Texas Commerce Bank Reagan Through Texas Commerce Bank Nat. Ass'n v. Lebco Constructors, Inc.

Decision Date30 June 1993
Docket NumberNo. 13-91-423-CV,13-91-423-CV
Citation865 S.W.2d 68
CourtTexas Court of Appeals

Bob E. Shannon, Patrick O. Keel, Baker & Botts, Austin, Lillian Flurry, Baker & Botts, Houston, for appellant.

Joe H. Reynolds, Michael T. Trefny, Reynolds & Cunningham, K. Charles Peterson, Bishop, Peterson & Sharp, James M. Whorley, J. Cary Gray, James L. Reed, Jr., Looper, Reed, Mark & McGraw, Houston, for appellees.




Lebco, Inc. (Lebco), and Spencer/Center Development Partners, Ltd., Spencer/Center Retail Partners, Ltd., GBNF, Inc., and David Askanase, Trustee 1 (collectively the Spencer parties) sued Texas Commerce Bank-Reagan for fraud and negligent misrepresentation in connection with the bank's refusal to fund construction loans that it had already approved. The trial court rendered judgment in accordance with the jury verdict against the bank and awarded damages of $2,500,000 to Lebco and $300,000 to the Spencer parties. The bank appeals by three points of error. In addition, Lebco brings three and the Spencer parties bring five cross points.

The Spencer parties planned to develop a shopping center, Spencer Center, hired Lebco as general contractor for the project, and sought financing from the bank in the form

of a $5,000,000 construction loan. In addition, Lance McFaddin, who was one of the Spencer parties before he went bankrupt and was replaced by Askanase, also sought a $2,820,000 land acquisition and development loan in connection with the future expansion of Spencer Center onto an adjoining lot. The bank approved the loan requests and assured the Spencer parties that it would close and fund the loans as soon as its attorneys had completed the loan documents. In addition, according to the Spencer parties and Lebco, the bank told them that construction could actually begin before closing of the loans if Lebco would send a contrary letter to the bank stating that construction would not begin until after the loans closed

Lebco provided the letter that the bank requested, but contrary to the representations in the letter began construction on the project before the loans closed. The Spencer parties contend that they kept the bank informed of the progress of construction. However, shortly before the loans were scheduled to close, the bank decided not to fund the loans because of what the bank claimed to be unauthorized commencement of construction by Lebco. The Spencer parties were then unable to obtain alternate financing.

Lebco initiated the present lawsuit against the bank and the Spencer parties, and the Spencer parties brought a cross-action against the bank. After the trial court disposed of all other claims by directed verdict, the jury found that the bank's failure to fund the loans after representing that it would do so amounted to both fraud and negligent misrepresentation, and the jury assessed damages against the bank in favor of both Lebco and the Spencer parties.


In the present appeal, the bank does not challenge its liability generally under Lebco's and the Spencer parties' causes of action for fraud and negligent misrepresentation in connection with the bank's failure to fund the loans. Rather, the issues in the present appeal center around the damages claimed to have resulted from the bank's misrepresentations. Specifically, by its first and second points of error the bank complains of the trial court's failure to submit proper instructions regarding damages and challenges the sufficiency of the evidence to support the damage award to Lebco.

Lebco and the Spencer parties relied on loans from the bank to facilitate the construction of Spencer Center. Although Lebco was not a party to the bank's agreement to loan money to the Spencer parties, Lebco's construction contract with the Spencer parties depended upon the loans being funded, and both Lebco and the Spencer parties relied upon the bank's representations to each that the loans would be funded. As a consequence of the bank's later refusal to fund these loans, the Spencer parties were financially unable to complete the project or to pay for the work that Lebco had already done. The project thus failed, and Lebco and the Spencer parties suffered out-of-pocket losses due to these expenses associated with partial construction.

