Lewis v. Xium Corporation, No. 07-08-0219-CV (Tex. App. 7/8/2009)
| Decision Date | 08 July 2009 |
| Docket Number | No. 07-08-0219-CV.,07-08-0219-CV. |
| Parties | MIKE LEWIS AND GERI KINCANNON, Appellants, v. XIUM CORPORATION AND GREG A. DOCKERY, Appellees. |
| Court | Texas Court of Appeals |
Appeal from the 181st District Court of Potter County, No. 94,013-B, Honorable John B. Board, Judge.
Panel C: Before QUINN, C.J., and HANCOCK and PIRTLE, JJ.
Appellants, Mike Lewis and Geri Kincannon, appeal from a judgment rendered in favor of Appellees, Xium Corporation and Greg A. Dockery (Xium),1 during a bench trial of Lewis and Kincannon's action for breach of their investment contracts with Xium. Lewis and Kincannon assert the trial court erred by: (1) failing to order an accounting; (2) entering a directed verdict at the end of their case-in-chief; (3) denying their motion to supplement their pleadings; (4) denying their motion for discovery sanctions; (5) denying their motion for a modification of the Discovery Control Plan; (6) denying their post-trial motion for sanctions; (7) granting Xium's untimely objections to discovery; (8) permitting the admission of "royalty summaries" and amended "royalty summaries" into evidence; (9) permitting Xium to use documents at trial not produced in response to Lewis and Kincannon's discovery requests; and (10) misapplying the rules of civil procedure to a hearing on sanctions arising out of Xium's non-production of documents and abuse of the discovery process. Finding that the trial court erred by not ordering an accounting, we reverse the judgment of the trial court and remand for further proceedings in conformance with this opinion.
In their first Amended Petition filed January 26, 2006, Lewis and Kincannon alleged actions for violation(s) of the Texas Business Opportunity Act,2 Securities Act,3 Deceptive Trade Practices-Consumer Protection Act,4 and they sought damages for fraud and breach of contract, as well as seeking to pierce the corporate veil between Xium and its President, Dockery. Lewis and Kincannon alleged they invested money with Xium5 in return for royalties from the sale of Xium products or other income, but received no money. The petition sought "an accounting of the expenditures, expenses and income of [Xium and Dockery] involved in the marketing of Spilateral technology6 since the date of [Lewis and Kincannon's] initial investment upon which royalties would be computed." In addition, Lewis and Kincannon sought recovery of interest and attorney's fees.7
On July 21, 2006, Lewis and Kincannon filed traditional and "no-evidence" motions for summary judgment. On August 22, 2006, Xium and Dockery responded. With their response, they filed an affidavit by Dockery with attachments entitled "Royalty Summar[ies]."8 The record does not indicate whether the trial court ever ruled on Lewis and Kincannon's motion for summary judgment.
On July 24, 2007, the trial court filed its pretrial order requiring discovery (including supplemental responses) to be completed by November 15, 2007, and pleadings to be filed by December 14, 2007. The order also set a trial date of February 19, 2008. On August 21, 2007, Lewis and Kincannon filed a motion to compel and for sanctions alleging Xium had failed to properly respond to their first request for production of documents.9 On October 18, 2007, Xium produced a second set of documents.
On January 14, 2008, Xium filed an agreed motion to continue the trial date because the parties' depositions had not been conducted due to scheduling conflicts. The following day, the trial court denied that motion.
On February 1, 2008, Xium filed a motion for leave to file a "no evidence" motion for summary judgment and, on February 4, 2008, filed a motion for leave to file a traditional motion for summary judgment. Attached to the traditional motion for summary judgment was Dockery's affidavit and the purported "Royalty Summaries" originally filed in August 2006 in response to Lewis and Kincannon's traditional motion for summary judgment. On February 15, 2008, Xium faxed an updated copy of the "Royalty Summaries" to Lewis and Kincannon indicating they intended to use the summaries at trial on February 19.
