Casa El Sol-Acapulco, S.A. v. Fontenot

• Decision Date: 01 February 1996
• Docket Number: SOL-ACAPULC,No. 14-92-01345-CV,S,14-92-01345-CV
• Citation: 919 S.W.2d 709
• Parties: CASA ELA. and Zu Corporation, Appellants, v. Dallas FONTENOT, Robert Watters, and Trumps, Inc., Appellees. (14th Dist.)
• Court: Texas Court of Appeals

Page 709

919 S.W.2d 709

CASA EL SOL-ACAPULCO, S.A. and Zu Corporation, Appellants, v. Dallas FONTENOT, Robert Watters, and Trumps, Inc., Appellees.

No. 14-92-01345-CV.

Court of Appeals of Texas,

Houston (14th Dist.).

Feb. 1, 1996.

Rehearing Overruled May 2, 1996.

David A. Furlow, Houston, Kenneth M. Morris, Houston, for appellants.

George M. Bishop, Houston, Ronald J. Waska, Houston, for appellees.

Before ANDERSON, HUDSON and SEARS ^*, JJ.

MAJORITY OPINION

HUDSON, Justice.

This appeal arises from a dispute regarding the satisfaction of terms in an option contract. Based upon factual findings made by the jury, the trial court entered judgment in favor of appellees, Dallas Fontenot and Robert Watters ("Fontenot and Watters"). The jury found Fontenot and Watters failed to fulfill certain conditions of an option contract that would have entitled them to purchase properties and rights belonging to Casa El Sol Acapulco, S.A. ("CESA"). The jury found, however, that their failure to satisfy the conditions for acceptance should be excused. The trial court granted Fontenot and Watters specific performance by giving them another thirty days to accept the option. We reverse and render judgment in favor of appellants.

Although the events which preceded the attempted closing on March 5, 1991, are complicated, a brief outline will suffice here to set the context of the specific issues on appeal. The present dispute has its genesis in a settlement agreement effected on September 10, 1989, when numerous lawsuits between the parties were "resolved." At issue in these lawsuits was the management and control of a sexually oriented business known as Rick's Restaurant and Bar ("Rick's"). The settlement agreement awarded CESA the tangible assets of Rick's, namely, the property and building which accommodate the nightclub, and a note for 1.7 million dollars. Fontenot and Watters were awarded the intangible aspects of the business, namely, the ownership and management of Rick's. To implement this division, CESA obtained all the stock in three corporations, known as Zu, Bering, and Northland, which own or hold the rights to all the realty and appurtenant fixtures used by Rick's. Fontenot and Watters, on the other hand, acquired all the stock in Trumps, Inc. ("Trumps"). Trumps is the corporation that owns and manages Rick's. Trumps also agreed, as part of the settlement, to make rental payments for the use of Zu's property pursuant to the terms of a lease contract. In addition, Fontenot and Watters were given the option to purchase all the stock in Zu, Bering, and Northland on or before March 5, 1991, provided they satisfied numerous conditions set forth in the settlement agreement. In February of 1991, Fontenot and Watters notified CESA that they wished to exercise the option. On the scheduled closing day, March 5, 1991, CESA refused to close on the transaction, alleging that Fontenot and Watters had failed to meet all the conditions required as part of their acceptance of the option contract.

At the conclusion of trial, three questions were presented to the jury. In its first two points of error, CESA attacks the propriety of jury questions two and three. Question number one asked the jury to determine whether Fontenot and Watters accepted the "stock purchase agreement option" on or before midnight of March 5, 1991. The instruction accompanying the question informed the jury that acceptance of the option means "performance of the conditions of the agreement." The jury found that Fontenot and Watters did not accept the option before it expired. Question number two asked whether the failure of Fontenot and Watters to meet the option conditions should be excused under the doctrine of disproportionate forfeiture. The third question asked the jury to decide whether the failure of Fontenot and Watters to satisfy the option conditions was due to CESA's conduct, namely, whether CESA concealed material facts from Fontenot and Watters. CESA argues that questions two and three are erroneous because: (1) question number two is a question of law for the court, and is legally immaterial in this case because disproportionate forfeiture is not applicable to disputes regarding unilateral "option" contracts; and (2) question three presents the issue of equitable estoppel which cannot create contract rights where none exist and which, by the terms of the question, was fatally flawed from the inception because it did not apprise the jury that estoppel by silence is applicable only where there is an affirmative duty to speak.

