Opinion
NO. 01-09-00728-CV
08-16-2012
PETER FAZIO, SHARI FAZIO, AND ERIC FAZIO, Appellants v. CYPRESS/GR HOUSTON I, L.P., CYPRESS/GR HOUSTON, INC., AND CYPRESS EQUITIES, INC., Appellees CYPRESS/GR HOUSTON I, L.P., CYPRESS/GR HOUSTON, INC., AND CYPRESS EQUITIES, INC., Appellants v. PETER FAZIO, Appellee
On Appeal from the 129th District Court
Harris County, Texas
Trial Court Case No. 2004-65110
OPINION ON REHEARING
Appellees, Cypress/GR Houston I, L.P., Cypress/GR Houston, Inc., and Cypress Equities, Inc. (collectively, "Cypress"), moved for rehearing of our January 19, 2012 opinion. We grant the motion for rehearing, withdraw our January 19, 2012 opinion and judgment, and issue this opinion and judgment in their stead. Our disposition remains the same. We dismiss Cypress's February 24, 2012 motion for en banc reconsideration as moot.
Cypress/GR Houston, Inc. is the general partner of Cypress/GR Houston I, L.P. According to Cypress, Cypress Equities, Inc., is a real estate advisory firm.
See Brookshire Bros., Inc. v. Smith, 176 S.W.3d 30, 40 & n.2 (Tex. App.— Houston [1st Dist.] 2004, pet. denied).
This is an appeal from a judgment notwithstanding the verdict ("JNOV"). Appellants, Peter Fazio, Shari Fazio, and Eric Fazio (collectively, "Fazio") sued Cypress for fraud and fraudulent inducement relating to a purchase agreement (the "Purchase Agreement") for approximately nine acres of retail property with improvements consisting mainly of a Garden Ridge store (the "Property" or "the Garden Ridge store"). Fazio alleged that Cypress, as the seller, breached a condition in a letter of intent signed by both parties that required it to produce all information in its possession to Fazio, the buyer. A jury found in favor of Fazio and awarded actual and exemplary damages. Cypress moved for JNOV, arguing that Fazio's fraud claims were barred by a contractual disclaimer of reliance in light of Schlumberger Technology Corp. v. Swanson and its progeny. The trial court entered JNOV and ordered that Fazio take nothing by his claims. The court also denied Cypress/GR Houston I's motion for attorney's fees. Fazio appeals the JNOV, and Cypress/GR Houston I also appeals, seeking its attorney's fees.
Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997).
In five issues, Fazio argues that the trial court erred in disregarding the jury's verdict and granting JNOV because: (1) the evidence was sufficient to establish that Cypress, as the seller of the Garden Ridge store, had a duty to disclose material information to Fazio, Cypress failed to disclose information material to the purchase, Fazio was unaware that material information was omitted, Cypress knew Fazio was unaware of that information, and Cypress's conduct caused harm to Fazio; (2) Fazio's fraudulent inducement claim was not negated by the disclaimer of reliance, merger clause, or "as is" clause in the Purchase Agreement; (3) the actual damages awarded by the jury were recoverable under either the "out-of-pocket" or "rescission/restitution" measure of damages for fraudulent inducement; (4) the evidence was sufficient to show that Cypress Equities, Inc., Cypress/GR Houston I, L.P., and Cypress/GR Houston, Inc. operated as a single business enterprise and that Cypress Equities was 100% responsible for the harm to Fazio; and (5) there was clear and convincing evidence that the harm to Fazio resulted from fraud and that the amount of exemplary damages awarded was within statutory and constitutional limits.
In one issue, Cypress/GR Houston I, L.P. argues that it is entitled to its attorney's fees.
We reverse the trial court's JNOV and remand the cause to the trial court to render judgment on the verdict. We affirm the trial court's denial of Cypress/GR Houston I's motion for attorney's fees.
Background Facts
Fazio is a real estate investor in California who uses brokers to locate single-tenant/triple-net properties and to conduct due diligence, such as learning about the property's location, ensuring that the tenants are "real" and are paying rent and taxes, and investigating lease terms and other problems. In 2003, Fazio's brokers, David Banks and Barry Silver, California real estate salesmen, brought the Property to Fazio's attention.
A triple-net lease is one under which a tenant pays not only rent but also taxes, common area maintenance fees, and insurance.
On September 2, 2003, Fazio sent Cypress Equities a "Letter of Intent" (the "LOI") to purchase the Property, which it defined as "the Garden Ridge retail store located at 12001 East Freeway I-10, Houston, TX." The LOI, signed by Peter Fazio, stated Fazio's "interest in negotiating with you for the sale of your Property, referenced above, under the following terms and conditions." Fazio offered to pay Cypress $7,667,000 for the Property, "[b]ased on the currently reported absolute net income of $805,040.00." The LOI provided for a 30-day due diligence period following the receipt of certain listed documents "to investigate all aspects of the Property to determine, in Buyer's sole judgment, if it is acceptable." It provided that "Seller will provide Buyer with all information in their [sic] possession including, but not limited to the following . . . ." There followed a list of documents that included the lease and all amendments, the existing "as built" survey, all environmental and soil reports, a preliminary title report, and a site inspection if desired. The offer was made contingent on Fazio's receipt of acceptable notification from his lender of its willingness to underwrite the transaction.
In addition, the LOI provided, "This proposal is an expression of understanding and intention only, and if accepted, will provide guidance for drafting a formal Purchase Agreement. Terms and conditions set forth in this proposal shall not be binding on both parties until and unless a formal Purchase Agreement is executed and delivered to both parties." Cypress was to provide a Purchase Agreement to Fazio within five business days of mutual execution and delivery of the LOI. Fazio then had five business days following the receipt of the Purchase Agreement to execute and deliver it back to Cypress. On September 4, 2003, the LOI was "agreed and accepted" by Cypress Equities as the seller of the Property.
Fazio and his agents conducted due diligence as provided for in the LOI. Among other things, they asked Cypress for all information about the Property in Cypress's possession, in accordance with the express provision regarding disclosure in the LOI; they contacted Garden Ridge's CFO and the local store manager; they reviewed the Property's appraisals; and they conducted internet research on Garden Ridge.
As part of Fazio's due diligence, Silver familiarized himself with Garden Ridge, researched other stores in the area, investigated the lease terms, and looked at financials from the period when Garden Ridge had been a publicly traded company. He also requested "every scrap of paper" that Cypress had regarding the Property. Jason Claro, a Cypress employee and the primary contact person for the transaction, confirmed that Silver did not limit his request. Silver also reviewed Garden Ridge's financials and was concerned.
Banks reviewed Garden Ridge's financial statements, which were provided to him by Cypress. Banks was also concerned about the financials, so he and Silver set up a conference call with Garden Ridge's CFO. The CFO explained that the company was going through a reorganization and was restructuring some of its debt, but he was very positive about Garden Ridge's outlook. Banks also contacted Garden Ridge's lender. The banker, a Californian, stated that he knew that Garden Ridge was not "A-plus credit or anything like that," but he "liked the numbers" and it was a good investment. Banks also reviewed the title commitment, the appraisals of the Property, the Garden Ridge lease, and all of the documents he was provided.
Silver and Banks called Garden Ridge and asked Claro for individual store sales. When Claro did not provide that information, they called the store manager. The manager told them it was at least an average store and did not say anything negative about the store or the company. Silver and Banks also contacted Garden Ridge's CFO, who confirmed that there were losses for the period but told them that the company had secured a $50 million line of credit from Bank of America to stock its stores for the fourth quarter, that it had "bright prospects," and that he thought the financials would turn around. Fazio himself testified at trial that he reviewed three appraisals, all with a higher value than the contract price, and he was impressed by the appraisals and by Garden Ridge's excellent record of paying rent.
Cypress did not disclose to Silver, Banks, or Fazio that on February 27, 2003, approximately eight months before Fazio purchased the Property, Garden Ridge had retained Keen Realty, LLC ("Keen") as its "Special Real Estate Consultant with respect to restructuring and renegotiation of the Company's real estate leases" and that Keen had prepared a letter for Joe Rollins, Garden Ridge's Vice-President of Real Estate, to send to landlords. This letter was sent to Cypress's President, Chris Maguire, on March 5, 2003. It stated that Garden Ridge was "restructuring" and that as "part of that restructuring, we need to reduce our occupancy costs at your premises"; therefore, it had retained Keen, a company with twenty years of experience helping retailers "both in and out of Chapter 11 [bankruptcy proceedings] . . . to restructure their leasehold obligations."
Nor did Cypress disclose that it received two such letters regarding specific Garden Ridge properties—one for the Property itself and one for a Garden Ridge store in Conroe, Texas owned by another Cypress entity.
Cypress likewise failed to disclose that Keen had contacted Cypress's Director of Finance and others at Cypress on at least three other occasions to discuss the proposed rent-relief transaction, seeking an annual rent reduction of 30% for the Property in the amount of $241,512.
Cypress also failed to disclose that, on August 14, 2003, less than three weeks before the LOI was executed, Cypress's lender, Guaranty Federal Bank, had requested that Cypress's President, Maguire, execute a personal guaranty of the $5,704,000 loan secured by the Property because the bank was concerned about the financial condition of Garden Ridge. This guaranty obligated Maguire to repay the remaining balance on the $5,704,000 loan on the Property—approximately $4,500,000—if Cypress defaulted. Cypress also did not disclose that Maguire had not signed that personal guaranty at the time Fazio sent Cypress the LOI.
On September 19, 2003, Fazio signed the Purchase Agreement. Maguire likewise signed the Purchase Agreement, as Cypress/GR Houston I's President, on September 22, 2003. Under the terms of the LOI, the terms and conditions therein became binding upon the execution and delivery of the Purchase Agreement to both parties.
Article V of the Purchase Agreement, entitled "Inspection," covered Cypress's duty, "subject to the provisions of the Lease," to permit Fazio and his authorized agents and representatives to enter upon and inspect the condition of the property. Section 5.1, "Inspection Period," provided for a 30-day period for Fazio to enter and inspect the property. Within the first ten days of that period, Cypress was required to deliver specifically defined "Documents" to Fazio. The "Documents" Cypress undertook to deliver within ten days after the effective date of the Purchase Agreement were expressly defined in the Purchase Agreement as:
(i) copies of the Lease and all amendments thereto;
(ii) the Survey;
(iii) copies of any Plans;
(iv) to the extent allowed by the author, copies of all existing soil, engineering, architectural, and environmental reports covering the Property in [Cypress's] possession;
(v) copies of all Service Contracts, if any; and
(vi) copies of all Permits.
