would be unconscionable because: (1) both sides made
concession in negotiating the Amended Warrants; (2) the value of any additional
units Guggenheim obtained could have been zero if Valerus went bankrupt, which
was a real possibility at the time; and (3) the deal turned out worse for Valerus
because of the onerous TPG transaction that occurred six months’ after the
Amended Warrants were executed. We address each of these assertions in turn.
First, both sides did make concessions in negotiating the Amended
Warrants. But all of these concessions occurred after the parties agreed that the
3.5% equity stake in Valerus would be calculated at exercise, rather than at the
August 10, 2006 execution. None of these “concessions” would have been
necessary had Valerus not mistakenly believed that Guggenheim was entitled to a
3.5% equity stake at exercise. The trial court made findings to this effect, which
are unchallenged on appeal, supported by the record, and thus binding on this
court. See id. Further, that Valerus was contemplating bankruptcy at the time it
executed the Amended Warrants has no bearing on whether enforcing the
Amended Warrants would be unconscionable. In fact, this factor is more
22
appropriately considered when analyzing whether Valerus exercised ordinary care
in executing the Amended Warrants. Cf. James T. Taylor & Son, 335 S.W.2d at
374–76 (noting that external pressures bear on whether party exercised ordinary
care).
Second, Guggenheim’s allegation that the Amended Warrants only became a
bad deal for Valerus because of the TPG transaction that occurred six months’ after
they were executed is not availing. The trial court made the following
unchallenged finding:
Valerus calculated in connection with the Metalmark transaction that
Guggenheim’s dilution protection would result in Guggenheim
receiving “989,853 Class B Units pre-transaction, and 2,059,089 Class
B units post-transaction.” Thus, instead of being diluted to
approximately 1.68% of the company upon issuance of shares to
Metalmark, as it would have been under the Pre-Amendment Warrant,
Guggenheim would have maintained 3.5% of the company. This
would have been a material shift in wealth to Guggenheim even
before TPG came into the picture. Anti-dilution protection for equity
investors was a very significant, material right that Valerus mistakenly
provided to Guggenheim in exchange for nothing of value.
This unchallenged finding is supported by the record, and thus, is binding on this
court. See McGalliard, 722 S.W.2d at 696. In short, Guggenheim’s assertion that
it was the TPG transaction that occurred after the Amended Warrants were
executed that made these warrants unconscionable is unavailing.
In sum, we conclude that the trial court’s unchallenged findings of fact
support a conclusion that the mistake at issue here is of so great a consequence that
to enforce the Amended Warrants would be unconscionable. Cf. Int’l Ins. Co. v.
Jataine, 495 S.W.2d 309, 321–23 (Tex. Civ. App.—Corpus Christi 1973, writ ref’d
n.r.e.) (holding that appellant was entitled to return of funds under a theory of
23
unilateral mistake because if the funds were not returned, appellees would acquire
a windfall and be unjustly enriched).
• The mistake relates to a material feature of the contract.
In this case, the mistake at issue relates to the intent of the parties relative to
the dilution protection provided in the Original Warrant. As noted above, warrants
are often added as a “sweetener” to entice investors. The Original Warrant was
negotiated as part of a large credit agreement between Valerus and GFC, but the
value of the warrant was the primary concern of the parties during their warrant
negotiations. Thus, the dilution protection afforded GFC was a factor that both
parties discussed and negotiated in multiple conversations and communications,
albeit in a very short amount of time. In unchallenged findings supported by the
record, the trial court found that GFC initially drafted a warrant containing full
dilution protection by entitling GFC to additional shares in the event Valerus
issued shares to equity investors. The trial court further found as follows regarding
the dilution issue:
Throughout the next day, August 9, the parties exchange[d] e-mails
debating whether the warrant should be 3.5% of Valerus at exercise or
3.5% at issuance of the warrant. There was no resolution by the end
of the business day. In an e-mail at 5:04 p.m., Mr. Nichols
[representing GFC] maintained that the 3.5% was to be calculated “at
the time of exercise, not now. We discussed this with [Guggenheim]
and they felt that this was the deal.” At 6:12 p.m., in responding to a
Valerus e-mail arguing that the term sheet contemplated 3.5% at
issuance, Mr. Nichols argued, “[Guggenheim] gets warrants at
closing, not 3.5% equity (which is given at exercise). The difference
is whether ‘at time of closing’ refers to ‘warrants’ or ‘3.5%’” The day
ended with a final note from Valerus’s financial advisor, Gregg
Mockenhaupt of Sanders Morris Harris (“SMH”), who told
Guggenheim that Valerus did not wish to accept such an obligation,
because it would penalize existing owners if Valerus sold new equity
to raise capital from third parties. IF Valerus sold new equity after the
24
issuance of the warrant to Guggenheim, Guggenheim’s 3.5% would
result in Guggenheim receiving more shares of Valerus to make up a
3.5% stake and the existing owners’ percentage stake would be
decreased.