Before addressing the legal reasons which compel us to reverse the trial court's judgment, we recite the evidence presented by both sides regarding the attempted satisfaction of conditions of the option agreement. One of the conditions of the option agreement flowing from the 1989 settlement was that Fontenot and Watters satisfy the "Gentry Lien" and have it released of record. This lien was named after Ben Gentry, a former Trumps shareholder, who had previously sold his interest in the nightclub and who, because he was still owed approximately $200,000, held a lien on the property. On the final day of the option period, Fontenot and Watters retired the debt and obtained a release from Gentry. CESA refused to accept the release on the ground it had not been filed in the real property records of the Harris County Clerk.

Another disputed condition also concerned an encumbrance upon the property known as the "Sunbelt Lien." Pursuant to the 1989 settlement agreement, Fontenot and Watters had given CESA a first lien deed of trust on Trump's leasehold estate as a means of securing their debt to CESA. This condition was to protect CESA in the event of a possible default by Fontenot and Watters. In other words, if Fontenot and Watters defaulted, CESA could then become the tenant under the lease with Zu and continue operation of the nightclub. Fontenot and Watters, however, had previously borrowed $575,000 from Sunbelt National Bank on a promissory note secured by a deed of trust on real property owned by Zu. If Trumps defaulted on its loan, CESA wanted to make certain that its first lien deed of trust on Trumps leasehold estate was superior to Sunbelt's lien on the property being leased. To protect itself from such a default, CESA insisted that it have the right to take over the management of Rick's without fear that a foreclosure by Sunbelt would void its lease and effectively terminate the business. One of the conditions of the option agreement, therefore, was that the Sunbelt Lien be subordinate to the lease.

To comply with this condition, Fontenot and Watters obtained a "nondisturbance and attornment agreement" from Sunbelt National Bank that they contend made Sunbelt's lien subordinate to the lease. CESA contends, however, that the attornment agreement does not sufficiently protect its interest in Trumps' leasehold estate.

A less specific condition of the option agreement called for Fontenot and Watters to satisfy all liens and encumbrances on the land. Sometime after 1989, a tax lien was placed on the property by the Internal Revenue Service. Fontenot and Watters tried to persuade CESA to pay the debt because CESA owns Zu, and the lien was placed against the property when Zu failed to fully pay its taxes. CESA refused to satisfy the lien because the taxes accrued before the settlement agreement and at a time when Fontenot and Watters owned Zu. Because they never resolved this dispute, Fontenot and Watters put $10,000 in an escrow account to satisfy the tax lien. CESA claims this action falls well short of satisfying the condition that all liens and encumbrances be satisfied.

A final point of contention arose between the parties regarding the payment of money. To exercise the option, Fontenot and Watters had to tender $550,000 "in cash" to CESA. On the last day of the option period, Fontenot and Watters tendered a check from Heritage Title Company. CESA rejected the tender on the ground that the option agreement specified "cash."

After considering this evidence, the jury found that Fontenot and Watters had not complied with the conditions of the agreement. Fontenot and Watters argued in the alternative that if they failed to strictly comply with the conditions of the option agreement, equity should excuse their failure because CESA prevented them from meeting the conditions. Thus, they submitted questions two and three which would authorize the jury to find a legal basis for excusing their failure to perform.

Fontenot and Watters point to the following evidence in support of the jury's conclusion that CESA prevented them from meeting the option requirements. First, Salah Izzedin, a principal of CESA, allegedly told a former employee of CESA in the fall of 1990 that he hoped to frustrate any attempt by Fontenot and Watters to exercise the option agreement. Although the evidence was disputed, Fontenot and Watters also presented testimony that CESA's counsel said he did not want to inspect drafts of the closing documents, but then protested on March 4, 1991, when the documents had not been furnished to him. Yet when the documents were subsequently delivered to CESA's attorney, he did not review them until the waning hours of the last day of the option period. Fontenot and Watters further contend that on the afternoon of March 5, 1991, they had no reason to suspect that they had not satisfactorily complied in every material respect with the option conditions. They argue that CESA deliberately delayed the time of the closing until after 5:00 p.m. to prevent them from rectifying any of the alleged deficiencies and objections that CESA interposed at the closing.

The specific legal grounds which Fontenot and Watters submitted to the jury to excuse their failure to perform were based on the theories of disproportionate forfeiture and equitable estoppel. The case mentioned in the trial court and cited on appeal to support...