Carbona v. Ch Medical, Inc.

• Decision Date: 23 October 2008
• Docket Number: No. 05-06-01417-CV.,05-06-01417-CV.
• Parties: John A. CARBONA, Appellant/Cross-Appellee v. CH MEDICAL, INC. and CH Industries, Inc., Appellees/Cross-Appellants.
• Court: Texas Court of Appeals

266 S.W.3d 675

John A. CARBONA, Appellant/Cross-Appellee v. CH MEDICAL, INC. and CH Industries, Inc., Appellees/Cross-Appellants.

No. 05-06-01417-CV.

Court of Appeals of Texas, Dallas.

October 23, 2008.

Deborah G. Hankinson and Rick Thompson, Law Offices of Deborah Hankinson, PC, Dallas, TX, for Appellant.

Paul W. Brown, Law Offices of Paul W. Brown PC, Dallas, TX, for Appellee.

Before Justices WHITTINGTON, RICHTER, and MAZZANT.

OPINION

Opinion by Justice MAZZANT.

This case concerns the compensation due John A. Carbona, the chief executive officer of CH Medical, Inc. and a director of CH Industries, Inc., following the sale of the assets of C.H. Medical. After a jury trial, the trial court rendered judgment on the jury's breach of contract findings against Carbona but not on the jury's breach of fiduciary duty findings against Carbona. Carbona brings five issues asserting the trial court erred in rendering judgment on the jury's breach of contract findings, and CH Medical and CH Industries bring three cross-issues challenging the trial court's failure to render judgment on the jury's breach of fiduciary duty findings. We reverse in part and render judgment reducing the award of damages to CH Medical and CH Industries, we render judgment for Carbona on his claim for breach of contract, and we remand the cause to the trial court for further proceedings.

BACKGROUND

Charles Hasty was the sole shareholder of CH Industries, which owned two businesses, a sheet metal company called Humanetics, II and a business that manufactured, sold, and leased hospital beds called CH Medical. During the operation of the businesses, Humanetics loaned CH Medical $7,620,463. Carbona was a salesman for CH Medical, and in the early 1990s, Hasty promoted Carbona to president of CH Medical.

In 1995, Carbona signed an Employment Agreement appointing him chief executive officer of CH Medical, Inc. and director of CH Medical's sole shareholder, CH Industries, Inc. Besides setting forth the terms of employment, salary, and incentive bonuses, the Employment Agreement provided Carbona with "Phantom Stock Rights." The Phantom Stock Rights were the right to some of the economic benefits of stock ownership of twenty-five percent of CH Medical without CH Medical having to issue the shares. In the event of a sale of CH Medical, Carbona would receive money equal to his Phantom Stock Rights, which would "equal the value of twenty-five percent (25%) of the shares of CH Medical, Inc. outstanding immediately before the Sale event (such value measured immediately after consummation of a Sale Event)." The incentive bonus provisions were applied retroactively, and the bonuses Carbona would have earned before he signed the contract were treated as loans to the companies. The Employment Agreement was guaranteed by CH Medical, CH Industries, and Hasty.

In 1998, MEDIQ/PRN Life Support Services, Inc. (Mediq) offered $47.5 million for the assets of CH Medical, and CH Medical, CH Industries, and Hasty accepted. This amount included $20 million for patents owned by Hasty and Carbona and $500,000 as consideration for non-compete agreements ($250,000 each to Hasty and Carbona). The assets Mediq agreed to purchase included the inventory of hospital beds and CH Medical's accounts receivable from Medicaid. Mediq had the right to demand an adjustment of the purchase if the receivables or other assets were not as represented.

One of the conditions of the sale was the termination of Carbona's Employment Agreement. To compensate Carbona for his Phantom Stock Rights, Carbona, Hasty, CH Medical, and CH Industries entered into an agreement to pay Carbona a series of "bonuses." The terms of this Bonus Agreement, signed on May 28, 1998, superseded any inconsistent terms of the Employment Agreement. Under the Bonus Agreement, Carbona would receive an amount of money calculated by a formula set forth in the agreement. Additionally, Carbona would receive fifty percent of any amount of the sale that exceeded $24.7 million after various deductions and adjustments. Following the sale, Carbona initially received more than $10 million: $5 million for his patent, $250,000 for the non-compete agreement, and $4,940,265 under the formula in the Bonus Agreement.

