Lundy v. Masson

• Decision Date: 29 April 2008
• Docket Number: No. 14-06-00581-CV.,14-06-00581-CV.
• Citation: 260 S.W.3d 482
• Parties: Sean LUNDY, Appellant, v. Marcos V. MASSON, M.D. and Global Orthopaedics, Inc., Appellees.
• Court: Texas Court of Appeals

260 S.W.3d 482

Sean LUNDY, Appellant, v. Marcos V. MASSON, M.D. and Global Orthopaedics, Inc., Appellees.

No. 14-06-00581-CV.

Court of Appeals of Texas, Houston (14th Dist.).

April 29, 2008.

Rehearing Overruled July 10, 2008.

Timothy A. Hootman, Lance Christopher Kassab, Houston, for appellant.

George R. Gibson, Rod E. Gorman, Seth Adam Miller, Thomas Michael Ballases, Houston, for appellees.

Panel consists of Justices YATES, FOWLER, and GUZMAN.

OPINION

LESLIE B. YATES, Justice.

In twenty-three issues, appellant Sean Lundy appeals the jury verdict rendered in favor of appellees Marcos Masson, M.D. and Global Orthopaedic Solutions, Inc. ("Global") on their claims of fraud and breach of fiduciary duty. We reform the judgment in favor of Masson to reflect an election of remedies, and we affirm as reformed. We affirm the judgment in favor of Global on its breach of fiduciary duty claim. We reverse and render that portion of the judgment in favor of Global on its fraud claim.

I. FACTUAL AND PROCEDURAL BACKGROUND

In July 2001, Marcos Masson, M.D., an orthopaedic upper extremity surgeon, formed Global to design and produce orthopaedic surgical devices. In November 2001, three new members joined Global— Mark Henry, M.D., a partner at Masson's orthopaedic surgical practice, Houston Hand and Upper Extremity Center, L.L.C. ("Houston Hand"), Sean Griggs, M.D., a former partner at Houston Hand, and Sean Lundy.¹

Henry first introduced Masson to Lundy in the summer of 2000. At that time, Masson owned MasTech, a surgical device company. Lundy and Henry, who had a close and longstanding friendship dating back to college, were partners, along with Donny Byrne, in a company called Orthopaedic Retractors, Inc. ("ORI"). In 1999, Byrne had executed an agreement with Lundy and Henry in which he had assigned his retractor patent and related technology to ORI in exchange for a one-third ownership interest in the company.

The purpose of the meeting between Lundy and Masson in the summer of 2000 was to explore a possible merger between MasTech and ORI. Following the meetings, Lundy disappeared for approximately one year, ostensibly due to personal problems.² Shortly after Masson formed Global in July 2001, at Henry's urging, he interviewed Lundy to be President of Global. In the course of their discussions, Masson asked Lundy about the status of the patent that Byrne had assigned to ORI. Lundy told him, "No problem. There was a two-year contract that we had, or I did with Byrne, because Mr. Byrne apparently owed — owned the patent for retractors ... [a]nd now that the two-year contract is up, we can do whatever we want with it. It's not a problem."

In December 2001, Lundy began his employment as President of Global.³ His compensation included an annual salary of $200,000 and a 20% ownership interest in Global. In addition, Masson agreed to loan $75,000 to Lundy, payable to Global, to assist him in moving from Virginia and buying a new home in Houston. Masson testified that Lundy was responsible for managing the company which included, among other duties, hiring employees, preparing a business plan, negotiating vendor and distributor contracts, identifying manufacturers for the company's products, researching industry standards for pricing and packaging issues, learning about the sterilization process, and maintaining the financial books and records.

In December 2001, Masson also loaned Global $450,000 as start-up cash and signed a promissory note payable to Bank of America for a revolving line of credit in the amount of $1,000,000. Houston Hand also made numerous cash loans to Global totaling more than $670,000. Over the next two years until Global ceased its operations, the company's sales fluctuated greatly. According to Masson, Lundy told him that Global's sales were between $50,000 to $100,000 per month and, based on Lundy's assurances, Masson believed that "things were going great." However, Masson became concerned about Global's financial condition when some of the company's officers called him to complain about Lundy's absence from the company and he learned that several employees had been fired. When Masson requested financial information from Lundy, Lundy refused to provide it to him. Dawn Burks, Global's Vice President of Operations, testified that when she attempted to provide Masson with financial information at his request, Lundy became angry and forbade her from providing any financial reports to Masson without first securing his approval.

