Douglas v. Aztec Petroleum Corp.

• Decision Date: 25 July 1985
• Docket Number: No. 12-83-0046-CV,12-83-0046-CV
• Citation: 695 S.W.2d 312
• Parties: Donnie DOUGLAS, Individually and d/b/a Blackhawk Production, Appellant, v. AZTEC PETROLEUM CORPORATION, Appellee.
• Court: Texas Court of Appeals

Page 312

695 S.W.2d 312

Donnie DOUGLAS, Individually and d/b/a Blackhawk Production, Appellant, v. AZTEC PETROLEUM CORPORATION, Appellee.

No. 12-83-0046-CV.

Court of Appeals of Texas Tyler.

July 25, 1985.

Brendan J. Doran, Palestine, for appellant.

John C. Andrews, Dallas, E. Ray Andrews, Athens, for appellee.

ON MOTION FOR REHEARING

BILL BASS, Justice.

Our opinion dated May 9, 1985, is withdrawn, and the following is substituted.

Donnie Douglas, individually and d/b/a Blackhawk Production ("Douglas"), filed suit against Aztec Petroleum Corporation ("Aztec") to enfore a letter agreement between Douglas and Aztec. Under the agreement Douglas claimed he was due an overriding royalty interest in the oil and gas leases he had acquired for Aztec as part of the compensation for their acquisition. Aztec denied liability asserting that Douglas had not completed his services for Aztec in an "honest and forthright manner," as required by the letter agreement, ¹ but instead had falsified records and converted and embezzled funds advanced to Douglas to buy the leases. By counterclaim Aztec sought actual and exemplary damages from its agent Douglas for falsification of records, forgery, theft, conversion and embezzlement. A trial by jury resulted in a judgment denying Douglas the overriding royalty interest and awarding Aztec $107,834.57 actual damages and $100,000 exemplary damages. We affirm.

In February 1980 Aztec's president, Richard Seib, engaged Douglas to buy a 4900 acre block of leases for Aztec in Anderson County. For his services Douglas was to receive $5,000 together with an assignment of an overriding royalty interest in the leases obtained. This much of the oral agreement is reflected in the letter agreement of June 20, 1980, prepared and signed after the completion of leasing.

On February 23, 1980, Aztec sent Douglas a $5,000 payment in advance for buying the leases and two other checks totaling $124,180 to pay for leases. Douglas immediately went to work getting the block together. By the end of March all but a few tracts had been leased.

Douglas had a $60 personal checkbook balance when he made the agreement with Aztec. As soon as Aztec's money arrived, Douglas put it in his own account and embarked on a spending spree. He bought two cars and a boat, paid numerous personal expenses and retired two bank notes out of the account recently filled with Aztec money. Later a photocopy of each check was sent to Aztec with the payee altered to show that a lessor had received the money actually spent on personal items.

Douglas did not put all of Aztec's money in the bank. During the acquisition period, Aztec sent Douglas $343,557.35. Forty-two thousand dollars was kept as cash by Douglas and never deposited. When he made the final accounting to Aztec in June 1980, Douglas sent bogus receipts to show that the cash went to lessors. He admitted at trial that he did not really obtain receipts for cash payments but that his wife had forged all of those sent to Aztec by transposing signatures of lessors from other documents.

The following are some of the more striking admissions made by Douglas during the course of his testimony:

1. he retained $42,000 in cash out of the checks Aztec sent him;

2. he did not obtain receipts for the cash as it was used but that his wife later forged receipts to show that it had all gone for the purchase of leases;

3. he put all the rest of Aztec's funds into his personal account;

4. he altered photocopies of between "five and forty" of his personal checks so that they appeared to be made to lessors for their interests;

5. some of the altered checks actually cleared the bank as follows:

(a) $8,412.00 to Bacon Chevrolet for a Z-28 for his daughter;

(b) $7,384.00 for a boat for himself;

(c) $5,760.00 to Royce Chevrolet for a chevette for his wife;

(d) $4,076.00 payment on a personal note to National Security Bank;

(e) $316.00 and $178.48 used for personal expenses;

(f) $2,341.00 payment on a personal note to National Security Bank; and

(g) $301.00 to his family dentist.

6. he prepared the account given to Aztec June 20, 1980, using forged receipts and altering the amount and payee of checks to "plug in" whatever figure was necessary to come up to $338,557.35, the amount committed to his charge.

Once most of the leases were obtained, Douglas became very anxious to receive his override. But Seib kept badgering Douglas for an accounting. Thinking he was to receive the assignment of the override, Douglas took the concocted false account to Dallas on June 20, 1980, together with the forged receipts and altered checks supporting it. No assignment changed hands, but the letter agreement was executed.

