Fazio v. Cypress/GR Houston I, L.P.

Decision Date05 April 2013
Docket NumberNo. 01–09–00728–CV.,01–09–00728–CV.
Citation403 S.W.3d 390
PartiesPeter FAZIO, Shari Fazio, and Eric Fazio, Appellants v. CYPRESS/GR HOUSTON I, L.P., Cypress/GR Houston, Inc., and Cypress Equities, Inc., Appellees Cypress/GR Houston I, L.P., Cypress/GR Houston, Inc., and Cypress Equities, Inc., Appellants v. Peter Fazio, Appellee.
CourtTexas Court of Appeals

OPINION TEXT STARTS HERE

Sanford L. Dow, J.W. Beverly, Houston, TX, for Appellants.

Polly Graham, Arlen Ross Levy, Houston, TX, for Appellees.

Justice BLAND, joined by Chief Justice RADACK, and by Justices MASSENGALE, BROWN, and HUDDLE, for the en banc court.

EN BANC OPINION

JANE BLAND, Justice.

In this suit arising from the sale of land, we examine the appropriate measure of damages for a sale obtained through fraudulent inducement. A jury concluded that the seller of the land had failed to disclose material information to the buyer about the financial state of a commercial tenant who leased the land. But the jury further concluded that the buyers suffered nothing in damages proximately caused by the fraud, measured at the time of the sale, and it awarded no damages in connection with the costs incurred with the termination of the tenant's lease, nor the legal fees the buyers incurred due to the tenant's bankruptcy, nor the interest expense the buyers incurred on loans they obtained to facilitate the purchase. The trial court entered a take-nothing judgment in favor of the seller.

A majority of a panel of our court reversed the trial court, concluding that the buyers were nonetheless entitled to damages based on the loss that the buyers took when they sold the land three years later. The majority also concluded, with one justice dissenting, that the buyers did not disclaim reliance on the seller's promise of full disclosure in a letter of intent that the seller had signed before the sale. The seller moved for rehearing and rehearing en banc. The panel majority granted the motion for rehearing and revised its opinion, mooting the en banc request, but its disposition remained the same. The seller moved again for en banc consideration. Concluding that the case warranted en banc review, a majority of our court has voted to reconsider this case. SeeTex.R.App. P. 49.7. We withdraw the panel's August 16, 2012 opinion on rehearing and judgment, and substitute this opinion and judgment in its place.

We hold that the trial court properly entered a take-nothing judgment, because the jury found that no damages were proximately caused by the fraud, measured at the time of the sale, and it found no incidental or consequential damages relating to the sale. We further hold that the trial court properly denied the seller's request for attorney's fees as the prevailing party, because the parties' contract did not provide for a recovery for attorney's fees incurred in defense against claims of fraud. We therefore affirm.

Background

Peter, Shari, and Eric Fazio sued Cypress/GR Houston I, L.P., Cypress/GR Houston, Inc., and Cypress Equities, Inc. (collectively, Cypress) for fraudulent inducement, relating to the Fazios' purchase, in October 2003, of commercial land locatedon the frontage road of Interstate 10 in Houston. At that time, Garden Ridge Pottery leased the site for one of its retail stores.

After identifying the land as an investment prospect, the Fazios notified Cypress of their interest in purchasing it. In early September 2003, the parties executed a letter of intent, signed by Peter Fazio and a representative of Cypress Equities, in which Cypress agreed to allow the Fazios to investigate “all aspects of the Property” and further agreed to provide the Fazios with “all information in [Cypress's] possession.” The Fazios and their brokers subsequently conducted due diligence and inspected the property. As part of this process, they requested “every scrap of paper” that Cypress had regarding the property. The Fazios reviewed multiple appraisals of the property; researched the property's primary tenant, Garden Ridge; investigated the lease terms; reviewed Garden Ridge's audited financial statements; and contacted Garden Ridge's CFO for an assessment of Garden Ridge's financial condition. The Fazios' investigations revealed that Garden Ridge was restructuring and struggling financially, but that Garden Ridge had recently secured a line of credit for its operations to continue through the 2003 Christmas season. During their discussions with Garden Ridge's CFO, the CFO was optimistic that Garden Ridge could work through its financial difficulties. The Fazios' own lenders were not as certain, and told the Fazios that Garden Ridge was not a viable long-term tenant. Garden Ridge's audited financial statements, which the Fazios reviewed, showed that Garden Ridge had defaulted on its debt covenants and was in the process of corporate restructuring.

