Gary Hodge and Robert Hart III v. Stephen Kraft Ind. and as Member on Behalf of Grupo Habanero LLC

Opinion

ACCEPTED 04-15-00056-CV FOURTH COURT OF APPEALS SAN ANTONIO, TEXAS 4/14/2015 5:21:04 PM KEITH HOTTLE CLERK

No. 04-15-00056-CV th IN THE 4 DISTRICT COURT OF APPEALS SAN ANTONIO, TEXAS FILED IN 4th COURT OF APPEALS SAN ANTONIO, TEXAS GARY HODGE AND 04/14/2015 5:21:04 PM ROBERT HART III, KEITH E. HOTTLE Appellants, Clerk v.

STEPHEN KRAFT INDIVIDUALLY AND AS MEMBER ON BEHALF OF GRUPO HABANERO, LLC, Appellees. __________________

On appeal from the 225th District Court of Bexar County, Texas

__________________

BRIEF OF APPELLANTS __________________

Respectfully submitted,

Roderick J. Regan Attorney for Appellants BRANSCOMB | PC 711 Navarro St., Suite 500 San Antonio, TX 78205 Phone: (210) 598-5400 Fax: (210) 598-5405 SBN: 16733040

APPELLANTS REQUEST ORAL ARGUMENT

i IDENTITY OF PARTIES AND COUNSEL

Appellants:

Gary Hodge and Robert Hart III

Appellant Counsel/Trial Counsel:

Roderick J. Regan SBN: 16733040 Jessica Mann SBN: 24080165 Allison E. Moore SBN: 24077616 BRANSCOMB | PC 711 Navarro Street, Suite 500 San Antonio, TX 78205 Phone: (210) 598-5400 Fax: (210) 598-5405

Appellees:

Stephen Kraft Individually And as member on behalf of Grupo Habanero, LLC

Appellee Counsel/Trial Counsel:

Richard W. Espey SBN: 06667580 Matthew Soliday SBN: 24079367 Espey & Associates, PC 13750 San Pedro Avenue, Suite 730 San Antonio, TX 78232-4375 Phone: (210) 404-0333 Fax: (210) 404-0336

ii TABLE OF CONTENTS

IDENTITY OF PARTIES AND COUNSEL ........................................................... ii

TABLE OF CONTENTS ......................................................................................... iii

INDEX OF AUTHORITIES......................................................................................v

REFERENCE CITATION GUIDE ....................................................................... viii

STATEMENT OF THE CASE ................................................................................ ix

ISSUES PRESENTED...............................................................................................x

STATEMENT OF FACTS ........................................................................................1

SUMMARY OF THE ARGUMENT ........................................................................5

ARGUMENT .............................................................................................................8

ISSUE I Whether the trial court has abused its discretion in denying Appellants’ Motion to Compel Appraisal based on the argument that a condition precedent to initiating appraisal by appraiser appointed by the American Arbitration Association has not been met.......................................................................... 8

iii ISSUE II Whether Appellees’ receipt of timely notice of option election to repurchase membership interest satisfying the alleged condition precedent to initiating appraisal was established as a matter of law. ............................................................................ 12

ISSUE III Whether strict compliance with the alleged condition precedent to compelling appraisal was excused. ....................................... 17

A. Due to original impossibility .......................................... 18

B. Due to mutual mistake .................................................... 20

C. Due to Appellee’s false representation and/or concealment of a material fact ........................................ 23

ISSUE IV Whether Appellees are estopped from asserting a right to receive timely notice of Appellants’ exercise of their option to repurchase stock due to Appellees’ false representation and/or concealment making any exercise of notice under the strict contract provisions impossible.................................................. 25

PRAYER ..................................................................................................................28

iv INDEX OF AUTHORITIES Cases:

Burford v. Pounders, 199 S.W.2d 141 (Tex. 1947) ................................................. 24

Butler v. Prop. & Cas. Ins. Co. of Hartford, 2011 WL 2174965 (S.D. Tex. 2011) 10

Cattle Feeders, Inc. v. Jordan, 549 S.W.2d 29 (Tex. Civ. App.—Corpus Christi, 1977) ........................................................................................................................ 25

Chambers v. Hunt Petroleum Corp., 320 S.W.3d 578 (Tex. App.—Tyler 2010) ......................................................................................................................23, 24, 25

City of The Colony v. N. Texas Mun. Water Dist., 272 S.W.3d 669 (Tex. App.— Fort Worth 2008) ..................................................................................................... 22

Crown Constr. Co. v. Huddleston, 961 S.W.2d 552 (Tex. App.—San Antonio 1997) ........................................................................................................................ 20

Davis v. Grammer, 750 S.W.2d 766 (Tex. 1988) .................................................... 22

Durham v. Uvalde Rock Asphalt Co., 599 S.W.2d 866 (Tex. App.—San Antonio 1980) ........................................................................................................................ 22

Faucette v. Chantos, 322 S.W.3d 901 (Tex. App.—Houston [14th Dist.] 2010) ... 12

Gulbenkian v. Penn., 252 S.W.2d 929 (Tex. 1952) ................................................. 25

In re Allstate Cnty. Mut. Ins. Co., 85 S.W.3d 193 (Tex. 2002) ............................... 11

In re Clarendon Ins. Co., 2004 WL 2984916 (Tex. App.—Fort Worth 2004) ....... 11

In re State Farm Lloyds, 170 S.W.3d 629 (Tex. 2005) ........................................... 11

In re Universal Underwriters of Tex. Ins. Co., 345 S.W.3d 404 (Tex. 2011) ........... 9

James v. Prop. & Cas. Ins. Co. of Hartford, 2011 WL 4067880 (S.D. Tex. 2011) .. 9

v Janak v. Fed. Deposit Ins. Corp., 586 S.W.2d 902 (Tex. App.—Houston [1st Dist.] 1979) ........................................................................................................................ 18

Jones v. Gibbs, 130 S.W.2d 265 (Tex. App. 1939, no writ).................................... 23

Lexmark Intern., Inc. v. Ink Technologies Printer Supplies, LLC, 291 F.R.D. 172 (S.D. Ohio 2013) ...................................................................................................... 15

Marvin v. Rodgers, 115 S.W. 863 (Tex. Civ. App. 1909) ....................................... 19

Mathis v. Lockwood, 166 S.W.3d 743 (Tex. 2005) ................................................. 15

Miller v. Baum, 400 F.2d 176 (5th Cir. 1968) ......................................................... 19

NYKCool A.B. v. Pac. Intern. Servs., Inc., --F.Supp.3d--, 2014 WL 3605632 (S.D.N.Y. 2014) ....................................................................................................... 15

S.K.Y. Inv. Corp. v. H.E.Butt Grocery Co., 440 S.W.2d 885 (Tex. App.—Corpus Christi 1969) ............................................................................................................ 19

Safadjou v. Mohammadi, 964 N.Y.S.2d 801 (App. Div. [4th Dept.] 2013) ............ 15

Sanchez v. Prop. & Ins. Co. of Hartford, 2010 WL 413687 (S.D. Tex. 2010) ......... 9

Scott v. Sebree, 986 S.W.2d 364 (Tex. App.—Austin 1999) .................................. 23

Seymour v. Am. Engine & Grinding Co., 956 S.W.2d 49 (Tex. App.—Houston [14th Dist.] 1996) ..................................................................................................... 22

Smith v. Lipscomb, 13 Tex. 532 (1855) ................................................................... 19

State Farm Lloyds v. Johnson, 290 S.W.3d 886 (Tex. 2009) .................................... 9

Trudy’s Texas Star, Inc. v. Weingarten Realty Investors, 2004 WL 1792374 (Tex. App.—Austin 2004) ................................................................................................. 10

vi U.S. ex rel. Barko v. Halliburton Co., 952 F.Supp.2d 108 (D.D.C. 2013).............. 15

Vanguard Underwriters Ins. Co. v. Smith, 999 S.W.2d 448 (Tex. App.—Amarillo 1999) ..................................................................................................................10, 11

Williams v. Glash, 789 S.W.2d 261 (Tex. 1990) ..................................................... 21

Winegar v. Martin, 304 S.W.3d 661 (Tex. App.—Fort Worth 2010) ..................... 21

Woodward v. Liberty Mut. Ins. Co., 2010 WL 1186323 (N.D. Tex. 2010) ............ 10

Rules:

TEX. R. CIV. PROC. 21a(b)(3) ................................................................................... 14

TEX. R. APP. PROC. 9.5 ............................................................................................. 14

vii REFERENCE CITATION GUIDE

The Parties:

In lieu of using the full names of the parties, this Brief may refer to the parties as follows:

Gary Hodge “Hodge” or “Appellant”

Robert Hart III “Hart” or “Appellant”

Gary Hodge and Robert Hart III “Appellants”

Stephen Kraft “Kraft” or “Appellee”

Stephen Kraft Individually “Appellees” And as member on behalf of Grupo Habanero, LLC

The Record on Appeal:

This Brief will refer to the record as follows:

Clerk’s Record “CR Page”

Reporter’s Record “RR Page:Line(s)”

viii STATEMENT OF THE CASE

This is a suit for breach of contract, tortious interference with contract, and

breach of fiduciary duty, filed prematurely during negotiations between parties on

the fair market value of membership interest to be conveyed to Appellants. (CR 1-

22) Appellants moved to compel an independent appraisal by an appraiser

appointed by the American Arbitration Association, pursuant to the Contract

between parties. (CR 34-63) The trial court denied Appellants’ motion without

entering findings of fact or conclusions of law. (CR 176)

ix ISSUES PRESENTED

ISSUE I Whether the trial court has abused its discretion in denying Appellants’ Motion to Compel Appraisal based on the argument that a condition precedent to initiating appraisal by appraiser appointed by the American Arbitration Association has not been met.

ISSUE II Whether Appellees’ receipt of timely notice of option election to repurchase membership interest satisfying the alleged condition precedent to initiating appraisal was established as a matter of law.

ISSUE III Whether strict compliance with the alleged condition precedent to compelling appraisal was excused.

A. Due to original impossibility B. Due to mutual mistake C. Due to Appellee’s false representation and/or concealment of a material fact

ISSUE IV Whether Appellees are estopped from asserting a right to receive timely notice of Appellants’ exercise of their option to repurchase stock due to Appellees’ false representation and/or concealment making any exercise of notice under the strict contract provisions impossible.

x No. 04-15-00056-CV th IN THE 4 DISTRICT COURT OF APPEALS SAN ANTONIO, TEXAS

GARY HODGE AND ROBERT HART III, Appellants, v.

STEPHEN KRAFT INDIVIDUALLY AND AS MEMBER ON BEHALF OF GRUPO HABANERO, LLC, Appellees. __________________

On appeal from the 225th District Court of Bexar County, Texas

__________________

BRIEF OF APPELLANTS __________________

TO THE HONORABLE COURT OF APPEALS:

Appellants Gary Hodge and Robert Hart III (“Appellants”), submit this

Brief. Appellants respectfully show:

STATEMENT OF FACTS

Appellee, Stephen Kraft, was hired by Appellants dba Grupo Habanero,

LLC (the “Company”) on September 19, 2012 in the role of Managing Director.

(CR 9) The parties executed an employment agreement (the “Contract”) (CR 9-

1 18). As part of the employment agreement, in consideration for his obligations

therein and in conjunction with salary and other benefits, Mr. Kraft received 100

units of membership interest, “which is equal to ten percent (10%) of all issued and

outstanding units of membership interest of the Company on a fully diluted basis

with an agreed value of $35,000 (the ‘Initial Membership Interest Price’).” (CR 10-

11).

The Company’s business was under-performing and Appellee resigned from

his employment with the Company on June 6, 2014. (CR 22) On such occurrence

the Contract provided that:

(e) If the employee’s employment is terminated for any reason by either part after the first anniversary of the Effective Date, the Company may, at its option, repurchase the Membership Interest; the Company must exercise such option in writing and close such repurchase within thirty (30) days of the termination of employment. The aggregate purchase price for the Membership Interest upon exercise of the option in this Section 3.4(e) shall be the “Fair Market Value” of the Membership Interest. The “Fair Market Value” of the Membership Interest shall be the price agreed to by the parties; if the parties cannot within thirty (30) days of the exercise of the option agree upon a Fair Market Value, the Fair Market Value shall be determined by a single appraiser chosen by the parties. If the parties cannot agree upon an appraiser, the parties shall apply to the American Arbitration Association (the “AAA”) to appoint a single appraiser. (CR 13, §3.4(e)) (emphasis added).

2 Pursuant the Contract, Appellants immediately initiated negotiations with

Mr. Kraft regarding the value of the membership interest to be repurchased,

communicating the intention to elect the option in §3.4(e) of the Contract. (RR

17:14-21). Although the intention to elect the repurchase option was clearly

communicated to Mr. Kraft, the parties could agree on neither the fair market value

of the membership interest nor an independent appraiser to settle the dispute. (Id.)

As such, the provision requiring the fair market value dispute to be submitted to an

appraiser appointed by the American Arbitration Association was invoked. (CR 13,

§3.4(e))

When discussions between parties broke down, Appellants personally served

Mr. Kraft with formal notice that Appellants have chosen to elect the option to

repurchase Mr. Kraft’s membership interest on July 3, 2014. Appellants drafted a

formal letter, indicating that “[p]ursuant to the provisions of Section 3.4(e) of the

Employment Agreement, the Company hereby exercises its option to repurchase

your 100 units of membership interest in the Company (the “Units”).” (CR 22)

Gary Hodge and Kenneth Rourke, two members of the Company, personally drove

out to the address Mr. Kraft provided for personal service (1114 Birch Hill, San

Antonio, Texas 78232). (CR 108-12, 116-17) The notice provision in the Contract

required that:

3 … notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given (a) when received if delivered personally or by courier, (b) on the date receipt is acknowledged if delivered by certified mail, postage prepaid, return receipt requested, or (c) one day after transmission if sent by facsimile transmission with confirmation of transmission, as follows: If to Employee, addressed to: 1114 Birch Hill, San Antonio, TX 78232; If to Company, addressed to: 108 N. Mesquite Street, Corpus Christi, TX 78401, or to such other addresses as either party may furnish to the other in writing in accordance herewith, except that notices or changes of address shall be effective only upon receipt. (CR 16 §6.1)

Mr. Kraft did not provide an alternative address or facsimile information.

(Id.) The Contract’s notice provision was referenced several times throughout the

contract. See, e.gs., (CR 10, § 2.2(d) Notice of Termination); (CR 12,

§§3.4(c)(i.v.), (v) Membership Interest Grants); (CR 13, §§3.4(d),(e) Membership

Interest Grants); (CR 16, §6.1 Notices); (CR 17, §6.10 Modification; Waiver).

Hodge and Rourke approached the front door to the address provided,

knocked several times, and when no one answered, taped the notice letter to the

door. Id. In addition, the Company emailed the notice letter to an email address

known to be used by Mr. Kraft, on the same day. (CR 113-116) The email did not

bounce back. (Id.)

Mr. Kraft does not have any affiliation with his notice address in the

Contract. (CR 173) In fact, Mr. Kraft alleges that his notice address (1114 Birch

Hill) in the Contract is a “scrivener’s error”. (CR 173, para. 4) Mr. Kraft’s physical

4 home address is: 1115 Birch Hill, San Antonio, Texas 78232. (CR 173, para. 3)

Again, negotiations regarding the fair market value of the membership

interest resumed, but the parties were unable to agree on the fair market value. (RR

17:14-21) Instead of agreeing to submit the dispute over the value of the

membership interest to an arbitrator appointed by the American Arbitration

Association, pursuant to the Contract, Appellee prematurely filed suit on

November 17, 2014, alleging breach of contract, tortious interference with

contract, and breach of fiduciary duty. (CR 1-22) Appellants moved to compel

appointment of an independent appraiser by the American Arbitration Association,

pursuant to Section 3.4(e) of the Contract. (CR 34-63) Appellees responded to

Appellants’ motion. (CR 140-174) The trial court denied the request without

entering findings of fact or conclusions of law in support of its order. (CR 176)

SUMMARY OF THE ARGUMENT

The Texas Supreme Court has enunciated a strong policy in favor of

enforcing appraisal clauses in contracts and the trial court has abused its discretion

to deny submission of the appraisal value dispute to an appraiser appointed by the

American Arbitration Association. The parties executed a valid, binding

employment contract that included an option for Appellants’ repurchase of the

5 membership interest granted to Appellee on hiring in the event that Appellee

ceased employment with Appellant. Appellants properly executed their election of

the option as a matter of law, obligating the Appellee to sell his membership

interest for fair market price to Appellants. Parties dispute the value of the

membership interest, requiring submission of the dispute to an appraiser appointed

by the American Arbitration Association by the terms of the contract; however, in

spite of his contractual obligations, Appellee prematurely files suit against of

Appellants alleging breach of contract, tortious interference of contract and breach

of fiduciary duty, claiming that a condition precedent to creating an enforceable

obligation to submit the dispute to an appraiser appointed by the American

Arbitration Association was not met.

Appellants satisfied the alleged condition precedent as a matter of law.

Appellee was on notice through continued negotiations of Appellants intention to

elect the option, thereby creating a binding obligation on behalf of both parties to

complete the transaction. Furthermore, Appellants formalized the intention to elect

the option by delivering written notice to Appellee through personal service

effected through hand-delivery and email on the last day of the option period.

Although Appellee alleges that the personal service was insufficient to meet

the alleged condition precedent to a binding option election, Appellants were

6 excused from strict compliance with the notice provision of the contract due to

either (1) original impossibility of personal service, (2) mutual mistake of the

“scrivener’s error” in Appellee’s address in the notice provision, and/or (3)

Appellee’s intentional fraudulent representation and/or concealment of the material

fact that the only method he provided for effecting personal service through the

notice provision on the contract was not an address at which he could be reached.

Appellants maintained no knowledge or means of knowledge that Appellee’s

address in the notice provision could not be used to effectuate personal service.

In the alternative, Appellee is estopped from reliance on the alleged

condition precedent due to his own admission that he fraudulently misrepresented

his address in the notice provision of the contract, even after the opportunity to

correct the mistake arose, and allowed Appellants to rely on that misrepresentation

to their detriment, including participation in this needless litigation. On these facts,

the trial court abused its discretion and should have concluded that Appellants are

entitled to compel Appellee to submit the dispute to an independent appraiser

appointed by the American Arbitration Association, disposing of all issues in this

matter.

7 ARGUMENT

ISSUE I Whether the trial court has abused its discretion in denying Appellants’ Motion to Compel Appraisal based on the argument that a condition precedent to initiating appraisal by appraiser appointed by the American Arbitration Association has not been met.

The trial court abused its discretion to deny submission of the appraisal

value dispute to an appraiser appointed by the American Arbitration Association.

After Appellants’ election of the option to repurchase the stock from Mr. Kraft,1

Parties could not agree on the value of the stock in order to complete the

transaction. (RR 17: 11-23)2 As such, Parties do not dispute that the contract

required an independent appraisal appointed by the American Arbitration

Association in the event that the Parties could not agree upon the fair market value

1 (CR 108-09) (sworn affidavit of Gary Hodge evidencing election of option and personal service of notice); (CR 113-16) (sworn affidavit of Haley Bennet evidencing same); (CR 117-18) (sworn affidavit of Kenneth Rourke evidencing same). 2 Appellee’s counsel stated at the hearing, “… when it came to the issue of trying to determine the value of the company on whether we wanted to negotiate a resolution…,” thus proving that the issue of valuation and negotiation of same was on the table and unresolved. (RR 17: 11-23)

8 of the stock.3 Regardless, once the Parties receive an independent appraisal, the

transaction will move forward, as Appellees no longer possess a right to refuse to

complete the transaction.

The Texas Supreme Court has enunciated “a strong policy in favor of

enforcing appraisal clauses” in contracts. Sanchez v. Prop. & Cas. Ins. Co. of

Hartford, 2010 WL 413687, at *4 (S.D. Tex. 2010) (citing State Farm Lloyds v.

Johnson, 290 S.W.3d 886, 888-89, 895 (Tex. 2009)); James v. Prop. & Cas. Ins.

Co. of Hartford, 2011 WL 4067880, at *3 (S.D. Tex. 2011) (not reported) (“The

Texas Supreme Court has long recognized that appraisal clauses are valid”); In re

Universal Underwriters of Tex. Ins. Co., 345 S.W.3d 404, 407 (Tex. 2011)

(“Appraisals can provide a less expensive, more efficient alternative to litigation,

and we have held that they ‘should generally go forward without preemptive

intervention by the courts.’”) (quoting Johnson, 290 S.W.3d at 895).

A competed appraisal is a condition precedent to bringing a suit on that

contract. Johnson, 290 S.W.3d at 894. “Indeed, if an appraisal clause is properly

3 The operative contract stated: “… if the parties cannot within thirty (30) days of the exercise of the option agree upon a Fair Market Value, the Fair Market Value shall be determined by a single appraiser chosen by the parties. If the parties cannot agree upon an appraiser, the parties shall apply to the American Arbitration Association (the “AAA”) to appoint a single appraiser.” (CR 13)

9 invoked and one party to the contract refuses to participate in the appraisal process,

a court lacks discretion not to issue an order compelling that party to participate.”

Woodward v. Liberty Mut. Ins. Co., 2010 WL 1186323, at *3 (N.D. Tex. 2010)

(not reported) (citing Vanguard Underwriters Ins. Co. v. Smith, 999 S.W.2d 448,

449, 451 (Tex. App.—Amarillo 1999, orig. proceeding) (per curiam)

(conditionally granting a writ of mandamus ordering a trial court to grant an

insurer’s motion to compel an insured to submit to appraisal); see also Butler v.

Prop. & Cas. Ins. Co. of Hartford, 2011 WL 2174965, at *2 (S.D. Tex. 2011) (not

reported) (finding Vanguard persuasive, abatement of the entire case pending

compelled appraisal is appropriate in the interest of the efficient and inexpensive

administration of justice); Trudy’s Texas Star, Inc. v. Weingarten Realty Investors,

2004 WL 1792374, at * 4 (Tex. App.—Austin 2004, rev. denied) (not reported)

(“Here, the dispute over fair market rental value falls squarely within the scope of

the appraisal provision, which thus must be enforced.”).

Instead of following precedent that would remove the necessity of continued

litigation, and in direct conflict with the established Texas Supreme Court

authority, the trial court abused its discretion in denying Appellants’ Motion to

Compel Appraisal. (CR 176) As such, the trial court has abused its discretion.

“Where a[]… contract like the one here mandates appraisal to resolve the parties’

10 dispute regarding the value of a loss and where the appraisal provision has not

been waived, a trial court abuses its discretion and misapplies the law by refusing

to enforce the appraisal provision.” In re Clarendon Ins. Co., 2004 WL 2984916,

at *3 (Tex. App.—Fort Worth 2004) (not reported) (citing In re Allstate Cnty. Mut.

Ins. Co., 85 S.W.3d 193, 195-96 (Tex. 2002) (orig. proceeding) (holding trial court

abused its discretion by construing appraisal provision as arbitration agreement and

refusing to enforce it); Vanguard, 999 S.W.2d at 451 (holding trial court abused its

discretion by refusing to enforce appraisal provision)); In re State Farm Lloyds,

170 S.W.3d 629, 632 (Tex. 2005) (“The Supreme Court… rejected the trial court’s

conclusion and held that the court abused its discretion by refusing to enforce the

[appraisal] provision… Absent some compelling reason to not enforce the

appraisal provision, the trial court had no discretion to refuse State Farm’s request

to enforce the appraisal provision.”).

Based on the trial court’s abuse of discretion in denying Appellants’ Motion

to Compel Appraisal, this Court must reverse and remand this matter to the trial

court with instructions to compel the appraisal of the stock to be repurchased.

11 ISSUE II Whether Appellees’ receipt of timely notice of option election to repurchase membership interest satisfying the alleged condition precedent to initiating appraisal was established as a matter of law.

Even if this Court determines that the trial court has not abused its discretion

to deny Appellants’ Motion to Compel Appraisal based on the argument that a

condition precedent to initiating appraisal has not been met, Appellees’ received

timely notice of the option to repurchase stock as a matter of law, satisfying the

alleged condition precedent.

By Appellants’ oral notification to Appellees of Appellants’ intent to

exercise the option and Appellees’ entering into formal negotiations regarding the

value of the stock following Kraft’s termination, Appellants indicated a formal

election to accept Appellees’ offer. The act of negotiating the value of the stock

was one arrangement that satisfied the intended purpose of the option and the

effect of Appellants’ election is the formation of a contract that binds both the

optionor and the optionee:

“Election is the act of the optionee which converts the option contract into a binding promise on the part of the optionor to sell. The effect of a timely and proper election under the contract, and of a timely and proper acceptance of an offer, is the same, in that the option contract, on the one hand, and the offer on the other, are turned into a bilateral contract. Having exercised the option by election the optionee must then proceed to

12 perform the conditions of the option contract in order to complete the transaction.” Faucette v. Chantos, 322 S.W.3d 901, 911 (Tex. App. – Houston [14th Dist.] 2010, no pet.) (citations omitted) (emphasis in original).

Appellants’ oral notification to Appellees of their intent to exercise the

option was all that was required to create an obligation to perform. Id. (“By

notifying [optionor] of [optionee’s] intent to exercise the option, [optionor] entered

into a bilateral contract and became obligated to perform.”). It is undisputed that

negotiations regarding the value of the membership interest to be transferred began

prior to the expiration of the option and continued throughout the option period.

(RR 17:14-21).

After negotiations broke down, but before the end of the option period,

Appellants reasserted their intention to exercise the option by formally invoking

the notice provision of the contract through personal service. Personal service was

executed through personal delivery and e-mail. Personal delivery was executed

through hand-delivery to the physical address in the notice provision of the

contract and by email to Mr. Kraft. Appellant Hodge “personally hand-delivered a

letter to [Appellant’s] address as listed in the Employment Agreement – 1114

Birch Hill, San Antonio, Texas 78232 – exercising Grupo Habanero, LLC’s option

to repurchase Plaintiff’s 100 units of membership interest. The letter was hand

13 delivered by me on July 3, 2014. I knocked on the front door at the 1114 Birch Hill

address two or three times. No one answered the door. I then scotch taped the letter

to the door. Ken Rourke, Grupo Habanero, LLC’s Chief Operating Manager at the

time, witnessed the hand-delivery of the option exercise letter to 1114 Birch Hill,

San Antonio, TX, on July 3, 2014….” (CR 108-09) (sworn affidavit of Gary

Hodge).

Email service was successfully completed to a known email address of Mr.

Kraft, on the last day of the option period (July 3, 2014), at which Appellants

verified Mr. Kraft had received and sent emails from in the past. “[Appellants]

delivered the option exercise letter by email to Plaintiff on July 3, 2014. We used

an email address for Plaintiff that we had used before and we knew to be accurate.”

(CR 108-09) (sworn affidavit of Gary Hodge); see also (CR 113-116) (sworn

affidavit of Haley Bennet certifying contents and delivery date and time of email).

Email service has been adopted as personal service in numerous contexts, if only

quite recently in Texas. Tex. R. App. Proc. 9.5 (personal service includes email to

served party and is complete on transmission of the document). Service by email

is presumably complete on transmission of the document to the receiving party.

Id.; cf. Tex. R. Civ. Proc. 21a(b)(3) (e-service is complete on transmission of

document to party’s electronic filing service provider). “[N]otice properly sent

14 pursuant to Rule 21a raises a presumption that notice was received.” Mathis v.

Lockwood, 166 S.W.3d 743, 745 (Tex. 2005).

Personal service via email is often appropriate in the international and

federal law context, especially recently, due to similar obstacles as Appellants’

encountered in attempting hand-delivery. “Service of process on [Appellees] by

electronic mail can be proper, as it was here.” U.S. ex rel. Barko v. Halliburton

Co., 952 F.Supp.2d 108, 117 (D.D.C. 2013) (international party). “Service by e-

mail is appropriate under [Federal] Rule 4(f)(3) in some circumstances. In

evaluating whether a particular method of service is sufficient, the court must

determine whether the alternative method is reasonably calculated, under all

circumstances, to apprise interested parties of the pendency of the action and afford

them an opportunity to present their objections.” NYKCool A.B. v. Pac. Intern.

Servs., Inc., --F.Supp.3d--, 2014 WL 3605632, at * 4 (S.D.N.Y. July 2014)

(citation omitted) (international party); Lexmark Intern., Inc. v. Ink Technologies

Printer Supplies, LLC, 291 F.R.D. 172, 175 (S.D. Ohio 2013) (when serving party

“has demonstrated that is has verified that each of the email addresses at which it

seeks to serve those [parties] is valid, and that communication has occurred with a

representative of the respective [party] at those email addresses” personal service

via email is appropriate and complete) (international party); Safadjou v.

15 Mohammadi, 964 N.Y.S.2d 801, 803-04 (App. Div. [4th Dept.] 2013) (although

service of process by email is not directly authorized by either New York law or

the Hague Convention, it is not prohibited under either state of federal law).

Similarly, no state of federal law prohibits personal service by email;

therefore, notice to Mr. Kraft, via a known, verified and valid email address of the

letter formally communicating notice of Appellants’ election of their option to

repurchase membership interest from Mr. Kraft, transmitted during the option

period satisfies the alleged condition precedent for an independent appraisal of the

value of membership interest and obligates Mr. Kraft to complete the transaction as

a matter of law. The weight of the authority commands that email service was an

appropriate means to perfect election of the option by personal service prior to the

option’s expiration. Based on proof of a valid exercise of the option, this Court

must reverse and remand this matter to the trial court with instructions to compel

the appraisal of the membership interest to be repurchased. Regardless, any

argument that strict compliance with the notice provision was not satisfied is

excused due to original impossibility, mutual mistake and/or fraudulent

misrepresentation by Appellees.

16 ISSUE III Whether strict compliance with the alleged condition precedent to compelling appraisal was excused.

The alleged condition precedent requires that the option be elected “in

writing and close such repurchase within thirty (30) days of the termination of

employment” and that the parties remain in disagreement of the fair market value

of the stock in order to invoke the provision requiring that a “parties shall apply to

the American Arbitration Association (the “AAA”) to appoint a single appraiser”

to settle the dispute over the value of the stock. (CR 13, Employment Contract, p.

5.)

In order to elect the option, the contract provided that “notices and all other

communications provided for herein shall be in writing and shall be deemed to

have been duly given (a) when received if delivered personally or by courier, (b)

on the date receipt is acknowledged if delivered by certified mail, postage prepaid,

return receipt requested, or (c) one day after transmission if sent by facsimile

transmission, as follows: If to Employee [Kraft], addressed to: 1114 Birch Hill,

San Antonio, TX 78232… or to such other address as either party may furnish to

the other in writing in accordance herewith,4 except that notices or changes of

4 No facsimile number or alternative address was furnished in writing to Appellants as required to supplement the contractual provisions herein. (CR 16)

17 address shall be effective only upon receipt.” (CR 16, Employment Contract, p. 8.)

It is undisputed that Kraft did not live or have any association with the

property at 1114 Birch Hill, nor did any agent of Kraft. (CR 173, paras. 3, 4, 6, 7)

Thus, short of Kraft providing an alternative method of supplying notice under the

contract, of which Appellee did not,5 both parties were under the same

misunderstanding of the same material fact—that the address provided in the

Employment Contract was accurate and available avenue to proper written notice.

A. Due to original impossibility

Appellants are excused from performance of the alleged condition precedent

because strict compliance with the notice provision of the option was impossible to

perform at the outset due to facts unknown to the Appellants. “A promise imposes

no duty if performance of the promise is impossible because of facts existing when

the promise is made of which the promissor neither knows nor has reason to

know.” Janak v. Fed. Deposit Ins. Corp., 586 S.W.2d 902, 907 (Tex. App.—

Houston [1st Dist.] 1979, no pet.). “When one party to a contract, by wrongful

5 Although Mr. Kraft states in his affidavit that “I notified [Appellants] of this error prior to my termination” (CR 173, para. 5), Mr. Kraft has supplied no evidence to support any alleged notification, as required by the contract itself. (CR 16, Notices, § 6.1) (“… or to such other address as either party may furnish to the other in writing in accordance herewith, except that notices or changes of address shall be effective only upon receipt.”).

18 means, prevents the other party from performing, as by making it impossible for

him to perform, such an action by the party at fault constitutes a breach of contract.

The effect of such a breach is not only to excuse performance by the injured party,

but also to entitle him to recover for any damage he may sustain by reason of the

breach.” S.K.Y. Inv. Corp. v. H.E.Butt Grocery Co., 440 S.W.2d 885, 889 (Tex.

App.—Corpus Christi 1969, no pet.) (citing Smith v. Lipscomb, 13 Tex. 532

(1855)); Miller v. Baum, 400 F.2d 176, 178 (5th Cir. 1968) (“Under the law of

Texas, ‘where two parties enter into a contract and consummation of said contract

is dependent upon occurrence of a future event, the promissor should do nothing to

prevent the occurrence of such future event.’”); Marvin v. Rodgers, 115 S.W. 863,

865 (Tex. Civ. App. 1909, no writ) (“It seems clear that, where a contract is made

which is performable at the time of the occurrence of a future event, the law

imputes to the promisor an agreement that he will put no obstacle in the way of the

happening of that event, and that he will hold himself in readiness to co-operate

where his co-operation is a necessary element in the happening of the contingency.

If, in violation of this implied covenant on his part, he does something which

prevents the happening of the event, the contract becomes absolute and must be

performed as if the event had occurred.”).

Here, input from Appellees alone prevented Appellants from strict

19 compliance with the contract. Appellees provided an address to be incorporated

into the notice provision of the option at which personal service to Mr. Kraft was

objectively impossible.6 (CR 173) As such, Appellants’ strict compliance with the

notice provision of the contract was excused. Notwithstanding, Appellee was not

harmed by any perceived lack of strict compliance with the notice provision

because Mr. Kraft had actual notice, through negotiations on the value of

membership interest to be repurchased under the option (RR 17:14-21) and through

his admissions of receiving the written notice (CR 173, para. 7). Therefore,

because Appellants’ strict compliance with the notice provision was excused and

Appellees are not harmed, this Court must reverse and remand this matter to the

trial court with instructions to compel the appraisal of the membership interest to

be repurchased.

B. Due to mutual mistake

In the alternative, if personal service was not possible at the address

provided by Mr. Kraft, Appellants are excused from performance of the alleged

6 Cf. Crown Constr. Co. v. Huddleston, 961 S.W.2d 552 (Tex. App.—San Antonio 1997, no pet.) (attempt to perform personal service by taping notice to the door of appellee’s office was not effective personal service because the office was a valid address at which to serve appellee). Huddleston does not address the issue of service to an address that is not a valid address at which to serve Appellee. Furthermore, Appellants taped the notice to the door of a personal single- family residence and not an office.

20 condition precedent because the option was made under both parties’

misconception or ignorance of a material fact and thus this portion is severable and

voidable. Williams v. Glash, 789 S.W.2d 261, 264 (Tex. 1990) (“Pursuant to the

doctrine of mutual mistake, when parties to an agreement have contracted under a

misconception or ignorance of a material fact, the agreement will be avoided.”).

“To prove a mutual mistake, the evidence must show that both parties were acting

under the same misunderstanding of the same material fact.” Winegar v. Martin,

304 S.W.3d 661, 667 (Tex. App.—Fort Worth 2010, no pet.) (emphasis added). In

Winegar, the court held that the parties had opposite understandings of the

contract’s effect, thus no mutual mistake was made. Id. However, in the instant

action, both Appellants’ and Mr. Kraft entered into the contract with the same

misunderstanding—that the notice provision that triggered strict compliance with

the option to repurchase the membership interest included at least one method of

personal service that could reach Mr. Kraft. Neither party noticed the “scrivener’s

error” in the contract that was the only means of strictly complying with the notice

provision. (CR 173, paras. 3, 4, 7) (sworn statement of Appellee Kraft admitting

his mistake in not noticing the “scrivener’s error”). Even if Appellee (Mr. Kraft)

argues that he had knowledge of the mistake (or that he had the privilege of

including any address he wished for personal service, and thus no mistake was

21 made), unilateral mistake by one party and knowledge of that mistake by the other

party is equivalent to mutual mistake as a matter of law. Davis v. Grammer, 750

S.W.2d 766, 768 (Tex. 1988); Seymour v. Am. Engine & Grinding Co., 956

S.W.2d 49, 58 (Tex. App.—Houston [14th Dist.] 1996, writ denied) (“Knowledge

by one party that the other is acting under a mistake of fact is equivalent to a

mutual mistake.”). The mistake involved material part of the contract because

notice to Kraft could not be accomplished as the contract was written, rendering

ineffectual several portions of the Employment Contract.7 City of The Colony v. N.

Texas Mun. Water Dist., 272 S.W.3d 669, 735 (Tex. App.—Fort Worth 2008, no

pet.) (mutual mistake must “materially affect the agreed-upon exchange”); Durham

v. Uvalde Rock Asphalt Co., 599 S.W.2d 866, 870 (Tex. App.—San Antonio 1980,

no writ) (“To enable a party to a written contract to be relieved from liability

thereunder on the ground of mutual mistake of fact, the mistake in question must

deal with a material part of the contract itself.”). Therefore, as all parties to the

contract maintained either the same misunderstanding or Appellants were

7 The written notice requirement that incorporated the “scrivener’s error” was referenced in many contract provisions, therefore the contract itself could not be effective without reliance on this material provision. See, e.gs., (CR 10, § 2.2(d) Notice of Termination); (CR 12, §§3.4(c)(i.v.), (v) Membership Interest Grants); (CR 13, §§3.4(d),(e) Membership Interest Grants); (CR 16, §6.1 Notices); (CR 17, §6.10 Modification;Waiver).

22 operating under a mistake of fact Mr. Kraft was not, either way, Appellants are

excused from strict compliance with the notice provision due to mutual mistake of

a material provision in the contract.

Thus, the trial court’s order denying Appellants’ Motion to Compel

Arbitration should be reversed because the alleged condition precedent to its

enforcement is excused due to mutual mistake of a collateral matter.

C. Due to Appellee’s false representation and/or concealment of a material fact

Again, in the alternative, even if Appellee (Mr. Kraft) asserts that the

address included as his proper notice address in the contract was intentional,

Appellee’s false representation and/or concealment that he could be reached for

personal service at the address made any exercise of notice under the strict contract

provisions impossible; therefore, Appellants’ strict compliance with same was

excused. “Equity excuses strict compliance of an option contract where some act

such as a misleading representation by the optionor prevents the optionee for

exercising the option right.” Scott v. Sebree, 986 S.W.2d 364, 372 (Tex. App.—

Austin 1999, rev. denied); Chambers v. Hunt Petroleum Corp., 320 S.W.3d 578,

583 (Tex. App. – Tyler 2010, no pet.) (citing Jones v. Gibbs, 130 S.W.2d 265, 272

(Tex. Civ. App. 1939, no writ)) (“… the failure of the optionee to comply strictly

23 with the terms or conditions of the option will be excused when the failure is

brought about by the conduct of the optionor.”). Notwithstanding the disagreement

between parties of the value of the stock to be repurchased, Appellants were at all

times ready, willing and able to close the purchase within the option period. (CR

110). A tender of consideration was all that was required to complete the option

requirements. Chambers, 320 S.W.3d at 583.

Appellees’ rejection of Appellants’ proposed value of the membership

interest to be repurchased and Kraft’s false representation of a notice address that

would make timely notice impossible serve as evidence of Kraft’s open refusal to

transfer the membership interest as required by the option. “It is thoroughly settled

that where [optionor] has openly and avowedly refused to perform his part of the

contract or declared his intention not to perform it, the [optionee] need not make

tender or payment of the consideration before bringing suit.” Chambers, at 583

(citing Burford v. Pounders, 199 S.W.2d 141, 144 (Tex. 1947)) (citations omitted).

Thus, tender was not required to maintain a proper election of the option and due

to the dispute between parties on the fair market value of the membership interest

(RR 17:14-21), Appellants are entitled to invoke the contract provision allowing an

independent appraisal. (CR 13)

Appellee’s intentional false representation, as an intentional act designed to

24 defeat Appellants’ attempts as strict compliance with the notice provision in the

contract, justify excusing Appellants’ from strict compliance. Chambers, 320

S.W.3d at 583-84 (“The trial court was justified in inferring that the Chamberses’

refusal to respond to Hunt’s repeated attempts to communicate with them during

the critical sixty day period for closing was calculated to defeat Hunt’s exercise of

its option.”). As such, the trial court’s order denying Appellants’ Motion to

Compel Arbitration should be reversed because the alleged condition precedent to

its enforcement is excused due to Appellee’s false representations.

ISSUE IV Whether Appellees are estopped from asserting a right to receive timely notice of Appellants’ exercise of their option to repurchase stock due to Appellees’ false representation and/or concealment making any exercise of notice under the strict contract provisions impossible.

Appellees are estopped from refusing to execute Appellants’ option to

repurchase the membership interest because strict compliance with the notice

provision was prevented by misleading representations or conduct by the Appellee.

“The elements of equitable estoppel are: 1) a false representation or concealment

of material fact; 2) made with actual or constructive knowledge of the facts; 3) to a

party without knowledge or means of knowledge of the real facts; 4) made with the

intention that it should be acted on; and 5) the party to whom it was made must

have relied on or acted on it to his prejudice.” Cattle Feeders, Inc., v. Jordan, 549

25 S.W.2d 29, 33 (Tex. Civ. App.—Corpus Christi 1977, no writ) (citing Gulbenkian

v. Penn, 252 S.W.2d 929 (Tex. 1952)) (citations omitted).

Appellee chose to sign the employment agreement that included no address

at which Appellants could successfully complete personal service to Mr. Kraft—a

false representation or concealment of material fact. (Compare CR 16 and CR 173

paras. 3-7) No dispute remains that Mr. Kraft knew that the address in the

employment contract was not his correct home address. (CR 173, paras. 3, 5)

Further, Mr. Kraft did not provide alternative means under the notice provision as

contemplated. (CR 16) Mr. Kraft could have provided a facsimile number for

which to send written notice in the alternative to a physical address, instead, no

alternative means of providing strict compliance with the notice provision was

available. (Id.) Appellants had no knowledge or means of knowledge that personal

delivery to Mr. Kraft could not be accomplished at the address provided in the

contract. (CR 108-09, 113-18) Mr. Kraft had every right to list any address he

preferred for personal service; therefore, Appellants did not have any means to

disprove the address provided after the Contract was signed. Appellants attempted

personal service nonetheless. (Id.) Mr. Kraft signed the agreement with the

intention that the notice provision could and should be acted on in the event that

26 Appellants wished to elect their option to repurchase the membership interest.8 (CR

18) And, Appellants relied on the terms of the notice provision, including the false

address, to attempt personal delivery to Mr. Kraft. (CR 108-09, 113-18) The

alleged failure of which is the subject of the current litigation, causing damages

and prejudice to Appellants by delaying the transfer of the membership interest

that may affect the value of the membership interest to Appellants’ detriment. With

all applicable elements of estoppel met without dispute, this Court must reverse

and remand this matter to the trial court with instructions to compel the appraisal

of the membership interest to be repurchased.

8 Mr. Kraft relies on the same agreement to argue that he now owns 10% of the membership interest of Grupo Habanero, LLC. Therefore, Mr. Kraft is estopped from asserting that the false representation in the contract was not meant to be relied on, due to Kraft’s own reliance on the same agreement.

27 PRAYER

WHEREFORE, Appellants respectfully request that this Court reverse the

trial court’s order denying Appellants’ Motion to Compel Appraisal, remand the

matter for entry of order granting Appellants’ Motion to Compel Appraisal and

grant such other and further relief to which Appellants may show itself to be justly

entitled.

Respectfully submitted,

Roderick J. Regan Attorney for Appellants BRANSCOMB | PC 711 Navarro St., Suite 500 San Antonio, TX 78205 Phone: (210) 598-5400 Fax: (210) 598-5405 SBN: 16733040

28 CERTIFICATE OF COMPLIANCE

I certify that this document was produced on a computer using Microsoft Word 2010 and contains 6,504 words, as determined by the computer software’s word-count function, excluding the sections of the document listed in Texas Rule of Appellate Procedure 9.4(i)(1).

Roderick J. Regan

CERTIFICATE OF SERVICE

I hereby certify that on this the 14th day of April, 2015, a true and correct copy of the foregoing Appellant’s Brief has been forwarded to the counsel below via certified mail, return receipt requested and email pursuant to the Texas Rules of Civil Procedure and the Texas Rules of Appellate Procedure.

Richard W. Espey Matthew Soliday Espey & Associates, PC 13750 San Pedro Avenue, Suite 730 San Antonio, TX 78232 Fax: (210) 404-0336 Attorneys for Appellees

Roderick J. Regan

A.1 Employment Agreement

A.2 July 3, 2014 Letter to Kraft

A.3 Affidavit of Gary Hodge

A.4 Affidavit of Haley Bennet

A.5 Affidavit of Kenneth Rourke

A.6 Motion

A.7 Response

A.8 Order

A.9 Rules Cited

A.10 Selected Case Authority Cited EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (::Agreemeni") is made effective as of "Effective Date," as defined below, by and between Grupo Habancro, LLC, a Texas limited liability company ("Company") and Stephen Kraft, an individual residing in San Antonio. Texas ("Employee").

ARTICLE I EMPLOYMENT AND DUTIES

1.1 Emplovnient; Effective Company agrees to employ Employee and Date. Employee agrees to be employed by Company, beginning as of September 19, 2012 (the "Effective Date") and continuing for the period of time set forth in Article II below, subject to the terms and conditions of this Agreement.

1.2 Position. From and after the Effective Date. Employee shall serve as the Managing Director. The Managing Director shall devote full time and best efforts to the overall supervision of the restaurants owned by the Company and shall report directly to the Managers of the Company. The Managing Director shall live in the "vicinity" of Bexar County, Texas, as determined by the Company with reasonable discretion.

1.3 Duties. Employee agrees to serve in the position referred to in Section 1.2 above and shall perform such duties as may from time to time be assigned by the Managers.

ARTICLE H TERM AND TERMINATION OF EMPLOYMENT

2.1 Term. This Agreement shall terminate on the first anniversary of the Effective Dale ("the Term"), unless sooner terminated in accordance with the terms in this Article II.

2.2 Company's Right to Terminate. Notwithstanding the provisions of Section 2.1 above. Company shall have the right to terminate Employee's employment under this Agreement at any time for any ofthe following reasons:

(a) by virtue of his physical or mental disability, Employee is unable to perform substantially and continuously the essential functions of his duties, with or without reasonable accommodations, for a period of 90 consecutive days or for a period of 120 non- consecutive days during any 12 month period; or

fb) at any lime for any reason whatsoever or for no reason at all, in the sole discretion of Company; or

(c) for cause, which for purposes of this Agreement shall mean Employee (i) has been indicted for, or convicted of, or pleaded no contest to, a misdemeanor involving moral turpitude or a felony, (ii) has willfully refused without proper legal reason to perform Employee's duties, (iii) has materially breached any material provision of this Agreement, (iv) has engaged in any act of serious dishonesty which adversely affects, or reasonably could in the EXHIBIT

DOCUMENT SCANNED AS FILED future adversely affect, the value, reliability or performance of Employee in a material manner, or (v) breach of fiduciary duly by Employee.

(d) Notice of Termination. If Company desires to terminate Employee's employment at any time for any reason or for no reason at all prior to the expiration of the Term, it shall do so by giving written notice to Employee that it has elected to terminate Employee's employment and stating the effective date of the termination. Further, Company's termination of Employee's employment shall not alter or amend the provisions of Articles IV and V below.

2.3 By Company. If Employee's employment is terminated by Company prior to the expiration of the Term as provided in Section 2. 1 above, then, upon the effective date of such termination, regardless of the reason therefore, Company's obligations under this Agreement shall immediately cease. If Employee is terminated pursuant to Sections 2.2fal or fb) above, Company will offer to Employee and Employee will be entitled to receive severance benefits equal to $5,000.00 per month for the remainder of the Term payable on the Company's regular payment dates for employees but no less frequently than monthly, less applicable statutory deductions and withholdings (the "Severance Benefits").

ARTICLE III COMPENSATION AND BENEFITS

3.1 Company promises to provide, and Employee agrees to accept, an Base Salary. annual Base Salary of Sixty Thousand Dollars ($60,000) ("Base Salary"), less applicable statutory deductions and withholdings, payable in accordance with Company's regular payroll procedures as presently in elfect and amended from time to lime. Company, by action of its Managers, may review Employee's Base Salary from lime to lime to determine if it should be increased.

3.2 Bonuses. During the Term, Company will pay Employee a quarterly bonus equal to 15% of the amount by which "Total Controllable Income" as defined hereafter exceeds "Base TCI" as defined hereafter. "Total Controllable Income" shall mean the gross revenue from all restaurants operated by the Company or its subsidiaries less those direct operating expenses identified in Exhibit A attached hereto. As an example, in 201 1, the two Habaneros restaurants had a combined Total Controllable Income or$2l01869 (the "Base TCI").

3.3 Other Perquisites. During his employment, Company will provide Employee and his family with; (i) health benefits substantially the same as those provided to Employee in 201 1 by the prior owner of the restaurants; (ii) a $300 monthly car allowance; and (iii) a $200 monthly phone allowance. Employee and, to the extent applicable, Employee's spouse, dependents and beneficiaries, shall be allowed to participate, if eligible, in all other benefit plans and programs of Company, including improvements or modifications of the same, which are now, or may hereafter be, available to similarly situated employees and their spouses, dependents, and beneficiaries.

3.4 Membership Interest Grants.

(a) Upon execution of this Agreement and the Company Agreement of the Company, Employee- shall be issued 100 units of membership interest (the "Membership Interest"), which is

l-MI'LOVMENT AGREIiMBNT PAGE 2 10 10

DOCUMENT SCANNED AS FILED equal to ten percent (10%) of all issued and outstanding units of membership interest of the Company on a fully diluted basis with an agreed value of S35,000 (the "Initial Membership Interest Price").

(b) Company hereby makes the following and warranties representations to

Employee intending Employee to rely upon them in connection with entering this Agreement;

(i) Organization, Good Standing and Qualification. The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Texas. The Company has all requisite limited liability company power and authority to own and operate its properties and assets, to execute and deliver this Agreement, to issue and sell the Membership Interest and to carry out the provisions of this Agreement.

(ii) Capitalization; Voting Rights. As of the Effective Date and including the Membership Interest issued as set forth in this Agreement, the Company will have 1,000 issued and outstanding units of membership interest. As of the date hereof there are no outstanding options, warrants, or other rights for the purchase or acquisition from the Company of units of membership interest, The rights, preferences, privileges and restrictions of the Membership Interest are as set forth in the Company Agreement of the Company and in this Agreement. When issued in compliance with the provisions of this Agreement, the Membership Interest will be validly issued, fully paid and non-assessable, and will be free of any liens or encumbrances, other than die Company's right to repurchase the Membership Interest and the general restriction on transfer all as provided in Section 3.4(d).