The Bonus Agreement set forth two relevant sets of payments to Carbona. The first was the "At Closing" Bonus of the amount under the formula paid to Carbona at the closing. Exhibit B to the Bonus Agreement set forth the numbers to be used in the initial calculation of the formula, and the agreement stated Carbona would be paid that amount, $4,940,265, at the closing. The second payment was the "Ninety Days After Closing" Bonus: ninety days after closing, the parties would recalculate the At Closing Bonus using the same formula and the more correct numbers then available; if the recalculation showed Carbona was owed money, he would receive it, and if it showed the At Closing Bonus was too high, he would refund the overpayment. Additionally, as part of the Ninety Days after Closing Bonus, Carbona would pay one-fourth of any post-closing expenses and would be paid for any incentive bonuses earned under the Employment Agreement before its termination at the closing of the sale. At the ninety-day point, the parties were also to agree to a reasonable estimation of future expenses, and Carbona was to pay twenty-five percent of that amount. To guarantee that money from the sale would be available if there was money owed to Carbona, the companies set aside one million dollars from the sale.

The closing of the sale of CH Medical to Mediq took place on May 29, 1998, and Carbona received the At Closing Bonus of $4,940,265. Problems quickly arose as some of the inventory could not be located and questions arose concerning the validity of some of the Medicaid receivables. Mediq demanded an adjustment of the purchase price pursuant to the Asset Purchase Agreement. These issues were not finally resolved until CH Medical and Mediq had entered into two settlement agreements, the first in March 1999 and the second in June 2000. Other problems included lawsuits brought by three former employees of the companies based on alleged misrepresentations by Carbona about the sale. These and other problems extended well beyond ninety days after the sale, and Carbona and CH Medical could not follow the Bonus Agreement's "Ninety-Day Bonus" provisions because they lacked the final numbers to enter into the formula, and no reasonable estimation of post-closing expenses was possible.

As part of the closing, Carbona signed an agreement terminating the Employment Agreement. However, Carbona remained president and chief executive officer of the companies until he resigned on August 31, 1999.

During the winding down of CH Medical, Hasty became concerned that there was not as much money after the sale as he had anticipated. Hasty believed the shortfall was due to the fact that Carbona's calculation of his share of the sale proceeds under the formula in the Bonus Agreement had not included the $7,620,463 intercompany liability of CH Medical to Humanetics. In 2002, CH Medical and CH Industries sued Carbona for breach of contract, fraud, and breach of fiduciary duty, asserting Carbona's failure to include the debt to Humanetics in the calculations of his share of the sale proceeds resulted in Carbona's receiving too much money from the sale of CH Medical. The companies also alleged Carbona breached the contract by failing to pay his share of the post-closing expenses. Carbona filed a counterclaim for an incentive bonus he had earned under the Employment Agreement before the sale of CH Medical. The trial court concluded the contracts were ambiguous and submitted their interpretation to the jury.

Concerning the interpretation of the various agreements, the jury found that under the Bonus Agreement's formula for calculating Carbona's share of the sale proceeds, Carbona and the companies did not agree "to exclude intercompany payables owed to Humanetics, II, if any, from the total amount of corporate liabilities to be deducted from the total amount of corporate assets of CH Medical, Inc. and its subsidiaries in calculating Carbona's 25% share of the sale proceeds."

On the companies' causes of action, the jury found Carbona breached the Bonus Agreement by not including the liability to Humanetics in the calculation of the At Closing Bonus. The jury also found he breached his fiduciary duty to the companies and committed fraud. The court submitted a single damages issue on breach of contract, breach of fiduciary duty, and fraud, and the jury determined Carbona received $1,427,000 in excess of his twenty-five percent share of the sale proceeds. The jury also found Carbona breached the Bonus Agreement by not paying his one-fourth share of the post-closing expenses, which the jury found amounted to $796,000. The trial court's judgment awarded the companies $2,223,000 for breach of contract, rendered a take-nothing judgment on the companies' fraud and breach-of-fiduciary-duty claims, and rendered a take-nothing judgment on Carbona's breach of contract claim. The court also awarded the companies their attorney's fees.

BREACH OF CONTRACT

In his first issue, Carbona asserts he did not breach the Bonus Agreement in his calculation of the At Closing bonus. The parties' dispute concerns the place of the $7,620,463 intercompany liability of CH Medical to Humanetics in the distribution of the sale proceeds.

The Bonus Agreement set out the formula to calculate Carbona's share of the sale proceeds, and Exhibit B to the agreement set out the numbers to be used in the initial calculation of the amount to be paid to Carbona at the closing.¹ The intercompany liability was not included in Exhibit B's figures used to calculate Carbona's At Closing bonus. CH Medical asserts this liability should have been part of the calculation under the formula. CH Medical's accounting...