Reservoir Sys. Inc. v. Tgs–nopec Geophysical Co.

• Decision Date: 09 November 2010
• Docket Number: No. 14–09–00528–CV.,14–09–00528–CV.
• Citation: 335 S.W.3d 297
• Parties: RESERVOIR SYSTEMS, INC. and Axel Sigmar, Appellants,v.TGS–NOPEC GEOPHYSICAL CO., L.P., Appellee.
• Court: Texas Court of Appeals

335 S.W.3d 297

RESERVOIR SYSTEMS, INC. and Axel Sigmar, Appellants,

v.TGS–NOPEC GEOPHYSICAL CO., L.P., Appellee.

No. 14–09–00528–CV.

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

Nov. 9, 2010.Rehearing En Banc Overruled Dec. 9, 2010.

Tanya Nicole Garrison, Jonathan David Saikin, Houston, for Appellants.James McBride, Scott R. McLaughlin, D. Elaine Conway, Maryellen Shea, Houston, for Appellee.Panel consists of Justices BROWN, SULLIVAN, and CHRISTOPHER.

OPINION

JEFFREY V. BROWN, Justice.

The appellee, TGS–NOPEC Geophysical Co., L.P. (“TGS”) sued the appellants, Reservoir Systems, Inc., and Reservoir's president and owner, Axel Sigmar, for breach of contract and fraud arising out of a failed business venture. Reservoir asserted counterclaims. After a bench trial, the trial court found in TGS's favor and ordered that TGS recover $5 million on its breach-of-contract claim against Reservoir and $735,000 on its fraud claim against Sigmar. On appeal, Sigmar challenges the legal and factual sufficiency of the evidence supporting the fraud finding and contends that, because TGS's only injury was the economic loss of the contract, TGS's claim sounds in contract alone, not tort. Reservoir does not challenge the breach-of-contract finding against it, but does contend on appeal that the trial court erred by excluding all evidence of damages on its counterclaims against TGS. For the reasons explained below, we affirm.

I

TGS records and processes geophysical seismic data, primarily offshore, and sells the data to oil and gas companies. Sigmar, in addition to being the president and owner of Reservoir, also was a shareholder of Reservoir Systems International S.A. de C.V. (“RSM”), a Mexican company. Some years before 2006, Sigmar began pursuing a series of potentially lucrative “direct award” contracts between RSM and Pemex, Mexico's national petroleum company. The contracts were to provide advanced seismic technologies to Pemex to allow it to gather survey information for Pemex's producing wells in Mexico. TGS was intrigued by Sigmar's ability to obtain a direct-award contract with Pemex and was looking for an opportunity to develop contacts that would enable it to conduct business in Mexico. In April 2006, TGS began discussing a business arrangement with Sigmar.

Initially, TGS considered acquiring an equity position in the project, but eventually decided to loan Reservoir $5 million instead. The loan, dated May 5, 2006, was secured by a promissory note. The loan's purpose was to help Reservoir obtain a $30–million loan from Alliance Capital to finance the Pemex project, including obtaining a source vessel from which the seismic data would be gathered.¹ TGS also located and arranged for a source vessel and provided consulting services. Sigmar had told TGS that he was very close to arranging the $30 million in financing from Alliance Capital. Based on Sigmar's representations, TGS believed that its loan was needed for Sigmar to finally attain the additional financing. Ultimately, however, Sigmar failed to secure this financing.

The project began to stall when vendors were not paid for their services. In September, before the start of operations, TGS notified Reservoir that it intended to call the loan. Reservoir did not repay the loan on the due date. TGS attempted to salvage the project through meetings with vendors, RSM's shareholders, and others who wanted Sigmar to relinquish operational and financial control, but Sigmar would not agree. The project remained undercapitalized, and eventually TGS decided not to invest any more money in it. Pemex later sued RSM to rescind the contract.

Kim Abdallah, the vice president of business development at TGS, testified at trial that TGS relied on Sigmar's representations when it decided to invest in the Pemex project. Among other things, Sigmar represented that he had strong ties with well-connected individuals in Pemex and the Mexican government. According to Sigmar, the brother of Mauricio Mireles, one of RSM's shareholders, had worked at the treasury department in customs and was going to provide important guidance regarding importation problems.² The principal of another shareholder, Erwin Larranaga, was in law enforcement and national security and was expected to provide protection for the equipment. TGS was interested in obtaining access to Sigmar's contacts and would not have participated in the Pemex project or loaned Reservoir $5 million but for Sigmar's contacts. But by November 2006, the shareholders had filed a lawsuit in Mexico disputing Sigmar's authority as president of RSM.

