Insurance Co. of North America v. Morris

Decision Date20 June 1996
Docket NumberNo. 14-94-00310-CV,14-94-00310-CV
PartiesINSURANCE COMPANY OF NORTH AMERICA, Appellant, v. John W. MORRIS, Rebecca S. Red, John T. Person, Bernice Person, Graham Glass, Sherrie Glass, Earl Lowe and Audrey Lowe, Appellees, v. WAITE HILL SERVICES, INC., Appellant. (14th Dist.)
CourtTexas Court of Appeals

David C. Mattka, Michael Kevin Queenan, Lisa D. Stewart, Dallas, for appellants.

James E. Doyle, Andrew R. Harvin, Houston, for appellees.

Before MURPHY, C.J., and AMIDEI and ANDERSON, JJ.

OPINION

AMIDEI, Justice.

This appeal is from a judgment awarding damages to investors in syndicated oil and gas partnership investments. Appellant, Insurance Company of North America ("INA"), was the surety for guaranty bonds issued in connection with promissory notes executed as part of the purchase of investment shares in two partnerships called Overlord III and IV. Appellant, Waite Hill Services, Inc. ("Waite"), was INA's managing general agent and the underwriter of INA's surety bonds. Commonwealth Enterprises, Inc. ("Commonwealth"), a Tennessee corporation, was the syndicator and general partner of Overlord III and IV. 1 Appellees are John W. Morris, Rebecca S. Red, John T. and Bernice Person, Graham and Sherrie Glass, and Earl and Audrey Lowe ("the Investors"). The jury found INA, through the acts and omissions of its agents, committed unconscionable acts, and aided and conspired in securities and common law fraud. INA and Waite appeal in twenty-nine points of error. 2

I. BACKGROUND

In 1982, Gordon Phillips of Gordon B. Phillips & Company (collectively "Phillips"), a Florida insurance agent, contacted Colony Insurance Company ("Colony"), a surplus lines carrier and reinsurer, about marketing surety bonds for limited partnership programs. Phillips, with Colony and its affiliate, Waite, developed a limited partnership investor bond program and sought a reputable insurance company with "name identification" to market the program. They chose INA as the front company because it had a good reputation and an A+15 rating.

In 1983, Phillips became a marketing agent for INA's surety bond programs. As such, Phillips reviewed and screened syndicator offerings and submitted programs to INA which were eligible for bonding. Phillips hired Locke Burgess ("Burgess") to handle the surety bond business. Burgess reviewed the private placement memoranda ("PPMs") and other documents for these programs and helped structure the deals in accordance with criteria set by INA. Waite, as managing agent, underwrote limited partnership programs for INA.

Commonwealth used Bruno Trimpoli ("Trimpoli"), its Chairman of the Board of Directors, to find lenders to finance its oil and gas drilling operations and insurance companies to issue financial guaranty surety bonds. Phillips contacted Trimpoli to discuss underwriting and issuing investor surety bonds for Commonwealth's oil and gas programs. In June 1983, Trimpoli and John Meatte ("Meatte"), Commonwealth's president, met with Phillips to discuss additional financing sources and investor surety bonding. Trimpoli testified at trial that, following this meeting, Burgess asked him to furnish copies of PPMs for previous Commonwealth programs. In July 1983, Trimpoli provided the PPMs on four earlier programs. Ten days later, Burgess called Trimpoli and was upset because he discovered in the old PPMs that Meatte had an SEC injunction against him. 3 According to his trial testimony, Trimpoli informed Burgess that Commonwealth's counsel, Laken Mitchell, had a legal opinion concluding the injunction was a moot issue. Burgess recognized the injunction was a problem, but nevertheless continued to work on concluding a deal.

Trimpoli furnished Phillips a draft format of the Commonwealth-INA program and sought Phillip's comments. In May 1984, Burgess notified Trimpoli the program had been "turned down" as a result of his underwriting due diligence. Commonwealth planned to dedicate only 68% of funding to drilling. Waite required changes, which allowed brokers to receive special limited partnership units through non-recourse promissory notes, diluting the Investors' interests and meeting INA's requirement that 80% of the funding be dedicated to drilling. In June 1984, Phillips confirmed Waite would participate in the Commonwealth oil and gas programs on behalf of INA.

