TCA Bldg. Co. v. Northwestern Resources Co.

Decision Date30 April 1996
Docket NumberNo. 10-94-282-CV,10-94-282-CV
Citation922 S.W.2d 629
PartiesTCA BUILDING COMPANY, Appellant, v. NORTHWESTERN RESOURCES COMPANY, et al., Appellees.
CourtTexas Court of Appeals

G. Allen Price & Michael A. McLaughlin, Houston, for appellant.

James N. Parsons III, Parsons & Thorn, Palestine, C. Morris Davis, Don H. Magee, David B. Young, McGinnis, Lochridge & Kilgore, LLP, Austin, for appellee, Northwestern Resources Co.

Richard L. Adams & David P. Poole, Worsham, Forsythe & Wooldridge, LLP, Dallas, for appellee Texas Utilities Electric Company.

Before CUMMINGS and VANCE, JJ.

OPINION

CUMMINGS, Justice.

TCA Building Company (TCA) appeals the trial court's judgment in favor of appellees Northwestern Resources Co. (NWR) and Texas Utilities Electric Company (TU Electric) on TCA's suit for declaratory judgment, fraud, and trespass. TCA raises eleven points of error: the first three address TCA's allegation that NWR's mining of lignite from a mine in which TCA possessed an interest was unlawful because a statute in effect at the time NWR executed its lease with the landowner rendered the lease void ab initio; in its fourth and fifth points TCA complains that the trial court erred in admitting into evidence a document created by NWR during trial because (1) it constituted an offer of settlement and (2) TCA was unfairly prejudiced by it; the sixth, seventh, and eighth points concern the factual sufficiency of the evidence on the questions of fraud, trespass, and damages, respectively; in its ninth and tenth points TCA argues (1) the trial court erred in submitting the question of NWR's defense of accord and satisfaction because there was no evidence adduced at trial in support of it and (2) the evidence is factually insufficient to support the jury's finding that NWR was entitled to the defense; and, finally, TCA contends in its eleventh point that NWR was not entitled to its estoppel defense because it was guilty of unclean hands. We affirm.

I. PROCEDURAL AND FACTUAL BACKGROUND

This suit arises out of the execution of certain coal and lignite leases on two tracts of land located in Freestone County totalling approximately 110 acres. We will track the relevant history of the two tracts, which we will refer to collectively as the "property."

On October 12, 1972, Woodrow Laird Lahrmann (Larry) purchased the property from the Veterans Land Board (VLB). Under his purchase agreement with the VLB, title to the property was to remain with the Board until the amount owing under the agreement was paid in full. On August 11, 1978, Larry executed a ten-year lease with TU Electric to mine coal and lignite from the property. 1 Larry died six days later, and his father, Woodrow Lee Lahrmann (Woody), inherited the property.

When the August 1978 lease was executed, Texas law prohibited leases on surface estates for longer than ten years on VLB land and also outlawed the granting of lease options of any length on VLB surface estates. Act of June 15, 1977, 65th Leg., R.S., ch. 871, § 161.227, 1977 Tex.Gen.Laws 2345, 2668 (current version codified as amended at TEX.NAT.RES.CODE ANN. § 161.227 (Vernon 1993)); see McPhail v. Texas Architectural Aggregate, Inc., 573 S.W.2d 893, 897 (Tex.Civ.App.--Eastland 1978, no writ). 2 On the same date TU Electric executed the ten-year lease, it also purchased, for $20, an option on the property whereby TU Electric could pay to the VLB the remaining amount of money Woody owed on the property before the ten years were over, which would then divest the VLB of ownership. By paying off the VLB in full, TU Electric would thereby activate the 35-year option the parties agreed would expire on August 11, 2013, 35 years after they executed the initial lease. The theory behind the option was that if the VLB was paid in full then section 161.227 would no longer have any application to the parties' transaction and they could then agree to a lease-term for whatever length they found mutually acceptable.

In 1982 Woody sought to invalidate the lease on the grounds that it purportedly violated section 161.227. He contended that the primary ten-year term plus the 35-year option term amounted to an impermissible 45- year term. The suit was later dismissed for want of prosecution. 3

In 1983 Woody's debt to the VLB was paid off, and he obtained fee simple ownership of the property.

In 1986 TU Electric assigned its interests in the property to NWR. Some time after acquiring TU Electric's interests, NWR conducted an examination into the history of the lease and became concerned that the option might be invalid under section 161.227 as it existed at the time of the lease's execution. Accordingly, NWR persuaded Woody in January 1987 to sign a ratification of the August 1978 transactions.