With regard to Lebco's claim for fraudulent misrepresentation, the victim is entitled to recover the actual amount of his loss resulting directly and proximately from the fraud practiced on him. Morriss-Buick Co. v. Pondrom, 131 Tex. 98, 113 S.W.2d 889 (Tex.Comm'n App.1938, opinion adopted); Kneip v. UnitedBank-Victoria, 774 S.W.2d 757, 759 (Tex.App.--Corpus Christi 1989, no writ). Generally, when the fraud is associated with the purchase or transfer of property, the victim is entitled to recover the difference between the value of that parted with and that received. In addition, the victim is also entitled to recover for pecuniary loss suffered otherwise as a consequence of his reliance upon the misrepresentation. Wright v. Carpenter, 579 S.W.2d 575, 578 (Tex.Civ.App.--Corpus Christi 1979, writ ref'd n.r.e.); El Paso Development Co. v. Ravel, 339 S.W.2d 360, 365 (Tex.Civ.App.--El Paso 1960, writ ref'd n.r.e.). For instance, the victim may recover special or consequential damages for losses on improvements to property purchased as a result of misrepresentation. See Trenholm v. Ratcliff, 646 S.W.2d 927, 933 (Tex.1983). When the fraudulent conduct does not involve the transfer of property, the victim necessarily proves his claim

by proving special or consequential damages of this nature. McClure v. Duggan, 674 F.Supp. 211, 222 (N.D.Tex.1987). 2

In Trenholm, a developer trying to sell lots in his subdivision fraudulently misrepresented to a potential builder that an adjacent mobile home park would be moved. In reliance on this representation, the builder purchased several lots and built homes on them. However, the mobile home park remained, and the builder subsequently sold these homes at a loss because the continued presence of the mobile home park depressed their value. The Texas Supreme Court held that the builder was entitled to recover the amount of his out-of-pocket loss on the homes, as well as a ten percent net profit which he otherwise could have expected to receive on the homes absent the presence of the adjacent mobile home park. Id. at 933.

In Khalaf v. Williams, 814 S.W.2d 854 (Tex.App.--Houston [1st Dist.] 1991, no writ), Williams contracted to build a night club for Khalaf in exchange for a partnership interest in the club. After Williams began construction, he learned that Khalaf had incorporated the night club and excluded Williams from ownership. Williams abandoned construction and sued Khalaf for, among other things, fraudulently inducing him to begin construction by promising him a partnership interest. The court of appeals found sufficient evidence to support an award for fraud based on Williams' losses during construction and the value of the promised partnership interest. Id. at 857.

As in Trenholm and Khalaf, in the present case when Lebco began construction as the general contractor he relied upon certain fraudulent misrepresentations, i.e., that the loan would be funded so that the owner could pay him for his work, that affected his compensation and profits on the project. We hold that Lebco is entitled to recover damages for these losses associated with partial construction of the failed project. Lebco's special or consequential damages due to its reliance on the misrepresentation must be measured by the difference between the amount that it was paid and the amount that it would otherwise have been paid had the loan been funded.

With regard to Lebco's claim for negligent misrepresentation, the Texas Supreme Court in Federal Land Bank Association v. Sloane, 825 S.W.2d 439, 442 (Tex.1991) 3 generally

adopted the measure of damages found in Restatement (Second) of Torts § 552B (1977), which includes in section 552B(1)(b) recovery for special or consequential damages in the form of "pecuniary loss suffered otherwise as a consequence of the plaintiff's reliance upon the misrepresentation." A cause of action for negligent misrepresentation thus includes the same elements of special and consequential damages as a cause of action for fraudulent misrepresentation. In the present case, therefore, Lebco was entitled to recover damages for its losses under either theory

By its first point of error the bank complains that the trial court failed to instruct the jury concerning the proper elements of damages for fraud and negligent misrepresentation.

Conditioned upon the jury's findings that the bank's fraud and negligent misrepresentation proximately caused damages to Lebco and the Spencer parties, jury questions 3 (with regard to fraud) and 7 (with regard to negligent misrepresentation) merely asked the jury to find what sum of money would fairly and reasonably compensate Lebco and the Spencer parties for such damages.

Damages must be measured by a legal standard, and that standard must be used to guide the fact finder in determining what sum would compensate the injured party. Jackson v. Fontaine's Clinics, Inc., 499 S.W.2d 87, 90 (Tex.1973). While the form of submission of a particular special issue is left to the sound discretion of the court, it is essential that the submission be sufficient to enable the jury to make an award of damages on proper grounds and correct principles of law. A submission is fatally defective if it fails to guide the jury to a finding on any proper legal measure of damages. Id. at 90; Chrysler Corp. v. McMorries, 657 S.W.2d...

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