Shook v. Walden

• Decision Date: 09 May 2012
• Docket Number: No. 03–09–00576–CV.,03–09–00576–CV.
• Citation: 368 S.W.3d 604
• Court: Texas Court of Appeals
• Parties: Stanley SHOOK, Appellant, Terry Walden and Joy Walden, Cross–Appellants, v. Terry WALDEN and Joy Walden, Appellees, Stanley Shook, Patrick Jaehne and S & J Endeavors, L.L.C., Cross–Appellees.

368 S.W.3d 604

Stanley SHOOK, Appellant,Terry Walden and Joy Walden, Cross–Appellants,

v. Terry WALDEN and Joy Walden, Appellees,Stanley Shook, Patrick Jaehne and S & J Endeavors, L.L.C., Cross–Appellees.

No. 03–09–00576–CV.

Court of Appeals of Texas, Austin.

March 16, 2012.

Rehearing Overruled May 9, 2012.

Robert W. Bland, Reese & Williamson, L.L.P., Gonzales, TX, Patrick Jaehne, Bastrop,TX, R. Carson Fisk, Ford, Nassen & Baldwin, P.C., Austin, TX, for appellee.

Jamie A. Rose, Amanda G. Taylor, Hohmann, Taube & Summers, L.L.P., Austin, TX, for appellant.

Before Chief Justice JONES, Justices PEMBERTON and HENSON.

OPINION

BOB PEMBERTON, Justice.

The principal issue presented in this appeal concerns the power of courts to disregard the separate existence of a Texas limited liability company (LLC) under the equitable “veil-piercing” principles that have evolved in regard to business corporations. Specifically, we must determine whether, assuming these principles can be applied to LLCs, a claimant seeking to “pierce” an LLC's “veil” with respect to the entity's contractual liabilities must prove—as has long been required by statute when piercing the veil of a business corporation—that the person against whom liability is sought to be imposed used the LLC to perpetrate actual fraud for the person's direct personal benefit. Although the Texas Legislature has recently addressed this issue through amendments to the business organizations code that specifically extended the statutory standards governing veil piercing of corporations to LLCs,¹ the case on appeal is among those governed by prior law.

Under prior law, we conclude that courts must resolve the question the same way the Legislature eventually did—the veil of an LLC may be pierced with respect to the entity's contractual liabilities only upon proof that the defendant used the LLC to perpetrate actual fraud for the defendant's direct personal benefit.

BACKGROUND

The underlying dispute centers on a real property sale and home construction project that both went awry. On September 19, 2006, appellees and cross-appellants Terry and Joy Walden, then residents of Washington state, signed a pair of contracts with a homebuilding and real-estate development company, cross-appellee S & J Endeavors, LLC. In one of the contracts (the “Land Contract”), S & J agreed to convey to the Waldens, via general warranty deed, a residential lot in the western Bastrop County subdivision known as “The Colony” (the “Lot”) in exchange for a payment of $62,000. The Land Contract further provided that S & J was to furnish the Waldens with a survey of the Lot within seven days after the contract's effective date. The transaction was to close on the later of September 25, 2006, or within seven days after any objections to title defects, exceptions, or encumbrances revealed on the survey were cured or waived. In the event the sale did not close by the specified date, the Land Contract afforded the Waldens the rights either to terminate the contract or enforce it through specific performance.

In the second contract (the “Construction Contract”)—comprised of both a Texas Association of Builders form contract and an addendum drafted by the Waldens ²—S & J agreed to build a single-family residence on the Lot according to agreed-upon plans and specifications. In exchange, the Waldens agreed to pay S & J the builder's costs plus twelve percent profit. The Construction Contract also stated that the total “Contract Price” was not to exceed $429,000. The Waldens and S & J would later dispute whether or not the “Contract Price” served to limit S & J's recoverable profit.

S & J had been formed in 2002.³ It had two members who were also its sole managers, appellant and cross-appellee Stanley Shook and cross-appellee Patrick Jaehne—hence the name “S” (Shook) and “J” (Jaehne). The Shook–Jaehne relationship was not limited to business—Jaehne was married to Shook's daughter until shortly before trial, and evidently this familial relationship had helped spur the formation of the business. According to Shook's testimony at trial, he had “set up” S & J following the marriage, including investing roughly $200,000 in the entity, to enable his new son-in-law to launch a business “building houses” so he could “make a good living,” a decision driven “100 percent” by the fact that Jaehne was now his daughter's husband.⁴ Shook depicted his role in S & J thereafter as merely that of a passive investor.⁵ Although the Waldens would later dispute that characterization, emphasizing such facts as S & J's use of Shook's residence as its mailing address, Shook's status as one of only two managers and members of the entity, Shook's signature on some of S & J's checks, and a handful of occasions in which Shook had contributed his own handiwork to the construction project,⁶ it is undisputed that Jaehne handled virtually all of the business's day-to-day operations. True to form, it was Jaehne rather than Shook who had executed both the Land Contract and the Construction Contract with the Waldens on S & J's behalf.

