Simplified Development Corp. and James P. Cashiola v. Jon Garfield

• Court: Court of Appeals of Texas
• Decided: February 14, 2008
• Docket: 14-06-00526-CV
• Status: Published

Opinion

Appellant=s and Appellee=s Motions for Rehearing are Overruled

Appellant=s and Appellee=s Motions for Rehearing are Overruled.  Opinion of November 6, 2007,  Withdrawn; Affirmed in Part, Reversed and Remanded in Part and Substitute Memorandum Opinion filed February 14, 2008.

In The

Fourteenth Court of Appeals

____________

NO. 14-06-00526-CV

SIMPLIFIED DEVELOPMENT CORP. AND JAMES P. CASHIOLA, Appellants

V.

JON GARFIELD, Appellee

On Appeal from the 295th District Court

Harris County, Texas

Trial Court Cause No. 03-28787

S U B S T I T U T E   M E M O R A N D U M   O P I N I O N

Appellants/cross-appellees, Simplified Development Corporation (ASimplified@) and James P. Cashiola=s Motion for Rehearing is overruled, our memorandum opinion of November 6, 2007 is withdrawn, and the following substitute memorandum opinion is issued in its place

This is a case involving a breach of two contracts: an employment contract and a stock option agreement.  Appellants appeal a judgment awarding damages and attorneys= fees to appellee/cross-appellant Jon Garfield.  In turn, Garfield appeals the trial court=s disregard of the jury=s answer finding that Simplified=s breach of Garfield=s Stock Option Agreement damaged Garfield in the amount of $3 million.  We affirm in part and reverse and remand in part.

Factual and Procedural Background

I.        Cashiola and Simplified

Simplified is a software company that produced software to track telephone calls and simultaneously bill customers.  Simplified was wholly owned by Cashiola, who was also Simplified=s president, chief executive officer, and, through most of the relevant time period, its sole director.  Cashiola was also heavily involved in Simplified=s day to day operations, particularly its sales activities.  Cashiola=s primary goal throughout the time period relevant to this appeal was to take Simplified public.

II.       Simplified Hires Garfield

In 1998 Garfield, a former certified public accountant, was employed as the Vice-President of Acquisitions for Coach USA,  Inc.  Beginning in 1998, Cashiola worked for a year recruiting Garfield to join Simplified as its chief financial officer.  Garfield, who was deeply involved in Coach USA=s initial public offering, fit into Cashiola=s plan to take Simplified public.  Prior to accepting Cashiola=s offer, Garfield investigated Simplified=s business and assets.  Garfield learned that Simplified=s most significant asset was its 47.5% ownership interest in Network Enhanced Telecom, LLP (ANET@).  NET was in the pre-paid telephone card business.  NET was also a customer of Simplified as it used Simplified=s software to track its customers= use of NET telephone cards.  As a result of the nature of its business, NET generated stable cash flow and was a profitable business.  Simplified benefitted from NET=s success as it received revenue from NET=s use of Simplified=s software as well as cash when NET distributed profits to its owners.  Garfield realized that NET was Simplified=s most critical source of funds and was the key to Simplified=s success.

Following his due diligence, Garfield agreed to leave Coach USA and become Simplified=s chief financial officer.  Garfield had an Employment Agreement with Simplified in which Simplified agreed that if Garfield was terminated without cause, it would pay him one year=s salary as well as any unpaid bonus.  In addition to his Employment Agreement, Garfield had a Stock Option Agreement (ASOA@) in which he received options to purchase 300,000 shares of Simplified stock at a designated price.  Under the SOA, Garfield received twenty percent of the options when he signed his Employment Agreement and the remainder of the options would vest at a rate of twenty percent per year of employment.  However, the SOA also provided that in the event Garfield was terminated without cause or a AMajor Event,@ as defined in the SOA, occurred, all options would immediately vest.^[1]

III.      Simplified Experiences Financial Problems

After Garfield joined the company, Simplified began to experience financial difficulties as a result of problems with its software.  Many of Simplified=s customers lodged complaints about the performance of the software and refused to pay for the software.   Many of these customer complaints grew out of Cashiola=s misrepresentations regarding the software=s capabilities.  These misrepresentations ranged from claiming the software supported ninety-nine languages when it only supported three, to promising that customized features could be developed in six weeks when it would actually take at least a year.  As a result of these problems, Simplified could not collect its receivables, its revenues were overstated, and it was unable to generate positive cash flow.

