Basic Capital Mgmt. Inc. v. Dynex Commercial Inc.

• Citation: 54 Tex. Sup. Ct. J. 781,348 S.W.3d 894
• Decision Date: 21 October 2011
• Docket Number: No. 08–0244.,08–0244.
• Parties: BASIC CAPITAL MANAGEMENT, INC., American Realty Trust, Inc., Transcontinental Realty Investors, Inc., Continental Poydras Corp., Continental Common, Inc., and Continental Baronne, Inc., Petitioners,v.DYNEX COMMERCIAL, INC. and Dynex Capital, Inc., Respondents.
• Court: Supreme Court of Texas

348 S.W.3d 894

54 Tex. Sup. Ct. J. 781

BASIC CAPITAL MANAGEMENT, INC., American Realty Trust, Inc., Transcontinental Realty Investors, Inc., Continental Poydras Corp., Continental Common, Inc., and Continental Baronne, Inc., Petitioners,

v.DYNEX COMMERCIAL, INC. and Dynex Capital, Inc., Respondents.

No. 08–0244.

Supreme Court of Texas.

Argued Sept. 10, 2009.Decided April 1, 2011.Rehearing Denied Oct. 21, 2011.

Lawrence J. Friedman, James Robert Krause, William Carter Boisvert, Friedman & Fieger, L.L.P., William V. Dorsaneo III, SMU School of Law, J. Robert Arnett II, Munck Butrus Carter, P.C., Dallas, TX, John Augustine Sopuch III, The Law Offices of John A. Sopuch III, St. Croix City, TX, Bart F. Higgins, Friedman & Fieger, L.L.P., Carlos G. Lopez, Vincent & Moye, P.C., Kenneth F. Nye, Thomas V. Murto, III, Law Offices of R. Jack Ayres, Jr., G. Michael Gruber, Godwin Gruber, P.C., Christopher Louis Kurzner, Kurzner PC, Michael Lewis Gaubert, Friedman & Fieger, L.L.P., Eric V. Moyè, Vial, Hamilton, Koch & Knox, John Frederick Redwine, Eric Redwine Law Offices, Jamil N. Alibhai, Munck Butrus Carter, P.C., Dallas, TX, Thomas R. Phillips, Baker Botts L.L.P., Austin, TX, Allyson Newton Ho, Morgan, Lewis & Bockius LLP, Houston, TX, Melissa J. Armstrong, Baker Botts L.L.P., Dallas, TX, for Basic Capital Management, Inc.William Richard Thompson II, Deborah G. Hankinson, Hankinson Levinger LLP, Charles L. Perry, Andrews & Kurth, L.L.P., Dallas, TX, Elana S. Einhorn, The University of Texas School of Law, Austin, TX, Ryan D. Clinton, Hankinson Levinger LLP, Dallas, TX, for Dynex Commercial, Inc.Justice HECHT delivered the opinion of the Court.

This is an action for breach of a commitment to provide financing for future real estate investments. The borrowers were to be entities that would be formed to hold each investment separately as opportunities arose. We hold that the corporate owners of those entities were third-party beneficiaries of the commitment, and that consequential damages for the lender's breach of the commitment were foreseeable. We reverse the judgment of the court of appeals ¹ and remand the case to that court for further consideration.

I

Basic Capital Management, Inc. managed publicly traded real estate investment trusts in which it also owned stock, including American Realty Trust, Inc. (“ART”) and Transcontinental Realty Investors, Inc. (“TCI”).² We refer to the three collectively as petitioners. Respondent Dynex Commercial, Inc. provided financing for multi-family and commercial real estate investors. ³

ART and TCI held investment property through wholly owned “single-asset, bankruptcy-remote entities”—SABREs, for short. A SABRE, as the term for which it stands suggests, is an entity that owns a single asset and whose solvency is independent of affiliates. Lenders like Dynex commonly require a SABRE as a borrower so that in the event of default, the collateral can be recovered more easily than from a debtor with multiple assets and multiple creditors.⁴

After several months of discussions and negotiations, Dynex agreed to loan three TCI-owned SABREs ⁵ $37 million to acquire and rehabilitate three commercial buildings—one each—in New Orleans if Basic would propose other acceptable SABREs to borrow $160 million over a two-year period.⁶ The agreements were eventually formalized in letters. The New Orleans Agreement was between Dynex and TCI and provided in part:

Dynex Commercial, Inc. (Lender) herein agrees to provide financing for the acquisition and/or rehabilitation of the captioned three (3) properties located in New Orleans, Louisiana under the following terms and conditions:

1. BORROWER: Three (3) single asset, bankruptcy remote borrowing entities, acceptable to Lender....

TCI accepted the agreement as “borrower”, although it is not a SABRE. The $160 million commitment (“the Commitment”) was between Dynex and Basic. It also stated that each borrower would be a “Single Asset, Bankruptcy Remote Borrowing Entity acceptable to Lender”. The SABREs would be owned by ART or TCI. “First and foremost,” Dynex stressed, “the two transactions [were] intertwined.”