Seib testified that upon receipt of the account he contacted some of the lessors and discovered several who were not paid the amounts reported. With this knowledge he refused to convey the override to Douglas.

Jack Coleman, a CPA for Aztec, testified from an audit of Douglas' and Aztec's records it appeared that $107,874.57 could not be related to the purchase of oil leases nor to Douglas' $5,000 compensation or expenses.

Douglas defends his conduct saying that he and Seib agreed that Aztec should advance purchase money to Douglas based upon a $75-per-acre lease price. If, as contemplated, Douglas bought the leases at a cheaper price, the savings would be split three ways, two shares going to Douglas and wife and one to Seib. In his testimony Douglas recalled that Seib had told him to forge receipts and alter checks to show a false higher cost for the leases because Seib was having cash flow problems. Douglas acknowledged that he was also supposed to report to Seib the actual price paid. Douglas introduced no figures to show what Seib's kickback should have been under the alleged secret deal.

Seib denied the existence of the secret bargain as well as the receipt of any confidential payment. He also disclaimed instructing Douglas or his wife to alter checks or forge receipts in furtherance of such a scheme.

Three issues were submitted to the jury. The issues and the jury's answers are as follows:

SPECIAL ISSUE NO. 1

Do you find from a preponderance of the evidence that Donnie Douglas failed to complete his services to Aztec in an honest and forthright manner?

Answer 'Yes' or 'No.'

ANSWER: Yes.

SPECIAL ISSUE NO. 2

What sum of money, if any, do you find Aztec was damaged as a result of Donnie Douglas' failure, if any, to complete his services in an honest and forthright manner?

Answer in Dollars and Cents, if any.

ANSWER: $107,874.57.

SPECIAL ISSUE NO. 3

What sum of money, if any, do you find that Aztec should be awarded against Donnie Douglas as exemplary damages for his failure, if any, to complete his services in an honest and forthright manner?

'Exemplary damages' means an amount of money which you may in your discretion award as a penalty or by way of punishment, or as an example to others, and which is in addition to any amount which may have been found by you as actual damages.

Answer in Dollars and Cents, if any.

ANSWER: $100,000.00.

Based on these findings by the jury, Aztec was awarded damages in the amount of $107,874.57, plus exemplary damages in the amount of $100,000.00, costs and interest. The trial court further held that Douglas was not entitled to an overriding royalty interest in any of the leases he acquired on behalf of Aztec.

Douglas contends that the phrase in the letter agreement, "This ORRI [overriding royalty interest] is earned by Donnie Douglas only after he has completed his services to Aztec in an honest and forthright manner," if it deserves to be given any force, can be effective only as a condition precedent or a covenant, but not both. If it is a condition precedent, its breach will not support damages but will excuse Aztec's future performance to convey Douglas the override. If it is a covenant, damages are the only appropriate remedy for its breach. Therefore Douglas maintains the trial court's judgment excusing Aztec's future performance (conveyance of the override) and awarding actual damages rests on inconsistent implied findings that the provision in question is both a condition precedent and a covenant.

Appellant argues that if the provision must be given any legal effect, it must be regarded as a covenant. Therefore Aztec's promise to convey the override is not excused, and the judgment denying Douglas the override is improper.

In his third, fourth, sixth and seventh points of error, Douglas argues that even if the covenant was breached, Aztec did not plead breach of contract nor adduce evidence at trial referable to breach of contract. Therefore the judgment of the trial court awarding actual damages of $107,834.57 is unsupported by pleading and proof. He further claims that even if actual damages are proper, exemplary damages are not recoverable in contract unless a coincident tort is pleaded and proven. Since no tort issue was submitted to the jury, Douglas argues Aztec waived recovery upon a tort theory by failing to request special issues thereon.

In his eighth and ninth points of error, Douglas complains of the trial court's refusal to submit a requested special issue and instruction he believes critical to his estoppel defense.

Douglas asked for the following special issue:

Do you find from a preponderance of the evidence that the method of completion of the services of Donnie Douglas to Aztec was directed by Richard Seib?

The requested instruction read as follows:

By the term 'completed his services to Aztec in an honest and forthright manner' is meant failure, if any, by Donnie Douglas to carry out his duties in the manner directed by Richard Seib after their agreement, if any, that the overriding royalty interest was earned by Donnie Douglas only after he completed his services to Aztec in an honest and forthright manner.

Douglas claims he pleaded and proved that Aztec was estopped to claim he did not act...