Simplified=s financial problems became so serious that, in order to keep the doors open and the company moving toward its goal of an initial public offering, Simplified had to start searching for outside investors and loans.  Initially, Garfield procured a bridge loan for $4 million from Silicon Valley Bank (ASVB@) to keep the company operating until an investor was found.  With regard to the SVB loan, Cashiola instructed Garfield to Ado whatever you have to do to get it done.@  Without the August 2000 SVB loan, Simplified would have been forced to close its doors as it would have been unable to make its payroll.

Next, Simplified sought out investors willing to infuse money into the company in exchange for a percentage of the ownership.  Eventually, Bear Stearnes,  a group of venture capitalists Garfield had previously dealt with while employed at another company, after some preliminary discussions and investigation, gave Simplified a term sheet.  A term sheet was a list of conditions that had to be met before Bear Stearnes would go forward with the investment.  One of the conditions included in Bear Stearnes= term sheet required Simplified to divest itself of its ownership interest in NET.  In addition, Bear Stearnes also called for changes in Simplified=s management.  After sending Simplified its term sheet, Bear Stearnes conducted its final due diligence of Simplified and decided to reduce the amount it was willing to invest in Simplified in exchange for a twenty-five percent ownership interest.  At that point, Cashiola  made the decision to reject the Bear Stearnes term sheet. 

IV.      Simplified Spins Off NET

Even though Cashiola had rejected Bear Stearnes as an investor in Simplified, he  decided to go through with the spinoff of Simplified=s interest in NET.  Following the collapse of the Bear Stearnes deal, Cashiola moved Simplified=s interest in NET to Net Holdings, LLC, a company Cashiola had formed specifically for that purpose.  The transfer of NET from Simplified to Net Holdings was completed on August 22, 2000.  Cashiola was the sole owner of Net Holdings.  Prior to the transfer, Garfield notified Cashiola that, because Simplified=s interest in NET constituted more than fifty percent of Simplified=s assets, such a move would qualify as a Major Event triggering paragraph 29 of Garfield=s SOA.  It was undisputed at trial that the aggregate value of Garfield=s stock options was less than $3 million at the time of the transfer; therefore, pursuant to paragraph 29 of Garfield=s SOA, Simplified had to obtain Garfield=s written consent to the transfer of the NET asset.  To obtain Garfield=s consent to the transfer, Cashiola represented to Garfield that he would receive stock options^[2] in Net Holdings with the same terms and conditions as his stock options in Simplified.  Based on that representation, Garfield consented to the transfer of Simplified=s interest in NET to Net Holdings.  Cashiola never followed through on his promise and Garfield never received the promised stock options in Net Holdings.  Thus, Cashiola was able to move Simplified=s most valuable asset from Simplified to a company he owned unencumbered by any stock options held by another person.

V.      Simplified Terminates Garfield

Within five months after Cashiola moved Simplified=s interest to Net Holdings, Simplified terminated Garfield, ostensibly for cause.  In the letter terminating Garfield,  Simplified gave two reasons for the termination: (1) Simplified claimed Garfield had not protected Simplified on the loan from SVB; and (2) Simplified blamed Garfield for the undisputed fact that Simplified missed its revenue recognition projections.

VI.      Cashiola Benefits From NET

Cashiola soon personally reaped the benefit of moving NET to Net Holdings.  On June 7, 2001, Cashiola sold five percent of Net Holdings= interest in NET to GoCodeBlue for $1 million.  In addition, Cashiola obtained a release of his personal guaranty of a large loan made to Simplified by Vector, the investor group that had ultimately invested in Simplified, by pledging Net Holding=s remaining interest in NET to Vector.

VII.     Garfield=s Lawsuit Against Simplified and Cashiola

Following his termination, Garfield filed suit against Simplified and Cashiola.  Garfield sued Simplified for breach of his employment contract, breach of his stock option agreement, and fraud.  In addition, Garfield asserted Cashiola was responsible for Simplified=s contractual obligations because he used Simplified to perpetrate an actual fraud on Garfield and personally benefitted from that fraud.  Following trial, the jury found that Simplified (1) breached Garfield=s employment contract by terminating Garfield without cause and determined Garfield=s damages caused by that breach to be $155,000; (2) breached Garfield=s SOA and that Garfield=s damages resulting from that breach were $3 million; and (3) did not commit fraud.  The jury found that Cashiola was responsible for Simplified=s conduct because he used Simplified to perpetrate an actual fraud on Garfield primarily for his direct personal benefit.  As previously agreed, following the jury=s verdict, the parties submitted the issue of Garfield=s attorneys= fees to the trial court.  The trial court then rendered its final judgment on the jury=s verdict, awarding Garfield $3,155,000 in damages, plus $307,975 in attorney=s fees, as well as pre-judgment and post-judgment interest, and costs of court.