(iii) Limited Liability Company Documents. Complete and accurate copies of (he Company's Certificate of Formation and Company Agreement are attached hereto as Exhibit B. The Company is not currently contemplating any amendment to such documents.

(iv) Authorization; Binding Obligations. All limited liability company action on the part of the Company, its officers, managers and members necessary for the authorization of this Agreement, the performance of all obligations of the Company hereunder as of the Effective Date and die authorization, sale, issuance and delivery of the Membership Interest pursuant hereto has been taken or will be taken prior to the Effective Date. This Agreement, when executed and delivered, will be valid and binding obligation of the Company enforceable in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) general principles of equity thai restrict the availability of equitable remedies.

(v) Members. Exhibit C contains a complete list of all of the Company's members, the units of membership interest they own and their addresses.

EMPLOYMENT AGREEMENT PAGE 3 11 11

DOCUMENT SCANNED AS FILED (vi) Compliance with Laws, To its knowledge, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which violation would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company.

(c) Right of First Offer for Eciuilv Securities.

(i) Notwithstanding subsection (ii) below, until the first anniversary of this Agreement, the Company shall not issue any "Equity Securities" as defined below.

(ii) Employee shall have a right of first ofter to purchase his Pro Rata Portion (as defined below) of all Equity Securities that the Company may, from time to time, propose to sell and issue after the date of this Agreement,

Employee's "Pro Rata Portion" is equal to the ratio of (x) (he (iii) number of units of membership interest of the Company which the Employee holds immediately prior to the issuance of such Equity Securities to (y) the total number of units of the Company's outstanding membership interests, immediately prior to the issuance of the Equity Securities. The term "Equity Securities" shall mean (1) any membership interest of (he Company, (2) any security convertible, with or without consideration, into any membership interest (including any option to purchase such a convertible security), (3) any security carrying any warrant or right to subscribe to or purchase any membership interest or (4) any such warrant or right.

(iv) In the event the Company proposes to undertake an issuance of Equity Securities, the Company shall deliver written notice ("Notice") to the Employee via reputable overnight delivery service of (I) its bona fide intention to undertake an issuance of Equity Securities, (2) a description of the designations, preferences, privileges and rights of the Equity Securities to be offered and of each and every right, agreemcnl and instrument to be attached to, delivered with or made appurtenant to such securities ("Appurtenant Rights"), (3) the aggregate number of Equity Securities to be offered to the offerees thereunder (the "Offerees"), (4) the identity of the Offerees and (5) the price and terms and conditions upon which the Company proposes to offer the Equity Securities to the Offerees.

(v) Within thirty (30) days of receiving the Notice, Employee shall notify the Company in writing if he desires to exercise, in full or in part, his rights set forth in this Paragraph (c). If Employee exercises his rights, Employee may purchase the offered Equity Securities which such Employee elects to purchase by paying the same consideration, as paid by the Offerees, and under the same terms and conditions applicable to the Offerees.

liMPLOYMIiNT AGREEMENT PAGE '1 12 12

DOCUMENT SCANNED AS FILED (vi) If Employee purchases Equtly Securities under this Paragraph (c) hereof, he shall also receive all Appurtenant Rights provided or granted to investors as part of the offering of Equity Securities, and shall, as a condition to receiving the Equity Securities and the Appurtenant Rights, execute and become obligated under any agreements and other instruments required to be executed by all investors in connection with such offering.

(ti) If the Employee's employment is terminated for any reason by either party on or before the first anniversary of the Effective Date, the Company may, at its option, repurchase the Membership Interest; the Company must exercise such option in writing and close such repurchase within thirty (30) days of the termination of employment. If the Company terminates Employee's employment prior to the first anniversary of the Effective Date, the Employee has the option to put the Membership Interest to the Company; the Employee must exercise such put in writing and close such repurchase within thirty (30) days of the termination of employment. In either case the aggregate purchase price for the Membership Interest will be the Initial Membership Interest Price plus or minus an amount equal to the percentage increase or decrease over Base TCI multiplied by the Initial Membership Interest Price. For example, if Base TCI is 5227,000 and Total Controllable Income is increased to S327,000 then the percentage increase would be (327.000 - 227,000)/227,000 or 44.05% multiplied by the Initial Membership Interest Price of $35,000 for an increase of $15,418.50, Therefore, the purchase price for the Membership Interest would be $35,000 plus $15,418.50 equals $40,418.50. Conversely, if Base TCI is $227,000 and Total Controllable Income is reduced to $127,000 then the percentage decrease would be (127,000 - 227,000)/227,000 or -44.05% multiplied by the initial Membership Interest Price of $35,000 for a decrease of $15,417.50. Therefore, the purchase price for the Membership Interest would be $35,000 minus $15,418.50 equals $19,581,50. in the event that the purchase of Membership Imerest contemplated by this Section 3.4 occurs before the full year of Total Controllable Income has elapsed from the Effective Date, then the available data shall be annualized for purposes of the calculation of the purchase price for the Membership Interest. The Membership Interest shall not be transferred by Employee except with the express written consent of the Company. Any transler of legal or beneficial ownership shall be void ab initio.

(e) If the Employee's employment is terminated for any reason by either party after the first anniversary of the Effective Date, the Company may, at its option, repurchase the Membership Interest; the Company must exercise such option in writing and close such repurchase within thirty (30) days of the termination of employment. The aggregate purchase price for the Membership Interest upon exercise of the option in this Section 3.4(e) shall be the "Fair Market Value" of the Membership Interest. The "Fair Market Value" of the Membership Interest shall be the price agreed to by the parties: if the parties cannot within thirty (30) days of the exercise of the option agree upon a Fair Market Value, the Fair Market Value shall be determined by a single appraiser chosen by the parties. If the parties cannot agree upon an appraiser, the parties shall apply to the American Arbitration Association (the "AAA") to appoint a single appraiser. The appraiser shall provide a written appraisal and shall determine the Fair Market Value of the Membership Interest without deduction for its minority position and restrictions on transfer. The determination of the appraiser shall be final and binding upon the parlies and the closing of the sale shall be completed within thirty (30) days of receiving the appraiser's determination. The parties shall supply the appraiser with any requested information about the Company and shall split the cost of the appraiser and any AAA fees.

HMI'LOYMI-NT AGREI-MENT RAGE 5 13 13

DOCUMENT SCANNED AS FILED (f) All certificates evidencing units of membership interest now owned or that may be acquired by the Employee will note conspicuously on the back as follows:

"REFERENCE MADE TO AN AGREEMENT IS HEREBY DATED EFFECTIVE AS OF SEPTEMBER 19, 2012, ON FILE AT THE PRINCIPAL PLACE OF BUSINESS OF THE COMPANY AND AT ITS REGISTERED OFFICE IF THE TWO ARE NOT THE SAME, WHICH AGREEMENT RESTRICTS THE TRANSFER OR PLEDGE OF THE UNITS OF MEMBERSHIP INTEREST REPRESENTED BY THIS CERTIFICATE AND CONTAINS CERTAIN OTHER AGREEMENTS CONTEMPLATED TO BE BINDING ON THE OWNER OF MEMBERSHIP INTERESTS IN THE COMPANY. THE COMPANY WILL FURNISH A COPY OF THE AGREEMENT TO THE RECORD HOLDER OF THIS

CERTIFICATE WITHOUT CHARGE. UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE."

ARTICLE IV PROTECTION OF INFORMATION

Confidcnrial Information. Employee acknowledges that during his employment with Company. Company will provide him with and/or give him access to Confidential information (defined below) of Company. Confidential Information means ail information and compilations of information of any kind, type or nature (tangible and intangible, written or oral, and including information contained, stored, or transmitted through any electronic medium), which relates to Company including, without limitation, products; services; plans, including, without limitation, business and marketing plans; procedures; formulae; processes; pricing: customers. Confidential Information does not, however, include any information that is available to the public other than as a result of any act, directly or indirectly, of Employee. Employee agrees that all Confidential Information is and shall remain the sole properly of Company.

ARTICLE V NON COMPETITION AND NON-SOLICITATION OBLIGATIONS

5.1 Non-Comnctition and Non-Solicitation Obligations. In exchange for the consideration delivered in connection with thai certain Asset Purchase Agreement between Coastal King, Ltd., Texas Burrilo Co., LLC and Habaneros Mexican Grill, LP (the "APA") and as a materia! inducement for Coastal King, Ltd. to enter into the APA, and in order to protect the Confidential Information that the Company will provide in accordance with Article IV above. Employee expressly covenants and agrees that, for any reason, directly or indirectly, for himself or on behalf of or in conjunction with any other person, entity or business of whatever nature for any period during which Employee is an officer, employee, consultant or manager of the Company and for an additional 30 months from and after the date of termination of any such relationship (the "Prohibited Pe^iod,,) he shall not;

EMPLOYMENT AGREEMENT 1'AGE 6 14 14

DOCUMENT SCANNED AS FILED Engage, within the Bexar County, Texas (the "Prohibited Area") as an officer, director, manager, owner, investor, lender, partner, member, joint venturer or in a managerial or advisory capacity (whether as an employee, independent contractor, consultant or advisor, or as a sales representative, dealer or distributor), or as an employee, agent, service provider or in any other non-managerial capacity, in any Mexican restaurant business (the "Restricted Business");

For Employee or on behalf of or in conjunction with any other person, solicit or attempt to solicit, recruit, or attempt to recruit any employee, consultant or agent of Company or any of its affiliates;

Request or attempt to request any business related to any Restricted Business from any corporation, association, partnership, organization, business, individual or governmental entity, who as of the dale of the request or attempted request or within 36 months prior to that date, is or was a customer, or an actively sought prospective customer, or a significant vendor or supplier of the Company or any of its affiliates.

5.2 Scnarato Covenant. The covenants in this Article are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant.

5.3 Subsequent Employment. The further expressly covenants and Employee agrees that during the Prohibited Period, he will advise the Company of the identity of any new employer of the Employee or business started by Employee within the Prohibited Area within ten days of accepting such employment or forming such business.

5.4 Reasonableness of Restrictions. Employee agrees that (i) the terms of this Article V are reasonable and conslilule an otherwise enforceable agreement to which the terms of this Agreement are ancillary or a part of; (ii) the consideration provided by the Company under this Agreement is not illusory; (iii) the restrictions of this Article V are necessary and reasonable for the protection of the legitimate business interests and goodwill of the Company; and (iv) the consideration of employment given to Employee by the Company under this Agreement, including without limitation, the provision by the Company or its affiliates of Confidential Information and specialized training to Employee, gives rise to the Company's interests in the covenants set forth in this Article V,

5.5 Scvcriibilitv. Employee and the Company agree that it was both parties' intention to enter into a valid and enforceable Agreement. Employee agrees that if any covenant contained in this Article V is found by a court of competent jurisdiction to contain limitations as to lime, geographic area, or scope of activity that are not reasonable and impose a greater restraint than is necessary to protect the goodwill or other business interests of the Company or its affiliates, then the court shall reform the covenant to the extent necessary to cause the limitations contained in the covenant as to time, geographic area, and scope of activity to be restrained to he reasonable and to impose a restraint that is not greater than necessary to protect the goodwill and other business interests of the Company and its affiliates.

5.6 Rights and Remedies Unon Breach. Employee acknowledges that money damages would not be sufficient remedy for any breach of this Article V by the Employee. In

EMPLOYMENT AGREEMENT PACE 7 15 15

DOCUMENT SCANNED AS FILED to the event that the Company determines that Employee has breached or attempted or threatened the breach any provision ol' this Article V, in addition to any other remedies at law or in equity Company may have available to it, it is agreed that the Company shall be entitled to terminate

any payments then owing to Employee under this Agreement, and, shall be entitled, upon application to any court of proper jurisdiciion, to a temporary restraining order or preliminary by injunction against Employee prohibiting such breach or attempted or threatened breach agrees proving only the existence of such breach or attempted or threatened breach. Employee shall be that the period during which the covenants contained in this Article are in effect computed by excluding from such computation any time during which Employee is in violation of any provision of this Article. Furthermore. Employee agrees to waive any bonding the requirement in connection with any injunction or temporary restraining order sought by Company under this section.

AR TICLE VI MISCELLANEOUS

6.1 Notices. For purposes of this Agreement, notices and all other communications when provided for herein shall be in writing and shall be deemed to have been duly given (a) receipt is acknowledg ed if received if delivered personally or by courier, (b) on the date after delivered by certified mail, postage prepaid, return receipt requested, or (c) one day transmission if sent by facsimile transmission with confirmatio n of transmissio n, as follows:

If to Employee, addressed to:

1114 Birch Hill San Antonio, TX 78232

If to Company, addressed to:

108 N. Mesquite Street Corpus Christi, TX 78401

or to such other address as either party may furnish to the other in writing in accordance herewith, except that notices or changes of address shall be effective only upon receipt.

6.2 Annlicahlc Law. This Agreement is entered into under, and shall be construed and interpreted, and the rights of the parties shall be governed by. the laws of the State of Texas with respeel to any claim or dispute related to or arising under this Agreement.

6.3 No Waiver. No failure by either party hereto at any time to give notice of any breacli by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

6.4 Severability and Reformation. If a court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other

''AGE 8 r.MI'LOYMENT AGREEMENT 16 16

DOCUMENT SCANNED AS FILED provision of this Agreement and all other provisions shall remain in full force and effect. Furthermore, the parties explicitly agree that such court is authorized to reform any such invalid or unenforceable provision to be valid and fully enforceable under the law and that the parlies agree that in such case, they will treat the provision as having automatically been so reformed.

6.5 Co mi tc marts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement,

6.6 Headings. The section headings have been inserted for purposes of convenience and shall not be used for interpretive purposes.

6.7 Assignment. This Agreement is personal to Employee and shall not be assignable by Employee. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns; the Company may assign and transfer its rights and obligations under this Agreement, by operation of law or otherwise, to any successor to ail or substantially all of its equity ownership interests, assets or business by dissolution, merger, consolidation, transfer or assets, or otherwise as permitted under the Company's organizational documents.

6.8 Survival- The termination of this Agreement and Employee's employment shall not affect any right or obligation of any party which has accrued and vested prior to such termination or which by its terms survives the termination of this Agreement and Employee's employment. The provisions of Section 3.4, except Section 3.4(c). Articles IV and V shall survive termination of this Agreement.

6.9 Entire Agreement. This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and contains all the covenants, promises, representations, warranties and agreements between the parties with respect to employment of Employee by Company. Without limiting the scope of the preceding sentence, all understandings and agreements preceding the dale of execution of this Agreement and relating to the subject matter hereof are hereby null and void and of no further force and effect.

6. 10 IVIodifkation; Waiver. Any modification to or waiver of this Agreement will be effective only with the prior written consent of Company and Employee,

{Signal ure page follows.]

GMPLOYMGNT AGREEMENT I 'AGE 9 17 17

DOCUMENT SCANNED AS FILED IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Dale.

COMPANY:

GRUPO HABANERO, LLC

By: Ml Name: C/ll Vf- Title;

EMPLOYEE:

Signatun' Page to Kmploymem Agreement — Stephen Kraft cnul Cn/po Hnbanero. LLC 18 18

DOCUMENT SCANNED AS FILED EXHIBIT B

Company Documents

19 19

DOCUMENT SCANNED AS FILED KXH1BIT A

Examples of Operating Expenses

(Spreadsheet for calculation of TCI to be attached)

20 20

DOCUMENT SCANNED AS FILED EXHIBIT C

List of Members and Units of Membership Interest with Addresses

Roberi G. Han. Ill 400 Units

Gary Hodge 400 Units

ClilT Graham 100 Units

Stephen Kraft 100 Units

21 21C0<'iV3907,DOC:ii>

DOCUMENT SCANNED AS FILED GRUPO HABANERO, LLC CORPUS CHRIST/, TEXAS 78401

July 3,2014

Mr. Stephen Kraft (Via Hand Delivery and U.S. Mail) 1 114 Birch Hill San Antonio, TX 78232

RE: Employment Agreement between Orupc Habanero, LLC and Stephen Kraft effective

as of September 19, 2012 (the "Employment Agreement").

Dear Mr. Kraft;

As you know, you resigned from your position with Grupo Habanero, LLC (the "Company") as of June 6, 2014. Pursuant to the provisions of Section 3 .4(e) of the Employment Agreement, the Company hereby exercises its option to repurchase your 100 units of membership interest in the Company (the "Units"). As you know, the Company loses money and without the advances made by the other principals of the Company the Company would be insolvent. In exchange for $10, which the parties agree is the fair market value of the Units, Stephen Kraft hereby sells, transfers and delivers the Units to the Company free and clear of any lien, pledge, charge, security interest, encumbrance or adverse claim, and the Company hereby accepts the Units.

If you agree to the terras of this letter agreement, please execute this Employment Agreement where indicated in the space below and return a copy to me. Upon receipt of the copy of the duly executed letter agreement, I will deliver the consideration contemplated in this letter agreement to you.

Unless we have received the signed letter agreement from you within 30 days of the exercise of the option set forth in this letter agreement, we will assume that you disagree with the fair market value of the Units set forth herein and that you will invoke the mechanisms for determining the fair market value as set forth in Section 3.4(e) of the Employment Agreement. If so, we will have to split the cost of the appraiser and any AAA fees that may be incurred as a result of such procedure.

Sincerely,

GRUPO HABANERO, LLC AGREED AND ACCEPTED:

Name; _ Stephen Kraft Title; VVl g-riy Date

_ EXHIBIT fC094S45S. DOCX : 3 }

22 22 _a 'DOCUMENT ICTSNED AS FILED GRUPO HABANERO, LLC CORPUS CHRJSTI, TEXAS 78401

July 3, 2014

Mr. Stephen Kraft (Via Hand Delivery and U.S. Maii) 11 14 Btrch Hill San Antonio, TX 78232

RE: Employmenl Agreement between Orupo Habanero, LLC and Stephen Kraft efTective as of September 19, 2012 (the "Employment Agreement").

Dear Mr. Kraft;

As you know, you resigned from your position with Grupo Habanero, LLC (the "Company") as of June 6, 2014. Pursuant to the provisions of Section 3.4(e) of the Employment Agreement, the Company hereby exercises its option to repurchase your 100 units of membership interest in the Company (the "Units"). As you know, the Company loses money and without the advances made by the other principals of the Company the Company would be insolvent. Jn exchange for S10, which the parties agree is the fair market value of the Units, Stephen Kraft hereby sells, transfers and delivers the Units to the Company free and clear of any lien, pledge, charge, security interest, encumbrance or adverse claim, and the Company hereby accepts the Units.

If you agree to the terms of this letter agreement, please execute this Employment Agreement where indicated in the space below and return a copy to me. Upon receipt of the copy of the duly executed letter agreement, I will deliver the consideration contemplated in this letter agreement to you.

Unless we have received the signed letter agreement from you within 30 days of the exercise of the option set forth in this letter agreement, we will assume that you disagree with the fair market value of the Units set forth herein and that you will invoke the mechanisms for determining the fair market value as set forth in Section 3.4(e) of the Employment Agreement. If a), we will have to split the cost of the appraiser and any AAA fees that may be incurred as a result of such procedure.

Sincerely,

GRUPO H^fiANHRO, LLC AGREED AND ACCEPTED:

By: Name: Stephen Kraft Title: . Date

EXHIBIT {C0948458.DOCX:1}

Ll DOCUMENT SCANNED AS FILED" 63 63 FILED 1/13/2015 3:39:33 PM Donna Donna Kay Kay McKinney McKinney Bexar Bexar County County District District Clerk Clerk Accepted By: Accepted By: Lisa Lisa Morales Morales

18038 CAUSE NO. 2014-CI-

STEVEN KRAFT INDIVIDUALLY § IN THE DISTRICT COURT AND AS A MEMBER ON BEHALF § OF GRUPO HABANERO, LLC § Plaintiff § § 225,h JUDICIAL DISTRICT VS. § § GARY HODGE AND § ROBERT HART III § Defendants § BEXAR COUNTY, TEXAS

AFFIDAVIT

BEFORE ME, the undersigned authority, personally appeared GARY HODGE, who

being duly sworn, deposed as follows:

"My name is GARY HODGE. I am a Defendant in the above-styled lawsuit, and am also

a principal owner for Grupo Habanero, LLC. I am at least 18 years of age and of sound mind. I

am personally acquainted with the facts alleged herein, I hereby swear that the following

statements are true and correct.

Plaintiff resigned from his position with the Company on or about June 6, 2014. Plaintiff

also has admitted in his Original Petition in this case that he resigned from his position on June

6, 2014.

Pursuant to provision 3.4(e) of the Employment Agreement (attached as "Exhibit A" to

Plaintiff's Original Petition and Application for Temporary Restraining Order and Temporary

Injunction filed in this case, and incorporated by reference), I personally hand-delivered a letter

to Plaintiffs address as listed in the Employment Agreement -1114 Birch Hill, San Antonio,

Texas 78232- exercising Grupo Habanero, LLC's option to repurchase Plaintiffs 100 units of

membership interest. The letter was hand delivered by me on July 3, 2014. I knocked on the

front door at the 1314 Birch Hill address two or three times. No one answered the door. I then

108 108 scotched taped the letter to the door. Ken Rourke, Grupo Habanero, LLC's Chief Operating

Manager at the lime, witnessed the hand-delivery of the option exercise letter to 1114 Birch Hill,

San Antonio, TX, on July 3, 2014. A true and correct copy of the letter is attached as Exhibit 1

to this Affidavit.

In addition, either myself or Haley Bennet, the previous Director of Finance for Grupo

Habanero, LLC, delivered the option exercise letter by email to Plaintiff on July 3, 2014. We

used an email address for Plaintiff that we had used before and we knew to be accurate. A copy

of the email is attached as Exhibit 2 to this Affidavit" We knew this email was delivered

to Plaintiffs email address on Exhibit 2, because it did not bounce back.

"Further affiant sayeth not."

GARYFJQDGEJ)

SUBSCRIBED AND SWORN TO BEFORE ME on^M^Oj^ , by

f Nofaryjjbblic. Sta^; of

JULIE REGAN My Commission Expires November 20, 2015

109 109 GRUPO HABANERO, LLC CORPUS CHRISTI, TEXAS 78401

July 3,2014

Mr. Stephen Kraft (Via Hand Delivery and U.S. Mail) 1 1 14 Birch Hill San Antonio, TX 78232

RE: Employment Agreement between Grupo Habanero, LLC and Stephen Kraft elTective as of September 19, 2012 (the "Employment Agreement").

Dear Mr. Kraft:

As you know, you resigned from your position with Cirupo Habanero, LLC (the "Company") as of June 6, 2014. Pursuant to the provisions of Section 3.4(c) of the Employment Agreement, the Company hereby exercises its option to repurchase your 100 units of membership interest in the Company (the "Units"). As you know, the Company loses money and without the advances made by the other principals of the Company the Company would be insolvent. In exchange for S10, which the parties agree is the fair market value of the Units, Stephen Kraft hereby sells, transfers and delivers the Units to the Company free and clear of any lien, pledge, charge, security interest, encumbrance or adverse claim, and the Company hereby accepts the Units.

If you agree to the terms of this letter agreement, please execute this Employment Agreement where indicated in the space below and return a copy to me. Upon receipt of the copy of the duly executed letter agreement, I will deliver the consideration contemplated in this letter agreement to you.

Unless we have received the signed letter agreement from you within 30 days of the exercise of the option set forth in this letter agreement, we will assume that you disagree with the fair market value of the Units set forth herein and that you will invoke the mechanisms for determining the fair market value as set forth in Section 3.4(e) of the Employment Agreement. If so, we will have to split the cost of the appraiser and any AAA fees that may be inciiired as a result of such procedure.

Sincerely,

GRUPO HAJBANERO, LLC AGREED AND ACCEPTED:

Name: Stephen Kraft Title; . Date

{C09484S8.DOCX:1} ^^XHIBrT \ 110 110 Hart Restaurant . . . Haley Bennett Management. Inc.

Steve's Employment document

Gary Hodge Thu, Jul 3, 2014 at 12:24 PM To: Gary Hodge Co: Haley Bennett , Steve

Attached hereto is Steve's Employment document dated July 3, 2014.

•rt Steve Document.pdf ^ 28 K

EXHIBIT

*2 111 111 GRUPO HABANERO, LLC CORPUS CHRISTI, TEXAS 78401

July 3, 2014

Mr. Stephen Kraft (Via Hand Delivery and U.S. Mail) 1 1 14 Birch Hill San Antonio, TX 78232

RE: Employment Agreement between Gmpo Habanero, LLC and Stephen Kraft effective as of September 19, 2012 (the "Employment Agreement").

Dear Mr. Kraft: ...

As you know, you resigned from your position with Gmpo Habanero, LLC (the "Company") as of June 6, 2014. Pursuant to the provisions of Section 3.4(e) of the Employment Agreement, the Company hereby exercises its option to repurchase your 100 units of membership interest in the Company (the "Units"). As you know, the Company loses money and without the advances made by the other principals of the Company the Company would be insolvent. In exchange for $10, which the parties agree is the fair market value of the Units, Stephen Kraft hereby sells, transfers and deUvers the Units to the Company free and clear of any lien, pledge, charge, security interest, encumbrance or adverse claim, and the Company hereby accepts the Units.

If you agree to the terras of this letter agreement, please execute this Employment Agreement where indicated in the space below and return a copy to me. Upon receipt of the copy of the duly executed letter agreement, I will deliver the consideration contemplated in this letter agreement to you.

Unless we have received the signed letter agreement from you within 30 days of the exercise of the option set forth in this letter agreement, we will assume that you disagree with the fair market value of the Units set forth herein and that you will invoke the mechanisms for determining the fair market value as set forth in Section 3.4(e) of the Employment Agreement. If so, we will have to split the cost of the appraiser and any AAA fees that may be incurred as a result of such procedure.

Sincerely,

GRUPO HABAJ^ERO, LLC AGREED AND ACCEPTED:

By: Name; Stephen Kraft Title: Date

{C0948458. OOCX: 1}

112 112 FILED FILED 1/13/2015 1/13/2015 3:42:37 3:42:37 PM PM Donna Donna Kay Kay McKinney McKinney Bexar Bexar County County District District Clerk Clerk Accepted Accepted By: By: Maria Abilez

18038 18038 CAUSE NO. 2014-CI- Ioujj

STEVEN KRAFT INDIVIDUALLY § IN THE DISTRICT COURT AND AS A MEMBER ON BEHALF § OF GRUPO HABANERO, LLC § Plaintiff § § 225th JUDICIAL DISTRICT VS. § § GARY HODGE AND § ROBERT HART III § Defendants § BEXAR COUNTY, TEXAS

AFFIDAVIT

BEFORE ME, the undersigned authority, personally appeared HALEY BENNET, who

being duly sworn, deposed as follows:

"My name is HALEY BENNET. I was the prior Director of Finance and Accounting for

Grupo Habanero, LLC. I am at least 18 years of age and of sound mind, I am personally

acquainted with the facts alleged herein. I hereby swear that the following statements are true

and correct.

On or about June 6, 2014, Plaintiff resigned from his position with the Company. While I

have not yet determined for myself the exact date Plaintiff resigned, Plaintiff has admitted in his

Original Petition in this case that he resigned from his position on June 6, 2014. On July 3,

2014, Gary Hodge prepared a letter to Plaintiff exercising Grupo Habanero, LLC's option to

repurchase Plaintiffs 100 units of membership interest for $10.00. Either myself or Gary Hodge

delivered the option exercise letter by email to Plaintiff on July 3, 2014. We used an email

address for Plaintiff that we had used before and we knew to be accurate. We knew this email

was delivered to Plaintiffs email address on Exhibit 1 because it did not bounce back.

I was the custodian of records for Grupo Habanero, LLC during the time period Plaintiff

resigned from the company up until December 31, 2014. Attached hereto as Exhibit I is a true

113 113 and correct copy of the email sent to Plaintiff and letter prepared and sent to Plaintiff. These

records are kept by Grupo Habanero, LLC in the regular course of business, and it was in the

regular course of business of Grupo Habanero, LLC for any employee or representative of Grupo

Habanero, LLC with knowledge of the act, event, condition, opinion, or diagnosis, recorded to

make the record or to transmit information thereof to be included in such record; and the record

was made at or near the time or reasonably soon thereafter. The records attached hereto are the

original or exact duplicates of the original,"

"Further affiant sayeth not."

HALEY BENNET

SUBSCRIBED AND SWORN TO BEFORE ME on by

ALLYSON TASTE E1ERMANN iYrArfS Notary Public I'VPSfn STATE OF TEXAS My Comm. Exp. 12-05-2018 > Notary Pultilic, State of ^

114 114 Hart Restaurant Haley Bennett Management, Inc.

Steve's Employment document

Gary Hodge Thu, Jul 3, 2014 at 12:24 PM To; Gary Hodge Cc: Haley Bennett , Steve

Attached hereto is Steve's Employment document dated July 3, 2014.

-J Steve Document, pdf 28K

EXHIBIT

I 115 115 GRUPO HABANERO, LLC CORPUS CHRISTI, TEXAS 78401

July 3,2014

Mr. Stephen Kraft (Via Hand Delivery and U.S. Mail) 11 14 Birch Hill San Antonio, TX 78232

RE: Employment Agreement between Grupo Habanero, LLC and Stephen Kraft effective as of September 19, 2012 (the "Employment Agreement").

Dear Mr. Kraft: „

As you know, you resigned from your position with Grupo Habanero, LLC (the "Company") as of June 6, 2014. Pursuant to the provisions of Section 3.4(e) of the Employment Agreement, the Company hereby exercises its option to repurchase your 100 units of membership interest in the Company (the "Units"). As you know, the Company loses money and without the advances made by the other principals of the Company the Company would be insolvent. In exchange for $10, which the parties agree is the fair market value of the Units, Stephen Kraft hereby sells, transfers and delivers the Units to the Company free and clear of any lien, pledge, charge, security interest, encumbrance or adverse claim, and the Company hereby accepts the Units.

If you agree to the terms of this letter agreement, please execute this Employment Agreement where indicated in the space below and return a copy to me. Upon receipt of the copy of the duly executed letter agreement, I will deliver the consideration contemplated in this letter agreement to you.

Unless we have received the signed letter agreement from you within 30 days of the exercise of the option set forth in this letter agreement, we will assume that you disagree with the fair market value of the Units set forth herein and that you will invoke the mechanisms for determining the fair market value as set forth in Section 3.4(e) of the Employment Agreement. If so, we will have to split the cost of the appraiser and any AAA fees that may be incurred as a result of such procedure.

Sincerely,

GRUPO HABANERO, LLC AGREED AND ACCEPTED:

By: . ^ Name: Stephen Kraft Title: Date

{C094S458.DOCX.1}

116 116 FILED 1/13/2015 1/13/2015 9:49:19 9:49:19 PM PM Donna Donna Kay Kay McKinney McKinney Bexar Bexar County County District District Clerk Clerk Accepted By: By: Cecilia Cecilia Barbosa Accepted Barbosa 2014CI18038 CAUSE NO. 2014-CI-Hi035

STEVEN KRAFT INDIVIDUALLY § IN THE DISTRICT COURT AND AS A MEMBER ON BEHALF § OF GRUPO HABANERO, LLC § Plaintiff 225th JUDICIAL DISTRICT VS. § § GARY HODGE AND § ROBERT HART III § Defendants § BEXAR COUNTY, TEXAS

AFFIDAVIT

BEFORE ME, the undersigned authority, personally appeared KENNETH ROURKE,

who being duly sworn, deposed as follows:

"My name is KENNETH ROURKE. I previously was the Chief Operating Officer of

Grupo Habanero, LLC. I am at least 18 years of age and of sound mind. I am personally

acquainted with the facts alleged herein. I hereby swear that the following statements are true

and correct.

On or about June 6, 2014, Plaintiff resigned from his position with the Company.

Plaintiff resigned from his position with Grupo Habanero, LLC on or about June 6, 2014. While

I have not yet determined for myself that exact date that Plaintiff resigned. Plaintiff has admitted

in his Original Petition in this case that he resigned from his position on June 6, 2014.

On July 3, 2014, I personally accompanied Gary Hodge when he hand delivered a letter

to what he believed was Plaintiffs address - 1114 Birch Hill, San Antonio, Texas 78232-

exercising Grupo Habanero, LLC's option to repurchase Plaintiffs 100 units of membership

interest for $10.00. I watched Gary Hodge knock on the front door at the 1114 Birch Hill

address two or three times. No one answered the door. I then watched Gary Hodge scotch tape

the letter to the door.

117 117 "Further affiant sayeth not."

lyrliA KENNETH kmxB rM

SUBSCRIBED AND SWORN TO BEFOIUE ME on ljl3/^ . by

.^^/A MADRID 'mm Nr^b'ic AnT'Jn1™^"05 ((haliaJijriodMpL Apf|( 20, 2016 Notary Public, State of _ Tiyg s

118 118 FILED FILED 12/3/2014 12/3/2014 4:00:07 4:00:07 PM PM Donna Donna Kay McKinney Bexar Bexar County County District District Clerk Accepted Accepted By: By: Daniel Daniel Galan Galan

Cause No. 201 4-CI-l 8038

STEPHEN KRAFT INDIVIDUALLY § IN THE DISTRICT COURT AND AS MEMBER ON BEHALF OF § GRUPO HABANERO, LLC, § Plaintiff § § 225™ JUDICIAL DISTRICT vs. § § GARY HODGE AND ROBERT HART III § Defendants § BEXAR COUNTY, TEXAS

DEFENDANTS. GARY HODGE AND ROBERT HART HI'S MOTION TO COMPEL APPRAISAL AND ABATE LAWSUIT

TO THE HONORABLE COURT:

Defendants, Gary Hodge and Robert Hart, III ("Defendants"), file this Motion to Compel

Appraisal and Abate lawsuit in the above numbered and styled cause of action, and in support

hereof, respectfully show the Court the following:

I. FACTUAL/PROCEDURAL BACKGROUND

1. On or about September 19, 2012, Grupo Habanero, LLC (the "Company") was

formed to own and operate two Habaneros restaurants in San Antonio, Texas that were

previously owned by Plaintiff. The members of the company include Plaintiff, Defendants and

Cliff Graham who executed a "Company Agreement". See Company Agreement attached

hereto as Exhibit "A."

2. On the same date, Plaintiff executed an Employment Agreement with the

Company. See Employment Agreement attached hereto as Exhibit "B." Per the Employment

Agreement, Plaintiff received 100 membership shares of the Company representing a 10 percent

ownership interest in the entity with an agreed value of $35,000.00. Ex. B, Article 3.4(a).

Specifically at issue in this case is provision 3.4(e) which states as follows:

If the Employee's employment is terminated for any reason by either party after the first anniversary of the Effective Date, the Company may, at its option, repurchase the

{C0808503,DOCX: I ) 1

34 34 Membership Interest; the Company must exercise such option in writing and close such repurchase within thirty (30) days of the termination of employment. The aggregate purchase price for the Membership Interest upon exercise of the option in this Section 3.4(e) shall be the "Fair Market Value" of the Membership Interest. The "Fair Market Value" of the Membership Interest shall be the price agreed to by the parties; if the parties cannot within thirty (30) days of the exercise of the option agree upon a Fair Market Value, the Fair Market Value shall be determined by a single appraiser chosen by the parties. If the parties cannot agree upon an appraiser, the parties shall apply to the American Arbitration Association (the "AAA") to appoint a single appraiser. The appraiser shall provide a written appraisal and shall determine the Fair Market Value of the Membership Interest without deduction for its minority position and restrictions on transfer. The determination of the appraiser shall be final and binding upon the parties and closing of the sale shall be completed within thirty (30) days of receiving the appraiser's determination.The parties shall supply the appraiser with any requested information about the Company and shall split the cost of the appraiser and any AAA fees.

3. On or about June 6, 2014, Defendant resigned from his position with the

Company. Pursuant to provision 3.4(e) of the Employment Agreement, the Company exercised

its option to repurchase Plaintiffs 100 units of membership interest on July 3, 2014. See letter to

Plaintiff attached hereto as Exhibit "C." The Company offered to pay Plaintiff $10.00 for his

interest, which the Company stated was the fair market value of the units. Ex. C. Negotiations

began regarding the offer and were continuing as far as Defendants were concerned. During

negotiations, Plaintiff filed an Original Petition and Application for Temporary Restraining

Order and Temporary Injunction on November 17, 2014, which specifically addresses the

repurchase of his membership units.

4. Plaintiff claims in his Petition that the offer from the Company for $10 was

"obviously frivolous". Yet, Plaintiff failed to comply with the Employment Agreement.

Specifically, Plaintiff failed to agree to appoint an appraiser to determine the fair market value of

his membership interest or, if no agreement could be reached, allowing the AAA to appoint an

arbitrator. Instead, Plaintiff completely ignored his contractual obligations and filed the instant

lawsuit.

(C0808503.DOCX:1 ( 2

35 35 5. Since Plaintiff clearly did not agree to the fair market value offered for his

interest. Plaintiffs options were to agree to an appraiser or have one appointed by the AAA if no

agreement could be reached. At this point, it has become abundantly clear that Plaintiff and

Defendants' relationship has deteriorated to the point that agreeing on an appraiser is not likely

to happen. As such, Defendants file this Motion to Compel Appraisal to have the AAA appoint

an appraiser pursuant to provision 3.4(e) of the Employment Agreement and abate the underlying

lawsuit until the appraisal is completed.

II. ARGUMENTS AND AUTHORITIES

6. Appraisal provisions are enforceable. The Texas Supreme Court has recently

upheld the enforceability of appraisal clauses, distinguishing them from arbitration clauses:

[WJhile arbitration determines the rights and liabilities of the parties, appraisal merely 'binds the

parties to have the extent or amount of the loss determined in a particular way.' Trudy's Texas

Star, Inc. v. Weingarten Realty Investors, No. 03-03-00538-CV, 2004 WL 1792374, at *4

(Tex.App.-Austin Aug. 12, 2004, pet. denied) (mem. op.) (citing In re Allstate County Mut. Ins.

Co., 85 S.W.3d 193, 195 (Tex.2002) (quoting Scottish Union & Nat 'I Ins. Co. v. Clancy, 71 Tex.

5, 8 S.W. 630, 631 (Tex. 1888)).

7. In Trudy's, the parties entered into a written lease agreement which provided for

two separate and independent monthly payments: the base rent and the percentage rent. Id at *3.

The lease contained an option to extend, which specified that all the terms of the initial lease

continued to apply during the extension period and the base rent was to be adjusted to equal the

"fair market rental value." Id. The lease agreement contained a provision which specifically

outlined an appraisal process to be used when the parties were not able to agree to fair market

rental value. Id. The tenant, however, wished to enforce an arbitration provision in the lease. Id.

The Court of Appeals found the lease language could be given a definite legal meaning and it

(C0808503.DOCX: I ) 3

36 36 was not reasonably susceptible to more than one meaning; thus, the procedure for determining

how the parties must resolve a dispute over fair market value was not ambiguous. Id. Since the

appraisal provision was more specific than the arbitration provision, the Court applied general

rules of contract construction and held the appraisal provision controlled. Id. The Court reasoned

the public policy that created a presumption in favor of arbitration was also advanced by the

decision of parties to resolve their disputes through means other than arbitration, such as an

appraisal process. Id. at *4. The Court concluded that the dispute over fair market value fell

squarely within the scope of the appraisal provision, which had to be enforced. Id.

8. Here, the parties have specifically contracted to use the appraisal process for

determining the fair market value of Plaintiffs membership interest and even included a process

for choosing an appraiser should the parties disagree. See Ex. B. The parties were in the process

of negotiating the fair market value when Plaintiff applied for a temporary injunction and filed

his Petition which revolves around the value of his membership interest. Plaintiff failed to abide

by the contractual obligations regarding the process by which the value would be determined.

9. Just as in Trudy's, the dispute here centers around the fair market value of

Plaintiffs membership interest, which falls directly within the scope of the appraisal provision in

the Employment Agreement. As such, the appraisal provision should be enforced.

10. Abating the case is proper. As stated above, courts have deemed appraisal

provisions enforceable. In addition, the Fort Worth Court of Appeals granted a writ of

mandamus to abate a lawsuit until the parties had complied with the appraisal provision in their

contract, likening the appraisal provision to an arbitration clause in the sense that each compels

enforcement upon a showing that the dispute falls within its scope. Id. (citing Vanguard

Underwriters Ins. Co. v. Smith, 999 S.W.2d 448, 451 (Tex.App. -Fort Worth 1999, orig.

proceeding). The parties here are disputing the fair market value of Plaintiffs membership

{C0808503.DOCX:I ) 4

37 37 interest, which clearly falls within the scope of provision 3.4(e) of the Employment Agreement.

Thus, this matter should be abated until the parties comply with the appraisal provision in their

contract.

III. PRAYER

WHEREFORE, Defendants requests that the Court grant their Motion to Compel

Appraisal and Abate lawsuit until the appraisal occurs, and for such other and further relief, at

law or equity, to which Defendants may be entitled.

Respectfully submitted,

BRANSCOMB | PC A Professional Corporation 7! 1 Navarro St., Suite 710 San Antonio, Texas 78205 Telephone: (210) 598-5400 Telecopier: (210) 598-5405

By: Roderick J. Regan TSB* 16733040 Jessica R. Mann TSB#24080165

ATTORNEYS FOR DEFENDANTS GARY HODGE AND ROBERT HART, III

{C0808503,DOCX:1}

38 38 FIAT ON PLAINTIFF'S MOTION TO COMPEL APPRAISAL AND ABATE LAWSUIT

On December 2, 2014, Plaintiff requested that its MOTION TO COMPEL APPRAISAL AND ABATE LAWSUIT in the above styled cause be set for hearing,

IT IS THEREFORE ORDERED that said Plaintiffs MOTION TO COMPEL APPRAISAL AND ABATE LAWSUIT is set for hearing on December 9, 2014 , at 8:30 a.m.. in Room# 1.09 Presiding Presiding ' l Anr M-;r ;. I X 7S;:,iJ^Room#1-09 David A. Canales feliled and hearing requested: ... . this is nut ice of the hearins) 12/3/2014 12/3/2014 Presid i ng J udge ii nxi ixx miXNG 73rd District Court Bexar County, Texas

CERTIFICATE OF SERVICE

1 hereby certily that on this the 5 day of December, 2014, a true and correct copy of the foregoing has been forwarded to the counsel below pursuant to the Texas Rules of Civil Procedure.

Richard W. Espey - email Matthew Soliday - email Espey & Associates, PC 13750 San Pedro Avenue, Suite 730 San Antonio, TX 78232

Roderick J. Regan

{00808503 DOCX: I }

39 39 GRUPO HABANERO, LLC

COMPANY AC. REEMENT

The members of Grupo Habanero. LLC (the "company") have adopted this agreement as the company agreement of the company.

ARTICLE 1 MEMBERS; PURPOSE AND AUTHORITY

1.1 Members. The members of the company are Robert G. Hart. III. Gary Hodge. Cliff Graham and Stephen Kraft.

1.2 The purpose of the company is to own and operate two Purpose and Aiuhority. Habaneros restaurants in San Antonio. Texas. However, in furtherance of that purpose, the company is authorized to engage in any business or investment in which a limited liability company may legally engage.

ARTICLE 11 CAPITAL CONTRIBUTIONS

2.1 Contributions. Each member will be required to contribute to the company only such money or property as such member agrees to contribute.

2.2 Return of Contributions.The company will not be required to return a capital contribution to a member, except to the extent the law or this agreement requires the company to do so.

ARTICLE 111 ALLOCATIONS AND DISTRIBUTIONS

.>.1 Allocations. The company will maintain capital accounts for the members.

(a) All items of income, gain, loss, deduction, and credit of the company will be allocated among the members in accordance with their relative holdings of Units.

(b) If Units are transferred during a calendar year, the managers will have the discretion to determine how profits or losses will be allocated between the transferor and transferee.

3.2 Distributions. From time to time, the managers may cause the company to distribute cash or other property to the members. Distributions will be made pro rata, in accordance with the members' relative holdings of Units.

ARTICLE IV MANAGEMENT

4. 1 Numbe r of Managers; M anauement by Managers ,

1 | EXHIBIT' iC07051K2,lX)C:2}

II 40 40 A (a) The company will have two (2) managers. Except as provided in Sections 4.Ub) and (c). the managers will have the power and authority to cause the company to take any action the managers deem necessary or appropriate, without the consent of any member. The officers of the company will be responsible for the day-to-day operations of the company.

(b) The company will have a managing owner who will be appointed by the holders of two-thirds of the Units held by all members. Notwithstanding anything else in this agreement, the managing owner will have the right to veto any action taken at any meeting of the members and/or managers, or of any committee designated by the managers, or action taken by written consent by the members and/or managers of the company. Robert G. Hart, III is hereby appointed as the managing owner.

(c) Subject to Section 4.1(b). but notwithstanding any other provision of this agreement, the affirmative vote of the holders of a majority of the Units is required to take the following actions:

(i) issue any additional Membership Interests after Membership Interests arc issued to the initial members of the company;

(ii) approve any merger, interest exchange, conversion, or sale of all or substantially all of the company's assets;

(iii) voluntarily cause the winding up of the company;

(iv) lake or authorize any act that would make it impossible to carry on the ordinary business of the company; or

(v) cause the company to incur any indebtedness for borrowed money.

4.2 Election; Resignation. The managers will be elected by a majority of the voles cast by the members in a position-by-position vote. Each manager elected will serve until his successor is elected, A manager may resign at any time.

4.3 Any vacancy in a manager's position will be filled by a vole of a Vacancy. majority of the voles cast by the members. A manager elected to fill a vacancy will serve until his successor is elected.

4.4 Change of Number. The number of managers may be changed at any time by the members, but a decrease in number will not have the effect of shortening the term of any incumbent manager. The members will be responsible for electing a manager to fill any manager position created by an increase in the number of managers.

4.5 The members may remove a manager with or without cause at any Removal. time. A manager may only be removed by vote of a majority of the votes cast by the members.

! CO 705 182. DOC: 2}

41 41 4.6 Meetings. The managers will not be required to hold annual meetings. The president or any manager may call special meetings of the managers. The person calling the meeting may fix any place for holding the meeting. The person calling the meeting will give notice of the meeting to each manager at least three days before the date of the meeting, in writing. The purpose of the meeting is not required to be specified in the notice of the meeting except as may be otherwise required by law. the Certificate of Formation or this agreement. The managers may vote on any matter on which a manager requests that a vote be taken.

4.7 Quorum. A majority of the managers must be present to constitute a quorum for action, except as otherwise required by law. the Certificate of Formation, or this agreement. If a quorum is not present at a meeting, the managers who are present may adjourn the meeting. The president will give all managers notice of the reconvening of any adjourned meeting in the manner provided herein for the calling of a meeting of the managers.

4.8 Majority Vote. If a quorum is present at any meeting, the vote of a majority of the managers present will decide any matter brought before such meeting, unless the question is one upon which a different vote is required by law, by the Certificate of Formation, or by this agreement.

4.9 Committees. The managers may designate committees to act on the managers' behalf. Each committee will have such powers as the managers may specify, subject to any restrictions imposed by the TBOC. The managers will have the power at any lime to change the number and members of any committee, and to fill vacancies and discharge any committee or any particular member. The requirements of this Article which govern the managers will also apply to committees and their members.

4.10 Written Consent. Any action required or permitted to be taken at a meeting of the managers or any committee may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by at least the minimum number of managers or committee members necessary to take action at a meeting at which all managers or committee members were present and voted.

ARTICLE V MEETINGS OF MEMBERS

5.1 Meetings. The members will not be required to hold annual meetings. The president of the company may call special meetings of the members. The president will call a special meeting if members owning one-fourth of all the Units or a majority of the managers request a special meeting in writing, staling the purposes of the proposed meeting. Business transacted at a special meeting will be limited to the purposes staled in the notice of the meeting.

5.2 Location of Meetinus. Unless a particular notice states otherwise, the members will hold their meetings at the company's principal office.

5.3 Action bv Telephone Conference. Members may participate in and hold a meeting by means of a conference telephone or similar communications equipment or other suitable electronic communications equipment, including video conferencing technology, or the internet, or a combination thereof, by means of which all Membeis participating in the meeting

|C07«5182.1)OC;2! 3

42 42 will constitute can hear each other and participate in the meeting. Participation in such meeting s in the attendance and presence in person at such meeting, except where a Member participate on the ground that meeting for the express purpose of objecting to the transaction of any business the meeting is not lawfully called or convened.

The 5.4 Notice. The president will give each member written notice of each meeting. for which the notice will state the place, day and hour of each meeting and will state the purposes delivered to the members not less meeting is called. The president will cause the notice to be or by mail, at than 10 nor more than 60 days before the date of the meeting, either personally given three days their addresses on the company's books. Notice by mail will be deemed to be after it is deposited in the United Stales mail, postage paid.

5.5 Waiver of Notice. If a member signs a written waiver of notice (regardless of proper notice. If a when the waiver is signed), the member will be deemed to have received have waived notice member attends or participates at a meeting, the member will be deemed to of objecting to of the meeting, unless the member attends or participates for the express purpose or convened. the transaction of a business on the grounds that the meeting is not lawfully called

5.6 Quorum. 1 he holders of a majority of the Units must be present in person or by law. by represented by proxy to constitute a quorum for action, except as otherwise required for any purpose at the Certificate of Formation, or by this agreement. Once a Unit is represented until the a meeting, it is deemed present for quorum purposes for the remainder of the meeting are present in meeting is adjourned. If. however, a quorum does not exist, the members who The president will person or represented by proxy will have the power to adjourn the meeting. required for give all members notice of the reconvening of any adjourned meeting, in the manner the calling of a special meeting.

5.7 Majority Vote. If a quorum is present at a meeting, the vote of the holders of a majority of the Units present in person or represented by proxy will decide any matter brought law, by before the meeting, unless the question is one upon which a different vote is required by the Certificate of Formation, or by this agreement.

5.8 Votine Riuhts. Each Unit will be entitled to one vote on each mailer submitted to a vote. A member may vole either in person or by written proxy executed by the member or the member's duly authorized attorney.

5.9 Written Consent. Any action required or permitted to be taken at a meeting of the members may be taken without a meeting, without prior notice, and without a vole, if one or more consents in writing, setting forth the action so taken, will be signed by members having not fewer than the minimum number of voles that would be necessary to take the action at a meeting at which all members were present and voted.

ARTICLE VI OFFICERS

6.1 Officers. The managers will appoint a president and a secretary of the company, and may also appoint other officers. The officers will be responsible for the day-to-day operation of the company. Each offieci will have the powers and responsibilities normally

|C0705l82.nOC:2| . 4

43 43 associated with the office, and such other powers and responsibilities as the managers may designate. An officer is not required to be a member or a manager. A person may hold more than one office. Cliff Graham is hereby appointed to serve as the initial President. Robert G. Hart. Ill is hereby appointed to serve as the initial Secretary.