The only disclaimer clause in the Purchase Agreement appeared in Section 5.2, titled "Document Review." The disclaimer, by its title, language, and subject, concerned only the inspection of the defined Documents during the defined period for the inspection of the Property. It stated in its entirety:
(d) No Representation or Warranty by Seller. Purchaser hereby acknowledges that, except as otherwise specifically set forth in this Agreement, Seller has not made and does not make any warranty or representation regarding the truth, accuracy, or completeness of the Documents or the source(s) thereof, and that Seller has not undertaken any independent investigation as to the truth, accuracy, or completeness of the Documents and is providing the Documents solely as an accommodation to Purchaser. Except with respect to any express warranties made in this Agreement, Seller expressly disclaims and Purchaser waives any and all liability for representations and warranties, express or implied, statements of fact, and other matters contained in the Documents, or for any omissions from the Documents, or in any other written or oral communication transmitted or made available to Purchaser. Except with respect to any express warranties made in this Agreement, Purchaser shall rely solely upon its own investigation with respect to the Property, including, without limitation, the Property's physical, environmental, or economic condition, compliance or lack or compliance with any ordinance, order, permit, or regulation or any other attribute or matter relating thereto.
In addition to the disclaimer of reliance, the Purchase Agreement contained an "as is" clause, Section 5.5, "Property Conveyed 'AS IS.'" Subsection 5.5(a) provided that Fazio agreed to accept the property "'as is,' 'where is,' and 'with all faults,' subject to any physical or environmental condition which may exist, and without the existence of and reliance on any representation or warranty by seller." The "as is" clause further provided that Fazio acknowledged and agreed that he had "or will have, prior to the end of the inspection period, thoroughly inspected and examined the property to the extent deemed necessary . . . to enable [him] to evaluate the purchase of the property" and that he was "relying solely upon such inspections, examination, and evaluation of the property . . . in purchasing the property on an 'as is,' 'where is' and 'with all faults' basis, without representations, warranties or covenants, express or implied, of any kind or nature."
Finally, the Purchase Agreement contained a merger clause, which provided:
Section 11.1 Entire Agreement.
This Agreement contains the entire agreement of the parties hereto. There are no other agreements, oral or written, and this Agreement can be amended only by written agreement signed by the parties hereto, and by reference, made a part hereof.
On September 23, 2003, four days after the execution of the Purchase Agreement, Maguire executed the personal guaranty of the loan secured by the Property that had been demanded by Cypress's lender, Guaranty Bank, on August 14, 2003. Once the purchase transaction closed, Maguire's guaranty was extinguished. Maguire's execution of the guaranty after the execution of the LOI and Purchase Agreement was not disclosed to Fazio, even though it occurred during the 30-day disclosure period.
The sale of the Property to Fazio for $7,667,000 closed on October 31, 2003. Fazio received rental payments from Garden Ridge for November and December 2003, but the rental payment for January 2004 bounced. Fazio never received another rental payment from Garden Ridge. Garden Ridge filed for Chapter 11 bankruptcy protection and ultimately rejected the lease for the Property. After unsuccessful attempts to rent the Property, Fazio sold the empty building in 2007 for $3,750,000.
Fazio sued Cypress, eventually alleging, in his live pleading at the time of trial, fraud in the inducement, fraud in a real estate transaction, violation of the Texas Real Estate License Act, negligence, breach of fiduciary duty, civil conspiracy to commit fraud, and single business enterprise.
The case was tried to a jury in January 2008. After the trial court granted directed verdicts for Cypress on Fazio's other claims, the case was submitted to the jury solely on fraud. Fazio argued that Cypress had a duty to disclose all information concerning the Property under the LOI, which included the statement that "[t]he Seller will provide the Buyer with all information in [its] possession including, but not limited to the following . . . ." Fazio contended that Cypress made a partial disclosure of financial information concerning the Garden Ridge store but did not disclose the entire truth. He contended that material information not disclosed included the March 5, 2003 request from Garden Ridge for a substantial rent reduction and the indication to Cypress that Garden Ridge was considering bankruptcy. Fazio also contended that Cypress did not disclose the August 14, 2003 request of Guaranty Bank that Maguire provide his personal guaranty on the outstanding balance of the $5,704,000 loan on the Property. Fazio claimed, and testified at trial, that had he known this information, he would not have purchased the Property.
The jury was instructed that fraud occurs when a party fails to disclose a material fact within its knowledge, knowing that the other party is ignorant of the fact and does not have an equal opportunity to discover the truth; it intends to induce the other party to take some action by failing to disclose the fact; and the other party suffers injury as a result of acting without knowledge of the undisclosed fact. The jury was also instructed on materiality.
In its verdict, the jury found that: (1) Cypress Equities committed fraud against Peter Fazio, but the other Cypress entities did not (Question 1); (2) Peter Fazio's actual damages for the fraud were $3,961,524.60, the difference between the price Fazio paid for the property and what he received when he sold it (Question 2); (3) Cypress Equities was 100% responsible for the damages found in Question 2, and the other Cypress entities, Joe Fazio, Barry Silver, and David Banks had no responsibility for the harm (Question 3); (4) Cypress/GR Houston I, L.P., Cypress/GR Houston, Inc., and Cypress Equities, Inc. were a single business enterprise (Question 4); (5) by clear and convincing evidence, the harm to Fazio resulted from fraud (Question 5); and (6) Cypress Equities owed Fazio $667,000.00 in exemplary damages (Question 6).
Cypress moved for JNOV. Cypress argued that the jury's answer to Question 1—finding fraud based on the non-disclosure of material facts—should be set aside. It argued that it owed no duty to disclose any omitted fact to Fazio because the LOI did not create such a duty; the facts were discoverable by Fazio; there was legally insufficient evidence to show that Fazio was unaware of any omitted fact, that Cypress knew or should have known Fazio was unaware of any omitted fact, or that Cypress failed to disclose a material fact; the evidence established that Cypress disclosed all material facts, and any facts not disclosed were not material; there was legally insufficient evidence that Cypress's conduct harmed Fazio; and Cypress Equities had no duty to disclose because it was not the seller. Cypress also argued that the reliance element of Fazio's fraud claim was negated by the merger clause, disclaimer of reliance, and "as is" language in the Purchase Agreement.
Cypress argued that the jury's answer to Question 2—assessing actual damages—should be set aside because the measure of damages was not correctly submitted to the jury. It argued that Texas law requires the jury to measure fraud damages at the time of the fraudulent transaction, and the evidence was legally and factually insufficient to show that Fazio suffered damages at the time the Property was purchased.
Cypress also argued that the jury's answer to Question 3—apportioning liability and finding Cypress 100% responsible for Fazio's damages—should be set aside. It argued that, because the evidence established that the damages were caused by Fazio or his agents and Fazio judicially admitted that Silver and Banks contributed to the harm, the evidence was legally and factually insufficient to support the jury's finding.
Cypress further argued that the jury's answer to Question 5—finding fraud by clear and convincing evidence—should be set aside because the evidence was legally insufficient to show that Fazio's harm resulted from fraud.
Finally, Cypress argued that the jury's answer to Question 6—assessing exemplary damages—should be set aside because there was legally insufficient evidence to support the amount of exemplary damages awarded and the award violated the due process and due course of law provisions of the United States Constitution and the Texas Constitution.
On December 22, 2008, the trial court granted Cypress's motion for JNOV on the above stated grounds. On February 9, 2009, Cypress moved for rendition of a take-nothing judgment, and Cypress/GR Houston I moved for its attorney's fees. On May 14, 2009, the trial court rendered judgment that Fazio take nothing, and it denied the motion for attorney's fees.
Cypress's motion for JNOV also raised other grounds not relevant to this appeal that were denied by the trial court.
Fazio filed a notice of appeal and brings five issues challenging the trial court's rendition of JNOV. Cypress/GR Houston I, L.P., Cypress/GR Houston, Inc., and "Cypress Equities, LLC" filed a notice of appeal, but only Cypress/GR Houston I, L.P. filed an appellant's brief, challenging the trial court's denial of its attorney's fees.
Counsel has informed the Court that this is the same entity as Cypress Equities, Inc.
The Court notified Cypress/GR Houston, Inc. and "Cypress Equities, LLC" of their failure to file a brief as required by Texas Rules of Appellate Procedure 38.8(a)(1) and 42.3. See Showbiz Multimedia, LLC v. Mountain States Mortg. Ctrs., Inc., 303 S.W.3d 769, 771 n.2 (Tex. App.—Houston [1st Dist.] 2009, no pet.). In response, they filed a motion to dismiss their appeals, which we granted.
Standard of Review for JNOV
A trial court may grant a motion for JNOV if a directed verdict would have been proper, and it may disregard any jury finding on a question that has no support in the evidence. TEX. R. CIV. P. 301. A trial court may disregard a jury finding and render JNOV if the finding is immaterial or if there is no evidence to support one or more of the jury findings on issues necessary to liability. See Tiller v. McLure, 121 S.W.3d 709, 713 (Tex. 2003); Spencer v. Eagle Star Ins. Co., 876 S.W.2d 154, 157 (Tex. 1994); Williams v. Briscoe, 137 S.W.3d 120, 124 (Tex. App.—Houston [1st Dist.] 2004, no pet.). A question is immaterial, for the purpose of determining whether a court may disregard a jury finding, when the question should not have been submitted or when it was properly submitted but has been rendered immaterial by other findings. Spencer, 876 S.W.2d at 157.
A trial court properly enters a directed verdict when: (1) a defect in the opposing party's pleadings makes them insufficient to support a judgment; (2) the evidence conclusively proves a fact that establishes the 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. M.N. Dannenbaum, Inc. v. Brummerhop, 840 S.W.2d 624, 629 (Tex. App.—Houston [14th Dist.] 1992, writ denied). In such a case, the issue should not be submitted to the jury. See Sanchez ex rel. Estate of Galvan v. Brownsville Sports Ctr., Inc., 51 S.W.3d 643, 667 (Tex. App.—Corpus Christi 2001, pet. granted, judgm't vacated w.r.m.) ("Only issues raised by the evidence are to be submitted to the jury. Whether a question is raised by the evidence is to be determined by the same standard that applies to determination of whether an instructed verdict should be given.") (citing TEX. R. CIV. P. 278 and Blonstein v. Blonstein, 831 S.W.2d 468, 471 (Tex. App.—Houston [14th Dist.] 1992, writ denied)).