Appellants then filed a Motion to Disregard Certain Jury Findings and for Judgment Notwithstanding the Verdict arguing, among other things, that there was legally insufficient evidence supporting the jury=s $3 million damage answer.  The trial court subsequently granted appellant=s motion on the damages question only and entered an Amended Final Judgment in which it reduced Garfield=s damages to $155,000, but left the remainder of the original judgment intact, including holding Cashiola jointly and severally liable to Garfield.  This appeal followed.

Discussion

In this appeal, the parties each raise issues challenging the trial court=s amended final judgment.  We initially address those issues raised by appellants and then examine Garfield=s single issue on appeal.^[3]

I.        Did the Amended Final Judgment Incorrectly Hold Cashiola Personally Liable for Simplified=s Breach of Garfield=s Employment Agreement?

In response to Jury Question 12, the jury found that Cashiola was responsible for Simplified=s conduct because he used Simplified to perpetrate an actual fraud on Garfield primarily for his own personal benefit.  The trial court entered judgment against Cashiola based on this finding.  In their first two issues, appellants contend the judgment must be reversed because the evidence supporting the jury=s answer to Question 12 is legally and factually insufficient.  We disagree.

A.      Standard of Review

When both legal and factual sufficiency challenges are raised on appeal, we must first examine the legal sufficiency of the evidence.  City of Houston v. Cotton, 171 S.W.3d 541, 546 (Tex. App.CHouston [14th Dist.] 2005, pet. denied) (citing Trimble v. Tex. Dep=t of Protective & Regulatory Serv., 981 S.W.2d 211, 217 (Tex. App.CHouston [14th Dist.] 1998, no pet.).  In conducting a legal sufficiency review, we must consider the evidence in the light most favorable to the verdict and indulge every reasonable inference that supports it.  City of Keller v. Wilson, 168 S.W.3d 802, 821B22 (Tex. 2005); Harris County v. Vernagallo, 181 S.W.3d 17, 24 (Tex. App.CHouston [14th Dist.] 2005, pet. denied); Prairie View A & M Univ. v. Brooks, 180 S.W.3d 694, 705 (Tex. App.CHouston [14th Dist.] 2005, no pet.).  The evidence is legally sufficient if it would enable reasonable and fair-minded people to reach the verdict under review.  Keller, 168 S.W.3d at 827B28; Vernagallo, 181 S.W.3d at 24; Brooks, 180 S.W.3d at 705.  This court must credit favorable evidence if reasonable jurors could, and disregard contrary evidence unless reasonable jurors could not.  Keller, 168 S.W.3d at 827; Vernagallo, 181 S.W.3d at 24; Brooks, 180 S.W.3d at 705.  The trier of fact is the sole judge of the witnesses= credibility and the weight to be given their testimony.  Keller, 168 S.W.3d at 819; Vernagallo, 181 S.W.3d at 24; Brooks, 180 S.W.3d at 705. This court cannot substitute our judgment for that of the jury, so long as the evidence falls within the zone of reasonable disagreement.  Keller, 168 S.W.3d at 822; Vernagallo, 181 S.W.3d at 24; Brooks, 180 S.W.3d at 705.  But if the evidence allows of only one inference, neither jurors nor the reviewing court may disregard it.  Keller, 168 S.W.3d at 822; Vernagallo, 181 S.W.3d at 25; Brooks, 180 S.W.3d at 705.

This court may sustain a legal sufficiency, or no evidence, point only if the record reveals one of the following: (1) the complete absence of a vital fact; (2) the court is barred by rules of law or of evidence from giving weight to the only evidence offered to prove a vital fact; (3) the evidence offered to prove a vital fact is no more than a scintilla; or (4) the evidence established conclusively the opposite of the vital fact.  Keller, 168 S.W.3d at 810; Brooks, 180 S.W.3d at 705.

In reviewing factual sufficiency, we must examine the entire record, considering both the evidence in favor of, and contrary to, the challenged findings.  See Maritime Overseas Corp. v. Ellis, 971 S.W.2d 402, 406B07 (Tex. 1998); Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986).  We may set aside the verdict for factual sufficiency only if it is so contrary to the overwhelming weight of evidence as to be clearly wrong and unjust.  See Ellis, 971 S.W.2d at 407; Nip v. Checkpoint Systems, Inc., 154 S.W.3d 767, 769 (Tex. App.CHouston [14th Dist.] 2004, no pet.).  However, we may not substitute our judgment for that of the jury, even if the evidence would clearly support a different result.  Nip, 154 S.W.3d at 769.