In October 2002, Cindy Reichek, Global and Houston Hand's controller, resigned because of differences with Lundy and Henry. Lundy told Masson that Cindy had made "a mess" of the bookkeeping and proposed working at Houston Hand for three to four weeks to "clean the books," to which Masson agreed. When Masson later became concerned about Lundy's extended absence from Global, Henry reassured him that they needed Lundy's help at Houston Hand and that Lundy would return to Global. Lundy worked at Houston Hand for approximately ten months and, according to Masson, never returned to Global's offices. Masson later learned that Lundy and Henry had executed an employment agreement—without Masson's knowledge—under which Lundy was to begin working full-time for Houston Hand as its General Business Manager beginning in May 2003.⁴

In May 2003, Global was converted from an L.L.C. to a corporation. At trial, Masson testified that he agreed to the conversion based on Lundy's representation that it was for tax purposes. As shareholders of the corporation, Masson and Henry each owned 39.5% of Global and Lundy owned 20%. Lundy was named President and Chief Operating Officer, Masson was named Chairman of the Board, and Henry was named Chief Science Officer.

In June 2003, in an effort to raise $3,000,000 to further Global's business development, Lundy prepared a private placement memorandum to present to outside investors. Lundy told Masson that the additional money would enable them to "grow the company" and to repay the $450,000 loan to Masson. Ultimately, no one invested in Global as a result of the memorandum.

In July 2003, Masson received the first financial report regarding Global from the company's accountant, Lamont Grogan. The profit and loss statement showed that Global had lost more than $570,000 in 2002. The balance sheet revealed, among other things, a negative balance of $592,313.99, and that the entire $1,000,000 line of credit extended to Global by Bank of America had been drawn down.⁵ In addition, the balance sheet did not reflect the loans from Houston Hand to Global.

On August 13, 2003, Masson filed suit against Lundy alleging fraud, conversion, and breach of fiduciary duty and requested that the court appoint a receiver for Global.⁶ On December 12, 2003, the trial court appointed Charles Gerhardt as receiver for Global. Based on his findings, Gerhardt filed cross-claims on behalf of Global against Lundy alleging fraud and breach of fiduciary duty.⁷ In December 2005, a jury trial was held which lasted five days.

At trial, Gerhardt testified about his assessment of Global's financial condition. In an effort to determine whether the business could be operated, he interviewed numerous people, including Lundy, Masson, and Byrne, reviewed Global's books and financial records, and inspected Global's facilities and existing inventory. Gerhardt discovered that Global had no remaining employees and no money in its bank accounts, the existing inventory was not capable of being sold, there was no insurance in place, and the accounts receivable were uncollectible. Based upon all of the information available to him, Gerhardt determined that Global could not be run. He also concluded that Global's problems were the result of Lundy's malfeasance, and not simply bad business judgment. Gerhardt testified that he decided to sue Lundy on behalf of Global because of (1) Lundy's failure to properly document the $75,000 promissory note in Global's financial books reflecting the loan made to him by Global and his subsequent denial in his deposition that he had ever seen or signed the note, (2) Byrne's lawsuit,⁸ (3) the inaccurate financial information reflected in Global's accounting software, and (4) the "grossly misleading" financial projections in the private placement memorandum prepared by Lundy.

At the conclusion of trial, the jury rendered a verdict in favor of Masson on his claims of fraud and breach of fiduciary duty, awarding him $985,000 in actual damages and $500,000 in punitive damages. The jury also found in favor of Global on its fraud and breach of fiduciary duty claims, awarding the company $150,000 in actual damages and $175,000 in punitive damages.⁹ Lundy filed a motion for new trial, which the trial court subsequently denied. Lundy timely filed this appeal.¹⁰

II. STANDARD OF REVIEW

A. Legal Sufficiency

When a party challenges the legal sufficiency of the evidence supporting an adverse finding on an issue on which it does not have the burden of proof, that party must demonstrate on appeal that there is no evidence to support the adverse finding. IKON Office Solutions, Inc. v. Eifert, 125 S.W.3d 113, 123 (Tex.App.-Houston [14th Dist.] 2003, pet. denied); Price Pfister, Inc. v. Moore & Kimmey, Inc., 48 S.W.3d 341, 347 (Tex.App.-Houston [14th Dist.] 2001, pet. denied) (citing Croucher v. Croucher, 660 S.W.2d 55, 58 (Tex.1983)). To prevail on a legal sufficiency challenge to a question on which it had the burden of proof, a party must establish that (1) there was no evidence to support the jury's finding and (2) the evidence established a contrary proposition as a matter of law. IKON Office Solutions, 125 S.W.3d at 123; Schwartz v. Pinnacle Commc'ns, 944 S.W.2d 427, 431-32 (Tex.App.-Houston [14th Dist.] 1997, no writ).

We consider all of the evidence in the light most favorable to the jury's verdict, indulging every reasonable inference in favor of the prevailing party....