To sustain a challenge to the legal sufficiency of the evidence to support a jury finding, the reviewing court must find that: (1) there is a complete lack of evidence of a vital fact; (2) the court is barred by rules of evidence or law from giving weight to the only evidence offered to prove a vital fact; (3) there is no more than a mere scintilla of evidence to prove a vital fact; or (4) the evidence conclusively established the opposite of a vital fact. Volkswagen of Am., Inc. v. Ramirez, 159 S.W.3d 897, 903 (Tex. 2005).
In reviewing a grant of JNOV, the reviewing court must determine whether there is any evidence upon which the jury could have made the finding. See id. The reviewing court must view 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. See City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005); Bradford v. Vento, 48 S.W.3d 749, 754 (Tex. 2001); see also Tiller, 121 S.W.3d at 713 (holding that, in reviewing "no evidence" point, court views evidence in light that tends to support finding of disputed fact and disregards all evidences and inferences to contrary). If some evidence supports the disregarded finding, the reviewing court must reverse and render judgment on the verdict unless the appellee asserts cross-points showing grounds for a new trial. See M.N. Dannenbaum, Inc., 840 S.W.2d at 628; Basin Operating Co. v. Valley Steel Prods. Co., 620 S.W.2d 773, 776 (Tex. Civ. App.—Dallas 1981, writ ref'd n.r.e.). Where there is no objection to the jury charge, the court reviews the sufficiency of the evidence in light of the charge submitted. See Bradford, 48 S.W.3d at 754.
Fazio's Fraudulent Inducement Claim
Cypress argued in its motion for JNOV, which the trial court granted, that questions on fraud should never have been submitted to the jury because (1) it did not withhold material information from Fazio that it had a duty to disclose and (2) Fazio's fraud claims were barred as a matter of law by the disclaimer of reliance and the "as is" clause in the Purchase Agreement, and, thus, there was no evidence to support the jury's verdict.
In his first issue, Fazio argues that the trial court erred in disregarding the jury's answers to Questions 1 and 2, finding that Cypress Equities defrauded him. He contends that the evidence was sufficient to establish that Cypress, as seller of the Property, had a duty as a matter of law to disclose material information to him; Cypress failed to disclose information material to the purchase; he was unaware that the material information was omitted; Cypress knew he was unaware of that information; and Cypress's conduct caused him harm. In his second issue, Fazio argues that his fraudulent inducement claim was not negated by the disclaimer of reliance, merger clause, or "as is" clause contained in the Purchase Agreement. We address these issues together.
A. The Elements of Fraudulent Inducement
Fraudulent inducement is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof. Haase v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001); Clark v. Power Mktg. Direct, Inc., 192 S.W.3d 796, 799 (Tex. App.—Houston [1st Dist.] 2006, no pet.). Thus, with a fraudulent inducement claim, the elements of fraud must be established as they relate to an agreement between the parties. Haase, 62 S.W.3d at 798–99.
A contract is subject to avoidance on the ground that it was induced by fraud. Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 331 (Tex. 2011); see also Formosa Plastics Corp. USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 46 (Tex. 1998) ("As a rule, a party is not bound by a contract procured by fraud."). Indeed, "the law long ago abandoned the position that a contract must be held sacred regardless of the fraud of one of the parties in procuring it." Dallas Farm Mach. Co. v. Reeves, 307 S.W.2d 233, 239 (Tex. 1957).
The elements of fraud are: (1) that the speaker made a material misrepresentation (2) that he knew was false when he made it or that he made recklessly without any knowledge of its truth and as a positive assertion (3) with the intent that the other party act upon it and (4) that the other party acted in reliance on the misrepresentation and (5) suffered injury thereby. Italian Cowboy, 341 S.W.3d at 337. Fraud may also occur when (1) a party conceals or fails to disclose a material fact within the knowledge of that party; (2) the party knows the other party is ignorant of the fact and does not have an equal opportunity to discover the truth; (3) the party intends to induce the other party to take some action by concealing or failing to disclose the fact; and (4) the other party suffers injury as a result of acting without knowledge of the undisclosed fact. Bradford, 48 S.W.3d at 754–55; JSC Neftegas-Impex v. Citibank, N.A., 365 S.W.3d 387, 408 (Tex. App.—Houston [1st Dist.] 2011, pet. denied). A representation is material if "a reasonable person would attach importance to [it] and would be induced to act on the information in determining his choice of actions in the transaction in question." Italian Cowboy, 341 S.W.3d at 337.
Generally, the failure to disclose information—which is alleged here—does not constitute fraud unless there is a duty to disclose the information. Bradford, 48 S.W.3d at 755; Ins. Co. of N. Am. v. Morris, 981 S.W.2d 667, 674 (Tex. 1998); JSC Neftegas-Impex, 365 S.W.3d at 408–09 (holding that first element of fraud claim based on failure to disclose material fact within defendant's knowledge is triggered only if defendant has legal obligation to disclose fact). "[A] general duty to disclose information may arise in an arm's-length business transaction when a party makes a partial disclosure that, although true, conveys a false impression." Bradford, 48 S.W.3d at 755. This Court, likewise, has found a common-law duty to speak in certain circumstances, namely: "(1) one who voluntarily discloses information has a duty to disclose the whole truth; (2) one who makes a representation has a duty to disclose new information when he is aware that the new information makes the earlier representation misleading or untrue; and (3) one who makes a partial disclosure and conveys a false impression has a duty to correct it." JSC Neftegas-Impex, 365 S.W.3d at 409.
Silence may be equivalent to a false representation when the particular circumstances impose a duty on the party to speak and the party nevertheless deliberately remains silent. Bradford, 48 S.W.3d at 755; SmithKline Beecham Corp. v. Doe, 903 S.W.2d 347, 353 (Tex. 1995). Thus, a seller of real estate has a duty to disclose material facts that would not be discoverable by the exercise of ordinary care and diligence on the part of a purchaser or which a reasonable investigation and inquiry would not uncover, because "where there is a duty to speak, silence may be as misleading as a positive misrepresentation of existing facts." Smith v. Nat'l Resort Communities, Inc., 585 S.W.2d 655, 658 (Tex. 1979). Even in the absence of a duty to disclose, a purchaser is entitled to rescind the transaction if an undisclosed fact is basic and is one the seller knows the purchaser would regard as material. Id. (holding that careful reading by purchasers of twenty-eight page declaration of reservations received at time contract for sale of lot was executed would not have reasonably alerted them to possibility that inundation easement encumbered lot, and, therefore, purchasers were entitled to rescission). Whether a duty to disclose exists is a question of law. Bradford, 48 S.W.3d at 755.
In addition, fraud requires a showing of actual and justifiable reliance. Grant Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913, 923 (Tex. 2010); Ernst & Young, L.L.P. v. Pac. Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001); JSC Neftegas-Impex, 365 S.W.3d at 397 n.3. In evaluating justification, the court considers whether, "given a fraud plaintiff's individual characteristics, abilities, and appreciation of facts and circumstances at or before the time of the alleged fraud[,] it is extremely unlikely that there is actual reliance on the plaintiff's part." Grant Thornton, 314 S.W.3d at 923 (quoting Haralson v. E.F. Hutton Grp., Inc., 919 F.2d 1014, 1026 (5th Cir. 1990)).
B. The Duty to Disclose
Fazio argues that Cypress did have a duty to disclose and that the jury correctly found that it defrauded him by concealing economic information material to the purchase of the Garden Ridge store. Cypress argued in its motion for JNOV, and responds on appeal, that it had no duty to disclose to Fazio the economic information that was concealed. We conclude that Cypress had both a common law and a contractual duty to provide to Fazio the economic information concealed. Thus, Fazio's claims fall within the category of claims for which an action for fraudulent inducement lies.
This case is similar to Italian Cowboy. In that case, the supreme court held, in circumstances similar to those in this case, that "commercial tenants are entitled to rely on the fact that a landlord will not actively conceal material information" regarding the condition of the property and misrepresent that information to one not in a position to discover the truth for himself. See 341 S.W.3d at 339. Italian Cowboy, which had leased a restaurant site, sued Prudential, the landlord, for withholding its knowledge of an odor problem at the proposed restaurant site and affirmatively stating that the site had no problems. Id. at 328, 338–39. The Texas Supreme Court held that the Prudential agent's "one-sided knowledge of past facts" made her false representations that she had been working with the restaurant site since its inception, that "the building was in perfect condition, never a problem whatsoever," and that there was "nothing wrong with the place at all" actionable under the circumstances of the case. Id. at 328, 339. The court stated, "Firsthand knowledge—like [the landlord's]—concerning material information—like an odor problem in a restaurant site—is exactly the sort of scenario that demonstrates the sound policy behind the exception allowing an opinion to be actionable under certain circumstances where material information was withheld." Id. at 339; see also Bradford, 48 S.W.3d at 754–55 (holding that fraud may occur when party conceals or fails to disclose material fact within knowledge of that party of which it knows other party is ignorant, while knowing other party does not have equal opportunity to discover truth and intending to induce that party to take some action by concealing or failing to disclose fact, and other party suffers injury as result of acting without knowledge of undisclosed fact).
Here, the LOI expressly provided, "Seller will provide Buyer with all information in [its] possession including, but not limited to the following" listed documents. The LOI became binding under its terms when the Purchase Agreement was signed on September 19, 2003. Cypress knew from the express representation in the LOI that Fazio had based his offer of $7,667,000 for the Property in the LOI on Cypress's "currently reported absolute net income of $805,040." It further knew that this income was generated by rental income received from Garden Ridge. Cypress also knew that Fazio was seeking all documents in its possession material to the purchase of the Property and that it had promised to provide them, and it knew that Garden Ridge was restructuring its leasehold obligations, that Garden Ridge "need[ed] to reduce [its] occupancy costs at [Cypress's] premises," that one of the leaseholds Garden Ridge intended to restructure was the Garden Ridge store Fazio was investigating buying, and that Keen and Cypress had discussed at least three times a 30% annual rent reduction for the Property in the total amount of $241,512. Finally, Cypress knew that its own lender had demanded the personal guaranty from its president of the outstanding $5,704,000 loan secured by the Property.
In accordance with the due diligence provision in the LOI, Fazio, an experienced real estate investor, and his agents conducted due diligence before Fazio signed the Purchase Agreement, including requesting and reviewing all financial information about the Property in Cypress's possession. When Fazio discovered disturbing information about Garden Ridge in the financial statements provided to him, he conducted further investigations with both Garden Ridge and Cypress. He was repeatedly assured that all was well and that Garden Ridge anticipated strong sales and, for that reason, Garden Ridge had taken out a large inventory loan from Bank of America to finance the Christmas season.