Dynex loaned TCI's three SABREs the money to acquire the New Orleans buildings and funded a $6 million loan presented by Basic under the Commitment. But then market interest rates rose, making the terms of the Commitment unfavorable to Dynex. Dynex refused to provide further funding for improvements to the New Orleans buildings or to make any other loans under the Commitment.

Petitioners sued Dynex for breach of the Commitment, alleging that as a result, transactions that would have qualified for funding were financed elsewhere at higher rates or not at all. Petitioners claimed damages for interest paid in excess of what would have been charged under the Commitment and for lost profits from investments for which financing could not be found. TCI also sued Dynex for breach of the New Orleans Agreement. Dynex counterclaimed against petitioners for fraud.

ART and TCI alleged that they “were intended beneficiaries of the $160 million Commitment because their wholly owned subsidiaries would own the properties and borrow the funds advanced by Dynex Commercial under the commitment.” Dynex controverted this claim, pleading that ART and TCI “lack [ed] standing to assert claims under the alleged $160 million loan commitment”. Dynex and petitioners filed cross-motions for partial summary judgment on the issue, and the trial court granted petitioners' motion. Based on its ruling, the trial court issued an order in limine forbidding reference to the standing arguments before the jury.

After a trial of over a month, the jury returned a petitioners' verdict. The jury found that Dynex breached the Commitment, resulting in $256,233.25 lost profits for Basic, $25,367,090 lost profits for ART and TCI, and $2,183,287 increased costs in obtaining alternate financing for ART and TCI. The jury also found that TCI lost $252,577 profits as a result of Dynex's breach of the New Orleans Agreement.⁷

Dynex moved for judgment notwithstanding the verdict. Among other things, Dynex re-urged what it had earlier called its standing argument: that ART and TCI could not recover damages for breach of the Commitment, nor TCI for breach of the New Orleans Agreement, because neither was a party to, nor a third-party beneficiary of, those agreements. Dynex also argued that Basic could not recover lost profits for breach of the Commitment because such consequential damages were not reasonably foreseeable when the Commitment was made. The trial court granted the motion and rendered a take-nothing judgment for Dynex.

Petitioners appealed. The parties raised a number of issues, but the court of appeals found two to be dispositive and focused on them.⁸ First, it agreed with Dynex that ART and TCI were not third-party beneficiaries of the Commitment, nor TCI of the New Orleans Agreement.⁹ Both agreements, the court reasoned, were expressly made for the benefit of the borrowers—the SABREs that ART or TCI were to create as occasion arose—and any benefit to ART and TCI was at most indirect and therefore unrecoverable.¹⁰ Petitioners countered that Dynex was contending, in essence, that ART and TCI were “not entitled to recover in the capacity in which [they sued]”, a matter Dynex had not raised by a verified pleading as required by Rule 93(2) of the Texas Rules of Civil Procedure,¹¹ and therefore could not assert. The court of appeals rejected petitioners' argument.¹²

Second, the court held that Basic could not recover lost profits as consequential damages for Dynex's breach of the Commitment because there was no evidence that Dynex knew, when it made the Commitment, what specific investments would be proposed, or that other financing would not be obtainable. ¹³ Having concluded that there was no basis for any recovery by ART and TCI, the court did not consider Dynex's challenges to their damage claims.¹⁴ The court affirmed the trial court's judgment.

We granted the petition for review.¹⁵

II

We consider first whether ART and TCI can recover for breach of the Commitment, and TCI for breach of the New Orleans Agreement, as third-party beneficiaries.

We agree with the court of appeals that Dynex's failure to file a verified denial under Rule 93(2) does not preclude it from contesting ART's and TCI's right to recover as non-parties. Though the requirement of a verified denial to challenge a plaintiff's capacity to recover has long been part of Texas civil procedure,¹⁶ the case law is somewhat confused about when the requirement applies.¹⁷ The issue is made more difficult here because Dynex pleaded its challenge as lack of standing, which need not be raised by verified denial.¹⁸ These problems need not detain us here. Regardless of whether the issue is properly denominated standing, as the parties seemed to think in the trial court, or capacity, as petitioners have argued on appeal, the substance of Dynex's assertion—that ART and TCI cannot recover for Dynex's breaches of its agreements because they were not parties to the agreements—was addressed in cross-motions for summary judgment and adjudicated prior to trial. Not only was the matter raised by Dynex in its motion without objection,¹⁹ it was raised by petitioners themselves in their own motion, and then adjudicated in their favor. At that point, there was no longer any reason for a verified pleading,²⁰ and the trial court's post-trial about-face did not resurrect the pleading requirement.

The law governing third-party beneficiaries is relatively settled:

The fact that a person might receive an incidental benefit from a contract to which he is not a party does not give that person a right of action to enforce the contract. A third party may recover on a contract made between other parties only if the parties intended to secure some benefit to that third party, and only if the contracting parties entered into the contract...