Summary
remanding because charge incorrectly assigned burden of proof
Summary of this case from Hotze v. In Mgmt.Opinion
No. 14-05-01215-CV
Opinion of April 26, 2007.
Opinion filed July 24, 2007.
On Appeal from the 127th District Court Harris County, Texas, Trial Court Cause No. 03-37143.
Panel consists of Justices FROST, SEYMORE, and GUZMAN.
SUBSTITUTE MEMORANDUM OPINION
We overrule appellee's motion for rehearing, withdraw our opinion of April 26, 2007, and issue the following substitute memorandum opinion.
James Leigh McGaughy, appellee, sued Larry A. Buhman, appellant, to recover what he believed to be his share of a partnership allegedly formed by an oral contract. The jury found for McGaughy and awarded damages and attorneys' fees. Buhman appeals, arguing that the trial court (1) improperly instructed the jury to assume that a partnership had been formed unless Buhman proved otherwise, (2) improperly placed the burden of proof on Buhman without requiring McGaughy to prove up the oral contract, (3) erred in denying Buhman's motion for directed verdict, and (4) erred in awarding McGaughy attorneys' fees because his claims were submitted as conversion claims rather than as a contract claim. We agree that the trial court's instructions and the jury charge improperly shifted the burden of proof. Accordingly, we reverse and remand for a new trial without reaching Buhman's remaining issues.
I. FACTUAL AND PROCEDURAL HISTORY
In 1995, Larry Buhman was working as a full-time dentist when he and a friend, John Goullet, formed a partnership and opened an upscale cigar shop called "The Smoke Ring." Buhman contributed all the capital to start the business in return for a sixty-percent partnership share. In exchange for his forty-percent share, Goullet contributed his industry knowledge, contacts, and management experience. Their partnership agreement was memorialized in a written contract, and the two men co-signed for partnership obligations and shared profits proportional to their partnership interest. Because Goullet was responsible for the day-to-day management of the shop, he was guaranteed monthly compensation of $2,000. Buhman was solely responsible for the bookkeeping and finances of the shop.
In 1997, Buhman became dissatisfied with Goullet's performance and decided to terminate the relationship. Because Buhman was still working full time as a dentist, he needed someone to quickly assume the management responsibilities for the shop. He made partnership offers to three people: Matthew Lichter, McGaughy, and another man identified at trial only as "Peter." Both Lichter and McGaughy testified regarding the partnership offers they received.
According to Lichter, Buhman offered to allow him to purchase a forty percent partnership interest in the business for $15,000. Under the terms of this offer, Lichter would have been required to assume Goullet's responsibilities for the day-to-day management of the shop; however, Lichter declined the offer.
McGaughy, who had been working part-time at The Smoke Ring, accepted Buhman's oral partnership offer, but their agreement was not reduced to writing and its terms are hotly disputed. The parties agree only that McGaughy was to manage the store, and was promised a forty percent share of the profits with a guaranteed minimum of $2,000 per month. McGaughy began managing The Smoke Ring on October 15, 1997.
If forty percent of the monthly profit was less than $2,000, McGaughy would nevertheless receive $2,000. The source of these funds during unprofitable months is unclear. We are unable to determine from the record whether this was a "draw" against future profits that was required to be repaid to the store in more profitable months, whether it was an treated as an expense in unprofitable months, or whether Buhman was expected to make up any shortfall in McGaughy's compensation from his own funds.
At Buhman's direction, McGaughy locked Goullet out of the store. Goullet subsequently sued and reached a settlement with Buhman regarding his partnership interest.
For several years, McGaughy and Buhman used business cards that identified each as "Owner" of The Smoke Ring. Buhman paid for the cards. McGaughy identified himself as an owner or a partner in the business to his friends and family, and did so in Buhman's presence without correction. The Smoke Ring was also repeatedly reorganized into various business structures for tax advantages as directed by Buhman. At one time, the business was organized as a partnership, and Buhman identified McGaughy to the Internal Revenue Service as the owner of a one-percent partnership interest; however, Buhman claimed one hundred percent of the deductions arising from the business on his personal tax return.
In 2003, Buhman became dissatisfied with McGaughy and told him that his "employment" was terminated. McGaughy filed suit, alleging breach of fiduciary duty and breach of the partnership agreement. Buhman answered that there was no enforceable partnership agreement because the agreement described by McGaughy lacked consideration and was not reasonably definite and certain. Buhman further alleged that McGaughy "was offered the opportunity to become a partner provided he made a $10,000 investment" and that investment of this sum, which Buhman characterized in his pleadings as a condition precedent, had not been accomplished as required. Buhman also alleged that McGaughy breached the agreement by, inter alia, removing merchandise from the store and using it to pay his personal debts.