There is undisputed evidence in the record that Fazio's agent asked Cypress for all information and "every scrap of paper" that Cypress had regarding the Property and that Cypress knowingly suppressed (1) the March 5, 2003 letter from Garden Ridge's restructuring consultant, Keen, to Cypress's President, Maguire, stating that Garden Ridge was "restructuring" and would "need to reduce our occupancy costs at your premises"; (2) two letters from Keen regarding specific properties, including the Property at issue here; (3) Keen's repeated communications with Cypress's Director of Finance seeking a 30% rent reduction on the Property; and (4) Cypress's lender's August 14, 2003 demand that Maguire execute a personal guaranty of the $5,704,000 loan secured by the Property. Cypress possessed all of this information before it executed the LOI containing Fazio's offer to pay Cypress $7,667,000, which was expressly "[b]ased on the currently reported absolute net income of $805,040." A reasonable person in Fazio's position would have attached importance to these facts. And such an investor would have wanted to know that four days after the September 19, 2003 execution of the Purchase Agreement for the Property, Maguire signed the guaranty requested by Guaranty Bank, knowing that it would be extinguished by the sale of the Property to Fazio, which closed on October 31, 2003.
We hold that Cypress had a duty under the terms of the LOI to disclose all information in its possession material to Fazio's purchase of the Property prior to the execution of the Purchase Agreement. We further hold that Cypress's superior knowledge of past facts regarding the financial stability of Garden Ridge which it actively concealed, knowing that Fazio was unaware of those facts and did not have an equal opportunity to discover the truth and intending to induce him to purchase the Property, made Cypress's suppression of information about Garden Ridge's restructuring, its negotiations with Garden Ridge's representatives over rent reduction, and the personal guaranty required of Maguire by the lender for the Property actionable under the circumstances. See Italian Cowboy, 341 S.W.3d at 338; Bradford, 48 S.W.3d at 754–55. Thus, we hold that Cypress's active concealment of this material information, which it was under both a contractual and a common-law duty to disclose, was fraudulent as a matter of law. See Italian Cowboy, 341 S.W.3d at 338–39.
C. Waiver of Reliance
In his second issue, Fazio argues that his fraudulent inducement claim was not waived by the disclaimer of reliance, merger, and "as is" clauses. Cypress argued successfully in its motion for JNOV, and argues on appeal, that it was.
A party to a contract may contractually waive reliance on disclosures through a disclaimer or merger clause. Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 178–79, 181 (Tex. 1997). But even a written contract containing a merger clause can be avoided for fraud in the inducement, and the parol evidence rule will not stand in the way of proof of such fraud. Italian Cowboy, 341 S.W.3d at 331. The question of whether an adequate disclaimer of reliance exists so as to negate a claim of fraudulent inducement is a question of law. Id. at 333.
In Schlumberger, the Texas Supreme Court recognized the conflict between the principle that parties should be able to bargain for and execute a release barring all further disputes, which necessarily contemplates that parties may disclaim reliance on representations, and the principle that "a release is a contract, and like any other contract, is subject to avoidance on grounds such as fraud or mistake." 959 S.W.2d at 178–79.
In that case, the plaintiffs alleged that they had been fraudulently induced to enter a settlement agreement with Schlumberger. Id. at 173. However, each plaintiff had also affirmed that he "expressly warrant[ed] and represent[ed] . . . that no promise or agreement which is not herein expressed has been made to him or her in executing this release, and that none of us is relying upon any statement or representation of any agent of the parties being released hereby. Each of us is relying on his or her own judgment . . . ." Id. at 180. The court observed that both parties had employed "highly competent and able legal counsel," the parties "were dealing at arm's length," both were "knowledgeable and sophisticated business players," there was considerable dispute about the value of the commercial project at issue, and the "sole purpose of the release was to end" that dispute by providing, "[i]n this context and in clear language," for the unequivocal disclaimer of reliance upon the other party's representations about the project's feasibility and value. Id.
The Schlumberger court held that "[t]he contract and the circumstances surrounding its formation determines whether the disclaimer of reliance is binding." Id. at 179. Thus, Schlumberger set up a two-part test for the validity of a disclaimer of reliance that looks, first, to the language of the contract and, second, to the circumstances surrounding the formation of the contract. The supreme court further held that "a release that clearly expresses the parties' intent to waive fraudulent inducement claims, or one that disclaims reliance on representations about specific matters in dispute, can preclude a claim of fraudulent inducement." Id. at 180. Under the circumstances of that case, the court held that the disclaimer of reliance by the Schlumberger plaintiffs conclusively negated as a matter of law the other party's representations about the feasibility and value of the project that were needed to support the plaintiffs' claim of fraudulent inducement. Id. at 180.
However, while the supreme court recognized the validity of the disclaimer clause under the particular facts of Schlumberger, it also stated, "We emphasize that a disclaimer of reliance or merger clause will not always bar a fraudulent inducement claim." Id. at 181. The court cited Prudential Insurance Co. v. Jefferson Associates, Ltd., 896 S.W.2d 156 (Tex. 1995).
In Prudential, the supreme court had held that "[a] buyer is not bound by an agreement to purchase something 'as is' that he is induced to make because of a fraudulent representation or concealment of information by the seller." 896 S.W.2d at 162. The court explained:
A seller cannot have it both ways: he cannot assure the buyer of the condition of a thing to obtain the buyer's agreement to purchase "as is," and then disavow the assurance which procured the "as is" agreement. Also, a buyer is not bound by an "as is" agreement if he is entitled to inspect the condition of what is being sold but is impaired by the seller's conduct. A seller cannot obstruct an inspection for defects in his property and still insist that the buyer take it "as is." In circumstances such as these an "as is" agreement does not bar recovery against the seller.
We also recognize that other aspects of a transaction may make an "as is" agreement unenforceable. The nature of the transaction and the totality of the circumstances surrounding the agreement must be considered. Where the "as is" clause is an important part of the basis of the bargain, not an incidental or "boiler-plate" provision, and is entered into by parties of relatively equal bargaining position, a buyer's affirmation and agreement that he is not relying on representations by the seller should be given effect.
Id.
Subsequently, in Forest Oil Corp. v. McAllen, the Texas Supreme Court clarified the factors for the court to consider in determining whether, under the circumstances, a disclaimer of reliance bars a fraudulent inducement claim:
(1) the terms of the contract were negotiated, rather than boilerplate, and during negotiations the parties specifically discussed the issue which has become the topic of the subsequent dispute; (2) the complaining party was represented by counsel; (3) the parties dealt with each other in an arm's length transaction; (4) the parties were knowledgeable in business matters; and (5) the release language was clear.268 S.W.3d 51, 60 (Tex. 2008) (holding that waiver-of-reliance provision precluded fraudulent inducement claim with respect to arbitration clause in release). In Forest Oil, the disclaimer, like that in Schlumberger, stated:
Defendants expressly represent and warrant . . . that no promise or agreement which is not herein expressed has been made to them in executing the releases contained in this Agreement, and that they are not relying upon any statement or representation of any of the parties being released hereby. Defendants are relying upon [their] own judgment and each has been represented by its own legal counsel in this matter.Id. at 54 n.4. As in Schlumberger, the supreme court found that the disclaimer barred the plaintiff's fraudulent inducement claim. Id. at 60–61. The court expressly declined, however, to adopt a per se rule that a disclaimer automatically precludes a fraudulent inducement claim, stating that it decided the case "on this record" and that its holding "should not be construed to mean that a mere disclaimer standing alone will forgive intentional lies regardless of context." Id. at 61.
Finally, in Italian Cowboy, the supreme court applied the Schlumberger and Forest Oil test and reached the opposite conclusion from that in Schlumberger and Forest Oil—again on the basis of the language of the disclaimer and the facts of the particular case—consistent with its holdings in both of those cases and in Prudential. It held that general language in a contractual merger clause and disclaimer of reliance was not sufficiently clear and unequivocal to bar the plaintiffs' claim for fraudulent inducement where the landlord of the property at issue had concealed information material to the transaction known to it and had affirmatively misrepresented the condition of the property prior to execution of the lease. Italian Cowboy, 341 S.W.3d at 336.
In Italian Cowboy, the plaintiffs, who had successfully owned and operated restaurants for more than twenty years, identified the defendant's property, a Dallas shopping center, as a possible site for a new restaurant, Italian Cowboy. Id. at 328. During the lease negotiations, the property-management director told the plaintiffs that the building was practically new and had no problems, that she had been there from the beginning, and that it was "in perfect condition . . . [with] no problem whatsoever." Id.
The lease contained a merger clause and a provision stating,
Tenant acknowledges that neither Landlord nor Landlord's agents, employees or contractors have made any representations or promises with respect to the Site, the Shopping Center or this Lease except as expressly set forth herein.
Id.
After signing the lease and beginning to remodel the property, the plaintiffs heard for the first time from a nearby cinema manager about a "very, very bad odor" that had existed in the previous restaurant in the building. Id. at 329. When asked about the odor, the property manager denied having heard about such a problem. Id. Persistent problems with the odor, despite repeated denials by the property manager of any knowledge of the presence of the odor in the previous restaurant, eventually led the tenants to discover that the odor was sewer gas, that it had been present in the previous restaurant, and that efforts to correct it had failed. Id. at 330.
The supreme court stated, "Today, we expressly hold that a merger clause— as distinct from a specific disclaimer-of-reliance clause—may not, by itself, bar an action to set aside a contract based on fraudulent inducement." Id. at 336 n.7. It expressly "decline[d] to extend [its] holdings in Schlumberger and Forest Oil— each of which included clear and unequivocal language expressly disclaiming reliance on representations, and representing reliance on one's own judgment—to the generic merger language contained in the contract at issue in this case." Id. at 336. Applying ordinary principles of contract construction, the court held that the parties to the lease intended nothing more than a standard merger clause and did not intend to include a disclaimer of reliance on representations. Id. at 334. It held, "As a matter of law, the lease agreement at issue does not disclaim reliance, and thus does not defeat Italian Cowboy's claim for fraudulent inducement." Id. at 336-37.
The court noted, "Were this a clear and unequivocal disclaimer-of-reliance clause, our analysis would then proceed to 'the circumstances surrounding [the contract's] formation,' in order to determine whether such a provision is binding on the parties involved." Id. at 337 n.8 (citing Schlumberger, 959 S.W.2d at 179). Because, however, the disclaimer did not clearly and unequivocally express an intent to preclude a fraudulent inducement claim, the language was not effective to negate reliance and the courts did not need to review the circumstances surrounding the formation of the agreement, namely the remaining Forest Oil factors. See id. at 336; see also Schlumberger, 959 S.W.2d at 179 (holding that clear and unequivocal language is necessary to bar fraudulent inducement claim).