The surety bonds issued by INA, as front company, were underwritten and executed by Waite, its managing general agent. As part of the underwriting process, Phillips and Waite evaluated the "track record" of the syndicator and the quality and economic viability of the drilling program. Waite reviewed a summary for each program prepared by Phillips or Energy Assurance Company, a firm which assisted in research and evaluation. Waite also selected and paid Bancapital Corporation to prepare due diligence reports on the geology. Waite, Phillips and their counsel then reviewed, approved or modified the PPM for each program. INA included information in the PPMs and had authority to, and did, require changes at times. After the programs were approved, Phillips and Waite screened and approved investors.

From October to December 1984 the Investors were contacted by investment advisers, Joseph Ace and Stephen Gunnels, who were salesmen acting for INA and Commonwealth. Ace, who sold the investments to all Investors except Red, was a general partner in Overlord III and IV. Ace and Gunnels furnished the Investors with PPMs describing the investments in Overlord III and IV. Samples of INA's bond documents were included in the PPMs, and the salesmen touted the underwriting involvement of INA to sell the programs. The Investors testified they did not read all of the PPMs, which amounted to over 200 pages, but relied on the explanations provided by Ace and Gunnels and the summary included in the package of information.

The PPMs provided that the Investors had an option to purchase Overlord units in cash or make a down payment and sign a promissory note for the balance. According to their testimony, the Investors were presented only the leveraged option. The Investors invested in one or both of the Overlord programs. 4 Each unit sold for $20,000, of which they paid $5,000 in cash and executed a note for the balance. These notes were assigned to a lender as collateral for operating loans to the partnerships. The notes were secured by the surety bonds issued by INA, which obligated INA to pay the notes in the event the Investors defaulted. As part of the investment package, the Investors signed an indemnification agreement promising to reimburse INA for payments made under the bonds.

About one month after their purchase of the investments, the Investors testified they received additional documents requiring their signatures, including a new six-page surety bond. They testified the salesmen told them there had been a "printing error," the additional documents contained no new terms, failure to sign would cause forfeiture of their down payments, and the documents were required to be returned immediately. The Investors signed the additional documents, not learning until later that they contained disclaimers as to INA's involvement in the programs.

The Investors each made at least one installment payment on the notes before payments ceased in 1986. The Investors discovered the programs they had purchased were not the safe, low-risk investments they had thought. They came to the conclusion that the Overlord programs were sold to them based on fraud and misrepresentations. After default on the promissory notes, INA paid the notes as obligated by its bonds, and the lenders assigned the Investors' promissory notes to INA. INA made demand on the Investors for reimbursement pursuant to the indemnification agreements. When no reimbursement was made, INA then sued the Investors. The Investors counterclaimed and brought third party claims against Waite, alleging violations of the Texas Deceptive Trade Practices Act ("DTPA"), 5 the Texas Securities Act ("TSA"), 6 fraud, conspiracy and breach of the duty of good faith and fair dealing. The jury found in favor of the Investors on each of these claims and awarded damages. The jury also found the Investors were not liable on the promissory notes or indemnity agreements they had executed in connection with their purchases of the Overlord units. The Investors elected the greater recovery permitted under the DTPA, and the trial court entered judgment for damages totalling $435,000, including mandatory and additional damages under the DTPA, plus attorney's fees in the amount of $400,000. The judgment declared the notes, bonds and indemnification agreements unenforceable.

The central issues in this appeal concern the degree of INA's participation in the structuring, promotion and sales of the investments, and the authority of agents underwriting and marketing the investments to bind INA by their actions. INA argues the Investors wrongfully consider sale of the oil and gas investments to be the same as the sale of the surety bonds provided by INA. INA contends it merely issued the surety bonds and was not a party to any fraud or misrepresentations in connection with the investments.

II. AGENCY

In points of error one through five, INA complains the trial court erred in instructing the jury on common law and statutory agency theories. The court included in the charge an instruction on statutory agency and definitions of actual and apparent authority of an agent to bind a corporation.

We review charge error under an abuse of discretion standard while recognizing that there is a presumption in favor of broad-form submission of questions. Texas Dep't of Human Servs. v. E.B., 802 S.W.2d 647, 649 (Tex.1990). The trial court has wide discretion in submitting explanatory instructions and definitions. Wisenbarger v. Gonzales Warm Springs Rehab. Hosp., Inc., 789 S.W.2d 688,...

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