Dunnagan v. Watson

• Decision Date: 24 August 2006
• Docket Number: No. 2-04-381-CV.,2-04-381-CV.
• Citation: 204 S.W.3d 30
• Parties: James R. DUNNAGAN and Parker County's Squaw Creek Downs, L.P., Appellants and Appellees, v. Joseph Earl WATSON, Appellee and Appellant.
• Court: Texas Court of Appeals

204 S.W.3d 30

James R. DUNNAGAN and Parker County's Squaw Creek Downs, L.P., Appellants and Appellees, v. Joseph Earl WATSON, Appellee and Appellant.

No. 2-04-381-CV.

Court of Appeals of Texas, Fort Worth.

August 24, 2006.

Rehearing Overruled September 21, 2006.

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Brent Hamilton, Plainview, Joseph W. Spence, Fort Worth, for Appellant.

Jackson Walker, L.L.P., Fort Worth, for Appellee.

Panel A: CAYCE, C.J.; LIVINGSTON and HOLMAN, JJ.

OPINION

DIXON W. HOLMAN, Justice.

I. INTRODUCTION

This appeal concerns a dispute between Appellant and Cross-Appellee James R. Dunnagan ("Dunnagan")¹ and Appellee and Cross-Appellant Joseph Earl Watson ("Watson"), two members of a limited partnership who sued each other after repeated disagreements ensuing from activities associated with the limited partnership. After a trial, a jury found that Watson breached fiduciary duties that he owed to the limited partnership and that it was not practicable for the limited partnership to continue. In four issues, Dunnagan, as appellant, complains that the trial court abused its discretion by refusing to strike Watson's second amended petition, that the trial court erred by denying his motion to disregard jury findings and to reform judgment, that the evidence is legally and factually insufficient to support the jury's finding that Dunnagan's actions rendered it not practicable for the limited partnership to continue, and that the trial court abused its discretion by denying his motion for new trial. In two issues, Watson, as cross-appellant, challenges the legal and factual sufficiency of the evidence to support the jury's finding that he breached fiduciary duties owed to the limited partnership and the trial court's judgment awarding damages to the limited partnership. We affirm the trial court's judgment in all respects.

II. FACTUAL AND PROCEDURAL BACKGROUND

On September 22, 1997, Dunnagan, Watson, and Larry Lawley ("Lawley") entered into a limited partnership agreement for the purpose of acquiring, holding, managing, and operating the former Trinity Meadows horse racing facility in Willow Park, Parker County, which Dunnagan, Lawley, and two other investors had purchased while the facility was in bankruptcy. The name of the limited partnership was "Parker County's Squaw Creek Downs, L.P." ("the limited partnership"). At the time of the limited partnership's inception, Dunnagan owned forty-nine percent of the limited partnership and Watson and Lawley each owned twenty-four and one-half percent of the limited partnership. All were limited partners.

Dunnagan, Watson, and Lawley also formed Parker County III, Inc. ("PC III"), a Texas corporation that owned the remaining two percent of the limited partnership and served as its general partner. Dunnagan owned fifty percent and Watson and Lawley each owned twenty-five percent of PC III. Watson served as the president, Lawley as the vice-president, and Dunnagan as the secretary/treasurer of PC III.

The limited partnership applied for a Class 2 horse racetrack license with the Texas Racing Commission in February 1998. A few months later, while the application for the license was pending, Lawley, along with Watson's support, suggested that the limited partnership open a restaurant at the facility in an effort to gain support from the horsemen—the individuals who used the facility to train their horses—and to demonstrate to the public that the facility was occupied and no longer the former Trinity Meadows operation. Watson opined that the limited partnership would be granted a racing license "soon" and that the restaurant would help jump start the patronage. Dunnagan, however, was opposed to opening the restaurant because he did not think that it would be profitable. Instead, he wanted to focus on obtaining a racing license. Tom Keating, the general manager and CPA of the limited partnership from October 1997 to May 1999, projected that the restaurant would not be profitable without a racing license.

Despite Dunnagan's objections and concerns, the limited partners reached an agreement regarding opening the restaurant. The minutes from a board meeting held on June 24, 1998 state,

The fourth item on the agenda was the restaurant. Joel Watson and Larry Lawley agreed to be responsible for all the expenses of the restaurant and with that agreement Jim Dunnagan did not have any objection to moving forward with it opening as soon as possible. Larry and Joel will also be entitled to all of the profits from the restaurant if any between now and when the track opens. It is agreed between the partners that once simulcasting begins the partners will all own and split the proceeds and/or losses in the restaurant equally.