6.2 Terms. Each officer will hold office until the managers appoint a successor for that officer. The managers will fill any vacancy in any office. 1 he managers may remove any officer at any time, with or without cause. If the managers remove an officer, the removal will not affect any contract rights the officer has. The appointment of a person as an officer will not of itself create contract rights.

ARTICLE VII RESTRICTIONS ON DISPOSITIONS OF UNITS: WITHDRAWAL

7.1 Restrictions on the Disposition of Units. Except as provided in (i) that certain Employment Agreement between the company and Stephen Kraft (the "Kraft Employment Agreement"') and (ii) the Agreement Restricting Transfer of Membership Interests dated the same date as this agreement among Robert G. Hart, III, Gary Hodge and Cliff Graham (the "Transfer Restriction Agreement"), no member will make any Disposition of any Units without the written consent of members holding a majority of the Units. Any attempted Disposition of Units that is not in accordance with this agreement, the Kraft Employment Agreement or the Transfer Restriction Agreement will be null and void. .

7.2 Admission as a Member, A person to whom Units are transferred in accordance with this agreement, the Kraft Employment Agreement or the Transfer Restriction Agreement will be admitted to the company as a member, effective as of the date the company receives the transferee's written agreement to be bound by this agreement as a member. Until a transferee of Units becomes a member, the transferee will not have the right to vote as a member, nor wilt the transferee have any of the other rights of a member, except as required by the TBOC.

7.3 Expenses. The member effecting a Disposition and any person admitted to the company in connection with the Disposition will pay, or reimburse the company for. all costs incurred by the company in connection with the Disposition or admission, on or before the tenth day after the receipt by that person of the company's invoice for the amount due.

7.4 Withdrawal. Except as provided in this agreement, the Kraft Empioyment Agreement or the Transfer Restriction Agreement, a member does not have the right or power to withdraw from the company as a member. A member may withdraw from the company by delivering a letter to the company, signed by the member, notifying the company that the member is withdrawing from the company and assigning the member's entire Membership Interest to the company. A member will not receive any consideration for such an assignment,

ARTICLE VIII WINDING UP

8.1 Winding Up. The company will be wound up only upon the first to occur of the following:

[C(I70JIS2.DOC:2J 5

44 44 (a) the written consent of members holding a majority of the Units held by all members: or

(b) any other event that, under the TBOC. requires that the company be wound up.

8.2 Liuuidation and Termination.If the company is wound up, the managers will appoint a liquidator. The liquidator will proceed diligently to wind up the affairs of the company. Until the company's affairs are wound up, the liquidator will manage the company with all of the power and authority of the managers. The steps to be accomplished by the liquidator are as follows:

(a) the liquidator will cause any notice required by the TBOC to be mailed to each known creditor of and claimant against the company in the manner described in the TBOC;

(b) the liquidator will cause the company to pay or perform all of its obligations (including all expenses incurred in liquidation), or establish reserves for the payment and performance of those obligations; and

(c) all remaining assets of the company will be distributed to the members as follows:

(i) the liquidator may sell company property, including to members, and any resulting gain or loss will be allocated to the members' capital accounts;

(ii) the liquidator will determine the fair market value of all company property that has not been sold, net of any liabilities to which that property is subject, and the members' capital accounts will be adjusted as if there were a disposition of that property for its fair market value on the date of distribution; and

(iii) all remaining company property will be distributed among the members in accordance with their positive capital account balances, as determined after taking into account all capital account adjustments for the year in which the liquidation occurs (other than those made by reason of this clause (iii)).

8.3 Deficit Capital Accounts. Notwithstanding anything to the contrary in this agreement, and notwithstanding any custom or rule of law to the contrary, no member will ever be obligated to restore any deficit in the member's capital account.

8.4 Certificate of Termination. Once the company's assets have been applied and distributed as required by law and this agreement, the managers will file a Certificate of Termination with the Texas Secretary of Stale, and lake such other actions as may be necessary to terminate the company.

JC0705182.DOC 2 J

45 45 46 9P

ARTICLE IX TAXES

9.1 Tax Returns. The managers will cause all company lax returns to be prepared and filed with the proper authorities. Each member will furnish to the company all information it has that is necessary to enable the company's income tax returns to be prepared and filed.

9.2 Tax Elections. Neither the company nor any member may make an election for 1 the company to be excluded from the application of the provisions of subchapter K of chapter of subtitle A of the IRC.

ARTICLE X GENERAL PROVISIONS

1 0.1 Other Opportunities. Without the written consent of members holding a majority or of the Units held by all members, a member or manager will not engage in any other business of the company, without investment that is similar to or competitive in nature with the business other offering any interest or participation in the business or investment to the company and the members.

10.2 Unit Certificates. The Units may be represented by certificates, if the members so elect. The president will sign any certificates that are issued.

10.3 Entire Aureement: Amendments. This agreement, the Kraft Employment agreement Agreement and the Transfer Restriction Agreement constitute the members' entire company, relating to the company, and supersede all prior agreements with respect to the whether oral or written. Notwithsta nding any other provision of this agreement , the affirmative or this vote of the holders of all of the Units is required to amend the Certificate of Formation agreement.

10.4 Binding Effect. Subject to the restrictions in this agreement, the Kraft this Employment Agreement and the Transfer Restriction Agreement on Dispositions of Units, agreement is binding on and inures to the benefit of the members and their respective heirs, legal representatives, successors, and assigns.

10.5 Governing Law; Severability. THIS AGREEMENT IS GOVERNED BY AND OF WILL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE TEXAS. EXCLUDING ANY CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT THE REFER THE GOVERNANCE OR THE CONSTRUCTION OF THIS AGREEMENT TO LAW OF ANOTHER JURISDICTION. In the event of a direct conflict between the provisions of this agreement and (a) any provision of the Certificate of Formation, or (b) any mandatory provision of the TBOC. the applicable provision of the Certificate of Formation or the TBOC to any will control. If any provision of this agreement or the application of this agreement remainder of this person or circumstance is held invalid or unenforceable to any extent, the not be agreement and the application of that provision to other persons or circumstances will affected, and that provision will be enforced to the greatest extent permitted by law.

;C07()5IX2.l)O(.'.2| 10.6 hurther Assurances. Each member will execute and deliver any additional may be necessary or appropriate documents and instruments and perform any additional acts that the transactions contemplated by to effectuate and perform the provisions of this agreement and this agreement.

10.7 Indemnification. To the fullest extent permitted by law. each member will and hold them harmless from and indemnify the company, each manager and each other member ng, without limitation, costs of against all losses, costs, liabilities, damages, and expenses (includi breach by that member of this suit and attorney's fees) they may incur on account of any agreement.

parts, 10.8 This agreement may be executed in any number of counter Counterparts. document. All counterparts will with the same effect as if all signing parties had signed the same be construed together and constitute the same instrument.

ARTICLE XI DEFINITIONS

following 11.1 Definitions. As used in this agreement, the following terms have the meanings:

, exchange, mortgage, "Dispose" or "Disposition" means a sale, assignment, transfer encumbrance (including, without pledge, gram of a security interest, or other disposition or limitation, by operation of law).

or statute, as amended "IRC" means the Internal Revenue Code of 1986 and any success from lime to time.

the company, including all "Membership Interest" means the interest of a member in rights and obligations pertaining to the Membership Interest.

any successor statute, as "TBOC" means the Texas Business Organiirations Code and amended from time to time.

initial members will "Units" means units of Membership Interest in the company. The agreement. initially have the number of Units set out on the signature page of this

the TBOC have the Terms not otherwise defined in this agreement that are defined in meanings given them in the TBOC.

used in this 1 1 .2 Construction. Whenever the context requires, the gender of all words es to Articles and Sections agreement includes the masculine, feminine, and neuter. All referenc refer to articles and sections of this agreement.

1 1 .3 Branscomb I PC. F.ach person executing this agreement other than Robert and its lawyers are G. Hart, III and Gary Hodge acknowledges that Bran.scomb|PC this transaction. Each such representing only Robert G. Hart, III and Gary Hodge in separate legal counsel to help person acknowledges that he has been encouraged to engage

J (.'0705 1 82.l)OC:2 ! 8

47 47 and that he has had ample Eiim review this agreement, and the provisions of this Section, opportunity to do so.

[Signallire Page Immediately Follows]

{C0705)«2,DOC;21

48 48 Signed on ,2012. to be effective as of the date the Certificate of Formation of the company is filed by the Secretary of Stale.

Rob^Ci. H Uniis; 400

GaryTTMge Units: 400

m Cliff Ciraham Units: 100

mts; 100

[C0705I82.DOC: 21 10

49 49 KM i'LOYMENT AGREEMENT

") is made effective as of THIS EMPLOYMENT AGREEMENT ("Agreement Grupo Habancro, LLC. a Texas limited "Effective Date," as defined below, by and between an individual residing in San Antonio. liability company ("Company") and Stephen Kraft, Texas ("Employee").

ARTICLE 1 EMPLOYMENT AND DUTIES

LI Eniplovinent; Effective Date. Company agrees to employ Employee and ing as of September 19, 2012 (the Employee agrees to be employed by Company, beginn set forth in Article II below, subject to "Effective Date") and continuing for the period of lime the terms and conditions of this Agreement.

serve as the 1.2 From and after the Effective Date. Employee shall Position. full time and best efforts to the overall Managing Director. The Managing Director shall devote and shall report directly to the Managers supervision of the restaurants owned by the Company the "vicinity" of Bexar County. Texas, as of the Company. The Managing Director shall live in determined by the Company with reasonable discretion.

d to in Section 1.2 above 1.3Duties. Employee agrees to serve in the position referre assigned by the Managers. and shall perform such duties as may from time to lime be

ARTICLE 11 TERM AND TERMINATION OF EMPLOYMENT

of the Effective 2.1 Term This Agreement shall terminate on the first anniversary the terms in this Article 11. Date ("the Term"), unless sooner terminated in accordance with ons of Section 2.1 2.2 ( oilman v's Right to Terminate. Notwithstanding the provisi ment under this Agreement above. Company shall have the right to terminate Employee's employ at any time for any of the following reasons:

is unable to (a) by virtue of his physical or mental disability. Employee of his duties, with or without perform substantially and continuously the essential functions or for a period of 120 non- reasonable accommodations, for a period of 90 consecutive days conseculive days during any 12 month period; or the sole (b) at any lime for any reason whatsoever or for no reason at all, in discretion of Company; or ee (i) (c) for cause, which for purposes of this Agreement shall mean Employ a misdemeanor involving moral has been indicted for, or convicted of. or pleaded no contest to. legal reason to perform turpitude or a felony, (ii) has willfully refused without proper on of this Agreement, (iv) Employee's duties, (iii) has materially breached any material provisi , or reasonably could in the has engaged in any act of serious dishonesty which adversely affects

EXHIBIT 1.

50 50 {C0673907 DOC-61

h of Employee in a material manner, luturc adversely affect, the value, reliability or performance or (v) breach of fiduciary duly by Employee.

te Employee's Notice of Termination. If Company desires to termina (d) at all prior to the expirat ion of the Term, employment at any time for any reason or for no reason it has elected to terminate Employee's it shall do so by giving written notice to Employee that tion. Further. Company's termination of employment and stating the effective date of the termina ons of Articles IV and V below. Employee's employment shall not alter or amend the provisi

by Company prior to the 2.3 By Company. If Employee's employment is terminated then, upon the effective date of such expiration of the Term as provided in Section 2.1 above, ny's obligations under this Agreement termination, regardless of the reason therefore. Compa nt to Sections 2.2(a) or fb) above. shall immediately cease. If Employee is terminated pursua be entitled to receive severance benefits Company will offer to Employee and Employee will Term payable on the Company's regular equal to $5,000.00 per month for the remainder of the than monthly, less applicable statutory payment dates for employees but no less frequently s"). deductions and withholdings (the "Severance Benefit

ARTICLE III COMPENSATION AND BENEFITS

ee agrees to accept, an 3.1Base Salary. Company promises to provide, and Employ 0) ("Base Salary "), less applicable annual Base Salary of Sixty Thousand Dollars ($60,00 nce with Company's regular payroll statutory deductions and withholdings, payable in accorda to time. Company, by action of its procedures as presently in effect and amended from time time to determine if it should be Managers, may review Employee's Base Salary from time to increased.

quarterly bonus equal 3.2 Bonuses. During the Term. Company will pay Employee a as defined hereafter exceeds "Base to 15% of the amount by which "Total Controllable Income" the gross revenue from all TCI" as defined hereafter. "Total Controllable Income" shall mean those direct operating expenses restaurants operated by the Company or its subsidiaries less 1. the two Habaneros restaurants identified in Exhibit A attached hereto. As an example, in 201 TCI"). had a combined Total Controllable Income of $210,869 (the "Base

3.3 Other Perquisites. During his employment. Company will provide Employee provided to Employee in and his family with; (i) health benefits substantially the same as those allowance; and (iii) a $200 201 1 by the prior owner of the restaurants; (ii) a $300 monthly car ble. Employee's spouse, monthly phone allowance. Employee and, to the extent applica if eligible , in all other benefit plans dependents and beneficiaries, shall be allowed to participate, of the same, which are and programs of Company, including improvements or modifications ees and their spouses, now, or may hereafter be, available to similarly situated employ dependents, and beneficiaries.

3.4 Membership Interest Grants.

of the Company. (a) Upon execution of this Agreement and the Company Agreement (the "Membership Interest"), which is Employee shall be issued 100 units of membership interest

I'AtiK 2 KMHLUYMF.NT AGRKKMKNT (C0673907 [XK' ftl 51 51 hip interest of the equal to ten percent (10%) of all issued and outstanding units of members value of $35,000 (the "Initial Membership Company on a fully diluted basis with an agreed Interest Price").

hereby makes the following representations and warranties to (b) Company this Agreement: Employee intending Employee to rely upon them in connection with entering

(i) Organization. Good Standing and Qualification. The Company is standing a limited liability company duly organized, validly existing and in good The Compan y has all requisite limited under the laws of the State of Texas. s and liability company power and authority to own and operate its propertie hip assets, to execute and deliver this Agreement, to issue and sell the Members Interest and to carry out the provisions of this Agreement.

(ii)Capitalization; Voting Rights. As of the Effective Date and nt, the including the Membership Interest issued as set forth in this Agreeme units of members hip interest. Company will have 1.000 issued and outstanding rights As of the date hereof, there are no outstanding options, warrants, or other interest. for the purchase or acquisition from the Company of units of membership the Members hip Interest are The rights, preferences, privileges and restrictions of nt. as set forth in the Company Agreement of the Company and in this Agreeme When issued compliance with the provisions of this Agreement, the in ssable, and Membership Interest will be validly issued, fully paid and non-asse y's right to will be free of any liens or encumbrances, other than the Compan the general restrictio n on transfer ail as repurchase the Membership Interest and provided in Section 3.4(d).

(iii) Limited Liability Company Documents. Complete and accurate are copies of the Company's Certificate of Formation and Company Agreement lating any attached hereto as Exhibit B. The Company is not currently contemp amendment to such documents.

(iv) Authorization; Binding Obligations, All limited liability company action on the part of the Company, its officers, managers and members necessary for the authorization of this Agreement, the performance of all obligations of the Company hereunder as of the Effective Date and the authorization, sale, issuance and delivery of the Membership Interest pursuant hereto has been taken or will be taken prior to the Effective Date. This Agreement, when executed and delivered, will be valid and binding obligation of the Company enforceable in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) general principles of equity that restrict the availability of equitable remedies.

(v) Members. Exhibit C contains a complete list of all of the Company's members, the units of membership interest they own and their addresses.

PAfiP .1 I-MPI OYMLN I* AG R P.I; Mi'. NT (<. (>67.1407 r>(K" 61

52 52 (vi)Compliance with Laws, To its knowledge, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties, which violation would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company.

(c) Riaht of First Offer for Equity Securities.

(i) Notwithstanding subsection (ii) below, until the first anniversary of this Agreement, the Company shall not issue any "Equity Securities'" as defined below.

(ii) Employee shall have a right of first offer to purchase his Pro Rata Portion (as defined below) of all Equity Securities that the Company may, from lime to time, propose to sell and issue after the date of this Agreement.

Employee's "Pro Rata Portion" is equal to the ratio of (x) the (iii) number of units of membership interest of the Company which the Employee holds immediately prior to the issuance of such Equity Securities to (y) the total number of units of the Company's outstanding membership interests, immediately prior to the issuance of the Equity Securities. The term "Equity Securities" shall mean (1) any membership interest of the Company. (2) any security convertible, with or without consideration, into any membership interest (including any option to purchase such a convertible security). (3) any security carrying any warrant or right to subscribe to or purchase any membership interest or (4) any such warrant or right.

(iv) In the event the Company proposes to undertake an issuance of Equity Securities, the Company shall deliver written notice ("Notice") to the Employee via reputable overnight delivery service of { 1 ) its bona fide intention to undertake an issuance of Equity Securities. (2) a description of the designations, preferences, privileges and rights of the Equity Securities to be offered and of each and every right, agreement and instrument to be attached to, delivered with or made appurtenant to such securities ("Appurtenant Rights"), (3) the aggregate number of Equity Securities to be ottered to the offerees thereunder (the "Offerees"), (4) the identity of the Offerees and (5) the price and terms and conditions upon which the Company proposes to offer the Equity Securities to the Offerees.

(v) Within thirty (30) days of receiving the Notice, Employee shall notify the Company in writing if he desires to exercise, in full or in part, his rights set forth in this Paragraph (c). If Employee exercises his rights. Employee may purchase the offered Equity Securities which such Employee elects to purchase by paying the same consideration, as paid by the Offerees, and under the same terms and conditions applicable to the Offerees.

EMPLOYMENT AGREEMENT PAGE 4 ICWSWV DOC 6|

53 53 (vi) If Employee purchases Equity Securities under this Paragraph (c) hereof, he shall also receive all Appurtenant Rights provided or granted to investors as part of the offering of Equity Securities, and shall, as a condition to receiving the Equity Securities and the Appurtenant Rights, execute and become obligated under any agreements and other instruments required to be executed by all investors in connection with such offering.

(d) If the Employee's employment is terminated for any reason by either party on or before the first anniversary of the Effective Date, the Company may. at its option, repurchase the Membership Interest; the Company must exercise such option in writing and close such repurchase within thirty (30) days of the termination of employment, if the Company terminates Employee's employment prior to the first anniversary of the Effective Dale, the Employee has the option to put the Membership Interest to the Company; the Employee must exercise such put in writing and close such repurchase within thirty (30) days of the termination of employment. In cither case the aggregate purchase price for the Membership Interest will be the Initial Membership Interest Price plus or minus an amount equal to the percentage increase or decrease over Base TCI multiplied by the Initial Membership Interest Price. For example, if Base TCI is S227,000 and Total Controllable Income is increased to $327,000 then the percentage increase would be (327.000 - 227,000)/227,000 or 44.05% multiplied by the Initial Membership Interest Price of $35,000 for an increase of $15,418.50. Therefore, the purchase price for the Membership Interest would be $35,000 plus $15,418,50 equals $40,418.50. Conversely, if Base TCI is $227,000 and Total Controllable Income is reduced to $127,000 then the percentage decrease would be (127.000 - 227.000)7227.000 or -44,05% multiplied by the Initial Membership Interest Price of $35,000 for a decrease of $15,417.50. Therefore, the purchase price for the Membership Interest would be $35,000 minus $15,418.50 equals $19,581.50. In the event that the purchase of Membership Interest contemplated by this Section 3.4 occurs before the full year of Total Controllable Income has elapsed from the Effective Date, then the available data shall be annualized for purposes of the calculation of the purchase price for the Membership Interest. The Membership Interest shall not be transferred by Employee except with the express written consent of the Company. Any transfer of legal or beneficial ownership shall be void ab initio.

(e) If the Employee's employment is terminated for any reason by either party after the first anniversary of the Effective Date, the Company may. at its option, repurchase the Membership Interest; the Company must exercise such option in writing and close such repurchase within thirty (30) days of the termination of employment. The aggregate purchase price for the Membership Interest upon exercise of the option in this Section 3.4(e) shall be the "Fair Market Value" of the Membership Interest. The "Fair Market Value" of the Membership Interest shall be the price agreed to by the parties; if the parties cannot within thirty (30) days of the exercise of the option agree upon a Fair Market Value, the Fair Market Value shall be determined by a single appraiser chosen by the parlies. If the parties cannot agree upon an appraiser, the parties shall apply to the American Arbitration Association (the "AAA") to appoint a single appraiser, The appraiser shall provide a written appraisal and shall determine the Fair Market Value of the Membership Interest without deduction for its minority position and restrictions on transfer. The determination of the appraiser shall be final and binding upon the parties and the closing of the sale shall be completed within thirty (30) days of receiving the appraiser's determination. The parties shall supply the appraiser with any requested information about the Company and shall split the cost of the appraiser and any AAA fees.

I'AOI 5 KMI'I.OYMliNT AGRHKVII N I 10)673907 OOC.6I

54 54 55 ss

(0 All certificates evidencing units of membership interest now owned or that may be acquired by the Employee will note conspicuously on the back as follows:

"REFERENCE IS HEREBY MADE TO AN AGREEMENT DATED EFFECTIVE AS OF SEPTEMBER 19, 2012. ON FILE AT THE PRINCIPAL PLACE OF BUSINESS OF THE COMPANY AND AT ITS REGISTERED OFFICE IF THE TWO ARE NOT THE SAME. WHICH AGREEMENT RESTRICTS THE TRANSFER OR PLEDGE OF THE UNITS OF MEMBERSHIP INTEREST REPRESENTED BY THIS CERTIFICATE AND CONTAINS CERTAIN OTHER AGREEMENTS CONTEMPLATED TO BE BINDING ON THE OWNER OF MEMBERSHIP INTERESTS IN THE COMPANY, THE COMPANY WILL FURNISH A COPY OF THE AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE, UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE."

ARTICLE IV PROTECTION OF INFORMATION

Confidential Information. Employee acknowledges that during his employment with n Company. Company will provide him with and/or give him access to Confidential Informatio ns (defined below) of Company. Confidential Information means all information and compilatio of information of any kind, type or nature (tangible and intangible, written or oral, and including relates to information contained, stored, or transmitted through any electronic medium), which Company including, without limitation, products: services; plans, including, without limitation, ial business and marketing plans; procedures; formulae; processes; pricing; customers. Confident other than Information does not, however, include any information that is available to the public ial as a result of any act. directly or indirectly, of Employee. Employee agrees that all Confident Information is and shall remain the sole property of Company.

ARTICLE V NON-COMPETITION AND NON-SOLICITATION OBLIGATIONS

5.1 Non-Coinnctition and Non-Solicitation Obligations. In exchange for the consideration delivered in connection with that certain Asset Purchase Agreement between Coastal King, Ltd., Texas Burrito Co., LLC and Habaneros Mexican Grill. LP (the "APA") and as a material inducement for Coastal King. Ltd. to enter into the A PA. and in order to protect the Confidential Information that the Company will provide in accordance with Article IV above. Employee expressly covenants and agrees that, for any reason, directly or indirectly, for himself for or on behalf of or in conjunction with any other person, entity or business of whatever nature any period during which Employee is an officer, employee, consultant or manager of the Company and for an additional 30 months from and after the date of termination of any such relationship (the "Prohibited Period") he shall not:

PAGE 6 EMPLOYMENT AGREEMENT iC0671W7 DOC.ei Engage, vvilhin the Bexar County. Texas (the ¦ Prohibited Area") as an officer, director, manager, owner, investor, lender, partner, member, joint venturer or in a managerial or advisory capacity (whether as an employee, independent contractor, consultant or advisor, or as a sales representative, dealer or distributor), or as an employee, agent, service provider or in any other non-managerial capacity, in any Mexican restaurant business (the "Restricted Business");

For Employee or on behalf of or in conjunction with any other person, solicit or attempt of to solicit, recruit, or attempt to recruit any employee, consultant or agent of Company or any its affiliates:

Request or attempt to request any business related to any Restricted Business from any corporation, association, partnership, organization, business, individual or governmental entity, who as of the date of the request or attempted request or within 36 months prior to that date, is or of was a customer, or an actively sought prospective customer, or a significant vendor or supplier the Company or any of its affiliates.

5.2 The covenants in this Article are severable and separate, Separate Covenant. and the unenforceability of any specific covenant shall not affect the provisions of any other covenant.

5.3 Subsequent EmnloYment. The Employee further expressly covenants and

agrees that during the Prohibited Period, he will advise the Company of the identity of any new employer of the Employee or business started by Employee within the Prohibited Area within ten days of accepting such employment or forming such business.

5.4 Reasonableness of Restrictions. Employee agrees that (i) the terms of this Article V are reasonable and constitute an otherwise enforceable agreement to which the terms of this Agreement are ancillary or a part of; (ii) the consideration provided by the Company under this Agreement is not illusory", (ui) the restrictions of this Article V are necessary and reasonable for the protection of the legitimate business interests and goodwill of the Company; and (iv) the consideration of employment given to Employee by the Company under this Agreement, including without limitation, the provision by the Company or its affiliates of Confidential Information and specialized training to Employee, gives rise to the Company's interests in the covenants set forth in this Article V.

5.5 Severability. Employee and the Company agree that it was both parties" intention to enter into a valid and enforceable Agreement. Employee agrees that if any covenant contained in this Article V is found by a court of competent jurisdiction to contain limitations as to time, geographic area, or scope of activity that are not reasonable and impose a greater restraint than is necessary to protect the goodwill or other business interests of the Company or its affiliates, then the court shall reform the covenant to the extent necessary to cause the limitations contained in the covenant as to lime, geographic area, and scope of activity to be restrained to be reasonable and to impose a restraint that is not greater than necessary to protect the goodwill and other business interests of the Company and its affiliates.

5.6 Rights and Remedies Upon Breach. Employee acknowledges that money damages would not be sufficient remedy for any breach of this Article V by the Employee. In

PAGE 7 EMPLOYMENT AGREEMENT { C06739O7. DOC :6 )

56 56 threatened to the event that the Company determines that Employee has breached or attempted or in equity the breach any provision of this Article V, in addition to any other remedies at law or be entitled to terminate Company may have available to it. it is agreed that the Company shall entitled, upon any payments then owing to Employee under this Agreement, and. shall be y application to any court of proper jurisdiction, to a temporary restraining order or preliminar breach by injunction against Employee prohibiting such breach or attempted or threatened agrees proving only the existence of such breach or attempted or threatened breach. Employee this Article are in eftect shall be that the period during which the covenants contained in is in violation computed by excluding from such computation any time during which Employee any bonding of any provision of this Article. Furthermore, Employee agrees to waive order sought by the requirement in connection with any injunction or temporary restraining Company under this section.

ARTICLE VI MISCELLANEOUS

6.1 For purposes of this Agreement, notices and all other communications Notices. (a) when provided for herein shall be in writing and shall be deemed to have been duly given ged if received if delivered personally or by courier, (b) on the date receipt is acknowled day after delivered by certified mail, postage prepaid, return receipt requested, or (c) one with confirmat ion of transmiss ion, as follows; transmission if sent by facsimile transmission

If to Employee, addressed to:

1114 Birch Hill San Antonio. TX 78232

If to Company, addressed to;

108 N. Mesquite Street Corpus Chrisli. TX 78401

e or to such other address as either party may furnish to the other in writing in accordanc herewith, except that notices or changes of address shall be effective only upon receipt.

6.2 Annlicablc Law. This Agreement is entered into under, and shall be construed and interpreted, and the rights of the parties shall be governed by, the laws of the Stale of Texas with respect to any claim or dispute related to or arising under this Agreement.

6.3 No Waiver. No failure by either party hereto at any lime to give notice of any breach by the other party of. or to require compliance with, any condition or provision of this same Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the or at any prior or subsequent time.

6.4 Severability and Reformation. If a court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other

I'AGIi 8 HMPLOYMRNT AGRBEMRNT | C0fi73907 . DOC '6 1 57 57 provision of this Agreement and ail other provisions shall remain in Cull force and effect. Furthermore, the parties explicitly agree that such court is authorized to reform any such invalid or unenforceable provision to be valid and fully enforceable under the law and that the parties agree that in such case, they will treat the provision as having automatically been so reformed.

6.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement.

6.6 Headings. The section headings have been inserted for purposes of convenience and shall not be used for interpretive purposes.

6.7 Assignment. This Agreement is personal to Employee and shall not be

assignable by Employee. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns; the Company may assign and transfer its rights and obligations under this Agreement, by operation of law or otherwise, to any successor to all or substantially all of its equity ownership interests, assets or business by dissolution, merger, consolidation, transfer or assets, or otherwise as permitted under the Company's organizational documents.

6.8 Survival. The termination of this Agreement and Employee's employment shall not affect any right or obligation of any party which has accrued and vested prior to such termination or which by its terms survives the termination of this Agreement and Employee's employment. The provisions of Section 3.4, except Section 3.4(c). Articles IV and V shall survive termination of this Agreement.

6.9 Entire Agreement. This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and contains all the covenants, promises, representations, warranties and agreements between the parties with respect to employment of Employee by Company. Without limiting the scope of the preceding sentence, all understandings and agreements preceding the date of execution of this Agreement and relating to the subject matter hereof are hereby null and void and of no further force and effect.

6.10 Modification; Waiver. Any modification to or waiver of this Agreement will be effective only with the prior written consent of Company and Employee.

[Signature page follows.]

EMPLOYMEN I AGREEMENT PAHE V jC0fi73907.DOC 61

58 58 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Dale.

COMPANY:

GRUPO HABANHRO, LLC

By: A_ Name: mmmf Title:

EMPLOYEE:

Signature Page to Employment Agreement - Stephen Kraft and Grttpo Habanera, LLC ,'('06 73 907. DOC':fit

59 59 EXHIBIT A

Examples of Operating Expenses

(Spreadsheet for calculation of TCI to be attached)

1C0673907,DOC;6}

60 60 EXHIBIT B

Company Documents

(CO673907.DOC:6)

61 61 EXHIBIT C

List of Members and Units of Membership Interest with Addresses

Robert G. Hart, ill 400 Units

Gary Hodge 400 Units

Cliff Graham 1 00 Units

Stephen Kraft 1 00 Units

100573007 DGC:6)

62 62 GRUPO HABANERO, LLC CORPUS CHRJSTI, TEXAS 78401

July 3, 2014

Mr. Stephen Kraft (Via Hand Delivery and U.S. Maii) 11 14 Btrch Hill San Antonio, TX 78232

RE: Employmenl Agreement between Orupo Habanero, LLC and Stephen Kraft efTective as of September 19, 2012 (the "Employment Agreement").

Dear Mr. Kraft;

As you know, you resigned from your position with Grupo Habanero, LLC (the "Company") as of June 6, 2014. Pursuant to the provisions of Section 3.4(e) of the Employment Agreement, the Company hereby exercises its option to repurchase your 100 units of membership interest in the Company (the "Units"). As you know, the Company loses money and without the advances made by the other principals of the Company the Company would be insolvent. Jn exchange for S10, which the parties agree is the fair market value of the Units, Stephen Kraft hereby sells, transfers and delivers the Units to the Company free and clear of any lien, pledge, charge, security interest, encumbrance or adverse claim, and the Company hereby accepts the Units.

If you agree to the terms of this letter agreement, please execute this Employment Agreement where indicated in the space below and return a copy to me. Upon receipt of the copy of the duly executed letter agreement, I will deliver the consideration contemplated in this letter agreement to you.

Unless we have received the signed letter agreement from you within 30 days of the exercise of the option set forth in this letter agreement, we will assume that you disagree with the fair market value of the Units set forth herein and that you will invoke the mechanisms for determining the fair market value as set forth in Section 3.4(e) of the Employment Agreement. If a), we will have to split the cost of the appraiser and any AAA fees that may be incurred as a result of such procedure.

Sincerely,

GRUPO H^fiANHRO, LLC AGREED AND ACCEPTED:

By: Name: Stephen Kraft Title: . Date

EXHIBIT {C0948458.DOCX:1}

Ll DOCUMENT SCANNED AS FILED" 63 63 FILED 1/14/2015 1/14/2015 9:31:38 AM 9:31:38 AM Donna Donna Kay Kay McKinney McKinney Bexar Bexar County County District District Clerk Clerk Accepted By: Accepted By: Brenda Brenda Carrillo Carrillo

R:\l3598.0001\pleadi tigsVntns &ords\plts resp to (icfs mtn to comp app and mtn for protect, docx

CAUSE NO. 2014-CI-18038

STEVE KRAFT INDIVIDUALLY AND § IN THE DISTRICT COURT OF AS A MEMBER ON BEHALF OF § GRUPO HABANERO, LLC § Plaintiff § § VS. § 225th JUDICIAL DISTRICT § GARY HODGE AND ROBERT HART III § Defendant § BEXAR COUNTY, TEXAS

PLAINTIFFS' RESPONSE TO DEFENDANTS' MOTION TO COMPEL APPRAISAL AND MOTION FOR PROTECTION

COMES NOW Plaintiffs STEVE KRAFT, Individually and as a member on behalf of

GRUPO HABANERO, LLC, ("Plaintiff) files this their response to Defendants' Motion to

Compel Appraisal and Motion for Protection and would show unto the court as follows:

1. Factual Backaround

In September, 2012 Plaintiff agreed to sell his restaurants to the Defendants. A new entity

was created, Grupo Habanero, LLC ("Grupo") to effectuate the sale. Plaintiff retained a 10%

interest in the new entity and entered into an employment contract with the new entity. See

Company Agreement attached hereto as Exhibit A and Employment Agreement attached hereto as

Exhibit B. At the time of the sale. Plaintiffs interest in the new entity had an agreed value of

$35,000.00.

On June 6, 2012, Grupo terminated the Plaintiffs employment. Under the terms of their

contract Grupo had an option to purchase the membership interest of the Plaintiff. In order to be

effective, the "Company must exercise such option in writing and close such repurchase within

thirty (30) days of the termination of employment." See Exhibit B. Notice of the option to

repurchase were governed by Article 6. 1 of the Employment Agreement which states:

140 140 "For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall he deemed to have been duly given (a) when received if delivered personally or by courier, (b) on the date receipt is acknowledged if delivered by certified mail, postage prepaid, return receipt requested, or (c) one day after transmission if sent by facsimile transmission with confirmation of transmission, as follows:

If to Employee, addressed to:

11 14 Birch Hill San Antonio, TX 78232

or to such other address as either party may furnish to the other in accordance herewith, except that notices or changes of address shall be effective only upon receipt" (emphasis added).

This notice provision contained a scrivener's error as the Plaintiffs address is 1115 Birch

Hill, San Antonio, TX 78232, Defendants were well aware of the Plaintiffs actual address.

Defendants attempted, and failed, to timely exercise the purchase option. The Defendants

drafted a letter dated July 3, 2012 which states that it was sent via hand delivery and U.S. Mail.

See letter attached hereto as Exhibit C. They did not hand deliver the letter to the Plaintiff and

Defendants have provided no evidence, despite numerous requests, that the letter was ever sent to

the Defendant by certified mail, return receipt requested. As such Defendants never timely

exercised the repurchase option.

Upon realizing that that they had not exercised the purchase option, the Defendants began

to make threats against the Plaintiffs interest. The Defendants engaged in oppressive conduct to

freeze out the Plaintiff, including denying him access to the financial records of the company to

which he is entitled by law, records they are still refusing to produce as requested by Plaintiffs in

their requests for production from which Defendants are seeking protection.

141 141 il. Argument and Authorities

In order to enforce an arbitration or appraisal clause, the party seeking to compel arbitration

must present evidence of an arbitration agreement that governs the dispute at issue in the case.

Weekley Homes v. Jennings, 936 S.W. 2d 16, (Tex, App. - San Antonio, 1996, writ denied). It is

the movant's burden to establish their contractual right to arbitration'. Id. at 19, This burden

includes proof of compliance with a condition precedent. Id, at 19, Establishing the existence of

an arbitration agreement is generally evidentiary. Murdoch v. Trisun Healthcare, LLC, 2013 Tex.

App, LEXIS 5638 (Tex. App, - Austin, 2013, pet, denied). If the material facts necessary to

determine the issue are controverted, the trial court must conduct an evidentiary hearing to

determine the disputed material facts. Jack B. Anglin Co. v. Tipps, 842 S.W, 2d 266 (Tex. 1992),

In Weekley, the agreement containing the arbitration clause also contained a condition

precedent: the parties had to first mediate the case before they could invoke binding arbitration,

Weekley, 936 S.W, 2d at 17. The Movant's only evidence to support its motion to compel

arbitration was the contract itself. Id. at 18, The Court upheld the denial of the motion to compel

because the movant "did not produce any evidence that it complied with its contractual

requirements which would entitle it to arbitration." Id dA. 19,

Here, the Employment Contract also contains a condition precedent: in order to invoke the

appraisal process, the Defendants must first show that the Company timely exercised its repurchase

option. Defendants have made no effort to show that they properly and timely exercised the option.

In fact, they filed their motion for protection to prevent Plaintiffs from discovering the very facts

necessary to establish their right to compel an appraisal. As in Weekley, the only evidence they

have offered in the contract itself.

1 The Employment Agreement does not contain an arbitration clause, but many of the same principles apply in the context of when an appraisal clause is cnforccabic.

142 142 It is we!! settled law that strict compliance with the provisions of an option contract is

mandatory. Crown Constr. Co. v Huddleston, 961 S,W, 2d 552 (Tex, App. -San Antonio 1997, no

pet.). Failure to exercise an option according to its terms, including untimely or defective

acceptance is simply ineffectual, and legally amounts to nothing more than a rejection. Id. at 558,

Here the contract required that the Company exercise the option in writing and dose the repurchase

within thirty (30) days of the termination of employment. The contract also stipulated that proper

notice of the exercise could only be made through personal delivery, certified mail return receipt

requested, or facsimile transmission with confirmation,

It is an undisputed fact the Plaintiff was never hand delivered the purported notice. What

actually happened is that the Defendants posted the notice, after the expiration of thirty days, on

the door of the Plaintiffs neighbor, as they purposefully used an address they knew to be incorrect,

See Affidavit of Stephen Kraft, attached hereto as Exhibit D and incorporated in to this response.

Such delivery does not constitute personal delivery and does not strictly comply with the contract.

See Crown Constr. Co. 961 S.W, 2d at 557 (holding that personal delivery means actual hand to

hand delivery, taping notice to a door fails to properly deliver notice.)

It is also undisputed that the Company did not timely send the notice to the Plaintiff via

U.S. certified mail return receipt requested. As noted above, Defendants filed a motion for

protection to prevent Plaintiffs from this exact discovery (presumably because Defendants are well

aware they did not timely send the notice). It is similarly undisputed that the Company did not

send the required notice by facsimile transmission. As Defendants have not met their burden to

establish that they met the required conditions precedents to establish their right to an appraisal,

their motion to compel an appraisal should be denied.

143 143 Furthermore, the claims of the Plaintiffs are not within the scope of the appraisal clause,

The Defendants bear the initial burden to establish the to-be-arbitrated claims fa!! within the

agreement's scope. Grand Homes 97, LP. v. Loudermilk, 208 S.W. 3d 696 (Tex. App. - Fort

Worth, 2006, pet, denied). In the present case, the appraisal clause is very narrow. First, as

previously discussed, it only applies if the repurchase option has been properly exercised. It should,

of course, be noted that the Employment Agreement docs not contain an arbitration agreement,

only an appraisal process. That process can only determine the fair market value of the membership

interest of the Plaintiff. It cannot determine whether defendants have breached their fiduciary duty,

or whether they have engaged in oppressive conduct toward a minority member, or even whether

the repurchase option was exercised. This case is not about the fair market value of Plaintiffs

membership interest in Grupo, it is about whether the Defendants can force him to sell his interest,

and whether the Defendants have breached their duties to the Company in attempting to freeze out

a member, In short, compelling an appraisal would be putting the cart before the horse.

WHEREFORE PREMISES CONSIDERED Plaintiffs Stephen Kraft and Grupo Habanero,

LLC pray that this Court deny Defendants Motion to Compel an Appraisal, as Defendants have

offered no proof they fulfilled all conditions precedent to invoke the appraisal process, in the

alternative, Plaintiffs pray that the Court deny Defendants' Motion for Protection, grant Plaintiffs'

motion for expedited discovery, and continue Defendants' Motion to Compel an Appraisal until

discovery has been completed on the issue of notice, at which time the Court will conduct an

evidentiary hearing and for such further relief as the Plaintiffs may show themselves justly entitled.

144 144 Respectfully submitted,

Espey & Associates, PC 13750 San Pedro Avenue, Suite 730 San Antonio, Texas 78232-4375 Telephone: (210)404-0333 Telecopier: (210) 404-033$

By:_ RICHARD W, ESPEY State Bar No. 06667580 respev@lawesriev.com MATTHEW SOLID AY State Bar No. 24079367 msolidav@lawespey,com

Attorneys for Plaintiffs, Stephen Kraft, Individually and as a member on behalf of Grupo Habanero, LLC

CERTIFICATE OF SERVICE

I hereby certify that a true and correct copy of the foregoing document wavs^ryed in compliance with Rules 21 and 21a of the Texas Rules of Civil Procedure on January /4-f , 2015, on the following counsel of record:

Roderick J. 'Rod' Regan Branscomb | PC 71 1 Navarro, Suite 500 San Antonio TX 78401-0036 210.598,5405 Facsimile Attorneys for Defendants

RICHARD W. ESPEY MATTHEW B. SOL1DAY

145 145 GRUPO HABANERO, LLC

COMPANY AGREEMENT

EXHIBIT {C0705182.DOC;2}

146 146 I A TABLE OF CONTENTS

ARTICLE I MEMBERS; PURPOSE AND AUTHORITY , 1.1 Members 1 .2 Purpose and Authority

ARTICLE II CAPITAL CONTRIBUTIONS. 2.1 Contributions 2.2 Return of Contributions

ARTICLE III ALLOCATIONS AND DISTRIBUTIONS. 3.1 Allocations, 3.2 Distributions

ARTICLE IV MANAGEMENT 4. 1 Number of Managers; Management by Managers 4.2 Election; Resignation ; 2 4.3 Vacancy 2 4.4 Change of Number 2 4.5 Removal 2 4.6 Meetings 3 4.7 Quorum 3 4.8 Majority Vote 3 4.9 Committees 3 4.10 Written Consent 3

ARTICLE V MEETINGS OF MEMBERS 3 5.1 Meetings 3 5.2 Location of Meetings 3 5.3 Action by Telephone Conference 3 5.4 Notice 4 5.5 Waiver of Notice 4 5.6 Quorum 4 5.7 Majority Vote 4 5.8 Voting Rights 4 5.9 Written Consent 4

ARTICLE VI OFFICERS 4 6.1 Officers 4 6.2 Terms 5

ARTICLE VII RESTRICTIONS ON DISPOSITIONS OF UNITS; WITHDRAWAL 5 7. 1 Restrictions on the Disposition of Units 5 7.2 Admission as a Member 5 7.3 Expenses 5 7.4 Withdrawal 5

{C0705182.DOC:2)

147 147 ARTICLE VIII WINDING UP 5 8.1 Winding Up 5 8.2 Liquidation and Termination 6 8.3 Deficit Capital Accounts 6 8.4 Certificate of Termination 6

ARTICLE IX TAXES 7 9.1 Tax Returns 7 9.2 Tax Elections 7

ARTICLE X GENERAL PROVISIONS 7 10.1 Other Opportunities 7 10.2 Unit Certificates 7 10.3 Entire Agreement; Amendments 7 10.4 Binding Effect 7 10.5 Governing Law; Severability 7 10.6 Further Assurances 8 10.7 Indemnification 8 10.8 Counterparts 8

ARTICLE XI DEFINITIONS 8 11.1 Definitions. 8 1 1 .2 Construction 8 1 1.3 Branscomb I PC. 8

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148 148 GRUPO HABANERO, LLC

COMPANY AGREEMENT

The members of Grupo Habanero, LLC (the "company") have adopted this agreement as the company agreement of the company.

ARTICLE I MEMBERS; PURPOSE AND AUTHORITY

1¦! Members. The members of the company are Robert G. Hart, III, Gary Hodge, Cliff Graham and Stephen Kraft.

1 ,2 Purpose and Authority. The purpose of the company is to own and operate two Habaneras restaurants in San Antonio, Texas. However, in furtherance of that purpose, the company is authorized to engage in any business or investment in which a limited liability company may legally engage.

ARTICLE II CAPITAL CONTRIBUTIONS

2.1 Contributions. Each member will be required to contribute to the company only such money or property as such member agrees to contribute.

2.2 Return of Contributions. The company will not be required to return a capital contribution to a member, except to the extent the law or this agreement requires the company to do so.

ARTICLE III ALLOCATIONS AND DISTRIBUTIONS

3¦! Allocations. The company will maintain capital accounts for the members.

(a) All items of income, gain, loss, deduction, and credit of the company will be allocated among the members in accordance with their relative holdings of Units,

(b) If Units are transferred during a calendar year, the managers will have the discretion to determine how profits or losses will be allocated between the transferor and transferee.

3.2 Distributions. From time to time, the managers may cause the company to distribute cash or other property to the members. Distributions will be made pro rata, in accordance with the members' relative holdings of Units.

ARTICLE IV MANAGEMENT

4.1 Number of Managers; Management by Managers.

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149 149 (a) The company will have two (2) managers. Except as provided in Sections 4.1(b) and (c), the managers will have the power and authority to cause the company to take any action the managers deem necessary or appropriate, without the consent of any member. The officers of the company will be responsible for the day-to-day operations of the company.

(b) The company will have a managing owner who will be appointed by the holders of two-thirds of the Units held by all members. Notwithstanding anything else in this agreement, the managing owner will have the right to veto any action taken at any meeting of the members and/or managers, or of any committee designated by the managers, or action taken by written consent by the members and/or managers of the company. Robert G. Hart, III is hereby appointed as the managing owner.

(c) Subject to Section 4.1(b), but notwithstanding any other provision of this agreement, the affirmative vote of the holders of a majority of the Units is required to take the following actions:

(i) issue any additional Membership Interests after Membership Interests are issued to the initial members of the company;

(ii) approve any merger, interest exchange, conversion, or sale of all or substantially all of the company's assets;

(iii) voluntarily cause the winding up of the company;

(iv) take or authorize any act that would make it impossible to carry on the ordinary business of the company; or

(v) cause the company to incur any indebtedness for borrowed money.

4.2 Election; Resignation. The managers will be elected by a majority of the votes cast by the members in a position-by-position vote. Each manager elected will serve until his successor is elected. A manager may resign at any time.

4.3 Vacancy. Any vacancy in a manager's position will be filled by a vote of a majority of the votes cast by the members. A manager elected to fill a vacancy will serve until his successor is elected.

4.4 Change of Number. The number of managers may be changed at any time by the members, but a decrease in number will not have the effect of shortening the term of any incumbent manager. The members will be responsible for electing a manager to fill any manager position created by an increase in the number of managers.

4.5 Removal. The members may remove a manager with or without cause at any time. A manager may only be removed by vote of a majority of the votes cast by the members.

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150 150 4.6 Meetings. The managers will not be required to hold annual meetings. The president or any manager may call special meetings of the managers. The person calling the meeting may fix any place for holding the meeting. The person calling the meeting will give notice of the meeting to each manager at least three days before the date of the meeting, in writing. The purpose of the meeting is not required to be specified in the notice of the meeting except as may be otherwise required by law, the Certificate of Formation or this agreement. The managers may vote on any matter on which a manager requests that a vote be taken.

4.7 Quorum. A majority of the managers must be present to constitute a quorum for action, except as otherwise required by law, the Certificate of Formation, or this agreement. If a quorum is not present at a meeting, the managers who are present may adjourn the meeting, The president will give all managers notice of the reconvening of any adjourned meeting in the manner provided herein for the calling of a meeting of the managers.

4.8 Majority Vote, If a quorum is present at any meeting, the vote of a majority of the managers present will decide any matter brought before such meeting, unless the question is one upon which a different vote is required by law, by the Certificate of Formation, or by this agreement,

4.9 Committees. The managers may designate committees to act on the managers' behalf. Each committee will have such powers as the managers may specify, subject to any restrictions imposed by the TBOC. The managers will have the power at any time to change the number and members of any committee, and to fill vacancies and discharge any committee or any particular member. The requirements of this Article which govern the managers will also apply to committees and their members.

4. 1 0 Written Consent. Any action required or permitted to be taken at a meeting of the managers or any committee may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by at least the minimum number of managers or committee members necessary to take action at a meeting at which all managers or committee members were present and voted,

ARTICLE V MEETINGS OF MEMBERS

5.1 Meetings. The members will not be required to hold annua! meetings. The president of the company may call special meetings of the members. The president will call a special meeting if members owning one-fourth of all the Units or a majority of the managers request a special meeting in writing, stating the purposes of the proposed meeting, Business transacted at a special meeting will be limited to the purposes stated in the notice of the meeting.

5.2 Location of Meetings. Unless a particular notice states otherwise, the members will hold their meetings at the company's principal office.

5.3 Action by Telephone Conference. Members may participate in and hold a meeting by means of a conference telephone or similar communications equipment or other suitable electronic communications equipment, including video conferencing technology, or the internet, or a combination thereof, by means of which all Members participating in the meeting

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151 151 can hear each other and participate in the meeting. Participation in such meeting will constitute attendance and presence in person at such meeting, except where a Member participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

5.4 Notice, The president will give each member written notice of each meeting. The notice will state the place, day and hour of each meeting and will state the purposes for which the meeting is called. The president will cause the notice to be delivered to the members not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, at their addresses on the company's books. Notice by mail will be deemed to be given three days after it is deposited in the United States mail, postage paid.

5.5 Waiver of Notice. If a member signs a written waiver of notice (regardless of when the waiver is signed), the member will be deemed to have received proper notice. If a member attends or participates at a meeting, the member will be deemed to have waived notice of the meeting, unless the member attends or participates for the express purpose of objecting to the transaction of a business on the grounds that the meeting is not lawfully called or convened.

5.6 Quorum. The holders of a majority of the Units must be present in person or represented by proxy to constitute a quorum for action, except as otherwise required by law, by the Certificate of Formation, or by this agreement. Once a Unit is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting until the meeting is adjourned. If, however, a quorum does not exist, the members who are present in person or represented by proxy will have the power to adjourn the meeting. The president will give all members notice of the reconvening of any adjourned meeting, in the manner required for the calling of a special meeting.

5.7 Majority Vote. If a quorum is present at a meeting, the vote of the holders of a majority of the Units present in person or represented by proxy will decide any matter brought before the meeting, unless the question is one upon which a different vote is required by law, by the Certificate of Formation, or by this agreement. .

