Cunningham v. Healthco, Inc.

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Citation824 F.2d 1448
Docket NumberNo. 86-1358,86-1358
PartiesDr. Larry CUNNINGHAM, Plaintiff, and Dental Leasing, Inc., Plaintiff-Appellee, v. HEALTHCO, INC., et al., Defendants-Appellants.
Decision Date21 August 1987

W.W. Mitchell, II and Bruce W. Akerly, Dallas, Tex., for defendants-appellants.

Moore & Peterson, William N. Radford and William F. LePage, Andrea Semple, Moore & Peterson, Dallas, Tex., for plaintiff-appellee.

Appeals from the United States District Court for the Northern District of Texas.

Before GARZA, WILLIAMS and GARWOOD, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

In this diversity case, we review the award of $259,000 in damages and $90,000 in attorneys' fees to Dental Leasing, Inc., a Texas corporation engaged in the management of dental clinics, for breaches of contract and misrepresentations made by Healthco, Inc., and H.P.S.C., Inc., both Massachusetts corporations involved in the sale, distribution, and lease financing of dental equipment. We reverse the award of $95,000 to Dental Leasing stemming from the breach of the computer agreement, and we affirm all other damages awards. We reverse the award of $90,000 in attorneys' fees, and remand the case for a recalculation of those fees.

Facts

Appellee Dr. Larry Cunningham, a plaintiff in the case below, was a dentist engaged in private practice. In 1980, he entered into discussions with representatives of appellants Healthco, Inc., and H.P.S.C., Inc., concerning the concept of retail dentistry. Healthco is a distributor and supplier of dental equipment and merchandise to dentists throughout the United States. H.P.S.C. provides for the purchase and lease financing of dental equipment from Healthco. Prior to 1983, H.P.S.C. was Healthco Professional Services Corp., a wholly-owned subsidiary of Healthco. Presently, Healthco owns 80% of H.P.S.C.

Healthco's agents in its discussion with Dr. Cunningham were Bill Morsinkhoff and Stan Foster. Morsinkhoff was Healthco's regional equipment manager in its Dallas office, and was also an agent of H.P.S.C. Cunningham testified that Foster urged him to consider opening a series of "retail" high-volume dental centers located in shopping malls in the Dallas metropolitan area. Foster provided magazine, newspaper, and journal articles on the subject of retail dentistry, and warned Cunningham that "there were going to be a lot of big dental centers taking over [the] practice and basically shutting out the private practitioners." Foster related that "Healthco was telling him that this thing was fixing to happen and they wanted to be a part of it in Texas."

Pursuant to his discussions with Foster, Cunningham entered into two real estate leases in early 1981 for space in two suburban Dallas shopping centers. He submitted financial statements to Healthco, and received verbal assurances that it would lease to him the necessary equipment for the two new clinics and that H.P.S.C. would provide lease financing. In early February, 1981, Cunningham executed two equipment lease agreements for the two clinics, as well as a contract to purchase computer equipment for the clinics from a division of Healthco.

In mid-February, 1981, Foster and Cunningham met with Foster's attorney, Cunningham's attorney (Mr. Green), a dental associate of Cunningham's who was interested in becoming involved in retail dentistry (Dr. Bonola), and Cunningham's dental clinic manager (Donna Duncan). The purpose of the meeting was to discuss the possibility of opening a series of dental clinics in various locations in the Dallas area, and the meeting ended in an agreement that Cunningham and Bonola would open two more clinics, which would be combined in a four-clinic operation with the two offices Cunningham had began setting up.

The parties dispute the exact nature of the specific agreements entered into between Cunningham and Bonola on one side, and Healthco and H.P.S.C. on the other. The jury found that three oral contracts had been made between Cunningham and Healthco: an agreement that Healthco would sell Cunningham the business opportunity to own and manage four dental clinics; an agreement that Healthco would provide an integrated management system for the operation of the clinics; and an agreement that Healthco or H.P.S.C. would provide financing for all four clinics. The jury found that Healthco and/or H.P.S.C. breached those contracts, as well as a fourth contract by which Healthco promised to sell to Cunningham a computer system that would satisfy the business needs of the four-clinic operation.