The court reiterated the two-part test for determining whether a disclaimer of reliance in a contract bars a claim of fraudulent inducement that it had enunciated in Schlumberger: (1) the merger and disclaimer clauses must include "clear and unequivocal language expressly disclaiming reliance on representations, and representing reliance on one's own judgment"; and (2) if the agreement does clearly and unequivocally disclaim reliance on the representations of a party, the court must analyze the circumstances surrounding the contract's formation under the Forest Oil factors to determine whether the language is effective to negate reliance and, thus, to preclude a fraudulent inducement claim. See Italian Cowboy, 341 S.W.3d at 336.
We apply the Italian Cowboy, Forest Oil, Schlumberger, and Prudential analysis in this case to determine whether the disclaimer of reliance, merger, and "as is" clauses in the Purchase Agreement waived Fazio's fraudulent inducement claim.
1. Whether the disclaimer of reliance, "asis," and merger clauses in the Purchase Agreement "clearly and unequivocally" barred Fazio's fraudulent inducement claims
To determine whether the language of the disclaimer "clearly and unequivocally" disclaimed reliance on Cypress's representations, we apply the ordinary principles of contract construction. See id. at 332. "In construing a contract, a court must ascertain the true intentions of the parties as expressed in the writing itself." Id. at 333. To determine intent, "we must examine and determine the entire writing in an effort to harmonize and give effect to all the provisions of the contract so that none will be rendered meaningless." Id. (quoting J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003)); see also Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). We begin with the contract's express language. Italian Cowboy, 341 S.W.3d at 333. In construing a contract, "[w]e give . . . terms their plain and ordinary meaning unless the [contract] indicates that the parties intended a different meaning." Dynegy Midstream Servs., Ltd. P'ship v. Apache Corp., 294 S.W.3d 164, 168 (Tex. 2009); see also U.S. Denro Steels v. Lieck, 342 S.W.3d 677, 682 (Tex. App.—Houston [14th Dist.] 2011, pet. denied). "If the written instrument is so worded that it can be given a certain or definite legal meaning or interpretation, then it is not ambiguous and the court will construe the contract as a matter of law." Italian Cowboy, 341 S.W.3d at 333 (quoting Coker, 650 S.W.2d at 393); see also John Wood Grp. USA, Inc. v. ICO, Inc., 26 S.W.3d 12, 16 (Tex. App.—Houston [1st Dist.] 2000, pet. denied). Only when a contract is ambiguous may a court consider the parties' interpretation and admit extraneous evidence to determine its true meaning. Italian Cowboy, 341 S.W.3d at 333-34.
"The intent of the parties to be bound is an essential element of an enforceable agreement and is often a question of fact," but where the "intent is clear and unambiguous on the face of the agreement, it may be determined as a matter of law." John Wood Grp., 26 S.W.3d at 16. We determine whether a contract is ambiguous by examining it as a whole in light of the circumstances present when it was executed by the parties. Sun Oil Co. v. Madeley, 626 S.W.2d 726, 731 (Tex. 1981); U.S. Denro Steels, 342 S.W.3d at 683. We also bear in mind the particular business activity to be served, and, when it is possible and proper to do so, we avoid a construction that is unreasonable and inequitable. Reilly v. Rangers Mgmt., Inc., 727 S.W.2d 527, 530 (Tex. 1987); U.S. Denro Steels, 342 S.W.3d at 682.
Article V of the Purchase Agreement specified Cypress's duty to provide to Fazio during the first ten days of the designated due diligence period certain defined Documents having to do with the condition of the Property; and it set out the parameters of that duty, including its disclaimer of responsibility for the accuracy and completeness of the defined Documents, all of which dealt with the condition of the Property, not with the economics of the purchase transaction.
Section 5.2 of the Purchase Agreement, titled "Document Review," which set out the only disclaimer in the body of the Purchase Agreement, was restricted by its own terms to a disclaimer of reliance on "the truth, accuracy, or completeness of the Documents" and, "[e]xcept with respect to any express warranties made in this Agreement," to a disclaimer of reliance and waiver of liability for "representations or warranties, express or implied, statements of fact, and other matters contained in the Documents." The "Documents" to which the disclaimer referred were expressly defined in the Purchase Agreement as "(i) copies of the Lease and all amendments thereto; (ii) the Survey; (iii) copies of any Plans; (iv) to the extent allowed by the author, copies of all existing soil, engineering, architectural, and environmental reports covering the Property in Seller's possession; (v) copies of all Service Contracts, if any; and (vi) copies of all Permits."
The defined Documents to which the disclaimer expressly applied did not include financial documents. Thus, the only bases for concluding that the disclaimer of reliance in the Purchase Agreement clearly and unequivocally waived Cypress's duty to disclose to Fazio material information in its possession are the sentence following the statement in the disclaimer that "Seller has not made and does not make any warranty or representation regarding the truth, accuracy, or completeness of the Documents or the source(s) thereof" which states, "Except with respect to any express warranties made in this Agreement, Seller expressly disclaims and Purchaser waives any and all liability for representations and warranties, express or implied, statements of fact, and other matters contained in the Documents, or for any omissions from the Documents, or in any other written or oral communication transmitted or made available to Purchaser" and the similarly general statement at the end of the paragraph, which states, "Except with respect to any express warranties made in this Agreement, Purchaser shall rely solely upon its own investigation with respect to the Property, including, without limitation, the Property's physical, environmental, or economic condition, compliance or lack or compliance with any ordinance, order, permit, or regulation or any other attribute or matter relating thereto."
We conclude that the disclaimer of reliance clearly and unequivocally expresses Fazio's intent to rely on his own and his agents' inspections of the "Real Property" and to waive reliance on the accuracy and completeness of the defined Documents regarding the condition of the Real Property, but that it is unreasonable as a matter of law to read the two boiler-plate general statements in the disclaimer in Article V, dealing with property inspections, as clearly and unequivocally waiving Fazio's right to rely on Cypress's fulfillment of its common law and contractual duty to disclose all material financial information about the Garden Ridge store in its possession. Under the principle of ejusdem generis, "[W]hen words of a general nature are used in connection with the designation of particular objects or classes of persons or things, the meaning of the general words will be restricted to the particular designation." See State v. Fid. & Deposit Co. of Md., 223 S.W.3d 309, 312 (Tex. 2009) (per curiam); Hilco Elec. Coop. v. Midlothian Butane Gas Co., 111 S.W.3d 75, 81 (Tex. 2003). Likewise, under the principle of expressio unius est exclusio alterius, or "the expression of one is the exclusion of the other," "it is a settled rule that the express mention or enumeration of one person, thing, consequence or class is equivalent to an express exclusion of all others." Johnson v. Second Injury Fund, 688 S.W.2d 107, 108–09 (Tex. 1985) (quoting State v. Mauritz-Wells Co., 175 S.W.2d 238, 241 (Tex. 1943)).
The disclaimer of reliance in the section of the Purchase Agreement entitled "Document Review" can only reasonably be read as limited by the title, language, and subject matter of Article V of the Purchase Agreement, by the title, language, and subject matter of the disclaimer itself, and by the rules of contract construction to Fazio's disclaimer of reliance on "omissions from the Documents," a defined term in the disclaimer, and on "any other written or oral communications transmitted or made available to Purchaser." Thus, the disclaimer is limited to omissions and communications with respect to the Lease, the survey, copies of any Plans, existing soil, engineering, architectural, and environmental reports, service contracts, and permits in Cypress's possession. Likewise, in this context, the general statement—that "[e]xcept with respect to any express warranties made in this Agreement" Fazio was relying "solely upon [his] own investigation with respect to the Property, including, without limitation, the Property's physical, environmental, or economic condition, compliance or lack of compliance with any ordinance, order, permit, or regulation or any other attribute or matter relating thereto"—clearly refers to Fazio's agreement to rely on his own investigation of the condition of the Real Property and does not express his intention to waive reliance on the truthfulness and completeness of Cypress's disclosures of economic information in its possession regarding the Garden Ridge purchase transaction.
We conclude that the disclaimer does not clearly and unequivocally express Fazio's intention to waive either Cypress's duty of disclosure under the terms of the LOI or Cypress's common law duty to disclose fully and truthfully, and not to actively and misleadingly conceal, material financial information about the Property in its possession which it knew Fazio did not know of and did not have an equal opportunity to discover. See Italian Cowboy, 341 S.W.3d at 339 ("[C]ommercial tenants are entitled to rely on the fact that a landlord will not actively conceal material information."); see also Bradford, 48 S.W.3d at 754–55; Prudential, 896 S.W.2d at 162 (holding that buyer is not bound by agreement to purchase something "as is" that he is induced to make by fraudulent representation or concealment of information by seller).
Similarly, the standard boiler-plate "as is" clause in the Purchase Agreement is expressly limited by its terms to Fazio's agreement "to accept the property 'as is,' 'where is,' and 'with all faults', subject to any physical or environmental condition which may exist, and without the existence of and reliance on any representation or warranty by Seller." This "as is" clause, by its own terms, is limited to the physical or environmental condition of the Property. It does not, under any reasonable construction, waive reliance on Cypress's duty under the LOI to disclose the complete financial condition of the Property. See Italian Cowboy, 341 S.W.3d at 340–41; Schlumberger, 959 S.W.2d at 181; Prudential, 896 S.W.2d at 162.
Nor can the standard boiler-plate merger clause in the Purchase Agreement be reasonably interpreted as waiving Fazio's fraudulent inducement claim. See Italian Cowboy, 341 S.W.3d at 334 (holding that when parties have merely recited "the provisions of a standard merger clause," they have not shown intent to include disclaimer of reliance on representations) (citing 11 SAMUEL WILLISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS § 33.21 (4th ed. 1999) ("Recitations to the effect that a written contract is integrated, that all conditions, promises, or representations are contained in the writing . . . are commonly known as merger or integration clauses.")). This is particularly the case where the LOI expressly stated that its terms became "binding on both parties" only upon execution of the formal Purchase Agreement.
We hold that neither the disclaimer of reliance, nor the "as is" clause, nor the merger clause in the Purchase Agreement contains "clear and unequivocal language expressly disclaiming reliance on representations, and representing reliance on one's own judgment" that waived Fazio's fraudulent inducement claim based on Cypress's concealment of economic information material to the purchase of the Garden Ridge store. Therefore, the first prong of the two-part test for Fazio's waiver of reliance on Cypress's disclosures was not met.