5.8 Voting Rights. Each Unit will be entitled to one vote on each matter submitted to a vote. A member may vote either in person or by written proxy executed by the member or the member's duly authorized attorney,

5.9 Written Consent. Any action required or permitted to be taken at a meeting of the members may be taken without a meeting, without prior notice, and without a vote, if one or more consents in writing, setting forth the action so taken, will be signed by members having not fewer than the minimum number of votes that would be necessary to take the action at a meeting at which all members were present and voted.

ARTICLE VI OFFICERS

6. 1 Officers. The managers will appoint a president and a secretary of the company, and may also appoint other officers. The officers will be responsible for the day-to-day operation of the company. Each officer will have the powers and responsibilities normally

{ C0705 1 82.DOC:2 } 4 152 152 associated with the office, and such other powers and responsibilities as the managers may designate. An officer is not required to be a member or a manager. A person may hold more than one office. Cliff Graham is hereby appointed to serve as the initial President. Robert G. Hart, III is hereby appointed to serve as the initial Secretary.

6.2 Terms.Each officer will hold office until the managers appoint a successor for that officer. The managers will fill any vacancy in any office. The managers may remove any officer at any time, with or without cause. If the managers remove an officer, the removal will not affect any contract rights the officer has. The appointment of a person as an officer will not of itself create contract rights.

ARTICLE VII RESTRICTIONS ON DISPOSITIONS OF UNITS; WITHDRAWAL

7.1 Restrictions on the Disposition of Units. Except as provided in (i) that certain Employment Agreement between the company and Stephen Kraft (the "Kraft Employment Agreement") and (ii) the Agreement Restricting Transfer of Membership Interests dated the same date as this agreement among Robert G. Hart, III, Gary Hodge and Cliff Graham (the "Transfer Restriction Agreement"), no member will make any Disposition of any Units without the written consent of members holding a majority of the Units. Any attempted Disposition of Units that is not in accordance with this agreement, the Kraft Employment Agreement or the Transfer Restriction Agreement will be null and void.

7.2 Admission as a Member. A person to whom Units are transferred in accordance with this agreement, the Kraft Employment Agreement or the Transfer Restriction Agreement will be admitted to the company as a member, effective as of the date the company receives the transferee's written agreement to be bound by this agreement as a member. Until a transferee of Units becomes a member, the transferee will not have the right to vote as a member, nor will the transferee have any of the other rights of a member, except as required by the TBOC.

7.3 Expenses. The member effecting a Disposition and any person admitted to the company in connection with the Disposition will pay, or reimburse the company for, all costs incurred by the company in connection with the Disposition or admission, on or before the tenth day after the receipt by that person of the company's invoice for the amount due,

7.4 Withdrawal. Except as provided in this agreement, the Kraft Employment Agreement or the Transfer Restriction Agreement, a member does not have the right or power to withdraw from the company as a member. A member may withdraw from the company by delivering a letter to the company, signed by the member, notifying the company that the member is withdrawing from the company and assigning the member's entire Membership Interest to the company. A member will not receive any consideration for such an assignment.

ARTICLE VIII WINDING UP

8.1 Winding Up. The company will be wound up only upon the first to occur of the following:

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153 153 (a) the written consent of members holding a majority of the Units held by all members; or

(b) any other event that, under the TBOC, requires that the company be wound up,

8.2 Liquidation and Termination. If the company is wound up, the managers will appoint a liquidator. The liquidator will proceed diligently to wind up the affairs of the company. Until the company's affairs are wound up, the liquidator will manage the company with all of the power and authority of the managers. The steps to be accomplished by the liquidator are as follows:

(a) the liquidator will cause any notice required by the TBOC to be mailed to each known creditor of and claimant against the company in the manner described in the TBOC;

(b) the liquidator will cause the company to pay or perform all of its obligations (including all expenses incurred in liquidation), or establish reserves for the payment and performance of those obligations; and

(c) all remaining assets of the company will be distributed to the members as follows:

(i) the liquidator may sell company property, including to members, and any resulting gain or loss will be allocated to the members' capital accounts;

(ii) the liquidator will determine the fair market value of all company property that has not been sold, net of any liabilities to which that property is subject, and the members' capita! accounts will be adjusted as if there were a disposition of that property for its fair market value on the date of distribution; and

(iii) all remaining company property will be distributed among the members in accordance with their positive capital account balances, as determined after taking into account all capital account adjustments for the year in which the liquidation occurs (other than those made by reason of this clause (iii)).

8.3 Deficit Capital Accounts, Notwithstanding anything to the contrary in this agreement, and notwithstanding any custom or rule of law to the contrary, no member will ever be obligated to restore any deficit in the member's capital account.

8.4 Certificate of Termination. Once the company's assets have been applied and distributed as required by law and this agreement, the managers will file a Certificate of Termination with the Texas Secretary of State, and take such other actions as may be necessary to terminate the company.

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154 154 ARTICLE IX TAXES

9. 1 Tax Returns. The managers will cause all company tax returns to be prepared and filed with the proper authorities. Each member will furnish to the company all information it has that is necessary to enable the company's income tax returns to be prepared and filed.

9.2 Tax Elections. Neither the company nor any member may make an election for the company to be excluded from the application of the provisions of subchapter K of chapter I of subtitle A of the IRC.

ARTICLE X GENERAL PROVISIONS

10.1 Other Opportunities. Without the written consent of members holding a majority of the Units held by all members, a member or manager will not engage in any other business or investment that is similar to or competitive in nature with the business of the company, without offering any interest or participation in the business or investment to the company and the other members,

1 0.2 Unit Certificates. The Units may be represented by certificates, if the members so elect. The president will sign any certificates that are issued.

10.3 Entire Agreement; Amendments. This agreement, the Kraft Employment Agreement and the Transfer Restriction Agreement constitute the members' entire agreement relating to the company, and supersede ail prior agreements with respect to the company, whether oral or written. Notwithstanding any other provision of this agreement, the affirmative vote of the holders of all of the Units is required to amend the Certificate of Formation or this agreement.

10.4 Binding Effect. Subject to the restrictions in this agreement, the Kraft Employment Agreement and the Transfer Restriction Agreement on Dispositions of Units, this agreement is binding on and inures to the benefit of the members and their respective heirs, legal representatives, successors, and assigns.

10.5 Governing Law: Severability. THIS AGREEMENT IS GOVERNED BY AND WILL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF ANOTHER JURISDICTION. In the event of a direct conflict between the provisions of this agreement and (a) any provision of the Certificate of Formation, or (b) any mandatory provision of the TBOC, the applicable provision of the Certificate of Formation or the TBOC will control, If any provision of this agreement or the application of this agreement to any person or circumstance is held invalid or unenforceable to any extent, the remainder of this agreement and the application of that provision to other persons or circumstances will not be affected, and that provision will be enforced to the greatest extent permitted by law.

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155 155 10.6 Further Assurances. Each member will execute and deliver any additional documents and instruments and perform any additional acts that may be necessary or appropriate to effectuate and perform the provisions of this agreement and the transactions contemplated by this agreement.

10.7 Indemnification. To the fullest extent permitted by law, each member will indemnify the company, each manager and each other member and hold them harmless from and against all losses, costs, liabilities, damages, and expenses (including, without limitation, costs of suit and attorney's fees) they may incur on account of any breach by that member of this agreement.

10.8 Counterparts, This agreement may be executed in any number of counterparts, with the same effect as if all signing parties had signed the same document. All counterparts will be construed together and constitute the same instrument.

ARTICLE XI DEFINITIONS

11.1 Definitions. As used in this agreement, the following terms have the following meanings:

"Dispose" or "Disposition" means a sale, assignment, transfer, exchange, mortgage, pledge, grant of a security interest, or other disposition or encumbrance (including, without limitation, by operation of law),

"IRC" means the Internal Revenue Code of 1986 and any successor statute, as amended from time to time.

"Membership Interest" means the interest of a member in the company, including all rights and obligations pertaining to the Membership Interest.

"TBOC" means the Texas Business Organizations Code and any successor statute, as amended from time to time.

"Units" means units of Membership Interest in the company. The initial members will initially have the number of Units set out on the signature page of this agreement.

Terms not otherwise defined in this agreement that are defined in the TBOC have the meanings given them in the TBOC.

1 1.2 Construction. Whenever the context requires, the gender of all words used in this agreement includes the masculine, feminine, and neuter. All references to Articles and Sections refer to articles and sections of this agreement,

11.3 Branscomb I PC. Each person executing this agreement other than Robert G. Hart, III and Gary Hodge acknowledges that Branscomb|PC and its lawyers are representing only Robert G. Hart, III and Gary Hodge in this transaction. Each such person acknowledges that he has been encouraged to engage separate legal counsel to help

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156 156 him review this agreement, and the provisions of this Section, and that he has had ample opportunity to do so.

[Signature Page Immediately Follows]

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157 157 Signed on , 2012, to be effective as of the date the Certificate of Formation of the company is filed by the Secretary of State.

Robert G. Hart, ill Units: 400

Gary Hodge Units: 400

Cliff Graham Units: 100

Stephen Kraft Units: 100

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158 158 EM V LOYM EN 1' AG R E EMENT

THIS EMPLOYMENT AGREEMENT ("Agreemenl") is made effective as of "Effective Dale," as defined below, by and between Grupo Habancro, LLC, a Texas limited liability company ("Company") and Stephen Kraft, an individual residing in San Antonio, Texas ("Employee").

ARTICLE I EMPLOYMENT AND DUTIES

1.1 Eninlovmcnt; Effective Date. Company agrees to employ Employee and Employee agrees to be employed by Company, beginning as of September 19, 2012 (the "Effective Date") and continuing for the period of time set forth in Article II below, subject to the terms and conditions of this Agreement.

L2Position. From and after the Effective Date, Employee shall serve as the Managing Direetor. The Managing Director shall devote full time and best efforts to the overall supervision of the restaurants owned by the Company and shall report directly to the Managers of the Company, The Managing Director shall live in the "vicinity" of Bexar County. Texas, as determined by the Company with reasonable discretion.

1 .3 Duties. Employee agrees to serve in the position referred to in Section 1.2 above and shall perform such duties as may from time to time be assigned by the Managers.

ARTICLE 11 TERM AND TERMINATION OF EMPLOYMENT

2.1 Term. This Agreemenl shall terminate on the first anniversary of the Effective Dale ("the Term"), unless sooner terminated in accordance with the terms in this Article II.

2.2Comniinv's Ritrht to Terminate, Notwithstanding the provisions of Section 2. J above. Company shall have the right to terminate Employee's employment under this Agreement at any time for any of the following reasons:

(a) by virtue of his physical or mental disability. Employee is unable to perform substantially and continuously the essential functions of his duties, with or without reasonable accommodations, for a period of 90 consecutive days or for a period of 120 non- consecutive days during any 12 month period; or

(b) at any lime for any reason whatsoever or for no reason at all, in the sole discretion of Company; or

(c) for cause, which for purposes of this Agreement shall mean Employee (i) has been indicted for, or convicted of, or pleaded no contest to, a misdemeanor involving moral turpitude or a felony, (ii) has, willfully refused without proper legal reason to perform Employee's duties, (Hi) has materially breached any material provision of Ihis Agreement, (iv) has engaged in any act of serious dishonesty which adversely affects, or reasonably could in the

EXHIBIT

159 159!l: ' ¦"i:i 1 " ' future adversely affect, the value, reliability or performance of Employee in a material manner, or (v) breach of fiduciary duty by Employee.

(d) Notice of Tcnninidion If Company desires to terminate Employee's employment at any time for any reason or for no reason at all prior to the expiration of the Term, it shall do so by giving written notice to Employee that it has elected to terminate Employee's employment and stating (he effective date of the termination. Further, Company's termination of Employee's employment shall not alter or amend the provisions of Articles IV and V below,

2.3 By Comnany. If Employee's employment is terminated by Company prior to the expiration of the Term as provided in Section 2.1 above, then, upon the effective date of such termination, regardless of the reason therefore, Company's obligations under this Agreement shall immediately cease. If Employee is terminated pursuant to Sections 2.2(a) or (h) above, Company will offer to Employee and Employee will bo entitled to receive severance benefits equal to $5,000.00 per month for the remainder of the Term payable on the Company's regular payment dates for employees but no less frequently than monthly, less applicable statutory deductions and withholdings (the "Severance Benefits"),

ARTICLE ill COMPENSATION AND BENEFITS

3.1 Base Salary. Company promises to provide, and Employee agrees to accept, an annual Base Salary of Sixty Thousand Dollars ($60,000) ("Base Salary"), less applicable statutory deductions and withholdings, payable in accordance with Company's regular payroll procedures as presently in effect and amended from time to lime. Company, by action of its Managers, may review Employee's Base Salary from time to time to determine if it should he increased.

3.2 Bonuses. During the Term, Company will pay Employee a quarterly bonus equal to 15% of the amount by which "Total Controllable Income" as defined hereafter exceeds "Base TCI" as defined hereafter. "Total Controllable Income" shall mean the gross revenue from all restaurants operated by (he Company or its subsidiaries less those direct operating expenses identified in Exhibit A attached hereto. As an example, in 201 1, the two Habaneros restaurants had a combined Total Controllable Income or$2l 0,869 (the "Base TCI").

3.3 Other Perquisites. During his employment, Company will provide Employee and his family with: (i) health benefits substantially the same as those provided to Employee in 201 1 by the prior owner of the restaurants; (ii) a $300 monthly car allowance; and (iii) a $200 monthly phone allowance. Employee and, to the extent applicable. Employee's spouse, dependents and beneficiaries, shall be allowed to participate, if eligible, in all other benefit plans and programs of Company, including improvements or modifications of the same, which are now, or may hereafter be. available to similarly situated employees and their spouses, dependents, and beneficiaries.

3.4 Meinbcrshin Interest Grants.

(a) Upon execution of this Agreement and the Company Agreement of the Company, Employee shall be issued 100 units of membership interest (the "Membership Interest"), which is

l-MPLOVMEN I AGRBKMBNT "" CAGE 2 160 160 equal to ten percent (10%) of all issued and outstanding units of membership interest of the Company on a fully diluted basis with an agreed value of $35,000 (the "Initial Membership Interest Price").

(h) Company hereby makes the following representations and warranties to Rmployee intending Employee to rely upon them in connection with entering this Agreement:

(i) Organization, Good Standing and Qualification. The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Texas. The Company has all requisite limited liability company power and authority to own and operate its properties and assets, to execute and deliver this Agreement, to issue and sell the Membership Interest and to carry out the provisions of this Agreement,

(ii) Capitalization; Voting Rights. As of the Effective Date and including the Membership fnlcrcsl issued as set forth in this Agreement, the Company will have 1,000 issued and outstanding units of membership interest. As of the date hereof, there are no outstanding options, warrants, or other rights for the purchase or acquisition from the Company of units of membership interest. The rights, preferences, privileges and restrictions of the Membership Interest are as set forth in the Company Agreement of the Company and in this Agreement. When issued in compliance with the provisions of this Agreement, the Membership Interest will be validly issued, fully paid and non-assessable, and will he free of any liens or encumbrances, other than the Company's right to repurchase the Membership Interest and (he general restriction on transfer all as provided in Section 3.4(d).

(iii) Limited Liability Company Documents. Complete and accurate copies of the Company's Certificate of Formation and Company Agreement are attached hereto as Exhibit B. The Company is not currently contemplating any amendment to such documents.

(iv) Authorization; Binding Obligations. All limited liability company action on the part of the Company, its officers, managers and members necessary for the authorization of this Agreement, the performance of all obligations of the Company hereunder as of the Effective Date and the authorization, sale, issuance and delivery of the Membership Interest pursuant hereto has been taken or will be taken prior to the Effective Date. This Agreement, when executed and delivered, will be valid and binding obligation of the Company enforceable in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) general principles of equity that restrict the availability of equitable remedies.

(v) Members. Exhibit C contains a complete list of all of the Company's members, the units of membership interest they own and their addresses.

EMPLOYMENT AGREEMENT PAGE 3

161 16T ' i3i !! (vi) Compliance with Laws. To its knowledge, lite Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of (lie conduct of its business or the ownership of its properties, which violation would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company.

( c) Richl of First Offer for Lquity Securities .

(i) Notwithstanding subsection (ii) below, until (he first anniversary of this Agreement, the Company shall not issue any "Equity Securities" as defined below,

(ii) Employee shall have a right of first offer to purchase his Pro Rata Portion (as defined below) of all Equity Securities that the Company may, from time to time, propose to sell and issue after the dale of this Agreement.

(iii) Employee's "Pro Rata Portion" is equal to the ratio of (x) the number of units of membership interest of the Company which the Employee holds immediately prior to the issuance of such Equity Securities to (y) the total number of units of the Company's outstanding membership interests, immediately prior to the issuance of the Equity Securities. The term "Equity Securities" shall mean (1) any membership interest of the Company, (2) any security convertible, with or without consideration, into any membership interest (including any option to purchase such a convertible security), (3) any security carrying any warrant or right to subscribe to or purchase any membership interest or (4) any such warrant or right.

(iv) In the event the Company proposes to undertake an issuance of Equity Securities, the Company shall deliver written notice ("Notice") to the Employee via reputable overnight delivery service of (1) its bona fide intention to undertake an issuance of Equity Securities, (2) a description of the designations, preferences, privileges and rights of the Equity Securities to be offered and of each and every right, agreement and instrument to be attached to, delivered with or made appurtenant to such securities ("Appurtenant Rights"), (3) the, aggregate number of Equity Securities to be offered to the offerees thereunder (the "Offerees"), (4) the identity of the Offerees and (5) the price and terms and conditions upon which the Company proposes to offer the Equity Securities to the Offerees,

(v) Within thirty (30) days of receiving the Notice, Employee shall notify the Company in writing if he desires to exercise, in full or in part, his rights set forth in (his Paragraph (c). If Employee exercises his rights, Employee may purchase the offered Equity Securities which such Employee elects to purchase by paying the same consideration, as paid by the Offerees, and under the same terms and conditions applicable to the Offerees.

BMPLOYMENT AGREEMENT PAGE' 162 162 (vi) If Employee purchases Bquily Securities under this Paragraph (c) hereof, he shall also receive all Appurtenant Rights provided or granted to investors as part of the offering of Equity Securities, and shall, as a condition to receiving the Equity Securities and the Appurtenant Rights, execute and become obligated under any agreements and other instruments required to be executed by all investors in connection with such offering.

(d) If the Employee's employment is terminated for any reason by either party on or before the first anniversary of the Effective Date, the Company may, at its option, repurchase the Membership Interest; the Company must exercise such option in writing and close such repurchase within thirty (30) days of the termination of employment, If the Company terminates Employee's employment prior to the first anniversary of the Effective Date, tire Employee has the option to put the Membership Interest to the Company; the Employee must exercise such put in writing and close such repurchase within thirty (30) days of (he termination of employment. In either case the aggregate purchase price for (he Membership Interest will be (he Initial Membership Interest Price plus or minus an amount equal to the percentage increase or decrease over Base TCI multiplied by the Initial Membership Interest Price. For example, if Base TCI is $227,000 and Total Controllable Income is increased to $327,000 then the percentage increase would be (327,000 - 227,000)/227.000 or 44.05% multiplied by the Initial Membership Interest Price of $35,000 for an increase of $15,418,50. Therefore, the purchase price for the Membership Interest would be $35,000 plus $15,418.50 equals $40,418.50, Conversely, if Base TCI is $227,000 and Total Controllable Income is reduced to $127,000 then (be percentage decrease would be (127,000 - 227, 000)7227,000 or -44,05% multiplied by the Initial Membership Interest Price of $35,000 for a decrease of $15,417.50. Therefore, the purchase price for the Membership Interest would be $35,000 minus $15,418,50 equals $19,581.50, In the event that the purchase of Membership Interest contemplated by this Section 3,4 occurs before the full year of Tola! Controllable Income has elapsed from the Effective Date, then the available data shall he annualized for purposes of the calculation of the purchase price for the Membership Interest, The Membership Interest shall not be transferred by Employee except with the express written consent of the Company, Any transfer of legal or beneficial ownership shall be void ab initio.

(e) If the Employee's employment is terminated for any reason by either parly after the llrst anniversary of the Effective Date, the Company may, at its option, repurchase the Membership Interest; the Company must exercise such option in writing and close such repurchase within thirty (30) days of the termination of employment. The aggregate purchase price for the Membership Interest upon exercise of the option in this Section 3.4(e) shall be the "Fair Market Value" of the Membership Interest. The "Fair Market Value" of the Membership Interest shall be the price agreed to by the parties; if the parlies cannot within thirty (30) days of the exercise of the option agree upon a Fair Market Value, the Fair Market Value shall be determined by a single appraiser chosen by the parties. If the parties cannot agree upon an appraiser, the parties shall apply to the American Arbitration Association (the "AAA") to appoint a single appraiser. The appraiser shall provide a written appraisal and shall determine the Fair Market Value of the Membership Interest without deduction for its minority position and restrictions on transfer. The determination of the appraiser shall be final and binding upon the parties and the closing of the sale shall be completed within thirty (30) days of receiving the appraiser's determination. The parties shall supply the appraiser with any requested information about the Company and shall split the cost of the appraiser and any AAA fees.

PMPLOYMKNT AGRERMENT CAGE 5

163 163 (t) All ccrfillcalcs evidencing units of membership interest now owned or that may he acquired by the Employee will note conspicuously on the back as follows:

"REFERENCE IS HEREBY MADE TO AN AGREEMENT DA TED EFFEC TIVE AS OF SEPTEMBER 19, 2012, ON FILE AT THE PRINCIPAL PLACE OF BUSINESS OF THE COMPANY AND AT ITS REGISTERED OFFICE IF THE 'TWO ARE NOT THE SAME, WHICH AGREEMENT RESTRICTS THE TRANSFER OR PLEDGE OF THE UNITS OF MEMBERSHIP INTEREST REPRESENTED BY THIS CERTIFICATE AND CONTAINS CERTAIN OTHER AGREEMENTS CONTEMPLATED TO BE BINDING ON THE OWNER OF MEMBERSHIP INTERESTS IN THE COMPANY. THE COMPANY WILL FURNISH A COPY OF THE AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE, UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE."

ARTICLE IV PROTECTION OF INFORMATION

Confidential Informiition. Employee acknowledges that during his employment with Company, Company will provide him with and/or give him access to Confidential Information (defined below) of Company, Confidential Information means all information and compilations of information of any kind, type or nature (tangible and intangible, written or oral, and including information contained, stored, or transmitted through any electronic medium), which relates to Company including, without limitation, products; services; plans, including, without liniilation, business and marketing plans; procedures; formulae; processes; pricing; customers. Confidential Information does not, however, include any information that is available to the public other than as a result of any act, directly or indirectly, of Employee. Employee agrees (hat all Confidential Information is and shall remain the sole property of Company.

ARTICLE V NON-COMPETITION AND NON-SOLICITATION OBLIGATIONS

5.1 Non-Coin petition and Non-Solicitation Obligations. In exchange for the consideration delivered in connection with that certain Asset Purchase Agreement between Coastal King, Ltd., Texas Bunito Co., LLC and I labaneros Mexican Grill, LP (the UAPA") and as a material inducement for Coastal King, Ltd. to enter into the APA, and in order to protect the Confidential Information that the Company will provide in accordance with Article IV above. Employee expressly covenants and agrees thai, for any reason, directly or indirectly, for himself or on behalf of or in conjunction with any other person, entity or business of whatever nature for any period during which Employee is an officer, employee, consultant or manager of the Company and for an additional 30 months from and after the date of termination of any such relationship (the "Prohibited Period") he shall not;

F.MPI 0 Y M RNT AG R KliMENT PAGE 6 DOC' hi 164 Engage, wilhin llic Bexar County, Texas (the "Prohibited Area") as an officer, director, manager, owner, investor, lender, partner, member, Joint venturer or in a managerial or advisory capacity (whether as an employee, independent contractor, consultant or advisor, or as a sales representative, dealer or distributor), or as an employee, agent, service provider or in any other non-managerial capacity, in any Mexican restaurant business (the "Restricted Business");

For Employee or on behalf of or in conjunction with any other person, solicit or attempt to solicit, recruit, or attempt to recruit any employee, consultant or agent of Company or any of its affiliates;

Request or attempt to request any business related to any Restricted Business from any corporation, association, partnership, organization, business, individual or governmental entity, who as of the date of the request or attempted request or within 36 months prior to that dale, is or was a customer, or an actively sought prospective customer, or a significant vendor or supplier of the Company or any of its affiliates.

5.2 Sena rate Covenant. The covenants in this Article arc severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant.

5.3 Subsequent K m n 1 o v m cut. The Employee further expressly covenants and agrees that during the Prohibited Period, he will advise the Company of the identity of any new employer of the Employee or business started by Employee within the Prohibited Area within ten days of accepting such employment or forming such business.

5.4 Reasonableness of Rcsfrictions. Employee agrees that (i) the terms of this Article V are reasonable and constitute an otherwise enforceable agreement to which the terms of this Agreement are ancillary or a part of; (ii) the consideration provided by the Company under this Agreement is not illusory; (ill) the restrictions of this Article V arc necessary and reasonable for (he protection of the legitimate business interests and goodwill of the Company; and (iv) the consideration of employment given to Employee by the Company under this Agreement, including without limitation, the provision by the Company or its affiliates of Confidential Information and specialized training to Employee, gives rise to die Company's interests in the covenants set forth in this Article V.

5.5 Severability, Employee and the Company agree that it was both parties' intention to enter into a valid and enforceable Agreement. Employee agrees that if any covenant contained in this Article V is Found by a court of competent jurisdiction to contain limitations as to lime, geographic area, or scope of activity that arc not reasonable and impose a greater restraint than is necessary to protect the goodwill or other business interests of the Company or its afiiliatcs. then (he court shall reform the covenant to the extent necessary to cause the limitations contained in the covenant as to time, geographic area, and scope of activity to be restrained to be reasonable and to impose a restraint that is not greater than necessary to protect the goodwill and other business interests of the Company and its affiliates,

5.6 Rights and Remedies llnon Breach. Employee acknowledges that money damages would not he sufficient remedy for any breach of this Article V by the Employee. In

r.iVtn.OYMt N I AGREEMENT PAGE 7

165 :kxAs' the event that the Company determines that Employee has breached or attempted or threatened to breach any provision of this Article V, in addition to any other remedies at law or in equity the Company may have available to it, it is agreed that the Company shall he entitled to terminate any payments then owing to Employee under this Agreement, and, shall he entitled, upon application to any court of proper jurisdiction, to a temporary restraining order or preliminary injunction against Employee prohibiting such breach or attempted or threatened breach by proving only the existence of such breach or attempted or threatened breach. Employee agrees that the period during which the covenants contained in this Article arc in effect shall be computed by excluding from such computation any time during which Employee is in violation of any provision of this Article. Furthermore, Employee agrees to waive any bonding requirement in connection with any injunction or temporary restraining order sought by the Company under this section.

ARTICLE VI MISCELLANEOUS

6.1 Notices. For purposes of this Agreement, notices and all other communications provided for herein shall be in writing ami shall be deemed to have been duly given (a) when received if delivered personally or by courier, (b) on the date receipt is acknowledged if delivered by certified mail, postage prepaid, return receipt requested, or (c) one day after transmission if sent by facsimile transmission with confirmation of transmission, as follows:

If to Employee, addressed to:

1 114 Birch Hill San Antonio, TX 78232

If to Company, addressed to:

108 N. Mesquite Street Corpus Chrisli, TX 78401

or to such other address as cither party may furnish to the other in writing in accordance herewith, except that notices or changes of address shall be effective only upon receipt,

6.2 Annlicabk- Law. This Agreement is entered into under, and shall be construed and interpreted, and the rights of the parties shall be governed by, the laws of (he Stale of Texas with respect to any claim or dispute related to or arising under this Agreement.

6.3 No Waiver. No failure by either party hereto at any time to give notice of any breach by the other parly of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

6.4 Severability and Reformation, if a court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other

EMPLOYMENT AGREEMENT PAGE 8

166 166 provision of this Agreement and all other provisions shall remain in full force and effect. Furthermore, the parties explicitly agree that such court is authorized to reform any such invalid or unenforceable provision to be valid and fully enforceable under the law and that the parties agree that in such case, they will treat the provision as having automatically been so reformed.

(>.5 Comitornarts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement,

6.6 Headings. The section headings have been inserted for purposes of convenience and shall not be used for interpretive purposes.

6.7 Assimimcnt. This Agreement is personal to Employee and shall not be assignable by Employee, This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns; the Company may assign and transfer its rights and obligations under this Agreement, by operation of law or otherwise, to any successor to all or substantially all of its equity ownership interests, assets or business by dissolution, merger, consolidation, transfer or assets, or otherwise as permitted under the Company's organizational documents.

6.8 ¦Survival. The termination of this Agreement and Employee's employment shall not affect any right or obligation of any party which has accrued and vested prior to such termination or which by its terms survives the termination of this Agreement and Employee's employment. The provisions of Section 3.4, except Section 3, 4(c), Articles IV and V shall survive termination of this Agreement.

6.9 Entire Agreement. This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof, and contains all the covenants, promises, representations, warranties and agreements between the parties with respect to employment of Employee by Company. Without limiting the scope of the preceding sentence, all understandings and agreements preceding (he date of execution ol" this Agreement and relating to the subject matter hereof are hereby null and void and of no further force and effect.

6.10 Modification; Waiver. Any modification to or waiver of this Agreement will be effective only with the prior written consent of Company and Employee.

[Signallire page foilw r.v.J

EMPLOYMENT AGREEMENT CAGE 9 167 167 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.

COMPANY:

GRUPO HABANERO, LLC

By: Name; CvCl if- ij(V(^IX\Ar- Htlc:

EMPLOYEE:

Slgitaiiire I'fige in Employment Agrei'mani - Stephen Krtjl niul Crnpo Hahonern, /,/ ( .' •(167391)7 l>OC/>l 168 168 EXHIBIT A

Examples of Operating Expenses

(Spreads heel Ibr calculation of TCI to be attached)

169 169 EXHIBIT U

Company Documents

170ai./w.?7 oora*.; 170 EXHIBIT C

List o)' Members and Units of Mcmhcrsliip Interest with Addresses

Robert 0. Hart, li! 400 Units

Gary Hodge 400 Units

Cliff Graham !00 Units

Stephen Kraft 100 Units

^aKiTJ'xn.Drx'oi 171 GRUPO HABANERO, LLC CORPUS CHR1STI, TEXAS 78401

July 3, 2014

Mr. Stephen Kraft (Via Hand Delivery and U.S. Mail) 1 114 Birch Hill San Antonio, TX 78232

RE: Employment Agreement between Grupo Habanero, LLC and Stephen Kraft effective as of September 19, 2012 (the "Employment Agreement").

Dear Mr. Kraft:

As you know, you resigned from your position with Grupo Habanero, LLC (the "Company") as of June 6, 2014. Pursuant to the provisions of Section 3.4(e) of the Employment Agreement, the Company hereby exercises its option to repurchase your 100 units of membership interest in the

Company (the "Units"). As you know, the Company loses money and without the advances made by the other principals of the Company the Company would be insolvent. In exchange for $10, which the parties agree is the fair market value of the Units, Stephen Kraft hereby sells, transfers and delivers the Units to the Company free and clear of any lien, pledge, charge, security interest, encumbrance or adverse claim, and the Company hereby accepts the Units,

If you agree to the terms of this letter agreement, please execute this Employment Agreement where indicated in the space below and return a copy to me. Upon receipt of the copy of the duly executed letter agreement, I will deliver the consideration contemplated in this letter agreement to you.

Unless we have received the signed letter agreement from you within 30 days of the exercise of the option set forth in this letter agreement, we will assume that you disagree with the fair market value of the Units set forth herein and that you will invoke the mechanisms for determining the fair market value as set forth in Section 3.4(e) of the Employment Agreement. If so, we will have to split the cost of the appraiser and any AAA fees that may be incurred as a result of such procedure.

Sincerely,

GRUPO iRO, LLC AGREED AND ACCEPTED:

By: Name; _ Stephen Kraft Title: Date

(C094S458.DOCX:1} EXHIBIT

172 172 C AFFIDAVIT OF STEVE KRAFT

STATE OF TEXAS § § COUNTY OF BEXAR §

BEFORE ME, the undersigned Notary Public, on this day personally appeared Steve Kraft

who, being by me duly sworn on oath deposed as follows:

1. "I am of sound mind and capable of making this Affidavit, 1 am over the age of

twenty-one years and have never been convicted of a felony or any crime of moral turpitude. I

am competent to testify to the matters contained in this Affidavit. Unless otherwise indicated,

every statement made in this Affidavit is made on my personal knowledge and is true and

correct. This Affidavit is being made in support of Plaintiffs' response to Defendants Motion to

Compel Arbitration and Motion for protection.

2. I am a holder of a 10% ownership interest in Grupo Habanero, LLC whose

principal office is located, 108 N, Mesquite Street, Corpus Christi, TX 78401.

3. I reside at 1115 Birch Hill, San Antonio, TX 78232

4. My Employment Agreement (Attached to the response as Exhibit B) contained a

scrivener's error which stated by address was 1 1 14 Birch Hill, San Antonio, TX 78232

5. I notified Defendants of this error prior to my termination.

6. The letter attached to Plaintiffs' response as Exhibit C was not personally

delivered to me.

7. The letter was apparently posted to my neighbor's door. I did not become of

aware of the letter within 30 days of my termination.

8. 1 did not receive the letter by facsimile transmission.

EXHIBIT

173 173 -D 9, I did not receive the letter by U.S. Certified Mail, return receipt requested within

30 days of my termination by Grupo Habanero, LLC.

FURTHER AFFIANT SAYETH NAUGHT.

STEVE KRAFT

SUBSCRIBED AND SWORN TO BEFORE ME on this the day of January, 20ffS

/-

NOTARY PUBLIC, in and for the STATE OF TEXAS

| #1% CAROL M. CHELKOWSKI T*: wfTI MY COWWiSSK)N EXPIRES R:\I3598.000npleadings\petitions-aiiKvws\KrBfl Affidavit, doc i!W ^aa'15

174 174 DOCUMENT SCANNED AS FILED

20140113038-0225 ' Cause No. 2014-C1-18038

STEPHEN KRAFT INDIVIDUALLY § IN THE DISTRICT COURT AND AS MEMBER ON BEHALF OF § GRUPO HABANERO, LLC, § Plaintiff § § 225™ JUDICIAL DISTRICT vs. § § GARY HODGE AND ROBERT HART III § Defendants § BEXAR COUNTY, TEXAS

ORDER REGARDING MOTION TO COMPEL ARBITRATION

On this day came on to be heard Defendants' DEFENDANTS, GARY HODGE AND

ROBERT HART HI'S MOTION TO COMPEL APPRAISAL AND ABATE LAWSUIT, the

supporting affidavits of Gary Hodge, Haley Bennet, and Kenneth Roark. filed, of record in this / / / fvH-h //x rp>pcn5>cl- (fid ' * mAPb ' case, and the testimony of Gary Hodge in support of the Motion. J* Plaintiff did-not file-ajAaitten V -response, hut he appealed in person and tes Lifted bcfore-tbe-€otnt. A record was made of the /

hearing- The Court is of the opinion, and it is THEREFORE ORDERED,, that Defendants' JJW MOTION TO COMPEL APPRAISAL AND ABATE LAWSUIT is

DENIED.

Dated this 2d- day of 2015

JUDGE PRES V 0 Approved as to form only: L

Roden i, TBN 16733040, 210-598-5400, fax 210-598-5406, email RRegan@BranscombPC.coTn

Richard W. Es 667580, 2104040333, fax 2104040336, email respey@lawespeyxom

{C0808503,DOCX:1 )

176 176 Rule 21. Filing and Serving Pleadings and Motions, TX R RCP Rule 21

Vernon's Texas Rules Annotated Texas Rules of Civil Procedure Part II. Rules of Practice in District and County Courts Section 1. General Rules (Refs & Annos)

TX Rules of Civil Procedure, Rule 21

Rule 21. Filing and Serving Pleadings and Motions

Currentness

(a) Filing and Service Required. Every pleading, plea, motion, or application to the court for an order, whether in the form of a motion, plea, or other form of request, unless presented during a hearing or trial, must be filed with the clerk of the court in writing, must state the grounds therefor, must set forth the relief or order sought, and at the same time a true copy must be served on all other parties, and must be noted on the docket.

(b) Service of Notice of Hearing. An application to the court for an order and notice of any hearing thereon, not presented during a hearing or trial, must be served upon all other parties not less than three days before the time specified for the hearing, unless otherwise provided by these rules or shortened by the court.

(c) Multiple Parties. If there is more than one other party represented by different attorneys, one copy of each pleading must be served on each attorney in charge.

(d) Certificate of Service. The party or attorney of record, must certify to the court compliance with this rule in writing over signature on the filed pleading, plea, motion, or application.

(e) Additional Copies. After one copy is served on a party, that party may obtain another copy of the same pleading upon tendering reasonable payment for copying and delivering. Tx. Supreme Court Misc. Dkt. No. 13-9165 Court of Criminal Appeals Misc. Dkt. No. 13-003

(f) Electronic Filing.

(1) Requirement. Except in juvenile cases under Title 3 of the Family Code, attorneys must electronically file documents in courts where electronic filing has been mandated. Attorneys practicing in courts where electronic filing is available but not mandated and unrepresented parties may electronically file documents, but it is not required.

(2) Email Address. The email address of an attorney or unrepresented party who electronically files a document must be included on the document.

(3) Mechanism. Electronic filing must be done through the electronic filing manager established by the Office of Court Administration and an electronic filing service provider certified by the Office of Court Administration.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1 Rule 21. Filing and Serving Pleadings and Motions, TX R RCP Rule 21

(4) Exceptions.

(A) Wills are not required to be filed electronically.

(B) The following documents must not be filed electronically:

(i) documents filed under seal or presented to the court in camera; and

(ii) documents to which access is otherwise restricted by law or court order.

(C) For good cause, a court may permit a party to file other documents in paper form in a particular case.

(5) Timely Filing. Unless a document must be filed by a certain time of day, a document is considered timely filed if it is electronically filed at any time before midnight (in the court's time zone) on the filing deadline. An electronically filed document is deemed filed when transmitted to the filing party's electronic filing service provider, except:

(A) if a document is transmitted on a Saturday, Sunday, or legal holiday, it is deemed filed on the next day that is not a Saturday, Sunday, or legal holiday; and

(B) if a document requires a motion and an order allowing its filing, the document is deemed filed on the date that the motion is granted.

(6) Technical Failure. If a document is untimely due to a technical failure or a system outage, the filing party may seek appropriate relief from the court. If the missed deadline is one imposed by these rules, the filing party must be given a reasonable extension of time to complete the filing.

(7) Electronic Signatures. A document that is electronically served, filed, or issued by a court or clerk is considered signed if the document includes:

(A) a “/s/” and name typed in the space where the signature would otherwise appear, unless the document is notarized or sworn; or

(B) an electronic image or scanned image of the signature.

(8) Format. An electronically filed document must:

(A) be in text-searchable portable document format (PDF);

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2 Rule 21. Filing and Serving Pleadings and Motions, TX R RCP Rule 21

(B) be directly converted to PDF rather than scanned, if possible;

(C) not be locked; and

(D) otherwise comply with the Technology Standards set by the Judicial Committee on Information Technology and approved by the Supreme Court.

(9) Paper Copies. Unless required by local rule, a party need not file a paper copy of an electronically filed document.

(10) Electronic Notices From the Court. The clerk may send notices, orders, or other communications about the case to the party electronically. A court seal may be electronic.

(11) Non-Conforming Documents. The clerk may not refuse to file a document that fails to conform with this rule. But the clerk may identify the error to be corrected and state a deadline for the party to resubmit the document in a conforming format.

(12) Original Wills. When a party electronically files an application to probate a document as an original will, the original will must be filed with the clerk within three business days after the application is filed.

(13) Official Record. The clerk may designate an electronically filed document or a scanned paper document as the official court record. The clerk is not required to keep both paper and electronic versions of the same document unless otherwise required by local rule. But the clerk must retain an original will filed for probate in a numbered file folder.

Credits Oct. 29, 1940, eff. Sept. 1, 1941. Amended by orders of Sept. 20, 1941, eff. Dec. 31, 1941; Aug. 18, 1947, eff. Dec. 31, 1947; July 11, 1977, eff. Jan. 1, 1978; June 10, 1980, eff. Jan. 1, 1981; April 24, 1990, eff. Sept. 1, 1990; Dec. 11, 2013, eff. Jan. 1, 2014.

Editors' Notes

COMMENT--2013

Rule 21 is revised to incorporate rules for electronic filing, in accordance with the Supreme Court's order--Misc. Docket No. 12-9206, amended by Misc. Docket Nos. 13-9092 and 13-9164--mandating electronic filing in civil cases beginning on January 1, 2014. The mandate will be implemented according to the schedule in the order and will be completed by July 1, 2016. The revisions reflect the fact that the mandate will only apply to a subset of Texas courts until that date.

Notes of Decisions (74)

Vernon's Ann. Texas Rules Civ. Proc., Rule 21, TX R RCP Rule 21 Current with amendments received through 3/15/2015

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3 Rule 21. Filing and Serving Pleadings and Motions, TX R RCP Rule 21

End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 4 9.5. Service, TX R APP Rule 9.5

Vernon's Texas Rules Annotated Texas Rules of Appellate Procedure Section One. General Provisions Rule 9. Documents Generally (Refs & Annos)

TX Rules App.Proc., Rule 9.5

9.5. Service

Currentness

(a) Service of All Documents Required. At or before the time of a document's filing, the filing party must serve a copy on all parties to the proceeding. Service on a party represented by counsel must be made on that party's lead counsel. Except in original proceedings, a party need not serve a copy of the record.

(b) Manner of Service.

(1) Documents Filed Electronically. A document filed electronically under Rule 9.2 must be served electronically through the electronic filing manager if the email address of the party or attorney to be served is on file with the electronic filing manager. If the email address of the party or attorney to be served is not on file with the electronic filing manager, the document may be served on that party or attorney under subparagraph (2).

(2) Documents Not Filed Electronically. A document that is not filed electronically may be served in person, by mail, by commercial delivery service, by fax, or by email. Personal service includes delivery to any responsible person at the office of the lead counsel for the party served.

(c) When Complete.

(1) Service by mail is complete on mailing.

(2) Service by commercial delivery service is complete when the document is placed in the control of the delivery service.

(3) Service by fax is complete on receipt.

(4) Electronic service is complete on transmission of the document to the serving party's electronic filing service provider. The electronic filing manager will send confirmation of service to the serving party.

(d) Proof of Service. A document presented for filing must contain a proof of service in the form of either an acknowledgment of service by the person served or a certificate of service. Proof of service may appear on or be affixed to the filed document. The clerk may permit a document to be filed without proof of service, but will require the proof to be filed promptly.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1 9.5. Service, TX R APP Rule 9.5

(e) Certificate Requirements. A certificate of service must be signed by the person who made the service and must state:

(1) the date and manner of service;

(2) the name and address of each person served; and

(3) if the person served is a party's attorney, the name of the party represented by that attorney.

Credits Eff. Sept. 1, 1997. Amended by Supreme Court Dec. 23, 2002, eff. Jan. 1, 2003. Amended by Supreme Court Dec. 11, 2013, eff. Jan. 1, 2014. Approved by Court of Criminal Appeals Dec. 11, 2013, eff. Jan. 1, 2014.

Editors' Notes

NOTES AND COMMENTS Comment to 2002 change: The change clarifies that the filing party must serve a copy of the document filed on all other parties, not only in an appeal or review, but in original proceedings as well. The rule applies only to filing parties. Thus, when the clerk or court reporter is responsible for filing the record, as in cases on appeal, a copy need not be served on the parties. The rule for original civil proceedings, in which a party is responsible for filing the record, is stated in subdivision 52.7.

Comment to 2013 change: Rule 9 is revised to incorporate rules for electronic filing, in accordance with the Supreme Court's order--Misc. Docket No. 12-9208, amended by Misc. Docket Nos. 13-9092 and 13-9164--mandating electronic filing in civil cases in appellate courts, effective January 1, 2014. In addition, Rule 9.9 is added to provide privacy protection for all documents, both paper and electronic, filed in civil cases in appellate courts.

Notes of Decisions (4)

Rules App. Proc., Rule 9.5, TX R APP Rule 9.5 Current with amendments received through 3/15/2015

End of Document © 2015 Thomson Reuters. No claim to original U.S. Government Works.

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2 Cattle Feeders, Inc. v. Jordan, 549 S.W.2d 29 (1977)

[3] Contracts 549 S.W.2d 29 Options; rights of first refusal Court of Civil Appeals of Texas, Corpus Christi. Equity will excuse strict compliance with terms CATTLE FEEDERS, INC., Appellant, of an option agreement where such compliance v. has been prevented by some act of optionor such as a waiver or misleading representations or Jo Ann JORDAN and G. F. Jordan, Appellees. conduct. No. 1152. | March 10, 1977. 8 Cases that cite this headnote Lessee sought specific performance by lessors of an option to purchase property. The 135th District Court, Goliad County, [4] Landlord and Tenant Frank H. Crain, J., entered judgment for defendants, and Time plaintiff appealed. The Court of Civil Appeals, Nye, C. J., Failure of lessee to provide lessor with timely held that failure of lessee to provide lessors with timely notice of its intent to exercise option to purchase notice of its intent to exercise option was not subject to being did not result from an honest and justifiable excused on ground of an honest and justifiable mistake, that mistake and, hence, was not excused where it right to receive timely notice of lessee's intent to exercise was clear from record that lessee simply never its option was not waived by lessors either expressly or notified lessors of its intention to exercise option impliedly, and that lessors were not equitably estopped from and that written notice, even if sent, was never asserting their right to receive timely notice in absence of received by lessors. evidence establishing a false representation or concealment on part of lessors. 1 Cases that cite this headnote

Affirmed. [5] Estoppel Nature and elements of waiver Estoppel West Headnotes (13) Implied waiver and conduct constituting waiver [1] Contracts Waiver, whether express or implied, is an Options; rights of first refusal intentional release, relinquishment, or surrender As a general rule, in absence of equities, an of a right that is at the time known to the party optionee is held to strict compliance with terms making it. of option agreement. 1 Cases that cite this headnote 4 Cases that cite this headnote [6] Estoppel [2] Contracts Nature and elements of waiver Options; rights of first refusal In order to constitute a waiver, it is essential that An optionee will be excused from strict there be an existing right, benefit or advantage, compliance with terms of an option agreement a knowledge, actual or constructive, of existence where his conduct in failing to comply is not due and an actual intention to relinquish it. to willful or gross negligence on part of optionee 1 Cases that cite this headnote but is the result of an honest and justifiable mistake. [7] Estoppel 9 Cases that cite this headnote Nature and elements of waiver

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Waiver takes place where one dispenses with Intent performance of something which he has a right Before an estoppel will arise, there must be to exact, and occurs where one in possession certainty to every intent. of any right, whether conferred by law or by contract, with full knowledge of material facts Cases that cite this headnote does or forbears to do something, and such action is inconsistent with his right or his intention to [12] Estoppel rely upon it. Essential elements 1 Cases that cite this headnote Failure to prove one of the essential elements of estoppel is fatal to the cause of action.

