Klein v. Sporting Goods, Inc., B14-88-00182-CV

• Decision Date: 27 April 1989
• Docket Number: No. B14-88-00182-CV,B14-88-00182-CV
• Citation: 772 S.W.2d 173
• Parties: Edward J. KLEIN, Appellant, v. SPORTING GOODS, INC., et al., Appellees. (14th Dist.)
• Court: Texas Court of Appeals

Page 173

772 S.W.2d 173

Edward J. KLEIN, Appellant, v. SPORTING GOODS, INC., et al., Appellees.

No. B14-88-00182-CV.

Court of Appeals of Texas,

Houston (14th Dist.).

April 27, 1989.

Rehearing Denied June 8, 1989.

Jeff Crane, Tamara C. Sampson, Houston, for appellant.

Joseph O. Slovacek, Wesley S. Coddou, Houston, for appellees.

Before MURPHY, ROBERTSON and SEARS, JJ.

OPINION

MURPHY, Justice.

Edward Klein appeals from a judgment holding him liable for the debts of the Gun Exchange, a corporation for which Klein was the sole shareholder. In twenty-two points of error Klein asserts (1) the evidence was legally and factually insufficient to support a finding of constructive fraud; (2) the evidence was legally and factually insufficient to support an award of damages or attorney's fees; (3) the special issues submitted were not supported by appellees' pleadings; (4) the special issues failed to include causation as an element of constructive fraud; (5) the special issues were improperly worded; (6) the testimony of certain witnesses should have been excluded; and (7) evidence of Klein's use of corporate funds to pay personal debts should have been excluded. We affirm.

In May 1985, Ed Klein was the sole shareholder, director, and chief executive officer of the Gun Exchange. The Gun Exchange operated as a retail firearms dealership. The inventory of the Gun Exchange had been pledged as security for a $622,500 debt owed to InterFirst Bank. Appellant also owed $231,484.60 to appellees, Sporting Goods, Inc., Hill Country Wholesale, Inc., Gene Sears Supply Co. of Texas, Inc., Browning, and Zeiss Optical. The debts owed to appellees were unsecured.

On May 20, 1985, InterFirst Bank notified appellant of its intention to foreclose on the inventory of the Gun Exchange and sell it at public auction. InterFirst Bank further advised appellant that, pursuant to a personal guaranty, he would be responsible for any deficiency following the sale. Appellant testified he was certain there would be a deficiency if the inventory was sold. Appellant immediately incorporated the Gun Store for the purpose of purchasing the assets of the Gun Exchange at the foreclosure sale.

Before the foreclosure sale, appellant obtained a $650,000 line of credit from CharterBank on behalf of the Gun Store. The line of credit was to be secured by the assets of the Gun Exchange which appellant intended to purchase at the foreclosure sale. Appellant also assigned a life insurance policy, which originally belonged to the Gun Exchange, to CharterBank as additional security on the line of credit for the Gun Store.

The day of the sale appellant purchased the assets of the Gun Exchange for $650,000. The highest bid before appellant's bid was $175,000. Further, appellant testified that the inventory was valued at only $400,000. However, appellant admitted that if the $175,000 bid had been accepted, he would have been personally liable for the resulting deficiency.

After the foreclosure sale, the only asset of the Gun Exchange available to pay the trade creditors was the corporation's bank account, which contained approximately $12,000. That money was never paid to appellees. It was paid to appellant for loans he allegedly made to the Gun Exchange. Following the sale, the Gun Store began operating as a retail firearms dealer with the inventory purchased from the foreclosure sale, in the same location and with the same personnel as the Gun Exchange.

Appellees subsequently filed suit on a sworn account against appellant individually, the Gun Exchange, the Gun Store, and EJK Devco, Inc. In addition to their allegations that the Gun Exchange owed appellees $231,484.60, appellees alleged that appellant used the corporate fiction of the Gun Exchange to perpetrate a fraud, thus requiring that the corporate fiction be disregarded. The Gun Exchange failed to answer the lawsuit and a default judgment was rendered against it in the amount of $231,484.60. The default judgment became final when the Gun Exchange was severed from the suit. Immediately before trial, appellees non-suited the Gun Store and EJK Devco, Inc., and proceeded against appellant under a constructive fraud theory. The jury determined that appellant used the corporate fiction of the Gun Exchange as a sham to perpetrate a fraud on appellees. Thus, the corporate fiction was disregarded and appellant became liable for debts and obligations of the Gun Exchange. The primary debt of the Gun Exchange was the default judgment previously rendered in favor of appellees.