Despite its agreement in the letter of intent to provide to the Fazios “all information in its possession,” Cypress did not disclose to the Fazios that, in February 2003, Garden Ridge had sent a letter to Cypress stating that it was “restructuring” and needed “to reduce our occupancy costs at your premises.” Cypress also did not disclose that Garden Ridge had sought a 30% rent reduction for the I–10 property as well as a similar reduction for another property owned by a separate Cypress entity and leased to Garden Ridge. Finally, Cypress failed to disclose that in early September 2003, Cypress's own lender was concerned about the financial condition of Garden Ridge and had asked that Cypress's President, Chris Maguire, execute a personal guaranty for the $5,704,000 loan that it had made to Cypress that had been formerly secured only by the property. Maguire eventually signed the guaranty—on September 25, one day after Cypress sold the land to the Fazios.

The parties executed the final purchase agreement on September 24, 2003 for a price of $7,667,000. The agreement contained various provisions disclaiming the Fazios' reliance on representations made by Cypress to the Fazios.

Garden Ridge paid its rent in October, November, and December, but it defaulted on its rent in January 2004, and shortly thereafter declared bankruptcy. Once in Chapter 11 bankruptcy protection, Garden Ridge rejected its lease. The Fazios attempted, unsuccessfully, to re-lease the land. They later sold it in 2007 for $3,750,000.

The jury found that Cypress Equities, but neither of the other Cypress entities, had defrauded the Fazios. It attributed 100% responsibility for any harm to the Fazios to Cypress Equities, but it found that the Cypress entities operated as a single business enterprise.

The trial court instructed the jury on two measures of direct damages, and various measures of incidental and consequentialdamages. The trial court's two measures for actual damages were distinctly different: Jury question 2(1) instructed the jury to determine [t]he difference between the price the Fazios paid for the Property and the amount they received when they sold the Property”; to this question, the jury answered $3,961,524.60, which is the actual difference in the two amounts. Question 2(2), in contrast, instructed the jury to determine “the difference, if any, between the price the Fazios paid for the Property and the value of the Property at the time the Purchase Agreement was executed”; to this question, the jury answered $0. In response to each of four instructions on incidental and consequential damages, the jury also answered $0. But, finding clear and convincing evidence of fraud, the jury awarded $667,000 in exemplary damages.

Both parties moved for judgment in the trial court. Among other grounds, Cypress argued that the Fazios were not entitled to a judgment based on the jury's answer to question 2(1) because it was an improper measure of damages, and that it, Cypress, was entitled to judgment based on the jury's answer to question 2(2), in which the jury awarded nothing under the proper measure of damages. The Fazios requested judgment on the jury's verdict for the amount the jury found in answer to question 2(1), plus exemplary damages. After extensive post-verdict briefing, the trial court entered a take-nothing judgment for Cypress and denied Cypress's request for attorney's fees.

The Fazios appeal the trial court's judgment against them on their claim for fraudulent inducement, contending that the trial court erred in disregarding the jury's liability and damages findings in their favor. They contend that the trial court instead should have disregarded the damages questions the jury found against them. Cypress also appeals, challenging the trial court's denial of its motion for attorney's fees.

Damages
A. Standard of Review

The Fazios challenge the trial court's judgment disregarding question 2(1), arguing that the question was a proper measure of damages. A trial court should disregard a jury finding if the jury question to which the finding responds is legally defective; the answer to a legally defective question is immaterial to the judgment. See Spencer v. Eagle Star Ins. Co., 876 S.W.2d 154, 157 (Tex.1994); Williams v. Briscoe, 137 S.W.3d 120, 124 (Tex.App.-Houston [1st Dist.] 2004, no pet.). Similarly, a trial court should disregard a jury finding if the evidence is legally insufficient to support it, or if a directed verdict would have been proper because a legal principle precludes recovery. Tex.R. Civ. P. 301; see Fort Bend Cnty. Drainage Dist. v. Sbrusch, 818 S.W.2d 392, 394 (Tex.1991); Williams, 137 S.W.3d at 124;John Masek Corp. v. Davis, 848 S.W.2d 170, 173 (Tex.App.-Houston [1st Dist.] 1992, writ denied).

B. Measuring Direct Damages

There are two measures of direct damages in a fraud case: out-of-pocket and benefit-of-the-bargain. Formosa Plastics Corp. USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 49 (Tex.1998) (citing Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 817 (Tex.1997)). Out-of-pocket damages measure...

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