Cathey v. Meyer

Decision Date04 August 2003
Docket NumberNo. 10-99-326-CV.,10-99-326-CV.
PartiesJohn CATHEY, Appellant, v. Larry MEYER and John Glover, Appellees.
CourtTexas Court of Appeals

Greg White, McGregor & White, Dale Williams, Jim Wren, Williams, Squires & Wren, Waco, Gary L. Richardson, Tulsa, for Appellant.

Corbet F. Bryant, Jeffrey S. Levinger, Monica Wiseman Latin, Stephanie M. Dooley, Carrington, Coleman, Sloman & Blumenthal, Dallas, for Appellee.

Before Chief Justice DAVIS, Justice VANCE, and Justice GRAY.

OPINION

BILL VANCE, Justice.

This cause involves allegations of fraud and breach of fiduciary duty between business associates.

I. FACTUAL BACKGROUND

In the mid-1990's, Larry Meyer was in the real estate development business. His projects included the acquisition, management, development, and sale of investment properties. To fund these projects, Meyer borrowed the initial investment money from a lending source called C.I.O.S. Meyer's income derived, at least in part, from profits on the projects1 and from consulting fees from the numerous limited partnerships he set up to carry out the projects.

In the fall of 1992, Meyer and John Cathey formed a business relationship. It was Cathey's job to find projects in which Meyer could invest and to help plan the financing, construction, and operation of the projects. Over the years, Cathey and Meyer entered into a series of agreements, both oral and written, on various projects. Cathey was paid a base salary, but he alleged his primary benefit was to be income derived in various ways from net profits from the projects on which he worked. From September 1992 to August 1996, Cathey was involved in dozens of projects with Meyer. Pertinent to the lawsuit which is the subject of this appeal, they were involved in the following:

1993: The acquisition of the Silverado Apartments, for which there was a written distribution agreement that Cathey would be paid twenty percent of net profits.

1993: The acquisition of the Polo Club Apartments, for which there was a written distribution agreement that Cathey would be paid five percent of net profits.

1995: The acquisition of the Valley Ranch Apartments, for which there was a written distribution agreement that Cathey would be paid nine percent of net profits if the distribution occurred before Meyer and Cathey terminated their business relationship, and four and one-half percent after termination.

1995: The acquisition of the Arbors Apartments. Cathey and Meyer were the sole partners in a limited partnership which purchased these apartments from Meyer's father. Cathey's interest in the partnership was five percent.

1995: The refinancing of the Silverado Apartments and the Arbors Apartments.

June 1995 through August 1996: The development of a project in Waco to construct a movie theater complex, and a project in Dallas to construct luxury condominiums.

John Glover, an attorney, was also involved in the projects, drafting the legal documents for the limited partnerships and corporations through which the projects were carried out, as well as the written agreements which defined Cathey's financial interests. Cathey was an officer, manager, or partner in many of these business entities, but he claimed he was not privy to the financial records. At trial, Meyer stated that Cathey simply never asked to review the records.

During the three years and eleven months of his dealings with Meyer, Cathey was paid about $260,000. But the two had periodic disagreements about what Cathey's financial interests were. First, Cathey claimed at trial that by January 1993, just four months into their relationship, Meyer had promised that Cathey would make twenty percent of the net profits from projects Cathey found, and ten percent from projects he did not find but nevertheless worked on. He was also to receive a $25,000 bonus if he completed a refinancing of the loans on a property previously purchased. He claimed that this oral "global agreement" as well as other oral promises were not always fully honored. However, there was trial testimony from Meyer's witnesses that the "global agreement," if it existed, would not have pertained to larger projects or to projects involving outside partners. Cathey also complained that a number of times Meyer either (a) refused to put in writing the oral agreement they had reached on a particular project or (b) presented Cathey with a written agreement containing provisions different from what had been agreed. Also, Cathey claimed to have suffered because many of the projects, after expenses and overhead were deducted, never made any net profit. He claimed at trial that Meyer secretly paid himself large "consulting fees" thereby draining off any net profit and enriching himself in the process.