[8] Estoppel 2 Cases that cite this headnote Implied waiver and conduct constituting waiver [13] Estoppel In order to establish an implied waiver, there Contracts relating to real estate must be a clear, unequivocal and decisive act Lessors were not equitably estopped from showing such a purpose. asserting their right under lease to receive timely 1 Cases that cite this headnote notice of lessee's intent to exercise its option to purchase where, apart from failing to establish any false representation or concealment on part [9] Landlord and Tenant of lessors, evidence clearly showed that lessor Time did nothing to prevent lessee from exercising Timely notice of lessee's intent to exercise option in question. its option to purchase property was neither expressly nor impliedly waived by lessors where 1 Cases that cite this headnote even lessee's president testified that there was no oral agreements concerning lease and only evidence of an implied waiver was fact that lessors were occasionally in area and knew of Attorneys and Law Firms some improvements being made by lessee to property. *30 Fly, Moeller & Stevenson, Victoria, William C. Reiff, Houston, for appellant. 1 Cases that cite this headnote Marion M. Lewis and Jackie W. Marr, Guittard & Henderson, Victoria, for appellees. [10] Estoppel Essential elements An equitable estoppel occurs when a false OPINION representation or concealment of material fact is made with actual or constructive knowledge of NYE, Chief Justice. facts, to a party without knowledge or means of knowledge of real facts, and with intention that Suit was brought by Cattle Feeders, Inc., the appellant herein, it should be acted on, and party to whom it is against Jo Ann and G. F. Jordan, appellees, seeking specific made relies on or acts on representation to his performance of an option to purchase 91.755 acres of land prejudice. in Goliad County. Trial was before a jury. From a judgment denying all relief, appeal has been perfected to this Court. 4 Cases that cite this headnote On January 15, 1971, Cattle Feeders, Inc. entered into a lease agreement with Jo Ann and G. F. Jordan covering some [11] Estoppel 91.755 acres of land in two noncontiguous tracts. This land is

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located north of U. S. Highway 59 in *31 Goliad County and properly exercised the written option agreement is not before is divided by a farm to market road. This acreage was part of a us. large tract of land in the same area which was either owned or leased by Cattle Feeders, Inc. as a part of their cattle feedlot Through two points of error, Cattle Feeders allege that operation. The lease stated that it was for farming, grazing and the trial court erred in refusing to permit the appellant livestock feeding purposes only. The term was 5 years. The to present to the jury, by evidence and special issues, its lease provided that all fences and water reservoirs constructed alternative theory that Cattle Feeders was entitled to specific by the tenant were to remain on the premises. The lease, by performance of the option contract on equitable grounds. The its terms, granted Cattle Feeders an option to purchase the appellant is relying on the language in Jones v. Gibbs, 133 land in question based on certain conditions precedent, one Tex. 627, 130 S.W.2d 265 (1939, opinion adopted) to the of which was at least 90 days' written notice of such election effect that strict compliance with the terms or conditions of to purchase. The option agreement provided that time was of an option is excused when such failure is brought about by the essence concerning exercising the option to purchase. certain conduct of the optionor. The crux of Cattle Feeders' argument is that the appellees engaged in such conduct as In either April or May of 1971, Cattle Feeders alleged that it would have excused strict compliance with the terms of the had sent a letter to the Jordans expressing its desire to exercise option agreement and the trial court erred in refusing to allow the option and purchase the land. No copy of this letter was Cattle Feeders to present this evidence to the jury. It is, produced or introduced into evidence. On December 5, 1975, therefore, necessary that we carefully review appellant's bill Cattle Feeders sent a letter to the Jordans in which they of exceptions evidence to determine the validity of appellant's tendered the first purchase payment for the land pursuant to points of error. the terms set out in the option agreement. The Jordans refused this check on the grounds that they had not been notified of Appellant Cattle Feeders' first bill of exceptions covered the Cattle Feeders' intent to exercise its option as provided for in testimony of a Mr. Carl Knabe who did some clearing work the option agreement. on the land in question. Mr. Knabe testified that he burned off brush, root-plowed, raked the land and stacked and burned Shortly thereafter, Cattle Feeders brought this suit for specific roots. He testified that this work was done in June and July of performance of the option agreement on two grounds. The 1970 and that he charged Cattle Feeders $40.00 to $42.00 per first theory was that it had in fact properly exercised the acre for the work. He testified that this work makes the land option by giving written notice 90 days prior to January 15, more productive and *32 increased the value of the land. He 1976. Alternatively, Cattle Feeders urged that in the event also testified that the value of such services at the time of the that Cattle Feeders had not satisfied the requirement of the trial was approximately $80.00 per acre. option agreement, the Jordans were estopped from asserting the 90 day notice requirement. The Jordans, after excepting The next testimony excluded by the trial court was that of the to certain allegations in Cattle Feeders' pleadings, specifically president of the appellant's corporation, a Mr. Pat Hencerling. denied Cattle Feeders' claims and brought a cross-action for Mr. Hencerling testified that in June and July of 1970, immediate possession of the land. At the beginning of the Cattle Feeders executed certain documents with the appellee trial, the Jordans filed a motion in limine to exclude from the concerning this land. He testified that these documents were jury all of the evidence pertaining to waiver or estoppel on later embodied in the lease agreement. He testified that the the part of the Jordans. Although the trial court granted the lease agreement was part of an overall transaction between motion, all of the excluded evidence is before us on bill of the parties to purchase the land and that the land in question exceptions. was leased to Cattle Feeders and not purchased outright so as to gain a tax advantage for the appellees. He testified that The jury found that no written notice of the exercising of the lease price was about $10.00 per acre above the going the option was mailed to Mrs. Jordan by Cattle Feeders; rate. He testified that he cleared the land, planted various that Mrs. Jordan did not receive any such notice; and that grasses and built ponds on the land. He also testified that Cattle Feeders was not damaged by Mrs. Jordan's refusal he had the land sloped for the feed yards and constructed a to surrender possession of the land to them. Cattle Feeders mobile home park for his employees. He testified he paid does not attack these findings by the jury in this appeal. approximately $40.00 to $45.00 per acre to clear the land, Therefore, the question as to whether or not the appellant several hundred dollars per acre to slope certain land and $1,500.00 each for the three ponds that were constructed. He

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also testified he spent $35.00 to $45.00 per acre to plant grass S.W.2d 555 (1961); Tidwell v. Lange, 531 S.W.2d 384 on approximately 5 acres to prevent erosion. He testified that (Tex.Civ.App. Waco 1975, no writ). The equities which the corporation spent between $10,000.00 and $12,000.00 will excuse strict compliance with the terms of an option to construct the mobile home park. He testified that it also agreement are set out in *33 Jones v. Gibbs, 130 S.W.2d spent approximately $2,000.00 on fences. He stated that he 265 (Tex.Com.App. 1939, opinion adopted), see pp. 272-273. spent about $60.00 per acre to fertilize some 80% of the land These equitable principles can be summarized. An optionee in 1975 and planted oats at a cost of $40.00 per acre. In will be excused from strict compliance where his conduct in summary, he testified he would not have spent any of this failing to comply was not due to willful or gross negligence on money if he was not under the impression that Cattle Feeders the part of the optionee but was rather the result of an honest either owned the land or would acquire the land. He then and justifiable mistake. In addition, equity will also excuse pointed out on a map other land in the immediate area which strict compliance where the strict compliance was prevented the corporation had previously purchased from the appellees. by some act of the optionor such as waiver or misleading He testified that all this work on the land in question was representations or conduct. clearly visible from the road adjacent to the land and that the appellees were seen in the vicinity of the property. [4] There is no evidence in the record that Cattle Feeders' failure to provide appellees with timely notice of its intent On cross-examination under the bill of exceptions, to exercise the option was the result of an honest and Hencerling stated that he had the right, under the lease, justifiable mistake. To the contrary, the record indicates to make all the improvements and that appellees could not that the appellant simply never notified the appellees of its have stopped any of the improvements. He admitted that he intention to exercise the option. The written notice, even if had never discussed the improvements with the appellees. sent, was never received by appellees. Finally, Hencerling stated that the reason he made all the improvements was his reliance on the written notice to [5] [6] [7] Next, we consider waiver and estoppel. appellees. Waiver, whether express or implied, is an intentional release, relinquishment, or surrender of a right that is at the time The final testimony under the bill of exceptions was that of known to the party making it. In order to constitute a the appellee Jo Ann Jordan. Mrs. Jordan testified that she waiver, it is essential that there be an existing right, benefit owned land in the vicinity of the land in question which she or advantage, a knowledge (actual or constructive) of the leased or used to graze cattle. She stated that since 1974, she existence and an actual intention to relinquish it. It must be a visited the area about once very two weeks but between 1971 voluntary act made with full knowledge of the facts. Rio Delta and 1975, she only occasionally visited the area. She said she Land Company v. Johnson, 475 S.W.2d 346 (Tex.Civ.App. observed the improvements on the subject land. She testified Corpus Christi 1971, writ ref'd n. r. e.). A waiver takes place she always thought appellant would exercise its option but where one dispenses with performance of something which never knew this for a fact. She said her assumption was based he has a right to exact, and occurs where one in possession of on the improvements and the integration of the land into the any right, whether conferred by law or by contract, with full remainder of the appellant's operations. She said she refused knowledge of material facts does or forbears to do something, the tendered money because she was no longer bound by and such action is inconsistent with his right or his intention the agreement. She stated that prior to December 5, 1975, to rely upon it. Ford v. Culbertson, 158 Tex. 124, 308 S.W.2d she received no communication from appellant indicating an 855 (1958); First National Bank of Midland v. Stoutco, intent to exercise its option. She stated that had the option Inc., 530 S.W.2d 619 (Tex.Civ.App. San Antonio 1975, writ been properly exercised she would have sold the land to dism'd); Zurich Insurance Company v. Wiegers, 527 S.W.2d appellant as per the agreement. 511 (Tex.Civ.App. Austin 1975, no writ); Rice v. Travelers The only remaining question involved in this case is whether Indemnity Company, 526 S.W.2d 698 (Tex.Civ.App. Waco or not the appellant is entitled to the land in question through 1975, writ ref'd n. r. e.); Texana Oil Company v. Stephenson, some act or acts of the appellees which excused or prevented 521 S.W.2d 104 (Tex.Civ.App. El Paso 1975, no writ). the exercising of the option agreement. [1] [2] [3] As a general rule, in absence of equities, [8] [9] We have carefully reviewed all of the record and an optionee is held to strict compliance with the terms of find that there is no evidence of any waiver. Even appellant's an option agreement. Zeidman v. Davis, 161 Tex. 496, 342 president testified there were no oral agreements concerning

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252 (Tex.Civ.App. Amarillo 1975, writ ref'd n. r. e.); Astro the lease. The only evidence of implied waiver is the fact that Sign Company v. Sullivan, 518 S.W.2d 420 (Tex.Civ.App. appellee was in the area occasionally, knew of some of the Corpus Christi 1974, writ ref'd n. r. e.). Before an estoppel will improvements to the land and that appellant was using the arise, there must be certainty to every intent. Rio Delta Land land. In order to establish an implied waiver, there must be a Company v. Johnson, supra. The evidence totally fails to clear unequivocal and decisive act showing such a purpose. establish any false representation or concealment on the part Corrin v. Slagle, 300 S.W.2d 657 (Tex.Civ.App. Fort Worth of the appellees. In fact, the evidence clearly shows that the 1957, writ ref'd n. r. e.); Bounds v. Home Mut. Life & appellees did nothing to prevent the appellant Cattle Feeders Accident Ass'n No. 1, 290 S.W.552 (Tex.Civ.App. Amarillo from exercising the option in question. Failure to prove one of 1927, no writ). There is simply no evidence anywhere in the the essential *34 elements of estoppel is fatal to the cause of record that appellee waived her right to notice of appellant's action. Barfield v. Howard M. Smith Company of Amarillo, intention to exercise its option. 426 S.W.2d 834 (Tex.Sup.1968). [10] [11] [12] [13] The elements of equitable estoppel are: 1) a false representation or concealment of material fact; After reviewing all of appellant's bill of exceptions evidence, 2) made with actual or constructive knowledge of the facts; it is unnecessary for us to determine the correctness of the 3) to a party without knowledge or means of knowledge of trial court's action in preventing the jury from hearing this the real facts; 4) made with the intention that it should be evidence. Even if all of the evidence had been submitted to acted on; and 5) the party to whom it was made must have the jury, it would not have supported a judgment favorable to relied on or acted on it to his prejudice. Gulbenkian v. Penn, appellant's claim to equitable relief. 151 Tex. 412, 252 S.W.2d 929 (1952); Clifton v. Ogle, 526 S.W.2d 596 (Tex.Civ.App. Fort Worth 1975, writ ref'd n. Appellant's points of error are overruled. The judgment of the r. e.); Connally v. Home Insurance Company, 525 S.W.2d trial court is AFFIRMED.

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© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5 Chambers v. Hunt Petroleum Corp., 320 S.W.3d 578 (2010)

1 Cases that cite this headnote 320 S.W.3d 578 Court of Appeals of Texas, Tyler. [2] Contracts Options; rights of first refusal Brady W. CHAMBERS and Exercise of an option must be unqualified and Evelyn B. Chambers, Appellants, strictly in accordance with the terms of the v. agreement, unless equity requires otherwise. HUNT PETROLEUM CORPORATION, Appellee. 1 Cases that cite this headnote No. 12–09–00225–CV. | Aug. 25, 2010. [3] Contracts Synopsis Options; rights of first refusal Background: Lessors brought action to quiet title to 3.94 acre tract of land, seeking declaration that lessee's option to The failure of the optionee to comply strictly purchase was invalid and judgment for back taxes. Lessee with the terms or conditions of the option will be filed counterclaim seeking declaration that the option was excused when the failure is brought about by the valid and a decree ordering its specific performance, seeking conduct of the optionor. an award of clearing and mowing costs under the theory 1 Cases that cite this headnote of quantum meruit, and attorney's fees. The 188th Judicial District Court, Gregg County, David Scott Brabham, J., entered judgment for lessee, and lessors appealed. [4] Contracts Options; rights of first refusal Where a defendant has openly and avowedly Holdings: The Court of Appeals, Bill Bass, J., held that: refused to perform his part of an option contract or declared his intention not to perform it, the [1] lessors' refusal to perform lease's option to purchase plaintiff seeking to exercise the option need not excused lessee's failure to tender consideration as required to make tender of payment of the consideration exercise option; before bringing suit; formal tender is excused when tender would be a useless and idle [2] lessee's failure to pay taxes did not preclude specific ceremony. performance; and 1 Cases that cite this headnote

[3] evidence was insufficient to support award in quantum meruit for clearing and mowing costs. [5] Contracts Options; rights of first refusal A tender of consideration is excused where Affirmed in part, reversed in part and rendered in part, and the optionor intentionally avoids giving the reversed and remanded in part. purchaser an opportunity of making it.

1 Cases that cite this headnote West Headnotes (18) [6] Landlord and Tenant Breach of Agreement [1] Contracts Options; rights of first refusal Evidence was sufficient to support finding that lessors openly refused to perform lease's Strict compliance with the provisions of an option to purchase which excused lessee's failure option contract is required. to tender $100 consideration with 60 days

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of the notice of the exercise of the option Courts will not construe a contract provision as to purchase; evidence indicated that lessors a condition precedent unless they are compelled refused to respond to lessee's repeated attempted to do so by language that may be construed in no to communicate with them during the 60- other way. day period, but, almost immediately after the expiration of that time period, gave lessor formal 1 Cases that cite this headnote notice to vacate the premises. [12] Contracts Cases that cite this headnote Conditions Precedent in General If a contract contains a condition precedent, it [7] Contracts must either have been met or excused before the Excuses for Nonperformance or Defects other party's obligation can be enforced. A prerequisite to the remedy of excuse of performance is that the covenants in a contract Cases that cite this headnote must be mutually dependent promises. [13] Specific Performance Cases that cite this headnote Fraud or inequitable conduct of plaintiff subsequent to contract [8] Contracts A court may refuse to grant equitable relief Dependent or independent stipulations such as specific performance to a party who has When a covenant goes only to part of the been guilty of unlawful or inequitable conduct consideration on both sides and a breach may regarding the issue in dispute. be compensated for in damages, it is to be regarded as an independent covenant, unless this Cases that cite this headnote is contrary to the expressed intent of the parties. [14] Specific Performance Cases that cite this headnote Sufficiency of performance by plaintiff in general [9] Contracts Lessee's failure to pay taxes as required under What are conditions precedent in general lease did not preclude specific performance of A “condition precedent” in a contract is an event lease's option to purchase provision; lease's taxes that must occur or an act that must be performed provision was a covenant independent of the before a right can accrue to enforce an obligation. option to purchase, $100 payment for exercise of option was nominal and real price for tract was Cases that cite this headnote embraced within $39,600 consideration already paid on execution of the lease, lessors knew [10] Contracts of the option to purchase and never informed Conditions Precedent in General lessee of the taxes due or asked lessee to pay its pro rata share, and damages were available to Such terms as “if,” “provided that,” “on compensate lessors. condition that,” or some similar phrase of conditional language are normally required to Cases that cite this headnote create a condition precedent.

1 Cases that cite this headnote [15] Implied and Constructive Contracts Nature of employment and promise to pay [11] Contracts Evidence was insufficient to support award in Conditions Precedent in General quantum meruit to lessee of 3.94 acre tract for cost incurred in clearing and mowing lessors'

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entire 7.94 acre tract; lessee's own evidence, including memos and invoices, showed that the Attorneys and Law Firms work was done “as a favor” to lessor and that *580 Deborah J. Race, Lawrence L. Beason, for Appellants. lessee “thought it would be in our best interest to help out” lessor by cleaning up his side of Diane V. Devasto, J. Matt Rowan, Jerry S. Harris, for the property, and lessee had never previously Appellee. asked lessors to pay any part of the clearing and mowing costs, which had been incurred four Panel consisted of WORTHEN, C.J., GRIFFITH, J., and years prior to the subject quiet title action. BASS, Retired Justice, Twelfth Court of Appeals, sitting by assignment. Cases that cite this headnote

[16] Implied and Constructive Contracts OPINION Work and labor in general; quantum meruit BILL BASS, Justice. To recover under the doctrine of quantum meruit, a plaintiff must establish that: (1) valuable This is an appeal from a judgment granting specific services and/or materials were furnished, (2) to performance to Hunt Petroleum Corporation of an option the party sought to be charged, (3) which were to purchase, and awarding damages and attorney's fees. In accepted by the party sought to be charged, three issues, Brady W. Chambers and Evelyn Chambers and (4) under such circumstances as reasonably contend that (1) the option had expired because Hunt failed notified the recipient that the plaintiff, in to timely tender the $100.00 purchase money, (2) Hunt was performing, expected to be paid by the recipient. not entitled to enforce the option because it was in default on the contract's provisions, and (3) there was insufficient Cases that cite this headnote evidence to support the award of damages. We affirm the trial court's order for specific performance, reverse and render the [17] Implied and Constructive Contracts award of damages, render judgment awarding taxes paid by Amount of Recovery the Chamberses, and remand the cause for a redetermination The measure of damages for a claim in quantum of attorney's fees. meruit is the reasonable value of the work performed and the materials furnished. *581 BACKGROUND Cases that cite this headnote The parties' predecessors in interest, Sonat Exploration [18] Implied and Constructive Contracts Company and First Church of the Nazarene, on August Work and labor in general; quantum meruit 7, 1992, entered into a lease with an option to purchase involving 3.94 acres of a 7.94 acre tract in Longview, Gregg Implied and Constructive Contracts County, Texas. The term of the lease was fifteen years. Sonat Implication of request or promise to pay paid $39,300.00 at the execution of the lease “as rent for the The party seeking to recover in quantum entire lease term.” The lease required Sonat to pay all ad meruit must establish that the work done was valorem taxes and other costs during the term “as if it were accepted by the party to be charged under the fee simple owner,” and provided that the church would such circumstances as reasonably notified the have no ownership responsibilities. The lease granted Sonat recipient that the plaintiff in performing expected the exclusive option to purchase the 3.94 acre tract “at any to be paid by the recipient. time prior to the end of the lease term.” The lease and the option were assignable. The option agreement contained the Cases that cite this headnote following provision:

The option shall be exercisable by giving written notice to the Lessor

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prior to the end of the lease and to this letter. On September 20, 2007, Russell sent a third the purchase shall be completed by letter to the Chamberses referring to the numerous occasions conveyance of the property by General that Hunt had attempted without success to communicate with Warranty Deed and payment of the them by telephone despite Hunt's leaving several messages purchase price within sixty (60) days for them on their voice mail. Another warranty deed was from the delivery of the notice of enclosed for the Chamberses to execute. The letter concluded the intent to exercise the option. The by asking the Chamberses to call one of *582 two numbers purchase price shall be one hundred to schedule a time to close. The Chamberses did not respond dollars ($100) to be paid in cash at to the third letter. closing. On October 8, 2007, Hunt received a letter from the On November 22, 2004, the Chamberses bought the 7.94 acre Chamberses' lawyer advising Hunt it was in default under the tract that was subject to the lease for $50,000.00. Shortly lease, and, as a result, was now holding over. thereafter, the Chamberses received notice from the City of Longview that excessive overgrowth on the tract was a On November 5, 2007, the Chamberses filed a suit to quiet violation of the municipal code. Brady Chambers contacted title to the 3.94 acre tract. They sought a declaration that Hunt Petroleum Corporation, the successor in interest to the option to purchase was invalid on various grounds, and Sonat, to notify it of the problem and its responsibility under judgment awarding them the back taxes they had paid on the the lease to clear the 3.94 acre tract to correct the code property. violations. Hunt counterclaimed seeking a declaration that the option was In May 2005, Hunt hired a contractor to clear and mow the valid and a decree ordering its specific performance. It also 3.94 acres. The contractor “began clearing the approximately sought an award of 50.6% of the land clearing and mowing 8 acres, our half and as a favor to Mr. Chambers, his half costs under the theory of quantum meruit, and attorney's fees. also.” The cost for clearing and mowing the 7.94 acres was $17,353.00. The foreman's memo noted that “there was a The trial court found that Hunt had properly and timely brush and dirt pile on Mr. Chambers['s] half of the property exercised its option. The trial court ordered the Chamberses that was buried in a pit that we dug. We put the excess dirt in to execute a warranty deed, and, upon its delivery, that Hunt a low area on his side to help it from collecting water.” The tender $100.00 to the Chamberses. The court also awarded foreman's memo also stated that “[w]e thought it would be in Hunt $11,132.00 in damages (50.6% of the total clearing and our best interest to help out Mr. Chambers by cleaning up his mowing charges), and $29,289.91 in attorney's fees. side.” Hunt mowed the entire tract in 2006 and 2007. Only the $4,625.00 cost of the 2007 mowing was charged to this tract. DID THE OPTION EXPIRE BECAUSE The Chamberses paid $1,698.00 in taxes attributable to Hunt's OF HUNT'S FAILURE TO TENDER 3.94 acres. THE $100.00 PURCHASE MONEY?

On July 16, 2007, Brad Russell, district landman for Hunt, In their first issue, the Chamberses contend that the option to sent the Chamberses formal notice of Hunt's exercise of its purchase expired because Hunt failed to meet its contractual option to purchase. Russell stated in the letter that Hunt would obligation to tender the $100.00 purchase price within the prepare a plat and general warranty deed for the Chamberses' sixty day period allowed for closing after its notice of review. The Chamberses did not respond. Russell sent another exercise of the option. They maintain that there are no letter to the Chamberses on September 8, 2007, once again special circumstances that serve to excuse Hunt from strict informing them that Hunt was exercising the option in the compliance with the contract's terms. The Chamberses argue lease and enclosing a general warranty deed. Russell asked that there is no evidence, or at least insufficient evidence, or the Chamberses to review the deed and sign it. In his letter, findings to support the trial court's conclusion that they were Russell stated that he would call the Chamberses and fix a solely to blame for the failure to close. time to meet with them to pay the $100.00 purchase price, pursuant to the lease terms. The Chamberses did not respond

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[3] [4] [5] However, the failure of the optionee to comply Standard of Review strictly with the terms or conditions of the option will be In an appeal from a bench trial, the trial court's findings of excused when the failure is brought about by the conduct fact have the same force and effect as a jury verdict and are of the optionor. Jones, 133 Tex. at 640, 130 S.W.2d at 272. reviewable for legal and factual sufficiency under the same “It is thoroughly settled that where a defendant has openly standards that are applied to the review of a jury verdict. and avowedly refused to perform his part of the contract or Anderson v. City of Seven Points, 806 S.W.2d 791, 794 declared his intention not to perform it, the plaintiff need not (Tex.1991). make tender of payment of the consideration before bringing suit.” Burford v. Pounders, 145 Tex. 460, 466, 199 S.W.2d When reviewing a finding for legal sufficiency, we must 141, 144 (Tex.1947); Rus–Ann. Dev., Inc. v. ECGC, Inc., credit evidence favorable to the judgment if a reasonable 222 S.W.3d 921, 927 (Tex.App.-Tyler 2007, no pet.). Formal fact finder could, disregard contrary evidence unless a tender is excused when tender “would be a useless and idle reasonable fact finder could not, and reverse the fact finder's ceremony.” Burford, 145 Tex. at 467, 199 S.W.2d at 145. determination only if the evidence presented in the trial court A tender of consideration is excused where the optionor would not enable a reasonable and fair minded fact finder to intentionally avoids giving the purchaser an opportunity of reach the judgment under review. City of Keller v. Wilson, making it. 81 C.J.S. Specific Performance § 116 (1977). 168 S.W.3d 802, 827 (Tex.2005). The court should sustain an appellant's legal sufficiency challenges if the record reveals (1) there is a complete absence of evidence of a vital fact; Discussion (2) the court is barred by rules of law or evidence from [6] The trial court made the following findings of fact giving weight to the only evidence offered to prove a vital germane to this issue. fact; (3) the evidence offered to prove a vital fact is no more than a mere scintilla; or (4) that the evidence conclusively 10. On July 16, 2007, prior to the expiration of the Lease establishes the opposite of a vital fact. Id. More than a scintilla with Option, Defendant gave Plaintiffs written notice of its of evidence exists if the evidence rises to a level that would election to exercise the option to purchase the 3.94 acres. enable reasonable and fair minded people to differ in their Plaintiffs received this notice on or about July 25, 2007, conclusions. Ford Motor Co. v. Ridgway, 135 S.W.3d 598, but made no response to it. 601 (Tex.2004). 11. Subsequent to July 25, 2007, Defendant made several attempts to contact Plaintiffs, both in writing and by When considering a factual sufficiency challenge, we telephone, in order to arrange a closing of the purchase of consider all of the evidence and set aside the judgment only the 3.94 acres in accordance with the terms of the Lease if it so contrary to the overwhelming weight of the evidence with Option, but Plaintiffs ignored all of [Defendant's] that it is clearly wrong and unjust. Cain v. Bain, 709 S.W.2d attempts to do so. 175, 176 (Tex.1986). 12. Defendant was at all material times ready, willing and *583 We review the trial court's conclusions of law de novo. able to close the purchase of the 3.94 acres pursuant to the State v. Heal, 917 S.W.2d 6, 9 (Tex.1996). terms of the Lease with Option.

Based on these findings, the trial court concluded that “the Applicable Law failure to close was solely the fault of the [Chamberses].” [1] [2] Strict compliance with the provisions of an option contract is required. See Jones v. Gibbs, 133 Tex. 627, 639– The Chamberses acknowledge that “[i]t is thoroughly settled 40, 130 S.W.2d 265, 271 (Tex. Comm'n App.1939, opinion that where a defendant has openly and avowedly refused to adopted). Exercise of an option must be unqualified and perform his part of the contract or declared his intention not strictly in accordance with the terms of the agreement, unless to perform it, the plaintiff need not make tender of payment of equity requires otherwise. City of Brownsville v. Golden the consideration before bringing suit.” See Burford, 145 Tex. Spread Electric Coop., 192 S.W.3d 876, 880 (Tex.App.- at 466, 199 S.W.2d at 144; Rus–Ann Dev., 222 S.W.3d at 927. Dallas 2006, pet. denied). However, the Chamberses insist that their silence in response to Hunt's attempts to communicate with them did not amount to an open refusal to perform the contract that might serve to

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excuse Hunt's tender of the $100.00 consideration. The lease agreement required payment of the $100.00 consideration within sixty days of the notice of the exercise of the option. Applicable Law The Chamberses argue that because Hunt did not timely pay [7] [8] [9] [10] [11] [12] “A prerequisite to the the consideration, its attempt to exercise the option was not remedy of excuse of performance is that the covenants in “strictly in accordance with the terms of the agreement” and a contract must be mutually dependent promises.” Hanks therefore ineffective. See Besteman v. Pitcock, 272 S.W.3d v. GAB Bus. Servs., Inc., 644 S.W.2d 707, 708 (Tex.1982). 777, 784 (Tex.App.-Texarkana 2008, no pet.). “[W]hen a covenant goes only to part of the consideration on both sides and a breach may be compensated for in We disagree. The trial court was justified in inferring that damages, it is to be regarded as an independent covenant, the Chamberses' refusal *584 to respond to Hunt's repeated unless this is contrary to the expressed intent of the parties.” attempts to communicate with them during the critical sixty Id. A “condition precedent” in a contract is an event that day period for closing was calculated to defeat Hunt's exercise must occur or an act that must be performed before a of its option. Almost immediately after the expiration of right can accrue to enforce an obligation.” Centex Corp. v. the lease and the sixty days provided for closing of Hunt's Dalton, 840 S.W.2d 952, 956 (Tex.1992). Such terms as exercise of its option, the Chamberses did communicate with “if,” “provided that,” “on condition that,” or some similar Hunt giving it formal notice to vacate the premises. In our phrase of conditional language are normally required to create view, the Chamberses' conduct was tantamount to a refusal to a condition precedent. Criswell v. European Crossroads perform their part of the contract. A tender of consideration Shopping Ctr., 792 S.W.2d 945, 948 (Tex.1990). Courts will is excused where the optionor intentionally avoids giving not construe a contract provision as a condition precedent the purchaser an opportunity of making it. See 81 C.J.S unless they are compelled to do so by language that may be Specific Performance § 116. A tender of the nominal $100.00 construed in no other way. See Reilly v. Rangers Mgmt., Inc., consideration under these circumstances “would have been a 727 S.W.2d 527, 530 (Tex.1987). “If a contract contains a vain and useless thing.” See Burford, 145 Tex. at 466, 199 condition precedent, it must either have been met or excused S.W.2d at 144. before the other party's obligation can be enforced.” Cal– Tex Lumber Co. v. Owens Handle Co., 989 S.W.2d 802, 809 Ample evidence supports the trial court's findings. The (Tex.App.-Tyler 1999, no pet.). findings support its conclusion that the failure to close within sixty days following Hunt's notice was solely the fault of the [13] “A court may refuse to grant equitable relief [specific Chamberses. The Chamberses' first issue is overruled. performance] to a [party] who has been guilty of unlawful or inequitable conduct regarding the issue in dispute.” Lazy M. Ranch, Ltd. v. TXI Operations, LP, 978 S.W.2d 678, 683 (Tex.App.-Austin 1998, pet. denied). IS A PARTY IN DEFAULT ON OTHER CONTRACT PROVISIONS ENTITLED TO ENFORCE AN OPTION IN THAT CONTRACT? *585 Discussion [14] We conclude that the requirement found in Article III Article III of the lease required the lessee, Hunt, to pay “all of the lease that the lessee pay taxes and other ownership ad valorem taxes during the term of the lease” and to pay costs associated with the 3.94 acre tract is a covenant “all other costs associated with the property as if it were the independent of the option agreement found in Article V. fee simple owner.” In their second issue, the Chamberses It is not a dependent covenant or condition precedent maintain that Hunt is not entitled to the equitable remedy of whose nonperformance would render the option agreement specific performance of the option provided by Article V of unenforceable by Hunt. the lease because it had breached the agreement by failing to pay the taxes on the 3.94 acres, and by allowing the tract A breach by Hunt of its obligations under Article III is readily to become overgrown in violation of the contract and the compensable by damages. The lease contains no language Longview municipal code. The question presented is whether from which it may be even inferred that the parties intended Hunt's breach of the covenant to pay the taxes and other to condition the lessee's enforcement of the option agreement costs associated with the property excuses the Chamberses' upon its payment of taxes and other costs associated with performance of the contract's option provision. the property. An examination of the entire agreement reveals

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no relationship between the taxes and other costs provision the option to lease 300 acres out of the 1,669 acres to mine and the option provision. There is no conditional language subsurface materials. To exercise the option, the contract indicating that the enforceability of the option is dependent required TXI (1) to give Lazy M. written notice of its upon Hunt's performance of its obligations under Article III. decision to exercise the option within six months of the execution of the contract and (2) tender $98,000.00 to Lazy In Cook v. Young, 269 S.W.2d 457 (Tex.Civ.App.-Fort Worth M. TXI attempted to exercise the option by delivering written 1954, no writ), the lessee sought specific performance of an notice accompanied by a $98,000.00 bank check. Lazy M. option to purchase clause in the lease agreement. Id. at 458. returned the check with a letter explaining that it would The lessor argued that the grant of summary judgment in the not lease the land, because TXI had *586 breached the lessee's favor was improper, because there was a fact issue contract by entering on and testing Lazy M.'s land outside the regarding whether the lessee had complied with a term of the 1,669 acres specified in the contract. Id. The uncontradicted lease requiring that it pay all the utility bills for the leased summary judgment evidence showed that, despite Lazy M.'s property. Id. at 460. The court of appeals held that compliance repeated objections, TXI intentionally persisted in coring with the terms of the lease was not a condition precedent to and testing outside of the area subject to the agreement. In the lessee's exercise of the option. Id. The court stated that conducting these tests, TXI stole valuable information about “[w]hile we find such a provision in the lease contract, we do the subsurface potential of the ranch. Id. at 681. not find it in that part of the instrument containing the option to purchase. The option is unconditionally granted and there is The Austin Court of Appeals held that TXI's conduct no requirement creating any condition precedent or otherwise constituted a material breach of an implied covenant not to limiting the right to exercise the option.” Id. explore outside the area agreed upon. Id. Consistent with the other opinions cited, the court of appeals acknowledged In Giblin v. Sudduth, 300 S.W.2d 330 (Tex.Civ.App.-Austin that having decided that TXI's conduct was a material breach 1957, writ ref'd n.r.e.), a contract for the sale of land also of an implied covenant, it must determine whether the gave the buyer an option to buy an adjoining tract. The option implied covenant was independent or dependent. Id. A breach provided as follows: of an independent covenant would give the nonbreaching party only a cause of action for damages resulting from the The seller agrees to give the purchaser breach. Id. The breach of a dependent covenant gives the an option on the acre tract joining nonbreaching party the election to terminate the contract. the property they are buying from the Id. In that event TXI would have forfeited its option. seller on the east; this option will “Forfeitures will be avoided unless [the] contract language be for 5 years and the purchasers admits of no other construction or results in a construction can take up their option at any time that is unreasonable, inequitable, or oppressive.” Id. (citing within 5 years from date by paying the Reilly, 727 S.W.2d at 530). The court considered several seller $1500.00 in cash. The purchaser factors in determining whether it would be inequitable and agrees to pay a yearly rental of $10.00. oppressive to characterize a party's nonperformance as merely a breach of an independent covenant: (1) the extent to Id. at 332. The court of appeals held that the purchaser's which the nonbreaching party will be deprived of the benefit failure to pay the rent did not bar the purchaser's exercise it reasonably could have anticipated had the breach not of the option. “The option was not conditioned upon the occurred, (2) the extent to which the injured party can be payment of the annual rental, the option was for five years[,] adequately compensated for the part of the benefit lost, and the purchasers were allowed to take up their option at any (3) the likelihood that the defaulting party will cure its time within five years by paying the seller $1500.00 in cash.” failure, and (4) the extent to which the conduct of the party Id. failing to perform comports with standards of good faith and fair dealing. Id. at 681–82 (citing RESTATEMENT OF In a case cited by the Chamberses, Lazy M. Ranch, Ltd. v. CONTRACTS (SECOND) § 241(a) (1981); Hernandez v. TXI Operations, LP, the contract required TXI to pay Lazy Gulf Group Lloyds, 875 S.W.2d 691, 693 (Tex.1994)). M. $2,000.00 for the right to conduct subsurface tests for gravel on part of the Lazy M. land—1,669 acres specifically The Chamberses stress that Hunt was unaware of the option described by metes and bounds. Lazy M. Ranch, 978 S.W.2d to purchase until they informed Hunt that the 3.94 acres was at 680. For the same consideration, the contract gave TXI

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overgrown and that the lease required Hunt to maintain the breach of an independent covenant to pay those taxes would tract in compliance with the municipal code. The Chamberses be genuinely inequitable and oppressive. The Chamberses' speculate that but for their notice, Hunt would have remained second issue is overruled. ignorant of their option to purchase and probably would have failed to exercise it. The Chamberses paid the taxes on the entire tract. They claim they bought the entire tract without IS THE EVIDENCE SUFFICIENT TO knowledge of the easement. The equities, the Chamberses SUPPORT THE AWARD OF DAMAGES contend, favor them and make it inequitable and oppressive FOR CLEARING AND MOWING? to reward Hunt by enforcing the option. [15] In their third issue, the Chamberses contend that the We, on the contrary, believe the equities weigh in Hunt's evidence is legally and factually insufficient to support the favor. The $100.00 to be paid at closing was nominal in that award to Hunt of $11,132.00 representing 50.6% of the it bore no relationship to the value of property exchanged. clearing and mowing charges Hunt incurred on the entire The real price paid for the tract upon the option's exercise was tract. The Chamberses' share of the 7.96 acres equals 50.6%. embraced within the $39,600.00 consideration already paid by the lessee at the execution of the lease in 1992. The lease The foreman's memo showing the cost for clearing and was of record when the Chamberses bought the property. mowing the entire tract stated “on 5–04–2005, M & J The Chamberses secured a title policy when they bought Construction began clearing approximately 8 acres (our half the property in 2004. The lease with option to purchase was and as a favor to Mr. Chambers, his half also....” The memo pointed out in the policy as an exception to coverage. The detailed how Mr. Chambers had met with him and stated, Chamberses knew or should have known of the option to “We thought it would be in our best interest to help out Mr. purchase when they bought the property. Chambers by cleaning up his side.”

Once informed that the 3.94 acres was overgrown, Hunt Brady Chambers testified that he walked around the tract with responded immediately by clearing the tract to cure the the foreman and the contractor. Chambers recalled that they problem and comply with the contract and the municipal told him that he was being so nice that they would clean up the code. The Chamberses complain of Hunt's failure to pay brush piles he had on his side. He testified that he had never the ad valorem taxes on the 3.94 acres from November of asked Hunt to mow his property. Chambers stated that, in fact, 2004 *587 when they bought the 7.96 acres until the time he had already had his part of the tract mowed for $200.00. In of trial. The Chamberses, as record owners, received the 2005, Hunt spent $17,353.28 on the property, but it charged tax notices for the entire tract. They concede they never only $4,625.00 to this property in 2007. Hunt never asked for informed Hunt regarding the taxes or asked it to pay its payment for this work, the bulk of which was performed in pro rata share. Even if Hunt had neglected to pay the taxes May 2005, almost four years before trial in April 2009. Hunt after being told what was due, the injured party could have sought to recover under the doctrine of quantum meruit. been adequately and easily compensated by damages. Hunt's conduct deprived the Chamberses of no benefit it reasonably could have anticipated. Hunt's conduct was fully consistent Applicable Law with standards of good faith and fair dealing. [16] [17] “To recover under the doctrine of quantum meruit, a plaintiff must establish that: (1) valuable services We have weighed the equities using the criteria set out and/or materials were furnished, (2) to the party sought in Lazy M. Fairness does not require that we regard the to be charged, (3) which were accepted by the party covenants breached by Hunt as constructively dependent sought to be charged, and (4) under such circumstances in order to avoid an inequitable or oppressive result. The as reasonably notified the recipient that the plaintiff, in covenants breached by Hunt were independent covenants performing, expected to be paid by the recipient.” Heldenfels whose nonperformance will not excuse the nonbreaching Bros., Inc. v. City of Corpus Christi, 832 S.W.2d 39, 41 party's performance. Hunt's predecessor had already paid all (Tex.1992). The measure of damages for a claim in quantum but $100.00 of the actual consideration for the property. Hunt meruit is the reasonable value of the work performed and the was never informed of the amount of taxes due nor was it materials furnished. M.J. Sheridan & Son Co. v. Seminole asked to pay them. A forfeiture of Hunt's option because of its

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recipient that the plaintiff in performing expected to be paid Pipeline Co., 731 S.W.2d 620, 625 (Tex.App.-Houston [1st by the recipient.” See Heldenfels Bros., Inc., 832 S.W.2d at Dist.] 1987, no writ). 41.

*588 Discussion There is an absolute absence of any evidence in this record Hunt proved the expense it incurred in clearing and mowing indicating that Hunt expected to be paid for the work done the 7.96 acres by the memos and invoices. Hunt's own on the Chamberses' part of the tract. The evidence, in fact, evidence shows that the work on the Chamberses' half was conclusively establishes the contrary. The Chamberses' third done “as a favor to Mr. Chambers.” The same memo states, issue is sustained. “We thought it would be in our best interest to help out Mr. Chambers by cleaning up his side.” CONCLUSION This is consistent with Chambers's testimony that he was led to believe that Hunt buried the brush piles on his part of That part of the judgment granting specific performance of the tract as a favor for his cooperation. Brad Russell, Hunt's the option to purchase the 3.94 acres is affirmed. The award landman who testified to the clearing and mowing costs, of damages to Hunt in the amount of $9,433.61 ($11,132.00 conceded that he had no reason to disbelieve Chambers's clearing and mowing costs less $1,698.39 taxes paid by testimony. Hunt, he told the court, had never previously asked Chambers attributable to the 3.94 acres) is reversed and the Chamberses to pay any part of the clearing and mowing judgment rendered that Hunt take nothing on its claim for costs, although most of the work had been done four years clearing and mowing costs. Judgment is rendered awarding before. the Chambers $1,698.39 for taxes they paid on the 3.94 acres. The award of attorney's fees to Hunt is reversed, and the [18] The party seeking to recover in quantum meruit must cause is remanded to the trial court for reconsideration of the establish that the work done was accepted by the party to be amount of attorney's fees. charged “under such circumstances as reasonably notified the

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© 2015 Thomson Reuters. No claim to original U.S. Government Works. 9 Faucette v. Chantos, 322 S.W.3d 901 (2010)

Frost, J., concurred in part, dissented in part, and filed 322 S.W.3d 901 opinion. Court of Appeals of Texas, Houston (14th Dist.).

H. Frank FAUCETTE and J. Lawrence West Headnotes (23) Schadler, Appellants/Cross–Appellees, v. Grace C. CHANTOS and A.J. Chantos [1] Appeal and Error Rendering Final Judgment & Associates, Inc. d/b/a Sarco of Texas, Appellees/Cross–Appellants. When appellate court reviews cross-motions for summary judgment, it considers both motions No. 14–08–00536–CV. | Sept. 23, 2010. and renders the judgment that the trial court should have rendered. Synopsis Background: Former employer company and its principal 1 Cases that cite this headnote shareholder brought action against former employees for breach of contract, tortious interference with contract, and [2] Contracts other claims after failed sale of company to employees. Options; rights of first refusal The 151st District Court, Harris County, Caroline Elizabeth An “option” is a privilege or right which the Baker, J., granted company and shareholder partial summary owner of property gives another to buy certain judgment, awarded, after a jury trial, company and property at a fixed price within a certain time. shareholder damages for breach of contract, and granted judgment notwithstanding the verdict to former employees on 3 Cases that cite this headnote tortious interference claim. Both parties appealed.

[3] Contracts Options; rights of first refusal Holdings: The Court of Appeals, Jeffrey V. Brown, J., held An option contract has two components: (1) that: an underlying contract that is not binding until accepted, and (2) a covenant to hold open to the [1] former employees' acceptance of option to purchase optionee the opportunity to accept. remaining share of company did not vary materially from the described option, and thus acceptance could create a binding 2 Cases that cite this headnote contract;

[2] evidence was legally and factually sufficient to support [4] Contracts jury's finding on breach of contract damages; Options; rights of first refusal Generally, acceptance of an option must [3] company's claim was properly characterized as one for be unqualified, unambiguous, and strictly in tortious interference with prospective relations rather than accordance with the terms of the agreement. tortious interference with existing contracts; and 2 Cases that cite this headnote [4] company did not demonstrate that employees engaged in independently tortious or unlawful acts that interfered with its [5] Contracts business relations, as required to support tortious interference Options; rights of first refusal with prospective relations claim. Contracts Qualified or conditional acceptance of offer Affirmed.

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A conditional acceptance of an offer is generally considered a rejection and counteroffer, but that 1 Cases that cite this headnote does not mean the parties to an option cannot modify the option or the terms of the underlying [9] Contracts sale by mutual agreement. Options; rights of first refusal

1 Cases that cite this headnote Having exercised an option by election the optionee must then proceed to perform the conditions of the option contract in order to [6] Corporations and Business Organizations complete the transaction. Performance or breach Former employees' acceptance of option to Cases that cite this headnote purchase remaining shares of former employer company did not vary materially from the [10] Contracts option described in contract, and thus acceptance Options; rights of first refusal could create a binding contract as would The acceptance of an option ascribes contractual support company and its principal shareholder's duties to the optionee in the same way that it does breach of contract claim against employees after the optionor. failed sale of company, despite argument that employees' mere statements that they were ready Cases that cite this headnote to purchase some of the stock were not sufficient to accept the option; parties arranged a share [11] Appeal and Error ownership agreement that was consistent with Necessity of objection in general intended purpose of option, and by notifying company of their intent to exercise the option, Appellate court would measure the sufficiency employees entered into a bilateral contract and of the evidence against the language in jury became obligated to perform. charge regarding damages for breach of contract in company's action against former employees Cases that cite this headnote regarding failed sale of company to employees, where employees did not complain that the charge's measure of damages was improper or [7] Contracts otherwise object to the charge. Options; rights of first refusal Election is the act of the optionee which converts Cases that cite this headnote the option contract into a binding promise on the part of the optionor to sell. [12] Corporations and Business Organizations Cases that cite this headnote Damages or amount of recovery Evidence was legally and factually sufficient to support jury's finding of breach of contract [8] Contracts damages of $192,266 to principal shareholder Offer and acceptance in general of former employer company in shareholder's Contracts action against former employees regarding Options; rights of first refusal failed sale of company shares to employees, The effect of a timely and proper election under where amount was exactly the price per share an option contract, and of a timely and proper multiplied by the number of shares jury charge acceptance of an offer, is the same, in that the stated would have been sold had the breach of option contract, on the one hand, and the offer on contract not occurred. the other, are turned into a bilateral contract. Cases that cite this headnote

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To prevail on a tortious-interference claim, [13] Damages plaintiff is required to prove: (1) contracts Nature and theory of compensation existed which were subject to defendant's Jury award of breach of contract damages interference; (2) defendant willfully and to principal shareholder of former employer intentionally committed acts of interference; (3) company in amount of $192,266 was not a defendant's acts proximately caused damages; double recovery in shareholder's action against and (4) actual damages or loss occurred. former employees regarding failed sale of shareholder's company shares to employees, 3 Cases that cite this headnote even if shareholder was awarded the price she would have received for the shares while [17] Torts retaining the shares; jury was not asked to Prospective advantage, contract or relations; determine fair market value of shares or to expectancy calculate shareholder's net profits on sale of Elements of tortious interference with shares. prospective contract are: (1) a reasonable Cases that cite this headnote probability that the parties would have entered into a contractual relationship; (2) an independently tortious or unlawful act by the [14] Judgment defendant that prevented the relationship from Where directed verdict or binding occurring; (3) the defendant did such act with instructions would have been proper a conscious desire to prevent the relationship Judgment from occurring or knew that the interference Where there is no evidence to sustain was certain or substantially certain to occur as verdict a result of his conduct; and (4) the plaintiff A trial court may disregard a jury's verdict and suffered actual harm or damage as a result of the render a judgment notwithstanding the verdict if defendant's interference. no evidence supports one or more of the jury's 10 Cases that cite this headnote findings or if a directed verdict would have been proper. [18] Torts Cases that cite this headnote Contracts A third party is prohibited from tortiously [15] Appeal and Error interfering with a terminable-on-notice or Judgment terminable-at-will contract, but merely inducing Appeal and Error one of the parties to exercise his right to Extent of Review terminate contractual relations after giving the required notice does not necessarily constitute To determine whether the trial court erred tortious interference with contract under state in rendering a judgment notwithstanding the law. verdict, appellate court reviews the entire record, crediting favorable evidence if reasonable jurors 1 Cases that cite this headnote could and disregarding contrary evidence unless reasonable jurors could not. [19] Torts Cases that cite this headnote Competition Harm that results only from lawful competition [16] Torts is not compensable by the interference with Contracts contract tort.

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Cases that cite this headnote Cases that cite this headnote

[20] Torts [23] Torts Business relations or economic advantage, Business relations or economic advantage, in general in general Former employer's claim against its former Former employer did not demonstrate that employees was properly characterized as one for former employees engaged in independently tortious interference with prospective relations, tortious or unlawful acts that interfered with its rather than tortious interference with existing business relations with customers, as required contracts as employer argued, in action arising to support employer's tortious interference with out of employees' formation of new business and prospective relations claim against employees obtaining of some of employer's former lines of arising out of employees' formation of new business; although two of employer's customers business and obtaining of some of employer's exercised the terminable-on-notice provisions former lines of business; employer's argument of their contracts, there was no evidence that that employees planned to resign without notice either customer breached their contract with or warning, in a manner and at a time when they employer, and employer did not allege or show knew it would harm employer, only supported that employees induced customers to breach interference with employer's own performance contracts during thirty-day termination period. of its contracts.

4 Cases that cite this headnote 12 Cases that cite this headnote

[21] Torts Prospective advantage, contract or relations; expectancy Attorneys and Law Firms

One's interest in a contract terminable at will is *904 Clinard J. Hanby, The Woodlands, for appellants. primarily an interest in future relations between the parties, and he has no legal assurance of Bradley R. Walton, Peter Michael Kelly, James B. Lewis, them; for this reason, an interference with this Susan J. Taylor, Houston, for appellees. interest is closely analogous to interference with prospective contractual relations. Restatement Panel consists of Justices FROST, BROWN, and Senior (Second) of Torts § 766 comment. Justice HUDSON. *

Cases that cite this headnote * Senior Justice J. Harvey Hudson, sitting by assignment.

[22] Trial Statement of Issues OPINION Jury question was broad enough to encompass claim for tortious interference with prospective JEFFREY V. BROWN, Justice. relations, in former employer's claim against This case involves the failed sale of a company to its its former employees regarding employees' employees, who instead resigned from the company, formed formation of new business and obtaining of their own business, and obtained some of the seller's former some of employer's former lines of business, lines of business. The company, A.J. Chantos & Associates, where jury question asked whether employees Inc., d/b/a Sarco of Texas (“Sarco”) and its principal “intentionally interfered with the manufacturer's shareholder, Grace C. Chantos, sued former employees H. representative contracts [employer] had” with Frank Faucette and J. Lawrence Schadler, alleging breach of customers. contract, tortious interference with contract, and other claims.

