GXG, Inc. v. Texacal Oil & Gas, 13-96-368-CV

Citation977 S.W.2d 403
Decision Date18 June 1998
Docket NumberNo. 13-96-368-CV,13-96-368-CV
PartiesGXG, INC., Appellant, v. TEXACAL OIL & GAS and Ted O'Connor, Appellees.
CourtCourt of Appeals of Texas

Craig P. Henderson, William L. Wolf, P.C., Michael A. Dover, Dallas, for Appellant.

Robert L. Joseph, Joseph & Whatley, Sinton, for Appellee.



HINOJOSA, Justice.

This dispute arose from a conveyance of real and personal property interests. After appellee, Texacal Oil & Gas ("Texacal"), failed to make scheduled payments on a promissory note, appellant, GXG, Inc. ("GXG"), sought to foreclose on the properties. Texacal sued, seeking to block foreclosure on the properties, cancellation of the deed of trust and promissory note, abatement of the purchase price, quieting of title, and damages. GXG counterclaimed against Texacal and instituted a third-party action against appellee, Ted O'Connor ("O'Connor"), Texacal's president. GXG sought damages for Texacal's non-payment of the promissory note, fraud, and civil conspiracy. GXG also asked the trial court to impose a constructive trust and reform the note and deed of trust. A jury found that: (1) GXG did not convey the properties it promised to convey to Texacal, thereby excusing Texacal's performance, (2) Texacal sustained damages, (3) appellees did not commit or conspire to commit fraud on GXG, (4) Texacal owed $13,200 to GXG on the outstanding promissory note, and (5) there was no mistake necessitating reformation of the deed of trust.

The trial court disregarded the jury's findings on the balance due on the promissory note, some of Texacal's damages, and no mistake necessitating reformation of the deed of trust. The trial court rendered judgment in favor of GXG for $81,284.34 for the unpaid promissory note, reformed the deed of trust to include all of the properties conveyed, imposed an implied vendor's lien on all of the properties, and ordered foreclosure on the properties. The trial court ordered that GXG take-nothing against O'Connor.

By thirteen points of error, GXG complains the trial court erred by overruling its motions for judgment non obstante veredicto and new trial, by refusing to allow it to present relevant evidence, and by improperly calculating the balance due on the promissory note. By two cross-points, appellees, Texacal and O'Connor, contend the trial court erred in disregarding the jury's findings because there is sufficient legal and factual evidence to support them. We reform and modify the judgment and, as reformed and modified, affirm.

1. Background Facts

GXG, Inc., a Texas corporation formed in 1988, owned and operated various oil and gas properties in south Texas ("South Texas properties"). The company is owned by Gwen Knox and her two daughters. Knox is GXG's president. Brad Gatlin was Knox's financial advisor and an officer of GXG.

Besides the GXG properties, Knox also had legal and beneficial ownership interests in other oil and gas properties held in family trusts. She individually held an interest in the Yates Petroleum Company ("Yates properties") in New Mexico and was sole beneficiary of a family trust, the Gwendolyn Knox Schmaling Trust (the "Schmaling Trust"), containing oil and gas interests. She shared an equal beneficiary interest with her brother, Jack Knox, and sister, T.K. Helm, in two other family trusts, the T.B. Knox Trust ("the TBK Trust") and the E.D. Dill Trust ("the Dill Trust"), comprised of several types of property, including stocks and oil and gas interests. In 1991, all of the trusts were terminated and the assets distributed to the beneficiaries. Knox received 100% of the oil and gas properties of the Schmaling Trust. Knox, her brother, and sister each received one-third of the oil and gas properties in the TBK Trust and Dill Trust. Knox's share of the Schmaling, TBK, and Dill Trusts will hereafter be referred to collectively as the "Knox trust properties."

Ted O'Connor was a mortgage broker in Newport Beach, California. Gatlin and O'Connor had been acquainted since 1980, but were not frequently or regularly in touch. In late 1990 or early 1991, Gatlin contacted O'Connor to discuss a business proposition. Gatlin informed O'Connor that he "ran GXG," and that GXG's owners wanted to sell their oil and gas interests. Gatlin told O'Connor that, in addition to the GXG properties, Knox would be receiving oil and gas leases from the settlements of family trusts in 1991, and that these would also be included in the sale. Gatlin and O'Connor agreed that the price of the GXG lands would be $500,000, and the Knox trust properties $550,000. After reaching agreement on the price, O'Connor decided to form a company, Texacal Oil & Gas, Inc., which would acquire both GXG's and Knox's properties. Gatlin became a director, vice-president in charge of managing production, and registered agent of Texacal. Gatlin also became a shareholder with a 20% interest in Texacal. The shares had no par value and Gatlin did not invest any capital in exchange for the shares.