At trial, Buhman's testimony varied somewhat from his pleadings. He testified that he offered McGaughy a forty-percent partnership interest if McGaughy paid Buhman $10,000 within three years of assuming his management role. According to Buhman, the money had to be paid to him directly, rather than indirectly invested in the business. He further testified that he never considered McGaughy a partner, and that the profit sharing arrangement was simply a compensation scheme similar to other bonus and compensation structures in the industry. Buhman emphasized that, unlike Goullet, McGaughy never co-signed partnership obligations. He further testified that he allowed McGaughy to refer to himself as a partner and as an owner of The Smoke Ring because Buhman expected McGaughy to make the required payment within three years and because, as McGaughy's friend, Buhman did not want to embarrass him; however, Buhman also presented testimony of other witnesses that McGaughy denied possessing an ownership interest. Both parties agreed that after managing the business for approximately three years, McGaughy purchased a lawn-sprinkler business. According to Buhman, he understood at that time that McGaughy would not pursue Buhman's partnership offer.
Although the parties vigorously contested the issue of whether the partnership agreement was supported by consideration, the trial court did not submit a question on this issue. Both parties objected to the charge and proposed similar instructions asking the jury to determine, in the first instance, whether a partnership was formed. Under the proposed instructions, the jury would have been asked to evaluate the elements of formation for an oral contract, including consideration. The trial court refused both proposed instructions. Buhman also objected to the court's instruction that stated: "You are instructed that Mr. McGaughy was a 40-percent partner in The Smoke Shop [sic], unless there was a term of the agreement for him to pay $10,000 before becoming a partner." The only relevant statement from the trial court concerning consideration is the statement, made outside the jury's presence, "But the Court finds legally sufficient consideration, undisputed, that [McGaughy] managed The Smoke Ring for a number of years, more than three years."
Some of the discussion regarding the charge occurred off the record.
In Question One of the charge as submitted, the jury was asked the following:
Do you find that the parties agreed that:
A. Leigh McGaughy was required to make a $10,000 cash payment to Larry Buhman within three years before Mr. McGaughy would have a 40% partnership interest in The Smoke Ring.
or
B. Leigh McGaughy was NOT required to make a $10,000 cash payment to Larry Buhman within three years before Mr. McGaughy would have a 40% partnership interest in The Smoke Ring.
Choose A or B.
The jury answered, "B." Having selected this answer, the jury was next directed to Question Four as follows: "Find the fair value of Mr. McGaughy's 40% interest in The Smoke Ring at the time he was locked out of the business." The jury answered, "$ 126,000." The jury was then directed to Question Seven, pertaining to the amount of McGaughy's reasonable attorneys' fees.
On appeal, Buhman asserts inter alia that the trial court improperly placed the burden of proof upon him, and did not require McGaughy to prove the existence of an oral contract supported by the agreed consideration.
II. STANDARD OF REVIEW
We review alleged charge error for an abuse of discretion. Tex. Dept. of Human Servs. v. E.B., 802 S.W.2d 647, 649 (Tex. 1990). To determine if an error is reversible, we must consider the pleadings of the parties, the evidence presented at trial, and the charge in its entirety. See Island Recreational Dev. Corp. v. Republic of Tex. Sav. Ass'n, 710 S.W.2d 551, 555 (Tex. 1986). We will reverse only if the error, viewed in light of the totality of the circumstances, amounted to such a denial of the rights of the complaining party as was reasonably calculated and probably did cause the rendition of an improper judgment. See id.; TEX. R. APP. P. 44.1(a)(1). Omission of a key issue can be fatal, requiring the case to be reversed or remanded. See Sw. Bell Tel. Co. v. John Carlo Tex., Inc., 843 S.W.2d 470, 471-72 (Tex. 1992) (reversing and remanding because the trial court failed to include instruction requiring jury to make finding central to claim).