Upon signing the two contracts on September 19, 2006, the Waldens transmitted a $62,000 check to S & J in payment for the Lot. Construction on the house began within the same month. Thereafter, disputes arose concerning work quality and what Jaehne portrayed as frequent and unreasonable demands by the Waldens to remedy minor or imagined defects, change building plans, or obtain “extras” without additional charge. The disputes would escalate to the point that in September 2007, Joy Walden and Jaehne had a verbal altercation in which she ordered him to leave the property permanently and threatened to call the police.

Meanwhile, as construction on the house continued, there was a protracted delay in transferring title to the Lot to the Waldens. Causes of the delay included the fact that the Lot, though purportedly sold by S & J through Jaehne as its agent, was actually owned by Jaehne individually—and Jaehne had fallen behind in his payments of personal debt obligations secured by the property. There was also evidence that Jaehne sought to use the title transfer as leverage to ensure that the Waldens paid amounts he believed they owed for work under the Construction Contract. In response to Jaehne's failure or refusal to transfer title, the Waldens opted to treat the contract as continuing. At some point, Joy Walden drafted and Jaehne signed a document in which he promised to deliver to the Waldens “clear title with a Title Policy, survey and Deed to this property .... on or before March 23, 2007.” Ultimately, Jaehne and his wife would convey the Lot to the Waldens via a special warranty deed with vendor's lien on December 7, 2007, over a year after the original contemplated closing date.

The Waldens sued S & J and both Jaehne and Shook individually for damages, asserting numerous tort and contract theories.⁷ The claims were tried before a jury, which heard evidence for a total of fourteen days. At the conclusion of trial, the district court submitted questions inquiring as to whether S & J, Jaehne, or Shook had committed fraud through either misrepresentation or concealment of material facts; breached fiduciary duties owed to the Waldens; engaged in false, misleading, or deceptive acts or practices prohibited by the DTPA and did so with actual awareness, intent, and knowledge; engaged in unconscionable actions; or breached a warranty. Predicated on affirmative answers as to a defendant's liability for deceptive acts or practices, unconscionable actions, breach of warranty, and fraud by misrepresentation (but not the Waldens' other claims), the court submitted issues on actual damages, as well as questions on additional damages as permitted by the DTPA. Finally, the district court submitted a question inquiring as to whether the harm to the Waldens had resulted from the malice or fraud of each defendant (the predicate facts for awarding exemplary damages) and a corresponding question regarding the amount of exemplary damages that should be awarded.

The jury found S & J and Jaehne liable under each of the tort and DTPA theories submitted but awarded zero actual or additional damages. Additionally, although the jury found the predicate facts for imposing exemplary damages against S & J and Jaehne and purported to award approximately $45,000, the predicate finding was not unanimous, as required for such an award. In contrast to its findings against S & J and Jaehne, the jury failed to find that Shook was liable under any of the tort, DTPA, or exemplary-damage questions submitted.

The district court also submitted several liability issues predicated on contractual duties owed to the Waldens by S & J or Jaehne. These included questions inquiring whether S & J or Jaehne had failed to transfer legal title to the lot to the Waldens as required by the Land Contract and the date on which title was finally tendered. The Waldens viewed these questions as material to whether S & J or Jaehne was liable to them for liquidated damages under section 5.079 of the property code. Section 5.079 imposes liquidated damages on “sellers” for delays in transferring title to real property that is sold under an “executory contract” used or to be used as the purchaser's residence. SeeTex. Prop.Code Ann. §§ 5.062(a), .079 (West 2004). In response to these questions, the jury found that S & J and Jaehne had failed to transfer legal title to the lot to the Waldens as required by the Land Contract and did not tender title until December 7, 2007.

The district court additionally submitted issues inquiring whether S & J was liable to the Waldens for breaching the Construction Contract. The jury found that S & J had breached the Construction Contract, made findings adverse to S & J on defensive issues, and awarded the Waldens $80,000 in benefit-of-the-bargain damages.

The district court did not submit any liability theories predicated...