B.      The Evidence is Legally and Factually Sufficient to Support the Judgment

The Texas Business Corporation Act provides that an owner of a corporation is not liable for the contractual obligations of the corporation unless a plaintiff establishes that the owner Acaused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the . . . owner.@  See Tex. Bus. Corp. Act Ann. art. 2.21(A)(2) (Vernon 2003).  Appellants contend there is legally and factually insufficient evidence to establish that Cashiola: (1) used Simplified to perpetrate an actual fraud on Garfield; and (2) directly benefitted from the fraudulent conduct.

Appellants assert that to establish actual fraud as required by the statute, Garfield had to prove that Cashiola (1) made a material representation that was false; (2) knew the representation was false when he made it or made it recklessly as a positive assertion without any knowledge of its truth; (3) intended to induce Garfield to act on the representation; and (4) Garfield relied on the representation and suffered damages.^[4]  Appellants specifically contend there is legally and factually insufficient evidence that Cashiola knowingly or recklessly made a false representation to Garfield with the intent to induce Garfield to act on the representation.  Assuming without deciding those are the elements required to prove Aactual fraud@ in a case where a plaintiff seeks to make an owner responsible for corporate debts, there is legally and factually sufficient evidence establishing each challenged element.  Cf. Solutioneers Consulting, Ltd. v. Gulf Greyhound Partners, Ltd., C S.W.3d C, No. 14-06-00032-CV, 2007 WL 2386358, at *7 (Tex. App.CHouston [14th Dist.] Aug. 23, 2007, no pet. h.) (stating, in a similar scenario, that actual fraud involves dishonesty of purpose or intent to deceive).

Garfield testified that when he learned of the planned transfer of Simplified=s interest in NET to another company owned by Cashiola, he informed Cashiola the transfer constituted a AMajor Event@ under the terms of his SOA.  Garfield then told Cashiola that Simplified had to either: (1) obtain his consent to the transfer; or (2) pursuant to paragraph 29 of his SOA, give him $3 million worth of Simplified stock options.^[5]  According to Garfield, Cashiola told him he did not have the $3 million, but, he would give Garfield stock options in Net Holdings on the same terms and conditions as his Simplified stock options. Garfield testified that, based on this representation by Cashiola, he permitted the transfer to go forward.  Garfield also testified he never received the Net Holdings stock options as promised by Cashiola and was also unsuccessful in his efforts to exercise his Simplified stock options prior to his wrongful termination.  Since Cashiola testified he did not make the representation claimed by Garfield, it was the jury=s responsibility to weigh the credibility of the witnesses and decide the weight to be assigned to their testimony.  See City of Keller v. Wilson, 168 S.W.3d 802, 819 (Tex. 2005) (stating the jurors, as the sole judges of the credibility of the witnesses and the weight to give their testimony, can choose to believe one witness and disbelieve another).   The jury decided this issue against Cashiola.  The evidence of a false representation is legally and factually sufficient.

While a party=s intent is determined at the time he made the representation, intent may be inferred from a party=s subsequent acts after the representation was made.  Weinberger v. Longer, 222 S.W.3d 557, 562 (Tex. App.CHouston [14th Dist.] 2007, pet. denied) (citing Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex. 1986)).  Because intent to defraud is generally not susceptible to direct proof, it invariably must be proven by circumstantial evidence.  Id.  ASlight circumstantial evidence@ of fraud, when considered with the breach of a promise to perform, is sufficient to support a finding of fraudulent intent.  Id. at 562B63 (citing Spoljaric, 708 S.W.2d at 435).

Here, in addition to the evidence that appellants did not perform the promise to deliver stock options to Garfield, there was evidence that: (1) Cashiola refused to communicate with Garfield following the promise; (2) Simplified terminated Garfield without cause when Garfield continued his efforts to obtain his Simplified and Net Holdings stock options; and (3) Net Holdings was able to sell five percent of its interest in NET free from any restrictions that might have been imposed as a result of Garfield owning stock options in Net Holdings.  This constitutes Aslight circumstantial evidence@ of Cashiola=s fraudulent intent not to perform his agreement to give Garfield Net Holdings stock options.  Therefore, the evidence of fraudulent intent is legally and factually sufficient.     