In August 1996, Meyer presented Cathey with four documents and demanded he sign them. One was a general release of any interests Cathey might have in any of the projects he had been involved with. A second cut Cathey's interest in one of the apartment complexes in half. The third was an acknowledgment that Cathey was Meyer's employee, which Meyer said he needed for tax purposes. It also contained provisions dramatically cutting Cathey's monthly salary and binding Cathey to a non-competition agreement. The fourth provided that Cathey would get five percent of net profits from the Dallas condominium project. Cathey claimed that Meyer demanded that he sign all four documents, or he would get no interest in the Dallas project. Cathey refused to sign any of the documents. Meyer had the locks changed on Cathey's office, and their relationship ended.

II. TRIAL COURT PROCEEDINGS

On May 22, 1997, Cathey sued Meyer for fraudulently inducing Cathey into: (1) entering into written agreements regarding his compensation for work done on purchasing four apartment complexes, by not disclosing that Meyer intended to pay himself large consulting fees, which had the effect of draining off the profits from the apartment projects so that there were no net profits from which Cathey's share could derive; (2) working on the refinancing of two of the four apartment complexes, when Meyer did not intend to pay Cathey to the full extent orally promised; and (3) working on the Waco and Dallas projects, when Meyer did not intend to pay Cathey to the full extent orally promised. Cathey also sued Meyer for breach of fiduciary duty on the Waco and Dallas projects, asserting that Meyer took advantage of him by not fairly compensating him as promised.2

Cathey sued Glover, the attorney, for breach of fiduciary duty on the Dallas project by not protecting Cathey's interests in his dealings with Meyer, and for negligence on the Dallas project by not expressly telling Cathey that Glover was representing only Meyer's interests and that Cathey should seek other counsel. Cathey also alleged that Glover conspired with Meyer to fraudulently keep Cathey in the business relationship.3

A. The Verdict

After a six-week trial in July 1999, the jury returned its verdict on twenty-seven questions. Regarding the claims against Meyer, it found:

• Meyer fraudulently induced Cathey into written agreements on the four apartment complex projects. This fraud proximately caused $37,500 in damages.4

• Meyer fraudulently induced Cathey to provide services in connection with the refinancing of two of the four apartment complexes. This fraud proximately caused $35,000 in damages.5

• Meyer fraudulently induced Cathey to provide services regarding the Waco movie theater and Dallas condominium projects. This fraud proximately caused $150,000 in damages for the Waco project and $750,000 in damages for the Dallas project. $2,250,000 should be assessed against Meyer in exemplary damages for this fraud.

• Cathey ratified and waived Meyer's fraud that the jury found in all the above projects.

• There was a relationship of trust and confidence between Meyer and Cathey (i.e., Meyer had a fiduciary duty to Cathey) which existed prior to and apart from the Waco and Dallas projects, which relationship ended on August 13, 1996.

• Meyer breached his fiduciary duty to Cathey regarding the Waco and Dallas projects. This breach proximately caused $150,000 in damages for the Waco project and $750,000 in damages for the Dallas project.

• Cathey knew or should have known on or before May 22, 1995, of the facts underlying Meyer's breach of fiduciary duty. (The lawsuit was filed on May 22, 1997.)

B. Post-Verdict Motions and Orders

All the parties filed post-verdict motions. Cathey filed a "Motion to Disregard Certain Jury Findings and Motion for Judgment."6 Cathey asserted there was "no support in the evidence" for the jury's findings that (a) Cathey ratified and waived fraud by Meyer and (b) Cathey knew or should have known about the facts giving rise to the breach of fiduciary duty claim over two years before filing suit. Specifically, he argued the following:

1. Ratification only bars a remedy of rescission in a breach-of-contract action, not damages in a fraud action.

2. Under the definition of ratification in the charge, the person defrauded must either (a) continue to accept some benefits after learning of the fraud, or (b) conduct himself so as to recognize the agreement as binding. Because Cathey received no benefits from and there was no consummated agreement on the Waco and Dallas projects, by definition he cannot have ratified fraud related to those two projects.

3. The question on ratification was improper because the jury was not asked if Cathey had full knowledge of the fraud, which, he asserted, is required for ratification.

4. There was no evidence Cathey intentionally surrendered any right to the full benefit of his bargains with Meyer, which the instruction on waiver required the jury to find.

5. Waiver typically is asserted by a plaintiff in a breach-of-contract action when the defendant pleads the affirmative defense of fraud....

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