III. ANALYSIS
A. GOVERNING LAW
In a breach-of-contract action, the plaintiff must prove: (1) the existence of a valid contract, (2) performance or tendered performance by the plaintiff, (3) breach of the contract by the defendant, and (4) damages sustained by the plaintiff as a result of the breach. Valero Mktg. Supply Co. v. Kalama Int'l, L.L.C., 51 S.W.3d 345, 351 (Tex.App.-Houston [1st Dist.] 2001, no pet.). To be binding, the contract must contain all essential terms and be sufficiently certain to define the legal obligations of the parties. Stinger v. Stewart Stevenson Servs., Inc., 830 S.W.2d 715, 720 (Tex.App.-Houston [14th Dist.] 1992, writ denied). In addition, the contract must be supported by consideration. Alex Sheshunoff Mgmt. Servs., L.P. v. Johnson, 209 S.W.3d 644, 659 (Tex. 2006) (Jefferson, C.J., concurring). Consideration "may be either a performance or a return promise bargained for in a present exchange." Id. (citing Roark v. Stallworth Oil Gas, Inc., 813 S.W.2d 492, 496 (Tex. 1991). Moreover, it is an "elemental principle of contract law that `nothing is a consideration that is not regarded as such by both parties.'" Connell v. Provident Life Accident Ins. Co., 148 Tex. 311, 314, 224 S.W.2d 194, 196 (1949).
Although there are exceptions to this general rule, see id. at n. 3, none apply here.
It is essential that the parties agree on the consideration supporting the contract. See TCA Bldg. Co. v. Entech, Inc., 86 S.W.3d 667, 672 (Tex.App.-Austin, 2002, no pet.) (citing RESTATEMENT (SECOND) OF CONTRACTS: REQUIREMENT OF EXCHANGE; TYPES OF EXCHANGE § 71(4) (1981)). It is not enough that one party to the agreement offered consideration that could be considered a fair exchange for the other party's promise if the offered consideration is not what the other party agreed to accept; rather, the consideration must be that for which the parties bargained and on which they agreed. See id. (explaining that one party's proffered consideration was immaterial when the record did not show that the proffered consideration was promised or accepted in exchange for the other party's obligations).
Although consideration may be implied in a written contract, there is no presumption that an oral contract is supported by consideration. Okemah Constr., Inc. v. Barkley-Farmer, Inc., 583 S.W.2d 458, 460 (Tex.Civ.App.-Houston [1st Dist.] 1979, no writ). Consequently, it is the plaintiff's burden to plead and prove the element of consideration in a suit on an oral contract. Id.
B. APPLICATION TO THE JURY CHARGE
Because this is a suit on an oral contract, the burden was on McGaughy, as plaintiff, to plead and prove the existence of the alleged partnership agreement. That proof was required to include the element of consideration, an issue which was hotly disputed at trial. On appeal, McGaughy argues that "Buhman knew the following consideration was afforded in exchange for his partnership offer: quitting school; coming into the business to manage; managing day-to-day operations; upgrading inventory; [and] providing labor." Buhman contends that, at the time McGaughy was terminated or locked out, "Mr. McGaughy was a contract laborer who was getting paid 40 percent of profits." Moreover, Buhman testified that, as the sole owner of the store, he could choose to treat the store's income as profit, reinvest in the store, or simply withdraw the money and treat it as his personal income to spend as he chose. It is Buhman's position that he offered to exchange a forty-percent partnership interest for payment of $10,000 within three years, and that McGaughy's work at the store was not part of the consideration of the partnership offer. In addition, Buhman claimed that, if a valid contract was formed, McGaughy breached it by stealing from the store or converting merchandise to his own use.
McGaughy's argument that leaving school formed part of the consideration for the partnership agreement is not supported by the record. Although McGaughy testified that he left school to manage the cigar store, no evidence was presented at trial that Buhman asked McGaughy to abandon his studies or that Buhman agreed to accept such an act as part of the consideration for the partnership agreement. The only evidence that McGaughy and Buhman discussed this subject is the following testimony from McGaughy:
Q: [H]ow did he lead into the conversation about I'm going to make you this partnership offer?
A: We were pretty close. I remember he was like, well, Leigh, I'm going to ask you something butCor maybe he made the offer first; but he also cushioned it with, well, I know you are off on this track here, sales engineer. We talked about it often. And I wouldn't want to put you in a position to do anything, you know, wrong for yourself; but I have this situation. I feel confident that you could do this. I can't do this; and would you at least think about it, because I have the potential to lose everything with the present situation. And so —
Although the issue of consideration was central to the dispute, the jury's ability to determine the terms of the partnership agreement, if any, was limited by the court's instructions. As part of the court's charge, the jury was instructed, "The term `preponderance of the evidence" means the greater weight and degree of credible testimony or evidence introduced before you and admitted in this case." The jury was further instructed as follows: "Whenever a question requires other than a `Yes' or `No' answer, your answer must be based on a preponderance of the evidence." However, the jury was also instructed that "McGaughy was a 40% partner in The Smoke Shop [sic] unless there was a term of the agreement for him to pay $10,000 before becoming a partner."