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Both sides moved for summary judgment on the breach-of- Grace and Andy had two children, Linda and Andrew. contract claim, and the trial court granted Chantos and Sarco's Andrew worked for Sarco until 1993, when he started his motion for partial summary judgment on liability for breach own agency, Sarco Central, in New Braunfels. Linda married of contract. Faucette, who worked for Sarco for a few years in the 1980s, returned to Sarco as a salesman in 1994, and remained there The case was then tried to a jury on damages for breach until October 7, 2003. J. Lawrence Schadler worked as a of contract and on the tortious-interference claim. The jury salesman for Sarco from 1994 until October 7, 2003. The only awarded Chantos $192,266.00 in damages for breach of other sales employee for Sarco was Lane Malmburg, who contract. The jury found both defendants liable for tortious started with Sarco in 2002. Malmburg resigned the same day interference and awarded Sarco $201,407.21 in damages. The as Faucette and Schadler—October 7, 2003. trial court granted Faucette *905 and Schadler's motion for judgment notwithstanding the verdict on the tortious- For many years, Andy Chantos had suffered from a serious interference claim, but entered a judgment on the breach-of- illness. In 2001, he and Grace began to consider retiring contract claim for the amount awarded by the jury, attorney's and entered into negotiations with Chumley & Associates fees, pre- and post-judgment interest, and costs. to sell the agency. Ultimately, Andy and Grace broke off negotiations with Chumley and offered to sell Sarco to On appeal, appellants Faucette and Schadler contend the trial Andrew, Faucette, and Schadler. 1 Andrew already owned court erred in granting Chantos and Sarco's motion for partial 260 of Sarco's 1,000 shares, most of which were obtained in summary judgment on the breach-of-contract claim and in not 2001 when Sarco acquired Andrew's company, Sarco Central. granting their motion for summary judgment. In resolving this In the spring and summer of 2001, the parties executed the issue, we are asked to consider the infrequent circumstance “Sale and Purchase Agreement” containing the option to of a grantor of an option suing the holder of the option for purchase all the shares of stock in Sarco (the “contract”). allegedly breaching the option's terms. The appellants also contend that the evidence at trial was legally and factually 1 Grace Chantos testified that the reason she and Andy insufficient to prove damages for breach of contract. broke off negotiations with Chumley was because Chumley could not offer permanent employment to On cross-appeal, Chantos and Sarco contend that the trial Faucette and Schadler. court erred in granting Faucette and Schadler's motion for The contract provided that, when Faucette, Schadler, and judgment notwithstanding the verdict because Chantos and Andrew acquired forty-nine percent of the company, they Sarco presented legally sufficient evidence of each element would have the option to purchase the remainder of the of tortious interference. company from Chantos. The relevant portion of the contract provided: For the reasons explained below, we affirm. At such time as Buyers have acquired a total of forty-nine percent (49%) of the *906 authorized and outstanding I shares of the Corporation, Buyers shall have the option to purchase the remaining shares, but only in a lump sum Grace Chantos and her husband, Andy, formed Sarco of wherein Buyers purchase all remaining shares. Texas, a representative sales agency for plumbing supplies, in 1979. In 1983, they incorporated the agency as A.J. Chantos *** & Associates, Inc., d/b/a Sarco of Texas. Sarco had contracts with manufacturers in the plumbing, air-conditioning, and This Agreement shall terminate unless the Sale and heating industry. It was standard in the industry that the Purchase contemplated is completed in its entirety within contracts with the manufacturers had thirty-day termination thirty-two (32) months from the date of execution of the provisions. Despite the thirty-day cancellation provision, Agreement. Sarco represented several manufacturers for twenty years or more. These manufacturers included Elkay, Vanguard, Andy became gravely ill in late 2001, and after that he and McGuire, and Precision. Grace did not actively participate in the operation of Sarco. Faucette, Schadler, and Linda operated Sarco on a day-to-day

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basis. On August 18, 2002, Andy died. Grace returned to work On the day Faucette, Schadler, and Malmburg resigned, in May of 2003, and Linda resigned. Grace was in California. Consequently, the office was left without salespeople and unable to function adequately. 4 On July 22, 2003, Faucette, Schadler, Chantos, Andrew, That same day, Vanguard sent Sarco written notice that it and attorney Brad Walton met to discuss exercising the was terminating its manufacturer's sales representative *907 option. At the time of the meeting, Faucette owned 118 of contract with the company. Three days later, on October 10, Sarco's 1,000 shares; Schadler owned 116 shares, and Andrew 2003, Elkay also terminated its sales agreement with Sarco. owned 260 shares. Thus, together they owned 494 shares, Elkay and Vanguard signed representation agreements with or 49.4 percent of the company. 2 The parties discussed Tri–Rep shortly after that. Grace and Andrew were unable to a plan in which Faucette and Schadler were to purchase find experienced salespeople to staff the company, and Sarco enough shares from Chantos to bring their ownership to 260 was therefore unable to service its remaining lines. After shares each—the same number Andrew already owned. 3 Tri–Rep began operating, its annual sales ranged between $1 The company would then purchase the remaining shares. The million and $3 million. parties also discussed having another meeting within sixty days, apparently to finalize the agreement. But no second 4 Faucette and Schadler testified that they intended to work meeting occurred, and Faucette and Schadler did not purchase the entire week after they resigned, but because Grace the shares. changed the locks they were unable to do so. Schadler also testified that they continued to take orders for Sarco 2 from Malmburg's home for thirty days, and Sarco was At trial, the testimony reflected that Schadler owned 120 paid the commissions on those orders. shares, but we are confined to the summary judgment record for purposes of the appellants' first issue. 3 Schadler testified that the reason the parties discussed II equalizing the shares was that Grace was concerned about Schadler and Faucette having more shares than Breach of the Option Contract Andrew. Andrew, however, testified that the change actually helped Schadler and Faucette, who did not have Grace and Sarco moved for partial summary judgment on to purchase as many shares. their breach-of-contract claim. They alleged that, after Andy Sometime after the July 22 meeting, Faucette and Schadler's passed away, Faucette and Schadler “concluded that it would business relationship with Grace deteriorated, and after one be far less expensive to simply take the clients and suppliers particularly heated encounter with Grace, they decided to of [Sarco] rather than to continue with the purchase.” They leave Sarco and form their own representative agency. In also alleged that Faucette and Schadler persuaded several of early September, Faucette discussed leaving Sarco with Sarco's largest manufacturers and clients to leave Sarco and Schadler and Malmburg. They all resigned on October 7, to sign representation contracts with them. Grace and Sarco 2003. About a week or two before they resigned, Schadler contended that Faucette and Schadler breached the option went to some of the manufacturers with which Sarco contract when, at the meeting on July 22, 2003, Faucette and had representative contracts, including Elkay, Vanguard, Schadler gave notice of their intent to exercise their option to McGuire, and Precision, and posed a “hypothetical” question purchase all of the remaining shares of the company, but then asking if he and the others left Sarco, whether they could failed to complete the purchase. represent those manufacturers. Also, in late September or early October, Faucette spoke with an attorney about Faucette and Schadler responded to this motion and filed incorporating a new manufacturer's representative company their own motion for summary judgment on the breach- to be called Tri–Rep Sales, Inc. Faucette, Schadler, and of-contract claim. In Faucette and Schadler's motion for Malmburg did not inform Grace of their plans or that they summary judgment and response, they argued that they did were going to quit. They continued to represent to Grace and not exercise the option because they did not tender the Andrew that they intended to complete the purchase of shares funds to purchase the shares within the time required by the in Sarco. contract. Consequently, they argued, their failure to timely exercise the option according to its terms legally amounted to nothing more than a rejection of the option.

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purchase the shares. Among other things, Grace and Sarco On November 2, 2006, the trial court granted Grace and supported their motion with the following testimony from Sarco's motion for partial summary judgment. Faucette and Faucette's deposition: Schadler moved for reconsideration, which the trial court denied. Q. During that [July 22] meeting did you state that you were ready, willing and able to go forward with the deal to In their first issue, Faucette and Schadler contend that the trial purchase the remaining 51 percent in conjunction with— court erred in denying their motion for summary judgment A. I believe we did. on the breach-of-contract claim and in granting Grace and Sarco's motion. Q. —and that would have been in conjunction with Andrew C. Chantos and Lawrence— [1] We review the trial court's grant of summary judgment de novo. Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d A. Correct. 150, 156–57 (Tex.2004). A movant must establish its right Q. —Schadler. to summary judgment by showing that no genuine issue of material fact exists and that it is entitled to judgment And you told Grace you were going to go forward with the as a matter of law. Nixon v. Mr. Prop. Mgmt. Co., 690 deal? S.W.2d 546, 548 (Tex.1985). We take as true all evidence favorable to the non-movant, and we indulge every reasonable A. I believe I did. inference and resolve any doubts in the non-movant's favor. Joe, 145 S.W.3d at 157. We review a summary judgment Grace and Sarco also pointed to similar excerpts of both for evidence that would enable reasonable and fair-minded Faucette's and Schadler's testimony in which they confirmed jurors to differ in their conclusions. Wal–Mart Stores, Inc. v. that they agreed to exercise the option to purchase the Spates, 186 S.W.3d 566, 568 (Tex.2006) (per curiam). When remaining fifty-one percent of the corporation and discussed we review cross-motions for summary judgment, we consider how they would finance the purchases. Based on Faucette both motions and render the judgment that the trial court and Schadler's testimony, Grace and Sarco contended that should have rendered. Coastal Liquids Transp., L.P. v. Harris Faucette and Schadler committed to exercise the option County Appraisal Dist., 46 S.W.3d 880, 884 (Tex.2001). to purchase the remaining shares of the company and specifically worked out the details of how the purchase [2] [3] It is undisputed that, under the terms of the contract, was to be made, including seeking financing. But rather Faucette and Schadler, along with Andrew Chantos, acquired than complete the sale, Faucette and Schadler breached their an option to compel Grace to sell the remaining shares of contractual obligation by failing and refusing to carry through Sarco on the stated terms before the option expired. An with their agreement to purchase the remaining shares of option is a privilege or right which the owner of property stock. gives another to buy certain property at a fixed price within a certain time. *908 State v. Clevenger, 384 S.W.2d 207, [4] [5] [6] On appeal, Faucette and Schadler argue that 210 (Tex.Civ.App.-Houston 1964, writ ref'd n.r.e.). An option the option is not enforceable because their alleged acceptance contract has two components: (1) an underlying contract that varied materially from the option described in the contract. is not binding until accepted and (2) a covenant to hold open to They also contend that their alleged acceptance was, at best, a the optionee the opportunity to accept. Comeaux v. Suderman, statement of intent to purchase shares sometime in the future, 93 S.W.3d 215, 220 (Tex.App.-Houston [14th Dist.] 2002, and the sale was not completed by the deadline specified no pet.); Hott v. Pearcy/Christon, Inc., 663 S.W.2d 851, 853 in the contract. Generally, acceptance of an option must be (Tex.App.-Dallas 1983, writ ref'd n.r.e.). unqualified, unambiguous, and strictly in accordance with the terms of the agreement. Comeaux, 93 S.W.3d at 220; Crown In their motion for partial summary judgment, Grace and Const. Co. v. Huddleston, 961 S.W.2d 552, 558 (Tex.App.- Sarco contended that in the meeting on July 22, 2003, San Antonio 1997, no writ). A conditional acceptance of an Faucette and Schadler committed to exercise their option to offer is generally considered a rejection and counteroffer. See purchase the remaining fifty-one percent of the Sarco shares United Concrete Pipe Corp. v. Spin–Line Co., 430 S.W.2d and agreed that they would make financial arrangements to 360, 363–64 (Tex.1968); Hutcherson v. Cronin, 426 S.W.2d

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638, 641 (Tex.Civ.App.-Tyler 1968, no writ). But that does any additional shares does not raise an inference defeating not mean the parties to an option cannot modify the option summary judgment. The intended purpose of the option was or the terms of the underlying sale by mutual agreement. to enable the majority shareholders (now Grace) to relinquish See Humble Oil & Refining Co. v. Westside Inv. Corp., 428 ownership of the company to the other shareholders (Andrew, S.W.2d 92, 94–95 (Tex.1968); Wall v. Trinity Sand & Gravel Faucette, and Schadler) once they acquired forty-nine percent Co., 369 S.W.2d 315, 317 (Tex.1963). of the company. The evidence conclusively shows that the parties expressed an agreement consistent with this purpose. Faucette and Schadler argue that their alleged acceptance The arrangement to equalize the share ownership and to have varied materially from the option contained in the contract the company itself buy the remaining shares merely goes to because the parties' agreement was changed. Specifically, the manner in which the other shareholders would accomplish at the July 22 meeting, Faucette and Schadler expressed an the agreed-upon purpose of buying out Grace's ownership intent only to purchase enough shares from Grace so that interest. On these facts, therefore, there was no counteroffer they would each own 260 shares, the same number as held and rejection that rendered the agreement unenforceable. by Andrew Chantos. Conversely, the offer contained in the contract provided that the “Buyers” shall have the option to Faucette and Schadler argue, however, that the alleged purchase *909 the remaining shares, “but only in a lump acceptance was not made in the manner or within the sum wherein Buyers purchase all remaining shares.” The time the contract required. They point to the contract's “Buyers” are defined in the contract as Andrew C. Chantos, H. provision that the option requires the buyers to “purchase” Frank Faucette, and J. Lawrence Schadler. Thus, Faucette and all of the remaining shares and to do so “only in a lump Schadler argue, the option called for three buyers, Andrew, sum.” Therefore, they contend, the contract required them to Faucette, and Schadler, to make a lump-sum purchase of fifty- actually tender performance, not merely to announce an intent one percent of the shares of stock in Sarco. But the summary- to perform without ever tendering any money. As additional judgment evidence showed that the alleged acceptance called support for their interpretation of the contract, Faucette and for Faucette to purchase 142 shares, Schadler to purchase Schadler point to the “Term of Agreement” provision, which 144 shares, Andrew to purchase nothing, and Sarco itself states that the contract “shall terminate unless the Sale and to purchase the remaining 220 shares. 5 Consequently, they Purchase contemplated in its entirety within thirty-two (32) contend, their alleged acceptance amounted to nothing more months from the date of execution of the Agreement.” This than a counteroffer and rejection of the option contained in the language, they contend, requires that actual payment be made contract. See Antonini v. Harris County Appraisal Dist., 999 prior to the end of thirty-two months to exercise the option. S.W.2d 608, 610–11 (Tex.App.-Houston [14th Dist.] 1999, Thus, their mere statements at the July 22 meeting that they no pet.) (“Acceptance must be identical with the offer in order were ready to purchase some of Grace's stock were not to make a binding contract.”). sufficient to accept the option.

5 In their motion, Grace and Sarco relied on a line of cases Faucette's testimony included the following exchange: holding that unless an *910 option to purchase contains Q. So the plan was as of this July 22 meeting, was provision to the contrary, the optionee is only required to for you, Lawrence Schadler and Andrew C. Chantos to all equalize the number of shares you owned at notify the optionor prior to the expiration of the option 26 percent each and for Sarco of Texas to purchase period, and then tender performance within a reasonable time the remaining 22 percent. Is that correct? thereafter to exercise the option. See, e.g., English v. English, A. I believe that is correct. 44 S.W.3d 102 (Tex.App.-Houston [14th Dist.] 2001, no Schadler also confirmed this plan in the excerpts of his pet.); Maxwell v. Lake, 674 S.W.2d 795, 798 (Tex.App.- testimony attached to Grace and Sarco's motion. Dallas 1984, no writ); San Antonio Joint Stock Land Bank v. It is undisputed that Grace owned fifty-one percent of the Malcher, 164 S.W.2d 197, 200 (Tex.Civ.App.-San Antonio company's shares, her son Andrew owned twenty-six percent 1942, writ ref'd w.o.m.). In English, for example, an ex-wife of the shares, and Faucette and Schadler owned the rest. notified her ex-husband that she was exercising the option The summary-judgment evidence shows that at the July contained in the parties' divorce decree to buy out her ex- 22 meeting, Faucette and Schadler agreed to exercise the husband's interest in their homestead within the option period, option to purchase Grace's shares. That Andrew, one of but she did not complete the purchase before the option the “Buyers” defined in the contract, was not purchasing expired. Id. at 104. This court held that “where the option

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instrument is silent regarding the method of exercising the optionor to sell. The effect of a timely option, giving timely notice to the optionor and subsequently and proper election under the contract, tendering performance within a reasonable time is sufficient and of a timely and proper acceptance to exercise the option.” Id. (citing Maxwell v. Lake, 674 of an offer, is the same, in that the S.W.2d at 798). Grace and Sarco argue that, because the option contract, on the one hand, and option provision of the contract did not specify the manner or the offer on the other, are turned method in which they were to be notified that the option was into a bilateral *911 contract. Having accepted, Faucette's and Schadler's agreement to purchase exercised the option by election the the remaining shares of stock at the July 22 meeting was optionee must then proceed to perform sufficient to exercise the option. the conditions of the option contract in order to complete the transaction. On appeal, Faucette and Schadler argue that these cases stand merely for the proposition that unless the option Ferguson v. von Seggern, 434 S.W.2d 380, 385 provides otherwise, acceptance of the option does not require (Tex.Civ.App.-Dallas 1968, writ ref'd n.r.e.) (emphasis the optionee to tender actual payment before the option added); see also Hott, 663 S.W.2d at 854 (“When the expires; they do not hold that an optionee may accept an optionee gives notice or otherwise complies with the terms option by mere notice without ever tendering payment. Thus, and conditions of the option ... a bilateral executory contract Faucette and Schadler contend, an optionee who never tenders is formed, one party having the duty to convey and the performance cannot enforce the option. They also argue that other the duty to pay.”). The cases in which an optionee the option in this case does “provide otherwise” because it exercises the option and thus binds the optionor to perform requires the purchase be completed in its entirety according to are legion. See, e.g., Sinclair Refining Co. v. Allbritton, 147 its terms and within the specified deadline. In any event, they Tex. 468, 218 S.W.2d 185, 188–90 (1949); Smith v. Hues, 540 contend that because they never tendered payment within the S.W.2d 485, 490 (Tex.Civ.App.-Houston [14th Dist.] 1976, option period, they never exercised the option. As support, writ ref'd n.r.e.); Luccia v. Ross, 274 S.W.3d 140, 149–50 Faucette and Schadler cite Kruegel v. Berry, 75 Tex. 230, (Tex.App.-Houston [1st Dist.] 2008, pet. denied); Odum v. 9 S.W. 863, 864–65 (1888), in which the supreme court Sims, 609 S.W.2d 881, 882 (Tex.Civ.App.-San Antonio 1980, concluded that a lessee who had an option to purchase leased no writ); Kenver Corp. v. Robinson, 492 S.W.2d 317, 319– land for a specified amount within two years “had the right at 20 (Tex.Civ.App.-Beaumont 1973, writ ref'd n.r.e.); Giblin any time during the term of the lease ... to purchase the land v. Sudduth, 300 S.W.2d 330, 332–34 (Tex.Civ.App.-Austin by paying the consideration agreed upon,” but because he did 1957, writ ref'd n.r.e.); see also El Paso Natural Gas Co. v. not seek to enforce the option before the expiration of the two- W. Bldg. Assocs., 675 F.2d 1135, 1139–41 (10th Cir.1982) year period, and the land was then sold to a third party, the (holding optionee's acceptance of option without tender of lessee was not entitled to specific performance of the option purchase price created mutually binding contract entitling contained in the lease. Kruegel did not involve a situation optionee to specific performance). But the acceptance of an in which the lessee gave notice of an intent to exercise the option ascribes contractual duties to the optionee in the same option but failed to pay the consideration for the option within way that it does the optionor. By notifying Grace and Sarco the option period. And, the court in Kruegel did not address of their intent to exercise the option, Faucette and Schadler whether acceptance alone is insufficient to exercise an option. entered into a bilateral contract and became obligated to perform. See Ferguson, 434 S.W.2d at 385. And when they [7] [8] [9] [10] In this case, as in all option cases,failed to perform by refusing to complete the purchase of the the option contract itself is an offer by the optionor to the remaining shares, they breached the contract. optionee. By agreeing to purchase the remaining shares at the July 22 meeting—an arrangement that fulfilled the intended Because we affirm the trial court's grant of summary purpose of the option—Faucette and Schadler elected to judgment in favor of Grace and Sarco, we do not address accept the offer. The effect of this election is the formation of Faucette and Schadler's competing motion for summary a contract that binds both the optionor and the optionee: judgment.

Election is the act of the optionee We overrule Faucette and Schadler's first issue. which converts the option contract into a binding promise on the part of the

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is so contrary to the overwhelming weight of the evidence as to be clearly wrong and unjust. Pool v. Ford Motor Co., 715 Damages for Breach of Option Contract S.W.2d 629, 635 (Tex.1986). In their second issue, Faucette and Schadler contend that the evidence is legally and factually insufficient to prove [11] Initially, we note that the jury was asked to determine damages for breach of contract. They argue that Grace was Grace's damages for the breach of contract the court had awarded what she would have received from the sale of the found. The question was worded as follows: remaining shares of Sarco without any evidence of the value What sum of money, if any, if paid now in cash, would of the shares she should have surrendered in the transaction. fairly and reasonably compensate Grace C. Chantos for her According to Faucette and Schadler, proper proof of damages damages, if any, that resulted from such breach of contract? required not only evidence of the amount Grace would have received had the sale of the shares been performed, but Consider the following elements of damages, if any, and also evidence of the value of the shares she would have none other: surrendered in the transaction. See Miga v. Jensen, 96 S.W.3d 207, 215 (Tex.2002) (holding damage award resulting from a The amount Grace C. Chantos would have received for the breach of an agreement to purchase securities is the difference sale of her 502 shares of the business corporation if H. between the contract price and the fair market value of the Frank Faucette and J. Lawrence Schadler had not breached asset at the time of the breach); Holt Atherton Indus. Inc. the Sale and Purchase Agreement. v. Heine, 835 S.W.2d 80, 84 (Tex.1992) (evidence of lost income was legally insufficient to prove lost profits). They At the charge conference, Faucette's and Schadler's only also argue there was undisputed evidence that she retained the objection to this question was that the answers should have shares, sold assets of the company, and kept the proceeds for been separate for each of them. They did not complain that the instruction's measure of damages was improper or herself. 6 otherwise object to the instruction. Therefore, we measure the sufficiency of the evidence against the language in the charge. 6 Faucette and Schadler also complain that the judgment Osterberg v. Peca, 12 S.W.3d 31, 55 (Tex.2000) (holding, was erroneously rendered jointly and severally against when no objection is made to jury issue, sufficiency of the them for breach of contract. They state in their brief that evidence is measured against charge given by court rather even if they were required to exercise the option for the than some other unidentified law); Kroger Co. v. Brown, entire option price, Grace was entitled, at most, to an 267 S.W.3d 320, 323 (Tex.App.-Houston [14th Dist.] 2008, award of $82,472 against Faucette and $81,705 against no pet.) (measuring sufficiency of damages evidence against Schadler. But Faucette and Schadler do not provide any argument or authority to support their contention that commonly understood meaning of undefined term used in the trial court erred in rendering a judgment against charge); see also Equistar Chems., L.P. v. Dresser–Rand them jointly and severally; therefore, it is waived. See Co., 240 S.W.3d 864, 868 (Tex.2007) (holding argument that Tex.R.App. P. 38.1(i). charge submitted improper measure of damages was waived by failure to object in trial court); Tribble & Stephens Co. v. *912 When examining a legal-sufficiency challenge, we Consolidated Services, Inc., 744 S.W.2d 945, 949 (Tex.App.- review the evidence in the light most favorable to the San Antonio 1987, writ denied) (holding failure to raise challenged finding and indulge very reasonable inference issue of improper measure of damages in trial court waived that would support it. City of Keller v. Wilson, 168 S.W.3d review of complaints that proper measure of damages was not 802, 822 (Tex.2005). We credit favorable evidence if submitted to jury and that plaintiff failed to present evidence reasonable jurors could and disregard contrary evidence on the proper measure). unless reasonable jurors could not. Id. at 827. The evidence is legally sufficient if it would enable reasonable and fair- [12] [13] Here, the jury was instructed that the measure of minded people to reach the verdict under review. Id. damages is the amount of money Grace “would have received for the sale of her 502 shares” of the company had Faucette When examining a factual-sufficiency challenge, we consider and Schadler not breached the contract. Under the terms of and weigh all the evidence, both supporting and contradicting the contract, the price per share was $383. The jury awarded the finding. Mar. Overseas Corp. v. Ellis, 971 S.W.2d 402, $192,266, which is exactly the share price multiplied by 502. 406–07 (Tex.1998). We set aside the fact finding only if it

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Therefore, the jury's answer is supported by legally sufficient Sarco argues that the evidence shows that Faucette and evidence. And, although Faucette and Schadler complain Schadler intentionally destroyed Sarco's business for their *913 that Grace received a double recovery because she was own financial gain. Specifically, Faucette and Schadler, while awarded the sales price while retaining the shares, the jury receiving salaries and bonuses from Sarco to enable them to was not asked to determine fair market value of the shares purchase the company and promising they were continuing or to calculate Grace's net profits on the sale of the shares. with the purchase, persuaded the manufacturers who had been The evidence, measured against the question asked, is also with Sarco for over twenty years to terminate their contracts factually sufficient to support the jury's award. so they could do business with Faucette and Schadler's new company, Tri–Rep. Further, Faucette and Schadler planned Having overruled Faucette and Schadler's second issue, we their method of departure from Sarco—resigning without next turn to Grace and Sarco's cross-appeal. notice when Grace was out of the state and taking the only other salesman with them—knowing it would cause great harm to Sarco.

III Faucette and Schadler respond that Sarco's claim is not one for tortious interference with existing contracts, but is actually Tortious Interference one for tortious interference with prospective contracts. They point out that Elkay and Vanguard complied with their At trial, the jury found Faucette and Schadler tortiously contracts, giving Sarco the contractually required thirty-day interfered with Sarco's manufacturers' representative notice of termination, and that Sarco continued to act as contracts with Elkay and Vanguard. In a single issue, Sarco manufacturer's representative for those thirty days. According contends the trial court erred in granting Faucette and to Faucette and Schadler, Sarco is actually seeking to recover Schadler's motion for JNOV on the tortious-interference damages for the loss of the prospect that Elkay and Vanguard findings because Sarco presented legally sufficient evidence would continue to renew the manufacturer's representative of each element of that cause of action. contracts indefinitely.

[14] [15] A trial court may disregard a jury's verdict and This distinction is significant because in *914 Wal–Mart render a judgment notwithstanding the verdict if no evidence Stores, Inc. v. Sturges, 52 S.W.3d 711, 726 (Tex.2001), supports one or more of the jury's findings or if a directed our supreme court held that to prevail on a claim for verdict would have been proper. Tiller v. McLure, 121 S.W.3d tortious interference with prospective contracts the plaintiff 709, 713 (Tex.2003). The final test for legal sufficiency is must additionally prove that the defendant's conduct was whether the evidence at trial would enable reasonable and “independently tortious or wrongful.” The Sturges court fair-minded people to reach the verdict under review. City explained that conduct that is merely “sharp” or perceived as of Keller v. Wilson, 168 S.W.3d 802, 827 (Tex.2005). To “unfair competition” is not actionable as the basis for this tort. determine whether the trial court erred in rendering a JNOV, Id. The plaintiff is not required to prove an independent tort; we review the entire record, crediting favorable evidence if instead, the plaintiff need only establish that the defendant's reasonable jurors could and disregarding contrary evidence conduct would be actionable under a recognized tort. Id. unless reasonable jurors could not. Id. at 807. [17] Thus, after Sturges, the following formulation of the [16] To prevail on a tortious-interference claim, Sarco elements of the tort has been adopted: was required to prove: (1) contracts existed which were subject to Faucette and Schadler's interference; (2) Faucette (1) a reasonable probability that the parties would have and Schadler willfully and intentionally committed acts of entered into a contractual relationship; interference; (3) Faucette's and Schadler's acts proximately caused damages; and (4) actual damages or loss occurred. (2) an “independently tortious or unlawful” act by the Browning–Ferris, Inc. v. Reyna, 865 S.W.2d 925, 926 defendant that prevented the relationship from occurring; (Tex.1993); Rodarte v. Investeco Group, LLC, 299 S.W.3d (3) the defendant did such act with a conscious desire to 400, 411 (Tex.App.-Houston [14th Dist.] 2009, no pet.). prevent the relationship from occurring or knew that the

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interference was certain or substantially certain to occur as a result of his conduct; and *915 [20] In this case, the jury was asked in separate questions whether Faucette and/or Schadler “intentionally (4) the plaintiff suffered actual harm or damage as a result interfered with the manufacturer's representative contracts of the defendant's interference. [Sarco] had” with Elkay and Vanguard. The jury answered “yes” to both. But there was no evidence that either Elkay See Baty v. ProTech Ins. Agency, 63 S.W.3d 841, 860 or Vanguard breached their contracts with Sarco. It was (Tex.App.-Houston [14th Dist.] 2001, pet. denied). Faucette undisputed that Elkay and Vanguard gave thirty days' written and Schadler contend that Sarco does not even attempt to meet notice of termination as their contracts provided, and Sarco the burden of showing independently tortious conduct. did not allege or show that Faucette and/or Schadler induced them to breach their contracts with Sarco during the thirty- Sarco contends that Sturges does not apply because its day termination period. Sarco's real complaint below and on claims were brought for tortious interference with existing appeal is the loss of the continuing business relationship with contracts. Sarco points out that that it proved the existence Elkay and Vanguard, two of its most profitable lines, which of its contracts with the manufacturers and that Faucette and had existed for over twenty years. Schadler deprived Sarco of the benefits of those contracts. Sarco further points out that under Texas law the terminable- This court has recognized that tortious interference on-notice or terminable-at-will status of a contract is not a with prospective contractual relations includes continuing defense to an action for tortious interference. See Juliette business relations. See Heil–Quaker Corp. v. Mischer Corp., Fowler Homes, Inc. v. Welch Assocs., Inc., 793 S.W.2d 863 S.W.2d 210, 214 (Tex.App.-Houston [14th Dist.] 1993), 660, 666 (Tex.1990) (terminable-on-notice contract); Sterner writ granted, judgm't vacated w.r.m., 877 S.W.2d 300 v. Marathon Oil Co., 767 S.W.2d 686, 689 (Tex.1989) (Tex.1994). In Heil–Quaker, the appellants argued there was (terminable-at-will contract). Both Juliette Fowler Homes no evidence to support the jury finding of tortious interference and Sterner instruct that “[u]ntil a contract is terminated, with business relations because the tortious interference it is valid and subsisting, and third persons are not free alleged was directed to an existing contract rather than a to tortiously interfere with it.” Juliette Fowler Homes, prospective contractual relationship. Id. at 214. The court Inc., 793 S.W.2d at 666; Sterner, 767 S.W.2d at 689 rejected this contention, stating that tortious interference with (citing RESTATEMENT (SECOND) OF TORTS § 766 business or prospective contractual relations concerns not cmt. g (1979)); see also Knox v. Taylor, 992 S.W.2d only business relations that have not yet been reduced to a 40, 57–58 (Tex.App.-Houston [14th Dist.] 2001) (rejecting contract but also continuing business relations not amounting terminable-on-notice status of contract as defense to tortious- to a formal contract. Id. (citing RESTATEMENT OF TORTS interference-with-contract claim and holding third party's (SECOND)))) § 766B, cmt. a, c (1979)). mailing of defamatory memo interfered with plaintiff's business relationship). More recently, in an appeal from a summary judgment, the Fort Worth court of appeals rejected a contention that [18] [19] But as to terminable-on-notice or terminable- a claim for tortious interference with prospective relations at-will contracts, the protection Juliette Fowler Homes and could not apply to a complaint that business was taken Sterner provide is somewhat limited. The supreme court has from an existing customer. Astoria Indus. of Iowa, Inc. also instructed that a party cannot be liable for inducing v. SNF, Inc., 223 S.W.3d 616, 633 (Tex.App.-Fort Worth another party “to do what it had a right to do” under a contract. 2007, pet. denied). Citing Heil–Quaker Corp., the court ACS Investors, Inc. v. McLaughlin, 943 S.W.2d 426, 431 concluded that tortious interference with prospective business (Tex.1997). Thus, a third party is prohibited from tortiously relations includes tortious interference with continuing interfering with a terminable-on-notice or terminable-at- business relationships. Id. The court then proceeded to review will contract, but “merely inducing one of the parties to the summary-judgment evidence concerning the defendant's exercise his right to terminate contractual relations after alleged interference with the plaintiff's existing customer, giving the required notice does not necessarily constitute including whether there was no evidence that the defendant tortious interference with contract under Texas law.” Juliette engaged in independently tortious conduct. See id. at 633–37. Fowler Homes, Inc., 793 S.W.2d at 667. Likewise, “harm that results only from lawful competition is not compensable by the interference tort.” Sturges, 52 S.W.3d at 727.

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[21] In the context of at-will or terminable-on-notice 2008, pet. denied) (mem. op.); Anderson, Greenwood & contracts, the Restatement provides further support for the Co. v. Martin, 44 S.W.3d 200, 218 (Tex.App.-Houston conclusion that the loss of the contract due to another's [14th Dist.] 2001, pet. denied). But these cases are tortious acts is properly considered tortious interference with distinguishable because the issue presented here was not addressed. prospective, or continuing, business relations: 8 We note that an allegation that Faucette and Sarco One's interest in a contract terminable breached a fiduciary duty could have supplied the at will is primarily an interest in independently tortious conduct to support this element. future relations between the parties, See RenewData Corp. v. Strickler, No. 03–05–00273– and he has no legal assurance of CV, 2006 WL 504998, at *10–12 (Tex.App.-Austin Mar. them. For this reason, an interference 3, 2006, no pet) (mem. op.) (holding former employee's with this interest is closely analogous breach of fiduciary duties to employer satisfies the to interference with prospective Sturges prerequisites for a claim of tortious interference contractual relations. (See § 766B). with prospective business relations). But Grace and Sarco did not plead, seek to demonstrate, or request a RESTATEMENT (SECOND) OF TORTS § 766 cmt. g jury question concerning whether Faucette and Chantos (1979) (emphasis added). Likewise, section 766B, the section breached any fiduciary duty to Sarco. applicable to prospective contractual relations, includes Sarco contends, however, that it is not required to demonstrate “interferences with ... the opportunity of selling or buying that a contract was breached to show actionable interference land or chattels or services, and any other relations leading with contract relations. Instead, Sarco argues that a party may to potentially profitable contracts.” Id. § 766B cmt. c. The be liable for interference by actions that do not necessarily comments to this section explain that “[i]n many respects, induce a breach of contract but which injure persons so that a contract terminable at will is closely analogous to the they are unable to perform a contract, destroy or damage relationship covered by this Section.” Id. property that is the subject matter of a contract, or make performance of a contract “more burdensome, difficult or [22] We conclude, therefore, that under the facts of this impossible, or of less or no value to the one entitled to case, Sarco's claim is *916 properly characterized as one performance.” See Tippett v. Hart, 497 S.W.2d 606, 610 for tortious interference with prospective relations, rather (Tex.Civ.App.-Amarillo 1973), writ ref'd n.r.e., 501 S.W.2d than tortious interference with existing contracts. We further 874 (Tex.1973); RESTATEMENT (SECOND) OF TORTS § conclude that the jury questions, as written, were broad 766A. According to Sarco, Faucette and Schadler planned to enough to encompass this theory. resign without notice or warning, in a manner and at a time when they knew it would harm Sarco, and took Sarco's only [23] Because we have concluded that Sarco's claim is one other salesperson with them, leaving the company unable to for tortious interference with prospective contracts, Sarco was continue its contracts with Elkay, Vanguard, and even its required to demonstrate that, among other things, Faucette other lines, because it no longer had a sales force. and Schadler engaged in independently tortious or unlawful acts that interfered with its business relations with Elkay Sarco's argument fails, however, because it conflates distinct and Vanguard. See Sturges, 52 S.W.3d at 726. 7 But Sarco theories of tortious interference in a way that is inconsistent does not assert that Faucette and Schadler engaged in any with the jury questions and the evidence. Sarco's authorities independently tortious conduct. 8 In the absence of any address the situation in which a plaintiff may recover for evidence to support this element of the cause of action, we tortious interference with the plaintiff's performance of her conclude the trial court did not err in granting the JNOV. own contracts, not tortious interference with the other party to the contract's performance. For example, in Tippett v. Hart, 7 Hart sued Tippett for allowing his cattle to graze on her land We acknowledge that there are cases in which the without her permission, causing her to breach a contract she elements of tortious interference with contracts was applied to the alleged loss of continuing business had with a governmental agency that prohibited grazing. See relationships. See, e.g., SP Midtown, Ltd. v. Urban 497 S.W.2d at 607–11. Likewise, the Restatement (Second) Storage, L.P., No. 14–07–00717–CV, 2008 WL of Torts section 766A, entitled “Intentional Interference with 1991747, *8–9 (Tex.App.-Houston [14th Dist.] May 8, Another's Performance of His Own Contract,” provides as follows:

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granting Faucette and Schadler's motion for JNOV, and we *917 One who intentionally and overrule Sarco's issue. improperly interferes with the performance of a contract ... *** between another and a third person, by preventing the other from Having overruled the parties' issues on appeal and cross- performing the contract or causing appeal, we affirm the trial court's judgment. his performance to be more expensive or burdensome, is subject to liability to the other for the pecuniary loss resulting to him. (FROST, J. concurring and dissenting).

RESTATEMENT (SECOND) OF TORTS § 766A (1979). KEM THOMPSON FROST, Justice, concurring and Section 766A “is concerned only with the actor's intentional dissenting. interference with the plaintiff's performance of his own To the extent this court affirms the trial court's judgment contract, either by preventing that performance or making notwithstanding the verdict as to the tortious-interference- it more expensive or burdensome.” Id. cmt. a. Further, with-contract claims, I concur in the judgment. To the extent “[i]t is to be contrasted with [section] 766, which states this court affirms the trial court's judgment awarding recovery the rule for the actor's intentional interference with a on the breach-of-contract claims and declines to render a take- third person's performance of his existing contract with nothing judgment on these claims, I respectfully dissent. the plaintiff and section 766B, which concerns ‘the actor's intentional interference with the plaintiff's prospective Under the unambiguous language of the agreement in contract relations.” Id. question, to exercise their option to acquire the remaining shares of the corporation, the option holders had to make the Here, the jury was asked whether Faucette and Schadler purchase by means of a lump-sum payment within a specified tortiously interfered with Sarco's contracts with Elkay and time from the execution date of the contract, and if this Vanguard—not whether Faucette and Schadler tortuously purchase did not occur within that time frame, the agreement interfered with Sarco's own performance of its contracts with and the option in it would terminate. It is undisputed that Elkay and Vanguard. Even if we read the jury question the option holders never purchased the remaining shares, and broadly enough to encompass this theory, there is no the plaintiffs judicially admitted that the contract upon which evidence that Faucette and Schadler tortiously interfered by they base their breach-of-contract *918 claims terminated preventing Sarco from performing its contracts with Elkay at the expiration of the time period specified in the contract. and Vanguard. Elkay and Vanguard notified Sarco that they Because the option holders did not exercise their option were exercising their contractual rights to terminate their in the manner required by the contract and because the contracts on thirty days' notice almost immediately after contract terminated by its own terms, the trial court erred Faucette's and Schadler's resignations, and Sarco points to no in granting summary judgment in the plaintiffs' favor as to evidence that Faucette's and Schadler's actions impaired or liability on the breach-of-contract claims and in denying the destroyed its ability to perform its contracts with Elkay and defendants' motion for summary judgment as to these claims. Vanguard during the remaining thirty days of each contract. Accordingly, the trial court's judgment should be reversed, As previously discussed, Sarco's real complaint concerning and this court should render a take-nothing judgment. Elkay and Vanguard is the loss of these two profitable lines of business to Faucette and Schadler's new company, Tri–Rep. Further, to the extent Sarco points to evidence Relevant Background that it was unable to conduct business after Faucette and Schadler resigned, the jury was not asked whether Faucette Plaintiffs/appellees/cross-appellants Grace C. Chantos and and Schadler interfered with Sarco's ability to perform its own A.J. Chantos & Associates, Inc., d/b/a Sarco of Texas contractual obligations to its remaining lines. (hereinafter collectively, the “Chantos Parties”) 1 sued defendants/appellants/cross-appellees H. Frank Faucette and Therefore, viewing the evidence in a light most favorable to J. Lawrence Schadler (hereinafter collectively, the “Option the jury's verdict, we hold that the trial court did not err in Holders”) for breach of a written contract entitled “Sale and

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Purchase Agreement” (hereinafter, the “Contract”). Grace the *919 terms of the agreement; but they asserted that the Chantos, Grace's husband Andrew J. Chantos, Faucette, and Contract did not contain any terms regarding the manner for Faucette's wife executed the Contract on May 25, 2001. exercising the Option. Therefore, the Chantos Parties argued, Schadler and his wife executed the Contract on July 24, 2001. the Option Holders could accept and exercise the Option by giving oral notice to Grace at the July 22, 2003 meeting of 1 Though Sarco was a plaintiff in the trial court, it was their acceptance and intent to exercise the Option. not a party to the Contract, and the trial court rendered judgment only in favor of Grace. References in this Both in response to the Chantos Parties' motion and as a opinion to the “parties” pertain to the contracting parties, ground for summary judgment in their own motion for final not to the parties to the litigation, and do not include summary judgment, the Option Holders asserted that, under Sarco. the Contract, the parties specified the manner in which the In a section of the Contract entitled “Sale and Purchase,” the Option Holders had to exercise the Option—they had to parties detailed the contemplated sale of the shares of A.J. purchase Grace's remaining shares in a lump-sum payment by Chantos & Associates, Inc., d/b/a Sarco of Texas (hereinafter, the End Date. The summary-judgment evidence conclusively “Sarco”) by Grace and her husband to the Option Holders and proves that the Option Holders did not purchase Grace's Andrew J. Chantos (collectively hereinafter, the “Buyers”). remaining shares by the End Date. Therefore, the Option The parties agreed that during the first thirty months of the Holders asserted, (1) the Contract terminated by its own Contract or until the Buyers acquired forty-nine percent of the terms; and (2) the Option Holders had no obligation to Sarco shares, whichever occurred first, the Option Holders purchase the remaining shares under the Contract and did were required to purchase at least four Sarco shares per not breach any of its terms. The Option Holders attached to month. Under the terms of the Contract, if the Buyers acquired their motion for summary judgment responses to requests for at least forty-nine percent of the outstanding Sarco shares, admissions, in which the Chantos Parties judicially admitted then the Buyers had “the option to purchase the remaining that the Contract terminated within thirty-two months of the shares, but only in a lump sum wherein Buyers purchase all Contract's execution date and that the Contract was currently remaining shares.” The parties agreed that “[t]his Agreement terminated. shall terminate unless the Sale and Purchase contemplated is completed in its entirety within thirty-two (32) months The trial court denied the Option Holders' summary-judgment from the date of execution of the Agreement” (hereinafter, motion and granted the Chantos Parties' motion, ruling that, the “Termination Provision”), (emphasis added). The parties as a matter of law, the Option Holders breached the Contract did not specify a date of execution in the Contract. But in and are liable to Grace for the breach. light of the two dates on which parties executed the Contract, this thirty-two month period ended no later than on March 24, 2004 (hereinafter, the “End Date”). Principles of Option Law

It is undisputed that, by July 22, 2003, the Buyers had When one acquires an option to purchase property, the acquired forty-nine percent of the Sarco shares and that holder of the option purchases the right to compel a sale they had the option to purchase the remaining Sarco shares of the property on the stated terms before expiration of the provided in the Contract (hereinafter, the “Option”). The option. See Comeaux v. Suderman, 93 S.W.3d 215, 219– Chantos Parties moved for partial summary judgment as to the 20 (Tex.App.-Houston [14th Dist.] 2002, no pet.). Option Option Holders' liability on the breach-of-contract claims. In contracts have two components: (1) an underlying contract their sole ground for summary judgment, the Chantos Parties that is not binding until accepted and (2) a covenant to hold asserted that the summary-judgment evidence conclusively open to the option holder the opportunity to accept. See proves that (1) the Option Holders exercised the Option by id. at 220. Before the option can ripen into an enforceable giving oral notice to Grace at the July 22, 2003 meeting contract of sale, however, the option holder must manifest of their acceptance and intent to exercise the Option; and his acceptance. See id. Acceptance of an option must be (2) the Option Holders breached the Contract by failing and unqualified, unambiguous, and strictly in accordance with the refusing to purchase the remaining Sarco shares from Grace. terms of the agreement. See id. For this reason, a failure to The Chantos Parties agreed that acceptance of an option must exercise an option according to its terms, including untimely be unqualified, unambiguous, and strictly in accordance with or defective acceptance, is simply ineffectual, and legally

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amounts to nothing more than a rejection. See id. If the meaning or interpretation, it is unambiguous, and the court contract is silent regarding the method of exercising the construes it as a matter of law. Am. Mfrs. Mut. Ins. Co. v. option, the option holder may exercise the option by timely Schaefer, 124 S.W.3d 154, 157 (Tex.2003). This court cannot giving notice to the optionor of the option holder's intent rewrite the Contract or add to its language under the guise of to exercise the option, and the option holder also may be interpretation. See id. at 162. Rather, this court must enforce required to tender performance within a reasonable time. 2 the Contract as written. See Royal Indem. Co. v. Marshall, See English v. English, 44 S.W.3d 102, 105 (Tex.App.- 388 S.W.2d 176, 181 (Tex.1965). Houston [14th Dist.] 2001, no pet.).

2 Various cases state that, if the contract is silent regarding Analysis of the Contract the method of exercising the option, the option holder may exercise the option by timely giving notice to In the Contract, the parties agreed that, if the Buyers acquired the optionor of the option holder's intent to exercise at least forty-nine percent of the outstanding Sarco shares, the option and by subsequently tendering performance then the Buyers would have the option to purchase the within a reasonable time. See, e.g., English v. English, remaining shares, but only through a lump-sum payment by 44 S.W.3d 102, 105 (Tex.App.-Houston [14th Dist.] which the Buyers would acquire all remaining shares. The 2001, no pet.) (stating that “we conclude and hold parties also agreed that the entire Contract would terminate that where the option instrument is silent regarding the unless the contemplated purchase of the Sarco shares was method of exercising the option, giving timely notice completed in its entirety by the End Date. The parties did to the optionor and subsequently tendering performance not agree that any provisions of the Contract would survive within a reasonable time is sufficient to exercise the termination of the Contract. If the Option Holders could have option”). But, given that the overwhelming majority of exercised the Option simply by giving notice to Grace of option cases involve option holders seeking to enforce the option, it may be that the tender of performance is their acceptance and intent to exercise the Option and without required in these cases because the option holder seeks to purchasing the remaining shares from Grace, such an exercise enforce the option rather than as part of the exercise of the would have imposed a binding obligation on the Option option. See id. (stating that “if [option holder] gave notice Holders to purchase the remaining shares by a lump-sum of her intent to exercise the option within the applicable payment. But this construction of the Contract would render 180 day period, such notice would be sufficient to trigger the Termination Provision meaningless. See Kruegel v. Berry, her rights under the divorce decree”). This court need not 75 Tex. 230, 9 S.W. 863, 863–64 (1888) (stating that option address this issue to dispose of this appeal, and it is not holder under lease had to tender purchase price before lease addressed in this opinion. terminated in order to exercise option to buy leased premises for a specified price); Nguyen v. Woodley, 273 S.W.3d 891, 898 (Tex.App.-Houston [14th Dist.] 2008, no pet.) (holding *920 Principles of Contract Interpretation that contract for purchase of real property terminated by its In construing contracts, this court's primary concern is to own terms upon buyer's giving of a certain notice and that ascertain and give effect to the intentions of the parties therefore the contract was no longer valid and enforceable); as expressed in the contract. Kelley–Coppedge, Inc. v. Cate v. Woods, 299 S.W.3d 149, 153 (Tex.App.-Texarkana Highlands Ins. Co., 980 S.W.2d 462, 464 (Tex.1998). To 2009, no pet.) (holding that trial court erred as a matter of law ascertain the parties' true intentions, this court must examine by enforcing contract for purchase of real property that had the entire agreement in an effort to harmonize and give terminated by its own terms). 3 effect to all provisions of the contract so that none will be rendered meaningless. MCI Telecomms. Corp. v. Tex. 3 The Chantos Parties rely upon the English case. See Utils. Elec. Co., 995 S.W.2d 647, 652 (Tex.1999). Whether English, 44 S.W.3d at 103–5. But, in that case, the a contract is ambiguous is a question of law for the court. divorce decree in question contained language materially Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 different from the language in the Contract. See id. The (Tex.1996). A contract is ambiguous when its meaning is divorce decree did not contain language similar to the uncertain and doubtful or is reasonably susceptible to more Termination Provision, and the decree was silent as to than one interpretation. Id. But, when a written contract is the manner in which the option should be exercised. See worded so that it can be given a certain or definite legal id. Therefore, the English case is not on point.

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The sole ground asserted in the Chantos Parties' motion for *921 If the Termination Provision is given effect, then the Option Holders could not be bound to purchase the remaining summary judgment lacks merit. 4 In their cross-motion, the shares because they could wait until the End Date passed Option Holders proved as a matter of law that they did not and any obligation to purchase the remaining shares would exercise the Option and that the Contract terminated by its terminate. Harmonizing and giving effect to all provisions of own terms. 5 Though the majority notes the Option Holders' the contract so that none will be rendered meaningless, this arguments in this regard, the majority does not address these court should conclude that, under the unambiguous language arguments or explain why they lack merit. The court should of the Contract, the parties specified the manner in which address these arguments, sustain the Option Holders' first the Option Holders had to exercise the Option—they had issue, and hold that the trial court erred by failing to grant to purchase the remaining shares by the End Date. See the Option Holders' motion. 6 Accordingly, this court should MCI Telecomms. Corp., 995 S.W.2d at 652. The summary- reverse the trial court's judgment and render judgment that the judgment evidence proves as a matter of law that the Option Chantos Parties take nothing. Holders did not do so, and therefore, they did not exercise the Option. After the End Date passed, the Contract terminated 4 On appeal, the Chantos Parties assert, in the alternative, without any exercise of the Option. Indeed, the Chantos that this court should affirm the trial court's judgment Parties have judicially admitted that the Contract upon which on the breach-of-contract claims based on an alleged the trial court's judgment is based terminated on or before modification of the Contract by the parties at the July the End Date, which was before the Chantos Parties filed this 22, 2003 meeting. Significantly, however, the Chantos lawsuit in the trial court. Parties did not assert any alleged modification of the Contract as a ground in their summary-judgment motion. In their Contract, the parties required the Option Holders to Therefore, this court cannot affirm the trial court's purchase Sarco stock up to the forty-nine-percent threshold. summary judgment on this unasserted ground. See Stiles The parties could have required the Option Holders to v. Resolution Trust Corp., 867 S.W.2d 24, 26 (Tex.1993) purchase the remaining stock; however, the parties chose 5 Presuming for the sake of argument that the Option not to do so. Instead, they agreed to contractual language Holders could have exercised the Option by notice alone under which the Option Holders had the ability to choose and that they did so, the Chantos Parties still could whether they wanted to exercise the Option by purchasing the not prevail on a breach-of-contract claim because the remaining shares from Grace no later than the End Date. This Contract terminated on the End Date and the parties did court cannot rewrite the Contract or add to its language under not agree that any contractual obligations would survive the guise of interpretation; instead, the court must enforce termination. See Nguyen, 273 S.W.3d at 898; Cate, 299 the Contract as written. See Schaefer, 124 S.W.3d at 157; S.W.3d at 153. Marshall, 388 S.W.2d at 181. 6 This court appropriately holds the trial court did not err in granting the Option Holders' motion for judgment notwithstanding the verdict as to the tortious- Conclusion interference-with-contract claims.

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no certificate of service, no return receipt from certified or registered mail, and no affidavit 166 S.W.3d 743 certifying service, as required by rule governing Supreme Court of Texas. methods of service, notice to defendant's former Mary MATHIS, Petitioner, attorney was no longer notice to her after her v. attorney withdrew, and notice to defendant's last Joseph F. LOCKWOOD, Respondent. known address had been sent to plaintiff's home, but plaintiff could not serve defendant by serving No. 04–0516. | June 17, 2005. himself. Vernon's Ann.Texas Rules Civ.Proc., Rule 21a. Synopsis Background: Plaintiff filed petition for declaratory judgment 30 Cases that cite this headnote and motion for turnover of property. Following post-answer default judgment, defendant filed motion for rehearing. [2] Trial Following a hearing, the 303rd Judicial District Court, Dallas Nature of Evidence in General County, Richard Johnson, J., denied motion. Defendant Parties waived oath requirement with respect appealed. The Court of Appeals, 132 S.W.3d 629, affirmed. to testimony of plaintiff's counsel that notice Defendant appealed. had been sent to defendant and defendant's statement denying that she had received notice, when neither party raised any objection in [Holding:] The Supreme Court held that defendant's circumstances that clearly indicated each was nonappearance at trial was not intentional or result of tendering evidence on record based on personal conscious indifference, and thus she was entitled to have knowledge on sole contested issue, with default judgment that had been entered against her set aside. respect to post-judgment hearing on defendant's motion to set aside default judgment that had been entered against her in proceeding in Reversed and remanded. which plaintiff sought declaratory judgment and turnover of property to him.