As discussed above, the trial court further found that the dispute was
resolved the next day through a conversation between Mockenhaupt and
Guggenheim representative, Andrew Kenney. The nature and content of the
parties’ negotiations regarding the warrant clearly indicate that the dilution
protection afforded in the Original Warrant was the major factor of concern.
Accordingly, there can be little doubt that the parties’ intent regarding the
dilution protection contained in the Original Warrant was a material feature of the
contracts. This factor thus militates in favor of Valerus’s unilateral mistake claim.
• The mistake was made despite Valerus’s exercise of ordinary care.
“[T]he very word ‘mistake’ itself may connote some degree of negligence,”
and “ordinary negligence . . . will not necessarily bar the granting of equitable
relief.” James T. Taylor & Son, 335 S.W.2d at 374 (quotation omitted). Each
allegation of “negligence must depend to a great extent upon its own
circumstances,” such as “ill health,” time constraints, and other external pressures.
Id. at 374–76 (summarizing cases). The trial court made several unchallenged
findings that support a conclusion that Valerus exercised ordinary care in its efforts
to determine the intent of the Original Warrant: (a) the existence of external
pressures, including the 2008-2009 credit crisis; (b) time constraints, including
Valerus’s liquidity crisis and the fact that Valerus’s personnel and attorneys were
occupied by a number of extra tasks associated with the proposed Metalmark
transaction; and (c) Cunningham’s ill health, i.e., her recent cancer surgery and
ongoing testing and treatment at the time.
25
The trial court further found that Cunningham “used her best efforts to
ascertain the original intent in light of the circumstances existing at the time,”
including consulting with Kendrick, Erwin, and McGhan; consulting with SMH
and SS&F; and closely analyzing the plain language of the Original Warrant. The
trial court found that “after reaching out to the Valerus side of the 2006
negotiations, Ms. Cunningham had the mistaken understanding that the original
intent was that Guggenheim was to receive 3.5% always, which entitled
Guggenheim to additional shares if Valerus issued Shares to Metalmark in
connection with a Metalmark equity investment in Valerus.”
The trial court flatly rejected Guggenheim’s suggestions that Cunningham
“should have conducted a forensic examination of the company’s email servers and
turned over the company file room in search of documents that no one knew
existed in 2009” as “unrealistic” and imposing “a standard of care on Valerus far
exceeding that of ordinary care.” And, as discussed above, even if Cunningham
had “turned over the company file room,” Valerus had no document setting out the
terms of the 2006 oral compromise.
These unchallenged findings of fact, supported by the record and binding on
this court,10 establish that Valerus exercised ordinary care in attempting to discern
the intent of the ambiguous dilution protection afforded in the Original Warrant.
Guggenheim has not directed us to any evidence on the part of Valerus or its
agents that would preclude Valerus’s recovery under the theory of unilateral
mistake.11 See James T. Taylor & Son, 335 S.W.2d at 374–76; cf. Florsheim Co. v.
Miller, 575 F. Supp. 84, 85–87 (E.D. Tex. 1983) (discussing four-part James T.
10
See McGalliard, 722 S.W.2d at 696.
11
The trial court further rejected the notion that Erwin and McGhan were negligent
because they forgot the details of the 2006 warrant transaction, pointing out that both
Guggenheim’s Boehly and Murray admitted that they could not recall the details.
26
Taylor test and focusing particularly on ordinary care element). Thus, we conclude
that this factor supports Valerus’s unilateral mistake claim.
• Rescission does not result in prejudice to Guggenheim except for the loss of
its bargain.
Rescission of the Amended Warrants would place Guggenheim in the
position it would have been in had these warrants not been executed. In other
words, the only loss to Guggenheim is the loss of its bargain based on the mistake
of Valerus. Guggenheim would be placed in the position it was before the
Amended Warrants were issued and would be entitled to the benefits under the
Original Warrant. In short, after examining the trial court’s findings relative to the
James T. Taylor factors described above, we conclude that legally and factually
sufficient evidence supports rescission of the Amended Warrants based on
Valerus’s unilateral mistake claim. See James T. Taylor & Son, 335 S.W.2d at
372–73. We thus overrule Guggenheim’s fourth issue.