2. Whether the disclaimer was effective to negate Fazio's reliance on Cypress's disclosure of financial information given the circumstances surrounding formation of the contract
Because the first prong of the Schlumberger and Forest Oil test of waiver of reliance was not met in this case, we need not review the circumstances surrounding the formation of the parties' agreement under the remaining Forest Oil factors. See id. at 337 n.8 (holding that only where there is clear and unequivocal disclaimer of reliance must analysis "proceed to 'the circumstances surrounding [the contract's] formation,' in order to determine whether such a provision is binding on the parties involved"); see also Schlumberger, 959 S.W.2d at 179 (holding that clear and unequivocal language is necessary to bar fraudulent inducement claim).
However, the dissent disagrees with our analysis and would hold that, by executing the Purchase Agreement with its disclaimer and merger clauses, Fazio did clearly and unequivocally waive reliance on the completeness and truthfulness of Cypress's disclosure of economic information material to his purchase of the Property.
The dissent would also hold that the remaining Forest Oil factors support the finding that Fazio waived reliance on Cypress's full and truthful disclosure of economic information related to the Property. See Forest Oil, 268 S.W.3d at 60 (holding following as relevant factors: negotiation of contract terms rather than boilerplate, specific discussion of topic at issue, representation of complainant by counsel, arm's length transaction, parties' knowledge of business matters, and clarity of release language); Schlumberger, 959 S.W.2d at 179 (setting out two-part test for disclaimer of reliance's waiver of fraudulent inducement claims). Therefore, we address the Forest Oil factors in the context of our response to the dissent.
It is undisputed that both Fazio and Cypress were knowledgeable in business matters and that the transaction was one made at arm's length. See Forest Oil, 268 S.W.3d at 60. However, there is no evidence in the record that the terms of the disclaimer, "as is" clause, and merger clause in the Purchase Agreement were negotiated rather than mere boilerplate. See id. Nor does the record reflect any specific discussion of Fazio's waiver of Cypress's duty to disclose economic information. See id. To the contrary, the disclaimer in the Purchase Agreement is limited by its plain language to a disclaimer of reliance on the truthfulness and completeness of the defined Documents, while the LOI—not the Purchase Agreement—reflects Cypress's express undertaking to provide to Fazio all information in its possession material to the purchase of the Property and expressly states the parties' intention to incorporate that duty into the Purchase Agreement as a binding obligation upon execution and delivery of that Agreement. The record also reflects that Fazio requested all economic information concerning the Property and the Garden Ridge store and had meetings with Cypress and Garden Ridge agents and employees to discuss the economic condition of the Garden Ridge store. And it reflects that throughout the investigation period, material economic information of which Cypress had firsthand knowledge was actively concealed by Cypress, Garden Ridge, and Cypress agents. See Italian Cowboy, 341 S.W.3d at 339. Finally, the Purchase Agreement contained no release of claims.
The dissent, however, argues, contrary to the express language of the LOI making that agreement binding on the parties upon the execution and delivery of the Purchase Agreement, that "[t]he due diligence terms of the LOI, including the provision that '[t]he Seller will provide Buyer with all information in their possession,' did not become binding obligations of the seller upon the execution of the Purchase Agreement." Dissent at 3. The dissent continues, "Instead, as the parties expressly contemplated at the time the LOI was executed, and as routinely occurs in such transactions, the terms of the LOI were displaced by and replaced with the terms of the Purchase Agreement." Dissent at 4.
First, contrary to the dissent's claim that the terms of the LOI were displaced by and replaced with the terms of the Purchase Agreement, it is well established that "parties may agree upon some of the terms of a contract, and understand them to be an agreement, and yet leave other portions of an agreement to be made later." Scott v. Ingle Bros. Pac., Inc., 489 S.W.2d 554, 555 (Tex. 1972); see also Foreca, S.A. v. GRD Dev. Co., 758 S.W.2d 744, 746 (Tex. 1988) (stating that agreement simply to enter into negotiations for contract later does not create enforceable contract, but "parties may agree upon some of the terms of a contract, and understand them to be an agreement, and yet leave other portions of an agreement to be made later"). The parties may also "fully agree upon the terms of a contract knowing that there are other matters on which they have not agreed and on which they expect further negotiation," without rendering the agreement already made unenforceable. Scott, 489 S.W.2d at 556 (quoting CORBIN ON CONTRACTS (1963) 93–95); see Kelly v. Rio Grande Computerland Grp., 128 S.W.3d 759, 767 (Tex. App.—El Paso 2004, no pet.) (same). "Similarly, a letter of intent may be binding even though it refers to the drafting of a future, more formal agreement." Kelly, 128 S.W.3d at 767; see also Foreca, 758 S.W.2d at 746; John Wood Grp., 26 S.W.3d at 19. This may be true even though the parties expressly provide in their agreement that the new matters, when agreed upon, will be incorporated into a formal document along with the contract already made. Scott, 489 S.W.2d at 556.
Second, even though the parties to a contract execute a merger clause that memorializes their intent to integrate or absorb their prior negotiations, agreements, or understandings concerning the same subject matter into a subsequent written contract, the parol evidence rule does not bar enforcement of prior or contemporaneous agreements that are collateral to the integrated agreement and do not vary or contradict the express or implied terms or obligations of the integrated agreement. See Kelly, 128 S.W.3d at 767–69; Fish v. Tandy Corp., 948 S.W.2d 886, 898-901 (Tex. App.—Fort Worth 1997, writ denied).
"Before one contract is merged into another, the last contract must be between the same parties as the first, must embrace the same subject matter, and must have been so intended by the parties." Kelly, 128 S.W.3d at 768–69 (emphasis in original) (holding that merger clause in Purchase Agreement which stated that it merged all previous negotiations and constituted the entire agreement and understanding between parties "with respect to the subject matter of this Agreement" did not supersede Letter of Intent where benefits flowing to Kelly were expressed in LOI but not in Purchase Agreement); Fish, 948 S.W.2d at 898– 99 (holding that LOI did not merge into distributorship agreement). The parties' intent is often a question of fact, but "where the intent to be bound is clear and unambiguous on the face of the agreement, [intent] may be determined as a matter of law." John Wood Grp., 26 S.W.3d at 16; see Foreca, 758 S.W.2d at 745–46.
Here, the LOI required Cypress to produce all information in its possession, including, but not limited to, certain Documents, so that Fazio could perform his due diligence with respect to all aspects of the purchase transaction. Article V of the Purchase Agreement allocated responsibilities to the parties regarding the inspection of the Property. And the only disclaimer in the Purchase Agreement— the one set out in Article V—specifically disclaimed reliance on the accuracy and completeness of Cypress's production of expressly defined Documents specific to the Property, namely, the Lease, the Survey, Plans, soil, engineering, architectural, and environmental reports on the Property, Service Contracts, Permits, and communications related to the subject matter of those Documents. The terms of Article V of the Purchase Agreement, setting the parameters of Cypress's duty with respect to Fazio's inspection of the Property, can thus only reasonably be construed as collateral to the terms of the LOI and not as terms that varied from or contradicted the terms of the LOI, including the term requiring Fazio to produce all financial information in its possession material to the purchase. Thus, the conditions for merger of the terms of the LOI into the Purchase Agreement were not met, as the dissent would hold. See Kelly, 128 S.W.3d at 768-69; Fish, 948 S.W.2d at 898-99.
Moreover, the intention of the parties to be bound by the terms of the LOI upon the execution of the Purchase Agreement was clearly and unambiguously stated in the LOI, which provided, "Terms and conditions set forth in this proposal shall not be binding on both parties until and unless a formal Purchase Agreement is executed and delivered to both parties." (Emphasis added.) See Kelly, 128 S.W.3d at 767; see also Foreca, 758 S.W.2d at 746; John Wood Grp., 26 S.W.3d at 19 (letter of intent may be binding even though it refers to drafting of future, more formal agreement). To construe that language as providing that the terms of the LOI are merged into the Purchase Agreement and extinguished by the disclaimer and standard merger clause is to contradict the plain language of the LOI, which we may not do under the rules of contract construction. See Dynegy Midstream Servs., 294 S.W.3d at 168; see also Kelly, 128 S.W.3d at 768-69. This construction also renders meaningless the express intention of the parties to the LOI that Cypress provide to Fazio all information in its possession during the due diligence period in fulfillment of the terms of the LOI as a condition of enforcement of the Purchase Agreement, which is likewise forbidden. See Italian Cowboy, 341 S.W.3d at 333. A court will not read any part of an agreement so as to render it meaningless. Id.; J.M. Davidson, Inc., 128 S.W.3d at 229. The dissent's argument that the terms of the LOI were merged into and displaced by the terms of the Purchase Agreement is thus untenable.
We, therefore, disagree with the dissent that the merger clause, the disclaimer of reliance, and the "as is" clauses in the Purchase Agreement barred Fazio's fraudulent inducement claim. Rather, Cypress's contractual duty to produce to Fazio all information in its possession material to the purchase of the Property became binding upon the execution of the Purchase Agreement and its delivery to all parties, in accordance with the intention of the parties as expressly set out in the LOI. This duty was not displaced by the limited disclaimer, the merger clause, or the "as is" clause in the Purchase Agreement. Nor was Fazio's right to rely on Cypress's fulfillment of its common law duty not to actively conceal material financial information in its possession which it knew he did not have an equal opportunity to discover waived. Examination of the Forest Oil factors, therefore, reinforces our conclusion that the disclaimer, merger, and "as is" clauses in the Purchase Agreement did not "clearly and unequivocally" bar Fazio's reliance on the truthfulness and completeness of Cypress's disclosure of financial information about the Property.
3. Allen v. Devon Energy Holdings, L.L.C.
Cypress, however, contends on rehearing that the majority opinion in this case conflicts with this Court's recent panel opinion in Allen v. Devon Energy Holdings, L.L.C., 367 S.W.3d 355 (Tex. App.—Houston [1st Dist.] 2012, pet. filed). We, therefore, also address the distinction between Allen and this case.
Allen was an oil and gas case. In November 2003, Trever Rees-Jones, the manager and majority owner of Devon Energy Holdings' predecessor company, Chief Holdings, L.L.C. ("Chief"), sent a letter to Allen, a minority shareholder, stating his intent to offer to redeem Allen's shares and attached two reports to the letter, an Appraisal and a Reserve Report. Id. at 367. The November 2003 letter made pessimistic assessments of a number of facts and events that could negatively impact Chief's future value. Id.