There was also legally and factually sufficient evidence that Cashiola personally benefitted from the actual fraud.  On June 7, 2001 Net Holdings, which was wholly owned by Cashiola, sold 5% of its Net IP interest to GoCodeBlue for $1 million.  This constitutes legally and factually sufficient evidence that Cashiola was the primary beneficiary of the fraudulent conduct.  Farr v. Sun World Sav. Ass=n, 810 S.W.2d 294, 297B98 (Tex. App.CEl Paso 1991, no writ).  Appellants attempt to discredit this evidence by contending that Cashiola received no personal benefit from this transaction as he forgave loans he had made to Simplified.  Cashiola cites to section 5.9 of the Forbearance and Restructuring Agreement (the AForbearance Agreement@) between Vector Capital and other investors in Simplified (the AVector Group@) on the one hand, and Simplified and Cashiola on the other, in support of that claim.  The Forbearance Agreement is dated November 4, 2003, more than two years after the sale of the Net IP interest to GoCodeBlue.  Because of this more than two year gap between the sale to GoCodeBlue and the Forbearance Agreement, as well as credibility issues surrounding Cashiola, the jury was entitled to discredit appellants= assertions that Cashiola received no personal benefit from the sale.

Cashiola, in exchange for assigning Net Holdings=s interest in NET to Holdco, a company owned by the Vector Group, received a release on a personal guaranty he had given on a $2.5 million loan made by the Vector Group to Simplified.  This constitutes additional evidence that Cashiola received a personal benefit from the transfer of Simplified=s interest in NET to Net Holdings.  See Cass v. Stephens, 156 S.W.3d 38, 60 (Tex. App.CEl Paso 2004, pet. denied) (holding that defendant received a personal benefit when he reallocated oil well operating expenses to oil wells in which he owned a small percentage and thereby reduced his level of expenses).

Appellants also contend Garfield did not establish the reliance element of fraud.  Here appellants argue that because Garfield was an insider and was aware of the pending NET transfer, he could not have relied on Cashiola=s false promise of Net Holdings stock options  in exchange for his approval of the transfer.  We disagree Garfield=s status as an insider of Simplified has any impact on the sufficiency of the evidence establishing Garfield=s reliance. Garfield testified that he notified Cashiola that the proposed transfer of NET to Net Holdings constituted a major event under the terms of his SOA thus requiring Simplified to obtain his consent to the transfer.  At that point, according to Garfield, Cashiola represented to Garfield that if he consented to the NET transfer, Cashiola would give him stock options in Net Holdings with the same terms and conditions as his stock options in Simplified.  Faced with the choice of instituting litigation to stop the transfer or accepting the Net Holdings stock options and thereby preserving his interest in what he believed to be Simplified=s most valuable asset, Garfield accepted Cashiola=s offer of Net Holdings stock options, which he never received.  This is legally and factually sufficient evidence of Garfield=s reliance on Cashiola=s fraudulent representation.  See Anderson, Greenwood & Co. v. Martin, 44 S.W.3d 200, 214B15 (Tex. App.CHouston [14th Dist.] 2001, pet. denied) (upholding the jury=s finding of fraud based on representation that parties to a contract would be Apartners@ and Ashare common goals@).

In their motion for rehearing, appellants assert that the Simplified Amended and Restated 2000 Stock Option Plan precludes Garfield=s claim based on an oral promise made by Cashiola.  This contention is without merit as appellants do not point out how Simplified=s stock option plan prevents the owner of Net Holdings from promising Garfield stock options in Net Holdings.  

Finally, appellants contend the jury=s negative answers to jury questions 6 and 9 conflict with its affirmative answer to question 12.  In question 6, the jury was asked if Simplified committed fraud against Garfield A[i]n connection with entering into the Employment and Stock Option Agreements.@  In question 9, the jury was asked whether Simplified committed fraud against Garfield A[i]n connection with the letter dated September 15, 2000.@^[6]  In both questions, the inquiry was not directed at the oral representation made by Cashiola to induce Garfield to consent to the transfer of Simplified=s ownership interest in NET and therefore they have no impact on the jury=s answer to question 12.

Because the evidence is legally and factually sufficient that Cashiola used Simplified to perpetrate an actual fraud on Garfield and directly benefitted from the fraudulent conduct, we overrule appellants= first and second issues on appeal.

II.       Did the Trial Court Abuse its Discretion in the Admission of Evidence Regarding Cashiola=s Character and Participation in Events Leading to Simplified=s Financial Problems?

In their third issue, appellants contend the trial court erred in the admission of testimony by various witnesses regarding their: (1) opinion of Cashiola=s character for untruthfulness; and (2) knowledge of Cashiola=s involvement in Simplified=s sales  activities and responsibility for Simplified=s financial difficulties.  We address each contention in turn.