We note that this instruction also does not accurately reflect Buhman's contentions at trial because the instruction omits the requirement that the sum be paid within three years.
Whether the parties reached an agreement is a question of fact. Beal Bank, S.S.B., v. Schleider, 124 S.W.3d 640, 653 n. 8 (Tex.App.-Houston [14th Dist.] 2003, pet. denied). Moreover, it is a question of fact on which McGaughy bore the burden of proof. See Advantage Physical Therapy, Inc. v. Cruse, 165 S.W.3d 21, 24 (Tex.App.-Houston [14th Dist.] 2005, no pet.) ("To prove an action for breach of contract, a plaintiff must establish the existence of an enforceable contract."). However, this instruction required Buhman to rebut a presumption that McGaughy was a partner in The Smoke Ring. Thus, the jury instructions and charge as submitted improperly shifted the burden of proof to Buhman, the defendant.
C. HARM ANALYSIS
Our review requires us to assess whether the charge error was harmless. McGaughy claims the error was harmless because the jury rejected Buhman's position concerning the required consideration. Buhman counters that McGaughy was the party responsible for carrying the burden of proof and, as the charge stood, the jury was not asked to find whether McGaughy proved up the contract as required. As explained above, Buhman correctly asserts that a proponent of an oral contract has the burden to prove each element of the oral contract. We further agree with Buhman that the error was such that it was reasonably calculated to cause and probably did cause the rendition of an improper judgment.
In this case, the key issues in dispute were consideration and whether a partnership was ultimately formed. The jury was never asked to find the bargained-for consideration. As we have explained, it is not sufficient that the offered consideration was adequate unless it is also shown that the other party agrees to accept the offered consideration. The jury was never asked to find the parties agreed to the consideration that was provided and that allegedly formed a partnership. We therefore conclude the trial court reversibly erred by shifting the burden of proof.
To support his argument that any error was harmless, McGaughy relies on two cases: Walker v. Eason, 643 S.W.2d 390 (Tex. 1982) (per curiam), and Turk v. Robles, 810 S.W.2d 755 (Tex.App.-Houston [1st Dist.] 1991, writ denied). Both cases involve the improper shift of the burden of proof. Walker, 643 S.W.2d at 390; Turk, 810 S.W.2d at 759. Aside from this characteristic, the similarity between those cases and this case ends. In both Walker and Turk, the jury was asked to answerCand did answerCthe key question at issue. In both cases, the pivotal issue was whether testators had the requisite mental capacity to make testamentary instruments. Walker, 643 S.W.2d at 390; Turk, 810 S.W.2d at 757-60. Although the burden of proof in those cases was reversed, the juries made definitive findings that the testators lacked testamentary capacity. Walker, 643 S.W.2d at 390; Turk, 810 S.W.2d at 758. But the jury in this case made no such definitive finding on the main issue at trial.
Given the nature of this case as a suit on an oral contract, McGaughy was required to prove that he and Buhman agreed to the consideration. The jury was presented with one theory of consideration, for which it made a negative finding, but made no positive findings accepting McGaughy's allegations concerning formation of the partnership. Cf. Turk, 810 S.W.2d at 759 (explaining that to place the burden of proof on the proper party, the question must be worded such that an affirmative answer indicates the party with the burden established the fact). We cannot infer that the plaintiff met his burden by a preponderance of the evidence simply because the jury rejected one of the defendant's theories. Thus, we conclude the error was harmful.
Finally, McGaughy contends Buhman waived the buy-in requirement, or alternatively, time was not of the essence for the payment. In these arguments, McGaughy continues to place the burden on Buhman to prove the identity and failure of the bargained-for consideration. As we have explained, this is an improper placement of the burden of proof.
Based on our review of the pleadings, the evidence, and the charge, we conclude the trial court abused its discretion by overruling Buhman's objections to the charge. Moreover, the error was reasonably calculated to cause, and probably did cause, the rendition of an improper verdict. Accordingly, we sustain this issue.
Our analysis is unaffected by the trial court's statement, "But the Court finds legally sufficient consideration, undisputed, that [McGaughy] managed The Smoke Ring for a number of years, more than three years." The central issue in the case is not the adequacy of the consideration, but the identity of the consideration.
IV. CONCLUSION
Having determined that the trial court committed reversible jury-charge error, we reverse and remand for a new trial without reaching Buhman's remaining issues.