Allen accepted Chief's offer to redeem his shares in the company, and the closing on the Redemption Agreement occurred in June 2004. Id. The Agreement contained an Independent Investigation clause, under which Allen recognized that the reports attached to the November 2003 letter were not up-to-date and might not accurately reflect Chief's current value at the time of redemption. Id. In that clause, the parties released each other from "any claims that might arise as a result of any determination that the value of [Allen's] Interest at the [redemption] Closing was more or less than the Redemption Price." Id. at 368. "The [R]edemption [A]greement [also] contain[ed] mutual releases under which Allen and Chief [agreed to] 'fully and finally and forever settle, release and discharge each other' from 'any and all claims, demands, rights, liabilities and causes of action of any kind or nature' relating to the [R]edemption [A]greement, excluding breach of contract claims." Id.
Two years after Allen redeemed his minority interest in Chief, the company sold for almost twenty times the value used to calculate the redemption price. Id. at 367. Alleging that Rees-Jones had fraudulently induced him to redeem his shares, Allen sued Chief and Rees-Jones for securities violations, statutory and common law fraud, breach of fiduciary duty, and shareholder oppression. Id. at 365. He contended that the defendants had withheld information concerning technological advances in horizontal drilling and the company's significant lease acquisitions in an area of an existing natural gas field that had occurred in the eight months between the time of the redemption offer and the redemption of his shares. Id. at 366. The defendants responded that, in the November 2003 letter, the parties had contractually allocated to Allen the responsibility for investigating and evaluating his decision to redeem his shares and that, therefore, he could not claim that he based his decision on Rees-Jones's analysis rather than his own. Id.
This Court examined the representations in the November 2003 letter on which Allen based his claims and concluded that most were non-actionable statements of opinion, but that certain representations about the state of drilling technology and its effect on the profitability of drilling in the expansion area, were no longer accurate at the time of the redemption closing and were actionable. Id. at 372–76. The Court then examined the detailed disclaimer in the "Independent Investigation" clause in the June 2004 Redemption Agreement, in which Allen acknowledged and agreed, inter alia, that he had "received and read the Appraisal and the Reserve Report and has had the opportunity to obtain any additional information (including information concerning events occurring after the dates of the Appraisal and Reserve Report) necessary to permit him to evaluate the Company's proposal to acquire the Interest, and he has had an opportunity to discuss the Appraisal, the Reserve Report and such additional information with representatives of [Chief], the preparers of those reports and his own advisors and consultants and obtain answers to any questions that he may have had." Id. at 377 n.18.
The Allen panel held that the Redemption Agreement lacked a number of provisions that would provide more clarity but that "it clearly disclaims reliance on representations concerning the redemption price, the bases for that price (the Phalon appraisal and the Haas reserve report), and whether those documents accurately reflected the value of Chief or its assets." Id. at 380. Thus, those claims were barred. See id. at 388. However, the Court permitted the claims to go forward in the area of technological advances in horizontal drilling and the company's significant lease acquisitions. See id.
Unlike this case, the Allen opinion reflects a negotiated disclaimer of reliance in which Allen clearly and unequivocally acknowledged and specifically agreed that the Appraisal and Reserve Report were "estimates of value and reserves only and could differ from the value and reserves that might be determined in some other context by some other appraiser, engineer or other party," and he acknowledged that he had done his own due diligence investigation and had based his decision on his own expertise and judgment and "the advice and counsel of his own legal, tax, economic, engineering, geological and geophysical advisors and consultants." Id. at 377 n.18. Moreover, Allen acknowledged that he had the opportunity to obtain any additional information necessary to permit him to evaluate the redemption offer. See id. Finally, the parties specifically released each other "from any claims that might arise as a result of any determination that the value of the Interest at the Closing was more or less than the Redemption Price." Id.
Here, there is no evidence that the disclaimer was negotiated, and the Purchase Agreement contains no specific disclaimer of reliance on the truthfulness and completeness of the economic information Cypress was obligated to produce to Fazio by the common law and the LOI. Nor did the Purchase Agreement contain Fazio's acknowledgement that he had the opportunity to obtain any additional information necessary to permit him to evaluate the economic condition of the Property, and the record establishes the contrary, namely, that Cypress actively concealed material economic information that it had a duty to disclose. Finally, there was no mutual release of claims in the Purchase Agreement at issue in this case.
Far from conflicting with Allen, the majority opinion in this case complements it. We agree with the Allen panel that, to preclude a fraudulent inducement claim, the language of a disclaimer of reliance must satisfy the clarity requirement set out in Schlumberger and Forest Oil. See id. at 377. Here, the disclaimer of reliance in the Purchase Agreement did not meet that test. We also agree that the circumstances surrounding formation of the contract must evince the agreement of the parties that the plaintiff is relying exclusively on his own investigation and that he knowingly waives reliance on representations or omissions of the type on which the plaintiff's claims are based. See id. at 380. Here, the circumstances fail to support the conclusion that Fazio knowingly waived reliance on either the truthfulness or the completeness of Cypress's disclosure of financial information material to the purchase of the Garden Ridge store.
We hold that the merger clause, disclaimer of reliance, and "as is" clauses in the Purchase Agreement do not bar Fazio's fraudulent inducement claim. We further hold that the fraud findings made by the jury in response to Questions 1 and 2 were material and supported by the evidence and were not rendered immaterial by the disclaimer of reliance, merger clause, or "as is" clause in the Purchase Agreement. Therefore, the trial court erred in entering JNOV on Fazio's fraudulent inducement claim.
We sustain Fazio's first and second issues.
Damages
Fazio's remaining issues address the issue of damages.
A. Measure of Damages
In his third issue, Fazio argues that the damages awarded by the jury were recoverable under either the "out-of-pocket" or "rescission/restitution" measure of damages for fraudulent inducement. The jury found, in response to Question 2, that $3,961,524.60, representing the difference between the price Fazio paid for the Property and the amount he received when he sold the Property, would fairly and reasonably compensate Fazio for the fraud. Fazio contends that the trial court erred in disregarding the jury's answer to Question 2 on the ground that the measure of damages was not correctly submitted to the jury because Texas law requires the jury to measure fraud damages at the time of the fraudulent transaction and the evidence was legally and factually insufficient to show that Fazio suffered damages at the time the Property was purchased.
Cypress responds that the Property was worth exactly what Fazio paid for it in 2003 and that the instruction to calculate damages from the time Fazio resold the Property more than three years later submits an improper out-of-pocket measure of damages. It argues that Fazio "ignores the black-letter principle that a fraud claim requires a showing of damages, and those damages must be assessed at the time the Property was purchased," citing Arthur Andersen & Co. v. Perry Equipment Corp., 945 S.W.2d 812 (Tex. 1997).
Damages for fraud in the sale of real estate include the "out-of-pocket" measure, which is the difference between the value paid and the value received, and the "benefit of the bargain" measure, which is the difference between the value as represented by the seller and the value received as measured by fair market value. See Formosa Plastics, 960 S.W.2d at 49; W.O. Bankston Nissan, Inc. v. Walters, 754 S.W.2d 127, 128 (Tex. 1988); see also Nelson v. Nahm, 127 S.W.3d 170, 177 (Tex. App.—Houston [1st Dist.] 2003, pet. denied) ("Where there is fraud in the inducement to sign a contract, the injured party may elect damages on the contract or the equitable remedies of rescission or reformation.").
The test of fair market value is the price that would in all likelihood be agreed upon by a willing buyer and a willing seller, neither of whom is under any compulsion to buy or sell. ITT Commercial Fin. Corp. v. Riehn, 796 S.W.2d 248, 253 (Tex. App.—Dallas 1990, no writ). Restitution has also been permitted to ensure that the plaintiff is made whole when injured by the defendant's misrepresentations. See Henry S. Miller Co. v. Bynum, 836 S.W.2d 160, 162–63 (Tex. 1992) (holding, in DTPA case, that evidence supported award of damages in total amount of plaintiff's capital investment in lease venture for beauty shop, minus amount plaintiff received back from venture, including money received when plaintiff sold beauty shop business, as part of plaintiff's "actual loss" even though plaintiff did not present evidence to support "out-of-pocket" or "benefit-of-the-bargain" measure of damages). The concurring opinion in Bynum explained the standard of proof for damages for a wrongful act, such as misrepresentation, succinctly:
"Direct damages," also known as "general damages," compensate for the loss, damage or injury that is conclusively presumed to have been foreseen or contemplated by the party as a consequence of his breach of contract or wrongful act. For misrepresentation, there are two recognized measures of direct damages. The "out of pocket" measure, which operates on a restitutionary theory, measures the difference between the value of that which was parted with and the value of that which was received. The "benefit of the bargain" measure, which utilizes an expectancy theory, evaluates the difference between the value as represented and the value actually received.Bynum, 836 S.W.2d at 163 (Phillips, C.J., concurring) (citing Nobility Homes of Tex., Inc. v. Shivers, 557 S.W.2d 77, 78 n.1 (Tex. 1977) and W.O. Bankston Nissan, 754 S.W.2d at 128).
Here, the jury was instructed to determine the sum of money that would fairly and reasonably compensate Fazio for his injuries, measured as "[t]he difference between the price the Fazios paid for the Property and the amount they received when they sold the Property." This is a proper measure of actual damages for Cypress's fraud on an out-of-pocket theory. See Bynum, 836 S.W.2d at 162-63; Nelson, 127 S.W.3d 170, 177. The jury awarded Fazio the difference between the price he paid for the Property and the amount he received when he sold the Property. We hold that there was some evidence to support the jury's finding of damages in response to Question 2, and, therefore, the trial court erred in granting JNOV on this issue. See Tiller, 121 S.W.3d at 713.
We sustain Fazio's third issue.
B. Apportionment of Liability
In his fourth issue, Fazio argues that the evidence was sufficient to show that Cypress Equities, Inc., Cypress/GR Houston I, L.P. and Cypress/GR Houston, Inc. operated as a single business enterprise and that Cypress Equities was the agent for the seller and was 100% responsible for the harm to Fazio, as found by the jury in response to Questions 3 and 4; therefore, the trial court erred in disregarding the jury's answers to these questions and in granting JNOV and a take-nothing judgment.
In Question 3, the jury was asked to find the percentage of responsibility attributable to each of the Cypress defendants, Joe Fazio, Silver, and Banks in causing or contributing to cause the harm, if any, found in response to Question 2. The jury answered that Cypress Equities was 100% responsible for the harm to Fazio.
In Question 4, the jury was instructed that each of the Cypress defendants was individually responsible for the acts of all of the Cypress entities if they operated as a "single business enterprise" and that "[a] single business enterprise may be found when two or more corporations are not operated as separate entities, but rather integrate their resources to achieve a common business purpose." The jury was instructed to consider the following factors: whether the Cypress entities had common employees, common offices, common record keeping, centralized accounting, payment of wages by one corporation to another corporation's employees, common business names, services rendered by the employees of one corporation on behalf of another, undocumented transfers of funds between corporations, unclear allocation of profits and losses between the corporations, the same officers, the same shareholders, and/or the same telephone number.