The admission and exclusion of evidence is committed to the trial court=s sound discretion.  Prestige Ford Co. v. Gilmore, 56 S.W.3d 73, 78 (Tex. App.CHouston [14th Dist.] 2001, pet. denied) (citing City of Brownsville v. Alvarado, 897 S.W.2d 750, 753 (Tex. 1995)).  We will reverse only if the trial court abused its discretion by acting without reference to any guiding rules or principals or by acting arbitrarily or unreasonably.  In re R. J. P., 179 S.W.3d 181, 184 (Tex. App.CHouston [14th Dist.] 2005, no pet.) (citing City of San Benito v. Rio Grande Valley Gas Co., 109 S.W.3d 750, 757 (Tex. 2003)).  A party seeking to reverse a judgment based on evidentiary error must prove that the error probably resulted in an improper judgment, which usually requires the complaining party to show that the judgment turns on the particular evidence excluded or admitted.  Prestige Ford, 56 S.W.3d at 78.  We make this determination by reviewing the entire record.  Id.

B.      The Trial Court Did Not Abuse Its Discretion By Admitting the Contested Opinion Testimony

 During the trial, Garfield called several witnesses to testify regarding their opinion of Cashiola=s character for truthfulness or untruthfulness.  Each witness testified that, in the witness=s opinion, Cashiola is dishonest and untrustworthy.  Appellants contend the trial court abused its discretion in admitting this opinion testimony because, according to appellants, the admission of such testimony violates Rule 404(a) of the Texas Rules of Evidence.

In making this argument, appellants ignore the plain language of Rule 404(a)(3) which provides: ACharacter Evidence Generally.  Evidence of a person=s character or character trait is not admissible for the purpose of proving action in conformity therewith on a particular occasion, except: . . . (3) Character of witness.  Evidence of the character of a witness, as provided in rules 607, 608 and 609.@  Tex. R. Evid. 404(a)(3) (emphasis in original).  We therefore look to Rule 608 to determine if the opinion testimony at issue here complies with the Rules of Evidence.  Rule 608(a)(1) provides: AOpinion and Reputation Evidence of Character.  The credibility of a witness may be attacked or supported by evidence in the form of opinion or reputation, but subject to these limitations: (1) the evidence may refer only to character for truthfulness or untruthfulness.@  Tex. R. Evid. 608(a)(1) (emphasis in original).  Cashiola was a witness in the trial and therefore his credibility was at issue and could be attacked by evidence in the form of an opinion regarding his character for truthfulness or lack thereof.  That is exactly what the testimony did.  As the Rules of Evidence specifically permit this type of testimony, the trial court did not abuse its discretion when it admitted the opinion testimony attacking Cashiola=s reputation for truthfulness.

C.      The Trial Court Did Not Abuse Its Discretion By Admitting Testimony Regarding Specific Prior Bad Acts By Cashiola

In their third issue, appellants also contend the trial court abused its discretion when it allowed numerous witnesses to testify regarding other alleged misrepresentations made by Cashiola.  These alleged misrepresentations fall into two categories: (1) those made to Simplified customers regarding the capabilities of Simplified=s software; and (2) those made to Simplified employees.  Appellants assert the trial court=s decision allowing both categories of testimony violated Rule  608(b) of the Texas Rules of Evidence.  Garfield responds that the disputed testimony was admissible under Rule 404(b) of the Texas Rules of Evidence.  We agree with Garfield.

Rule 404(b) provides, in relevant part, A[e]vidence of other crimes, wrongs or acts is not admissible to prove the character of a person in order to show action in conformity therewith.  It may, however, be admissible for other purposes . . .@  Tex. R. Evid. 404(b).   Appellants claimed they terminated Garfield with cause and this was a defense to Garfield=s claims under both contracts.  Much of the contested testimony focused on Cashiola=s misrepresentations to Simplified=s clients which resulted in cancelled sales, refusals to pay, and ultimately, a decline in Simplified=s revenues.  This evidence was not admitted to prove Cashiola=s character or actions in conformity with that character but to rebut appellants alleged cause for terminating Garfield.  The evidence demonstrated that Garfield was not responsible for Simplified=s revenue issues, but Cashiola, at least in part, was, due to his misrepresentations to customers. The trial court did not abuse its discretion when it admitted this testimony.  See McLellan v. Benson, 877 S.W.2d 454, 457 (Tex. App.CHouston [1st Dist.] 1994, no writ) (holding that if the proponent of the evidence persuades the trial court that the evidence is relevant to a  material issue, the court may rule the evidence admissible).

