Rio Grande Valley Gas Co. v. City of Edinburg

CourtCourt of Appeals of Texas
Citation59 S.W.3d 199
Parties(Tex.App.-Corpus Christi 2000) RIO GRANDE VALLEY GAS CO., ET AL., Appellants, v. THE CITY OF EDINBURG, TEXAS, Appellee. NUMBER 13-98-630-CV
Decision Date21 December 2000

On appeal from the 92nd District Court of Hidalgo County, Texas. [Copyrighted Material Omitted]

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[Copyrighted Material Omitted] Christina Carlson Dodds, Austin, Eduardo R. Rodriguez, Rodriguez, Colvin & Chaney, Brownsville, Cynthia Kely Timms, Dallas, Sara Murray, Soules & Wallace, San Antonio, Daniel Bishop, Watson, Bishop, London & Galow, Austin, Jerry K. Clements, Locke, Purnell, Rain & Harrell, Paul D. Andrews, Soules, & Wallace, San Antonio, E. Lee Parsley, Locke Liddell & Snapp, Austin, Luther H. Soules, Iii, Soules & Wallace, San Antonio, Reagan Wm. Simpson, Fulbright & Jaworski, Houston, for appellants.

David C. Garza, Garza & Garza, Brownsville, Jennifer Bruch Hogan, Hogan, Dubose & Townsend, Benjamin L. Hall, III, Elizabeth B. Hawkins, O'Quinn & Laminack, Robert M. Roach, Cook, Roach & Lawless, Houston, Dana Livingston Cobb, Cook, Roach & Lawless, Austin, J.A. 'Tony' Canales, & Simonson, P.C., Corpus Christi, Russell S. Post, Hogan, Dubose & Townsend, Houston, for appellee.

Before Justices Hinojosa, Chavez and Rodriguez


Chavez, Justice.

Appellants 1 supplied natural gas to commercial and residential customers within the city of Edinburg. Some of that gas was sold and distributed according to the terms of a 1985 franchise granted by the city for the right to sell and distribute natural gas within the city in exchange for a 4% fee to be charged on all natural gas sales. In 1996 the city sued appellants, alleging that they had used various means to evade the 1985 franchise agreement. After a lengthy trial, the jury was asked to answer questions regarding breach of contract, fraud, tortious interference with contract, civil conspiracy, "single business enterprise" and fraudulent use of distinct corporations, and whether the property of certain appellants constituted a purpresture. Based on the jury's verdict, judgment was entered awarding the city $6,586,508.69 in actual damages (including prejudgment interest),2 $3,518,000 for trial and conditional appellate attorney's fees, $300,000 in exemplary damages, post-judgment interest, and costs. We affirm the city's recovery of lost franchise fees and the award of attorney's fees, but we remove the damages award for the value of certain lateral pipelines and the award of exemplary damages. As reformed, we render judgment that the city recover $774,445.33 in actual damages (including pre-judgment interest), plus $3,518,000 for trial and conditional attorney's fees.

For purposes of appeal, the appellants have formed five groups which have each filed separate briefs, raising dozens of issues. Rather than attempting to summarize the positions of the parties, we will first provide a factual overview, and then proceed to examine the parties' complaints and positions regarding each of the dispositive issues.

Factual Overview

Effective October 1, 1985 the city entered into a franchise agreement with Rio Grande Valley Gas Co. (RGVG), granting RGVG the "right, privilege, and franchise" to supply natural gas to customers within the city limits. In exchange for this franchise, RGVG was to pay the city "4% of its gross income derived from all gas sales within the City of Edinburg." In 1993, RGVG merged with Southern Union Gas Co. (SU), and SU assumed the franchise.

RGVG was a subsidiary of Valero Energy Corp. (VEC). RGVG obtained most of its natural gas supply from Valero Transmission Co. (VTC), at a set price which RGVG then offered to its customers at a set price. The prices for consumers were regulated and set by tariffs approved by the Railroad Commission. The market price, however, was much lower, and large industrial customers began clamoring for cheaper gas than was available at RGVG's set rate. In 1986 Reata Industrial Gas Co. (Reata), another subsidiary of VEC, began selling deregulated "spot-market" gas, which fluctuated in price according to the market price, to industrial customers in Edinburg. Eventually other companies in addition to Reata began supplying spot-market gas to large industrial customers in Edinburg, but this case deals primarily with Reata's spot-market sales.

Reata owned no pipes for delivering gas, so they contracted with VTC and RGVG for "transportation" of the gas to industrial customers. On paper, Reata's sales took place at designated points of sale outside of the city limits. However, there were no meters at these designated points, and the gas was not metered until it arrived at the customers' premises inside the city limits.