IV. VALERUS DID NOT BEAR THE RISK OF MISTAKE
In Guggenheim’s fifth issue, it urges that the trial court erred in finding for
Valerus on Valerus’s mistake claim because the record conclusively established
that Valerus bore the risk of mistake and insufficient evidence supports the trial
court’s findings and conclusions on this issue. Guggenheim first asserts that
because Valerus was subject to the “conscious ignorance” doctrine, it cannot rely
on the doctrine of mistake. Guggenheim then contends that Valerus assumed the
risk of mistake by contract. Finally, Guggenheim argues that it was not
unreasonable to allocate the risk of mistake to Valerus. We address each of these
arguments in turn.
27
A. Under the Facts of This Case, Valerus Is Not Subject to the “Conscious
Ignorance” Doctrine
Under the “conscious ignorance” doctrine, “a party bears the risk of mistake
when . . . he knowingly treats his limited knowledge of the facts surrounding the
mistake as sufficient.” Cherry v. McCally, 138 S.W.3d 35, 40 (Tex. App.—San
Antonio 2004, pet. denied). In other words, one “who intentionally assumes the
risk of unknown facts cannot escape a bargain by alleging mistake or
misunderstanding.” Geodyne Energy Income Prod. P’ship I-E v. Newton Corp.,
161 S.W.3d 482, 491 (Tex. 2005); see also Restatement (Second) of Contracts
§ 154 (1981) (“A party bears the risk of a mistake when . . . he is aware, at the time
the contract is made, that he has only limited knowledge with respect to the facts to
which the mistake relates but treats his limited knowledge as sufficient.”).
Here, however, as detailed above, the trial court found that Valerus, through
Cunningham’s efforts, exercised ordinary care in investigating the intent behind
the dilution protection provided in the Original Warrant. Valerus was not
“consciously indifferent” to the facts surrounding this mistake. Instead, the court
found that Cunningham carefully read the Original Warrant, discussed the intent of
the warrants with Valerus personnel, and when she was unable to ascertain the
intent behind the ambiguous dilution provisions, she sought out information from
the executives at Valerus, the investment banking firm assisting with the original
transaction, and the law firm that had been involved in negotiating the Original
Warrant. She even contacted the law firm that had represented Guggenheim
during the negotiation of the original transaction. Her investigation led her to
erroneously conclude that Guggenheim was entitled to a 3.5% equity stake in
Valerus when the warrants were exercised.
28
In sum, Valerus did not “intentionally assume[] the risk of unknown facts.”
Geodyne Energy Income Prod. P’ship I-E, 161 S.W.3d at 491. Cunningham was
not consciously indifferent to the facts surrounding the mistake; rather she made a
mistake after, as the trial court found, she “used her best efforts to ascertain the
original intent in light of the circumstances existing at the time.” Thus, Valerus is
not subject to the “conscious indifference” doctrine.
B. Valerus Did Not Assume the Risk of Mistake by Contract
Guggenheim points to the following provision of the Amended Warrants as
establishing that the mistake of risk was allocated to Valerus by contract:
No impairment. [Valerus] will not, by any voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by [Valerus], but will at all times in
good faith assist in the carrying out of all of the provisions of this
Section 8 and in the taking of all such action as may be necessary or
appropriate to protect the rights of [Guggenheim] against impairment.
This provision, by its plain language, requires Valerus to protect
Guggenheim against impairment; it does not allocate the risk of mistake to
Valerus. The trial court concluded, and we agree, that the word “impairment” used
in section 8.4 is a “technical business term used ‘in reference to diminishing the
value of a contractual obligation to the point that the contract becomes invalid or a
party loses the benefit of the contract.” (quoting Black’s Law Dictionary 331–32
(2d pocket ed. 2001)). It is not comparable to allocation-of-the-risk provisions,
such as “as is” sales or quitclaim deeds. Cf. Restatement (Second) of Contracts
§ 154(a) & cmt. b (“Just as a party may agree to perform in spite of
impracticability or frustration that would otherwise justify his non-performance, he
29
may also agree, by appropriate language or other manifestation, to perform in spite
of mistake that would otherwise justify his avoidance.”).12
Further, the language of this provision indicates that it applies to adjustments
made pursuant to section 8. And section 8 of the Amended Warrants deals only
with adjustments due to reorganization, reclassification, consolidation, or merger.
Nothing in section 8 of the Amended Warrants indicates that any adjustments
should be made in connection with an equity sale; this change is reflected in the
opening paragraphs of the Amended Warrants, which provide that Guggenheim
will be entitled to 3.5% of the outstanding shares of Valerus on exercise of the
warrants. We conclude that this provision does not allocate the risk of mistake to
Valerus.