The "single business enterprise" theory "applies whenever two corporations coordinate operations and combine resources in pursuit of the same business purpose." SSP Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 452 (Tex. 2008). Proof of a single business enterprise is not enough, however, to impose joint liability on separate entities. Id. "The corporate form normally insulates shareholders, officers, and directors from liability for corporate obligations . . . ." Castleberry v. Branscum, 721 S.W.2d 270, 271 (Tex. 1986). However, the corporate veil may be pierced and one entity held liable for the debts of another when, among other circumstances, "a corporation is organized and operated as a mere tool or business conduit of another." Id. at 272. "Alter ego applies when there is such unity between corporation and individual that the separateness of the corporation has ceased and holding only the corporation liable would result in injustice." Id. Alter ego "is shown from the total dealings of the corporation and the individual, including the degree to which corporate formalities have been followed and corporate and individual property have been kept separately, the amount of financial interest, ownership and control the individual maintains over the corporation, and whether the corporation has been used for personal purposes." Id.
Parties are not jointly liable for a corporation's obligations "merely because they were part of a single business enterprise," i.e., "merely because of centralized control, mutual purposes, and shared finances." SSP Partners, 275 S.W.3d. at 452, 455. Rather, "[d]isregarding the corporate structure involves two considerations": (1) "the relationship between [the] two entities" and (2) "whether the entities' use of limited liability was illegitimate." Id. at 455. Parties are jointly liable when the corporate structure is shown to be a fraud. See id.
SSP Partners was decided on November 14, 2008, almost a year after the instant case was tried, in January 2008. SSP Partners disavowed the sufficiency of proof of a single business enterprise to support the imputation of liability to a different entity or person on an alter ego theory, but the additional steps it required to impute liability on an alter ego theory were reflected in this case in the instructions to the jury on Questions 1 and 4.
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In Castleberry, the supreme court held that a showing of constructive fraud was enough to show an illegitimate use of the limited liability afforded corporations under a single business enterprise theory of liability. 721 S.W.2d at 273. In SSP Partners, it observed that the Texas Legislature "has since rejected that view in certain cases" and held that "the single business enterprise liability theory is fundamentally inconsistent with the approach taken by the Legislature in [Article 2.21 of the Texas Business Corporations Act]." 275 S.W.3d at 455–56. To pierce the corporate veil and impose liability under an alter ego theory of liability under SSP Partners, a plaintiff must show not only that the persons or entities on whom it seeks to impose liability are alter egos of the debtor, it must show also that the corporate fiction was used for an illegitimate purpose. See id. at 455-56 & n.57.
To satisfy the first consideration in piercing the corporate veil—whether the persons or entities sought to be charged with liability are alter egos of the primary debtor—the relationship between corporate entities can be assessed using factors such as:
• whether the entities shared a common business name, common offices, common employees, or centralized accounting;See Asshauer v. Glimcher Realty Trust, 228 S.W.3d 922, 934 (Tex. App.—Dallas 2007, no pet.); Paramount Petroleum Corp. v. Taylor Rental Ctr., 712 S.W.2d 534, 536 (Tex. App.—Houston [14th Dist.] 1986, writ ref'd n.r.e.).
• whether one entity paid the wages of the other entity's employees;
• whether one entity's employees rendered services on behalf of the other entity;
• whether one entity made undocumented transfers of funds to the other entity; and
• whether the allocation of profits and losses between the entities is unclear.
Here, the jury charge in Question 1—regarding fraud—and Question 4— regarding piercing the corporate veil—included both prongs of the proof of liability of one business entity for the debts of another under an alter ego theory. The evidence showed that the LOI was negotiated by, "agreed and accepted" by, and signed by Cypress Equities as Seller of the Property. The Purchase Agreement was executed by Cypress/GR Houston I, L.P. as Seller. The evidence further showed that Cypress Equities was solely responsible for developing and marketing the Property. Cypress Equities' President, Maguire, made the decision to sell the Property; its employees, including Maguire and Claro, communicated with potential buyers and their agents, including Fazio's agents, Silver and Banks; Cypress Equities negotiated and executed the LOI and obtained a confidentiality agreement regarding disclosure of Garden Ridge's financial information; it conducted discussions with Garden Ridge regarding its financial condition; it negotiated the sales price of the Property; it closed the transaction; its employee, Claro, was the principal contact person for Cypress for the sale to Fazio; and one of its employees was primarily responsible for handling the sale. The Property's owner, Cypress/GR Houston I, L.P., was a single-purpose entity created to own the property. It had no employees and no assets.
We hold that the evidence was sufficient to support the jury's finding, in response to Question 4, that the Cypress entities, including Cypress Equities and Cypress/GR Houston I, L.P., constituted a single business enterprise and that Cypress/GR Houston I, L.P. and Cypress Equities were alter egos of each other. Under the circumstances of this case, we further conclude that the evidence was sufficient to support the jury's response to Question 3, finding that Cypress Equities was 100% liable for the harm to Fazio and that the other Cypress entities, Cypress/GR Houston I, L.P. and Cypress/GR Houston, Inc., Joe Fazio, and Fazio's agents Silver and Banks, had no responsibility for causing the harm. Therefore, we hold that the trial court erred in disregarding the jury's answers to Questions 3 and 4 and in granting JNOV on the issue of Cypress Equities' 100% responsibility for the harm the fraud caused Fazio.
We sustain Fazio's fourth issue.
C. Exemplary Damages
In his fifth issue, Fazio argues that there was clear and convincing evidence that the harm to him resulted from Cypress's fraud, justifying the imposition of exemplary damages, and that the amount of exemplary damages awarded to him was within statutory and constitutional limits. Cypress responds that exemplary damages are not available where liability is precluded as a matter of law and that Fazio's fraud claim fails as a matter of law. It cites Wright v. Gifford-Hill & Co., 725 S.W.2d 712 (Tex. 1987). Cypress also argues that there is no clear and convincing evidence of fraud.
In Question 5, the jury was asked whether it found from clear and convincing evidence that the harm to Fazio resulted from fraud. It was given the same instruction on fraud as in Question 1 and was instructed that "'[c]lear and convincing evidence' means the measure or degree of proof that produces a firm belief or conviction of the truth of the allegations sought to be established." It answered, "yes." In Question 6, the jury was instructed that "'exemplary damages' means an amount that you may in your discretion award as a penalty or by way of punishment," and it was instructed on the factors to be considered: the nature of the wrong, the character of the conduct involved, the degree of culpability of Cypress Equities, the situation and sensibilities of the parties, the extent to which Cypress Equities' conduct offended a public sense of justice and propriety, and the net worth of Cypress Equities. In response to Question 6, asking it for the sum of money in exemplary damages it awarded, the jury answered, "$667,000.00."
Exemplary damages may be awarded for fraud only if the claimant's evidence of fraud is clear and convincing. TEX. CIV. PRAC. & REM. CODE ANN. § 41.003 (Vernon Supp. 2011). Clear and convincing evidence is "proof that will produce in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established." Id. § 41.001(2) (Vernon 2008). The finder of fact must consider the nature of the wrong, the character of the conduct involved, the degree of culpability of the defendant, the situation and sensibilities of the parties involved, the extent to which the defendant's conduct offended a public sense of justice and propriety, and the net worth of the defendant. Id. § 41.011(a) (Vernon 2008). Exemplary damages awarded against a defendant may not exceed an amount equal to the greater of either two times the amount of economic damages plus an amount equal to any noneconomic damages found by the jury, not to exceed $750,000, or $200,000. Id. § 41.008 (Vernon Supp. 2011).
Here, the exemplary damages awarded—$667,000—were not greater than two times the amount of economic damages found—$3,961,524.60—and did not exceed $750,000. Therefore, the award did not violate statutory and constitutional constraints. See id. Moreover, the evidence recited above is sufficient to support the jury's finding that the evidence of fraud was clear and convincing and that the nature of the wrong, the degree of Cypress's culpability, the situations and sensibilities of the parties, the extent to which Cypress's conduct offended a public sense of justice and propriety, and Cypress's net worth justified the imposition of the $667,000 in exemplary damages awarded to Fazio. See id. § 41.011. Therefore, we hold that the trial court erred in granting JNOV on the issue of exemplary damages.
We sustain Fazio's fifth issue.
Attorney's Fees
After the trial court granted JNOV, Cypress/GR Houston I filed a motion for attorney's fees against Peter Fazio based on the following provision in the purchase agreement:
Section 7.3 Attorney's Fees.
In the event either party hereto is required to employ an attorney in connection with claims by one party against the other arising from the operation of this Agreement, the non-prevailing party shall pay the prevailing party all reasonable fees and expenses, including attorney's fees incurred in connection with such transaction.
The trial court held two hearings. At the first, it heard evidence from Cypress/GR Houston I that its attorney's fees through judgment in the trial court were $987,934.64 and its expenses were $53,703.58. At the second hearing, the trial court heard legal arguments on whether attorney's fees were recoverable under the agreement, and the court expressed a concern that the phrase "claims . . . arising from the operation of this Agreement" restricted the ability of Cypress/GR Houston I to recover for prevailing on the issue of fraudulent inducement.
As a part of the final judgment, the trial court denied the motion for attorney's fees. Cypress/GR Houston I appeals the denial of the motion, arguing that the fraudulent inducement claim arises from the operation of the agreement.
We hold that the evidence was sufficient to support the jury's findings that all three Cypress defendants were participants in a single business enterprise that defrauded Fazio and that liability for the actions of any of them could be imputed to the others on an alter ego theory. Thus, Cypress was a not prevailing party, as necessary for the recovery of attorneys' fees under section 7.3 of the Purchase Agreement. We hold, therefore, that the trial court did not err in denying Cypress/GR Houston I's motion for attorney's fees.
We overrule Cypress/GR Houston I's issue on appeal.
Conclusion
We reverse the trial court's rendition of judgment notwithstanding the verdict and remand the cause to the trial court to render judgment on the verdict in favor of appellants Peter Fazio, Sherry Fazio, and Eric Fazio in accordance with this opinion. We affirm the portion of the judgment denying appellee Cypress/GR Houston I, L.P.'s motion for attorney's fees.
Evelyn V. Keyes
Justice
Panel consists of Justices Keyes, Sharp, and Massengale. Justice Massengale, dissenting.