In his first ten points of error, appellant claims the evidence was factually and legally insufficient to support the jury's finding of constructive fraud. The corporate fiction normally insulates shareholders, officers, and directors from liability for corporate obligations, but will be disregarded, even though corporate formalities have been observed and individual property has been kept separate, when the corporate form has been used as part of a basically unfair device to achieve an inequitable result. Specifically, the corporate fiction is disregarded when the fiction is used as a means of perpetrating fraud. Castleberry v. Branscum, 721 S.W.2d 270, 271 (Tex.1986). Neither fraud nor an intent to defraud need be shown as a prerequisite to disregarding the corporate entity; it is sufficient if recognizing the separate corporate existence would bring about an inequitable result. Id. at 272. Constructive fraud is the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of the tendency to deceive others, to violate confidence, or to injure public interests. Archer v. Griffith, 390 S.W.2d 735, 740 (Tex.1964).

Appellant argues there is no evidence, or, in the alternative, insufficient evidence that he violated any duty owed to appellees. Appellant contends the evidence shows he incorporated the Gun Store to continue the business of the Gun Exchange and failed to pay his trade creditors. In doing so, appellant argues he breached no duty. In support of his position appellant cites section 9.503 of the Texas Business and Commerce Code Annotated (Vernon Supp.1989) ^* as the extent of his obligations and duties in his business relationships. However, section 1.203 of the Business and Commerce Code provides that every contract or duty within the Business and Commerce Code imposes an obligation of good faith in its performance or enforcement. We will examine the record to determine whether the evidence supports a breach of appellant's duty of good faith to appellees. In doing so, we take "a flexible fact-specific approach focusing on equity." Castleberry, 721 S.W.2d at 273.

With regard to legal insufficiency points, we will consider only the evidence tending to support the finding, viewing it in the most favorable light in support of the finding, giving effect to all reasonable inferences that may properly be drawn therefrom and disregarding all conflicting evidence. Garza v. Alviar, 395 S.W.2d 821, 823 (Tex.1965).

In considering appellant's insufficient evidence points, we must remain cognizant of the fact that it is for the jury, as the trier of fact, to judge the credibility of the witnesses, to assign the weight to be given their testimony, and to resolve any conflicts or inconsistencies in the testimony. See Taylor v. Lewis, 553 S.W.2d 153, 161 (Tex.Civ.App.--Amarillo 1977, writ ref'd n.r.e.). We may not substitute our judgment for that of the jury if the challenged finding is supported by some evidence of probative value and is not against the great weight and preponderance of the evidence. Alford, Meroney & Co. v. Rowe, 619 S.W.2d 210, 213 (Tex.Civ.App.--Amarillo 1981, writ ref'd n.r.e.).

Under the facts in this case, there is some evidence to support the jury's finding of constructive fraud. In considering all the evidence, the jury's finding was not so against the great weight and preponderance of the evidence as to be manifestly unjust. The jury could well have concluded that the Gun Store was merely a continuation of the Gun Exchange, with the foreclosure sale being used as a method to avoid creditors. Therefore, the evidence was legally and factually sufficient to support the jury's finding of constructive fraud, allowing a judgment disregarding the corporate fiction, and holding appellant personally liable for the debts of the Gun Exchange. Points of error one through ten are overruled.

In his sixteenth point of error appellant claims the special issues submitted to the jury were improper because they did not require the jury to find that appellant breached a legal or equitable duty. Appellant has waived any error in the submission of the issues not specifying a duty by not properly objecting to the issues on those grounds. Brown v. American Transfer & Storage, 601 S.W.2d 931, 938 (Tex.1980). Point of error sixteen is overruled.

In his eleventh through fourteenth points of error appellant claims the evidence is legally and factually insufficient to support an award of damages and attorney's fees. In his fifteenth point of error appellant claims the trial court erred in submitting the special issues on constructive fraud to the jury because the issues failed to include causation as an element of appellees' cause of action. In this case no damage or attorney's fee issues were submitted to the jury. Those issues were decided by the default judgment, which reduced to judgment the debt owed to appellees by the Gun Exchange. The default judgment also awarded $75,000 in attorney's fees. Therefore, we must determine whether appellant may be held responsible for the debt of the Gun Exchange created by the default judgment.

The jury found that appellant committed constructive fraud by using the corporate fiction as a sham to perpetrate a fraud on appellees. In doing so, the jury found that the corporate fiction should be disregarded. When the corporate fiction is...