Penny v. El Patio, LLC

• Decision Date: 04 June 2015
• Docket Number: NO. 03–11–00420–CV,03–11–00420–CV
• Citation: 466 S.W.3d 914
• Parties: David Penny, Appellant v. El Patio, LLC d/b/a El Patio Motel, Appellee
• Court: Texas Court of Appeals

466 S.W.3d 914

David Penny, Appellant

v.El Patio, LLC d/b/a El Patio Motel, Appellee

NO. 03–11–00420–CV

Court of Appeals of Texas, Austin.

Filed: June 4, 2015

Rehearing Overruled July 13, 2015

Kurt H. Kuhn, Kuhn Hobbs, P.L.L.C., Austin, TX, Greg Gossett, Gossett, Harrison, Millican, San Angelo, TX, for Appellant.

Stephen H. Nickey, The Law Offices of Stephen H. Nickey, P.C., Mark C. Walker, Cox, Smith, Matthews, Inc., David M. Mirazo, Mounce, Green, Myers, Safi, Paxson & Galatzan, El Paso, TX, for Appellee.

Before Chief Justice Rose, Justices Goodwin and Field

OPINION

Jeff Rose, Chief Justice

David Penny appeals from a district-court judgment in favor of El Patio, LLC on claims involving the alleged mismanagement of the El Patio Motel in San Angelo, Texas. In three issues, Penny challenges the district court's (1) denial of Penny's motion to show authority, (2) imposition of discovery sanctions striking Penny's pleadings, and (3) award of joint and several exemplary damages. For the reasons set forth below, we will reverse and remand the district court's award of exemplary damages, but affirm the remainder of the judgment.

Background

The underlying legal dispute began as a response to the non-judicial foreclosure of the El Patio Motel under a deed of trust securing a $460,000 loan borrowed by the motel's parent, appellant El Patio, LLC. Specifically, LLC members Penny and Richard Cheroske filed suit against the trustee of the sale, Richard Rauber (another LLC member), to invalidate the deed of trust and set aside the foreclosure. But as occasionally happens, the scope of the underlying suit expanded to include additional parties and claims that, although related in that they involved the alleged mismanagement of the motel in the months before the foreclosure, soon overtook the foreclosure itself. In fact, the foreclosure-related claims were resolved during the course of litigation, while the claims involving the pre-foreclosure management of the motel survived and are the subject of this appeal.

At the outset, we will review the formation of the LLC and its purchase of the motel. In 2003, several business investors—including, relevant here, Penny, Cheroske, Stephen Hyde, and Rauber—formed the El Patio, LLC to purchase and own the El Patio Motel, a 100 room extended-stay residence located in San Angelo, Texas. Hyde was named as the LLC's operating manager, and the LLC, in turn, hired Blue Castle Property Management, LLC to operate and manage the motel's day-to-day business, such as collecting rents, maintaining bank accounts and records, and paying property and other expenses. Blue Castle was owned by 190 Orange Avenue, which itself was separately owned by LLC members Penny and Cheroske. In 2004, LLC member Rauber loaned the LLC $460,000 under a promissory note secured by a deed of trust in the motel, the same deed of trust under which the motel was later foreclosed. In hopes of a picture saving a thousand words (or at least making them easier to understand), the following is a general depiction of the relationship web described above.

In July 2009, after Blue Castle (in its management capacity) failed to make consecutive loan payments on the $460,000 loan, Rauber foreclosed on the note and sold the motel at a trustee's sale. One month later, Penny and Cheroske filed the underlying suit—as a derivative proceeding in their capacity as members of El Patio, LLC, see Tex. Bus. Orgs. Code §§ 101.451 –.463 (describing circumstances under which member owners of limited liability corporation may maintain “civil suit in the right of a domestic limited liability company,” i.e., a “derivative proceeding”)—to challenge the foreclosure on the ground that the deed of trust securing the loan was invalid. And soon thereafter, the LLC intervened in the foreclosure suit to assert several third-party claims against Penny, Cheroske, Blue Castle, Blue Castle's accountant, and 190 Orange Avenue for conversion, theft liability, breach of fiduciary duty, breach of contract, fraud, negligent misrepresentation, unjust enrichment, money had and received, and related declaratory and injunctive relief regarding the management and occupation of the motel.