During negotiations for the sale of GXG's properties to Texacal, Gatlin informed Texacal that he was a vice-president of GXG and ran all of the company's operations. He also disclosed his continuing status as Knox's financial advisor. However, Gatlin did not inform Texacal that some of the oil and gas leases and equipment involved in the negotiations were, in fact, his property rather than GXG's or Knox's. Gatlin did not inform GXG or Knox of his status as an officer, director, and registered agent of Texacal.

Prior to the closing of the transaction, Texacal engaged Robert Dougherty to perform a study on the oil and gas reserves of the properties Texacal expected to receive. Dougherty, who had previously performed work for GXG, was designated as Texacal's production superintendent when Texacal was first formed.

On April 9, 1991, GXG agreed to sell Texacal the South Texas properties and Knox's trust interests. The purchase price for all of the properties was $1,050,000. The written, executed agreement provided for Texacal to pay $500,000 in cash and to execute a promissory note for $550,000, secured by a deed of trust which encumbered selected portions, but not all, of the Knox trust and South Texas properties.

At the closing, Texacal received the assignment for the South Texas properties. As Knox did not yet have possession of the Knox trust properties, the note and deed of trust were placed in escrow with Equitable Bank in Dallas, until the balance of the properties was conveyed. Upon notification, in July 1991, that the remaining assignments had been prepared, Texacal authorized Equitable Bank to release the note and deed of trust to GXG.

After receiving the assignment papers, Texacal discovered that only a one-third interest in the Knox trust properties had been conveyed. This discovery led to a falling out between Gatlin and O'Connor, when Gatlin failed to explain why GXG's conveyance was deficient. Gatlin resigned as a director and officer of Texacal and declared his intention to tender his shares in October 1991. Texacal never paid Gatlin compensation for his services as vice-president or director and the shares had no redeemable value. Because Gatlin never returned the stock certificate, he remained a stockholder until early 1994, when Texacal's board of directors struck the shares off the company's books.

Knox discovered that Gatlin, who had been her personal financial manager since 1987, had misrepresented his qualifications as a financial advisor, committed numerous acts of fraud in managing her personal and business affairs, and had been rifling her bank accounts, including misappropriating the cash paid by Texacal. She sued Gatlin in Dallas, and the case was settled for $500,000. Gatlin is not a party to the instant suit and did not appear as a witness.

2. Choice of Law: Texas or California

At the trial on the matters before us, GXG elicited from Texacal's witnesses and from O'Connor a significant amount of testimony concerning the provisions and effects of California law on the issues. In its appellate brief, GXG emphasizes portions of this testimony in support of its arguments. Because the contract does not specify which state's law controls, Texas courts must look to the principles enunciated in the Restatement (Second) of Conflict of Laws (1971) to decide which state's law should govern contractual rights and obligations. Maxus Exploration Co. v. Moran Bros., Inc., 817 S.W.2d 50, 53 (Tex.1991). The general rule of section 188 of the Restatement 1 controls our analysis. See id.; see also DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677-78 (Tex.1990). Under that rule, "[t]he rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6." 2 RESTATEMENT (SECOND) OF CONFLICTS OF LAWS § 188(1) (1971).

We conclude this case has only tenuous ties to California. Ted O'Connor is a resident of California. Most, if not all, of Texacal's investors reside in California. However, Texacal is a corporation organized under Texas law, registered and operating in Texas. It has a Texas mailing address, and its registered agent, Henry Harding, is a Texas resident. GXG is also a Texas corporation. Knox is a Texas resident. The bulk of negotiations took place either in Texas or by telephone between Texas and California. Although there is a dispute as to where the contract, note, and deed of trust at issue were drafted, they were executed in Texas, and performance was to take place in Texas. Almost all of the oil and gas properties concerned, with the exception of a field in New Mexico, are located in Texas.

We hold that California law is neither controlling nor guiding in this case. Evidence and...

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