Opinion
No. 04-98-00540-CV
Delivered and Filed: July 7, 1999
Appeal from the 79th Judicial District Court, Jim Wells County, Texas Trial Court. No. 96-11-35196. Honorable Terry Canales, Judge Presiding.
Sitting: TOM RICKHOFF, Justice SARAH B. DUNCAN, Justice KAREN ANGELINI, Justice.
Nature of the case
Farid Pharaon and Pharoah Associates, Inc. ("P A") appeal from a judgment awarding Fesco, Inc. $24,994.77 in damages. In the first issue, Pharaon and P A argue that venue was improper. In the second issue, Pharaon and P A assert that the court's judgment based upon the failure to file verified denials was erroneous. In the third, fourth, fifth, and sixth issues, Pharaon and P A contend that no evidence or insufficient evidence supports the judgment. In the seventh issue, Pharaon and P A allege that the court abused its discretion by not re-opening the merits of the case.Factual Background
Poly O Energy, Inc. contracted with Fesco to provide fishing services at a well site in Duval County. After services were rendered, Poly O Energy failed to pay Fesco's invoices and Fesco filed suit for a sworn account debt of approximately $18,000. In response to the suit, Poly O Energy contended that Fesco's services were defective. Before trial, Fesco amended its petition to add Pharaon and P A as defendants. Pharaon was the president and sole shareholder of Poly O Energy and the president and sole shareholder of P A. Fesco alleged that Pharaon was liable under the alter ego theory and that he used Poly O Energy to perpetrate a fraud. With regard to P A's liability, Fesco urged that P A was liable under the single business enterprise theory. On September 2, 1997, the case was tried to the bench. The majority of the evidence centered around the services provided by Fesco and whether the job was performed in a timely manner. After hearing testimony concerning the quality of Fesco's services, the court rendered judgment against Poly O Energy for the amount of Fesco's invoices. The court then proceeded to hear testimony from Pharaon concerning the operations of Poly O Energy and P A. Because the trial court was unfamiliar with Fesco's theories of liability, the court recessed the trial to review authorities cited by Fesco. The court also ordered Pharaon to produce tax returns for both companies. Although Pharaon produced the tax returns, they were never admitted into evidence. On March 18, 1998, the Court heard Fesco's motion to enter judgment. The court entered judgment against Poly O Energy, Pharaon, and P A, jointly and severally for the principal amount of $18,303.19, pre-judgment interest in the amount of $1,691.58, and $5,000 in attorney's fees. Although we have no reporter's record, the parties agree that the court rendered judgment against Pharaon and P A because they did not file verified denials as to the capacity in which they were sued as required by Rule 93(2). See Tex. R. Civ. P. 93(2). Pharaon and P A filed a motion for new trial which was denied at a hearing on May 20, 1998. Because Pharaon and P A failed to timely request findings of fact and conclusions of law, they filed a motion for enlargement of time to request findings of fact and conclusions of law. Appellants contend that the court orally granted the motion for enlargement of time at the new trial hearing and instructed the parties to submit their respective finding of facts and conclusions of law. Although the parties submitted findings of fact and conclusions of law, the court did not issue any findings of fact or conclusions of law.Verified denial
In their second issue, Pharaon and P A contend that the judgment against them based on their failure to file verified denials was erroneous. Fesco argues that Pharaon and P A were required to file verified denials that they were not liable in the capacity in which they were sued. See Tex. R. Civ. P. 93(2). Rule 93(2) provides in pertinent part:A pleading setting up any of the following matters, unless the truth of such matters appear of record, shall be verified by affidavit.
(2) That the plaintiff is not entitled to recover in the capacity in which he sues, or that the defendant is not liable in the capacity in which he is sued.Id. (emphasis added). Because Pharaon and P A failed to file a verified denial asserting lack of capacity, Fesco urges that they waived any complaint of a judgment rendered in the capacity in which they were sued. See Werner v. Colwell, 909 S.W.2d 866, 870 (Tex. 1995). Pharaon and P A, however, were not required to file verified denials of capacity because they had no reason to deny capacity. Fesco sued Pharaon and P A in the proper capacity — Pharaon as an individual and P A as a corporation. If they were liable at all, they were liable in the capacities in which they were sued. The alter ego and single business enterprise allegations were theories of liability which Fesco had the burden to prove. If Fesco was able to prove these theories of liability, Pharaon would be liable in his individual capacity and P A would be liable in its corporate capacity. Thus, the judgment cannot be upheld on the basis of Pharaon's and P A's failure to file verified denials. We sustain the second issue.