Another purpose for which evidence of wrongs or other bad acts is admissible under Rule 404(b) is to prove intent.  Tex. R. Evid. 404(b).  The remainder of the contested testimony related to Cashiola fraudulently inducing other Simplified employees with promises of bonuses, commissions, stock options, and warrants.  Cashiola=s pattern of defrauding other employees corroborated Garfield=s testimony that Cashiola perpetrated a fraud upon him and thus was admissible under Rule 404(b) to show Cashiola=s fraudulent intent.  Once again, the trial court did not abuse its discretion when it admitted this testimony.   Id.  We overrule appellants= third issue.

III.      Did the Trial Court Err in its Determination of the Amount of Garfield=s Recoverable Attorneys= Fees?

In their fourth issue, appellants contend the trial court erred in its award of attorneys= fees because: (1) Garfield failed to segregate his fees between recoverable and non-recoverable claims; and (2) the hourly rate sought by Garfield was higher than the usual and customary fee because Garfield failed to properly employ the use of legal assistants to reduce  costs.

Texas law does not allow the recovery of attorneys= fees unless they are authorized by statute or contract.  Tony Gullo Motors I, L. P. v. Chapa, 212 S.W.3d 299, 310 (Tex. 2006).  Section 38.001 of the Texas Civil Practices & Remedies Code provides that a successful party in a breach of contract action may recover reasonable and necessary attorneys= fees.  Mullins v. Mullins, 889 S.W.2d 550,  554 (Tex. App.CHouston [14th Dist.] 1994, writ denied) (citing Tex. Civ. Prac. & Rem. Code Ann. ' 38.001 (Vernon 1997)).  Attorneys= fees are not recoverable in an action in tort however.  Knebel v. Capital Nat=l Bank, 518 S.W.2d 795, 803B04 (Tex. 1974).  As a result, parties seeking to recover attorneys= fees have always been required to segregate fees between claims where fees are recoverable and claims where they are not.  Chapa, 212 S.W.3d at 311.  An exception exists to this general duty to segregate if the claims are inextricably intertwined.  Id.  To establish that attorneys= fees are inextricably intertwined, the party seeking the recovery of attorneys= fees must establish that discrete legal services advanced both a recoverable and an unrecoverable claim.  Id. at 313B14.

During oral argument, counsel for Garfield conceded that, because the trial in this case predated Chapa, the evidence submitted to the trial court did not meet the requirements set forth in that case to establish that Garfield=s claims were inextricably intertwined.  Therefore, we sustain appellants= fourth issue.^[7]

IV.      Did the Trial Court Correctly Disregard the Jury=s Answer Finding Garfield Was Damaged in the Amount of $3 Million as a Result of Simplified=s Breach of the Stock Option Agreement?

Following the trial court=s entry of the initial final judgment in this case, appellants filed their Motion to Disregard Certain Jury Findings and for Judgment Notwithstanding the Verdict.  Appellants argued, in part, there was no evidence to support the jury=s finding that Garfield suffered $3 million damages as a result of Simplified=s breach of the SOA.  The trial court granted that portion of the motion and removed the $3 million damages from its amended final judgment.  In his single cross-issue on appeal, Garfield contends the trial court erred when it partially granted appellants= Motion to Disregard Certain Jury Findings and for Judgment Notwithstanding the Verdict and reduced his damages by $3 million.

In order to uphold a trial court=s judgment notwithstanding the verdict, an appellate court must determine that no evidence supports the jury=s findings.  Apache Corp. v. Dynegy Midstream Services, Ltd., 214 S.W.3d 554, 558 (Tex. App.CHouston [14th Dist.] 2006, rule 53.7(f) motion granted).  The final test for legal sufficiency must always be whether the evidence at trial would enable reasonable and fair-minded people to reach the verdict under review.  Id.  Under the properly applied scope of review, appellate courts must review the evidence in the light most favorable to the verdict, crediting favorable evidence if reasonable jurors could, and disregarding contrary evidence unless reasonable jurors could not disregard such evidence.  Id. at 558B59.

A judgment notwithstanding the verdict is proper in the following circumstances: (1) a defect in the opponent=s pleadings makes the pleadings insufficient to support a judgment; (2) the evidence conclusively proves a fact that establishes a party=s right to judgment as a matter of law; or (3) the evidence offered on a cause of action is insufficient to raise an issue of fact.  Id. at 559.  If there is sufficient evidence to support the jury=s findings, the judgment notwithstanding the verdict should be reversed.  Id.