23 Cases that cite this headnote West Headnotes (3)

[3] Process [1] Judgment Presumptions and Burden of Proof Want or Insufficiency of Notice of Notice properly sent pursuant to rule governing Proceedings methods of service raises a presumption that Judgment notice was received; however, it cannot be Mistake, Surprise, or Excusable Neglect in presumed that notice was properly sent, and General when notice is challenged, it must be proved Judgment according to the rule. Vernon's Ann.Texas Rules Weight and Sufficiency of Evidence Civ.Proc., Rule 21a. Defendant's nonappearance at trial concerning petition for declaratory judgment and motion 34 Cases that cite this headnote for turnover of property was not intentional or result of conscious indifference, and thus she was entitled to have default judgment that had been entered against her set aside; plaintiff failed *743 On Petition for Review from the Court of Appeals for to prove that he had effected service of trial the Fifth District of Texas. setting on defendant, given that record contained

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not intentional or the result of conscious indifference; (2) a Attorneys and Law Firms meritorious defense; and (3) a new trial would cause neither delay nor undue prejudice. Cliff v. Huggins, 724 S.W.2d 778, Mary Mathis, pro se. 779 (Tex.1987) (citing Craddock v. Sunshine Bus Lines, 134 Rhonda F. Hunter, for Joseph F. Lockwood. Tex. 388, 133 S.W.2d 124, 126 (1939)).

Opinion When the first element is established by proof that the defaulted party was not given notice of a trial setting, we PER CURIAM. have dispensed with the second element for constitutional reasons. Lopez v. Lopez, 757 S.W.2d 721, 723 (Tex.1988) Mary Mathis, appearing pro se, appeals the trial court's refusal (citing Peralta v. Heights Med. Ctr., Inc., 485 U.S. 80, 108 to set aside a post-answer default judgment against her. The S.Ct. 896, 99 L.Ed.2d 75 (1988)). court of appeals affirmed, holding Mathis failed to overcome a presumption that she received notice of the trial setting. 132 For the same reasons, the court of appeals also dispensed S.W.3d 629, 632. Finding neither presumption nor evidence with the third element. 132 S.W.3d at 631; accord In the to support this conclusion, *744 we reverse and remand to Matter of the Marriage of Lisa Ann Runberg, 159 S.W.3d the trial court for a new trial. 194, 200 (Tex.App.Amarillo 2005, no pet.); In the Matter of the Marriage of Brenda May Parker, 20 S.W.3d 812, 817– Mathis and her two children lived with respondent Joseph 18 (Tex.App.Texarkana 2000, no pet.). We need not reach Lockwood for some period of time before suit. When that issue here, however, because in any event Mathis's sworn the relationship soured, Lockwood filed suit seeking a motion asserted that a new trial would not injure Lockwood, declaration that he and Mathis were not common-law and nothing in the record establishes the contrary. Cliff, 724 spouses, and the return of property he claimed Mathis had S.W.2d at 779–80 (requiring new trial as “there is nothing in stolen. Mathis apparently filed an answer, though it is not in the record to show that a new trial will work an injury to [the the record. plaintiff]”); see also Dir., State Employees Workers' Comp. Div. v. Evans, 889 S.W.2d 266, 268 (Tex.1994) (holding The case was set for trial December 13, 2002, before a visiting Craddock elements may be established by affidavit, even if judge. Mathis did not appear. After brief testimony from Lockwood, a post-answer default judgment was rendered in not tendered as evidence at new trial hearing). 2 his favor. 2 While Mathis's motion for new trial was filed after the On January 9, 2003, Mathis filed a “Motion for a Request trial court's initial hearing on her “rehearing” motion, Rehearing” asserting she never received notice of the it was brought to the trial court's attention at a second December 13th trial. She testified to the same effect at a hearing held about a month later. hearing on the motion before the court's presiding judge on [1] [2] Thus, the only question before us is whether Mathis February 4th. Conversely, Lockwood's counsel testified that established the first element. Her sworn motion for new notice was sent to Mathis's last known address and her former trial asserted that she failed to appear at the December 13th attorney. None of the witnesses were sworn, and while the trial because she never received notice of the setting. At reporter's record indicates Lockwood's counsel tendered a the post-judgment hearing, Lockwood's counsel testified that document to the judge at this hearing, none appears in the notice was sent to Mathis, and *745 Mathis denied receiving reporter's record. 1 The trial court refused to set aside the it. While statements by neither were under oath, the oath default judgment. requirement was waived when neither raised any objection in circumstances that clearly indicated each was tendering 1 At Mathis's request, the court of appeals ordered both evidence on the record based on personal knowledge on the district clerk and the court reporter to supplement the the sole contested issue. Banda v. Garcia, 955 S.W.2d record with any exhibits. Tex.R.App. P. 34.5(c), 34.6(d). 270, 272 (Tex.1997) (holding attorney's unsworn statements Neither found any. tendered as evidence were sufficient absent objection); see also Wheeler v. Green, 157 S.W.3d 439, 444 (Tex.2005) For many years, a post-answer default could be set aside only (holding pro se litigants are governed by the same rules as if a defendant proved three elements: (1) nonappearance was attorneys).

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affirmative evidence that service occurred. See Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 512, 104 The court of appeals held that the trial court as fact finder S.Ct. 1949, 80 L.Ed.2d 502 (1984) (“When the testimony of a could have concluded that Mathis failed to overcome the witness is not believed, the trier of fact may simply disregard presumption “that a trial court hears a case only after proper it. Normally the discredited testimony is not considered a notice to the parties” and “that she was notified of the trial sufficient basis for drawing a contrary conclusion.”). setting.” 133 S.W.3d at 631–32 (citing Hanners v. State Bar of Tex., 860 S.W.2d 903, 908 (Tex.App.Dallas 1993, no writ)). No other alternatives established service. Notice to Mathis's We disagree that there were any such presumptions on the former attorney was no longer notice to Mathis after her facts presented here. attorney withdrew. Tex.R. Civ. P. 10; see, e.g., Stoner v. Thompson, 578 S.W.2d 679, 684 (Tex.1979) (holding pro se [3] It is true that notice properly sent pursuant to Rule 21a party was charged with notice of all pleadings served on him, raises a presumption that notice was received. Tex.R. Civ. P. or on his attorney prior to withdrawal). Notice to Mathis's 21a; Cliff, 724 S.W.2d at 780. But we cannot presume that last known *746 address was sent to Lockwood's home; notice was properly sent; when that is challenged, it must be Lockwood could not serve Mathis by serving himself. And proved according to the rule. counsel's statement at the trial that “I had my office call her and speak to her about today's hearing” shows no personal Unlike service of citation, Rule 21a allows service of notices knowledge that notice was received, certainly none 45 days by anyone competent to testify. Tex. R Civ. P. 21a. When before trial. Tex.R. Civ. P. 245. a party or attorney of record serves the notice (as occurred here), “[t]he party or attorney of record shall certify to the Citing Rule 21a's provision that notice may be sent to a party's court compliance with this rule in writing over signature and last known address, the court of appeals held that litigants on the filed instrument.” Id. (emphasis added). Like any other have a duty “to keep the court and parties apprised of their contemporaneous business record, this certificate bears some correct and current address.” 132 S.W.3d at 631. Not all assurance of trustworthiness as it was prepared as a matter of courts of appeals appear to agree. See Ewton v. Gayken, 130 office routine before any dispute about notice arose. S.W.3d 382, 384–85 (Tex.App.Beaumont 2004, pet. denied) (holding court clerk erred by sending dismissal notice to “A certificate by a party or an attorney of record, or the attorney's address of record rather than forwarding address return of the officer, or the affidavit of any person showing printed on returned envelope). But even assuming there is service of a notice shall be prima facie evidence of the fact such a duty, unless noncompliance was intentional rather than of service.” Id. Here, the record contains no certificate of a mistake, due process requires some lesser sanction than trial service, no return receipt from certified or registered mail, without notice or an opportunity to be heard. Peralta, 485 and no affidavit certifying service. Instead, the only evidence U.S. at 85–86, 108 S.Ct. 896; Cliff, 724 S.W.2d at 779. of service in the record was the oral assurance of counsel. As the rule's requirements are neither vague nor onerous, we Because the Craddock test was satisfied in this case, the trial decline to expand them this far. As none of the prerequisites court abused its discretion in refusing to set aside the default for prima facie proof of service were met, the court of appeals judgment against Mathis. Accordingly, without hearing oral was incorrect in indulging a presumption that Mathis received argument, we grant Mathis's petition for review, reverse the the notice Lockwood's counsel sent. court of appeals' judgment, and remand the case to the trial court for further proceedings consistent with this opinion. Without this presumption, there was no evidence that Mathis Tex.R.App. P. 59.1. received notice of the trial setting. Testimony by Lockwood's counsel that notice was sent did not contradict Mathis's testimony that notice was never received. See id. (“Nothing Parallel Citations herein shall preclude any party from offering proof that the notice or instrument was not received....”). Even if the trial 48 Tex. Sup. Ct. J. 895 judge disbelieved Mathis's testimony, that would not provide

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© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3 S. K. Y. Inv. Corp. v. H. E. Butt Grocery Co., 440 S.W.2d 885 (1969)

[3] Judgment 440 S.W.2d 885 Hearing and determination Court of Civil Appeals of Texas. In determining motion for summary judgment, Corpus Christi. trial court has duty to determine if there are any S. K. Y. INVESTMENT CORPORATION, Appellant, genuine issues of a material fact to be tried, v. and not to weigh the evidence or determine its credibility and thus try the case on the affidavits. H. E. BUTT GROCERY COMPANY, Appellee. Rules of Civil Procedure, rule 166–A. No. 473. | May 8, 1969. Cases that cite this headnote Action by lessor against lessee for breach of lease of space in proposed shopping center. The 28th District Court, Nueces [4] Judgment County, Horace S. Young, J., entered a take-nothing summary Matters of fact or conclusions judgment in favor of lessee and lessor appealed. The Court Affidavits supporting or opposing motion for of Civil Appeals, Green, C. J., held that where lessor did summary judgment must set forth such facts as not have title to demised premises, had not obtained a would be admissible in evidence. Rules of Civil building permit and had performed only site work, consisting Procedure, rule 166–A. of ground leveling and bulldozing of brush, construction work had not ‘commenced upon the building containing the 2 Cases that cite this headnote demised premises' within lease termination clause and lessee was entitled to terminate lease. [5] Judgment Affirmed. Matters of fact or conclusions Affidavits supporting or opposing motion for summary judgment must be factual as conclusions of affiant are not considered to have West Headnotes (12) any probative value. Rules of Civil Procedure, rule 166–A. [1] Judgment 3 Cases that cite this headnote Absence of issue of fact Summary judgment will be rendered only where record shows that there is no genuine issue as [6] Judgment to material fact and that moving party is entitled Landlord and tenant to a judgment as a matter of law. Rules of Civil Statement of lessor's president in his affidavit Procedure, rule 166–A. on motion for summary judgment that site preparation work constituted “commencement of Cases that cite this headnote construction” within lease provision authorizing termination by lessee if construction had [2] Judgment not commenced by particular date was mere Presumptions and burden of proof conclusion of affiant and had no probative force as evidence. Rules of Civil Procedure, rule 166– Burden of proof that there is no genuine issue as A. to any material fact and that movant is entitled to judgment as matter of law is on the movant, and 2 Cases that cite this headnote all doubts as to existence of a material fact issue are resolved against him. [7] Landlord and Tenant Cases that cite this headnote Breach by lessor

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Where lessor did not have title to demised was not admissible in lessor's action against premises, had not obtained a building permit lessee for breach of the lease. and had performed only site work, consisting of ground leveling and bulldozing of brush, 1 Cases that cite this headnote construction work had not “commenced upon the building containing the demised premises” [11] Customs and Usages within lease termination clause and lessee was Adding to terms of contract entitled to terminate lease. Where a contract is clear, complete and Cases that cite this headnote unambiguous and where it expressly provides that no obligation not stated therein would be imposed on either party, new terms cannot be [8] Contracts added to the contract by incorporating a usage Breach by making performance impossible or custom which would add to the contractual When one contracting party, by wrongful means, obligations of one of the parties. prevents other party from performing, such as by rendering performance impossible, such action 1 Cases that cite this headnote constitutes a breach of contract which not only excuses performance by injured party but also [12] Customs and Usages entitles injured party to recover for any damage Adding to terms of contract sustained because of the breach. Where lease did not require lessee to provide 6 Cases that cite this headnote interior design requirements to lessor's architect so that design of proposed building could be rendered and lease provided that no obligation [9] Customs and Usages or limitation not stated therein would be Explanation of Contract imposed on either party, evidence as to business Where a written contract is ambiguous or customs and usages concerning furnishing of obscure, so that intent of the parties is uncertain lessee's requirements for interior design was or where it is silent on a matter that needs to not admissible in breach of lease action to add be explained by extraneous evidence or where obligations expressly assumed by the lessee. it appears from the terms of the contract that other covenants were clearly contemplated to 2 Cases that cite this headnote effect the purposes of the contract, evidence with reference to uniform and well settled custom or usage pertaining to the matters with which they contract is admissible. Attorneys and Law Firms

Cases that cite this headnote *887 Keys, Russell, Watson & Seaman, William H . Keys, Corpus Christi, for appellant.

[10] Customs and Usages Sorrell, Anderson & Porter, Charles R. Porter, Jr., Corpus Exclusion by terms of contract Christi, for appellee. Where lease of space in proposed shopping center did not obligate lessee to furnish financial statements in order to help lessor obtain OPINION permanent financing for shopping center and contract provided that no obligation or limitation GREEN, Chief Justice. not stated in the lease should be imposed on This appeal is from a take-nothing summary judgment either party, evidence of customs and usages in a damage suit brought by appellant S.K.Y. Investment concerning furnishing of financial statements

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Corporation against appellee H. E. Butt Grocery Company summary judgments established by our State Supreme Court. for alleged breach of contract. The summary judgment Rule 166-A, Texas Rules of Civil Procedure provides that evidence consists of the pleadings of the parties, answers summary judgments shall be rendered where the record shows to interrogatories propounded by appellee to appellant, and that there is no genuine issue as to any material fact and that affidavits and counter affidavits, with exhibits attached. the moving party is entitled to a judgment as a matter of law. The burden of proof is on the movant, and all doubts as to It was shown by such evidence that appellant was a the existence of a material fact issue are resolved against him. corporation created to acquire, construct, lease and operate Great American Reserve Insurance Company v. San Antonio a shopping center to be located in Kingsville, Texas, with Plumbing Supply Company, Tex., 391 S.W.2d 41. The duty the name ‘Sky Way Mall Shopping Center.’ Prior to entering of the court is to determine if there are any genuine issues of into a lease contract with appellee, appellant had obtained a material fact to be tried, and not to weigh the evidence or a purchase option for land and had contacted various determine its credibility and thus try the case on the affidavits. other business concerns who might be interested in leasing Gulbenkian v. Penn, 151 Tex. 412, 252 S .W.2d 929; Gaines portions of the shopping center proposed to be constructed v. Hamman, 163 Tex. 618, 358 S.W.2d 557; Parrott v . Garcia, by appellant. After negotiations, appellant as Landlord and Tex., 436 S.W.2d 897. Affidavits supporting or opposing the appellee as Tenant executed a written lease agreement dated motion must set forth such facts as would be admissible in March 21, 1967, under the terms of which appellee would evidence. They must be factual; conclusions of affiant are not occupy a portion of the center. Construction work on he center considered to have any probative value. Box v. Bates, 162 had not been started when the lease was executed, and the Tex. 184, 346 S.W.2d 317; Crain v. Davis, Tex., 417 S.W.2d contract contained the following provision: 53; Travis County Water Control & Improvement District No. 12 v. McMillen, Tex., 414 S .W.2d 450. 'Article 2

B. If prior to September 1, 1967, construction work has Appellant by its first point of error asserts that a genuine not commenced upon the building containing the demised issue of a material fact was raised as to whether appellant had premises, Tenant may thereafter at its option cancel this lease, commenced construction on the building in question prior to by giving notice to the Landlord of its option to cancel on or September 1, 1967. Appellee answers this in its first reply before March 1, 1968. * * *‘ point by stating that the record shows as a matter of law that such construction had not been commenced on the date mentioned. Appellee's motion for summary judgment was based, in part upon its contention that construction upon the demised The conflict between the parties appears to be based on a premises had not commenced by September 1, 1967. By letter difference of opinion as to what is meant by commencement dated September 1, 1967, appellee gave notice to appellant of construction work. Factually, the record shows without that since construction work had not commenced, appellee dispute that the only work which had been done on the land was exercising its election to cancel and terminate the lease. prior to September 1, 1967, consisted of ground leveling and bulldozing of brush, etc., which was commenced on Appellant alleged its cause of action in alternate counts. It July 15, 1967, and completed prior to September 1, 1967. In pleaded (1) that construction had commenced by September this connection, the following interrogatories were asked of 1, 1967, and that appellee's attempted cancellation constituted appellant, and the following replies given. a breach of the contract, *888 and (2) in the alternative, '15. Was construction commenced on that if construction had not commenced by that date, failure the proposed Skyway Mall prior to to so commence was caused by the breach by appellee of September 1, 1967? If so, state the obligations that appellee owed under the contract in (a) failing date such construction commenced and to furnish details for the working plans and specifications to what work was completed or in progress be prepared by appellant and approved by appellee, and/or (b) on September 1, 1967. Also state who in failing to furnish requested financial information necessary performed such work.' to the procurement of long term financing. [1] [2] [3] [4] [5] In passing upon the points raised on this appeal, we shall be guided by the rules concerning Answer:

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'15. Yes. Site work, consisting of ground his lien to be superior to a lien claimed by a deed of trust leveling and bulldozing of brush, etc., or mortgage lien holder, where the mechanic's lien proponent was commenced on July 15, 1967.' asserts that work had commenced upon the building before the inception of the mortgage or deed of trust lien. The rule of law that seems to govern is set out in Rupp v. Cline & Son, Question: Inc., 230 Md. 573, 188 A.2d 146, 1 A.L.R.3rd 815, where the '16. Was construction commenced ‘upon the building court said: containing the demised premises' as described in the lease in 'These cases make it clear that before question prior to September 1, 1967? If so, state the date such there can be the Commencement of a construction commenced and what work was completed or building which would give a mechanics' in progress on September 1, 1967. Also state who performed lien claimant a preference over a such work. recorded mortgage there must be (1) a manifest commencement of some work or labor on the ground which everyone Answer: can readily see and recognize as the '16. Unless site work may be construed as such, construction commencement of a building and (2) was not commenced ‘upon the building containing the the work done must have been begun demised premises' because of Defendant's failure to submit with the intention and purpose then its interior design requirements and to furnish the requisite formed to continue the work until the financing information.’ completion of the building. If either of these elements is missing then there has been no ‘commencement of the building’ The latter part of this answer will be considered under within the meaning of (a Maryland subsequent points of error. statute).' *889 [6] While the affidavit of appellant's president states his opinion that such site work constituted the commencement of construction, this was a mere conclusion of affiant, and had no probative force as evidence. Box v. Bates, supra. See, also, Maule Industries, Inc. v. Gaines Construction Co., Fla.App., 157 So.2d 835, where the court held that the The above answers of appellant to the interrogatories, removing of the grass and scarifying of a portion of the together with affidavits attached to appellee's motion for land did not constitute a visible commencement of operations summary judgment evidencing that on September 1, 1967, within the meaning of the lien statute, and other authorities no construction work on any building had been commenced cited in annotation in 1 A.L.R.3rd 822 et seq. on the land in question, make it apparent that appellant We hold that the record shows without factual basis for relies solely on the site work and bulldozing to support its dispute that construction work had not commenced upon the contention that construction work had commenced ‘upon the building containing the demised premises prior to September building containing the demised premises' by September 1, 1, 1967. Appellant's first point of error is overruled. 1967. It was admitted by appellant that it did not own title to the land on that date, and that it had not obtained a building By its second and third points, appellant takes the position that permit. even if it failed timely to commence construction upon ‘the [7] Appellant cites no authorities in support of its contention building containing the demised premises', such construction under its first point. Appellee states in its brief that a diligent was prevented and appellant's failure is excused by appellee's search on counsel's part failed to disclose any Texas cases breach of the contract (1) in wrongfully failing to furnish its on the proposition of what constitutes commencement of requirements for interior design to appellant's architect, and construction work on a building, and we have found no such (2) in wrongfully failing to provide that financial information authorities. However, appellee cites us a number of out of normally and customarily furnished to financial concerns state authorities, including an annotation in 1 A.L.R. 3rd 822, interested in providing long-term permanent financing to which are persuasive on this question. The cases come about owners of shopping centers. through an attempt by a mechanic's lien claimant to cause

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[8] When one party to a contract, by wrongful means, Permanent financing upon a project of this size takes time prevents the other party from performing, as by making it to arrange, and Defendant knew it. Franklin Life Insurance impossible for him to perform, such an action by the party Company's refusal to approve the permanent financing sought at fault constitutes a breach of contract. The effect of such a by the Plaintiff made it necessary for other sources to breach is not only to excuse performance by the injured party, be investigated, and action was commenced immediately but also to entitle him to recover *890 for any damage he to reach this end. By reason of Defendant's said actions, may sustain by reason of the breach. 13 Tex.Jur.2d, p. 557, insufficient time remained within which to complete all p. 587, Contracts, s 307, s 325; Smith v. Lipscomb, 13 Tex. the formal requisites of permanent financing by the time 532; Sanderson v. Sanderson, 130 Tex. 264, 109 S.W.2d 744, of Defendant's wrongful termination of its lease agreement syl. (16, 17), op. adopted; City of Houston v. Howe & Wise, on September 1, 1967, though at such time Plaintiff had Tex.Civ.App., 323 S.W.2d 134, wr. ref. n.r.e . reached an informal agreement with General American Life Insurance Company to provide such financing. Defendant at all times was well aware of the refusal of Franklin Concerning appellant's contention that appellee breached Life Insurance Company to approve the financing and the the contract in wrongfully failing to provide that financial necessity of obtaining other financing. If there was a failure information normally and customarily furnished to financial to commence construction of the premises to be used as a concerns interested in providing long term permanent loans shopping center, which is not admitted but is denied, such to builders of shopping centers, and that such breach of the failure was attributable solely to the failure of Defendant to contract prevented appellant from performing its obligations, furnish the information normally and customarily furnished appellant relied on an affidavit from its president, Clarence by proposed tenants to concerns who will provide long-term Yarbrough, Jr, and on appellant's answers to interrogatories financing for shopping centers.' propounded by appellee. The pertinent parts of the affidavit read as follows: 'As president of the corporation, I was charged with the In answer to interrogatories, appellant replied that if responsibility of obtaining permanent financing of a long- construction was not commenced it was in part because of term nature for the construction of the shopping center. This appellee's failure to furnish requisite financial information was within the contemplation of the parties to the lease and that it was because of such failure that Franklin Life agreement, and Defendant well knew that the successful Insurance Co., decided to cancel its financing arrangements. acquisition of permanent financing depends upon the quality Appellant further answered that *891 the furnishing by of the tenants within the proposed shopping center, their proposed tenants of shopping centers of financial statements financial stability, the history of their operations, minimum and/or profit and loss statements for inspection and approval rental to be received by Plaintiff under the respective leases, by the lender of funds is customary, normal and usual in the the terms of the leases, etc. Defendant also well knew, and negotiation and construction of a shopping center. it is a fact, that, normally and customarily, the concern which is to permanently finance the shopping center seeks The statements in the answers to the interrogatories and and is furnished not only C.Y. balance sheets but also in Yarbrough's affidavit as to the reasons given for the profit and loss statements from the proposed tenants. At cancellation by the insurance company of its plans to finance all times material hereto, Defendant knew that Plaintiff this project are to a large extent conclusions and without was negotiating for permanent financing with Franklin Life probative force. Box v. Bates, supra; Crain v. Davis, supra. Insurance Company and was aware that, as a condition However, assuming that a fact issue was presented that the for permanent financing, Franklin Life Insurance required cause of appellant's failure to comply with its obligations Defendant to provide it with a profit and loss statement. On was the failure of appellee to submit financial and/or profit numerous occasions, I requested of Defendant that it furnish and loss statements to the insurance company proposing to such profit and loss statement but Defendant continued to finance the construction, the summary judgment evidence arbitrarily and capriciously refuse such information. As a does Not raise a genuine issue of the Material fact that direct consequence of such refusal on the part of Defendant, appellee was under any legal obligation to furnish same. Franklin Life Insurance Company refused to approve the A fact issue was raised as to a general custom, practice permanent financing sought by the Plaintiff corporation. and usage of a party in appellee's position as Tenant to furnish the financial statements requested. Appellant cites the

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following cases as authority for the rule that parties to an herein shall be imposed on either party hereto,’ new terms agreement are presumed to have contracted with reference can not be added to the contract by incorporating a usage or to general custom, practice and usage as to that particular custom which would add to the contractual obligations of one business: Luling Oil & Gas Company v. Humble Oil & of the parties . Refining Company, 144 Tex. 475, 191 S.W.2d 716 where the agreement was silent or obscure as to a particular subject; [12] The necessity of interior design requirements is Bender v . Peyton, 4 Tex.Civ.App. 57, 23 S.W. 222, wr. ref.; emphasized by the affidavit of architect Turner, filed in Latta v. Transit Grain Company, Tex.Civ.App., 222 S.W.2d opposition to appellee's motion for summary judgment. 467, n. w. h.; Stalcup v. Eastham, Tex.Civ.App., 330 S.W.2d Turner is shown to be a licensed professional architect in 237, wr. ref. n. r. e., and other authorities. Texas, employed by appellant to prepare preliminary working [9] As we understand and construe these authorities, they drawings and specifications for the proposed center. He stand for the proposition that where a written contract is referred to the portion of the contract which provided that ambiguous or obscure, so that the intent of the parties is ‘Construction of the demised premises by the Landlord uncertain; or where it is silent on a matter that needs to shall be in accordance with plans and specifications to be be explained by extraneous evidence; or where it appears prepared by Landlord and approved by Tenant,’ and stated from the terms of the contract that other covenants were that appellee's interior design was needed to merit appellee's clearly contemplated to effect the purposes of the contract, approval of Landlord's plans and specifications. According to evidence with reference to a uniform and well settled custom Turner, this information is normally and customarily supplied or usage pertaining to the matters with which they contract is as a matter of course by tenants in proposed shopping centers. admissible. Requests were made by him of appellee for the information, and such information was withheld by appellee, even though it was necessary for completion of the working drawings and The contract in issue here was a full, well prepared instrument specifications, for cost estimating, and for negotiation of a of some fifteen legal size pages, double spaced typing. construction contract. He stated in his affidavit that without Neither party makes any statement in its pleadings or briefs the information requested of appellee, it was not possible to that the contract is unclear or ambiguous as to any of its prepare grade elevations or commence site preparation and terms, or that extraneous evidence is needed to explain any grading prior to September 1, 1967. of its provisions. There are many provisions concerning the respective obligations incurred by the parties. There is NO provision concerning any obligation to furnish the financial Affiant Yarbrough stated that he had requested appellee statements referred to by appellant. to furnish its interior design requirements, that same were refused, and that without such information grade elevations Article 14 of the contract contains the following agreement of could not be prepared and only ground leveling and the parties: ‘No obligation or limitation not stated herein shall bulldozing on the ground could be done. be imposed on either party hereto. * * *’ (Emphasis added). [10] In this situation, we hold that evidence of customs and Assuming the facts to be as stated above, there still is usages would not be admissible to add to the obligations of no showing that appellee breached any of its contractual appellee. Miller v. Gray, 136 Tex. 196, 149 S.W.2d 582, 141 obligations. There was no provision in the contract requiring A.L.R. 1237; City of Houston v. Finn, 139 Tex. 111, 161 appellee to furnish the information referred to. We again S.W.2d 776, 778; George v. El Paso County Water Control & refer to the agreement of the parties stated in the contract Improvement District No. 1, Tex.Civ.App., 332 S.W.2d 144, in Article 14 thereof, supra. For the reasons heretofore 148, wr. ref. n. r. e.; Kingsley v. Western Natural Gas Co., stated in connection with the matter of furnishing financial Tex.Civ.App., 393 S.W.2d 345, 353, wr. ref. n. r. e.: Republic statements, we hold that evidence as to business customs and National Bank of Dallas v. National Bankers Life Insurance usages concerning the furnishing of Tenant's requirements for Company, Tex.Civ.App., 427 S.W.2d 76, 80 wr. ref. n. r. e. interior designs was not admissible to add to the obligations expressly assumed by appellee in the written contract. [11] We hold that the law of this State, as demonstrated in the authorities above cited, is that where a contract is Appellant's second and third points of error are overruled. clear, complete, and unambiguous, and especially where it expressly provides that ‘no obligation *892 * * * not stated

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on the other propositions raised and discussed in the briefs of Our decisions on the above points are decisive of this appeal. the parties. Appellee was entitled, as a matter of law, to the judgment which was rendered. It is, accordingly, unnecessary to pass Judgment affirmed.

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© 2015 Thomson Reuters. No claim to original U.S. Government Works. 7 State Farm Lloyds v. Johnson, 290 S.W.3d 886 (2009) 52 Tex. Sup. Ct. J. 1042

Dispute, before any coverage action was filed, over extent of hail damage to insured's roof, 290 S.W.3d 886 whether only ridgeline was damaged or entire Supreme Court of Texas. roof needed to be replaced, related to amount STATE FARM LLOYDS, Petitioner, of loss, within meaning of appraisal provision v. of homeowners policy, so that insured could Becky Ann JOHNSON, Respondent. demand appraisal on that question, even if appraisers' inquiry would include some causation No. 06–1071. | Argued Jan. 15, element. 2008. | Decided July 3, 2009. 46 Cases that cite this headnote | Rehearing Denied Aug. 28, 2009.

Synopsis [3] Insurance Background: Insured brought action against homeowners Contracts insurer for a declaratory judgment that dispute over extent Insurance of loss caused by hail was dispute over amount of loss and Validity was subject to appraisal. The 296th Judicial District Court, Collin County, Betty Canton, J., entered summary judgment An appraisal clause, in property insurance in favor of insurer. Insured appealed. The Court of Appeals, policy, binds the parties to have the extent or 204 S.W.3d 897, reversed and rendered, and remanded in part. amount of the loss determined in a particular Insurer filed petition for review. way, and like any other contractual provision, should be enforced.

39 Cases that cite this headnote [Holding:] The Supreme Court, Brister, J., held that, as a matter of first impression, insurer could not avoid insured's demand for appraisal to determine her amount of loss. Attorneys and Law Firms

Affirmed, and remanded. *887 John Christopher Nickelson, Joseph W. Spence, Julia Ann Dobbins, Michael W. Huddleston, Shannon, Gracey, Ratliff & Miller, L.L.P., Fort Worth, TX, for Petitioner.

West Headnotes (3) Russell J. Bowman, Scott Bowman & Staella, Dallas, TX, for Respondent. [1] Insurance Linda Jene Burgess, Winstead PC, Peter R. Meeker, Davis & Subjects and Scope of Appraisal Wilkerson, P.C., Austin, TX, for Amicus Curiae. Property insurer and insured's dispute over roof damage from hail fell within scope of Opinion appraisal, to determine “amount of loss,” under appraisal provision in standard-form policy, to Justice BRISTER delivered the opinion of the Court. extent parties' disagreed which shingles needed Appraisal clauses have appeared in most property insurance replacing. policies in Texas for many years. Although they rarely detail 52 Cases that cite this headnote the scope of appraisal, there has rarely been any litigation about it. The parties here agree that the scope of appraisal includes damage questions and excludes liability questions, [2] Insurance but they disagree which is involved in this dispute about hail Subjects and Scope of Appraisal damage to a homeowner's roof. Because an appraisal has yet to take place, we agree with the insured that the record

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does not establish that it will exceed the permissible scope 2 204 S.W.3d 897. As this suit sought nothing except of appraisal. Accordingly, we affirm the court of appeals' appraisal, the judgments of both the trial court (denying judgment in favor of the insured. it) and the court of appeals (compelling it) are final judgments within our appellate jurisdiction. See TEX. GOV'T CODE § 22.001(a).

I. Background 3 The Texas Windstorm Insurance Association and the Property Casualty Insurers Association of America A hailstorm moved through Plano, Texas in April of 2003, submitted amicus curiae briefs supporting parts of State damaging the roof of Becky Ann Johnson's home. She filed Farm's petition for review. a claim under her homeowners insurance policy with State While trial courts have some discretion as to the timing Farm Lloyds. State Farm's inspector concluded that hail had of an appraisal, they have no discretion to ignore a valid damaged only the ridgeline of her roof, and estimated repair costs at $499.50 (less than the policy's $1,477 deductible). appraisal clause entirely. 4 Accordingly, we review the entire By contrast, Johnson's roofing contractor concluded the entire record to decide whether either party was entitled to summary

roof needed to be replaced at a cost of more than $13,000. 1 judgment as a matter of law. 5

1 4 In re Allstate County Mut. Ins. Co., 85 S.W.3d 193, 196 The estimate in the record lists $13,428.19 as the “Roof Total,” but also lists a “Total Contract Price” of only (Tex.2002). $6,476.65. We use the larger number as that is the figure 5 See Canyon Reg'l Water Auth. v. Guadalupe–Blanco both parties quote in their briefs. River Auth., 258 S.W.3d 613, 616 (Tex.2008); Texas To settle this difference, Johnson demanded appraisal of Mun. Power Agency v. Pub. Util. Comm'n, 253 S.W.3d the “amount of loss” under the following provision in her 184, 192 (Tex.2007). standard-form policy:

Appraisal. If you and we fail to agree on the amount II. A Brief History of Appraisal Clauses of loss, either one can demand that the amount of the loss be set by appraisal. If either makes a written demand Insurance appraisal clauses have been around for a long for appraisal, each shall select a competent, disinterested time. In 1888 in Scottish Union & National Insurance Co. v. appraiser. Each shall notify the other of the appraiser's Clancy, this Court enforced an appraisal clause much like the identity within 20 days of receipt *888 of the written one used here. 6 It would be going too far to say the Court demand. The two appraisers shall then select a competent, approved of such clauses, but we unequivocally found them impartial umpire.... The appraisers shall then set the enforceable: amount of the loss. If the appraisers submit a written report of an agreement to us, the amount agreed upon shall be the 6 71 Tex. 5, 8 S.W. 630, 631 (1888) (providing for three amount of the loss. If the appraisers fail to agree within a appraisers and that “the award of any two, in writing, reasonable time, they shall submit their differences to the shall be binding and conclusive as to the amount of such umpire. Written agreement signed by any two of these three loss or damage”). shall set the amount of the loss. However injudicious it may be for parties to bind State Farm refused to participate in an appraisal, asserting themselves by such agreement, it seems to be well settled that the parties' dispute concerned causation and not “amount that, having done so, they cannot disregard it.... In the of loss.” Johnson filed suit seeking only a declaratory absence of fraud, accident, or mistake, the parties having judgment compelling appraisal. On cross-motions for agreed that the amount of loss shall be determined in summary judgment, the trial court agreed with State Farm that a particular way, we are constrained to hold that such no appraisal was warranted. The court of appeals reversed, stipulation is valid.... 7 2 holding that appraisal was required. We granted State 7 Id. Farm's petition to decide whether the dispute here fell within Today, appraisal clauses “are uniformly included in the scope of this appraisal clause. 3 most forms of property insurance policies.” 8 “Virtually

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every property insurance policy for both homeowners In Scottish Union, we referred to the scope of appraisal in the and corporations contains a provision specifying *889 course of distinguishing it from arbitration: ‘appraisal’ as a means of resolving disputes about the ‘amount But here the [appraisal clause] does of loss' for a covered claim.” 9 An appraisal clause like not divest the courts of jurisdiction, the one used here “appears in almost every homeowners, but only binds the parties to have automobile, and property policy in Texas.” 10 the extent or amount of the loss determined in a particular way, leaving 8 Johnny C. Parker, Understanding the Insurance Policy the question of liability for such loss Appraisal Clause: A Four–Step Program, 37 U. TOL. to be determined, if necessary, by the L.REV. 931, 931 (2006). courts. 16 9 Timothy P. Law & Jillian L. Starinovich, What Is It Worth? A Critical Analysis of Insurance Appraisal, 13 16 8 S.W. at 631. CONN. INS. L.J. 291, 292–93 (2006–07). In 1897, we repeated this distinction between damage 10 Br. of Prop. Cas. Insurers Ass'n of Am. as Amicus Curiae questions for appraisers and liability questions for the courts: Supporting Pet'rs at 8. It seems to be generally held that a Although the history of such clauses is both deep and wide, stipulation that the question of liability they have required this Court's attention only five times since shall be determined by arbitration is Scottish Union: in 1892, 11 1897, 12 1919, 13 1965, 14 and contrary to public policy and void, but 2002. 15 All of these cases concerned waiver or enforceability it is otherwise, as we have seen, as of the appraisal clause itself; we have never resolved a dispute to the ascertainment of the amount of about the scope of appraisal, or the meaning of “amount of the loss. There is neither repugnancy loss.” Accordingly, in addressing this issue for the first time nor inconsistency in leaving the former we keep in mind that appraisals have apparently resolved such question to the courts when the matters for many years without our aid. liability is disputed, and at the same time in providing that the amount 11 See Scottish Union & Nat'l Ins. Co. v. Clancy, 83 Tex. of the recovery shall be settled by 113, 18 S.W. 439, 441 (1892) (holding insurer's attempt arbitration. 17 to adjust and settle claim did not waive its right to appraisal). 17 Am. Cent., 38 S.W. at 1119. 12 See Am. Cent. Ins. Co. v. Bass, 90 Tex. 380, 38 S.W. While policies hostile to arbitration have largely been 1119, 1120 (1897) (holding insurer's denial of liability did not waive its right to appraisal). preempted, 18 limiting appraisal to damages and not liability 13 is surely *890 still correct. 19 Most appraisal clauses do not See Del. Underwriters v. Brock, 109 Tex. 425, 211 S.W. define the scope of appraisal in detail (as is the case here), but 779, 781 (1919) (holding insurer's appointment of biased appraiser waived its right to appraisal). the ordinary meaning of the words serves that purpose. 20 The word “appraisal” itself generally means “[t]he determination 14 See Glens Falls Ins. Co. v. Peters, 386 S.W.2d 529, 532 of what constitutes a fair price; valuation; estimation of (Tex.1965) (holding appraisal required as building was not a total loss). worth.” 21 The policy directs the appraisers to decide the “amount of loss,” not to construe the policy or decide whether 15 See In re Allstate County Mut. Ins. Co., 85 S.W.3d 193, the insurer should pay. 22 And the policy requires each party 195 (Tex.2002) (holding appraisal clause was not an to select a “competent, disinterested appraiser,” not a lawyer unenforceable arbitration agreement). or insurance expert. 23

III. The Scope of Appraisal: Damages vs. Liability 18 See In re Am. Homestar of Lancaster, Inc., 50 S.W.3d 480, 484 (Tex.2001) (“Congress passed the Federal

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Arbitration Act in 1925 to reverse the longstanding a matter of law either that this dispute is about causation or judicial hostility to arbitration agreements....”). that it is beyond the scope of appraisal. 19 See In re Allstate, 85 S.W.3d at 198 (citing Scottish 24 Compare Lundstrom v. United Servs. Auto. Ass'n–CIC, Union for the proposition that appraisal “binds the parties to have the extent or amount of the loss determined in a 192 S.W.3d 78, 89 (Tex.App.-Houston [14th Dist.] particular way, leaving the question of liability for such 2006, pet. denied) (rejecting claim that consideration loss to be determined, if necessary, by the courts”). of causation bars appraisal) with Germania Farm Mut. Ins. Ass'n v. Williams, No. 11–00–00393–CV, 2002 WL 20 Don's Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 32341841, at *3–4 (Tex.App.-Eastland May 23, 2002, S.W.3d 20, 23 (Tex.2008) (“Policy terms are given no pet.) (citing Wells for proposition that appraisers their ordinary and commonly understood meaning unless cannot consider causation); see also Salinas v. State the policy itself shows the parties intended a different, Farm Lloyds, 267 Fed.Appx. 381, 386 (5th Cir.2008) technical meaning.”). (following Wells as Texas law); Holt v. State Farm 21 Lloyds, No. CA 3:98–CV–1076–R, 1999 WL 261923, at BLACK'S LAW DICTIONARY 110 (8th ed.2004). *3 (N.D.Tex. April 21, 1999) (same). 22 See 15 COUCH ON INSURANCE § 210:42 (“As a 25 Compare CIGNA Ins. Co. v. Didimoi Prop. Holdings, general rule, the sole purpose of an appraisal is to N.V., 110 F.Supp.2d 259, 264 (D.Del.2000) (holding determine the amount of damage. As a consequence, causation was for appraisers), Augenstein v. Ins. Co. of N. an appraisal clause does not permit appraisers to Am., 372 Mass. 30, 360 N.E.2d 320, 324 (1977) (same), determine whether a loss was, in fact, total. However, the and Am. Cent. Ins. Co. v. Dist. Ct., Ramsey County, replacement cost of real property may be appraised, that Second Jud. Dist., 125 Minn. 374, 147 N.W. 242, 244 is, estimated or evaluated.”). (1914) (same), with HHC Assocs. v. Assurance Co. of 23 See 15 COUCH ON INSURANCE § 213:44 (“An Am., 256 F.Supp.2d 505, 511 (E.D.Va.2003) (holding appraiser can make no legal determinations.”); Br. of causation was question for court rather than appraisers), Tex. Windstorm Ins. Ass'n as Amicus Curiae Supporting Wausau Ins. Co. v. Herbert Halperin Distrib. Corp., Pet'rs at 8 (“In actual practice, appraisers and umpires 664 F.Supp. 987, 989 (D.Md.1987) (same), Rogers v. are frequently unqualified to make complex liability State Farm Fire & Cas. Co., 984 So.2d 382, 392 determinations under an insurance policy. There is no (Ala.2007) (same), Munn v. Nat'l Fire Ins. Co., 237 Miss. requirement that they be licensed. Umpires are often 641, 115 So.2d 54, 58 (1959) (same), and Merrimack lawyers or mediators with no particular experience or Mut. Fire Ins. Co. v. Batts, 59 S.W.3d 142, 153 expertise in property insurance coverage or claims. (Tenn.Ct.App.2001) (same); see also Knapp v. Allstate Appraisers are often contractors who may be familiar Ins. Co., 134 F.3d 378, 1998 WL 23225, at *1 (9th with repair costs but are not qualified to make policy Cir.1998) (unpublished table mem.) (holding appraisers interpretations or to determine cause and origin of the could discount appraisal for pre-existing wear-and-tear); damage being claimed. There is no explicit requirement Johnson v. Nationwide Mut. Ins. Co., 828 So.2d 1021, that the appraisers and umpire inspect the property or 1022 (Fla.2002) (holding causation is for appraisers read the policy, and many do not.”). when insurer admits part of loss is covered and for court when insurer denies any coverage). The line between liability and damage questions may not always be clear, as discussed below. But while appraisal clauses might be drafted more precisely, the scarcity of suits A. Is this a causation dispute? on the subject suggests the 1888 test is still adequate: the scope of appraisal is damages, not liability. First, the record does not prove that the dispute here is about causation.

[1] In its motion for summary judgment, State Farm asserted IV. The Scope of Appraisal: Causation that “the only shingles on Johnson's roof that were actually State Farm argues that no appraisal is needed here because damaged by hail were the shingles on the ridge of her roof.” A appraisers cannot decide causation issues. Texas courts have dispute about how many shingles were damaged and needed replacing is surely a question for the appraisers. If the parties split on this question, 24 as have the few courts elsewhere to must agree on precisely which shingles have been damaged address it. 25 But the *891 record here does not establish as

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before there can be an appraisal, appraisals would hardly be causes. 30 In the abstract, it is hard to say whether causation necessary. What's more, either party could avoid appraisal by is more a question of liability or damages. simply picking a few extras. The cost of replacing shingles (or anything else) is a function of both price and number; 28 See, e.g., STATE BAR OF TEX., TEXAS PATTERN appraisers must factor in both shingle prices and shingle JURY CHARGES—GENERAL NEGLIGENCE PJC C numbers to decide the “amount of loss.” To the extent the 4.1 (2008); STATE BAR OF TEX., TEXAS PATTERN parties disagree which shingles needed replacing, that dispute JURY CHARGES—MALPRACTICE, PREMISES, would fall within the scope of appraisal. PRODUCTS PJC C 51.3, 51.7, 51.19, 61.5, 66.4, 66.5, 71.3–71.7 (2008); STATE BAR OF TEX., On appeal, State Farm emphasizes it is disputing not just TEXAS PATTERN JURY CHARGES—BUSINESS, which shingles were damaged, but which were damaged by CONSUMER, INSURANCE, EMPLOYMENT PJC hail. But nothing in the summary judgment record establishes 102.1, 102.7, 102.8, 102.14 (2008). Johnson's roof was damaged by anything else. In State Farm's 29 See, e.g., STATE BAR OF TEX., TEXAS PATTERN denial letter, its summary judgment motion, and even its JURY CHARGES—GENERAL NEGLIGENCE briefs in this Court, there is neither evidence nor even a hint PJC C 8.2–8.5, 8.11, 9.2–9.5, 11.3 (2008); about what else caused the damage. The trial court could not STATE BAR OF TEX., TEXAS PATTERN conclude this was a causation dispute just because State Farm JURY CHARGES—MALPRACTICE, PREMISES, claimed it was. PRODUCTS PJC 80.3–80.6, 80.13, 81.3–81.6, 83.4, 84.3–84.4 (2008); STATE BAR OF TEX., Nor does the record conclusively establish that the parties' TEXAS PATTERN JURY CHARGES—BUSINESS, dispute is solely about how much of the roof was damaged CONSUMER, INSURANCE, EMPLOYMENT PJC rather than how much needs to be replaced. Sometimes it may 110.2, 110.5, 110.8, 110.13, 110.14, 110.18–110.22, be unreasonable or even impossible to repair one part of a 110.26–110.28, 110.30 (2008).

roof without replacing the whole. 26 The policy provides that 30 See, e.g., STATE BAR OF TEX., TEXAS PATTERN State Farm will pay reasonable and necessary costs to “repair JURY CHARGES—GENERAL NEGLIGENCE or replace” damaged property, and repair or replacement is PJC C 8.7–8.9 (2008); STATE BAR OF TEX., TEXAS PATTERN JURY CHARGES— an “amount of loss” question for the appraisers. 27 On this MALPRACTICE, PREMISES, PRODUCTS PJC record, the trial court could not conclude as a matter of 80.7–80.9 (2008); STATE BAR OF TEX., law that the parties' dispute was about causation rather than TEXAS PATTERN JURY CHARGES—BUSINESS, something else. CONSUMER, INSURANCE, EMPLOYMENT PJC 110.7, 110.25 (2008). 26 See, e.g., Wausau Ins. Co., 664 F.Supp. at 987. But in actual cases, causation usually falls into one category 27 Gulf Ins. Co. v. Pappas, 73 S.W.2d 145, 146–47 or the other. Thus, when different causes are alleged for a (Tex.Civ.App.-San Antonio 1934, writ ref'd). single injury to property, causation is a liability question for the courts. For example, in Wells v. American States Preferred Insurance Co., appraisers assessed foundation B. Are causation disputes a damage due to plumbing leaks (a covered peril) as “0” but question of liability or damages? damage due to settling (an excluded peril) as $22,875.94. 31 The Dallas Court of Appeals set aside the appraisal, holding Even if the parties' dispute involves causation, that does not appraisers could decide the amount of damage but not what prove whether it is a question of liability or damages. caused it. 32 Appraisers can decide the cost of repairs in this Causation relates to both liability and damages because it context, but if they can also decide causation there would be is the connection between *892 them. For example, the no liability questions left for the courts. Texas Pattern Jury Charges place causation in both the broad- 31 form liability questions, 28 and in the broad-form damage 919 S.W.2d 679, 685–86 (Tex.App.-Dallas 1996, writ questions that limit damages to those “resulting” from a denied).

particular occurrence, 29 and exclude damages due to other 32 Id. at 685.