In 1986 Richard Alamia, then mayor of Edinburg, sent a letter to the commissioners of the Railroad Commission supporting the availability of spot-market gas, and mentioning the benefits to the city of permitting RGVG to purchase some of its gas from Reata. Edinburg was also a participant in the "Valley Steering Committee," an organization of cities in the region which addressed issues concerning natural gas supply, including deregulated spot-market gas. In January 1988 the city adopted an ordinance approving the rate RGVG could charge for transporting gas within the city. The city also adjusted its budget to reflect lower anticipated revenue from gas franchise fees after Reata began supplying the large industrial customers with spot-market gas.

In March 1987 RGVG also transferred certain "lateral" pipelines to VEC. Most of these pipes lay outside the city limits. However, a small portion were inside the city. The city contends that its franchise agreement prohibited such a transfer without its approval, and that under the franchise agreement the city was authorized to purchase the assets to be transferred if such a situation arose.

Single Business Enterprise & Sham to Perpetrate Fraud

The jury found that RGVG, VEC, VTC, VNGC, and Reata operated as a single business enterprise between October 1, 1985 and September 30, 1993. Based on this finding, these appellants were held jointly and severally liable for the actual damages assessed against each. The jury also found that VEC was responsible for the conduct of RGVG during that same time period because VEC used RGVG to perpetrate a fraud on the city. Appellants make several arguments contesting these findings.

First, we consider appellants' argument that the only theory of collective liability pleaded by the city was "alter ego," and that the city never pleaded "single business enterprise" or "sham to perpetrate a fraud." In order to support recovery, a petition is required to contain "a short statement of the cause of action sufficient to give fair notice of the claim involved." Tex. R. Civ. P. 47(a). The test of the "fair notice" pleading requirement is whether an opposing attorney of reasonable competence, with the pleadings before him, can ascertain the nature and basic issues of the controversy and what testimony will probably be relevant. Horizon/CMS Healthcare Corp. v. Auld, 34 S.W.3d 887, 896-97, 2000 Tex. LEXIS 88, at *23 (Tex.2000); see Tex. R. Civ. P. 45(b).

The "single business enterprise" theory is described as analogous to partnership principles: that when corporations are not operated as separate entities, but rather integrate their resources to achieve a common business purpose, each constituent corporation may be held liable for the debts incurred by the other component entities in pursuit of that business purpose. Paramount Petroleum Corp. v. Taylor Rental Ctr., 712 S.W.2d 534, 536 (Tex. App.--Houston [14th Dist.] 1986, writ ref'd n.r.e.). Factors relevant to determining whether a "single business enterprise" is present include common employees common offices, centralized accounting, payment of wages by one corporation to another corporation's employees, common business name, services rendered by the employees of one corporation on behalf of another corporation, undocumented transfers of funds between corporations, and unclear allocation of profits and losses between corporations. Hall v. Timmons, 987 S.W.2d 248, 252 (Tex. App.--Beaumont 1999, no pet.); Beneficial Personnel Servs. of Tex., Inc. v. Rey, 927 S.W.2d 157,165 (Tex. App.--El Paso 1996, joint writ granted without reference to merits, remanded for settlement); Paramount, 712 S.W.2d at 536. To prove that there has been a sham to perpetrate a fraud, tort claimants must show only constructive fraud. Castleberry v. Branscum, 721 S.W.2d 270, 273 (Tex. 1986). Constructive fraud is the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others, to violate confidence, or to injure public interests. Archer v. Griffith, 390 S.W.2d 735, 740 (Tex. 1964).

The city's live pleading alleged alter ego and "joint enterprise liability" as "alternative" theories. To establish a "joint enterprise," a party must show (1) an agreement among the members of the group; (2) a common purpose; (3) a community of pecuniary interest; and (4) an equal right to control the enterprise. Shoemaker v. Whistler's Estate, 513 S.W.2d 10, 17 (Tex. 1974), citing Restatement (Second) of Torts § 491 cmt. c, (1965).

The "alter ego" theory applies to disregard the corporate fiction when the corporation is "organized and operated as a mere tool or business conduit of another corporation." Centeq Realty, Inc. v. Siegler, 899 S.W.2d 195, 198 (Tex. 1995). "Alter ego" is a separate and distinct theory from the concept of a "single business enterprise." Aluminum Chemicals (Bolivia), Inc. v. Bechtel Corp., 28 S.W.3d 64, 68, 2000 Tex. App. LEXIS 5188, at *7-8(Tex. App.--Texarkana 2000, no pet. h.); George Grubbs Enters., Inc. v. Bien, 881 S.W.2d 843, 859 (Tex....

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