Thus, Watson and Lawley assumed responsibility for all expenses associated with the restaurant until the racing license was obtained.

The restaurant opened in July 1998 and was initially managed by Lawley and Watson's parents, Sherry and Larry Watson.² At some point thereafter, however, Lawley no longer participated in the actual operation of the restaurant, leaving Sherry and Larry Watson with the responsibility. The restaurant's utility bills were in the name of the limited partnership. The limited partnership never operated the restaurant.

The limited partnership operated the facility's "backside" in 1997 and 1998.³ Although unprofitable, it was the only income generated by the limited partnership during this time. According to Dunnagan and Keating, Watson, Lawley, and Weldon Kennedy, Watson's grandfather, assumed the responsibility of operating the backside in January 1999. Similar to their agreement with Dunnagan regarding the restaurant, Watson and Lawley agreed to operate the backside at their own risk, assuming all of the losses and profits until the racing license was acquired. Watson testified that he and Lawley did not assume control and operation of the backside until December 1999.

In March 1999, the Racing Commission denied the limited partnership's application for a racing license. For the most part, it was at this point that the disagreements between the limited partners over various issues associated with the limited partnership began. Dunnagan indicated that he would no longer make any contributions to the limited partnership. He also wanted to close the backside because it was losing money. Watson and Lawley, however, voted to keep the backside open, as indicated by the minutes from a board meeting held on October 7, 1999, and continued to operate it under the same understanding regarding expenses and profits. The Watsons also continued to operate the restaurant after the racing license was denied in order to continue building "good faith" with the patrons and horsemen, to be up and running once the racing license was granted following a successful appeal of the initial decision denying the license, and to occupy the facility for insurance purposes. Dunnagan testified that he did not believe that the limited partnership was being treated fairly and that he expected the Watsons to pay rent to the limited partnership if they continued to operate the restaurant and backside after the racing license was denied. Watson did not recall Dunnagan suggesting that the facilities should be leased. The Watsons operated the restaurant and backside until November 1, 2002. PC III assumed possession, operation, and control of the backside on November 1, 2002, pursuant to an order entered by the trial court modifying a mutual temporary injunction initially entered into on June 25, 2001.⁴

Dunnagan and Watson also became involved in a dispute over Lawley's interests in the limited partnership and shares in PC III. Dunnagan had offered to purchase all of Watson's and Lawley's shares in PC III and interests in the limited partnership, but Watson objected and contended that the limited partnership agreement and the shareholders agreement required Lawley to offer his interests in PC III to him first. Kennedy also obtained an injunction enjoining Dunnagan from purchasing Watson's and Lawley's shares and interests. Lawley therefore offered to sell his interests in the limited partnership and PC III to Watson, who accepted. Watson ultimately made only two of the three required payments under his agreement with Lawley, and Dunnagan purchased Lawley's remaining shares of stock and interest in the limited partnership. Thereafter, Lawley owned no interest in the limited partnership and zero shares in PC III.

Watson sued Dunnagan and Lawley in June 2001. He sought injunctive relief to maintain the status quo of the limited partnership, a declaratory judgment to determine the ownership of Lawley's shares and limited partnership interest, and damages for breach of fiduciary duties. Dunnagan filed a third-party petition against Watson, alleging that Watson breached fiduciary duties.

At a meeting of the PC III board of directors on January 30, 2003, Watson was voted out as president and Lawley was voted out as vice-president of PC III. Dunnagan was elected as president and secretary of PC III.

Dunnagan and Watson went to trial in February 2003.⁵ The jury found that Dunnagan did not breach any fiduciary duties owed to the limited partnership, that Watson did breach fiduciary duties owed to the limited partnership, that Watson's breach of fiduciary duties caused the limited partnership damages in an amount of $459,645.69, that Watson loaned $0 to the limited partnership to pay its debts, and that it would not be practicable for the limited partnership to continue. The jury also determined the total capital contributions made by Dunnagan and Watson and the account balance of their respective capital contributions.

The trial court entered judgment on the verdict, which, among other things, ordered that the limited partnership be dissolved. Dunnagan subsequently moved to disregard the jury's answer to question...