Nelson v. Vernco Constr., Inc.

• Decision Date: 31 May 2018
• Docket Number: No. 08-10-00222-CV,08-10-00222-CV
• Citation: 566 S.W.3d 716
• Parties: David NELSON, Individually and d/b/a Collective Contracting, a Sole Proprietorship; Collective Contracting, Inc.; and E.E. Hood & Sons, Inc., Appellants, v. VERNCO CONSTRUCTION, INC., Appellee.
• Court: Texas Court of Appeals

566 S.W.3d 716

David NELSON, Individually and d/b/a Collective Contracting, a Sole Proprietorship; Collective Contracting, Inc.; and E.E. Hood & Sons, Inc., Appellants,

v.VERNCO CONSTRUCTION, INC., Appellee.

No. 08-10-00222-CV

Court of Appeals of Texas, El Paso.

May 31, 2018

Supplemental Opinion June 22, 2018

OPINION

YVONNE T. RODRIGUEZ, Justice

In this contract dispute arising out of a highway construction project, subcontractor Vernco Construction obtained a multimillion-dollar verdict against its former Corporate Vice President David Nelson and against prime contractor E.E. Hood & Sons, Inc. (Hood) after Hood fired Vernco and hired Nelson’s own private construction company, Collective Contracting, Inc., to finish certain subcontracted sewer work.

Although the procedural issues at play are complex, Vernco—alleging causes of action for breach of contract, tortious interference with a contract, breach of fiduciary duty, and fraud/conspiracy to defraud—essentially accuses Hood and Nelson of conspiring to sabotage Vernco’s subcontract so that Nelson’s personal company could then step in, perform work, and receive money that should have gone to Vernco. Hood and Nelson contend there was no conspiracy; rather, Vernco’s financial troubles and alleged misappropriation of funds ultimately led to a lapse in insurance coverage at the construction site, which gave Hood good cause to terminate Vernco’s subcontract and hire Nelson’s company to finish the job. Hood also insists it has already paid Vernco all monies legally owed per the terms of the Vernco Subcontract. Following trial, the jury sided with Vernco on all causes of action.

Hood and Nelson seek reversal of the judgment on multiple grounds. We reverse and render in part on the issue of attorney’s fees, reform the remainder of the judgment to reflect liability on breach of fiduciary duty grounds rather than breach of contract grounds, affirm the judgment as modified as to all issues except lost profit damages, and suggest a remittitur on lost profit damages.¹

I.BACKGROUND

A.Factual History

Setting the Stage: Vernco, Hood, and the Applewhite Project

In February 2004, after soliciting bids for a large construction project aimed at bolstering road and utilities infrastructure around the site of a proposed Toyota plant south of San Antonio, Texas (the Applewhite Project), the Texas Department of Transportation (TxDOT) ultimately awarded a prime contract to E.E. Hood & Sons, Inc. (Hood). Hood, in turn, hired Vernco Construction, Inc., as its subcontractor for water utility services. Hood had previously hired Vernco as a subcontractor on a different project (the Pat Booker Project). Jack Claflin was the owner/president of Vernco. Corporate Vice President David Nelson headed Vernco’s water utility services division and was largely the point person between Vernco and Hood for both the Pat Booker Project and the Applewhite Project. While this case primarily involves a dispute over the Vernco’s work on the Applewhite Project, as a side issue, Vernco alleges that Nelson told the company that as a result of delays on the Pat Booker Project, Vernco would be entitled to between $150,000 and $170,000 in inefficiency claims from TxDOT. According to Claflin, Nelson represented that he would file those claims on Vernco’s behalf. It is undisputed that Nelson did not timely file the Pat Booker project inefficiency claims.

Relevant Terms of the Applewhite Project Prime Contract and the Vernco Subcontract

The Applewhite Project’s Prime Contract between TxDOT and Hood incorporated by reference the provisions of TxDOT’s 1993 Standard Specifications for Construction and Maintenance of Highways, Streets, and Bridges (also known as the "Blue Book"). Germane excerpts of the Blue Book and subsequent change orders modifying the Prime Contract will be discussed later in this opinion.

Prime contractor Hood, in turn, signed a subcontract for utilities services with Vernco (the Vernco Subcontract). Relevant to this appeal are five sections of the Vernco Subcontract.