Also discussed at the February meeting was the creation of a corporation, eventually named Dental Leasing, Inc., to own and manage various parts of the new business. The parties dispute whether the separate corporation was the idea of Cunningham and his lawyer or of Healthco's agent Foster and his lawyer. There was testimony, however, that Foster had provided magazine articles discussing the fact that the majority of such retail dental centers were owned by management companies. Further, there was discussion of a Texas law regulating and partially limiting the right of a non-dentist to own equity in a dental clinic, and the use of a separate management company was discussed as one method of avoiding the ownership constraints otherwise created by the law. The jury determined that Dental Leasing was a third-party beneficiary of all four of the contracts breached by Healthco and/or H.P.S.C.

After the February meeting, Cunningham leased two more spaces in two additional shopping malls in the Dallas area. Bonola submitted financial statements to supplement those of Cunningham in order to obtain financing for the third and fourth clinics from H.P.S.C. Through Morsinkhoff, Healthco gave the dentists the same verbal assurances that credit was forthcoming that it had earlier given Cunningham in regard to the first two clinics. Three months later, however, in May, 1981, H.P.S.C. advised the dentists that it had decided not to finance clinics three and four. The jury found that Healthco and H.P.S.C. induced Cunningham to rely on their verbal assurances that they would provide financing for these clinics. After appellants denied Cunningham and Bonola further credit, Cunningham obtained a series of loans and credit packages from various banks and leasing agencies. Foster and Morsinkhoff helped Cunningham locate several of these alternative financing arrangements. Ultimately, enough credit was established to allow Dental Leasing to lease the Healthco dental equipment and computer system needed for the third and fourth clinics.

Dental Leasing had intended to open all four clinics by June 1, 1981. While the first clinic opened in the spring, the second clinic did not open until July 4, the third in the middle of August, and the fourth in September, 1981. From the time the clinics opened until the end of 1982, Healthco worked with Dental Leasing to fix the constant problems afflicting the computer system set up for the clinics. There was testimony that Healthco agents promised either to correct the problems with the computer system or rescind the computer lease contracts and create a new system. The jury found that the computer system never performed as promised, and that Healthco breached its contract to provide a functioning computer system that would satisfy the needs of the four-clinic operation.

On February 23, 1983, a year and a half after the fourth clinic opened, Dental Leasing filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. On November 9, 1983, a plan of reorganization was approved by the United States Bankruptcy Court. The confirmed plan contained a reservation of rights by the creditors in the event that Dental Leasing recovered, by way of lawsuit, any damages from Healthco or H.P.S.C.

On July 2, 1984, Cunningham and Dental Leasing filed the instant lawsuit. The jury found that Healthco and H.P.S.C. had breached the contracts described above, and that they had engaged in deceptive trade practices under the Texas Deceptive Trade Practices Act (DTPA). Dental Leasing was awarded a total of $259,000 in damages, along with $75,000 attorney fees for trial and $15,000 for appeals. Healthco and H.P.S.C. duly filed this appeal, claiming that (1) the evidence was not sufficient to support findings that oral contracts existed; (2) the claims against appellants based on oral contracts are barred by the statute of frauds; (3) Dental Leasing was not a third-party beneficiary of the three oral contracts and therefore cannot recover even if the contracts were breached; (4) evidence was not sufficient to support a finding that appellants breached the computer contract, and, in any event, Dental Leasing was not a third-party beneficiary of the computer contract; (5) Dental Leasing is not a "consumer" within the meaning of the Texas DTPA, and Dental Leasing's DTPA claims are barred by the applicable statute of limitations; (6) the trial court abused its discretion in denying appellants' motion for leave to file an amended answer with respect to the affirmative defense of accord and satisfaction; (7) evidence was not sufficient to support the damage awards, and those awards are duplicitous and fatally conflict with some of the jury's findings; (8) the trial court's charge to the jury regarding damages was misleading and unfair; and (9) the trial court erred in awarding attorney's fees. We will consider these claims in turn.

First Issue: Three Oral Contracts

Appellants claim that the evidence was insufficient to support findings that appellants and Cunningham entered into three oral contracts. The jury found that the parties made the following oral contracts: an agreement that "obligated Healthco to sell Cunningham the business opportunity to own and manage the four dental clinics involved in this case;" an agreement that "obligated Healthco or H.P.S.C. to provide...

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