On February 11, 2008, Xium filed a second agreed motion for a continuance premised on the pending motions for summary judgment and they jointly sought to continue the trial until March 24. On February 13, Lewis and Kincannon filed a motion to strike Xium's special exceptions to their first amended petition and Xium's "no evidence" and traditional motions for summary judgment. Lewis and Kincannon also filed for leave to file a second amended petition and sought discovery sanctions under Rules 193.6 and 215 of the Texas Rules of Civil Procedure10 based on Xium's failure to "fully and completely" respond to Lewis and Kincannon's request for production of documents. In support of their motion for discovery sanctions, Lewis and Kincannon asserted Xium wholly failed to respond to numerous, specific document requests or produced incomplete documents or documents for miscellaneous time periods. Lewis and Kincannon also sought a modification of the discovery plan pursuant to Rule 190.5.
On February 13, 2008, the trial court denied the second agreed motion for continuance.
Prior to trial on February 19, the trial court held a hearing and denied Lewis and Kincannon's motions. The trial court denied a third agreed motion for a continuance and Xium withdrew its motions for summary judgment.
The trial court permitted Lewis and Kincannon to put on a bill of exception pertaining to the trial court's denial of their discovery motions. In support of their bill, Lewis and Kincannon called Mark Kile, a certified public accountant, as a witness who had reviewed Lewis and Kincannon's request for production of documents and Xium's response. Kile's review of Xium's response served October 18, 2007, was completed December 22, 2007.
In response to Lewis and Kincannon's request for production, Kile testified Xium produced some board minutes but the minutes were incomplete. He testified that Xium produced no committee minutes, retirement plan information, or shareholder stock ledgers. Although Xium produced general ledger documents spanning years 1999 through 2005, he testified the ledgers were in batch format, only a few miscellaneous months were included in the postings, the "total" column was not included in the documents produced, and there was no detail of any individual transactions. In his opinion, the general ledger documents were incomplete, inadequate, and not representative of Xium's complete financial history. Further, he testified the production of cash disbursement records was incomplete; only one accounts receivable aging report was produced; the accounts payable information was incomplete and meaningless; some sales reports were produced for two years;11 customer contact information was incomplete; there were no payroll ledgers, quarterly payroll reports, salary agreements, or employee contracts,12 no employee benefit or compensation documents; corporate investment documents, property ownership documents; no loan, guarantee, outstanding commitment or asset pledge documents; corporate income tax returns; Form 1099's; interim financial statements;13 income statements; detailed inventory records; depreciation schedules; invoice copies. Although some bank statements were produced, only the front page of the statements was produced.
Kile testified the "Royalty Summaries," attached to Xium's summary judgment pleadings, were encompassed by a specific request for production by Lewis and Kincannon but were not produced. He indicated that he had no means to verify the calculations in the "Royalty Summaries" because Xium had not produced the underlying sales and inventory information or documents. Based upon his review of the documents produced by Xium, he opined their entire production was "really meaningless . . . [i]t was like either somebody . . . incompetent put them together or they were intentionally trying to deceive the plaintiffs, but they were unresponsive to the request . . . [u]seless, just a pile of paper, general ledgers and tax returns not provided, or the underlying documents, meaningless." Thereafter, without granting any further relief, the trial court commenced the bench trial.
Kincannon was the first witness. He had known Dockery for approximately twenty years14 when Dockery approached him about investing in his new corporation, Xium. Dockery represented Kincannon would triple a $10,000 investment in Xium in the first year.
On July 29, 1999, Kincannon agreed to invest $10,000 and entered into a Letter Agreement. In return for his investment, Kincannon was promised a royalty for each XM2000 unit sold by Xium not to exceed $30,000 or three hundred percent of his initial cash investment.15 The Agreement further provided, in pertinent part, as follows:
Xium will keep an accurate account of the product manufactured and sold, and shall render a statement of such business, in writing to you, within thirty (30) days after the end of each calendar quarter, and shall, concurrently, pay to you the full amount of royalty accrued during the calendar quarter.
At the end of the first year, Kincannon met with Dockery who represented that Kincannon had earned $30,000 in royalties during the first year. Dockery then displayed numerous kinds of wireless technology manufactured by Xium. He told Kincannon that he could apply Kincannon's $30,000 in royalty earnings toward ownership of a portion of Xium's business. Dockery showed Kincannon a chart entitled "Statistics & Projected Market Penetration." For each of twenty Xium products, the chart showed the projected units to be sold and the corresponding "pay zone" for an investor depending on the amount of their investment. The chart indicated that with a $25,000 investment, Kincannon...
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