B.      The Trial Court Did Not Err When it Disregarded the Jury=s $3 Million Damage Answer

While Garfield contends in his brief that he Adid not pull the $3 million figure from thin air,@ the evidence at trial was undisputed that the aggregate value of his stock options at the time of the transfer of NET to Het Holdings, was less than $3 million.  Indeed, there was no evidence from any witness on exactly what the value of Garfield=s stock options was. Instead, Garfield relied entirely on paragraph 29 of his SOA as the measure of his damages.  Paragraph 29, provides A[t]he Company agrees that it will not consummate a Major Event unless the aggregate value of the Option Shares to Employee is equal to $3,000,000 or greater, without the prior written consent of Employee.@ Garfield=s reliance on paragraph 29 to support his damage calculation is misplaced.

Neither party contends that the SOA agreement was ambiguous, and we agree it is not, therefore, we construe the SOA as a matter of law.  Material P=ships, Inc. v. Ventura, 102 S.W.3d 252, 258 (Tex. App.CHouston [14th Dist.] 2003, pet. denied).  Paragraph 29 unambiguously creates a consent right in favor of Garfield at any time when the value of his stock options was below the designated value of $3 million.  There is no language found in paragraph 29 that guaranteed Garfield $3 million if a AMajor Event@ occurred or that the value of those stock options would ever reach $3 million.  Because the SOA is not ambiguous, Garfield=s testimony on his understanding of paragraph 29 is not relevant and therefore constitutes no evidence supporting the jury=s damage finding.  See id. (stating only after a court first determines a contract is ambiguous may the court consider the parties= interpretations and admit extraneous evidence to determine the true meaning of the instrument).  Because there was no evidence supporting the jury=s $3 million damage finding, the trial court correctly granted appellants= Motion to Disregard Certain Jury Findings and for Judgment Notwithstanding the Verdict.  Accordingly, we overrule Garfield=s single issue on appeal.

Conclusion

Since we sustained appellants= fourth issue on appeal, we reverse that portion of the trial court=s amended final judgment awarding attorneys= fees to Garfield and remand that issue to the trial court for proceedings consistent with this opinion. Because we overruled appellants= first three issues on appeal, as well as Garfield=s single cross-issue on appeal, we affirm the remainder of the trial court=s amended final judgment.

/s/      John S. Anderson

Justice

Judgment rendered and Substitute Memorandum Opinion filed February 14, 2008.

Panel consists of Chief Justice Hedges and Justices Anderson and Seymore. 

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^[1]  In relevant part, paragraph 23 of the SOA defined a AMajor Event@ as occurring if Athe stockholders of [Simplified] shall approve a plan of complete liquidation of [Simplified] or an agreement for the sale or disposition by [Simplified] of all or a substantial portion of [Simplified=s] assets (i.e. 50 percent or more of the total assets of [Simplified]).@  Paragraph 29 of the SOA provides: AThe Company agrees that it will not consummate a Major Event unless the aggregate value of the Option Shares to Employee . . . is equal to $3,000,000 or greater, without the prior written consent of Employee.@

^[2]  We understand that limited liability companies do not issue stock but instead have membership interests.  See Tex. Rev. Civ. Stat. Ann. art. 1528n, ' 4.01 (Vernon Supp. 2006).  However, the parties referred to the promised option to purchase an interest in Net Holdings, LLC as Astock options@ and we follow their lead here.

^[3]  Appellants do not challenge those portions of the amended final judgment holding Simplified liable for breaching Garfield=s Employment Agreement. Appellants, in their Reply Brief, did raise an alternative issue contending that the evidence supporting the jury=s finding that Simplified breached Garfield=s SOA is legally and factually insufficient.  However, because a party cannot raise a new issue for the first time in a reply brief, we do not address that issue.  Tex. R. App. P. 38.3; Dallas Co. v. Gonzales, 183 S.W.3d 94, 104 (Tex. App.CDallas 2006, pet. denied).

^[4]  Question 12 asked:

Is James Cashiola responsible for the conduct of Simplified?

James Cashiola is responsible for the conduct of Simplified if James Cashiola used Simplified for the purpose of perpetrating and did perpetrate an actual fraud on Jon Garfield primarily for the direct personal benefit of James Cashiola.

Answer AYes@ or ANo@

^[5]  We address Garfield=s interpretation of paragraph 29 of his SOA in part IV below.

^[6]  Appellants contend the September 15, 2000 letter is connected with Garfield=s termination.  We disagree with this contention as Garfield was not terminated until January 22, 2001.

^[7]  Because we sustain appellants= fourth issue based on Garfield=s failure to segregate his attorneys= fees, we need not address appellants other contention that Garfield=s legal fees were too high because of a failure to use legal assistants.  Tex. R. App. P. 47.1.