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By contrast, when different types of damage occur to different rather than the jury, 39 and by refusing the writ we adopted items of property, appraisers may have to decide the damage that opinion. 40 If appraisers cannot take pre-existing wear caused by each before the courts can decide liability. For and tear into consideration in valuing the amount of loss, then example, in Lundstrom v. United Services Automobile Ass'n, we should have reversed it instead. the appraisers assessed $4,226.19 for damages due to water (a covered peril) but made no finding for damages due to 37 73 S.W.2d 145, 146 (Tex.Civ.App.-San Antonio 1934, mold (as to which coverage was disputed). 33 Rejecting the writ ref'd). argument that appraisal is barred “whenever causation factors into the award,” the court of appeals affirmed the water 38 Id. at 146–47 damage award, and rendered mold damage moot by finding 39 Id. no coverage. 34 In this context, courts can decide whether water or mold damage is covered, but if they can also decide 40 See Fiess, 202 S.W.3d at 749; Hyundai Motor Co. v. the amount of damage caused by each, there would be no Vasquez, 189 S.W.3d 743, 754 n. 52 (Tex.2006). damage questions left for the appraisers. Indeed, appraisers must always consider causation, at least as an initial matter. An appraisal is for damages caused by 33 192 S.W.3d 78, 88 (Tex.App.-Houston [14th Dist.] 2006, a specific occurrence, not every repair a home might need. pet. denied). When asked to assess hail damage, appraisers look only at 34 damage caused by hail; they do not consider leaky faucets or Id. at 89, 95. remodeling the kitchen. When asked to assess damage from The same is true when the causation question involves a fender-bender, they include dents caused by the collision separating loss due to a covered event from a property's but not by something else. Any appraisal necessarily includes pre-existing condition. Wear and tear is excluded in most some causation element, because setting the “amount of loss” property policies (including this one) because it occurs in requires appraisers to decide between damages for which every case. If State Farm is correct that appraisers can never coverage is claimed from damages caused by everything else. allocate damages between covered and excluded perils, then appraisals can never *893 assess hail damage unless a roof [2] This of course does not mean appraisers can rewrite 35 the policy. No matter what the appraisers say, State Farm is brand new. That would render appraisal clauses largely does not have to pay for repairs due to wear and tear or inoperative, a construction we must avoid. 36 any other excluded peril because those perils are excluded. But whether the appraisers have gone beyond the damage 35 See, e.g., CIGNA Ins. Co. v. Didimoi Prop. Holdings, questions entrusted to them will depend on the nature of N.V., 110 F.Supp.2d 259, 263 (D.Del.2000) (holding that the damage, the possible causes, the parties' dispute, and if “amount of loss” does not include causation, “appraisal the structure of the appraisal award (as discussed more fully would be a useless exercise because it would not fix below). State Farm cannot avoid appraisal at this point merely the amount of loss and either party could still contest damages”). because there might be a causation question that exceeds the scope of appraisal. 36 Fiess v. State Farm Lloyds, 202 S.W.3d 744, 748 (Tex.2006) ( “[I]t has again long been the rule that we must read all parts of a policy together, giving meaning to every sentence, clause, and word to avoid rendering C. When should appraisals be reviewed? any portion inoperative.”). Even if the appraisal here turns out to involve not just damage This was the conclusion we reached in Gulf Insurance Co. but liability questions, that does not mean appraisal should be of Dallas v. Pappas, a case in which a fire worsened pre- prohibited as an initial matter. existing sags in the floors and roof of a building. 37 The parties hotly disputed how much the floors sagged before the This case comes to us in an unusual posture. At least a dozen fire, and whether the building's interior should be repaired or Texas cases involve appraisals of hail damage, every one completely replaced to restore it to its previous condition. 38 challenging an appraisal after it had *894 taken place. 41 The court of appeals held these issues were for the appraisers

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By contrast, this appraisal has yet to occur. That makes a big Smith, 999 S.W.2d 448, 450 (Tex.App.-Amarillo 1999, difference for several reasons. no pet.); Providence Lloyds Ins. Co. v. Crystal City Indep. Sch. Dist., 877 S.W.2d 872, 878 (Tex.App.-San 41 Antonio 1994, no writ). See, e.g., Citizens' Ins. Co. v. Schofield, 116 Tex. 418, 293 S.W. 802, 805 (1927) (adopting opinion of Second, in most cases appraisal can be structured in a way Commission that allowed claim by insurer for expenses that decides the amount of loss without deciding any liability incurred in pre-suit appraisal); American Cent. Ins. Co. v. questions. As already noted, when an indivisible injury to Bass, 90 Tex. 380, 38 S.W. 1119, 1120 (1897) (holding property may have several causes, appraisers can assess the pre-suit appraisal had not been waived); Gardner v. amount of damage and leave causation up to the courts. When State Farm Lloyds, 76 S.W.3d 140, 142 (Tex.App.- divisible losses are involved, appraisers can decide the cost to Houston [1st Dist.] 2002, no pet.) (affirming pre- repair each without deciding who must pay for it. 43 When an suit appraisal); Germania Farm Mut. Ins. Ass'n v. Williams, No. 11–00–00393–CV, 2002 WL 32341841, insurer denies coverage, appraisers can still set the amount of at *4 (Tex.App.-Eastland May 23, 2002, no pet.) loss in case the insurer turns out to be wrong. 44 And when the (rejecting pre-suit appraisal); Vanguard Underwriters parties disagree whether there has been any loss at all, nothing Ins. Co. v. Smith, 999 S.W.2d 448, 451 (Tex.App.- prevents the appraisers from finding “$0” if that is how much Amarillo 1999, no pet.) (abating suit for appraisal); damage they find. Toonen v. United Servs. Auto. Ass'n, 935 S.W.2d 937, 940 (Tex.App.-San Antonio 1996, no writ) (affirming 43 See, e.g., Lundstrom v. United Servs. Auto. Ass'n–CIC, pre-suit appraisal); Hennessey v. Vanguard Ins. Co., 895 S.W.2d 794, 796 (Tex.App.-Amarillo 1995, writ 192 S.W.3d 78, 87–89 (Tex.App.-Houston [14th Dist.] denied) (involving pre-suit appraisal); Barnes v. W. 2006, pet. denied) (rejecting argument that appraisal is Alliance Ins. Co., 844 S.W.2d 264, 267 (Tex.App.-Fort barred “whenever causation factors into the award,” and Worth 1992, writ dism'd by agr.) (setting aside pre- affirming appraisal in which appraisers separated water suit appraisal); Pyles v. United Servs. Auto. Ass'n, 804 damage from mold damage). S.W.2d 163, 164 (Tex.App.-Houston [14th Dist.] 1991, 44 Am. Cent. Ins. Co. v. Bass, 90 Tex. 380, 38 S.W. 1119, writ denied) (affirming pre-suit appraisal); Gulf Ins. 1119–20 (1897). Co. v. Carroll, 330 S.W.2d 227, 231 (Tex.Civ.App.- Waco 1959, no writ) (holding pre-suit appraisal had been Third, the scant precedent involving disputes about the scope waived); U.S. Fid. & Guar. Co. v. Jordan, 278 S.W.2d of appraisal suggests that appraisals generally resolve such 569, 571 (Tex.Civ.App.-Amarillo 1955, writ dism'd) disputes. The final appraisal award here may substantiate (holding insurer waived pre-suit appraisal); Cont'l Fire State Farm's claim *895 that only the ridgeline suffered & Cas. Ins. Corp. v. Surber, 231 S.W.2d 750, 752 hail damage, or reach some in-between figure that proves (Tex.Civ.App.-Fort Worth 1950, no writ) (involving pre- acceptable to all concerned. Litigating the scope of appraisal suit appraisal). is wasteful and unnecessary if the appraisal itself can settle First, appraisal is intended to take place before suit is filed; this controversy. this Court and others have held it is a condition precedent to suit. 42 Appraisals require no attorneys, no lawsuits, no Finally, even if an appraisal award is flawed, that can pleadings, no subpoenas, and no hearings. It would be a rare be easily remedied by disregarding it later. Thus, when case in which appraisal could not be completed with less time insureds objected to appraisal procedures that were allegedly and expense than it would take to file motions contesting it. “inaccurate, unreliable, and biased,” we held in 2002 that Allowing litigation about the scope of appraisal before the the appraisal should go forward and the results could be appraisal takes place would mark a dramatic change in Texas challenged later if the insureds were dissatisfied. 45 If an insurance practice, and surely encourage much more of the appraisal is not an honest assessment of necessary repairs, that same. can be proved at trial and the award set aside. 46

42 Scottish Union & Nat'l Ins. Co. v. Clancy, 71 Tex. 45 In re Allstate County Mut. Ins. Co., 85 S.W.3d 193, 196 5, 8 S.W. 630, 631–32 (1888) (holding appraisal was (Tex.2002). condition precedent to litigation); Am. Cent. Ins. Co. v. Terry, 26 S.W.2d 162, 166 (Tex. Comm'n App.1930) (holding approved); Vanguard Underwriters Ins. Co. v.

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48 See, e.g., Glens Falls Ins. Co. v. Peters, 386 S.W.2d 529, 46 See Gulf Ins. v. Pappas, 73 S.W.2d 145, 146–47 532 (Tex.1965) (remanding for appraisal after parties (Tex.Civ.App.-San Antonio 1934, writ ref'd). agreed to try first whether building was a total loss). [3] But in every property damage claim, someone must determine the “amount of loss,” as that is what the insurer must pay. An appraisal clause “binds the parties to have *** the extent or amount of the loss determined in a particular We do not decide today whether the appraisal conducted on way.” 47 Like any other contractual provision, appraisal remand will necessarily be binding. The summary judgment clauses should be enforced. There may be a few times when record does not, and probably cannot, answer that question appraisal is so expensive and coverage is so unlikely that until after the appraisal has taken place. But for the reasons it is worth considering beforehand whether an appraisal is stated above, we affirm the court of appeals' order granting truly necessary. 48 But unless the “amount of loss” will Johnson's motion for summary judgment to compel State never be needed (a difficult prediction when litigation has Farm to participate in the appraisal process, and remanding yet to begin), appraisals should generally go forward without the issue of her attorney's fees to the trial court for preemptive intervention by the courts. consideration.

47 In re Allstate, 85 S.W.3d at 195 (quoting Scottish Union & Nat'l Ins. Co. v. Clancy, 71 Tex. 5, 8 S.W. 630, 631 Parallel Citations (1888)). 52 Tex. Sup. Ct. J. 1042

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© 2015 Thomson Reuters. No claim to original U.S. Government Works. 8 Trudy's Texas Star, Inc. v. Weingarten Realty Investors, Not Reported in S.W.3d (2004) 2004 WL 1792374

The lease provides that Trudy's would pay both a base rent (“minimum guaranteed rental”) and a percentage rent 2004 WL 1792374 (“percentage rental”) each month. Under the lease, the base Only the Westlaw citation is currently available. rent increased twice during the six-year term, once after SEE TX R RAP RULE 47.2 FOR three years, and again after five years. 1 The percentage rent DESIGNATION AND SIGNING OF OPINIONS. amounted to six percent of monthly gross sales (defined in the lease) when they exceeded $200,000 (the “breakpoint”). MEMORANDUM OPINION Court of Appeals of Texas, 1 From months one through thirty-six, the base rent was Austin. $7,702.92; from months thirty-seven to sixty, it was TRUDY'S TEXAS STAR, INC., Appellant $8,442.08; and from months sixty-one to seventy-two, it was $8,942.08. v. WEINGARTEN REALTY INVESTORS, Appellee. The lease also granted Trudy's an option to extend the term of the lease for one five-year period by giving Weingarten notice No. 03-03-00538-CV. | Aug. 12, 2004. of such intent at least nine months before the expiration of the initial six-year term: “Such extended term shall be upon From the District Court of Travis County, 261st Judicial all of the terms and conditions set forth in this lease except District, No. Gn301352; Margaret A. Cooper, Judge that Minimum Guaranteed Rental shall equal the ‘fair market Presiding. rental value’ of the Premises as determined under Section 4.6 below.” Attorneys and Law Firms

Ernest W. Boyd, for Trudy's Texas Star, Inc. Section 4.6 provides

Charles S. Baker, for Weingarten Realty Investors. If Tenant exercises its 60-month extension operation ... and Landlord Before Justices KIDD, B.A. SMITH and PEMBERTON. and Tenant are not able to reach an agreement with respect to the fair market rental value of the Premises MEMORANDUM OPINION within six (6) months prior to the commencement of such option period, BEA ANN SMITH, Justice. Landlord and Tenant shall each within fifteen (15) days thereafter, *1 Trudy's Texas Star, Inc. and Weingarten Realty Investors name a professional appraiser who dispute which of two provisions in their lease agreement is a qualified, professional, licensed controls the determination of Trudy's rental payments for the appraiser and shall notify the other extension period of their lease of restaurant space. Trudy's party in writing in accordance with contends that the arbitration provision controls; Weingarten the notice provision of this lease insists that the trial court properly ordered Trudy's to abide of the name of such appraiser. If by the lease's appraisal provision. For the reasons that follow, the two appraisers cannot agree on we affirm the trial court's summary judgment in favor of a fair market rental value, the two Weingarten. appraisers thus appointed shall, by agreement between them within forty- five (45) days of their appointment, BACKGROUND appoint a third appraiser who shall also be a qualified, professional, licensed In 1996, Trudy's leased restaurant space in the Brodie appraiser, and the three appraisers Oaks shopping center from Austin Retail BOA I and II shall determine the fair market rental for an initial term of six years. Weingarten purchased the value of the Premises. By written center and the lease in 1998, becoming Trudy's' landlord. communication mailed or delivered on

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1 Trudy's Texas Star, Inc. v. Weingarten Realty Investors, Not Reported in S.W.3d (2004) 2004 WL 1792374

or before the date which is two (2) that each had already engaged an appraiser, received an months prior to the commencement of appraisal value, and communicated the value to the other. the sixty (60) month option period, the Negotiations continued for several months, during which appraisers shall notify both Landlord both Trudy's and Weingarten proposed to invoke the and Tenant of their findings. If the appraisal process as a last resort if their negotiations proved three appraisers are unable to agree unsuccessful. In February 2003, Trudy's sent a letter to upon a valuation, the value agreed Weingarten indicating that it intended “to pursue the hiring of upon by any two of them shall be a third appraiser to resolve this matter. [Trudy's] will speak binding. If none of the three appraisers with the appraiser which Trudy's previously used and will thus selected are able to agree on provide third appraiser to you as soon as possible so that the valuation by the date which is you may consider the person and determine if he or she two (2) months prior to the date of is acceptable to you.”About a week later, Trudy's decided commencement of the option period, instead to proceed to arbitration pursuant to section 30.2 of the then the average of the valuations of lease agreement, which provides that the parties shall submit the two appraisers closest to each other “any dispute related to this lease” to binding arbitration. shall be binding. Landlord and Tenant Trudy's sent Weingarten a formal demand for arbitration in shall each bear the cost of the appraiser mid-April. appointed by them and shall each pay for one-half (½) of the cost of the third Shortly thereafter, Trudy's filed a lawsuit seeking to compel appraiser. arbitration due to the parties' dispute over the “method of calculation and proper amount of rent to be paid.”Weingarten *2 In mid-April 2002, Trudy's gave Weingarten notice that it filed an answer and counterclaim, in which it sought a was exercising its option to extend the lease. By early October declaratory judgment that Trudy's must comply with section 2002, the parties had each engaged an appraiser under section 4.6 to determine fair market rental value. Weingarten then 4.6 of the lease; 2 the two appraisals of fair market rental filed a motion for summary judgment, arguing that the lease value were highly incompatible. Their disagreement centered clearly expresses the intent of the parties to resolve their on whether a fair market rental value must take into account dispute over base rent for the extension period through the the additional percentage rental based on gross sales. In an specific appraisal process outlined in section 4.6, rather than e-mail dated October 8, 2002, Weingarten's representative the general arbitration clause in section 30.2. The trial court wrote to Trudy's' counsel: “I believe before we go to the granted the motion, and Trudy's appeals that judgment. expense of hiring a third appraiser, we need to confirm the ground rules for what we are trying to determine. In reviewing the lease with our attorneys, I believe it is very clear that the only item subject to negotiation between the appraisers is the DISCUSSION Minimum Guaranteed Rental.”It was Weingarten's position *3 Trudy's first asserts that the trial court erred in declaring that a fair market rental value could be calculated without that section 4.6 of the lease controls this dispute rather than regard to the percentage rental. Trudy's, which had proved ordering the parties to arbitration. Trudy's cites section 30.2 exceedingly successful in this location, wished to lower from of the lease, providing that the parties shall submit “any six percent the percentage used to calculate the percentage dispute related to this lease” to binding arbitration, after rental and to increase the breakpoint above $200,000 in gross unsuccessfully resolving it on their own or through mediation. sales. To urge this adjustment it combined the base rent Weingarten rejoins that section 4.6 controls, being more and percentage rent to calculate an overall rent per square specific and indicating a clear intent by the parties to resolve foot for bargaining purposes. Weingarten was willing to the base-rent issue by appraisals. negotiate new rental terms but never agreed to the percentage or breakpoint figures proposed by Trudy's. The court's primary concern in construing a written contract is to ascertain the true intentions of the parties as expressed 2 It is not clear from the record what communications in the instrument. National Union Fire Ins. v. CBI Indus., transpired between April and October, but based on their Inc., 907 S.W.2d 517, 520 (Tex.1995). We examine and correspondence starting on October 8, we can conclude consider the entire writing in an effort to harmonize and to

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 2 Trudy's Texas Star, Inc. v. Weingarten Realty Investors, Not Reported in S.W.3d (2004) 2004 WL 1792374

give effect to all the provisions of the contract so that none 30.2, which broadly covers “any dispute.” Pursuant to rules will be rendered meaningless.Coker v. Coker, 650 S.W.2d of contract construction, the more specific section 4.6 must 391, 393 (Tex.1983). No single provision will control; rather, control over the more general section 30.2. See Forbau, 876 all provisions must be considered with reference to the S.W.2d at 133-34. whole instrument. Id. In the event that two provisions of a contract arguably conflict, courts apply rules of construction *4 Nonetheless, Trudy's urges that a broad arbitration to harmonize the provisions. See Ogden v. Dickinson State clause purporting to cover all disputes related to a contract Bank, 662 S.W.2d 330, 332 (Tex.1983). A specific provision creates a presumption in favor of arbitration and that any controls over a general provision. See Forbau v. Aetna Life doubts as to whether a dispute falls under its scope are Ins. Co., 876 S.W.2d 132, 133-34 (Tex.1994). to be resolved in favor of arbitration. See In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex.2001). Although If a contract is unambiguous, its terms can be interpreted Trudy's correctly states the presumption in favor of arbitration as a matter of law by the court. Coker, 650 S.W.2d at over resolution of disputes by the courts, the presumption 393. A contract is not ambiguous if it can be given a does not necessarily favor arbitration over other forms of certain or definite legal meaning or interpretation. Lopez alternative dispute resolution, especially when the parties v. Munoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 861 have intentionally chosen one alternative remedy for a (Tex.2000). Only if contract language is subject to two or specific dispute. The public policy favoring arbitration more reasonable interpretations is it ambiguous, and whether indicates a concern with its function as an alternative a contract is ambiguous is a question of law for the court to resolution of a dispute by the courts: “In addition to to decide by looking at the agreement as a whole in light alleviating some measure of the burden on the courts, of the circumstances present when the contract was entered. arbitration in a commercial context is a valuable tool which National Union, 907 S.W.2d at 520. Whether an agreement provides business people, and all citizens, with greater imposes a duty on the parties to arbitrate a dispute is a matter flexibility, efficiency, and privacy.”L.H. Lacy Co. v. City of of contract interpretation and is a question of law for the Lubbock, 559 S.W.2d 348, 352 (Tex.1977). This same public court.Tenet Healthcare Ltd. v. Cooper, 960 S.W.2d 386, 388 policy is advanced by the decision of parties to resolve their (Tex.App.-Houston [14th Dist.] 1998, pet. dism'd w.o.j.). disputes through means other than arbitration, such as the appraisal process chosen here; there is no reason to blindly The lease provides for two separate and independent monthly favor arbitration over another alternative form of dispute payments: the base rent and the percentage rent. The option resolution specifically chosen by the parties to resolve a to extend, which Trudy's could unilaterally exercise, specifies particular kind of dispute. SeeTex. Civ. Prac. & Rem.Code that all the terms of the initial lease, which necessarily include Ann. § 154.021 (West 1997) (court shall confer with parties the percentage-rental provision, continue to apply during the to determine most appropriate alternative dispute resolution extension period; the base rent is to be adjusted to equal the procedure). “fair market rental value.” Section 4.6 outlines an appraisal process to be used when Trudy's and Weingarten “are not The Texas Supreme Court has recently upheld the able to agree to fair market rental value.”As evidenced by enforceability of appraisal clauses, distinguishing them from the parties' failed negotiations and pleadings, they have not arbitration clauses: “[W]hile arbitration determines the rights been able to reach an agreement as to fair market rental and liabilities of the parties, appraisal merely ‘binds the value. Section 4.6 reveals their intent to submit the issue of parties to have the extent or amount of the loss determined fair market rental value to appraisers to determine base rent in a particular way.’ “ In re Allstate County Mut. Ins. Co., 85 during the extension period. The lease language can be given S.W.3d 193, 195 (Tex.2002) (quoting Scottish Union & Nat'l a definite legal meaning and is not reasonably susceptible Ins. Co. v. Clancy, 71 Tex. 5, 8 S.W. 630, 631 (Tex.1888)); to more than one meaning. See Coker, 650 S.W.2d at 393. see also Hartford Lloyd's Ins. Co. v. Teachworth, 898 It is, therefore, not ambiguous concerning how the parties F.2d 1058, 1061-62 (5th Cir.1990) (both arbitration and must resolve a dispute over “fair market rental value”; they appraisal aim to submit dispute to third party for speedy and must follow the procedures in section 4.6 to hire two, and if efficient resolution without recourse to courts; however, they necessary three, appraisers. The appraisal provision in section are significantly different procedures). Here, the appraisal 4.6-pertaining to a dispute as to fair market rental value-is provision in section 4.6 binds the parties to have the fair more specific than the general arbitration provision in section market rental value determined in a particular way; it does

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 3 Trudy's Texas Star, Inc. v. Weingarten Realty Investors, Not Reported in S.W.3d (2004) 2004 WL 1792374

not deprive either party of its rights under the contract or rental value. By about September 15, 2002, they were determine liability. The Fort Worth Court of Appeals granted to appoint the third appraiser, if necessary. The first a writ of mandamus to abate a lawsuit until the parties correspondence in the record is dated October 8, 2002. had complied with the appraisal provision in their contract, It is an e-mail from Weingarten to Trudy's, clarifying that only the base rent is subject to negotiation between likening the appraisal provision to an arbitration clause in the the appraisers and stating that Weingarten is willing sense that each compels enforcement upon a showing that to proceed to hire the third appraiser. The evidence the dispute falls within its scope. See Vanguard Underwriters indicates only that the timeline for hiring the third Ins. Co. v. Smith, 999 S.W.2d 448, 451 (Tex.App.-Fort Worth appraiser was not followed. It also indicates the reason 1999, orig. proceeding). Here, the dispute over fair market for the delay in hiring the third appraiser: the protracted rental value falls squarely within the scope of the appraisal negotiations between the parties, purportedly to resolve provision, which thus must be enforced. We hold that the the issue of fair market rental value without having to trial court properly ordered Trudy's to abide by the appraisal incur the cost of a third appraiser. process in section 4.6 and, therefore, overrule Trudy's first Finally, Trudy's argues that the trial court granted more issue. relief than Weingarten requested in its motion for summary judgment. Weingarten's motion sought a declaration that *5 Trudy's alternatively argues that by pursuing negotiations section 4.6 was the proper method for determining the and not strictly adhering to its timeliness, Weingarten waived fair market rental value. By granting such declaration and its right to enforce section 4.6, or that at least there is decreeing that Trudy's “shall take nothing in its claims” a material fact issue concerning its waiver. Waiver is the against Weingarten, Trudy's insists that the trial court intentional relinquishment of a known right or intentional implicitly granted judgment on the “definitional dispute” conduct inconsistent with claiming that right. Jernigan v. concerning the term “fair market rental value.” Because Langley, 111 S.W.3d 153, 156 (Tex.2003).“There can be no Weingarten did not submit this issue to the trial court waiver of a right if the person sought to be charged with for determination in its summary-judgment motion, argues waiver says or does nothing inconsistent with an intent to rely Trudy's, it was error for the court to deny relief to Trudy's on upon such right.”Id. When the facts and circumstances are an issue that was not before it on summary judgment. undisputed or clearly established, as they are here, waiver is a question of law for the court. See id. at 156-57. Trudy's correctly cites Alder v. Laurel for the proposition that a trial court considering a motion for summary judgment is The undisputed evidence shows repeated attempts by restricted to the issues raised in the motion, the response, and Weingarten to invoke the appraisal process when other subsequent replies. 82 S.W.3d 372, 375-76 (Tex.App.-Austin negotiations were faltering. Indeed, both parties had timely 2002, no pet.)(citing Stiles v. Resolution Trust Corp., 867 proceeded through the initial steps outlined in section S.W.2d 24, 26 (Tex.1993)); see alsoTex.R. Civ. P. 166a(c). 4.6 by hiring appraisers who conducted appraisals and Also, it is error for a trial court to grant more relief than communicated their conclusions to one another. 3 However, is sought. See Bandera Elec. Coop., Inc. v. Gilchrist, 946 Weingarten and Trudy's were also in the midst of protracted S.W.2d 336, 337 (Tex.1997); Page v. Gellar, 941 S.W.2d negotiations over new rental terms for the extension period. 101, 102 (Tex.1997). However, we cannot conclude that this Weingarten did nothing inconsistent with an intent to rely trial court granted judgment on an issue not before it. on the appraisal process as a last resort-in fact, it repeatedly invoked the procedures when the negotiations seemed to *6 In its petition, Trudy's asked the court to compel break down. The delay in hiring the third appraiser was due the parties to arbitration to resolve their dispute over the to the ongoing negotiations over rent, not to Weingarten's fair market rental value. Weingarten, in response, sought a intentional relinquishment of its right to invoke section 4.6, declaratory judgment that section 4.6 of the lease, not section as evidenced by its recurring invitation to proceed to hire the 30.2, controls the dispute and that Trudy's must comply with third appraiser. We hold that Weingarten did not waive its that provision. Although the parties may dispute what “fair right to rely on section 4.6 and overrule Trudy's second issue. market rental value” means, the trial court held that they have contracted for a way to resolve that dispute via the appraisal 3 According to the timeline in section 4.6, the parties were process outlined in section 4.6. We overrule Trudy's third each to have appointed an appraiser by about August 1, issue. 2002, if they had not already agreed on a fair market

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set forth in section 4.6 and may not compel arbitration under CONCLUSION section 30.2. Weingarten did not waive its right to enforce Section 4.6 specifically governs this dispute concerning fair the appraisal provision, and the trial court did not grant more market rental value. To determine the base rent for the relief than Weingarten requested. Therefore, we affirm the extension period, Trudy's must follow the appraisal process summary judgment in all respects.

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© 2015 Thomson Reuters. No claim to original U.S. Government Works. 5 Winegar v. Martin, 304 S.W.3d 661 (2010) 176 Oil & Gas Rep. 776

instrument, not the intent that the parties may have had, but failed to express in the instrument. 304 S.W.3d 661 Court of Appeals of Texas, Cases that cite this headnote Fort Worth.

Alvie Max WINEGAR and [3] Deeds Alice Winegar, Appellants, Repugnant or conflicting parts or clauses v. In seeking to ascertain the intention of the Noel David MARTIN, Roberta Sue Martin, Travis parties, the court must attempt to harmonize Ryan Martin, and Angela R. Martin, Appellees. all parts of a deed because the parties to an instrument intend every clause to have some No. 2–09–019–CV. | Jan. 21, 2010. effect.

Synopsis Cases that cite this headnote Background: Royalty interest holders brought action against co-tenants for declaration that they owned 1/3, rather than [4] Deeds 1/9 royalty interest. The 355th District Court, Hood County, Consideration Ralph H. Walton, Jr., J., granted summary judgment in favor of co-tenants. Royalty interest holders appealed. Deeds Language of instrument Deeds Construction and operation of exceptions Holdings: The Court of Appeals, Sue Walker, J., held that: Deeds [1] deed reserved a 1/9 royalty interest, and Construction and operation of reservations In determining the legal effect of a deed, whether [2] there was no mutual mistake by royalty holder and co- as to grant, exception, reservation, consideration, tenants. or other feature, the inquiry is not to be determined alone from a single word, clause, or part, but from every word, clause, and part that Affirmed. is pertinent.

Cases that cite this headnote

West Headnotes (20) [5] Deeds Questions for jury [1] Deeds Ambiguity in a deed is a question of law. Creation by deed in general Primary duty of the court in interpreting what Cases that cite this headnote estate a deed conveys is to ascertain the intent of the parties. [6] Deeds Cases that cite this headnote Language of instrument An instrument is not ambiguous if it can be given a definite or certain meaning as a matter of law; [2] Deeds but, if a deed is subject to two or more reasonable Creation by deed in general interpretations, it is ambiguous. In interpreting what estate a deed conveys, courts look to the intent that is expressed by the Cases that cite this headnote

© 2015 Thomson Reuters. No claim to original U.S. Government Works. 1 Winegar v. Martin, 304 S.W.3d 661 (2010) 176 Oil & Gas Rep. 776

When the deed reserves a fraction of the minerals [7] Deeds under the land described, then the deed reserves Language of instrument a fraction of the minerals under the entire tract of An ambiguity in a deed does not arise land, regardless of the part of the mineral estate simply because the parties advance conflicting actually conveyed. interpretations; instead, both interpretations must be reasonable. 1 Cases that cite this headnote

Cases that cite this headnote [13] Mines and Minerals Nature of estate granted or reserved [8] Judgment Deed that reserved for royalty owner an Particular Cases undivided 1/3 of his non-participating royalty If the language in a deed is ambiguous, a fact interest reserved a 1/9 royalty interest; owner question exists for the jury to resolve, making reserved his 1/3 mineral interest and then summary judgment improper. reserved a 1/3 royalty of 1/3 interest out of the mineral interest conveyed. Cases that cite this headnote 1 Cases that cite this headnote [9] Deeds Questions for jury [14] Mines and Minerals If a court finds the language in a deed to be Nature of estate granted or reserved unambiguous, the court may construe the deed as There was no mutual mistake by royalty holder a matter of law. and co-tenants regarding whether royalty owner was reserving 1/3 royalty interest or 1/3 interest Cases that cite this headnote out of mineral interest conveyed; parties had opposite understandings of deed's effect, since [10] Mines and Minerals co-tenants did not know that royalty owner Construction and operation in general thought he was reserving 1/3 royalty interest Specific rules of construction apply to cases and royalty owner thought he was doing so, in which a grantor owns an undivided mineral and no evidence existed that co-tenants knew interest and reserves a fraction of that interest. of royalty owner's purported misunderstanding that he thought he was reserving a 1/3 royalty Cases that cite this headnote interest.

Cases that cite this headnote [11] Mines and Minerals Nature of estate granted or reserved [15] Contracts If the deed reserves a fraction of the minerals Mutual mistake under the land conveyed, then it reserves a fraction of the part of the mineral interest actually Under the doctrine of mutual mistake, when owned by the grantor and conveyed by the deed. parties to an agreement have contracted under a misconception or ignorance of a material fact, 1 Cases that cite this headnote the agreement will be avoided.

Cases that cite this headnote [12] Mines and Minerals Kind, quantity, and location of minerals granted or reserved [16] Evidence Contracts in general

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When a party alleges that, by reason of mutual Where any plausible inference would be a guess, mistake, an agreement does not express the real neither fact may be inferred. intentions of the parties, extrinsic evidence is admissible to show the real agreement. Cases that cite this headnote

Cases that cite this headnote

[17] Reformation of Instruments Attorneys and Law Firms Mutuality of Mistake *662 Thomas M. Michel, Griffith, Jay & Michel, LLP, Fort When a party seeks reformation due to mutual Worth, TX, for Appellant. mistake, the party must show what the parties' true agreement is and that the instrument David E. Keltner, Marianne M. Auld, Jody S. Sanders, Kelly incorrectly reflects that agreement due to a Hart & Hallman LLP, Fort Worth, TX, for Appellee. mutual mistake. Panel: DAUPHINOT, GARDNER, and WALKER, JJ. Cases that cite this headnote

[18] Contracts *663 OPINION Mutual mistake SUE WALKER, Justice. To prove a mutual mistake, the evidence must show that both parties were acting under the same misunderstanding of the same material I. INTRODUCTION fact. The primary issue in this appeal is whether a royalty Cases that cite this headnote reservation in a deed reserved the grantor's entire 1/3 royalty interest or only a 1/3 of his 1/3 royalty interest, or a 1/9 royalty interest. The trial court granted summary judgment in favor [19] Evidence of Appellees Noel David Martin, Roberta Sue Martin, and Construction Travis Ryan Martin (the Martins) 1 and against Appellants Mines and Minerals Alvie Max Winegar and Alice Winegar, judicially declaring Nature of estate granted or reserved that Appellants own an undivided 1/9 (1/3 of the grantor's Statement by co-tenants that they did not 1/3) nonparticipating royalty interest. In seven issues, the understand that royalty owner was reserving a Winegars appeal the trial court's summary judgment in favor 1/3 royalty was not judicial admission of mutual of the Martins. We will affirm. mistake; if anything, it showed that parties had opposite understandings of deed's effect, since 1 Appellee Angela R. Martin was married to Travis Ryan co-tenants did not know that royalty owner Martin, but they divorced before this suit was filed. thought he was reserving 1/3 royalty interest Angela did not contest the relief sought by the Winegars and royalty owner thought he was doing so, at trial, she did not join in the Martins' motions for and no evidence existed that co-tenants knew summary judgment, and she has not filed a brief in this of royalty owner's purported misunderstanding appeal. that he thought he was reserving a 1/3 royalty interest. II. FACTUAL BACKGROUND Cases that cite this headnote Alvie Winegar, Noel David Martin, and Travis Martin purchased 107.123 acres of property in Hood County as 1/3 [20] Evidence cotenants. The purchase included the surface estate and 100% Inferences from evidence of the mineral estate. In 2003, Alvie agreed to sell his 1/3

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interest in the land to the Martins and Angela and reserve to the Martins filed cross-motions for summary judgment on himself a nonparticipating royalty interest. their requests for declaratory judgment. The Martins also moved for summary judgment *664 on statute of limitations The first paragraph of the deed from Alvie to the Martins and grounds and moved for no-evidence summary judgment Angela conveyed to the Martins and Angela “all of Grantor's on the Winegars' remaining claims. 3 After a hearing, the undivided ONE–THIRD (1/3) interest on the real property trial court entered a final judgment granting the Martins' more particularly described in Exhibit ‘A’ attached hereto.” motions for traditional and no-evidence summary judgment The second paragraph provides in part, and denying the Winegars' motion for partial summary judgment. In its order, the trial court judicially declared that Included in this Deed and conveyed the deed from Alvie to the Martins and Angela reserved from Grantor to Grantee is the right to Alvie “an undivided 1/9th (1/3rd of [Alvie's] 1/3rd) to receive all royalty (except as nonparticipating royalty interest.” The trial court denied all limited by the reservation below), other relief requested. The Winegars filed this appeal. bonus, delay rentals, and the right to enter into or make oil, gas, and/or 3 The Winegars later filed a supplemental petition pleading mineral leases. Out of the undivided mineral interest conveyed, Grantor the discovery rule and quasi-estoppel to avoid the Martins' statute of limitations defense. reserves to himself, and his heirs, successors, personal representatives, and assigns, an undivided ONE– III. STANDARDS OF REVIEW THIRD (1/3) of royalty (“non- participating royalty interest”), which reserved non-participating royalty A. Traditional Summary Judgment interest shall only be payable out In a summary judgment case, the issue on appeal is of oil, gas, or other minerals that whether the movant met the summary judgment burden by may be produced from the Lands. establishing that no genuine issue of material fact exists By this reservation, Grantor shall not and that the movant is entitled to judgment as a matter of participate in the making of any leases law. Tex.R. Civ. P. 166a(c); Mann Frankfort Stein & Lipp on the undivided mineral interest Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848 (Tex.2009). conveyed to Grantee, or be entitled We review a summary judgment de novo. Mann Frankfort, to receive or own any bonus or delay 289 S.W.3d at 848. rentals for the granting of any lease on the Lands by Grantee. We take as true all evidence favorable to the nonmovant, and we indulge every reasonable inference and resolve any In April 2004, the Martins and Angela executed a mineral doubts in the nonmovant's favor. 20801, Inc. v. Parker, lease with Quicksilver Resources, covering the entire 249 S.W.3d 392, 399 (Tex.2008); Sw. Elec. Power Co. 107.023–acre property. In December 2007, Quicksilver sent v. Grant, 73 S.W.3d 211, 215 (Tex.2002). We consider Alvie a division order showing that he owned a 1/9 royalty the evidence presented in the light most favorable to the interest in the property. 2 nonmovant, crediting evidence favorable to the nonmovant if reasonable jurors could and disregarding evidence contrary 2 Earlier that year, Alvie had conveyed 1/2 of his royalty to the nonmovant unless reasonable jurors could not. Mann interest to his wife, Alice. Thus, any royalty interest Frankfort, 289 S.W.3d at 848. We must consider whether reserved to Alvie is now owned by him and Alice. reasonable and fair-minded jurors could differ in their The Winegars filed suit against the Martins and Angela conclusions in light of all of the evidence presented. See Wal– in February 2008, seeking a declaration that they own a Mart Stores, Inc. v. Spates, 186 S.W.3d 566, 568 (Tex.2006); 1/3, rather than a 1/9, royalty interest, reformation of the City of Keller v. Wilson, 168 S.W.3d 802, 822–24 (Tex.2005). deed based on mutual mistake, and economic damages. The Martins filed a counterclaim seeking a declaration that the The summary judgment will be affirmed only if the record Winegars own a 1/9 royalty interest. The Winegars and establishes that the movant has conclusively proved all

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essential elements of the movant's cause of action or defense to the Martins and Angela reserved an undivided 1/9 royalty as a matter of law. City of Houston v. Clear Creek Basin Auth., interest because it unambiguously reserved a 1/3 royalty 589 S.W.2d 671, 678 (Tex.1979). interest and because, alternatively, the reservation language in the deed is ambiguous, making summary judgment improper. When both parties move for summary judgment and the trial court grants one motion and denies the other, the reviewing court should review both parties' summary judgment evidence A. General Rules of Deed Construction and determine all questions presented. Mann Frankfort, 289 S.W.3d at 848. The reviewing court should render the [1] [2] The primary duty of the court in interpreting judgment that the trial court should have rendered. Id. what estate a deed conveys is to ascertain the intent of the parties. Alford v. Krum, 671 S.W.2d 870, 872 (Tex.1984), overruled on other grounds by Luckel v. White, 819 S.W.2d B. No–Evidence Summary Judgment 459 (Tex.1991). We look to the intent that is expressed by the instrument, not the intent that the parties may have had After an adequate time for discovery, the party without the but failed to express in the instrument. Alford, 671 S.W.2d burden of proof may, without presenting evidence, move for at 872; Pierson v. Sanger, 93 Tex. 160, 163, 53 S.W. 1012, summary judgment on the ground that there is no evidence 1013 (1899). to support an essential element of the nonmovant's claim or defense. Tex.R. Civ. P. 166a(i). The motion must specifically [3] [4] In seeking to ascertain the intention of the parties, state the elements for which there is no evidence. Id.; Timpte the court must attempt to harmonize all parts of a deed Indus., Inc. v. Gish, 286 S.W.3d 306, 310 (Tex.2009). The because the parties to an instrument intend every clause to trial court must grant the motion unless the nonmovant have some effect. Woods v. Sims, 154 Tex. 59, 64, 273 produces summary judgment evidence that raises a genuine S.W.2d 617, 620 (1954); see Plainsman Trading Co. v. issue of material fact. See Tex.R. Civ. P. 166a(i) & cmt.; Crews, 898 S.W.2d 786, 789 (Tex.1995). In determining Hamilton v. Wilson, 249 S.W.3d 425, 426 (Tex.2008). the legal effect of a deed, whether as to grant, exception, reservation, consideration, or other feature, the inquiry is not When reviewing a no-evidence summary judgment, we to be determined alone from a single word, clause, or part but examine the entire record in the light most favorable to from every word, clause, and part that is pertinent. Zephyr the nonmovant, *665 indulging every reasonable inference Oil Co. v. Cunningham, 265 S.W.2d 169, 174 (Tex.Civ.App.- and resolving any doubts against the motion. Sudan v. Fort Worth 1954, writ ref'd n.r.e.). Sudan, 199 S.W.3d 291, 292 (Tex.2006). We review a no-evidence summary judgment for evidence that would [5] [6] [7] The question of ambiguity in a deed is a enable reasonable and fair-minded jurors to differ in their question of law. Cherokee Water Co. v. Freeman, 33 S.W.3d conclusions. Hamilton, 249 S.W.3d at 426 (citing City of 349, 353 (Tex.App.-Texarkana 2000, no pet.) (citing Reilly Keller, 168 S.W.3d at 822). We credit evidence favorable to v. Rangers Mgmt., Inc., 727 S.W.2d 527, 529 (Tex.1987)). the nonmovant if reasonable jurors could, and we disregard An instrument is not ambiguous if it can be given a evidence contrary to the nonmovant unless reasonable jurors definite or certain meaning as a matter of law. Coker v. could not. Timpte Indus., 286 S.W.3d at 310 (quoting Mack Coker, 650 S.W.2d 391, 394 (Tex.1983). If, however, a Trucks, Inc. v. Tamez, 206 S.W.3d 572, 582 (Tex.2006)). deed is subject to two or more reasonable interpretations, If the nonmovant brings forward more than a scintilla of it is ambiguous. See Columbia Gas Transmission Corp. v. probative evidence that raises a genuine issue of material fact, New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex.1996). An then a no-evidence summary judgment is not proper. Smith v. ambiguity does not arise simply because the parties advance O'Donnell, 288 S.W.3d 417, 424 (Tex.2009). conflicting interpretations; instead, both interpretations must be reasonable. Lopez v. Munoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 861 (Tex.2000).

IV. DEED CONSTRUCTION [8] [9] If the language in a deed is ambiguous, a fact In the Winegars' fourth, fifth, and sixth issues, they argue that question exists for the jury to resolve, making summary the trial court erred by declaring that the deed from Alvie judgment improper. Corine, Inc. v. Harris, 252 S.W.3d

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657, 659 (Tex.App.-Texarkana 2008, no pet.) (citing J. The rules from Hooks and King have been consistently Hiram Moore, Ltd. *666 v. Greer, 172 S.W.3d 609, 614 applied by the Texas Supreme Court and our sister courts. (Tex.2005)). If a court finds the language in a deed to be Compare Averyt, 717 S.W.2d at 894 (holding that reservation unambiguous, the court may construe the deed as a matter of of royalty from minerals “that may be produced from all of law. Id. (citing Westwind Exploration, Inc. v. Homestate Sav. the described land” reserved royalty from minerals produced Ass'n, 696 S.W.2d 378, 381 (Tex.1985)). from whole of tracts described in deed), and Middleton, 504 S.W.2d at 841, 843 (holding that a conveyance of 1/64 royalty interest in minerals under “all of the above described land and premises” operated to convey 1/64 royalty interest B. Legal Distinction Between Reservations from all lands described, not just the fractional interest from Land “Conveyed” and Land “Described” conveyed), with Clack v. Garcia, 323 S.W.2d 468, 468– [10] [11] Specific rules of construction apply to cases 69 (Tex.Civ.App.-San Antonio 1959, no writ) (holding that in which a grantor owns an undivided mineral interest and reservation of undivided 1/16 interest in minerals under and reserves a fraction of that interest. See Averyt v. Grande, that may be produced from “the interest of said grantors Inc., 717 S.W.2d 891, 893 (Tex.1986). Courts have drawn in said land” was reservation of 1/16 of grantor's interest, a distinction between reservations from the land “conveyed” or 1/256 mineral interest), and Dowda v. Hayman, 221 and reservations from the land “described.” See Middleton S.W.2d 1016, 1018 (Tex.Civ.App.-Fort Worth 1949, writ v. Broussard, 504 S.W.2d 839, 842 (Tex.1974). If the ref'd) (holding that reservation of 1/2 of all the minerals deed reserves a fraction of the minerals under the land “on and under the land and premises herein conveyed” conveyed, then the deed reserves a fraction of the part of the reserved 1/2 of the grantor's mineral interest in the land being mineral interest actually owned by the grantor and conveyed conveyed). by the deed. Averyt, 717 S.W.2d at 893; Hooks v. Neill, 21 S.W.2d 532, 538 (Tex.Civ.App.-Galveston 1929, writ ref'd). In Hooks, the grantor owned and conveyed all of his C. Deed Reserved One–Ninth Royalty Interest undivided 1/2 interest in a tract of land. 21 S.W.2d at 538. The grantor reserved a 1/32 interest in oil under the “said [13] Here, the deed provides, “Out of the undivided mineral land and premises herein described and conveyed.” Id. The interest conveyed, *667 Grantor reserves ... an undivided court focused on the words “and conveyed” and held that the ONE–THIRD (1/3) of royalty (“non-participating royalty deed unambiguously reserved 1/32 of the 1/2 minerals that interest”)....” [Emphasis added.] This reservation is similar to the grantor conveyed, or a 1/64 mineral interest. Id. that in Hooks; it reserved a fraction (1/3) of royalty interest out of the mineral interest conveyed. See Clack, 323 S.W.2d [12] On the other hand, when the deed reserves a fraction at 468–69; Dowda, 221 S.W.2d at 1018; Hooks, 21 S.W.2d of the minerals under the land described, then the deed at 538. The deed conveyed a 1/3 mineral interest, which reserves a fraction of the minerals under the entire tract of included a 1/3 royalty interest. The deed reserved to Alvie 1/3 land, regardless of the part of the mineral estate actually of royalty out of the 1/3 mineral interest conveyed, or a 1/9 conveyed. Averyt, 717 S.W.2d at 893; King v. First Nat'l royalty interest. Bank of Wichita Falls, 144 Tex. 583, 586, 192 S.W.2d 260, 262 (1946). In King, the deed conveyed a 1/2 interest “in The Winegars attempt to distinguish the reservation in this and to the following described land” and reserved “from case from that in Hooks, Clack, and Dowda. They argue the ‘hereinabove described land’ an undivided one-eighth that in those cases, the grantor conveyed a mineral interest of the ‘usual and customary one-eighth royalty reserved by and then reserved a percentage of the mineral interest the landowner.’ ” 144 Tex. at 586, 192 S.W.2d at 262. The conveyed, whereas here, Alvie conveyed his mineral interest court focused on the words “described land” and held that and then reserved a royalty interest out of the mineral interest the grantor reserved an undivided 1/8 “of the royalty from conveyed. In other words, Alvie conveyed all of his 1/3 the entire land,” rather than 1/8 of the grantor's undivided 1/2 interest in the minerals—including the rights to develop, to interest that he conveyed. Id. at 586–87, 192 S.W.2d 260, 192 lease, to receive bonus payments, to receive delay rentals, S.W.2d at 262–63. to receive royalty payments (the bundle of sticks)—and then reserved one of those sticks out of the bundle (i.e. royalty interest). See Luckel, 819 S.W.2d at 463 (“A royalty interest

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is an interest in land that is a part of the total mineral real agreement. *668 See Johnson v. Conner, 260 S.W.3d estate.”); Altman v. Blake, 712 S.W.2d 117, 118 (Tex.1986) 575, 581 (Tex.App.-Tyler 2008, no pet.). When a party seeks (stating the five essential attributes of mineral estates are reformation due to mutual mistake, the party must show the rights to develop (right of ingress and egress), to lease what the parties' true agreement was and that the instrument (executive right), to receive bonus payments, to receive delay incorrectly reflects that agreement due to a mutual mistake. rentals, and to receive royalty payments). This distinction See id. (citing Estes v. Republic Nat'l Bank of Dallas, 462 does not change our holding. The deed carved an undivided S.W.2d 273, 275 (Tex.1970)). 1/3 of royalty “out of the undivided [1/3] mineral interest conveyed.” In other words, Alvie reserved a fraction—1/3— [18] To prove a mutual mistake, the evidence must show that out of the entire 1/3 interest in royalty that he owned. See both parties were acting under the same misunderstanding of Clack, 323 S.W.2d at 468–69; Dowda, 221 S.W.2d at 1018; the same material fact. Walden v. Affiliated Computer Servs., Hooks, 21 S.W.2d at 538. Inc., 97 S.W.3d 303, 326 (Tex.App.-Houston [14th Dist.] 2003, pet. denied); see also City of The Colony v. N. Tex. Mun. Taking as true all evidence favorable to the Winegars as the Water Dist., 272 S.W.3d 699, 735 (Tex.App.-Fort Worth nonmovants and indulging every reasonable inference and 2008, pet. filed) (holding appellant produced no evidence to resolving any doubts in their favor, we hold that the Martins support mutual mistake element requiring that both parties be met their summary judgment burden by establishing that no mistaken about a common intention). genuine issue of material fact exists and that they are entitled to judgment as a matter of law that the deed unambiguously [19] Here, the Winegars argue that the Martins “judicially reserved an undivided 1/9 nonparticipating royalty interest. admitted that there was a mistake” when they stated in See Tex.R. Civ. P. 166a(c); Mann Frankfort, 289 S.W.3d at their motion for summary judgment, “The Martins did 848; Parker, 249 S.W.3d at 399; Sw. Elec. Power Co., 73 not understand that [Alvie was] reserving a 1/3 royalty.” S.W.3d at 215. We overrule the Winegars' fourth, fifth, and This statement is not a judicial admission of mutual sixth issues. mistake; if anything, it shows that the parties had opposite understandings of the deed's effect—the Martins did not know Alvie thought he was reserving a 1/3 royalty interest while Alvie thought he was reserving a 1/3 royalty interest. See V. NO MUTUAL MISTAKE Walden, 97 S.W.3d at 326; Johnson, 260 S.W.3d at 581–82. [14] In the Winegars' seventh issue, they argue that the trial Likewise, no evidence exists that the Martins knew of Alvie's court erred by granting the Martins' no-evidence summary purported misunderstanding that he thought he was reserving judgment because the Winegars presented some evidence on a 1/3 royalty interest. See Seymour v. Am. Engine & Grinding Co., 956 S.W.2d 49, 58 (Tex.App.-Houston [14th Dist.] 1996, the issue of mutual mistake. 4 writ denied) (“Knowledge by one party that the other is acting under a mistake of fact is equivalent to a mutual mistake.”). 4 The Winegars also argue in their seventh issue that a fact issue exists regarding their “counter-defense” of [20] The Winegars further assert that the Martins' statement quasi-estoppel. They pleaded quasi-estoppel to avoid that they did not understand that Alvie was reserving a 1/3 the Martins' limitations defense, and because we uphold royalty interest directly conflicts with an email exchange the trial court's summary judgment on grounds other than limitations, we need not address this issue. See between David Martin and Mark Kalpakis, an attorney who was David Martin's neighbor. In the email exchange, David Tex.R.App. P. 47.1; Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 216 (Tex.2003); Star–Telegram, Martin requested that Kalpakis provide “language for the title Inc. v. Doe, 915 S.W.2d 471, 473 (Tex.1995). company that would allow me to retain the executive rights and provide only 1/3 interest in future royalties.” [Emphasis [15] [16] [17] Under the doctrine of mutual mistake, added.] One could infer from this email that, by using when parties to an agreement have contracted under a the phrase “provide only 1/3 interest in future royalties,” misconception or ignorance of a material fact, the agreement David Martin meant a 1/3 interest in future royalties either will be avoided. Williams v. Glash, 789 S.W.2d 261, 264 out of the mineral interest conveyed or out of the entire (Tex.1990). When a party alleges that, by reason of mutual mistake, an agreement does not express the real intentions mineral interest. 5 Any plausible inference would be a guess; of the parties, extrinsic evidence is admissible to show the consequently, “neither fact may be inferred.” See City of

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material fact on mutual mistake. See Smith, 288 S.W.3d at Keller, 168 S.W.3d at 813 (quoting Tubelite, a Div. of Indal, 424; Sudan, 199 S.W.3d at 292. We overrule the Winegars' Inc. v. Risica & Sons, Inc., 819 S.W.2d 801, 805 (Tex.1991)). seventh issue. Considering the record as a whole, we cannot say that David Martin's email to Kalpakis created conflicting evidence of probative value such that reasonable and fair-minded jurors would differ in their conclusion that the Martins believed VI. CONCLUSION Alvie was reserving 1/3 of his 1/3 royalty interest, rather than his entire 1/3 royalty interest. See Hamilton, 249 S.W.3d at The Winegars' remaining three issues dispute whether the trial 426 (citing City of Keller, 168 S.W.3d at 822); Kindred v. court granted the Martins' summary judgment motion at least Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex.1983). in part on limitations. Having overruled the Winegars' fourth through seventh issues and having held that the trial court 5 did not err by granting summary judgment in favor of the Furthermore, Kalpakis responded to David Martin's Martins and by judicially declaring that the deed reserved an email by providing the reservation language that was later used in the deed from Alvie to the Martins and undivided 1/9 nonparticipating royalty interest, we need not Angela, reserving a 1/3 royalty interest out of the mineral address the Winegars' remaining issues. See Tex.R.App. P. interest conveyed. We have already explained that 47.1; Provident Life & Accident Ins. Co., 128 S.W.3d at 216; this reservation unambiguously reserved a 1/9 royalty Star–Telegram, 915 S.W.2d at 473. We affirm the trial court's interest. judgment. Examining the entire record in the light most favorable to the Winegars, as the *669 nonmovants, indulging every Parallel Citations reasonable inference and resolving any doubts against the Martins' motion, we hold that the Winegars have not produced 176 Oil & Gas Rep. 776 a scintilla of probative evidence raising a genuine issue of

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