Payment Arrangement

Section 3(e) of the Vernco Subcontract details the payment arrangement between the parties and places restrictions on what Vernco may do with the money it receives from Hood:

Section 3. PAYMENT. (a) The Contractor agrees to pay the Subcontract for the performance of this Subcontract, as specified herein, the sum of Two Million Two Hundred Nunety [sic] Two Thousand Three Hundred Eleven and Ninety Four Hundredths dollars ($2,292,311.94 [sic] ) subject to additions and deductions for charges agreed upon or determined, as herein after provided. Partial payments will be made to the Subcontractor each month in the amount equal to 95 per cent of the value ... of the quantity ... of the work performed hereunder, less the aggregate of previous payments.... Upon complete performance of this Subcontract by the Subcontractor and final approval and acceptance of Subcontractor’s work and materials by the Owner, the Contractor will make final payment to the Subcontractor of the Balance due to him under this Subcontract no sooner than 10 days after full payment for such work and materials has been received [sic] by the Contractor from the Owner.

...

(c) Contractor reserves the right to make payment by joint check or by direct check to Subcontractor’s materialmen or sub-subcontractors or any person who has right of action against Contractor or Contractor’s Surety under any law. Subcontractor agrees that contractor reserves the right of determination as to what manner of payment shall be made.

...

(e) The Subcontractor agrees and covenants that money received for the performance of this Subcontract shall be used solely for the benefit of persons and firms supplying labor, materials, supplies, tools, machines, equipment, plant or services exclusively for this project in connection with this Subcontract and ... any money paid to the Subcontractor pursuant to this Subcontract shall immediately become and constitute a trust fund for the benefit of said persons and firms, and shall not in any instance be diverted by Subcontractor to any other purpose until all obligations arising hereunder have been fully discharged, and all claims arising therefrom have been fully paid.... [Emphasis in orig.].

Changes to the Scope of Work and Price Adjustments

Section 4 of the Vernco Subcontract deals with how changes and adjustments in the scope of work and the amount of money owned to Vernco will be handled:

Section 4. CHANGES. The Contractor may at any time by written order of Contractor’s authorized representative, and without notice to the Subcontractor’s sureties, make changes in, additions to and deletions from the work to be performed and materials to be furnished under this Subcontract, and the Subcontractor shall promptly proceed with the performance of this Subcontract as so changed. Any increase or decrease in the Subcontract price resulting from changes shall be agreed upon in writing by the parties hereto. Any claim for adjustment of the subcontract price under this Section must be made in writing within ten days from the date such changes are ordered. The Subcontract price shall be equitably adjusted on account of any such changes, subject to any applicable provisions of the contract between the Contractor and the Owner....

Subcontractor’s Inability to Complete Subcontracted Work

Section 5 of the Vernco Contract addresses Vernco’s prosecution of work:

Section 5. PROSECUTION OF WORK.

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(b) In the event the Subcontractor fails to comply, or becomes disabled and is unable to comply with the provisions of this Subcontract as to character or time of performance, and the failure or inability is not corrected within five days after written request by the Contractor to the Subcontractor, the Contractor may, by other Subcontractor or otherwise, without prejudice to any other right or remedy, take over and complete the performance of this Subcontract at the expense of the Subcontractor, or, without taking over the work, may furnish the necessary materials and/or employ the workmen necessary to remedy the situation at the expense of the Subcontractor. If the Contractor takes over the work pursuant to this paragraph it is specifically agreed that the Contractor may take possession of the premises and of all materials the Subcontractor at the site for the purpose of completing the work covered by this Subcontract....

Insurance Coverage

Section 10 of the Vernco Subcontract outlines insurance requirements for the Applewhite Project:

Section 10. INSURANCE. (a) The Subcontractor shall provide and maintain Workman’s Compensation and Employer’s Liability Insurance for the protection of his employees, as required by law of an employer or to limits specified in the contract. The Subcontractor shall also provide and maintain full force and effect, during the term of this Subcontract, insurance (including but not limited to insurance covering the operation of automobiles, trucks and other vehicles) with an insurance company satisfactory to the Contractor protecting the Subcontractor, the Owner and the Contractor against liability from damages ... arising from and growing out of the Subcontractor’s operations in connection with the performance of this Subcontract.

(b) [...] Written proof satisfactory to the Contractor and the Owner of compliance with the requirements of this section shall be furnished to the Contractor and the Owner before any work is performed under this Subcontract. Such proof of insurance shall provide for ten (10) days written notice to the Contractor and the Owner prior to the cancellation or modification of any insurance referred to therein.

Breach

Finally, Section 31 deals with what happens in the event of a breach:

Section 31. BREACH OF TERM OR CONDITION. Upon Subcontractor’s breach of any term or condition of this Subcontract, except those which specifically provide a period within which a particular breach may be cured, the Contractor, in his sole discretion, may

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