Sigmar also represented that he had strong relationships with an “alliance” of companies that were purportedly already committed to perform the services required. The alliance supposedly included, among others, Paulsson Geophysical Services, Inc. (“Paulsson”). Paulsson owned a trademarked technology known as “Massive 3D VSP,” which Sigmar claimed to have permission to use. This representation was reflected in Sigmar's PowerPoint presentation to TGS as well as in a services agreement between RSM and Reservoir. Additionally, the stated purpose of the July 2006 Pemex contract was for RSM to “obtain and process data from massive 3D seismic vertical profiles in the marine or inland areas, using Massive 3D VSP technology, for the assets of [Pemex].” TGS relied on Sigmar's representation that Paulsson was involved in the project when it decided to invest. Contrary to this representation, however, Sigmar was not authorized to provide Paulsson's technology.³

The loan agreement between TGS and Reservoir expressly provided that Reservoir was not to use the loan proceeds for any purpose other than “securing and servicing the Pemex contract.” Abdallah testified that the purpose of the loan was to “engage the operations going forward,” such as obtaining the source vessel and paying for a performance bond. When Reservoir received the loan, Sigmar conveyed $2 million of it through Tao Technologies to RSM.⁴ Sigmar testified that RSM then sent some of the $2 million back to Reservoir to pay expenses incurred before the loan was made. Sigmar also testified that some of the outstanding invoices were from Sigma Research & Development, a company Sigmar owned. Sigma Research then paid some of the money received from Reservoir to Sigmar for expenses predating the loan. According to Sigmar, these expenses included repayment of loans he had made to Sigma Research and for his salary. Sigmar also testified that some of the money was transferred from Reservoir to Maribel Properties, another company he owned, to cover Reservoir's back rent. Sigmar admitted that about $735,000 found its way into an account apparently for his personal use.

Abdallah testified that TGS would not have made the loan if it had known that Sigmar was not going to use all of it to secure and service the Pemex contract; nor would it have done so if it knew Sigmar was going to pay himself “over $900,000” of the loan proceeds.

II

Sigmar first contends the evidence is legally and factually insufficient to support the trial court's finding that he committed fraud. To demonstrate fraud or fraudulent inducement, TGS was required to show that (1) Sigmar made a material misrepresentation to TGS, (2) the representation was false and Sigmar knew it was false when it was made or he made it without knowledge of its truth, (3) Sigmar made the representation with the intention that TGS act on it, (4) TGS acted in reliance on it, and (5) the representation caused TGS injury. Formosa Plastics Corp., USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 47 (Tex.1998). Fraudulent inducement is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. Haase v. Glazner, 62 S.W.3d 795, 798–99 (Tex.2001).

A

A trial court's findings are reviewable for legal and factual sufficiency of the evidence by the same standards that are applied in reviewing evidence supporting a jury's answer. Catalina v. Blasdel, 881 S.W.2d 295, 297 (Tex.1994); CA Partners v. Spears, 274 S.W.3d 51, 69 (Tex.App.-Houston [14th Dist.] 2008, pet. denied.). If there is more than a scintilla of evidence supporting a finding of fact, we will overrule a legal-sufficiency challenge. CA Partners, 274 S.W.3d at 69. In reviewing a factual-sufficiency challenge, we consider all of the evidence and will set aside a finding only if it is so against the great weight and preponderance of the evidence as to be clearly wrong and unjust. Id.

When, as here, the trial court files no findings of fact or conclusions of law, the trial court's judgment implies all findings of fact necessary to support it. Pharo v. Chambers County, 922 S.W.2d 945, 948 (Tex.1996). But when a reporter's record is filed, these implied findings are not conclusive and may be challenged for legal and factual sufficiency. See Roberson v. Robinson, 768 S.W.2d 280, 281 (Tex.1989) (per curiam).

B

Sigmar contends there are two specific bases for the trial court's fraud finding: (1) the allegation in TGS's petition that Sigmar represented that the loan was to be used for securing and servicing the Pemex contract; and (2) the trial court's determination that Sigmar fraudulently used some of the money to pay himself back.⁵ Sigmar then contends the evidence is legally and factually insufficient to support either theory.

In its live pleading, TGS alleged the following:

Sigmar made false representations that TGS–NOPEC relied upon to its detriment before entering into the Loan Agreement and Promissory Note. Specifically, Sigmar misrepresented that he had disclosed all material facts related to [Reservoir]'s financial condition, business, properties, or prospects to TGS–NOPEC. Further, Sigmar represented that he would not use the proceeds of the Loan for any other purpose than securing and servicing the Pemex contract. (as referenced in the Loan Agreement)...