Penny, Cheroske, and the other third-party defendants, believing that the LLC's attorney did not have the requisite authority under the entity's governing documents to intervene on behalf of the LLC, filed a Rule 12 motion with the district court that required the LLC's attorney to demonstrate to the court that he had the authority to prosecute the suit on the LLC's behalf. See Tex.R. Civ. P. 12 (“A party in a suit or proceeding pending in a court of this state may, by sworn written motion stating that he believes the suit or proceeding is being prosecuted or defended without authority, cause the attorney to be cited to appear before the court and show his authority to act.”). After two hearings on the issue—the second in response to a motion by the third-party defendants to set aside the district court's first denial of their motion—the district court found that the LLC's attorney had the authority to prosecute the suit and denied the third-party defendants' motion, allowing the LLC's third-party claims to continue.

Eventually, after Rauber had resolved his claims with the third-party defendants and agreed with the LLC to set aside the foreclosure, the only remaining claims were El Patio, LLC's claims against the third-party defendants. During the course of the litigation of these remaining claims, the third-party defendants refused to respond to the LLC's discovery requests and discovery-related motions until—after issuing an injunction, granting several motions to compel, awarding significant monetary sanctions, and repeatedly warning the third-party defendants about the consequences of their continued failure to respond—the district court struck the third-party defendants' pleadings and awarded judgment to El Patio, LLC on all its claims. Ultimately, following a trial on the damages issues only, the district court entered final judgment awarding El Patio, LLC the declaratory and injunctive relief it had requested, as well as $302,591.47 in actual damages, $419,506.86 in exemplary damages, pre- and post-judgment interest, and costs of court. Relevant to an issue raised on appeal, the judgment made the third-party defendants jointly and severally liable for the economic and exemplary damages, pre-judgment interest, and the costs of court. It is from this final judgment that Penny appeals here.¹

Rule 12 motion to show authority

In his first issue, Penny challenges the district court's denial of the third-party defendants' Rule 12 motion challenging the authority of David Mirazo (El Patio, LLC's attorney) to prosecute the LLC's suit. See Tex.R. Civ. P. 12. Specifically, Penny asserts that the district court's denial was in error because Mirazo failed to introduce evidence establishing his authority and, in the alternative, that Mirazo did not have the LLC's authorization to litigate. Because an attorney's authority to file or maintain a suit is a question of law, we review a district court's decision on such a matter de novo. See State v. Evangelical Lutheran Good Samaritan Soc'y, 981 S.W.2d 509, 511 (Tex.App.–Austin 1998, no pet.) (citing Gulf Reg'l Educ. Television Affiliates v. University of Houston, 746 S.W.2d 803, 806 (Tex.App.–Houston [14th Dist.] 1988, writ denied) ); see also Metz v. Lake LBJ Mun. Util. Dist., No. 03–01–000312–CV, 2002 WL 31476887, at *4 (Tex.App.–Austin Nov. 7, 2002, no pet.) (mem. op., not designated for publication).²

Penny and Cheroske's Rule 12 motion asserted that Mirazo lacked authority because he lacked the authorization from a majority of the members that is required by the LLC's governing documents. The LLC, offering an affidavit from Hyde and a copy of its operating agreement, responded that Hyde, as operating manager, had the authority under the operating agreement to hire an attorney to prosecute a suit on behalf of the LLC and, further, that more than 70% of the ownership interest in the LLC had approved the LLC's petition in intervention. See Tex.R. Civ. P. 12 (“At the hearing on the motion, the burden of proof shall be upon the challenged attorney to show sufficient authority to prosecute or defend the suit on behalf of the other party.”). After an initial hearing on the issue, the district court found that Mirazo had authority to prosecute and denied Penny and Cheroske's motion. The district court later reaffirmed that finding and denied a second motion on the issue after a hearing prompted by Penny and Cheroske's allegations that they had been denied the opportunity to present evidence and that Mirazo had presented no evidence that he was authorized to prosecute El Patio, LLC's suit.

On appeal, Penny argues initially that the district court erred in denying his motion to show authority because Mirazo, El Patio, LLC's attorney, had “introduced no evidence or testimony at the hearing in support of his authority.” A cursory examination of the record shows that this assertion lacks merit. El Patio, LLC's response (and its response to the motion to set aside the district court's first denial of its Rule–12 motion) included an affidavit from Stephen Hyde in which he averred that he had the authority to retain an attorney to prosecute El Patio, LLC's claims because he is the operating manager and the LLC's operating agreement gives the operating manager “all powers and rights necessary, proper, convenient, or advisable to effectuate and carry out the purposes, business and objectives of the Company, and to maximize Company profits.” The LLC also provided the district court with copies of its operating agreement, bank records, membership assignments, and three written consents to litigation signed by certain member owners. And at the second hearing on the attorney-authorization issue, the district court was presented with essentially the same evidence, plus...