Sufficiency of the evidence
In the third, fourth, fifth, and sixth issues, Pharaon and P A contend that no evidence or insufficient evidence exists to support the judgment. Although findings of fact and conclusions of law were not filed in this case, a reporter's record was filed and, therefore, the implied findings may be challenged by legal and factual sufficiency points. See Roberson v. Robinson, 768 S.W.2d 280, 281 (Tex. 1989). To determine whether there is legally sufficient evidence, all the record evidence and inferences must be viewed in a light most favorable to the finding. Formosa Plastics Corp. USA v. Presidio Engineers Contractors, Inc., 960 S.W.2d 41, 48 (Tex. 1998). Anything more than a scintilla of evidence is legally sufficient to support the finding. Id. In reviewing factual sufficiency issues, the reviewing court considers all of the evidence to determine whether the findings are so against the great weight and preponderance of the evidence as to be manifestly unjust. Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986); In re King's Estate, 150 Tex. 662, 244 S.W.2d 660, 661 (1951). In its petition, Fesco alleged that Pharaon committed fraud and used the corporate fiction to achieve an inequitable result and to conceal a fraud. Fesco contends that Poly O Energy was used as a sham to perpetrate a fraud and, therefore, recognition of the separate corporate existence of Poly O Energy should be disregarded. See Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex. 1986) (finding that constructive fraud is sufficient to hold a shareholder liable for using the corporate fiction as a sham to perpetrate a fraud). As far as P A's liability, Fesco alleged that Poly O Energy and P A were operated as the same corporation and, therefore, P A should be liable under the single business enterprise theory. Article 2.21 of the Business Corporation Act overruled the use of constructive fraud set forth in Castleberry. See Farr v. Sun World Savings Ass'n, 810 S.W.2d 294, 296 (Tex.App.El Paso 1991, no writ). Article 2.21 provides in pertinent part:A. A holder of shares, an owner of any beneficial interest in shares, or a subscriber for shares whose subscription has been accepted, or any affiliate thereof or of the corporation, shall be under no obligation to the corporation or to its obligees with respect to:
(2) any contractual obligation of the corporation or any matter relating to or arising from the obligation on the basis that the holder, owner, subscriber, or affiliate is or was the alter ego of the corporation, or on the basis of actual fraud or constructive fraud, a sham to perpetrate a fraud, or other similar theory, unless the obligee demonstrates that the holder, owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, owner, subscriber, or affiliate.Tex. Bus. Corp. Act Ann. art. 2.21, § A(2) (Vernon Supp. 1999). In the comments to article 2.21, the Legislature stated that the provisions of article 2.21 applied to alter ego and "any other similar theory" including the single business enterprise theory. The comments further state that article 2.21 applies to claims against related entities, "such as brother/sister corporations in that the common thread for liability in these circumstances can only be reached by first imposing liability through the shareholder." Thus, under article 2.21 Fesco must prove that Pharaon perpetrated an actual fraud in order to impose liability on Pharaon P A. To prove actual fraud, Fesco must show "a material misrepresentation, which was false, and which was either known to be false when made or was asserted without knowledge of its truth, which was intended to be acted upon, which was relied upon, and which caused injury." See Formosa, 960 S.W.2d at 47. The mere failure to perform the contract is not fraud. Id. at 48. In an attempt to prove liability against Pharaon and P A, Fesco questioned Pharaon about his business dealings. According to Pharaon, Poly O Energy was created in 1982 and purchased assets from P A who had filed for bankruptcy. In November of 1995, Poly O Energy received an assignment of the Duval County lease. Pharaon testified that he hoped to have the well producing in thirty days but ran into problems. After encountering problems with the well, Poly O Energy contracted with numerous companies to provide various services. Despite the efforts, the well was not producing and Pharaon admitted that by the time Fesco worked on the well in August of 1995, Poly O Energy had incurred debt of several hundred thousand dollars. Pharaon admitted that he did not inform Fesco that it would have to wait to be paid out of production. Fesco contends this amounts to fraud and, therefore, Pharaon is liable under the alter ego theory of liability. We find no evidence, however, that Pharaon made any material false representation which would rise to the level of actual fraud. According to Pharaon, Poly O Energy had received a $200,000 line of credit in October of 1995 secured by a certificate of deposit owned by P A. In January of 1996, the bank took the certificate of deposit and applied it to the line of credit. In October of 1996, a mortgage and deed of trust was executed between Poly O Energy and P A in the amount of $270,000 which represented the $200,000 certificate of deposit and a $70,000 loan which was only documented in the internal books. Fesco argues that these activities by Poly O Energy and P A are evidence of the two corporations operating as a single business enterprise. We note, however, that the dealings of which Fesco complains occurred well after the dispute between Fesco and Poly O Energy arose. In a further attempt to prove single business enterprise, Fesco elicited testimony that the financial books for Poly O Energy and P A were kept by the same individual at the same location and, Poly O Energy and P A were in the same business and operated out of the same location. Again, we find no evidence of any activity on the part of P A and Poly O Energy that would amount to actual fraud. Without evidence of actual fraud, Fesco cannot pierce the corporate veil and hold Pharaon individually liable. See Menetti v. Chavers, 974 S.W.2d 168, 174 (Tex.App.-San Antonio 1998, no pet.). Likewise, Fesco cannot hold P A liable for Poly O Energy's debts absent a showing of actual fraud. Therefore, the evidence is legally insufficient to support a judgment against Pharaon and P A. We sustain the third, fourth, fifth and sixth issues. Having found the evidence legally insufficient to support the judgment, we need not address the factual sufficiency issues. Because of our disposition, we need not address the first issue concerning venue or the seventh issue concerning the failure of the court to re-open the case. Finding the evidence legally insufficient to support the judgment, we reverse and render judgment that Fesco, Inc. take nothing by way of its claims against Pharaon and P A. Do Not Publish