In 1988 the ten-year lease expired by its own terms with no lignite having been produced from the property. Also in 1988, NWR took possession of the property under the lease. Woody vacated the property at or about this time and then tried to sell it to NWR. NWR, however, decided not to purchase the property.

In April 1991 Donald McLaughlin left NWR's employment and began to work for B & B Real Estate Company. Donald then joined with his brother, Michael, to buy the property from Woody through TCA, a company Michael had previously created in 1990 to build a house for investment purposes. TCA bought the property on September 20, 1991, for approximately $130,000.

Subsequent to TCA's purchase of the tracts, NWR began preparations for mining by stripping the land down to the level of possible coal production.

Within two months from the date it bought the property, TCA ordered NWR to vacate the premises. NWR maintained that the lease Woody ratified was valid and, therefore, it was entitled, pursuant to the ratified lease, to remain on the property and mine it. NWR accordingly continued to prepare the property for mining. TCA, in response, threatened NWR with a $55,000,000 lawsuit if it continued its operations.

In February 1993 NWR answered that it would bypass the property and not mine it at all if TCA did not recognize NWR's mining rights. TCA refused to confirm NWR's mining rights, so NWR bypassed the property. TCA then sued NWR for bypassing the property, alleging that by doing so TCA was deprived of the ability to conduct effective mining operations of its own.

TCA then offered to sell and deliver the unmined lignite to Houston Lighting & Power Company (HL & P), the same customer to whom NWR had agreed to sell the lignite it had mined. On October 29, 1993, HL & P accepted TCA's offer, subject to several conditions, one of which was that TCA obtain a letter of release from NWR of HL & P's exclusive requirements contract with it. HL & P had previously agreed with NWR to purchase all of the lignite it needed to operate its power plant from NWR. Therefore, HL & P needed to obtain a release from this exclusivity agreement before it could purchase any lignite from TCA.

NWR initially refused TCA's request to release HL & P from the exclusivity clause; however, on December 10, 1993, NWR filed a "Release of Exclusivity and License," designed, according to NWR, to convey to TCA all its lignite rights so that TCA could sell the lignite to HL & P or some other customer. TCA however disputed the effectiveness of the release because it did not expressly convey title to the lignite and because NWR might be entitled to royalty payments from the sale of the lignite. Following testimony to this effect at trial, NWR prepared a Supplement to the Release of Exclusivity and License and filed it on February 9, 1994. The Supplement expressly conveyed to TCA any mineral interests NWR might have in the property. NWR also offered to provide the necessary overburden and topsoil to reclaim the property, which would remedy any problems NWR's bypass of the property might have presented to anyone trying to mine the property.

II. WHETHER THE 1978 LEASE WAS VOID AB INITIO

In its first point of error TCA contends the trial court erred in concluding that the 1978 lease, although void under section 161.227, could later be ratified once the impediment of the statute had been removed. We agree with the trial court.

At the time the lease and option was executed in 1978, section 161.227 provided:

(a) No land purchased under this chapter may be leased by the purchaser for a term of more than 10 years except for oil, gas, and other minerals and as long after 10 years as minerals are produced from the land in commercial quantities.

(b) No lease may contain a provision for option or renewal of the lease or re-lease of the property for any term, and the taking of an option, renewal, or re-lease agreement on a separate instrument to take effect in the future is prohibited. A lease or instrument that contains an option, renewal, or re-lease agreement in violation of this section is expressly declared to be void.

From the language of the statute, the law appears clear that the parties' lease agreement, including both the 35-year option and the ten-year primary term, was void.

In 1981, however, section 161.227 was amended to allow for lease terms of more than ten years on VLB land as well as lease options provided that both terms combined did not exceed 40 years. Act of June 17, 1981, 67th Leg., R.S., ch. 812, § 1, 1981 Tex.Gen.Laws 3080. In 1987, NWR paid Woody $20 to ratify the lease. TCA contends the ratification was ineffective because the lease, void at the time it was executed, could never be ratified.

As a general rule, void contracts cannot be ratified. Jack v. State, 694 S.W.2d 391, 397 (Tex.App.--San Antonio 1985, writ ref'd n.r.e.); Seafarers' Welfare Plan v. George E. Light Boat Storage, Inc., 402 S.W.2d 231, 234 (Tex.Civ.App.--Houston 1966, writ ref'd n.r.e.); see The Atrium v. Kenwin Shops of Crockett, Inc., 666 S.W.2d 315, 317 (Tex.App.--Houston [14th Dist.] 1984, writ ref'd n.r.e.); Peniche v. Aeromexico, 580...

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