C. Allocating the Risk to Valerus Is Not Reasonable
The trial court stated in its findings and conclusions that “it is not reasonable
under the circumstances to allocate the risk of mistake to Valerus.” In so
concluding, the trial court relied on section 157 of the Restatement (Second) of
Contracts. This section provides: “A mistaken party’s fault in failing to know or
discover the facts before making the contract does not bar him from avoidance . . .
unless his fault amounts to a failure to act in good faith and in accordance with
standards of fair dealing.” Restatement (Second) of Contracts § 157. As described
above, the trial court made several unchallenged findings that Valerus acted with
12
The illustration to comment b illuminates the type of language that would allocate the
risk to a particular party:
A contracts to sell and B to buy a tract of land. A and B both believe that A has
good title, but neither has made a title search. The contract provides that A will
convey only such title as he has, and A makes no representation with respect to
title. In fact, A’s title is defective. The contract is not voidable by B, because the
risk of the mistake is allocated to B by agreement of the parties.
Restatement (Second) of Contracts § 154 cmt. b (emphasis added). This sort of allocation-of-
risk language is completely absent from the provision at issue in this case.
30
ordinary care in investigating the mistake at issue. Guggenheim has made no
assertion that Valerus failed to act in good faith or in accordance with standards of
fair dealing in negotiating the Amended Warrants. And there are certainly no
findings by the trial court to this effect. Thus, we agree with the trial court that it is
not reasonable under the circumstances to allocate the risk of mistake to Valerus.
For the foregoing reasons, we overrule Guggenheim’s fifth issue.
V. SUMMARY JUDGMENT ON GUGGENHEIM’S COUNTERCLAIMS
In Guggenheim’s sixth and final issue, it asserts that the trial court erred by
granting summary judgment for Valerus on Guggenheim’s counterclaims for
specific performance of section 8.4 of the Amended Warrants and for attorney’s
fees. Guggenheim asserts that section 8.4 of the Amended Warrants is a “covenant
not to sue.” We disagree.
Section 8.4’s anti-impairment provision contains a promise of good faith
performance. Nothing in this provision represents a covenant that Valerus would
not sue to rescind the contract for an alleged mistake. This provision does not
approach language in a covenant-not-to-sue provision: the plain language of this
provision does not purport to prevent Valerus from filing suit. See, e.g., Nat’l
Prop. Holdings, L.P. v. Westergren, 453 S.W.3d 419, 428–29 (Tex. 2015) (per
curiam) (“Although the release provides an affirmative defense to future suits, we
cannot construe it as including a covenant not to sue where, in fact, the plain
language does not bar future suits.” (emphasis added)).
Moreover, it has long been the rule in Texas that attorney’s fees are only
recoverable as allowed by contract or statute. See, e.g., Akin Gump v. Nat’l Dev. &
Research, 299 S.W.3d 106, 120 (Tex. 2009). Nothing in the Amended Warrants
provides a right to attorney’s fees. And under Texas Civil Practice & Remedies
31
Code § 38.001, Guggenheim could recover attorney’s fees only if it prevailed; i.e.,
only if it recovered damages. See, e.g., MBM Fin’l Corp. v. Woodlands Oper. Co.,
L.P., 292 S.W.3d 660, 666 (Tex. 2009) (“To recover fees under this statute, a
litigant must do two things: (1) prevail on a breach of contract claim, and (2)
recover damages.”). Here, Guggenheim has not recovered any damages on any
breach of contract claim.
In short, we agree with the trial court that Valerus did not breach section
8.4’s anti-impairment provision by suing to rescind the Amended Warrants for
alleged mistake. Moreover, Guggenheim did not prevail on any breach of contract
claim. Thus, the trial court did not err by granting summary judgment to Valerus
on this issue. We overrule Guggenheim’s sixth and final issue.
VI. CONCLUSION
First, we have determined that the Original Warrant was ambiguous, which
requires us to overrule Guggenheim’s first two issues. Based on the voluminous
unchallenged findings of fact made by the trial court that are supported by the
record, we have further concluded that (1) Valerus did not have possession of
documents resolving this ambiguity and (2) Valerus’s unilateral mistake claim is
supported by sufficient evidence. We further agree with the trial court’s
conclusions that the risk of mistake was not allocated to Valerus under the
circumstances presented in this case. Finally, we have overruled Guggenheim’s
challenge to the trial court’s summary judgment in favor of Valerus on
Guggenheim’s breach of contract claims.
32
Accordingly, for the reasons expressed above, we affirm the trial court’s
judgment.
/s/ Sharon McCally
Justice
Panel consists of Justices McCally, Brown, and Wise.
33